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Re: what is risk?

Yet another type of risk is opportunity cost, the money you don't make while waiting for something that may never happen. This one is easy to overlook because the financial press never runs scary stories about it. You can never eliminate all forms of risk, just decide which ones apply to your situa...
by magician
Tue Sep 30, 2014 12:07 am
 
Forum: Investing - Theory, News & General
Topic: what is risk?
Replies: 116
Views: 4737

Re: what is risk?

First, what is volatility? from Wikipedia, Volatility (finance) . In finance, volatility is a measure for variation of price of a financial instrument over time. Most people in finance use the terms "volatility" and "correlation" very loosely, and never really know to what chara...
by magician
Mon Sep 29, 2014 10:46 am
 
Forum: Investing - Theory, News & General
Topic: what is risk?
Replies: 116
Views: 4737

Re: what is risk?

Which is riskier: 1) Certain to miss your goal by a large margin. 2) May miss your goal by a large margin, may exceed your goal by a large margin. Under Bob's definition, 2 is riskier - it has more "Uncertainty of outcomes". I find it hard to believe anyone would prefer 1. If so, does tha...
by magician
Mon Sep 29, 2014 1:23 am
 
Forum: Investing - Theory, News & General
Topic: what is risk?
Replies: 116
Views: 4737

Re: what is risk?

Yet another type of risk is opportunity cost, the money you don't make while waiting for something that may never happen. This one is easy to overlook because the financial press never runs scary stories about it. You can never eliminate all forms of risk, just decide which ones apply to your situa...
by magician
Mon Sep 29, 2014 1:20 am
 
Forum: Investing - Theory, News & General
Topic: what is risk?
Replies: 116
Views: 4737

Re: what is risk?

When Harry Markowitz developed Modern Portfolio Theory in the 1950s, he needed a way to quantify risk. This was before modern digital computers, so he needed a means of quantifying risk that was easy to compute. Volatility met those criteria. Markowitz never suggested using volatility (of returns) ...
by magician
Mon Sep 29, 2014 1:14 am
 
Forum: Investing - Theory, News & General
Topic: what is risk?
Replies: 116
Views: 4737

Re: what is risk?

Howard Marks of Oaktree Capital has done some good work on risk. http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CCAQFjAA&url=http%3A%2F%2Fwww.oaktreecapital.com%2FMemoTree%2FRisk%2520Revisited.pdf&ei=bVonVL7jCYKLoQSZ44CIDw&usg=AFQjCNG5lxPi6x1...
by magician
Mon Sep 29, 2014 1:10 am
 
Forum: Investing - Theory, News & General
Topic: what is risk?
Replies: 116
Views: 4737

Re: Buffett: Modern investment theory is horse-pucky

Tigermoose wrote:Most theory is.

A silly generalization.
by magician
Fri Sep 12, 2014 9:35 am
 
Forum: Investing - Theory, News & General
Topic: Buffett: Modern investment theory is horse-pucky
Replies: 119
Views: 10467

Re: The Worst Investment You Can Make: Buying a Home

marbleous wrote:The Worst Investment You Can Make: Buying a Horse

That depends on how you calculate the value of your returns.

I've never regretted buying any of our horses.
by magician
Wed Aug 20, 2014 12:31 pm
 
Forum: Investing - Theory, News & General
Topic: The Worst Investment You Can Make: Buying a Home
Replies: 135
Views: 16949

Re: Math question: how to combine two return series?

If you get a combined return series using weighted average return for each year, can't you then just take the stdev of the combined (portfolio) return series? Yes. The portfolio return each period will just be 0.75(stock return i ) + 0.25(bond return i ). You now have a return series for the portfo...
by magician
Sun Aug 10, 2014 4:51 pm
 
Forum: Investing - Theory, News & General
Topic: Math question: how to combine two return series?
Replies: 13
Views: 1199

Re: The Worst Investment You Can Make: Buying a Home

thx1138 wrote:A home that is your residence is not an investment, it is an expense plain and simple.

It is neither that plain nor that simple.
by magician
Sat Aug 09, 2014 11:14 am
 
Forum: Investing - Theory, News & General
Topic: The Worst Investment You Can Make: Buying a Home
Replies: 135
Views: 16949

Re: Dividend Strategy Ain't For Everyone

Aptenodytes wrote:Magic doesn't work.

