risk/return

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pages: 276 words: 59,165

Impact: Reshaping Capitalism to Drive Real Change by Ronald Cohen

"World Economic Forum" Davos, asset allocation, benefit corporation, biodiversity loss, carbon footprint, carbon tax, circular economy, commoditize, corporate governance, corporate social responsibility, crowdsourcing, decarbonisation, diversification, driverless car, Elon Musk, family office, financial independence, financial innovation, full employment, high net worth, housing crisis, impact investing, income inequality, invisible hand, Kickstarter, lockdown, Mark Zuckerberg, microbiome, minimum viable product, moral hazard, performance metric, risk-adjusted returns, risk/return, Silicon Valley, sovereign wealth fund, Steve Ballmer, Steve Jobs, tech worker, TED Talk, The Wealth of Nations by Adam Smith, transaction costs, zero-sum game

Impact-weighted accounts for businesses, which dependably reflect their impact, will be the watershed between the risk–return and risk–return–impact paradigms. Investment returns from risk–return–impact will be at least as good as the returns from risk–return, and most likely better. Risk–return–impact thinking is disrupting entrepreneurship, business, investment, philanthropy and government in just as far-reaching a way as technology. The chain-reaction triggered by risk–return–impact thinking is already under way, driven by young consumers, entrepreneurs and employees. They have influenced the behavior of investors, who have joined them in influencing the behavior of businesses, philanthropists and governments.

For outcome payers, they represent an outcomes-based contract that delivers better results and provides greater transparency on what works and what doesn’t than a conventional contract that pays for activities. SIBs and DIBs are the purest expression of risk–return– impact at work. They are part of a general shift, which is already under way, to a system whose model of decision-making introduces this new mindset of risk–return–impact, rather than risk–return. They also make us realize that the impact of social interventions can actually be measured. This realization is now spreading to the broader understanding that impact can be measured and compared across companies, transforming all decision-making that relates to them.

As a result, SIBs reduce the volatility and improve the returns of a portfolio when the stock market takes a nosedive or interest rates soar. Because of the importance of investment flows within our economies, risk– return–impact investing puts us on the road to impact economies SIBs and DIBs also clearly demonstrate the inherent logic of risk–return–impact and that by optimizing this triple helix we can reach a higher ‘efficient frontier’, where for the same level of risk we can achieve higher returns and greater impact. Because of the importance of investment flows within our economies, risk–return–impact investing puts us on the road to impact economies, where impact influences every decision taken in investment and as a consequence, as we will see in the next chapter, in business too.


pages: 300 words: 77,787

Investing Demystified: How to Invest Without Speculation and Sleepless Nights by Lars Kroijer

Andrei Shleifer, asset allocation, asset-backed security, Bernie Madoff, bitcoin, Black Swan, BRICs, Carmen Reinhart, clean tech, compound rate of return, credit crunch, currency risk, diversification, diversified portfolio, equity premium, equity risk premium, estate planning, fixed income, high net worth, implied volatility, index fund, intangible asset, invisible hand, John Bogle, Kenneth Rogoff, low interest rates, market bubble, money market fund, passive investing, pattern recognition, prediction markets, risk tolerance, risk/return, Robert Shiller, selection bias, sovereign wealth fund, too big to fail, transaction costs, Vanguard fund, yield curve, zero-coupon bond

We can accept the premise that market forces have set a price on individual securities and the aggregate market at a level that is consistent with the risk/return characteristics of that asset class. Because equities are riskier, we get higher expected returns, etc. For other investments left out of the rational portfolio there is typically not a liquid and efficient market to set prices for the individual investments, so someone without an edge is unable to simply buy into the whole asset class and expect to get its overall risk/return. So there is no theoretical inconsistency in being a rational investor – on the contrary. We don’t think we know any better than the market about the risk/return profiles of individual securities or how they move relative to one another.

The beautiful shortcut – follow the crowd But here is the beautiful thing. If you generally believe in efficient markets, you don’t need to worry about the portfolio theory above or collecting millions of correlations and thousands of risk-return profiles. The market’s ‘invisible hand’ has already done all that for you. We don’t think we are able to reallocate between securities in such a way that we have a higher risk/return profile than what the aggregate knowledge of the market provides. Buying the entire market is essentially like buying the tangency point T. To some people it will seem like too bold an assumption that capital has seamlessly flowed between countries and industries in such a way that world markets are efficiently allocated.

Investment A in the chart, therefore, consists of many thousands of underlying equities from all over the world in the portfolio (see later). By combining the minimal risk asset and A (world equities) in various proportions we choose various risk/return levels in the most efficient way, from minimal risk to the risk of the world equity markets, or greater than that if we borrow money. Point T is already the tangency point, or optimal portfolio, and we don’t think we can reallocate money between the many securities in such a way that we end up with better risk/return characteristics (see Figure 3.7). Figure 3.7 Combining the minimal risk asset and world equities Later, when we add other government and corporate bonds, we will see that this is akin to when we added the possibility of investment B earlier.


pages: 317 words: 106,130

The New Science of Asset Allocation: Risk Management in a Multi-Asset World by Thomas Schneeweis, Garry B. Crowder, Hossein Kazemi

asset allocation, backtesting, Bear Stearns, behavioural economics, Bernie Madoff, Black Swan, book value, business cycle, buy and hold, capital asset pricing model, collateralized debt obligation, commodity trading advisor, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, diversification, diversified portfolio, financial engineering, fixed income, global macro, high net worth, implied volatility, index fund, interest rate swap, invisible hand, managed futures, market microstructure, merger arbitrage, moral hazard, Myron Scholes, passive investing, Richard Feynman, Richard Feynman: Challenger O-ring, risk free rate, risk tolerance, risk-adjusted returns, risk/return, search costs, selection bias, Sharpe ratio, short selling, statistical model, stocks for the long run, survivorship bias, systematic trading, technology bubble, the market place, Thomas Kuhn: the structure of scientific revolutions, transaction costs, value at risk, yield curve, zero-sum game

Similarly, private equity returns and the returns of many hedge fund strategies are model driven. The message sent is clear—beware of past data and doubly beware of bad past data. Today’s market and trading environment is fundamentally different than that of even five years ago. Today, tradable ETFs exist that provide access to a wide range of investment sectors and risk/return scenarios. Tradable forms of private equity, real estate, hedge fund, managed futures, and commodity indices also exist. Moreover, the degree to which these new investment tools are offered and how they are presented to investors is often based on the business model of the firm offering the investment or investment advice.

A REVIEW OF THE CAPITAL ASSET PRICING MODEL The model developed by Sharpe and others is known as the Capital Asset Pricing Model (CAPM). While the results of this model are based on several unrealistic assumptions, it has dominated the world of finance and asset allocation for the past 40 years. The main foundation of the CAPM is that regardless of their risk-return preference, all investors can create desirable mean-variance efficient portfolios by combining two portfolios/assets: One is a unique, highly diversified, mean-variance efficient portfolio (market portfolio) and the other is the riskless asset. By combining these two investments, investors should be able to create mean-variance efficient portfolios that match their risk preferences.

The combination of the riskless asset and 5 A Brief History of Asset Allocation the market portfolio (the Capital Market Line [CML] as shown in Exhibit 1.2) provides a solution to the asset allocation problem in a very simple and intuitive manner: Just combine the market portfolio with riskless asset and you will create a portfolio that has optimal risk-return properties. In such a world, the risk of an individual security is then measured by its marginal contribution to the volatility (risk) of the market portfolio. This leads to the so-called CAPM: E ( Ri ) − Rf = [ E ( Rm ) − Rf ] βi βi = Corr ( Ri , Rm ) × σi σm where Rf = Return on the riskless asset E(Rm) and E(Ri) = Expected returns on the market portfolio and a security σm and σi = Standard deviations of the market portfolio and the security Corr(Ri,Rm) = Correlation between the market portfolio and the security CML Expected Return Markowitz Efficient Frontier Market Portfolio Risk-Free Rate Standard Deviation EXHIBIT 1.2 Capital Market Line 6 THE NEW SCIENCE OF ASSET ALLOCATION Expected Return SML Market Portfolio Risk-Free Rate 0 1 2 Beta EXHIBIT 1.3 Security Market Line Thus, in the world of the CAPM all the assets are theoretically located on the same straight line that passes through the point representing the market portfolio with beta equal to 1.


Commodity Trading Advisors: Risk, Performance Analysis, and Selection by Greg N. Gregoriou, Vassilios Karavas, François-Serge Lhabitant, Fabrice Douglas Rouah

Asian financial crisis, asset allocation, backtesting, buy and hold, capital asset pricing model, collateralized debt obligation, commodity trading advisor, compound rate of return, constrained optimization, corporate governance, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, discrete time, distributed generation, diversification, diversified portfolio, dividend-yielding stocks, financial engineering, fixed income, global macro, high net worth, implied volatility, index arbitrage, index fund, interest rate swap, iterative process, linear programming, London Interbank Offered Rate, Long Term Capital Management, managed futures, market fundamentalism, merger arbitrage, Mexican peso crisis / tequila crisis, p-value, Pareto efficiency, Performance of Mutual Funds in the Period, Ponzi scheme, proprietary trading, quantitative trading / quantitative finance, random walk, risk free rate, risk-adjusted returns, risk/return, selection bias, Sharpe ratio, short selling, stochastic process, survivorship bias, systematic trading, tail risk, technology bubble, transaction costs, value at risk, zero-sum game

Construction of efficient frontiers with each of the pools. 3. Comparison of the efficient frontiers built with CTAs to those constructed without CTAs and determination if this hedge fund strategy adds value at the portfolio level or not in terms of risk/returns. Recall that, in a risk/return framework, the efficient frontier represents all the risk/return combinations where the risk is minimized for a specific return (or the return is maximized for a specific risk). Each minima (or maxima) is reached thanks to an optimal asset allocation. The process of constructing efficient frontiers through an asset weight optimization is summarized in this definition: For all possible target portfolio returns, find portfolio weights (i.e., asset allocation) such as the portfolio volatility is minimized and the following constraints are respected: no short sale, full investment, and weight limits if any. 316 PROGRAM EVALUATION, SELECTION, AND RETURNS Clearly, the resulting efficient frontier depends on the returns, volatility, and correlations of the considered assets, but it also depends on the constraints (maximum and minimum weight limit, no short selling, and full investment) fixed by the portfolio manager.

