Re: what should i be doing with surplus bankroll?
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so before you ask me another one, please answer what you'd rather use if not the sharpe ratio to compare attractiveness of an investment?
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Speaking only for retirement investing:
Return(include all costs), Volatility, Kurtosis, Skewness
Human Capital Risk
But really all those boil down to a probabilistic distribution of outcomes (in this case, age when we can retire).
A set of parameters should be constructed for those according to an individual's need and then portfolios should be compared based on their adherence to the parameter set.
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but you've set out an almost impossible task.
volatility (historic & logical-forward-looking) is reasonable to estimate. but the distribution is not. the parameter set would be highly sensitive to kurtosis & skewness.
estimating volatilities is reasonable but difficult, due to the large degree of randomness inherent in investing. knowing, even within a range, the kurtosis (which boils down to a #), is an impossibly hard task. how can you measure it accurately? skewness may be a tad easier but both of those distribution qualifiers need baysian estimation and the "next" observation can severely change the posterior (turned prior) distribution.
i agree with the goal, but have a hard time getting my head around the means. can you furnish an example of the process??
let's take the simple standard 60/40 equity/bond portfolio of yesteryear, what would your answers to your methodology above yield?
the goal, as you stated it above, would be to get a distribution of ages at which we can retire (likely defined as meeting some minimum total asset criteria).
thanks,
Barron
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