We have a portfolio with weights A=20%, B=60%, C=20%. That we have this particular portfolio is really a market prediction. What are the returns that the portfolio is “expecting”? In technical terms, we want the implied alpha of the portfolio (found via reverse optimization). We’ll explore this in a mostly pictorial fashion. Eventually we do … Continue reading
Portfolio Probing
A quant review of “The Quants” by Scott Patterson
There were giant mutant quants destroying every … Oh, sorry. That was ants not quants, and it was a Japanese movie not a book. Given my blog’s remit, it seems obligatory to review this book. The full title is significant. It is “The Quants: How A New Breed Of Math Whizzes Conquered Wall Street And … Continue reading
What the hell is a variance matrix?
When I first came to finance, I kept hearing about “risk models”. I wondered, “What the hell is a risk model?” Of course, I didn’t say this out loud — that would have given the game away. My wife has strict instructions that she is to be the only one to know that I’m an … Continue reading
Posted in R language, Risk, Statistics
Tagged covariance matrix, risk model, variance matrix
17 Comments
Elevated stock correlations
Monday’s Last Word by James Mackintosh in the FTfm states that stock correlations are very high relative to the historical record. He asserts that at least part of this is driven by passive investment — in particular people coming in and out of the market. A consequence of the high correlation is that it reduces … Continue reading
Posted in Fund management in general, Random portfolios
Tagged equity correlations, stock correlations
1 Comment
A performance step beyond “Economists’ Hubris”
The paper “Economists’ Hubris — The case of equity asset management” (SSRN) by Shojai, Feiger and Kumar has achieved some measure of notoriety. It has mentions in the MoneyScience blog and in the Financial Times among other places. A response to the article by Paul Kaplan of Morningstar is at Investment Week. If I may … Continue reading
Inaugural probe
Once I decided to blog, I had to determine how to go about it. My first thought was of Dorothy Parker. No one ever wanted to leave the table when she was there for fear of the witticisms she would make while they were gone. There are two problems with this strategy: I don’t know … Continue reading