Finally, the last one is made of all traditional assets and hedge funds strategies including CTAs. Whether to consider or not consider CTAs in the pools should affect the generated efficient frontiers and highlight any diversification capacity of CTAs. Concerning the portfolio optimizations, two frameworks are used: a classical two-dimensional risk-return framework and a three-dimensional one (a risk/return/time framework; the time being introduced with rolling statistics). The three-dimensional framework should capture time changes, which are rarely presented in portfolio allocation studies. Portfolio Optimization and Constraints Before being specific about CTAs, it is important to have a brief reminder of portfolio optimization and constraints.

The range of weight goes from 0 percent (unconstrained portfolio) to 100 percent (portfolio made of a single asset). As a constraint increases, the efficient surface is reduced and tends to a single risk/return combination (100 percent allocation in a single asset). As an example, let us focus on one portfolio optimization (Figures 17.11a and b). These assumptions are applied on the pool of assets IV (15 members): no constraints, full investment, and no short sell. The optimization includes assets having the best risk/return profiles. Hedge funds strategies like global macro or the REIT equities are immediately selected, which is not the case for CTAs. CTAs are not included in any efficient portfolio construction.


pages: 353 words: 88,376

The Investopedia Guide to Wall Speak: The Terms You Need to Know to Talk Like Cramer, Think Like Soros, and Buy Like Buffett by Jack (edited By) Guinan

Albert Einstein, asset allocation, asset-backed security, book value, Brownian motion, business cycle, business process, buy and hold, capital asset pricing model, clean water, collateralized debt obligation, computerized markets, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, equity risk premium, fear index, financial engineering, fixed income, Glass-Steagall Act, implied volatility, index fund, intangible asset, interest rate swap, inventory management, inverted yield curve, junk bonds, London Interbank Offered Rate, low interest rates, margin call, money market fund, mortgage debt, Myron Scholes, passive investing, performance metric, risk free rate, risk tolerance, risk-adjusted returns, risk/return, shareholder value, Sharpe ratio, short selling, short squeeze, statistical model, time value of money, transaction costs, yield curve, zero-coupon bond

Related Terms: • Modified Internal Rate of Return • Risk-Return Trade-Off • U.S. Treasury • Return on Investment—ROI • Treasury Bill—T-Bill Risk-Return Trade-Off What Does Risk-Return Trade-Off Mean? The principle that potential return rises with an increase in risk. Low levels of uncertainty (low risk) are associated with low potential returns, whereas high levels of uncertainty (high risk) are associated with high potential returns. According to the risk-return trade-off, invested money can render higher profits only if it is subject to the possibility of being lost. Investopedia explains Risk-Return Trade-Off Because of the risk-return trade-off, investors must recognize their personal risk tolerance when choosing investments.

Investopedia explains Coefficient of Variation (CV) The coefficient of variation allows investors to determine how much volatility (risk) they are assuming in relation to the amount of expected return from an investment; the lower the ratio of standard deviation to the mean return is, the better the risk-return trade-off is. Note that if the expected return in the denominator of the calculation is negative or zero, the ratio will not make sense. Related Terms: • Beta • Risk-Return Trade-Off • Volatility • Expected Return • Standard Deviation Collateral What Does Collateral Mean? Properties or assets that secure a loan or another debt. Collateral becomes subject to seizure on default.

The risk inherent to each party to a contract that the counterparty will not live up to its contractual obligations. The Investopedia Guide to Wall Speak 55 Investopedia explains Counterparty Risk In most financial contracts, counterparty risk is known as default risk. Related Terms: • Beta • Risk-Return Trade-Off • Unsystematic Risk • Risk • Systematic Risk Coupon What Does Coupon Mean? The interest rate stated on a bond when it is issued. The coupon typically is paid semiannually. This also is referred to as the coupon rate or coupon percent rate. Investopedia explains Coupon For example, a $1,000 bond with a coupon of 7% will pay $70 a year.


Stocks for the Long Run, 4th Edition: The Definitive Guide to Financial Market Returns & Long Term Investment Strategies by Jeremy J. Siegel

addicted to oil, Alan Greenspan, asset allocation, backtesting, behavioural economics, Black-Scholes formula, book value, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, capital asset pricing model, cognitive dissonance, compound rate of return, correlation coefficient, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, Everybody Ought to Be Rich, fixed income, German hyperinflation, implied volatility, index arbitrage, index fund, Isaac Newton, it's over 9,000, John Bogle, joint-stock company, Long Term Capital Management, loss aversion, machine readable, market bubble, mental accounting, Money creation, Myron Scholes, new economy, oil shock, passive investing, Paul Samuelson, popular capitalism, prediction markets, price anchoring, price stability, proprietary trading, purchasing power parity, random walk, Richard Thaler, risk free rate, risk tolerance, risk/return, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, stock buybacks, stocks for the long run, subprime mortgage crisis, survivorship bias, technology bubble, The Great Moderation, The Wisdom of Crowds, transaction costs, tulip mania, uptick rule, Vanguard fund, vertical integration

CHAPTER 2 Risk, Return, and Portfolio Allocation FIGURE 33 2–5 Risk-Return Trade-Offs for Various Holding Periods, 1802 through December 2006 curve means increasing the proportion in stocks and correspondingly reducing the proportion in bonds. As stocks are added to the all-bond portfolio, expected returns increase and risk decreases, a very desirable combination for investors. But after the minimum risk point is reached, increasing stocks will increase the return of the portfolio but only with extra risk. The slope of any point on the efficient frontier indicates the risk-return trade-off for that allocation.

The historical correlation between the annual returns in U.S. and non-U.S. markets has been about 57 percent, which means that 57 percent of the variation in non-U.S. markets is also seen in U.S. stock returns. Using these historical data allows us to construct Figure 10-2, which shows the risk-return trade-off (called the efficient frontier) for dollar-based investors depending on varying the proportions that are invested in foreign markets (measured by the EAFE Index) and U.S. markets. The minimum risk for this world portfolio occurs when 22.5 percent is allocated to EAFE stocks and thus 77.5 percent to U.S. stocks. But the “best” risk-return portfolio, called the efficient portfolio, is not the one with the lowest risk but the one that optimally balances risk and return.

For more information about this title, click here C O N T E N T S Foreword xv Preface xvii Acknowledgments xxi PART 1 THE VERDICT OF HISTORY Chapter 1 Stock and Bond Returns Since 1802 3 “Everybody Ought to Be Rich” 3 Financial Market Returns from 1802 5 The Long-Term Performance of Bonds 7 The End of the Gold Standard and Price Stability 9 Total Real Returns 11 Interpretation of Returns 12 Long-Term Returns 12 Short-Term Returns and Volatility 14 Real Returns on Fixed-Income Assets 14 The Fall in Fixed-Income Returns 15 The Equity Premium 16 Worldwide Equity and Bond Returns: Global Stocks for the Long Run 18 Conclusion: Stocks for the Long Run 20 Appendix 1: Stocks from 1802 to 1870 21 Appendix 2: Arithmetic and Geometric Returns 22 v vi Chapter 2 Risk, Return, and Portfolio Allocation: Why Stocks Are Less Risky Than Bonds in the Long Run 23 Measuring Risk and Return 23 Risk and Holding Period 24 Investor Returns from Market Peaks 27 Standard Measures of Risk 28 Varying Correlation between Stock and Bond Returns 30 Efficient Frontiers 32 Recommended Portfolio Allocations 34 Inflation-Indexed Bonds 35 Conclusion 36 Chapter 3 Stock Indexes: Proxies for the Market 37 Market Averages 37 The Dow Jones Averages 38 Computation of the Dow Index 39 Long-Term Trends in the Dow Jones 40 Beware the Use of Trend Lines to Predict Future Returns 41 Value-Weighted Indexes 42 Standard & Poor’s Index 42 Nasdaq Index 43 Other Stock Indexes: The Center for Research in Security Prices (CRSP) 45 Return Biases in Stock Indexes 46 Appendix: What Happened to the Original 12 Dow Industrials?


Mastering Private Equity by Zeisberger, Claudia,Prahl, Michael,White, Bowen, Michael Prahl, Bowen White

Alan Greenspan, asset allocation, backtesting, barriers to entry, Basel III, Bear Stearns, book value, business process, buy low sell high, capital controls, carbon credits, carried interest, clean tech, commoditize, corporate governance, corporate raider, correlation coefficient, creative destruction, currency risk, deal flow, discounted cash flows, disintermediation, disruptive innovation, distributed generation, diversification, diversified portfolio, family office, fixed income, high net worth, impact investing, information asymmetry, intangible asset, junk bonds, Lean Startup, low interest rates, market clearing, Michael Milken, passive investing, pattern recognition, performance metric, price mechanism, profit maximization, proprietary trading, risk tolerance, risk-adjusted returns, risk/return, Savings and loan crisis, shareholder value, Sharpe ratio, Silicon Valley, sovereign wealth fund, statistical arbitrage, time value of money, transaction costs, two and twenty

The maturity or stage of the development has of course a distinct impact on the risk−return profile of the underlying investment: a pre-completion project requires a higher risk tolerance but offers the greatest potential for price appreciation, while an investment in mature projects provides exposure to stable, long-term cash flows.5 Leverage is typically employed at all stages of development to enhance returns, with the physical assets themselves serving as collateral. Exhibit 5.4 provides a simple overview of the two project stages (early stage and mature) and the risk−return characteristics of real estate, infrastructure and natural resources projects.

