In an earlier article I wrote, I advocate on the importance of allocating and balancing your portfolio to achieve optimal returns based on the risk level you are willing to take. One of the important concepts illustrated in that particular particle is Tangency Portfolio. For the uninitiated, the Tangency Portfolio refers to the point where the Capital Allocation Line (CAL) intersects with the Efficient Frontier. (You might want to re-read that article to refresh your memory). It is an important point as it represents the most optimal combination of the various asset classes to provide you the maximized expected return for a given risk level, with the risk-free rate of return accounted for.
While this might sound good in theory, it is practically very difficult to achieve a tangency portfolio in real life. As you might have notice, the tangency portfolio tends to be constructed based on hindsight. Usually, it’s already...