The concept of Three-Dimensional Solutions pertains to two perspectives. One perspective is the three dimensions of asset allocation: stocks, bonds, and alternatives. By moving from one dimension to two, from stocks-only to stocks and bonds, an investor could retain 80% of their return and reduce their downside risk by over 50%. In financial parlance, their portfolios could become much more efficient as they earn more return for each unit of risk taken. By introducing a third dimension to asset allocation, alternative investments, the phenomenon is exaggerated further. By creating a three-dimensional investment portfolio as opposed to one, an investor can retain 85% of their return and reduce risk by 67%.
Instead of asking “Why would a person adopt a three-dimensional approach?” the better question is “Why wouldn’t they?” Why would you only observe one dimension or two, when you could observe three?
The mostly commonly used dimension of investment analysis is one everyone is familiar with: return on investment. This answers the question: “How much did I receive in compensation for the risk I took?” While determining return is usually straightforward, determining the quotient for risk is more ambiguous.
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