Used together with the case book Private Equity in Action—Case Studies from Developed and Emerging Markets, which complements the text, this book brings the learning points to life and offers readers a ringside seat to the day-to-day challenges facing partners in PE and venture funds. For novices to the field of PE, our book provides clear insights into the workings of the industry. While the book assumes a sound understanding of basic finance, accounting techniques and risk–return concepts, it offers links to literature and research to ensure clarity for those rusty in the theoretical concepts behind today's financial markets. Graduate and postgraduate students will find the book an invaluable companion for their PE, venture capital and entrepreneurship courses; it will allow them to connect the dots and ensure that an understanding of the dynamics in the industry is maintained as they explore the respective chapters in greater detail.

The larger number of portfolio companies and the high rate of failure require VCs to make tough decisions and (potentially) write off underperforming investments quickly to focus their time and resources on the most promising companies. Entrepreneurs are well advised to be aware of these dynamics before presenting their business plans to a VC fund. The risk−return dynamics of VC investing are a concern for its investors. While limited partners remain intrigued by the industry’s well-publicized winners and its fabled returns, a landmark report by the Kauffman Foundation published in 20126 raised doubts on the return contributions from venture to an institutional portfolio, implying that the risks may outweigh the strategy’s return and that LPs make decisions based on “seductive narratives like vintage year and quartile performance.”


Capital Ideas Evolving by Peter L. Bernstein

Albert Einstein, algorithmic trading, Andrei Shleifer, asset allocation, behavioural economics, Black Monday: stock market crash in 1987, Bob Litterman, book value, business cycle, buy and hold, buy low sell high, capital asset pricing model, commodity trading advisor, computerized trading, creative destruction, currency risk, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, diversification, diversified portfolio, endowment effect, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, fixed income, high net worth, hiring and firing, index fund, invisible hand, Isaac Newton, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Arrow, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, market bubble, mental accounting, money market fund, Myron Scholes, paper trading, passive investing, Paul Samuelson, Performance of Mutual Funds in the Period, price anchoring, price stability, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, seminal paper, Sharpe ratio, short selling, short squeeze, Silicon Valley, South Sea Bubble, statistical model, survivorship bias, systematic trading, tail risk, technology bubble, The Wealth of Nations by Adam Smith, transaction costs, yield curve, Yogi Berra, zero-sum game

Today, as in the past (and in some ways even more so than in the past), only a precious few investors have found strategies to beat the markets with any acceptable degree of consistency. Although Markowitz’s prescription for constructing portfolios requires assumptions we cannot replicate in the real world, the risk/return trade-off is central to all investment choices. Just as essential, Markowitz’s emphasis on the difference between the portfolio as a whole and its individual holdings has gained rather than lost relevance with the passage of time. The beta of the Capital Asset Pricing Model is no longer the single parameter of risk, but investors cannot afford to ignore the distinction between the risk of the expected returns of an asset class and the risk in decisions to bern_a03fpref.qxd xx 3/23/07 8:43 AM Page xx PREFACE outperform that asset class.

CAPM derives from mean/variance estimates for only one time period; there is only one asset to worry about and value; being in the market is the only risk that is rewarded; the investor takes no risks other than the risk of being in the market; and expected return and risk are always positively correlated. “These are really extreme assumptions,” Sharpe adds. Once unshackled from CAPM’s stylized view of the real world, the investor can employ a more varied and realistic setting when making choices. State-preference theory enables us to price assets and optimize the risk/return trade-off under a wide range of possible outcomes, taking into consideration the probabilities that each outcome may occur. As a consequence, this approach could include situations where the distribution of returns differs from the bell-shaped normal distribution. As Sharpe describes this approach, it also allows investors to consider “at least a limited range of more complex preferences of the sort Danny Kahneman has talked about [or] the implications of a world in which people have disagreements about * A more complete and extended version of Sharpe’s views on these matters appears in Sharpe (2006).

Although Scholes explicitly excludes considerations of alpha and beta in the management of his hedge fund, and although he claims the search for omega is not a zero-sum game, the roots of his strategies are still deeply imbedded in the basic structures of Capital Ideas. Risk, in all its manifestations, is the central consideration in everything his fund undertakes, and the risk/return trade-off is basic to all decisions. He makes little use of the Capital Asset Pricing Model, but assumptions of market efficiency explain why he insists the investments in his fund are not based on “mispricings” but, rather, on value created by investors seeking to shed risks by making it profitable for others to assume those risks for them.


The Smartest Investment Book You'll Ever Read: The Simple, Stress-Free Way to Reach Your Investment Goals by Daniel R. Solin

Alan Greenspan, asset allocation, buy and hold, corporate governance, diversification, diversified portfolio, index fund, John Bogle, market fundamentalism, money market fund, Myron Scholes, PalmPilot, passive investing, prediction markets, prudent man rule, random walk, risk tolerance, risk-adjusted returns, risk/return, transaction costs, Vanguard fund, zero-sum game

Su securities industry i$hares (ETF funds). website for, 15 &t also ETFs (exchange traded funds) iShares CON Bond Index Fund (XBB), 1\, 130, 180 iShares C DN Composite Index Fund (XIC). 15. 130, 180 iShares CON Income Trust Sector Index Fund, 135 iShares CON MSCI EAFE Index Fund (XlN). 15, 130. 180 iShares C DN S&P 500 Index Fund (XSP) . 15. 130, 180 rebalancing ponfolio$, 120, 132-33 risk and. 122-23 risk return comparison (01",,), 14,74--76 standard deviation to measure risk, 67-68, 85. 126. 138 value and small-cap equities in. 11 4 Set also asset allocation; Four-Step Process for Smart Investors investment portfolios. four model benefits of, 85-86. 144 chan, risk returns, 125 ETFs in, 15, 130-31 examples of, 85, 125--26, 130,180 how to choose, 124 risk and return summary, 179-80 Slandard d~ations in, 67-68,85, 126,138 Jensen, 153 Jog.

Reported at: http://finance. yahoo. com/ columnist/ article/ futureinvest/ 6953 Everyone wants to make as big a return as he or she can. But at what risk? The possibility of gaining a few percentage points on the upside may be dwarfed by the increase in downside risk. Take a look at the chart on page 74, which illustrates this point. 74 Your Broker or Advisor Is Keeping You from Being a Smart Im"eStor RISK RETURN COMPARISON (DitlI'Iri8l: 1911-2005) 11m _ • C*dI Yur lois AmgII AuuaJ II!ln • &1M SIKb 141M iIIJlIk ....... "" .,.. "" ... '" "' "" ,"' "" . . As you can see, if you invested in a diversified portfolio consisting of 100% stocks during the period 1977 to 2005, your average rerum would have been 1 1.7%.

., 149- 50 Berkshire Hathaway, 108 Bernstein, William, 142, 182 Bhattacharya, Utpal. 168 Biggs, Barton, 95 Blake, Christopher R., 158 Blirzcr, David M., 105 Bodie, Zvi, 163 Bogle, John c., 48, 89, 129, 147-48,150,159--60,168, 182 Bogk on Mutual Funds (Bogle), 182 bonds abo ut bonds, 13, 7 1 as asser class, 13,40,71, 121, IG2 186 Index risk return comparison (chan), 14,74-76 bond index funds, 19 Set also iShares CON Bond Index Fund (XBS) borrowing on margin, 77-78 Bowen,JohnJ.,84 Brinson, Gary P.. 12 1. 162 brokerage firms. Sf( securities industry Buffett, Warren, 86, 108-9 for index nmds, 147 for management fees, 5, 25, 35,37,62-63,88-90, 147,159--60 for sales and trading, 25, 35- 37, 53, 59-60, 63, 115.119, 128,154 for trading online. 119 for wrap accounts, 65--66 front-load and no-load funds, 60, 63 management expense ratio Cadsby, Ted, 181 Carrick, Rob, 65, 16 1 cash, as asset class, 40, 121 Chalmers, John M.R.• 149-50 C handler, James L. , 162 charitable organi7..ations, as Smart Investors, lOG C hevreau, Jonathan, 44, 77, 93, 146 chimp Story, 3-4. 146 Clements, Jonathan. 26, 29, 93, 152 commissions.


pages: 542 words: 145,022

In Pursuit of the Perfect Portfolio: The Stories, Voices, and Key Insights of the Pioneers Who Shaped the Way We Invest by Andrew W. Lo, Stephen R. Foerster

Alan Greenspan, Albert Einstein, AOL-Time Warner, asset allocation, backtesting, behavioural economics, Benoit Mandelbrot, Black Monday: stock market crash in 1987, Black-Scholes formula, Bretton Woods, Brownian motion, business cycle, buy and hold, capital asset pricing model, Charles Babbage, Charles Lindbergh, compound rate of return, corporate governance, COVID-19, credit crunch, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, Edward Glaeser, equity premium, equity risk premium, estate planning, Eugene Fama: efficient market hypothesis, fake news, family office, fear index, fiat currency, financial engineering, financial innovation, financial intermediation, fixed income, hiring and firing, Hyman Minsky, implied volatility, index fund, interest rate swap, Internet Archive, invention of the wheel, Isaac Newton, Jim Simons, John Bogle, John Meriwether, John von Neumann, joint-stock company, junk bonds, Kenneth Arrow, linear programming, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, managed futures, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, money market fund, money: store of value / unit of account / medium of exchange, Myron Scholes, new economy, New Journalism, Own Your Own Home, passive investing, Paul Samuelson, Performance of Mutual Funds in the Period, prediction markets, price stability, profit maximization, quantitative trading / quantitative finance, RAND corporation, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, selection bias, seminal paper, shareholder value, Sharpe ratio, short selling, South Sea Bubble, stochastic process, stocks for the long run, survivorship bias, tail risk, Thales and the olive presses, Thales of Miletus, The Myth of the Rational Market, The Wisdom of Crowds, Thomas Bayes, time value of money, transaction costs, transfer pricing, tulip mania, Vanguard fund, yield curve, zero-coupon bond, zero-sum game

“De Finetti Scoops Markowitz.” Journal of Investment Management 4: 5–18. ________. 2010. “God, Ants and Thomas Bayes.” American Economist 55, no. 2: 5–9. ________. 2016. Risk-Return Analysis, Vol. 2, The Theory and Practice of Rational Investing. New York: McGraw-Hill. ________. 2020. Risk-Return Analysis, Vol. 3, The Theory and Practice of Rational Investing. New York: McGraw-Hill. Markowitz, Harry M., and Kenneth Blay. 2014. Risk-Return Analysis, Vol. 1, The Theory and Practice of Rational Investing. New York: McGraw-Hill. Marschak, J. 1938. “Money and the Theory of Assets.” Econometrica 6, no. 4: 311–25. ________. 1946.

