[Zygote]

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because the diversificaiton reduces drawdowns without any reduction in returns via leverage.

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Im saying lets assume the portfolio starts with only the leveraged assets. Does adding the global stock index to the portfolio reduce risk without sacrificing returns or add returns without increasing risk, risk aversion reasons aside?

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the addition of a global stock index w/ a SR of .3 4% returns 12% vol (to a portfolio of TIPS/ST treasuries leveraged to hit 4% returns) reduces risk without decreasing returns. this is because it is 0% correlated with TIPS and between 40-60% correlated with the ST treasuries.

you can then leverage this portfolio (with a better sharpe ratio) to hit any risk level/return level you want.

further, you should also then add EMD, commodities (you can delever these through CCFs) etc. such that the overall sharpe ratio continues to increase. your portfolio will then also be protected against all economic environments (high inflation low growth, high inflation high growth, low inflation low growth, low inflation high growth) and will have the lowest drawdowns.

that is the proof of diversification you were looking for i think. the key though is you need access to leverage.

Barron

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I think im saying what you're saying. Ive always understood the benefits of diversifying to minimize risk but have yet to understand the benefits of increasing ev.

I agree that leverage seems to be the key, but more specifically is it the fact that you use one security to get leverage on the other security that really ties this all together?

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in a manner of speaking, yes...if you define repos or whatever you use to generate leverage as "a security to get leverage on another"... derivative securities definitely are the key.

institutional investors vastly underutilize lowly correlated asset classes and then bump up their risk target via leverage.

hope this helps,
Barron

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finally we're on the same page. thanks a bunch