How do you think this will affect an investment portfolio?

Suppose that you have a client whose investment portfolio you have been managing for the past five years.

Suppose further that this client believes that the equity market will increase this year and wants to re-allocate his fixed-income investments to the equity allocation.

If you decrease his bond allocation and increase his stock allocation, how will this affect the expected return and the standard deviation of the portfolio?

This sounds like you have been reading one too many finance text books. The numbers you are talking about can be computed, but are practically worthless. This is because the inputs to the calculations are estimates with such huge error margins that they should be termed “guesses”. The biggest tip-off comes from the use of the term “standard deviation”. This implies that the person with the formula thinks of market results as following a normal or Gaussian distribution. Professors like to believe this because it allows them to use all sorts of well understood statistical tools, so they ignore the ample empirical evidence that returns are not normally distributed.