In what, in retrospect, can be described as a tremendous understatement, Markowitz noted that “the calculation of efficient surfaces might possibly be of practical use.”45 Once an efficient set of portfolios could be determined, then investors might state the preferred portfolio for their desired risk-return combination. Markowitz was quick to point out that in order to be of practical use, two broad conditions first needed to apply. First, investors had to act “according to the E-V maxim.”46 In other words, investors needed to find higher expected returns more desirable, the “E” of the E-V maxim, while at the same time finding more variance (or variability) less desirable, the “V” of the E-V maxim, and only consider these two factors.

“The way I see things going in the next sixty years … is for the human-computer division of labor to cover more fully the various aspects of financial planning.”107 To that end, having laid the foundation in his first and second volumes, Markowitz recently completed the third volume of a projected four-volume series titled Risk-Return Analysis: The Theory and Practice of Rational Investing.108 These books expand on the analysis Markowitz first presented in his 1959 book, justifying the use of mean-variance analysis as a rational approach to decision making under uncertainty. According to Markowitz, despite its title, the series is “not about rational investing, it’s about rational decision making for financial planning.”109 Markowitz noted that portfolio selection needs to be considered in a broad context: “Just analyzing the portfolio selection decision in isolation is like trying to decide how bishops should move in a chess game without considering the chess game as a whole.”


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Beyond Diversification: What Every Investor Needs to Know About Asset Allocation by Sebastien Page

Andrei Shleifer, asset allocation, backtesting, Bernie Madoff, bitcoin, Black Swan, Bob Litterman, book value, business cycle, buy and hold, Cal Newport, capital asset pricing model, commodity super cycle, coronavirus, corporate governance, COVID-19, cryptocurrency, currency risk, discounted cash flows, diversification, diversified portfolio, en.wikipedia.org, equity risk premium, Eugene Fama: efficient market hypothesis, fixed income, future of work, Future Shock, G4S, global macro, implied volatility, index fund, information asymmetry, iterative process, loss aversion, low interest rates, market friction, mental accounting, merger arbitrage, oil shock, passive investing, prediction markets, publication bias, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Feynman, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, robo advisor, seminal paper, shareholder value, Sharpe ratio, sovereign wealth fund, stochastic process, stochastic volatility, stocks for the long run, systematic bias, systematic trading, tail risk, transaction costs, TSMC, value at risk, yield curve, zero-coupon bond, zero-sum game

To further illustrate the power of diversification between covered call writing and managed volatility, Stefan estimated returns, volatilities, downside risk, and relative performance statistics for the stand-alone and combined strategies. Based on data from January 1996 to December 2015, the risk-return ratio of the S&P 500 is 0.41. When combined with the covered call writing strategy (with gross exposure capped at 125%), the S&P 500’s risk-return ratio increases from 0.41 to 0.49, while downside risk is only marginally reduced. But when we add managed volatility, the risk-return ratio jumps from 0.49 to 0.69 (even though the stand-alone managed volatility strategy had a relatively low risk-return ratio of 0.17), and downside risk is reduced substantially. Takeaways and Q&A To summarize, volatility has been shown to be persistent, and in the short run, it has not been predictive of returns.

Their betas are all that matter.17 From that perspective, CAPM forecasts are most relevant for long investment horizons, say, over 10 years. They’re useful as inputs for life cycle investing applications, for example. Also, CAPM results can indicate whether valuation spreads, relative to long-term averages or between asset classes, may be transitory or permanent. All else being equal, the further away valuations are from their risk-return “CAPM equilibrium,” the greater the gravitational pull of mean reversion. But there’s another issue I should emphasize: the betas are just statistical estimates produced by a risk model. They’re not very forward-looking. In Table 1.1, non-US small caps have a lower beta than non-US large caps.

For unhedged international bonds, correlation peaks at 57% at 0.5 duration (here the effect of currency risk muddies the water). Harvey and Stonacek conclude that “current yields are most highly correlated with future returns for higher-quality and hedged bond indexes. As these indexes follow stricter maturity, duration, and quality rules, they present a more stable risk/return profile than unhedged and lower quality indexes.” For equity asset classes, even a 57% correlation between a simple, publicly available indicator and subsequent returns would be remarkable. Yet some of the fiercest debates I’ve witnessed on expected returns have been between bond quants, on how to account for minute details that may or may not improve the forecast.


The Handbook of Personal Wealth Management by Reuvid, Jonathan.

asset allocation, banking crisis, BRICs, business cycle, buy and hold, carbon credits, collapse of Lehman Brothers, correlation coefficient, credit crunch, cross-subsidies, currency risk, diversification, diversified portfolio, estate planning, financial deregulation, fixed income, global macro, high net worth, income per capita, index fund, interest rate swap, laissez-faire capitalism, land tenure, low interest rates, managed futures, market bubble, merger arbitrage, negative equity, new economy, Northern Rock, pattern recognition, Ponzi scheme, prediction markets, proprietary trading, Right to Buy, risk tolerance, risk-adjusted returns, risk/return, short selling, side project, sovereign wealth fund, statistical arbitrage, systematic trading, transaction costs, yield curve

ឣ 84 REAL ESTATE AND FORESTRY ______________________________________________ Larger-scale investors who are content to place themselves in a limited geography and to move a bit further up the risk–return spectrum can consider a direct forest purchase, managed by an experienced forestry management company. It is essential to obtain good value upon purchase at the outset; efficient sourcing and due diligence on properties are required. Risk–return profiles of forestry investments The typical returns from forestry investments in mature forestry markets, such as the United States or Australasia, have been estimated since the early 2000s to be in a typical range of 6 to 7 per cent per annum after inflation and before tax.

66 2.2 The overseas property market in the economic downturn James Price, Knight Frank LLP A ‘nice to have’ 69; Markets within the market 69; Which buyers are most active? 73; Outlook 74 2.3 Current opportunities in forestry investment Alan Guy and Alastair Sandels, Fountains Plc Introduction 79; The nature of the forestry asset class 79; Special qualities of forestry investment 80; Types of investment in the forestry asset class 82; Risk–return profiles of forestry investments 84; New revenue sources from forestry 85; Summary 85 2.4 Risks and direct investment in forestry Alan Guy and Alastair Sandels, Fountains Plc Risks in forestry investment 87; Direct investment 89; How UK and US forestry has performed in recent years 91; Tax treatment of forestry in the UK and United States 92; Summary 92 2.5 Timber investments in South-East Asia Guy Conroy, Oxigen Investments An ethical way to watch your money grow 94; Timber outperforms the stock market 96; Sri Lanka: the natural forest 97; Malaysia: ideal for teak 98; The science of trees 99; Agroforestry: a new ethical investment 100; What investors want to know 101; Can the experts all be wrong?

No matter how complex the concluding-solution set of investment answers is, that set is effectively meaningless to the client if the underlying inputs are questionable. Effective wealth managers appreciate the importance of this. Most ‘optimal’ outputs incorporate a degree of quantitative science. Such approaches typically embed a series of risk, return and correlation assumptions (and may also incorporate a confidence function). By means of a presumed optimization methodology, a mix of asset classes can be identified that matches an investor’s profile and steers him or her on a path to achieving investment objectives. Since the development of modern portfolio theory, analysts have questioned the validity of certain portfolio approaches.


pages: 354 words: 26,550

High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems by Irene Aldridge

algorithmic trading, asset allocation, asset-backed security, automated trading system, backtesting, Black Swan, Brownian motion, business cycle, business process, buy and hold, capital asset pricing model, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, computerized trading, diversification, equity premium, fault tolerance, financial engineering, financial intermediation, fixed income, global macro, high net worth, implied volatility, index arbitrage, information asymmetry, interest rate swap, inventory management, Jim Simons, law of one price, Long Term Capital Management, Louis Bachelier, machine readable, margin call, market friction, market microstructure, martingale, Myron Scholes, New Journalism, p-value, paper trading, performance metric, Performance of Mutual Funds in the Period, pneumatic tube, profit motive, proprietary trading, purchasing power parity, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Sharpe ratio, short selling, Small Order Execution System, statistical arbitrage, statistical model, stochastic process, stochastic volatility, systematic trading, tail risk, trade route, transaction costs, value at risk, yield curve, zero-sum game

High-frequency strategies focus on the most liquid securities; a security requiring a holding period of 10 minutes may not be able to find a timely counterparty in illiquid markets. While longer-horizon investors can work with either liquid or illiquid securities, Amihud and Mendelson (1986) show that longer-horizon investors optimally hold less liquid assets. According to these authors, the key issue is the risk/return consideration; longer-term A 37 38 HIGH-FREQUENCY TRADING investors (already impervious to the adverse short-term market moves) will obtain higher average gains by taking on more risk in less liquid investments. According to Bervas (2006), a perfectly liquid market is the one where the quoted bid or ask price can be achieved irrespective of the quantities traded.

The discipline of portfolio optimization originated from the seminal work of Markowitz (1952). The two dimensions of a portfolio that he reviewed are the average return and risk of the individual securities that compose the portfolio and of the portfolio as a whole. Optimization is conducted by constructing an “efficient frontier,” a set of optimal risk-return portfolio combinations for the various instruments under consideration. In the absence of leveraging opportunities (opportunities to borrow and increase the total capital available as well as opportunities to lend to facilitate leverage of others), the efficient frontier is constructed as follows: 1.

For every possible combination of security allocations, the risk and return are plotted on a two-dimensional chart, as shown in Figure 14.1. Due to the quadratic nature of the risk function, the resulting chart takes the form of a hyperbola. Return Risk FIGURE 14.1 Graphical representation of the risk-return optimization constructed in the absence of leveraging opportunities. The bold line indicates the efficient frontier. 203 Creating and Managing Portfolios of High-Frequency Strategies 2. The points with the highest level of return for every given level of risk are selected as the efficient frontier.


