Markowitz Portfolio Theory for Household Asset Allocation

Abstract

Nowadays, there are numerous families that do not manage their finances by scientific methods but rather by their personal feelings. Most common households do not have any professional information about financial and commonly take the extreme measures, such as saving all the money in cash or investing in stocks at any cost. These techniques are not suitable to balance returns and risks. The paper focuses on the application of Markowitz Portfolio Theory that can be used to assist ordinary families to allocate their savings into three basic types of assets: cash, stocks and bonds. The research focuses on three typical types of families-young families, middle-class families and retired families-and offers simple and practical plans for asset allocation for each of these family types. The results indicate that various families ought to select various stock proportions based on how much risk they are able to take. Young families should put 50% in stocks, middle class families should put 30% in stocks and retired families should only put 10% in stocks. The rest of the assets are split between bonds and cash. The structured allocation can effectively balance the expected return and investment risk, making family asset management more scientific, stable and secure. This book makes it easy to understand complicated financial theories, and offers straightforward, actionable tips for everyday families, even those that aren't financial experts.