Date: Wed, 6 Sep 2006 19:45:30 -0500
From: Will Trice 
Subject: Re: Mortgage on owned property
Newsgroups: misc.invest.financial-plan
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BreadWithSpam@fractious.net wrote:

> In particular, risk is lowered by diversifying into 
> assets whose returns are *uncorrelated* with each other.
 > This is not to say that my (contrived) example was actually
 > a lower-risk portfolio in the CAPM/Markowitz model, but that
 > it *could* be.

This does not always work.  In your case, even if your second investment 
was better than uncorrelated - that is, perfectly negatively correlated 
- you've probably increased your volatility.  But you have decreased the 
volatility of an all stock portfolio.

> Holding one single asset - a paid for house
> but no other investments whatsoever - is a very risky
> portfolio - but more importantly in the CAPM sense, is a
> highly inefficient portfolio inasmuch as the returns will
> be very very low relative to the risk.

Admittedly we have a definition problem with "risk", but a definition 
that defines a house as "very risky"
and defines a portfolio of a house + stock with leverage in the 
proportions you've suggested as less than "very risky" leaves me to 
wonder.  Are you sure that houses have inefficient risk/return ratios? 
They do have very low volatility which goes along with their low return.

-Will