The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk by William J. Bernstein

asset allocation, backtesting, book value, buy and hold, capital asset pricing model, commoditize, computer age, correlation coefficient, currency risk, diversification, diversified portfolio, Eugene Fama: efficient market hypothesis, financial engineering, fixed income, index arbitrage, index fund, intangible asset, John Bogle, junk bonds, Long Term Capital Management, p-value, passive investing, prediction markets, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, South Sea Bubble, stocks for the long run, survivorship bias, the rule of 72, the scientific method, time value of money, transaction costs, Vanguard fund, Wayback Machine, Yogi Berra, zero-coupon bond

Unfortunately, the above examples are no more than useful illustrations of the theoretical benefits of diversified portfolios. In the real world of investing, we must deal with mixes of dozens of asset types, each with a different return and risk. Even worse, the returns of these assets are only rarely completely uncorrelated. Worse still, the risks, returns, and correlations of these assets fluctuate considerably over time. In order to understand real portfolios, we shall require much more complex techniques. Thus far we have dealt with portfolios with only two uncorrelated components. Two uncorrelated assets may be represented with four time periods as in Uncle Fred’s coin toss, three assets with eight periods, four assets with 16 periods, etc.

A recurring theme in these pages is that you try as hard as you can to identify the diverse strains of current financial wisdom in order that you may ignore them. Now that we’ve ascertained that the popular view of international diversification has been poisoned by the recent poor performance of foreign stocks, what does the “complete” data show? Figure 4-5 is the risk-return plot for the full 30-year period from 1969 to 1998. For this period the returns for the S&P (12.67%) and EAFE (12.39%) were nearly identical. Note also how narrowly spaced the return values on the y axis are, with less than 1% separating all of the portfolio returns. The Behavior of Real-World Portfolios 49 Note how “bulgy” this plot is.

We are looking at recency again— our tendency to overemphasize recent events. However, no one questions that small stocks are more risky than large stocks. In Figure 4 -7, I’ve plotted various mixes of small and large stocks with the ubiquitous five-year Treasury notes. First, note that the two plots nearly overlap. In other words, the risk-return curves are very Figure 4-7. Large and small stocks/bonds, 1926–1998. 54 The Intelligent Asset Allocator similar, except that the small-stock curve extends out a lot farther to the right than the S&P curve. In the present graph, large stock and bond mixes appear to be slightly more efficient than small stock and bond mixes.


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The Four Pillars of Investing: Lessons for Building a Winning Portfolio by William J. Bernstein

Alan Greenspan, asset allocation, behavioural economics, book value, Bretton Woods, British Empire, business cycle, butter production in bangladesh, buy and hold, buy low sell high, carried interest, corporate governance, cuban missile crisis, Daniel Kahneman / Amos Tversky, Dava Sobel, diversification, diversified portfolio, Edmond Halley, equity premium, estate planning, Eugene Fama: efficient market hypothesis, financial engineering, financial independence, financial innovation, fixed income, George Santayana, German hyperinflation, Glass-Steagall Act, high net worth, hindsight bias, Hyman Minsky, index fund, invention of the telegraph, Isaac Newton, John Bogle, John Harrison: Longitude, junk bonds, Long Term Capital Management, loss aversion, low interest rates, market bubble, mental accounting, money market fund, mortgage debt, new economy, pattern recognition, Paul Samuelson, Performance of Mutual Funds in the Period, quantitative easing, railway mania, random walk, Richard Thaler, risk tolerance, risk/return, Robert Shiller, Savings and loan crisis, South Sea Bubble, stock buybacks, stocks for the long run, stocks for the long term, survivorship bias, Teledyne, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, the rule of 72, transaction costs, Vanguard fund, yield curve, zero-sum game

Value of $1.00 invested in stocks, bonds, and bills, 1901–2000 (semilogarithmic scale). (Source: Jeremy Siegel.) Risk—The Second Dimension The study of investment returns is only half of the story. Distilled to its essence, investing is about earning a return in exchange for shouldering risk. Return is by far the easiest half, because it is simple to define and calculate, either as “total returns”—the end values in Figures 1-7 and 1-8, or as “annualized returns”—the hypothetical gain you’d have to earn each year to reach that value. Risk is a much harder thing to define and measure. It comes in two flavors: short-term and long-term.

But these are the winning lottery tickets in the growth stock sweepstakes. For every growth stock with high returns, there are a dozen that, within a very brief time, disappointed the market with lower-than-expected earnings growth and were consequently taken out and shot. Summing Up: The Historical Record on Risk/Return I’ve previously summarized the returns and risks of the major U.S. stock and bond classes over the twentieth century in Table 1-1. In Figure 1-19, I’ve plotted these data. Figure 1-19 shows a clear-cut relationship between risk and return. Some may object to the magnitude of the risks I’ve shown for stocks.

That is not to say that your return requirements are immaterial. For example, if you have saved a large amount for retirement and do not plan to leave a large estate for your heirs or to charity, you may require a very low return to meet your ongoing financial needs. In that case, there would be little sense in choosing a high risk/return mix, no matter how great your risk tolerance. Figure 4-6. Portfolio risk versus return of bill/stock mixes, 1901–2000. There’s another factor to consider here as well, and that’s the probability that stock returns may be lower in the future than they have been in the past. The slope of the portfolio curve in Figure 4-6 is steep—in other words, in the twentieth century, there was a generous reward for bearing additional portfolio risk.


pages: 504 words: 139,137

Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined by Lasse Heje Pedersen

activist fund / activist shareholder / activist investor, Alan Greenspan, algorithmic trading, Andrei Shleifer, asset allocation, backtesting, bank run, banking crisis, barriers to entry, Bear Stearns, behavioural economics, Black-Scholes formula, book value, Brownian motion, business cycle, buy and hold, buy low sell high, buy the rumour, sell the news, capital asset pricing model, commodity trading advisor, conceptual framework, corporate governance, credit crunch, Credit Default Swap, currency peg, currency risk, David Ricardo: comparative advantage, declining real wages, discounted cash flows, diversification, diversified portfolio, Emanuel Derman, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, financial engineering, fixed income, Flash crash, floating exchange rates, frictionless, frictionless market, global macro, Gordon Gekko, implied volatility, index arbitrage, index fund, interest rate swap, junk bonds, late capitalism, law of one price, Long Term Capital Management, low interest rates, managed futures, margin call, market clearing, market design, market friction, Market Wizards by Jack D. Schwager, merger arbitrage, money market fund, mortgage debt, Myron Scholes, New Journalism, paper trading, passive investing, Phillips curve, price discovery process, price stability, proprietary trading, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, Reminiscences of a Stock Operator, Renaissance Technologies, Richard Thaler, risk free rate, risk-adjusted returns, risk/return, Robert Shiller, selection bias, shareholder value, Sharpe ratio, short selling, short squeeze, SoftBank, sovereign wealth fund, statistical arbitrage, statistical model, stocks for the long run, stocks for the long term, survivorship bias, systematic trading, tail risk, technology bubble, time dilation, time value of money, total factor productivity, transaction costs, two and twenty, value at risk, Vanguard fund, yield curve, zero-coupon bond

When done carefully, portfolio optimization provides a tool to reap the full benefits of diversification, to efficiently exploit high-conviction trades without excessive concentration, to systematically adjust positions based on the time-varying risk and expected return, and to minimize subjectivity in the portfolio choice. In summary, good portfolio construction techniques can help achieve a favorable risk-return profile for a set of trading ideas. A systematic approach helps reduce a trader’s own behavioral biases, that is, his tendencies to make certain mistakes. For instance, people like to hang on to their losing positions even if the reason they liked the securities no longer applies, and they like to sell winners to lock in gains even if the trade has gotten even better. 4.2.

LA: It’s purely driven by the discipline of making sure our portfolio is always focused on the opportunities we judge to be the most attractive. In the utopian world, every single day we would consider the return we think we can achieve in every one of our positions, how much risk we need to take to achieve that return, and how that risk-return profile compares to every other investment opportunity that we have. So if something is being bought or sold, that typically means we have concluded that another investment is more attractive at that point in time than a current investment. Of course, this is all easier in theory than in practice, but that’s our mindset.

A significant portion of the capital invested in the markets is invested in a manner that is very aligned with the relevant weightings to an index, typically on a cap-weighted basis. At Maverick, we are blissfully ignorant of a particular stock’s or sector’s weighting in any index—all we care about is the attractiveness of an investment on a risk-return basis. Last but not least, I think stability has been a big advantage for us over the years. We’ve enjoyed stability of both our investment team and our investor base, which really does allow us to invest with a longer term horizon. The vast majority of the capital we manage is attributable to profits we have generated for our investors, and most of the capital we manage has been invested in Maverick for more than ten years.


pages: 345 words: 87,745

The Power of Passive Investing: More Wealth With Less Work by Richard A. Ferri

Alan Greenspan, asset allocation, backtesting, Benchmark Capital, Bernie Madoff, book value, buy and hold, capital asset pricing model, cognitive dissonance, correlation coefficient, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, endowment effect, estate planning, Eugene Fama: efficient market hypothesis, fixed income, implied volatility, index fund, intangible asset, John Bogle, junk bonds, Long Term Capital Management, money market fund, passive investing, Paul Samuelson, Performance of Mutual Funds in the Period, Ponzi scheme, prediction markets, proprietary trading, prudent man rule, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Sharpe ratio, survivorship bias, Tax Reform Act of 1986, too big to fail, transaction costs, Vanguard fund, yield curve, zero-sum game

See American Stock Exchange (Amex) AQR Capital Management Art of Selling Intangibles, The (Gross) Asness, Cliff Assessments Asset allocation strategy: in 5-step process active asset classes and individual investors and for an IPS market conditions and passive risk/return assessment in strategic tactical Asset class: long-term expected risk/returns non-core asset classes volatility of Assets under management (AUM) AUM. See Assets under management (AUM) Bad accounting Banz, Rolf Barclays Capital Aggregate Bond Index Barra Inc. Basu, Sanjoy Batterymarch Financial Management Beardstown Ladies, the Bear market: advisors and endowment effect and market timing gaps and policy changes and risk and Beat-the-market advice Behavioral finance Benchmarking, improper Benchmark(s): buying defining good definition of identification of proper index funds and strategy index products and Benchmarks and Investment Management (Siegel) Benefits, passive index investing Berkshire Hathaway Inc.

