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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 10:24 am
 
Forum: Investing - Theory, News & General
Topic: Monte Carlo Software
Replies: 13
Views: 1192

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 1:39 am
 
Forum: Investing - Theory, News & General
Topic: Harry Markowitz meets the Efficient Frontier - and blinks
Replies: 4
Views: 845

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 7:19 pm
 
Forum: Investing - Theory, News & General
Topic: Riding the Yield Curve
Replies: 52
Views: 3203

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 5:53 pm
 
Forum: Investing - Theory, News & General
Topic: BRK go to for weird risks - NCAA bracket bet
Replies: 16
Views: 1439

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 5:22 pm
 
Forum: Investing - Theory, News & General
Topic: Riding the Yield Curve
Replies: 52
Views: 3203

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 5:19 pm
 
Forum: Investing - Theory, News & General
Topic: Riding the Yield Curve
Replies: 52
Views: 3203

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 4:02 pm
 
Forum: Investing - Theory, News & General
Topic: Riding the Yield Curve
Replies: 52
Views: 3203

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 1:08 am
 
Forum: Investing - Theory, News & General
Topic: Why can't an Index Fund beat the market?
Replies: 17
Views: 1743

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 1:03 am
 
Forum: Investing - Theory, News & General
Topic: Vanguard GNMA/ShortTerm Inv Grade 50/50 mix
Replies: 11
Views: 1387

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 1:47 pm
 
Forum: Investing - Theory, News & General
Topic: What is Coke stock beta?
Replies: 8
Views: 685

Re: What is Coke stock beta?

That's not what it indicates: you're talking about prices; beta talks about returns. A beta of 0.25 indicates that when the index's return rose by 1%, Coke's return rose by ¼%. But if the market's return changed from +2% to +3% (an increase of 1%), the market rose, while if Coke's return changed fr...
by magician
Mon Jan 06, 2014 4:36 pm
 
Forum: Investing - Theory, News & General
Topic: What is Coke stock beta?
Replies: 8
Views: 685

Re: What is Coke stock beta?

I'm having trouble understanding the Beta of Coke stock (KO). Morningstar reports a beta of 0.25 http://quotes.morningstar.com/stock/ko/s?t=ko This can't mean KO is only 25% as volatile as the market? If it's not 25% as volatile as the market, what does 0.25 mean? As I pointed out, you're correct: ...
by magician
Mon Jan 06, 2014 3:15 pm
 
Forum: Investing - Theory, News & General
Topic: What is Coke stock beta?
Replies: 8
Views: 685

Re: What is Coke stock beta?

A positive beta means the stock, on average, moved in the same direction as the market index. Let's be clear about this: a positive beta means that the stock's returns , on average, moved in the same direction as the market index's returns . Beta measures movement of returns , not movement of price...
by magician
Mon Jan 06, 2014 2:55 pm
 
Forum: Investing - Theory, News & General
Topic: What is Coke stock beta?
Replies: 8
Views: 685

Re: Commodity trading advisors-fooling some people all the t

MassInvestor wrote:Commodities should only be for those who want to take physical delivery or must hedge against changes in prices for business reasons.

Somebody has to take the other side of those contracts. It's unlikely that you'll find those counterparties exclusively amongst hedgers.
by magician
Sun Jan 05, 2014 3:12 am
 
Forum: Investing - Theory, News & General
Topic: Commodity trading advisors-fooling some people all the time
Replies: 14
Views: 1570

Re: 2013: a bad year for pimco

fundtalk wrote:. . . two of PIMCO's other star managers, Rob Arnott and Mohamed El-Erian.

I'm pretty sure that the people at Research Affiliates would be surprised to learn that Rob Arnott is a star manager at PIMCO.

(Those at PIMCO might be, as well.)
by magician
Sun Jan 05, 2014 2:56 am
 
Forum: Investing - Theory, News & General
Topic: 2013: a bad year for pimco
Replies: 26
Views: 2969

Re: Expected Return of Gold

LH wrote:(edited to decrease brevity)

Is it too early to nominate this for post of the year?
by magician
Wed Jan 01, 2014 10:45 pm
 
Forum: Investing - Theory, News & General
Topic: Expected Return of Gold
Replies: 44
Views: 2956

Re: Corporate bonds and holding to maturity

Of course one needs to take risk with bonds. If it's not credit risk, it's inflation risk, currency risk, call risk, etc. There is no investment that doesn't have some degree of risk. It's a matter of degree. Which is exactly my point. The platitude "take risk on the equity side, not on the fi...
by magician
Wed Dec 11, 2013 7:51 pm
 
Forum: Investing - Theory, News & General
Topic: Corporate bonds and holding to maturity
Replies: 20
Views: 1103

Re: Corporate bonds and holding to maturity

You could decide to take risks on the fixed income side of the portfolio. But it doesn't seem like it would be risk worth taking when the equity returns SHOULD be higher in the long run. But shouldn't equity risks be higher as well? It just seems to me that never taking any risk in fixed income is ...
by magician
Wed Dec 11, 2013 5:12 pm
 
Forum: Investing - Theory, News & General
Topic: Corporate bonds and holding to maturity
Replies: 20
Views: 1103

Re: Investment types that can lead to a loss greater than 10

unixunderground wrote:Could you guys please advise on a few kinds of investments (from any sector) that can lead to a loss greater than 100%?

