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In the most empirical, literal, quantitative sense things are different though. We are setting records in measures of many financial time series. This is the volatility of 10 year treasuries: https://fred.stlouisfed.org/series/VXTYN . It is the absolute highest in the history of the TYVIX. Likewise,...

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Playing with Portfolio Visualizer's rolling optimization, you can see why Sharpe himself recommends a market cap weight global portfolio and NOT rolling sharpe optimization: https://www.portfoliovisualizer.com/rolling-optimization?s=y&mode=2&startYear=1985&endYear=2019&goal=2&opt...

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Here's a thread about Sharpe's thoughts on an efficient portfolio https://www.bogleheads.org/forum/viewtopic.php?t=207804 Has anyone tested this on empirical data? Continual global market cap weighting is definitely a theoretically sound way of dealing with time dependence of sharpe ratios. But as ...

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Part of what inspired this post was a piece by Sharpe himself: http://web.stanford.edu/~wfsharpe/art/sr/sr.htm See the section 'Time Dependence' where Sharpe clearly states: "The Sharpe Ratio is not independent of the time period over which it is measured. This is true for both ex ante and ex p...

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Context: my hypothesis is that in practice, to achieve the closest thing to an efficient portfolio, we need to optimize the out of sample sharpe ratio for the period [T, T+k] where T is the present time and k is the length of time to hold a portfolio before reconstruction, and then adjust risk up or...

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Yep, if there is an argument for temporal diversification, then there is definitely an argument for temporal shifts in asset allocation, whether based on total market cap weights of different asset classes or volatility based weights. A fixed allocation (60:40, etc) is just to reduce cognitive burd...

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A very interesting read and perspective in MarketWatch today. Merrill Lynch’s head of wealth management, Andy Sieg, says he’s more than 80% stocks in his personal portfolio “You’re never going to make enough money if you have 40% of your money in bonds,” CNBC news anchor Becky Quick said. “I have s...

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Obligatory Preface: No one knows anything, and strategists' future return predictions are useless. That said, given where interest rates are, market valuations are not especially out of wack. There's no clear evidence of a bubble. If you put a gun to my head, I would predict the next 10 years will r...

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This is actually one of the most theoretically sound portfolios you could construct I'm not convinced about that. There are so many government imposed distortions and frictions around the world, it is hard to know how close this would be a real market portfolio. Even something simple like: what if ...

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So if diversification is a free lunch, and life-cycle investing style leverage is a free lunch would combining the two be a REALLY free lunch? Why not use a diverse set of things like buy futures on bonds, s&p index, nasdaq100, r2k, gold, sell 4-7 month out vix contracts, etc in combination? Fo...

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I would probably start with the paper: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1149340 I was sold just on the theory and logic of it. It's nice to see the backtest overwhelmingly favor it too. The thread I started to document the process is (I hope) a good resource: https://www.boglehea...

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The quotes I'm seeing now for S&P futures are flat or in backwardation, except for March 2020. Not sure why that contract is in contango. Whoah a second ago the March one was at 3197. Just checked again once you edited your post and saw it at 3200. :confused Might be a combination of expectatio...

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The quotes I'm seeing now for S&P futures are flat or in backwardation, except for March 2020. Not sure why that contract is in contango.

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I can't comment on TLT but I actually tend to find options to be significantly cheaper than futures. I might be doing something wrong but I can't figure out why. Maybe you can help. Just now I looked at a synthetic option position and it has a borrowing rate of ~1.8%. This makes sense, that's basic...

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Generally when people think they've found a "cheaper" way to replicate a position, they're not accounting for something. I can't comment on TLT but I actually tend to find options to be significantly cheaper than futures. I might be doing something wrong but I can't figure out why. Maybe ...

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I looked up the indexes mentioned by Sharpe in the video. CRSP US Total Market Index Market cap: $24,541,947 million FTSE Global All-Cap minus US Market cap: $21,356,625 million Note: The FTSE Global All-Cap index (the index followed by Vanguard's Total World Stock Index fund) actually shows the gl...

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Generally when people think they've found a "cheaper" way to replicate a position, they're not accounting for something. I can't comment on TLT but I actually tend to find options to be significantly cheaper than futures. I might be doing something wrong but I can't figure out why. Maybe ...