The objective of portfolio management is to create and follow an investment policy that provides the resources required to meet current and future obligations. At its core, the portfolio management process relies on a prudent mix of asset classes that’s based on research and reasonable assumptions about future risks, returns, and correlation with each other. Strict adherence to an asset allocation strategy is required for the investment policy to have its desired effect and avoid unwanted drift. This requires the regular monitoring of asset class levels since the markets are constantly moving. Occasional rebalancing back to the target asset allocation ensures that the portfolio stays on track.

Fiduciary 360 and its affiliate the Foundation for Fiduciary Studies are two of many private organizations dedicated to investment fiduciary education, practice management, and support. These organizations have identified similar characteristics of both model acts. There are seven Global Fiduciary Precepts.1 1. Know standards, laws, and trust provisions. 2. Diversify assets to specific risk/return profile of the trust. 3. Prepare investment policy statement. 4. Use prudent experts (for example, an investment advisor) and document due diligence when selecting experts. 5. Monitor the activity of the prudent experts. 6. Control and account for investment expenses. 7. Avoid conflicts of interests and prohibited transactions.


pages: 369 words: 128,349

Beyond the Random Walk: A Guide to Stock Market Anomalies and Low Risk Investing by Vijay Singal

3Com Palm IPO, Andrei Shleifer, AOL-Time Warner, asset allocation, book value, buy and hold, capital asset pricing model, correlation coefficient, cross-subsidies, currency risk, Daniel Kahneman / Amos Tversky, diversified portfolio, endowment effect, fixed income, index arbitrage, index fund, information asymmetry, information security, junk bonds, liberal capitalism, locking in a profit, Long Term Capital Management, loss aversion, low interest rates, margin call, market friction, market microstructure, mental accounting, merger arbitrage, Myron Scholes, new economy, prediction markets, price stability, profit motive, random walk, Richard Thaler, risk free rate, risk-adjusted returns, risk/return, selection bias, Sharpe ratio, short selling, short squeeze, survivorship bias, Tax Reform Act of 1986, transaction costs, uptick rule, Vanguard fund

While market efficiency is desirable, there are three limitations in achieving that ideal: the cost of information, the cost of trading, and the limits of arbitrage. Strictly speaking, arbitrage refers to a profit earned with zero risk and zero investment. However, in this book the term is used in its more popular interpretation, that is, a superior risk-return trade-off that probably requires both risk and investment. LIMITATION 1: COST OF INFORMATION In an article aptly titled “On the Impossibility of Informationally Efficient Markets,” Sandy Grossman and Joe Stiglitz go about proving just that. The concept behind the impossibility of informationally efficient markets is straightforward.

The idea is that financial assets are perfect substitutes for one another, and the market is huge. Any single supply or demand shock is small compared to the overall size of the market. And since financial assets are perfect substitutes, excess demand for a stock will be met by arbitrageurs. They will short-sell that stock, increasing its supply, and will buy another stock with equivalent risk-return characteristics. In such an event, any price change will be imperceptible. However, as reported in the previous section, there is a permanent 169 170 Beyond the Random Walk price impact. If there is no new information associated with index changes, then the only reason for the price impact is that financial assets do not have perfect substitutes.

Bottom Line Merger arbitrage can generate continuous and sustainable abnormal returns of 4–10 percent annually. Evidence relating to the profitability of merger arbitrage is long-term and consistent. Mutual funds specializing in merger arbitrage are a convenient way to earn a reasonable yet low-risk return. Stocks can be used to execute merger arbitrage transactions on an individual basis to possibly generate higher returns. Internet References Mutual Funds Specializing in Merger Arbitrage http://www.gabelli.com/funds/products/408.html: The site for Gabelli’s ABC Fund (GABCX). http://www.thearbfund.com: The site for the Arb Fund (ARBFX). http://www.enterprisefunds.com/funds/sector/ mergers_and_acquisitions.shtml: The site for Enterprise M&A Fund (EMACX).


pages: 206 words: 70,924

The Rise of the Quants: Marschak, Sharpe, Black, Scholes and Merton by Colin Read

Abraham Wald, Albert Einstein, Bayesian statistics, Bear Stearns, Black-Scholes formula, Bretton Woods, Brownian motion, business cycle, capital asset pricing model, collateralized debt obligation, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, discovery of penicillin, discrete time, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, fixed income, floating exchange rates, full employment, Henri Poincaré, implied volatility, index fund, Isaac Newton, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Arrow, Long Term Capital Management, Louis Bachelier, margin call, market clearing, martingale, means of production, moral hazard, Myron Scholes, Paul Samuelson, price stability, principal–agent problem, quantitative trading / quantitative finance, RAND corporation, random walk, risk free rate, risk tolerance, risk/return, Robert Solow, Ronald Reagan, shareholder value, Sharpe ratio, short selling, stochastic process, Thales and the olive presses, Thales of Miletus, The Chicago School, the scientific method, too big to fail, transaction costs, tulip mania, Works Progress Administration, yield curve

Tobin’s insight was to offer investors the opportunity to include in their portfolio a riskless asset or any combination of the optimal security portfolio and the riskless asset. From this framework, an investor is offered a range of investment opportunities that each yield the best possible return for any level of risk, according to each investor’s risk return preferences. While the model assumes that all would require a greater return to take on greater risk, some investors may nonetheless reside at a low level of risk and return, while others may accept a higher combination of risk and return. These qualities can be superimposed on the Markowitz bullet and the capital allocation line.

This approach shares obvious implications with the efficient market hypothesis, as the next volume of this series will describe. In essence, investment in a given security becomes somewhat irrelevant, then, if each security is priced efficiently according to its risk. A risk-free asset and any single asset can then provide any risk-return trade-off if both long and short positions are permitted. The need for a broader market portfolio is obviated. Weaknesses with the CAPM model A model based on the mean and variance approach is accurate only if we accept a number of restrictive assumptions. First, we must assume asset returns are normally distributed or, more generally, elliptically distributed.

The short selling of high beta stocks should then allow the purchase of the low beta stocks, with some profit left over and with very little or, ideally, zero risk. This higher risk-free return could then be used to buy and sell along a Markowitz security line with a higher risk-free return intercept. An investor could then earn a superior risk-return trade-off for any level of desired risk through leverage purchases of the market portfolio. Their clients at Wells Fargo thought the Fischer-Scholes intuition was like financial alchemy that somehow denied the by then in vogue and widely accepted efficient market hypothesis. The firm’s rejection of their insights elicited the same reaction from Black as any such rejection had had on him since adolescence – it made him believe his hypothesis with even greater fervor.


Risk Management in Trading by Davis Edwards

Abraham Maslow, asset allocation, asset-backed security, backtesting, Bear Stearns, Black-Scholes formula, Brownian motion, business cycle, computerized trading, correlation coefficient, Credit Default Swap, discrete time, diversified portfolio, financial engineering, fixed income, Glass-Steagall Act, global macro, implied volatility, intangible asset, interest rate swap, iterative process, John Meriwether, junk bonds, London Whale, Long Term Capital Management, low interest rates, margin call, Myron Scholes, Nick Leeson, p-value, paper trading, pattern recognition, proprietary trading, random walk, risk free rate, risk tolerance, risk/return, selection bias, shareholder value, Sharpe ratio, short selling, statistical arbitrage, statistical model, stochastic process, systematic trading, time value of money, transaction costs, value at risk, Wiener process, zero-coupon bond

To a trader that is limited by the amount of volatility rather than capital, this allows traders to improve their profits by 15 percent. (See Figure 3.12, Risk/Return.) 80 RISK MANAGEMENT IN TRADING 16.0% 100% Asset 1 Expected Return 15.0% 14.0% 13.0% 12.0% 11.0% 10.0% 100% Asset 2 9.0% 4.0% 4.5% 5.0% 5.5% 6.0% 7.0% 6.5% 7.5% 8.0% Portfolio Volatility Asset 1 Asset 2 FIGURE 3.11 Expected return (μ) Volatility (σ) Correlation (ρ) 15.0% 10.0% 7.5% 5.0% 50% Asset Allocation 2.35 k/R ew ard 2.25 2.20 Ris 2.15 tim al 2.10 2.05 Op Average Return / Volatility 2.30 2.00 1.95 1.90 1.85 Weight of Asset 1 FIGURE 3.12 Risk/Return 0% 10 0. .0 % 90 .0 % 80 % 70 .0 60 .0 % 50 .0 % .0 % 40 0% 30

The business of trading for profit, called speculation, might be defined as “assuming substantial investment risk to obtain a commensurate profit”. This is very different than gambling, which might be defined “playing a game where the results depend on luck rather than player skill”. Risk management can help identify situations that have a better than average risk/ return relationship. This can improve the profitability of a hedge fund and differentiate a hedge fund from its peers. While risk management is often mathematical, it still requires good judgment to be effective. An often‐repeated maxim at hedge funds is that the best way to avoid trading losses is to make smart trading decisions.

