[DcifrThs]

pete,

a few things:

we are way off track here in terms of the point of this thread.

second, your point above leverage is definitely correct. the main point though is that intelligent use of leverage (i.e. NOT 3:1 and extremem numbers i mentioned as instructive examples) is a good thing and can increase portfolio efficiency.

if the value of the underlying increases, you are less levered, but if it falls, you are more highly levered. on average, your total leverage will remain fairly close to your target without much adjustment (though some is necessary from time to time).

the statement "a 100% drop in a levered portfolio is more likely than in a non-levered portfolio" is correct and i was way off there. when you deal with this in practice though, there are some major differences:

first, you aren't levering the riskier parts of the portfolio. in fact, you do the exact opposite. you want to increase exposure to the least volatile (least correlated, and lower returning) assets to maximize your sharpe ratio and create the most efficient portfolio. these less risky asset classes are faaaaarrrrrrrr less likely to experience huge moves that cause anywhere near 20% losses in any amount of time (thus contributing to my statement that a levered portfolio is just as exposed to a non levered one. i was thinking of the ideal portfolio and applying to an equity only one which was wrong).

second, the amount of leverage is very small on average. it is nowhere near 3:1. more like 1.3 or 1.5:1 for ideal portfolio efficiency.

when you combine those two facts, you get that the best portfolio still is created via leverage and that leverage is overall fairly harmless when used in that manner.

so for being an ass with respect to the leverage argument, i have to apologize and hope you'll forgive.

the statements you made that were very incorrect were:

1) that timing of returns don't matter, and
2) that the best portfolio in the long run "usually" won't be one that maximizes your sharpe ratio

my whole point in this thread is pretty similar to what i mention here a lot: the best portfolio should have leverage (a small amount on the underutilized asset classes), the best portfolio is very well diversified, and (possibly a repeat of #2 there) any portfolio that invests in one single asset class or asset is problematic and can be dominated by many other portfolios (and crushed by the "best" one)

Barron