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I still don't understand the reasons for using options instead of futures for leverage. Options are literally cheaper in my case, once you account for taxes. As if that wasn't enough, they also would require no cash for collateral (no cash drag), no mark-to-market or quarterly rolling. I literally ...

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I'm for evidence based asset allocations. Life cycle investing is one of the best in that regard. I just wanted to write down my latest research experiments :wink: . A problem with my optimal variable asset allocation and lifecycle investing is that it only supports combinations of two assets. When...

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I'm fairly certain that if the markets go down, lifecycle investing requires to to reduce your position. Take a look at the lifecycle investing chart I posted earlier. At the far left side of the image $1_000_000 corresponds to an asset allocation of 60% stocks and $500_000 corresponds to an asset ...

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yes, changes in returns and risk premium are definitely not predictable out of sample. But again, variance and covariance definitely are very predictable - so you should be able to get lower variance out of sample (while assuming returns stay roughly constant) by more frequent optimization. Reducti...

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Options markets already take into account volatility prediction, so there's no free lunch there. Options premiums are determined largely by their Implied Volatility, which are forward looking and represent the market's expectation of future volatility. There is also a Variance Risk Premium, which i...

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When it comes to math, there aren't really opinions though. The predictability of volatility is well documented, going back to Mandelbrot, and Nobel prizes have been awarded for research in this area. Can you please link me to a paper that shows how to predict volatility? I know how to make delta-h...

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Reduction in variance (even modestly) becomes extremely important in the context of this thread, e.g. applying leverage, since volatility decay is quadratic w.r.t to the leverage ratio. This strategy, as I've implemented it, does not have volatility decay. But again, variance and covariance definit...

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Apparently, your risk aversion coefficient becomes more or less arbitrary low at the start of your career. This has implications for selecting the optimal portfolio. A risk tolerance below one results in the rational selection of a portfolio that has significant volatility drag. Below is an image f...

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With all the recent discussions about LETF I was curious how your risk tolerance changes when using lifecycle investing. Recall this graph that I made earlier: https://i.imgur.com/XnPifWf.png In this graph, where we assume our retiree has a risk aversion coefficient of 3.. 60% stocks corresponds to...

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Apparently, your risk aversion coefficient becomes more or less arbitrary low at the start of your career. This has implications for selecting the optimal portfolio. A risk tolerance below one results in the rational selection of a portfolio that has significant volatility drag. Below is an image f...

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I think that if anything, ETFs allow investors to focus on reducing inefficiencies at a more macro level, where the consequences are much more dire and systemic. And there are thousands of ETFs - you can express a view on any number of sectors and factors, bearish or bullish, with current index offe...

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While I subscribe to most boglehead tenets, there is one odd, persistent issue I have: the notion that portfolios must be fixed, and must backtest well over multi decade, if not multi-century periods. I do not understand why there is such an obsession with finding portfolio allocations that can do w...

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One quick tip - you can reduce the trading costs of synthetic longs using options by submitting split orders. Considering you are trading two contracts, with a roundtrip of 4 orders, trade execution makes a huge difference. You should not have to pay the quoted bid/ask if you are a smallish retail i...

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Hello everyone, mathematical riddle: 1) According to the Ishares website: TLT Weighted Avg. Maturity = 25.55 years IEF Weighted Avg. Maturity = 8.54 years So, 25.55 / 8.54 = 2.9918 So: Buy $ 100,000 of TLT = Buy 299,180 of IEF 2) According to the CME Group website: ZN Deliverable Maturities = 6.50 ...

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I keep seeing posts about futures being "better" than options, for reasons that don't make a lot of sense. Thanks to put-call parity, you should be able to simulate long position through a synthetic long, that is buying a call and selling a put at same strike and maturity. For something as...

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I just realized the source of the disconnect w.r.t inter temporal risk parity, and the stability of parameter estimates. One very counterintuitive finding - not only are many parameters NOT scale invariant for different time horizons, but increasing time scale can often lead to weaker parameter esti...

