RSS
 

Archive for the ‘Investing ideas’ Category

Volatility and its Impact on Your Portfolio

21 Oct

Published by: Direxionfunds
Date: 13 Nov 2007

“Assessing risk is an important part of investing. One commonly
used measure of risk is volatility, which measures
the variability of a security’s return through time. If
Security A and Security B have the same expected return
but Security B has greater variability of return, Security B
is more volatile than Security A. Given an equal return
most investor’s would prefer a security with less volatility,
which means that investors expect a higher return on an
investment when it carries a higher level of volatility.
This paper takes a close look at the basics of volatility, discusses
why it matters in relation to portfolio management,
and suggests some methods for managing and controlling
the impact of volatility. In highly volatile markets,
heightened emotions can lead to clouded judgment.
Controlling the amount of volatility within your portfolio
can allow for more prudent decisions.”

Full article (PDF): Link

 
Comments Off

Posted in Hedging, Investing ideas, Trading ideas

 

Risk and Volatility: Econometric Models and Financial Practice

14 Oct

Article by: Robert F. Engle III
Nobel lecture
Date: 8 Dec 2003

“The advantage of knowing about risks is that we can change our behavior to
avoid them. Of course, it is easily observed that to avoid all risks would be impossible;
it might entail no flying, no driving, no walking, eating and drinking
only healthy foods and never being touched by sunshine. Even a bath could
be dangerous. I could not receive this prize if I sought to avoid all risks. There
are some risks we choose to take because the benefits from taking them exceed
the possible costs. Optimal behavior takes risks that are worthwhile. This
is the central paradigm of finance; we must take risks to achieve rewards but
not all risks are equally rewarded. Both the risks and the rewards are in the future,
so it is the expectation of loss that is balanced against the expectation of
reward. Thus we optimize our behavior, and in particular our portfolio, to
maximize rewards and minimize risks.

“This simple concept has a long history in economics and in Nobel citations.
Markowitz (1952) and Tobin (1958) associated risk with the variance in
the value of a portfolio. From the avoidance of risk they derived optimizing
portfolio and banking behavior. Sharpe (1964) developed the implications
when all investors follow the same objectives with the same information. This
theory is called the Capital Asset Pricing Model or CAPM, and shows that
there is a natural relation between expected returns and variance.”

Full article (PDF): Link

 
Comments Off

Posted in Hedging, Implied volatility, Investing ideas, Trading ideas

 

The Cost of Volatility To Your Portfolio

12 Oct

Author: Geoff Considine
Published by: Seeking Alpha
Date: 14 Jun 2007

“In a recent article, I discussed why it is important to pay attention to risk measures like volatility and Beta.

“There is another way to examine the effective cost of volatility for investors: volatility drag. In financial modeling, we often look at average returns as the metric of growth rate, but there is another measure: Compounded Annual Growth Rate [CAGR], which is sometimes referred to as annualized return (Note: this terminology can be confusing because annualized return does not necessarily refer to CAGR, though it is often treated this way). The difference between the average annual return and CAGR is determined by volatility (as measured by the standard deviation in return)—and this difference is important.”

 Full article: Link

 
Comments Off

Posted in Investing ideas

 

The VIX as a Fix: Equity Volatility as a Lifelong Investment Enhancer

03 Oct

Article by: Michael Sloyer and Ryan Tolkin
Published by: Duke University
Date: 2008

“The VIX, a measure of the implied volatility of S&P 500 index options, is the
premier gauge of investor sentiment and market volatility. This analysis examines the
effectiveness of adding the VIX to passively managed equity-bond portfolios.
Furthermore, this study extends the existing literature by examining the efficacy of the
VIX in a life-cycle investing context. Due to the large negative correlation between the
VIX and the major equity indices, we find that a relatively small allocation to the VIX
would have significantly improved the risk-return profile of standard equity-bond
portfolios from 1986 through 2007. Additionally, we find that younger investors (i.e.
investors with higher risk tolerances and thus more exposure to equities rather than fixed
income) will benefit from having greater exposure to the VIX.”

Full article (PDF): Link

 
Comments Off

Posted in Implied volatility, Investing ideas

 
« Older Entries
Newer Entries »
 
© Copyright 2018 RealVol LLC. All rights reserved