Focus on Asset Allocation
Oyster indicates how spreading investment assets among a variety of different, uncorrelated types of risks can lower risk portfolio wide. For diversification to work effectively, allocations should be made to truly differentiated investments, not just different forms of the same risk. Harry Markowitz, with Modern Portfolio Theory, won a Nobel Prize for showing how combining two risky but uncorrelated asset classes can reduce risk and add value to an investor’s bottom line. Oyster also describes a number of different asset-allocation philosophies employed by some of the industry’s most astute investors including the Yale Investment Office, large public pensions in both Norway and Canada, as well as the unique asset-allocation approach employed by the Massachusetts Institute of Technology Investment Management Company.