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the possibility of unemployment is rather low for me. Other substantial expenses are not foreseeable at present. Besides, given the fact that I am a young investor, long investment horizon generally enable me to tolerate greater risk while requiring less liquidity. Tax concerns and regulatory factors will not be an issue for me in the near future.

Therefore, considering the objectives and constraints presented above, I would be better off if investing in risky assets in pursuit of higher returns. With a risk aversion of 6, I would invest my wealth in stocks while allocating remainders in treasury bills based on the suggestion given by TRowePrice.com.

Data and methodology

This following report will introduce essential concepts and methodologies in use, together with relative data applied, as groundwork of the subsequent portfolio construction and evaluation.

Portfolio diversification

The concept of diversification should be kept in mind at all time by a portfolio manager since it is the most fundamental notion that can facilitate an efficient portfolio.

In theory, stocks in a portfolio are facing two broad sources of uncertainty. One arises from macroecomomic factors which will exert influences on all stocks and cannot be predicted with certainty. The other one concentrates on firm-specific situations, which would only affect a particular firm or industry without noticeably impacting other companies (Bodie, Kane and Marcus, 2004, p.224).

A diversification strategy attempts to reduce the portfolio deviation by adding more stocks into the portfolio until all firm-specific risk (unsystematic risk) is eliminated and only risks that are attributable to marketwide risk sources (systematic risk)remains.

Treynor/Black (TB) method

Treynor and Black offer an optimizing model that strikes a balance between diversification motives and aggressive exploitation of security mispricing for active portfolio managers (Bodie, Kane and Marcus, 2004,p.988).

Theoretically, the model has several underlying assumptions. First of all, only a limited number of stocks can be analyzed. Then, Mispricing is the guidance of the composition of the active portfolio and the market index portfolio is treated as the passive portfolio. Besides, macro forecasting provides information concerning expected return and variance of the passive portfolio. Lastly, a combination of the active and passive portfolio is the ultimate optimal risky portfolio (Bodie, Kane and Marcus, 2004,p.988).

To begin with, the active portfolio is constructed by running a series regression and identifying securities with significant nonzero alpha values. The weights of each mispriced securities can be obtained by maximizing the sharp ratio of the overall active portfolio. As mentioned previously, the passive portfolio is assumed to be the market index portfolio with its forecasting being made already.

The essence of Treynor/ Black method lies in the optimization process with the active and passive portfolios. By definition, the market index (passive portfolio) is the tangency point of the capital market line (CML) with the efficient frontier representing the universe of all securities assumed to be fairly priced. However, in practice, the market-index portfolio has been proved to be inefficient as a result of superior analysis ident