1. Sandy Warrick, CFA Risk and Return for Private Investors

9. Here is the Math: L : leverage.  : the annualized volatility S : skewness of returns K : kurtosis of returns

10. Leverage = Assets / (Assets – Liabilities)

14. Market Risk Premium: Consumption Models Economists have attempted to estimate what the market risk premium should be using consumption based models. Their conclusion is that the historic risk premium is higher than it should be, That’s a “puzzle” The 2007-2008 might have solved the puzzle – risk is higher and returns are lower when we include these years!

15. Equity Risk Premium: Consumption Models Economists sometimes call this the equity risk premium and it’s the same thing. Regardless of what you call it, it’s still a “puzzle”

16. The Relation between Return and Risk Another name for the equity risk premium is “the market price of risk.”

17. Historic Excess Returns vs. Risk Cash, Bond, Stock 1970 to 2009

19. A Bit More Math: Excess Return: Return higher than the risk free rate. Slope: Increased in return for an increase in risk L : leverage.  : the annualized volatility S : skewness of returns. K : kurtosis of returns

24. Risk Adjusted Return vs. Risk

27. Suitability

28. Model Portfolio Conservative Moderate Aggressive Cash 15.9% 1.2% 0.2% Bonds 58.1% 42.0% 8.3% Stock 25.4% 56.4% 84.1% Alternatives 0.7% 0.4% 7.4% Risk: 5.7% 9.7% 14.0% Return: 5.4% 6.2% 7.0%

29. Asset Allocation vs. Risk Tolerance

30. Risk vs. Return for Model Portfolios