One hundred percent of what, exactly?

One hundred percent of the value of the asset? Or 100% of the invested capital (equity)?
by magician
Wed Dec 11, 2013 3:40 am
 
Forum: Investing - Theory, News & General
Topic: Investment types that can lead to a loss greater than 100%
Replies: 16
Views: 1628

Re: Corporate bonds and holding to maturity

Artsdoctor wrote:Any portion of your fixed income portion of the portfolio should be considered safe.

Why is that?
by magician
Wed Dec 11, 2013 3:30 am
 
Forum: Investing - Theory, News & General
Topic: Corporate bonds and holding to maturity
Replies: 20
Views: 1103

Re: Corporate bonds and holding to maturity

dbr wrote:It should also be noted that the nominal but not the real principal was returned.

As with most Treasuries.
by magician
Wed Dec 11, 2013 3:29 am
 
Forum: Investing - Theory, News & General
Topic: Corporate bonds and holding to maturity
Replies: 20
Views: 1103

Re: Derivatives to hedge inflation? (swap, futures, etc)

The problem with derivatives is that some of these instruments get pretty complicated. The problem with complicated derivatives is that they get pretty complicated. Simple derivatives are . . . well . . . simple. A future (or forward) is nothing more complicated than an agreement to buy something i...
by magician
Wed Dec 11, 2013 1:44 am
 
Forum: Investing - Theory, News & General
Topic: Derivatives to hedge inflation? (swap, futures, etc)
Replies: 9
Views: 812

Re: Brent Arends: you can beat the market with smart timing

Brent Arends: you can beat the market with smart lucky timing

Fixed that for him.
by magician
Tue Nov 05, 2013 5:33 pm
 
Forum: Investing - Theory, News & General
Topic: Brent Arends: you can beat the market with smart timing
Replies: 89
Views: 5432

Re: Four-fund max?

Green: where's your avatar?
by magician
Fri Nov 01, 2013 5:23 pm
 
Forum: Investing - Theory, News & General
Topic: Four-fund max?
Replies: 17
Views: 2330

Re: Currency Exchange? [getting US dollars from a Yen loan]

It sounds like you're looking for a straight USD/JPY currency swap. You pay dollars (for yen) at initiation, receive dollars (for yen) interest during the life of the swap, then receive dollars (for yen) for the return of the original dollars at the end of the swap.
by magician
Fri Oct 18, 2013 12:12 am
 
Forum: Investing - Theory, News & General
Topic: Currency Exchange? [getting US dollars from a Yen loan]
Replies: 1
Views: 115

Re: the importance of rebalancing

By "rebalancing", you're assuming a constant mix rebalancing strategy.

What about other rebalancing strategies; e.g., CPPI?
by magician
Thu Sep 26, 2013 1:55 pm
 
Forum: Investing - Theory, News & General
Topic: the importance of rebalancing
Replies: 12
Views: 1156

Re: Does foreign currency provide any type of diversificatio

umfundi wrote:Currency-hedged global bonds are a yawn.

Covered interest rate parity says that if you hedge you should earn the same return as you would on domestic bonds.

Yawn.
by magician
Mon Sep 16, 2013 12:12 pm
 
Forum: Investing - Theory, News & General
Topic: Does foreign currency provide any type of diversification?
Replies: 21
Views: 1633

Re: Does foreign currency provide any type of diversificatio

Do stocks in a foreign currency or foreign currency itself provide any type of diversification in a portfolio? Interestingly, I just finished summarizing a reading on this very subject in the Level III CFA curriculum. Stocks and bonds denominated in foreign currencies can provide risk reducing dive...
by magician
Sun Sep 15, 2013 11:39 pm
 
Forum: Investing - Theory, News & General
Topic: Does foreign currency provide any type of diversification?
Replies: 21
Views: 1633

Re: What is the current equity risk premium, and how calcula

4.3%

Pulling it out of . . . the air.