Does too!
by magician
Fri Aug 01, 2014 3:45 pm
 
Forum: Investing - Theory, News & General
Topic: Dividend Strategy Ain't For Everyone
Replies: 149
Views: 11842

Re: Expected Future Yield Curve

What's the 2-year rate today?
by magician
Thu Jul 31, 2014 12:33 am
 
Forum: Investing - Theory, News & General
Topic: Expected Future Yield Curve
Replies: 22
Views: 1480

Re: bond duration and interest rate risk

See here. "Unlike a noncallable bond, a callable security’s duration, or sensitivity to interest rate changes, decreases when rates fall and increases when rates rise. - See more at: http://www.investinginbonds.com/learnmore.asp?catid=5&subcatid=76#sthash.9yumhJk0.dpuf" You are right....
by magician
Tue Jul 29, 2014 4:52 pm
 
Forum: Investing - Theory, News & General
Topic: bond duration and interest rate risk
Replies: 33
Views: 3187

Re: Is there any downside to investing in bond futures?

Thank you magician for correcting my math on the futures pricing. More generally, would it be right to say that a fully collateralized position of rolling front month treasury futures, say 10 year ones, would approximate have the same interest rate risks and returns as a treasury bond fund with the...
by magician
Wed Jul 23, 2014 1:14 pm
 
Forum: Investing - Theory, News & General
Topic: Is there any downside to investing in bond futures?
Replies: 73
Views: 2169

Re: Is there any downside to investing in bond futures?

The price is the future price, decreased by the future value of the coupons you won't receive. I covered that. The underlying is a theoretical, 20-years-to-maturity, 6% coupon, noncallable T-Bond. The futures price is S0 × (1+r)^T, where S0 is the (theoretical) price for the (theoretical) underlyin...
by magician
Wed Jul 23, 2014 10:27 am
 
Forum: Investing - Theory, News & General
Topic: Is there any downside to investing in bond futures?
Replies: 73
Views: 2169

Re: Is there any downside to investing in bond futures?

The price of a bond futures will be (surprise, surprise!) the future value of today's price on the bond, increased at the risk-free rate for the term of the futures contract. F0 = Future value of today's price increased at the Rf? What do you mean by future value of today's price? How do you know w...
by magician
Wed Jul 23, 2014 9:43 am
 
Forum: Investing - Theory, News & General
Topic: Is there any downside to investing in bond futures?
Replies: 73
Views: 2169

Re: Is there any downside to investing in bond futures?

longinvest wrote:What happens if the bond defaults?

If you have the long position in a futures contract, you'll be buying a defaulted bond.

Just as if you'd owned the bond itself. No difference.

(So, you might consider buying a CDS as well . . . .)
by magician
Wed Jul 23, 2014 9:33 am
 
Forum: Investing - Theory, News & General
Topic: Is there any downside to investing in bond futures?
Replies: 73
Views: 2169

Re: Is there any downside to investing in bond futures?

This has been interesting to read, but I'd be lying if I said that I understood most of it (magician, you got me the closest to understanding). I'm glad to hear that; thanks. The takeaway is: unless you're planning to take advantage of the leverage offered (and apart from the differing tax treatmen...
by magician
Wed Jul 23, 2014 9:06 am
 
Forum: Investing - Theory, News & General
Topic: Is there any downside to investing in bond futures?
Replies: 73
Views: 2169

Re: Is there any downside to investing in bond futures?

So here's a question for market timer, magician, or someone else who really understands these things: if you wanted exposure to a 2 year treasury and bought a 2 year future contract for delivery 2 years from now, is the price you would expect to pay now for that future be the notional of the contra...
by magician
Wed Jul 23, 2014 9:02 am
 
Forum: Investing - Theory, News & General
Topic: Is there any downside to investing in bond futures?
Replies: 73
Views: 2169

Re: Is there any downside to investing in bond futures?

The price of a bond futures will be (surprise, surprise!) the future value of today's price on the bond, increased at the risk-free rate for the term of the futures contract. F0 = Future value of today's price increased at the Rf? What do you mean by future value of today's price? How do you know w...
by magician
Wed Jul 23, 2014 8:43 am
 
Forum: Investing - Theory, News & General
Topic: Is there any downside to investing in bond futures?
Replies: 73
Views: 2169

Re: Is there any downside to investing in bond futures?

