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  #181  
Old 11-14-2007, 04:59 PM
Zygote Zygote is offline
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Posts: 2,051
Default Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.

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because the diversificaiton reduces drawdowns without any reduction in returns via leverage.

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Im saying lets assume the portfolio starts with only the leveraged assets. Does adding the global stock index to the portfolio reduce risk without sacrificing returns or add returns without increasing risk, risk aversion reasons aside?

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the addition of a global stock index w/ a SR of .3 4% returns 12% vol (to a portfolio of TIPS/ST treasuries leveraged to hit 4% returns) reduces risk without decreasing returns. this is because it is 0% correlated with TIPS and between 40-60% correlated with the ST treasuries.

you can then leverage this portfolio (with a better sharpe ratio) to hit any risk level/return level you want.

further, you should also then add EMD, commodities (you can delever these through CCFs) etc. such that the overall sharpe ratio continues to increase. your portfolio will then also be protected against all economic environments (high inflation low growth, high inflation high growth, low inflation low growth, low inflation high growth) and will have the lowest drawdowns.

that is the proof of diversification you were looking for i think. the key though is you need access to leverage.

Barron

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I think im saying what you're saying. Ive always understood the benefits of diversifying to minimize risk but have yet to understand the benefits of increasing ev.

I agree that leverage seems to be the key, but more specifically is it the fact that you use one security to get leverage on the other security that really ties this all together?

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in a manner of speaking, yes...if you define repos or whatever you use to generate leverage as "a security to get leverage on another"... derivative securities definitely are the key.

institutional investors vastly underutilize lowly correlated asset classes and then bump up their risk target via leverage.

hope this helps,
Barron

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finally we're on the same page. thanks a bunch
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  #182  
Old 11-14-2007, 05:04 PM
DcifrThs DcifrThs is offline
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Join Date: Aug 2003
Location: Spewin them chips
Posts: 10,115
Default Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.

[ QUOTE ]
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because the diversificaiton reduces drawdowns without any reduction in returns via leverage.

[/ QUOTE ]

Im saying lets assume the portfolio starts with only the leveraged assets. Does adding the global stock index to the portfolio reduce risk without sacrificing returns or add returns without increasing risk, risk aversion reasons aside?

[/ QUOTE ]

the addition of a global stock index w/ a SR of .3 4% returns 12% vol (to a portfolio of TIPS/ST treasuries leveraged to hit 4% returns) reduces risk without decreasing returns. this is because it is 0% correlated with TIPS and between 40-60% correlated with the ST treasuries.

you can then leverage this portfolio (with a better sharpe ratio) to hit any risk level/return level you want.

further, you should also then add EMD, commodities (you can delever these through CCFs) etc. such that the overall sharpe ratio continues to increase. your portfolio will then also be protected against all economic environments (high inflation low growth, high inflation high growth, low inflation low growth, low inflation high growth) and will have the lowest drawdowns.

that is the proof of diversification you were looking for i think. the key though is you need access to leverage.

Barron

[/ QUOTE ]

I think im saying what you're saying. Ive always understood the benefits of diversifying to minimize risk but have yet to understand the benefits of increasing ev.

I agree that leverage seems to be the key, but more specifically is it the fact that you use one security to get leverage on the other security that really ties this all together?

[/ QUOTE ]

in a manner of speaking, yes...if you define repos or whatever you use to generate leverage as "a security to get leverage on another"... derivative securities definitely are the key.

institutional investors vastly underutilize lowly correlated asset classes and then bump up their risk target via leverage.

hope this helps,
Barron

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finally we're on the same page. thanks a bunch

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glad i could help. your friend studying for the CFA though probably should have been able to clearly explain what i did [img]/images/graemlins/frown.gif[/img]

lemme know if i can answer anything else.
Barron
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  #183  
Old 11-15-2007, 12:46 AM
HP HP is offline
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Join Date: Oct 2004
Location: DZ-015
Posts: 2,783
Default Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.

thanks again, if you get bored of this no worries of course

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other problems with your example are that you're assuming that you will earn above the compound interest return every time you wait for the 10:1 payoff. but if that 10:1 payoff takes over T years, where T is the number of years investing at the risk free rate of interest earns you 1000% compound returns. if the 10:1 payoff takes longer than T years then you've "lost" money since you would have done better by doing nothing.

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What I was trying to say was we are trying to make 1000% profits above the profits we would make by simply putting it in a bank

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your example assumes that the price of the exchange rate and the interest rates are completely independent. they are highly intertwined.

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hmmmm, why so? I don't see how I made this assumption, implied or otherwise

to be clear I expect the interest rates for the USD and EUR to change over time, and be different from each other most of the time
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  #184  
Old 11-15-2007, 12:58 AM
kimchi kimchi is offline
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Join Date: May 2006
Location: FU minbet
Posts: 1,246
Default Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.


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Quote:
Tthe worst (peak to trough) drawdown was during the summer sell-off of 2005 though as I was fully invested in Latin, general emerging, and asia stocks at the time. I have since reduced the size of each position and increased the number of positions to add some more diversity at the expense of a reduced return.



first off, working backwards, the system may not (probably not given above) take into account volatilities and correlations of markets. the reason i say this is because a huge portion of your system shouldn't be in markets that are both a) highly volatile, and b) highly correlated to each other and the global economy.


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I monitor the volatilities of the markets i swing trade daily and I also keep tabs on correlation to prevent me from concentrating risk.

My long-term trading is very limited though, because of tax and regulations. I can't properly position size, go short, or diversify sufficiently because of these limitations. For example, this year (and for a couple of years) I've been heavily invested in China & Asia, India, Europe, Latin America, UK gilts, and resources. It sounds like a who's who of outperforming investments (except for the gilts), but there's been some really heart-stopping moments.

This money is becoming an increasingly large portion of my overall portfolio/account, so when the next trading signal shows, I'll have to move some money out of this system and into my buy & hold account.
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