However, those rules are seldom useful for identifying opportunities in the future. Historical testing also has a selection bias because of the strong relationship between risk and return. The best trading strategies typically demonstrate consistent good performance with very low risk. In other words, successful trading strategies have a better risk/return relationship than other investments. However, because these strategies aren’t taking on the most risk, they are seldom the most profitable strategies. Typically the topperforming investment in any given historical period is a very risky investment that happened to get lucky. The selection of a strategy that maximizes the profits for one period without making them apply to other periods is called curve fitting g or over-fitting. g KEY CONCEPT: SIMULATION ACCURACY Past performance does not necessarily guarantee future returns!


pages: 337 words: 89,075

Understanding Asset Allocation: An Intuitive Approach to Maximizing Your Portfolio by Victor A. Canto

accounting loophole / creative accounting, airline deregulation, Alan Greenspan, Andrei Shleifer, asset allocation, Bretton Woods, business cycle, buy and hold, buy low sell high, California energy crisis, capital asset pricing model, commodity trading advisor, corporate governance, discounted cash flows, diversification, diversified portfolio, equity risk premium, financial engineering, fixed income, frictionless, global macro, high net worth, index fund, inflation targeting, invisible hand, John Meriwether, junk bonds, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low cost airline, low interest rates, market bubble, merger arbitrage, money market fund, new economy, passive investing, Paul Samuelson, Performance of Mutual Funds in the Period, Phillips curve, price mechanism, purchasing power parity, risk free rate, risk tolerance, risk-adjusted returns, risk/return, rolling blackouts, Ronald Reagan, Savings and loan crisis, selection bias, seminal paper, shareholder value, Sharpe ratio, short selling, statistical arbitrage, stocks for the long run, survivorship bias, systematic bias, Tax Reform Act of 1986, the market place, transaction costs, Y2K, yield curve, zero-sum game

An increased equity exposure is the way the firm moved along the expected returns and the risk/return tradeoff ’s volatility. There were two components to this. First, as the firm moved from the conservative portfolio to the growth portfolio, it increased the equity exposure within each region without affecting the global allocation. Second, it increased the riskier assets’ exposure with the highest expected returns at the equity region’s expense with the lowest expected return. Increased uncertainty reduced the firm’s allocation to variables with the greatest expected returns. The greaterexpected-returns dispersion forced the firm’s risk/return tradeoff to mute increases in equities and regional exposures for all the portfolios.

An efficient portfolio is a portfolio that contains returns that have been maximized in relation to the risk level that individual investors desire. In a market that is in equilibrium, where the number of winners and losers must balance out, adding one additional asset class or stock does not increase the portfolio’s risk return ratio. This means the portfolio containing risky assets with the highest Sharpe ratio must be the market portfolio. Asset Allocation and Retirement Will efficiency do the trick over the long haul? Do modern advancements in the financial world guarantee that the returns to an investment plan or portfolio are going to be high enough to generate sufficient funds to meet future obligations?

The first step uses the asset classes’ historical returns and the variance–covariance matrix to build a combination of the various asset classes that leads one to the efficient frontier. This step also leads an investor to the point where maximum expected returns are reached for a determined risk level. The second step determines risk tolerance so an investor can choose the risk/return combination best suiting his or her preferences. I have two major objections to this process as it is currently practiced. The first objection is simply empirical: How long of a historical sample does one need to determine long-run historical returns and the variance–covariance matrix? In earlier chapters, I used traditional asset-allocation tools to decide whether individual asset classes—Treasury bonds (T-bonds), small-caps, large-caps, value stocks, growth stocks, and domestic/international stocks—would be included on the efficient frontier and thus be potentially included in an investor portfolio.


pages: 229 words: 75,606

Two and Twenty: How the Masters of Private Equity Always Win by Sachin Khajuria

"World Economic Forum" Davos, affirmative action, bank run, barriers to entry, Big Tech, blockchain, business cycle, buy and hold, carried interest, COVID-19, credit crunch, data science, decarbonisation, disintermediation, diversification, East Village, financial engineering, gig economy, glass ceiling, high net worth, hiring and firing, impact investing, index fund, junk bonds, Kickstarter, low interest rates, mass affluent, moral hazard, passive investing, race to the bottom, random walk, risk/return, rolodex, Rubik’s Cube, Silicon Valley, sovereign wealth fund, two and twenty, Vanguard fund, zero-sum game

It comes down to a set of characteristics that can be based on both natural aptitude and learned experience: the willingness to embrace and investigate the unknown, or even chaos—or at least the absence of identifiable order; the drive to develop and execute a logical plan to understand whether a sector is suitable for investment, and how to structure that investment to achieve the best risk/return; the humility to admit what you do not know, to clarify what you need to believe about a deal in order to commit investors’ money to it—and to own up to error and try to fix mistakes; the insatiable appetite to find a good business and figure out how to make it even better; the understanding of whether the changes a business needs to be successful are realistic and achievable, regardless of whether they are difficult; the mix of patience and intellectual curiosity to dig for data to analyze and the conviction to base decisions to create value on that data and your judgment; the emotional intelligence and empathy to realize that the folks who are going to do the hardest work to create value during the life of an investment are on the shop floor—the management and employees of a business—and how to identify and partner with them.

In our sketch, the Firm takes an enormous risk (with its investors’ capital) to turn Charlie’s fortunes around, at short notice, shoring up employment for thousands and giving a historic brand a new lease on life, at a time when the threat of bankruptcy was genuine. In real life, there are thousands of examples like this one every year, where private capital examines the risk/return trade-off for enterprises that might be on their knees and have nowhere else to go. Public markets may not contribute a dime. Governments may turn a blind eye. Nobody else might care, partly because traditional sources of capital prefer safer, less complex bets. When others flee, private equity steps in—and steps up.

Some weaknesses in a deal can be resolved by improving governance rights; others might need part of the investment structure to change—for example, changing the perimeter of assets to be acquired or financed to make for a better deal. At today’s investment committee meeting at the Firm, two contrasting opportunities are under consideration: They are different in sector, geography, and risk/return—but similar in terms of how the Firm approaches them. Over the course of three hours, the committee debates searing questions in a dynamic dialog designed to peel back each of the proposed deals to their most truthful essence—and to try to put investors’ money to work. Let’s put ourselves in the boardroom to witness these billions of dollars on the move


pages: 416 words: 39,022

Asset and Risk Management: Risk Oriented Finance by Louis Esch, Robert Kieffer, Thierry Lopez

asset allocation, Brownian motion, business continuity plan, business process, capital asset pricing model, computer age, corporate governance, discrete time, diversified portfolio, fixed income, implied volatility, index fund, interest rate derivative, iterative process, P = NP, p-value, random walk, risk free rate, risk/return, shareholder value, statistical model, stochastic process, transaction costs, value at risk, Wiener process, yield curve, zero-coupon bond

xix xix xxi PART I THE MASSIVE CHANGES IN THE WORLD OF FINANCE Introduction 1 The Regulatory Context 1.1 Precautionary surveillance 1.2 The Basle Committee 1.2.1 General information 1.2.2 Basle II and the philosophy of operational risk 1.3 Accounting standards 1.3.1 Standard-setting organisations 1.3.2 The IASB 2 Changes in Financial Risk Management 2.1 Definitions 2.1.1 Typology of risks 2.1.2 Risk management methodology 2.2 Changes in financial risk management 2.2.1 Towards an integrated risk management 2.2.2 The ‘cost’ of risk management 2.3 A new risk-return world 2.3.1 Towards a minimisation of risk for an anticipated return 2.3.2 Theoretical formalisation 1 2 3 3 3 3 5 9 9 9 11 11 11 19 21 21 25 26 26 26 vi Contents PART II EVALUATING FINANCIAL ASSETS Introduction 3 4 29 30 Equities 3.1 The basics 3.1.1 Return and risk 3.1.2 Market efficiency 3.1.3 Equity valuation models 3.2 Portfolio diversification and management 3.2.1 Principles of diversification 3.2.2 Diversification and portfolio size 3.2.3 Markowitz model and critical line algorithm 3.2.4 Sharpe’s simple index model 3.2.5 Model with risk-free security 3.2.6 The Elton, Gruber and Padberg method of portfolio management 3.2.7 Utility theory and optimal portfolio selection 3.2.8 The market model 3.3 Model of financial asset equilibrium and applications 3.3.1 Capital asset pricing model 3.3.2 Arbitrage pricing theory 3.3.3 Performance evaluation 3.3.4 Equity portfolio management strategies 3.4 Equity dynamic models 3.4.1 Deterministic models 3.4.2 Stochastic models 35 35 35 44 48 51 51 55 56 69 75 79 85 91 93 93 97 99 103 108 108 109 Bonds 4.1 Characteristics and valuation 4.1.1 Definitions 4.1.2 Return on bonds 4.1.3 Valuing a bond 4.2 Bonds and financial risk 4.2.1 Sources of risk 4.2.2 Duration 4.2.3 Convexity 4.3 Deterministic structure of interest rates 4.3.1 Yield curves 4.3.2 Static interest rate structure 4.3.3 Dynamic interest rate structure 4.3.4 Deterministic model and stochastic model 4.4 Bond portfolio management strategies 4.4.1 Passive strategy: immunisation 4.4.2 Active strategy 4.5 Stochastic bond dynamic models 4.5.1 Arbitrage models with one state variable 4.5.2 The Vasicek model 115 115 115 116 119 119 119 121 127 129 129 130 132 134 135 135 137 138 139 142 Contents 4.5.3 The Cox, Ingersoll and Ross model 4.5.4 Stochastic duration 5 Options 5.1 Definitions 5.1.1 Characteristics 5.1.2 Use 5.2 Value of an option 5.2.1 Intrinsic value and time value 5.2.2 Volatility 5.2.3 Sensitivity parameters 5.2.4 General properties 5.3 Valuation models 5.3.1 Binomial model for equity options 5.3.2 Black and Scholes model for equity options 5.3.3 Other models of valuation 5.4 Strategies on options 5.4.1 Simple strategies 5.4.2 More complex strategies PART III GENERAL THEORY OF VaR Introduction vii 145 147 149 149 149 150 153 153 154 155 157 160 162 168 174 175 175 175 179 180 6 Theory of VaR 6.1 The concept of ‘risk per share’ 6.1.1 Standard measurement of risk linked to financial products 6.1.2 Problems with these approaches to risk 6.1.3 Generalising the concept of ‘risk’ 6.2 VaR for a single asset 6.2.1 Value at Risk 6.2.2 Case of a normal distribution 6.3 VaR for a portfolio 6.3.1 General results 6.3.2 Components of the VaR of a portfolio 6.3.3 Incremental VaR 181 181 181 181 184 185 185 188 190 190 193 195 7 VaR Estimation Techniques 7.1 General questions in estimating VaR 7.1.1 The problem of estimation 7.1.2 Typology of estimation methods 7.2 Estimated variance–covariance matrix method 7.2.1 Identifying cash flows in financial assets 7.2.2 Mapping cashflows with standard maturity dates 7.2.3 Calculating VaR 7.3 Monte Carlo simulation 7.3.1 The Monte Carlo method and probability theory 7.3.2 Estimation method 199 199 199 200 202 203 205 209 216 216 218 viii Contents 7.4 Historical simulation 7.4.1 Basic methodology 7.4.2 The contribution of extreme value theory 7.5 Advantages and drawbacks 7.5.1 The theoretical viewpoint 7.5.2 The practical viewpoint 7.5.3 Synthesis 8 Setting Up a VaR Methodology 8.1 Putting together the database 8.1.1 Which data should be chosen?