Wow. Let's see if I can simplify things here for lee1026 : Taking the long position in bond futures is (nearly) identical to buying the underlying bond. Period. (Oh, sure, there are some minor complexities, but, in essence, they're (nearly) identical. I'll hit the complexities in a minute.) When you...
by magician
Wed Jul 23, 2014 12:11 am
 
Forum: Investing - Theory, News & General
Topic: Is there any downside to investing in bond futures?
Replies: 73
Views: 2169

Re: Can it be wrong to be too risk averse?

As a general rule, it's wrong to be too anything.
by magician
Tue Jul 22, 2014 9:24 am
 
Forum: Investing - Theory, News & General
Topic: Can it be wrong to be too risk averse?
Replies: 49
Views: 2576

Re: What to do in a market correction

What, exactly, is a market correction? The traditional definition is a drop > 10% but <20% (which would be a "bear market"). The drop in 2011 was interesting because it was a "bear market" if you look at intraday prices but only a "correction" if you went by close pric...
by magician
Mon Jul 21, 2014 9:07 am
 
Forum: Investing - Theory, News & General
Topic: What to do in a market correction
Replies: 32
Views: 3266

Re: What to do in a market correction

What, exactly, is a market correction? The traditional definition is a drop > 10% but <20% (which would be a "bear market"). The drop in 2011 was interesting because it was a "bear market" if you look at intraday prices but only a "correction" if you went by close pric...
by magician
Mon Jul 21, 2014 12:43 am
 
Forum: Investing - Theory, News & General
Topic: What to do in a market correction
Replies: 32
Views: 3266

Re: What to do in a market correction

What, exactly, is a market correction?
by magician
Mon Jul 21, 2014 12:10 am
 
Forum: Investing - Theory, News & General
Topic: What to do in a market correction
Replies: 32
Views: 3266

Re: Momentum Investing ?

pkcrafter wrote:bs010101, you are right, of course, but some Bogleheads, perhaps the majority, won't chase anything. Furthermore, the opposite of momentum is reversion to the mean.

Paul

The problem with reversion to the mean is naïvely believing that you know what the mean is.
by magician
Mon Jul 21, 2014 12:05 am
 
Forum: Investing - Theory, News & General
Topic: Momentum Investing ?
Replies: 55
Views: 4930

Re: Very high interest rate in other countries? How come?

You can access higher interest rates in other countries and avoid the risk of exchange controls through the currency futures markets, and you can now access the futures markets though Schwab (since it has acquired OptionsXpress). You would need to roll over the futures contracts 4 times a year. The...
by magician
Fri Jul 18, 2014 6:59 pm
 
Forum: Investing - Theory, News & General
Topic: Very high interest rate in other countries? How come?
Replies: 44
Views: 3415

Re: Very high interest rate in other countries? How come?

My reading of the academic research is that higher interest rate currencies tend to depreciate against lower rate ones, but by less than the interest rate differential. So it has been profitable to own higher rate currencies, but the profit has been less than the nominal rate spread. Hence: carry t...
by magician
Fri Jul 18, 2014 6:58 pm
 
Forum: Investing - Theory, News & General
Topic: Very high interest rate in other countries? How come?
Replies: 44
Views: 3415

Re: How do I model 20 yr Treasury portfolio impact?

Duration is the first-derivative of the price versus yield curve. Not to put too fine a point on it, but (modified) duration is not the first derivative of the price with respect to the yield; dollar duration is the first derivative of price with respect to yield. I think you may be putting too fin...
by magician
Mon Jul 14, 2014 2:30 pm
 
Forum: Investing - Theory, News & General
Topic: How do I model 20 yr Treasury portfolio impact?
Replies: 37
Views: 2607

Re: How do I model 20 yr Treasury portfolio impact?

acegolfer wrote:Image

What I hate about this graph is that at left end of it suggests that as the yield approaches zero (percent), the price goes to infinity, which is silly. But finance people always draw the graph like this.
by magician
Sun Jul 13, 2014 7:39 pm
 
Forum: Investing - Theory, News & General
Topic: How do I model 20 yr Treasury portfolio impact?
Replies: 37
Views: 2607

Re: How do I model 20 yr Treasury portfolio impact?

Call_Me_Op wrote:Duration is the first-derivative of the price versus yield curve.

Not to put too fine a point on it, but (modified) duration is not the first derivative of the price with respect to the yield; dollar duration is the first derivative of price with respect to yield.
by magician
Sun Jul 13, 2014 7:37 pm
 
Forum: Investing - Theory, News & General
Topic: How do I model 20 yr Treasury portfolio impact?
Replies: 37
Views: 2607

Re: Risk Adjusted Return?

