Re: Derivative Premium Arbitrage
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First let me state that I am by no means an expert and probably more towards the newb side of things. However, I'm wondering why people on this board don't recommend more leveraging. Isn't that a way to increase your EV? I understand that the risk goes up as well, but if there were ever people that should be able to understand/cope with that it should be professional gamblers.
We would certainly suggest raising a draw for value even though it would increase the variance. As long as the game continues long enough things will equal out and +EV decisions will yield higher returns.
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well i know i've personally stressed intelligent leverage for portfolio construction every chance i get.
maybe nobody wants to listen [img]/images/graemlins/frown.gif[/img]
for maximizing your sharpe ratio (risk adjusted returns) you NEED leverage to bring the low risk/return asset classes like IL bonds, short duration nominal bonds etc. AND you need to deleverage other allocations like REITs and commodities (the latter is readily available via CCFs).
in this way, you maximize the diversification benefits without sacrificing the returns on those diversified allocations.
once you have your maximized expected sharpe ratio, you can then lever up or down your entire portfolio to hit the risk/return target you desire. i know i've been sayin this for a while...
in terms of active management (which you seem to be talkign about more specifically) leverage is very important as well, so long as it is taken in an intelligent manner.
Barron
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