Part 1 Basic tools and building blocks

Our book begins with a discussion of what robo-advisors do, both generally and through a comparison of some of the best-known robo-advisors in the market. We also outline some of the advantages of robo-advising, including low fees, tax savings, and avoiding behavioral biases.

Chapter 2 explains some of the basic tools and concepts used in the financial industry. We show how to construct a portfolio of assets and how some asset allocations can give higher expected returns for the same amount of risk, which leads to the concept of the efficient frontier. The chapter ends by showing some of the questions robo-advisors use to help guide their clients into an appropriate portfolio.

Chapter 3 discusses how to estimate some important quantities: the expected returns and volatilities of individual assets and the correlations between pairs of assets. These are essential for calculating the expected return and volatility of a portfolio and for building portfolios using mathematical optimization.

Chapter 4 covers exchange-traded funds (ETFs). We’ll discuss how ETFs work, why they’re widely preferred over mutual funds by robo-advisors, and how to evaluate multiple ETFs competing in the same market segment.