(That's what most people do; I'm one of the rare few willing to admit it.)
by magician
Fri Sep 13, 2013 3:26 pm
 
Forum: Investing - Theory, News & General
Topic: What is the current equity risk premium, and how calculated?
Replies: 31
Views: 1874

Re: Are municipical utility revenue bonds extremely safe?

If the revenue's not there, they don't pay.

General obligation bonds are much safer.
by magician
Fri Sep 13, 2013 2:08 pm
 
Forum: Investing - Theory, News & General
Topic: Are municipical utility revenue bonds extremely safe?
Replies: 8
Views: 627

Re: How Much Did You Spend on Your Engagement Ring??

$600 for all three: her engagement and wedding rings, my wedding ring.

Thirty-four years ago.

I had the good sense to marry a woman who doesn't like diamonds; we got a custom design of a dove holding an olive branch: the leaves are jade.
by magician
Sun Sep 08, 2013 1:03 am
 
Forum: Personal Consumer Issues
Topic: How Much Did You Spend on Your Engagement Ring??
Replies: 289
Views: 19057

Re: Bond fund duration and YTM question

Actually, it's nearly linear, but the slope is steeper the closer you get to maturity: you get more price change closer to the maturity date than farther from the maturity date, not less . Are you sure about this? I know it's locally linear (with the slope you'd expect: market yield - coupon ), but...
by magician
Fri Sep 06, 2013 6:13 pm
 
Forum: Investing - Theory, News & General
Topic: Bond fund duration and YTM question
Replies: 20
Views: 1350

Re: Bond fund duration and YTM question

I think that those worrying about bond turnover have made the mistake of elevating bond maturity on a pedestal, as if the bond stays depressed until the day of maturity, then suddenly jumps up to par. In reality, it's a very continuous price appreciation, with most of the price recovery occuring fa...
by magician
Fri Sep 06, 2013 2:46 pm
 
Forum: Investing - Theory, News & General
Topic: Bond fund duration and YTM question
Replies: 20
Views: 1350

Re: Bond fund duration and YTM question

billyt wrote:Bond fund managers buy and sell to try to increase total return.

Fixed that for you.

;-)
by magician
Thu Sep 05, 2013 1:44 pm
 
Forum: Investing - Theory, News & General
Topic: Bond fund duration and YTM question
Replies: 20
Views: 1350

Re: Active Management and the Efficient Market

Simply put, because active mutual funds are not traded on the market. Instead, they are sold to clients using high-pressure sales tactics, loaded words like "these uncertain times", "ahead of the pack" and "sophisticated instruments", misleading past returns graphs, an...
by magician
Thu Sep 05, 2013 12:11 pm
 
Forum: Investing - Theory, News & General
Topic: Active Management and the Efficient Market
Replies: 6
Views: 460

Re: Bond fund duration and YTM question

⋅ That is how wikipedia defines it : The Yield to maturity (YTM) ... is the internal rate of return (IRR, overall interest rate) earned by an investor ... Yield to maturity is simply the discount rate at which the sum of all future cash flows from the bond (coupons and principal) is equal...
by magician
Thu Sep 05, 2013 10:21 am
 
Forum: Investing - Theory, News & General
Topic: Bond fund duration and YTM question
Replies: 20
Views: 1350

Re: Active Management and the Efficient Market

I think that you're misunderstanding the idea of market efficiency. An efficient market doesn't mean a market where everything (or, for that matter, anything) is priced fairly. An efficient market means a market where prices react quickly to new information: the market is informationally efficient, ...
by magician
Wed Sep 04, 2013 7:29 pm
 
Forum: Investing - Theory, News & General
Topic: Active Management and the Efficient Market
Replies: 6
Views: 460

Re: higher interest rates which assets do well

I would also think that stocks would be the first ones to stabalize or even increase because companies have the ability to increase prices in a high rate environment. If (nominal) rates increase because inflation increases, companies will be able to increase prices fairly easily. If (nominal) rates...
by magician
Sun Sep 01, 2013 11:57 am
 
Forum: Investing - Theory, News & General
Topic: higher interest rates which assets do well
Replies: 6
Views: 846

Re: Is it this easy: Stocks are safe, bonds are risky?

billyt wrote:1) Safety is defined by volatility.

I'm pretty sure that it's not.

We often use volatility (of returns) as a proxy for - or as a means to measure - risk, but that's not remotely the same as a definition.
by magician
Fri Aug 30, 2013 11:27 am
 
Forum: Investing - Theory, News & General
Topic: Is it this easy: Stocks are safe, bonds are risky?
Replies: 59
Views: 3542

Re: Is it this easy: Stocks are safe, bonds are risky?

