Portfolios of Stocks, Bonds, and Bills

ABOUT THIS CONTENT

Tolerance for risk should affect the leverage an investor uses but not his choice of portfolio of risky assets (assuming the investor evaluates prospective portfolio returns on the basis of mean and variance alone). This spreadsheet illustrates this point considering portfolios of stocks and bonds. The means and variances of portfolios are estimated on the basis of historical returns, using the Ibbotson data. The "efficient" portfolio of stocks and bonds is invested 60% in stocks and 40% in bonds.