2) If you nonetheless feel you must quantify, use a better measure of risk. There are numerous multi-factor models and models which tie returns to macro-economic factors. Some of the multi-factor models do a better job of explaining past returns than stdev (and it's friend, CAPM). The Fama-French t...
by magician
Mon Jul 07, 2014 9:12 am
 
Forum: Investing - Theory, News & General
Topic: Risk Adjusted Return?
Replies: 61
Views: 5133

Re: Risk Adjusted Return?

2) If you nonetheless feel you must quantify, use a better measure of risk. There are numerous multi-factor models and models which tie returns to macro-economic factors. Some of the multi-factor models do a better job of explaining past returns than stdev (and it's friend, CAPM). The Fama-French t...
by magician
Sun Jul 06, 2014 11:51 pm
 
Forum: Investing - Theory, News & General
Topic: Risk Adjusted Return?
Replies: 61
Views: 5133

Re: Why is the market portfolio a tangency portfolio?

The tangency portfolio is called the market portfolio, but there is no reason to believe that it is the portfolio comprising all possible investments in proportion to their market weights. Quite a few people seem to think that it is, but nobody has ever produced a convincing argument (that I've seen...
by magician
Thu Jul 03, 2014 5:34 pm
 
Forum: Investing - Theory, News & General
Topic: Why is the market portfolio a tangency portfolio?
Replies: 35
Views: 1208

Re: Bond yield =/= guaranteed return

BackInTheBlack wrote:
acegolfer wrote:1. Can a T-bill be called a zero-coupon bond?

1) Since T-bills technically are zeroes . . . .

Why "technically"?
by magician
Tue Jul 01, 2014 4:30 pm
 
Forum: Investing - Theory, News & General
Topic: Bond yield =/= guaranteed return
Replies: 36
Views: 3483

Re: Bond yield =/= guaranteed return

Langkawi wrote:While T-Bills technically share the characteristics of zero-coupon bonds, I've never heard a knowledgeable person refer to them as such.

I've referred to T-Bills as zero-coupon bonds. Frequently.

Whether or not I qualify as a knowledgeable person is another question entirely, however.
by magician
Fri Jun 27, 2014 4:27 pm
 
Forum: Investing - Theory, News & General
Topic: Bond yield =/= guaranteed return
Replies: 36
Views: 3483

Re: Options Trading: shooting down the "iron condor"

Beverage wrote:If you want to learn about options you should read Options As A Strategic Investment. But briefly:

- Options trading is a zero-sum game

Because of trading costs, options trading is a less-than-zero-sum game.
by magician
Sun May 04, 2014 11:52 pm
 
Forum: Investing - Theory, News & General
Topic: Options Trading: shooting down the "iron condor"
Replies: 19
Views: 2070

Re: Callable bond duration

packer16 wrote:A useful metric is yield to worse as this is lowest return you will get (assuming the firm does not go BK) and your yield to maturity is highest yield.

Again, it isn't necessarily true that YTM will be higher than all of the YTCs. It usually is, but it needn't necessarily be.
by magician
Sun Apr 27, 2014 1:50 am
 
Forum: Investing - Theory, News & General
Topic: Callable bond duration
Replies: 12
Views: 1903

Re: Callable bond duration

Duration is defined mathematically as the ratio of price change to interest-rate change (for mathematicians, it is the negative of the derivative of price with respect to interest rate). Actually, duration (specifically, effective duration) is defined mathematically as the ratio of the percentage p...
by magician
Sun Apr 27, 2014 1:48 am
 
Forum: Investing - Theory, News & General
Topic: Callable bond duration
Replies: 12
Views: 1903

Re: Callable bond duration

If your bond looks it is going to be called (based upon coupon being higher than re-fi rate), they will trade at yield to worst. You need to look at the bond specifics but bonds typically have multiple call dates with higher prices for earlier dates (this provides some protection to the bond holder...
by magician
Sun Apr 27, 2014 1:30 am
 
Forum: Investing - Theory, News & General
Topic: Callable bond duration
Replies: 12
Views: 1903

Re: Monte Carlo Software

I use Excel to run Monte Carlo simulations only about all the time. The software I prefer is @Risk by Palisade . You can download a trial copy here . I like @Risk for two primary reasons: ⋅ It's easy to learn ⋅ The functions work as if they were standard Excel functions
by magician
Mon Apr 21, 2014 9:24 am
 