The future is unknowable but we seem to have entered an era where the consensus is that stocks will generate positive real returns and bonds will not. Stocks are now "safe" and bonds are risky. If we know that bonds will not generate positive real returns, then they're not risky ; they're...
by magician
Fri Aug 30, 2013 11:25 am
 
Forum: Investing - Theory, News & General
Topic: Is it this easy: Stocks are safe, bonds are risky?
Replies: 59
Views: 3542

Re: Life Insurance.

The argument against that viewpoint is that if the insured doesn't die, those needs will have to be met by the insured's earning capacity; it's a somewhat macabre point of view that the beneficiaries should be better off should the insured die than should he live. If those needs would go unmet if t...
by magician
Wed Aug 28, 2013 2:18 pm
 
Forum: Personal Finance (Not Investing)
Topic: Life Insurance.
Replies: 31
Views: 1343

Re: Life Insurance.

The general idea of life insurance should be to replace the earning capacity that you lose should you die early. (Note: most people don't look at it this way.) So, if you're in your late 20s, you might work for another 40 years, and earn five-to-six-figures-a-year in that time. What is the present ...
by magician
Wed Aug 28, 2013 1:42 pm
 
Forum: Personal Finance (Not Investing)
Topic: Life Insurance.
Replies: 31
Views: 1343

Re: Life Insurance.

The general idea of life insurance should be to replace the earning capacity that you lose should you die early. (Note: most people don't look at it this way.) So, if you're in your late 20s, you might work for another 40 years, and earn five-to-six-figures-a-year in that time. What is the present v...
by magician
Wed Aug 28, 2013 12:33 pm
 
Forum: Personal Finance (Not Investing)
Topic: Life Insurance.
Replies: 31
Views: 1343

Re: Indexed Universal Life Insurance - Again ...

synthetic zero-cost collar on an S&P 500 index fund – which can be achieved with a combination of a long at-the-money put and a short in-the-money put , or a long at-the-money call and a short out-of-the-money call (all the options being European, of course) I found it easier to compare, as All...
by magician
Wed Aug 28, 2013 10:25 am
 
Forum: Personal Finance (Not Investing)
Topic: Indexed Universal Life Insurance - Again ...
Replies: 54
Views: 3702

Re: Annuities do not diversify stock bond risk medium/long t

LH wrote:If the market does not return, there is no magic money fairy that will make up the shortfall.

Sure there is.
by magician
Tue Aug 27, 2013 8:49 pm
 
Forum: Investing - Theory, News & General
Topic: Annuities do not diversify stock bond risk medium/long term
Replies: 41
Views: 1830

Re: Indexed Universal Life Insurance - Again ...

I was recently proposed a financial plan that involved Index Universal Life Insurance, with the usual claims of stock-market returns, no downside, upside capped at 11.5% (or whatever). (Note: when the agent (whose business card reads "Financial Consultant") told me that I didn't understand...
by magician
Tue Aug 27, 2013 4:15 pm
 
Forum: Personal Finance (Not Investing)
Topic: Indexed Universal Life Insurance - Again ...
Replies: 54
Views: 3702

Re: Make no mistake: Mr. Market is smarter than you

Make no mistake: Mr. Market is smarter than you It isn't so much that Mr. Market is smarter than you are (though he might be): Mr. Market runs the game. He decides on the prices of the securities, whether they're rational or not, justified or not. You may be a lot smarter than he in determining the...
by magician
Tue Aug 27, 2013 11:36 am
 
Forum: Investing - Theory, News & General
Topic: Make no mistake: Mr. Market is smarter than you
Replies: 36
Views: 3809

Re: I do not understand bonds

Day9 wrote:that is only true for correlation negative 1. it could have correlation between 0 and negative 1

Not even then, if we mean correlation of returns (which is what we're supposed to mean).
by magician
Tue Aug 27, 2013 1:01 am
 
Forum: Investing - Theory, News & General
Topic: I do not understand bonds
Replies: 10
Views: 1668

Re: I do not understand bonds

Now, bonds should be negatively correlated with stocks, so if equities tank, hopefully the (safe) "high quality" bond funds I own should go up in value. If bonds were negatively correlated with stocks, then every time stocks went up, bonds would go down. This would be true if you were tal...
by magician
Tue Aug 27, 2013 1:00 am
 
Forum: Investing - Theory, News & General
Topic: I do not understand bonds
Replies: 10
Views: 1668

Re: Index Universal Life Insurance

pkcrafter wrote:You might take a look at this article--

http://www.infinitebanking.org/wp-content/uploads/2012/05/BankNotes-May-2012.pdf

Paul

Thanks, Paul!
by magician
Mon Aug 26, 2013 10:04 am
 
Forum: Investing - Help with Personal Investments
Topic: Index Universal Life Insurance
Replies: 2
Views: 241
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