[Zygote]

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the traditional portfolio of stocks and bonds has a risk adjsuted return (sharpe ratio) of about 0.30-0.35

by taking away equity allocation and moving it to leveraged short term bonds as well as a small amount to commodities (CCFs so they are deleveraged to risk level of equities) in addition to leveraged IL bond allocations and REITs, you can create a portfolio with an expected and historic sharpe ratio of 0.70, which is more than twice as good as the traditional portfolio.

the reason this works is that by using leverage, you can bring other asset classes to the same risk level as equities. since on average, all asset classes can be expected to have between a 0.2 and 0.3 sharpe ratio, you can use leverage to increase the risk level and thus the returns of any asset class (or deleverage an asset class). this is true forall asset classes with the exception of commodities since that is debateable at the present time.

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You seem to misunderstand where i was coming from. I wasn't saying every portfolio with diverse assets must be worse than a less diverse portfolio. I just said, if you're focused on maximizing returns only, you just choose which ever asset you think is the best of all you have, and put all your eggs in that basket. Of the limited cash you have, by definition, if you divert some of this cash to an asset that is less likely to be profitable or an asset with an inverse relationship you must be sacrificing absolute expected value.

The only reason to hedge, which again is defined by finding an inverse relationship, is to minimize risk.

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neither of these is totally right. broad based indices of bonds, stocks, TIPS, etc. can all be expected to outperform risk free allocations due to capitalism.

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I dont know what a risk-free rate is. I dont know how such a thing can exist since there is always some default risk. I see your though point, just saying.

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capitalism returns the taking of risk, otherwise, risk would never be taken. an investor can allocate money to the risk free rate OR to an equity index. if the equity index couldn't be expected to return more than the risk free rate, no investor would put money in companies that require more capital to grow or invest or whatever they want capital for.

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I agree they wouldnt put money in if markets werent expected to beat tbills or watever, with all factors included, but this appears to have little to do with my point - perhaps im not understanding though?

If i want to invest in a stock or index right now the price i pay is the price the public or businesses are willing to sell at. Since the companies wants cash and i want interest, we make a trade at a given price, and if risk reward is generally positive compared to alternatives and there is limited stock then this price rate is competed for and driven up. If the risk reward is generally negative compard to alternatives the stock will go down over time.

If a stock rises over an extensive period of time compared to alternatives this is because early investors of alternatives were unaware of the stocks true potential, otherwise the stock wouldve be driven up earlier, and therefore the stock was mispriced in the past.

Mispricing ill define as being any value other than the true value.

Now adays people think more in advance than they used to which is why we see such high p/e ratios for some equities. This is why google's stock rose so fast for example. If google continues to rise fast for the next 10 years, then the average people 10 years ago were mispricing the expected returns, just like those who werent putting money down on google at $100 were mispricing the expected returns. i dont see how this can be escaped.

All this still remains true if we're talking about a basket of stocks.

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you can allcoate to a diverse set of asset classes and be sure that, over time, you will be rewarded to taking risk by allocating money to those asset classes.

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Are saying you can be 100% certain you will return profits? Please give me a reals world example.

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the construction of your portfolio will determine the relative risk adjusted return, but even an undiversified portfolio will return more than cash, otherwise, nobody would invest in it.

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people at least expect it to return more than cash. this doesnt disprove anything ive said.

If an index keeps rising over time its because investors continue expecting the current equity rates to out perform the alternatives. This indicates that investors are making short term predictions about the market's "risk premium" but past participants were not strong enough in their long term predictions if the index rises over an extensive time.