A number that goes with a mix you already chose.
The handoff from the last post
Last post introduced the second coefficient. We called it A_M. It sits inside a short formula that turns a mix into a label. Unlike the first A (we called in AHL on this post), this A_M coefficient is calculated using the portfolio you already have. First, you determine the weight of the portion of your portfolio that you deem is “risky”. Once obtained, it becomes a simple algebraic exercise. In our example we used the 100-year price returns of the S&P market index and its standard deviation. This week we look at ordinary mixes and the number that labels each one.
The formula, restated
Same moments as before. Excess return μ is about 4.63 percentage points (8.43% minus the 3.8% cash stand-in). Variance is about 0.0345.
Omega (ω) is the equity share you already chose. Higher equity, lower A_M. More bills, higher A_M. The number moves with the mix. It does not measure the tickets.
Ordinary mixes and the labels that go with them
Industry order: equity first, then T-bills. These are typical market allocations which is also dependent on an investor’s propensity to take on risks.
80 / 20 → A_M ≈ 1.68
High equity label.
70 / 30 → A_M ≈ 1.92
Still well above the worked-example band from the tickets.
60 / 40 → A_M ≈ 2.23
Growth-book neighborhood in the briefing.
50 / 50 → A_M ≈ 2.68
Whole-account example neighborhood. That discussion waits for the final post.
40 / 60 → A_M ≈ 3.35
More bills than equity.
30 / 70 → A_M ≈ 4.47
Defensive label.
20 / 80 → A_M ≈ 6.70
Mostly cash-like.
What the table does not do
These are example allocations. This isn’t your particular allocation. To get yours you have to do some digging of your own. Your retirement or brokerage accounts typically provide ways for you to download these allocations into a standard spreadsheet format.
measured the tickets. labels a mix. Do not average them. Do not treat either one as a recommendation.
Next
Next, we turn to capacity — what the plan can actually underwrite — on a million-dollar book. Appetite is one reading. Ability is the other. The tighter one sets the ceiling.
Stay tuned.