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Risk parity is just a method to better discover an "efficient" portfolio, as per MPT, on real world data, e.g. with better generalization performance out of sample. The problem with mean variance optimization is that it overfits and is really unstable. Also, it doesn't reflect the highly ...

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How are you determining the optimal portfolio? Is it the single set of weights that maximizes sharpe for the entire time period? Most modern risk parity strategies adjust weights as covariance structure changes over time. I use mean variance optimization with different assumptions. I generally redu...

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Min vol really is different from the other factors which rely more on a qualitative narrative about the nature of some sort of risk premium. Rather, "min vol" investing is kind of the whole motivation behind modern, quantitative investing. Vast majority of the consistently top performing h...

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Just wanted to add a few thoughts to this discussion. Note that my backtests below for Portfolio 2 just uses the oldest bond mutual fund I could find a ticker symbol for. I implement my actual strategy with treasury futures. Unfortunately that is not nearly enough data. See this chart from ERN in p...

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One small note to add to what has become a really interesting discussion: you're not obligated to stick to any one allocation forever. You're not even obligated to assume that assumptions around the risk premiums of asset classes will remain. I use a levered "risk parity" portfolio, but I ...

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Have you done any work on using alternate approaches to calculating volatility? From the papers I've read, the traditional approach of annualizing the standard deviations of logarithmic returns only preserves around 30% of the information around volatility clusters. I've looked at a couple GARCH va...

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While I'm not adopting Hydromod's strategies myself, I gotta say building an application to automatically make these trades according to target vol or UEI using Interactive Brokers' API sounds like a fun weekend project. I'm working on this, but it's eating up a lot more than one weekend! You can g...

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While I'm not adopting Hydromod's strategies myself, I gotta say building an application to automatically make these trades according to target vol or UEI using Interactive Brokers' API sounds like a fun weekend project. I'm working on this, but it's eating up a lot more than one weekend! You can g...

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Have you done any work on using alternate approaches to calculating volatility? From the papers I've read, the traditional approach of annualizing the standard deviations of logarithmic returns only preserves around 30% of the information around volatility clusters. I've looked at a couple GARCH va...

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While I get that the S&P 500 consists of multinational companies with international revenues, I think it's very risky to have zero China exposure. Why China specifically? Besides being another world power, it also has the ability to be self-sufficient. One seemingly esoteric thing to note, but ...

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While I get that the S&P 500 consists of multinational companies with international revenues, I think it's very risky to have zero China exposure. Why China specifically? Besides being another world power, it also has the ability to be self-sufficient. One seemingly esoteric thing to note, but i...

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HEDGEFUNDIE wrote: ↑Mon Aug 05, 2019 9:18 am
rascott wrote: ↑Mon Aug 05, 2019 9:17 am Almost like this risk parity thing works. TMF+4%, UPRO -6%.

60/40 dead even.
There is wisdom in the OG Strategy, my friend.

the negative correlation still works

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OP, would you consider updating your original post to clarify that your strategy depends on the use of non-callable low-interest debt, like a family or personal loan or home equity loan? It's an interesting thread and I'm enjoying following it but I think it needs to be clearer up front that margin...

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That said, if you want to eschew Samuelson and go with maximizing the geometric mean, you still want to follow the Kelly Criterion (which he even references): https://en.wikipedia.org/wiki/Kelly_criterion The OP is arguing to do the exact opposite under some misguided pretense of "buying low&q...

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That said, if you want to eschew Samuelson and go with maximizing the geometric mean, you still want to follow the Kelly Criterion (which he even references): https://en.wikipedia.org/wiki/Kelly_criterion The OP is arguing to do the exact opposite under some misguided pretense of "buying low&q...

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From April 2010 - T he ideas that I have been criticizing do not shrivel up and die. They always come back . I notice at the Amazon preview of their book, Lifecycle Investing , Ayres and Nalebuff dedicate the book "to their teacher Paul Samuelson" and claim their book is a straightforward...

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That said, if you want to eschew Samuelson and go with maximizing the geometric mean, you still want to follow the Kelly Criterion (which he even references): https://en.wikipedia.org/wiki/Kelly_criterion The OP is arguing to do the exact opposite under some misguided pretense of "buying low&qu...

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