Forum: Investing - Theory, News & General
Topic: Monte Carlo Software
Replies: 13
Views: 1456

Re: Harry Markowitz meets the Efficient Frontier - and blink

Don't read too much into that quote. When I interviewed Dr. Markowitz, I asked him about this story. He said that he had a choice of two investments: stocks and bonds. Thus, every combination of those two is on the minimum variance frontier, and all of those at or above the global minimum variance p...
by magician
Sun Jan 26, 2014 12:39 am
 
Forum: Investing - Theory, News & General
Topic: Harry Markowitz meets the Efficient Frontier - and blinks
Replies: 4
Views: 903

Re: Riding the Yield Curve

I don't believe preferred habitat is anywhere close to being as popular as the expectations theory. I don't know about its popularity, but it seems plausible. Insurance companies, for example (which are huge fixed income investors), like to match their assets and liabilities (maturity and duration,...
by magician
Wed Jan 22, 2014 6:19 pm
 
Forum: Investing - Theory, News & General
Topic: Riding the Yield Curve
Replies: 52
Views: 3683

Re: BRK go to for weird risks - NCAA bracket bet

odds of picking every winner correctly in a 64-team bracket are less than 1 in 9 quintillion....with some basketball knowledge, that only improves to about 1 in 128 billion, he said in a video posted on YouTube Do you really need any basketball knowledge? Just pick based on the ranking of the teams...
by magician
Wed Jan 22, 2014 4:53 pm
 
Forum: Investing - Theory, News & General
Topic: BRK go to for weird risks - NCAA bracket bet
Replies: 16
Views: 1488

Re: Riding the Yield Curve

I don't believe preferred habitat is anywhere close to being as popular as the expectations theory. I don't know about its popularity, but it seems plausible. Insurance companies, for example (which are huge fixed income investors), like to match their assets and liabilities (maturity and duration,...
by magician
Wed Jan 22, 2014 4:22 pm
 
Forum: Investing - Theory, News & General
Topic: Riding the Yield Curve
Replies: 52
Views: 3683

Re: Riding the Yield Curve

magician: do those other theories predict flattening of the yield curve because of some other reason? The liquidity premium theory can explain a normal yield curve, but not a flat or inverted yield curve. It's basis is that . . . well . . . there's a liquidity premium: higher rates for less liquidi...
by magician
Wed Jan 22, 2014 4:19 pm
 
Forum: Investing - Theory, News & General
Topic: Riding the Yield Curve
Replies: 52
Views: 3683

Re: Riding the Yield Curve

Longer points on the curve predict the future of the shorter points, all the way down to the Fed overnight rates. You're citing the pure expectations theory of interest rates, which is only one theory which tries to explain the shape of the yield curve. Others include the liquidity premium theory a...
by magician
Wed Jan 22, 2014 3:02 pm
 
Forum: Investing - Theory, News & General
Topic: Riding the Yield Curve
Replies: 52
Views: 3683

Re: Why can't an Index Fund beat the market?

Tracking error can be positive or negative in an index fund, aye. I think that you mean that the returns of the index fund can be above or below the returns of the index it tracks; i.e., the difference can be positive or negative. Tracking error is the standard deviation of those differences; it ca...
by magician
Sun Jan 12, 2014 12:08 am
 
Forum: Investing - Theory, News & General
Topic: Why can't an Index Fund beat the market?
Replies: 17
Views: 1778

Re: Vanguard GNMA/ShortTerm Inv Grade 50/50 mix

With GNMAs, the maturity/duration of the bond is determined by the borrower based on what is good for them. Borrowers are of course more likely to pay the bond off when rates go down and not do so if rates go up. Because this arrangement is unfavorable to the borrower lender/bondholder , GNMAs pay ...
by magician
Sun Jan 12, 2014 12:03 am
 
Forum: Investing - Theory, News & General
Topic: Vanguard GNMA/ShortTerm Inv Grade 50/50 mix
Replies: 11
Views: 1640

Re: What is Coke stock beta?

Kelly wrote:Magician,

Many thanks for these very valuable posts. I think I may finally understand beta!

Kelly

My pleasure.
by magician
Tue Jan 07, 2014 12:47 pm
 
Forum: Investing - Theory, News & General
Topic: What is Coke stock beta?
Replies: 8
Views: 720
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