I am new to investing. Currently I'm trying to read about it as much as possible. There is one question that bothers me quite much that I cannot find an answer to, so I decided to ask here.
There is a forumla called CAPM (Capital Asset Pricing Model). It calculates the expected return for a given risk. The formula assumes that I am building a market portfolio (i.e., investing into everything in the world).
And there is the 2004 article called The Capital Asset Pricing Model: Theory and Evidence that says, in particular, that you can "tweak" the portfolio a bit so that the risks would stay the same, but, surprisingly, the expected return would grow comparing to what the CAPM formula predicts. The article says, literally: "funds that concentrate on low beta stocks, small stocks or value stocks will tend to produce positive abnormal returns relative to the predictions of the Sharpe-Lintner CAPM, even when the fund managers have no special talent for picking winners".
The article is also cited in "The Little Book of Bulletproof Investing". The authors of the book suggest to build the next portfolio:
There are 2 concerns:
- The book is pretty old already (it's from 2010).
- There seems to be no other source that would describe or suggest building such a portfolio (except for the article and the book).
Is it still worth building the portfolio nowadays? Or it's better to invest in an index funds and to not overengineer the problem?