. • Direct costs (the capital needed to be exposed to the threefold surface of market, credit and operational risk is reduced). The promotion of a real risk culture increases the stability and quality of profits, and therefore improves the competitive quality of the institution and ensures that it will last. 2.3 A NEW RISK-RETURN WORLD 2.3.1 Towards a minimisation of risk for an anticipated return Assessing the risk from the investor’s point of view produces a paradox: • On one hand, taking the risk is the only way of making the money. In other terms, the investor is looking for the risk premium that corresponds to his degree of aversion to risk. • On the other hand, however, although accepting the ‘risk premium’ represents profit first and foremost, it also unfortunately represents potential loss.

One of the most detailed analyses is that carried out by Fama and Macbeth,42 which, considering the relation Ek = RF + βk (EM − RF ) as an expression of Ek according to βk , tested the following hypotheses on the New York Stock Exchange (Figure 3.27): • The relation Ek = f (βk ) is linear and increasing. • βk is a complete measurement of the risk of the equity (k) on the market; in other words, the specific risk σε2k is not a significant explanation of Ek . 42 Fama E. and Macbeth J., Risk, return and equilibrium: empirical tests, Journal of Political Economy, Vol. 71, No. 1, 1974, pp. 606–36. Equities 97 Ek EM RF 1 bk Figure 3.27 CAPM test To do this, they used generalisations of the equation Ek = f (βk ), including powers of βk of a degree greater than 1 and a term that takes the specific risk into consideration.


How I Became a Quant: Insights From 25 of Wall Street's Elite by Richard R. Lindsey, Barry Schachter

Albert Einstein, algorithmic trading, Andrew Wiles, Antoine Gombaud: Chevalier de Méré, asset allocation, asset-backed security, backtesting, bank run, banking crisis, Bear Stearns, Black-Scholes formula, Bob Litterman, Bonfire of the Vanities, book value, Bretton Woods, Brownian motion, business cycle, business process, butter production in bangladesh, buy and hold, buy low sell high, capital asset pricing model, centre right, collateralized debt obligation, commoditize, computerized markets, corporate governance, correlation coefficient, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency risk, discounted cash flows, disintermediation, diversification, Donald Knuth, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, fixed income, full employment, George Akerlof, global macro, Gordon Gekko, hiring and firing, implied volatility, index fund, interest rate derivative, interest rate swap, Ivan Sutherland, John Bogle, John von Neumann, junk bonds, linear programming, Loma Prieta earthquake, Long Term Capital Management, machine readable, margin call, market friction, market microstructure, martingale, merger arbitrage, Michael Milken, Myron Scholes, Nick Leeson, P = NP, pattern recognition, Paul Samuelson, pensions crisis, performance metric, prediction markets, profit maximization, proprietary trading, purchasing power parity, quantitative trading / quantitative finance, QWERTY keyboard, RAND corporation, random walk, Ray Kurzweil, Reminiscences of a Stock Operator, Richard Feynman, Richard Stallman, risk free rate, risk-adjusted returns, risk/return, seminal paper, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, sorting algorithm, statistical arbitrage, statistical model, stem cell, Steven Levy, stochastic process, subscription business, systematic trading, technology bubble, The Great Moderation, the scientific method, too big to fail, trade route, transaction costs, transfer pricing, value at risk, volatility smile, Wiener process, yield curve, young professional

Operating at a high level of abstraction makes it easy to switch to a different manifestation of the mathematics, and to think about finance problems in the broadest possible terms. After thinking about infinite universes, it’s easy to deal with the most abstract elements of finance. Around this time, my responsibilities at BARRA expanded beyond bonds. I began working on a project to apply these ideas of risk, return, and cost to equity trading. The portfolio manager trades off these three components, deciding which stocks to buy and sell to optimize the portfolio. The trader has a different problem. The portfolio manager provides the trader with the list of stocks to buy and sell. The trader must decide how to optimally schedule those trades (i.e., how much of each stock to trade each day).

As such, it evolved into a multiyear, multiman-year effort to develop the required component models and combine them. It provided me yet another opportunity to JWPR007-Lindsey 42 May 7, 2007 16:30 h ow i b e cam e a quant expand my sphere of knowledge well beyond that original interest rate option model. It also provided further evidence that the risk, return, and cost framework applied very generally to problems in finance. Active Portfolio Management In 1990, Richard Grinold offered an internal course at BARRA, combining academic theories and seminar presentations to sketch out a scientific approach to active management. Richard’s goal was to turn this into a book, and he offered the course as a way to make progress in that direction.

The reported returns of these asset classes were based on appraisals and matrix pricing rather than market transactions; hence, they displayed artificially low volatility. When these asset classes were introduced to the optimizer it indicated that most of the portfolio should be allocated to them. Moreover, it showed that such an extreme allocation would substantially improve the risk/return trade-off. My conjecture is that critics of optimization latched on to this result to hype the sensitivity of optimizers to input errors. Of course, informed users of optimization understand the problem and employ a variety of methods to adjust the volatility assumptions appropriately, and thereby obtain reasonable results.


pages: 517 words: 139,477

Stocks for the Long Run 5/E: the Definitive Guide to Financial Market Returns & Long-Term Investment Strategies by Jeremy Siegel

Alan Greenspan, AOL-Time Warner, Asian financial crisis, asset allocation, backtesting, banking crisis, Bear Stearns, behavioural economics, Black Monday: stock market crash in 1987, Black-Scholes formula, book value, break the buck, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, capital asset pricing model, carried interest, central bank independence, cognitive dissonance, compound rate of return, computer age, computerized trading, corporate governance, correlation coefficient, Credit Default Swap, currency risk, Daniel Kahneman / Amos Tversky, Deng Xiaoping, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Financial Instability Hypothesis, fixed income, Flash crash, forward guidance, fundamental attribution error, Glass-Steagall Act, housing crisis, Hyman Minsky, implied volatility, income inequality, index arbitrage, index fund, indoor plumbing, inflation targeting, invention of the printing press, Isaac Newton, it's over 9,000, John Bogle, joint-stock company, London Interbank Offered Rate, Long Term Capital Management, loss aversion, machine readable, market bubble, mental accounting, Minsky moment, Money creation, money market fund, mortgage debt, Myron Scholes, new economy, Northern Rock, oil shock, passive investing, Paul Samuelson, Peter Thiel, Ponzi scheme, prediction markets, price anchoring, price stability, proprietary trading, purchasing power parity, quantitative easing, random walk, Richard Thaler, risk free rate, risk tolerance, risk/return, Robert Gordon, Robert Shiller, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, stocks for the long run, survivorship bias, technology bubble, The Great Moderation, the payments system, The Wisdom of Crowds, transaction costs, tulip mania, Tyler Cowen, Tyler Cowen: Great Stagnation, uptick rule, Vanguard fund

Conclusion PART II THE VERDICT OF HISTORY Chapter 5 Stock and Bond Returns Since 1802 Financial Market Data from 1802 to the Present Total Asset Returns The Long-Term Performance of Bonds Gold, the Dollar, and Inflation Total Real Returns Real Returns on Fixed-Income Assets The Continuing Decline in Fixed-Income Returns The Equity Premium Worldwide Equity and Bond Returns Conclusion: Stocks for the Long Run Appendix 1: Stocks from 1802 to 1870 Chapter 6 Risk, Return, and Portfolio Allocation Why Stocks Are Less Risky Than Bonds in the Long Run Measuring Risk and Return Risk and Holding Period Standard Measures of Risk Varying Correlation Between Stock and Bond Returns Efficient Frontiers Conclusion Chapter 7 Stock Indexes Proxies for the Market Market Averages The Dow Jones Averages Computation of the Dow Index Long-Term Trends in the Dow Jones Industrial Average Beware the Use of Trendlines to Predict Future Returns Value-Weighted Indexes Standard & Poor’s Index Nasdaq Index Other Stock Indexes: The Center for Research in Security Prices Return Biases in Stock Indexes Appendix: What Happened to the Original 12 Dow Industrials?

One of the first large nonfinancial ventures was the Delaware and Hudson Canal, issued in 1825, which also became an original member of the Dow Jones Industrial Average 60 years later.22 In 1830, the first railroad, the Mohawk and Hudson, was listed; and for the next 50 years, railroads dominated trading on the major exchanges. 6 * * * Risk, Return, and Portfolio Allocation Why Stocks Are Less Risky Than Bonds in the Long Run As a matter of fact, what investment can we find which offers real fixity or certainty income? ... As every reader of this book will clearly see, the man or woman who invests in bonds is speculating in the general level of prices, or the purchasing power of money.

EFFICIENT FRONTIERS5 Modern portfolio theory describes how investors may alter the risk and return of a portfolio by changing the mix between assets. Figure 6-4 displays the risks and returns that result from varying the proportion of stocks and bonds in a portfolio over various holding periods ranging from 1 to 30 years based on 210 years of historical data. FIGURE 6-4 Risk-Return Tradeoffs (Efficient Frontiers) for Stocks and Bonds Over Various Holding Period 1802–2012 The “blank” square at the bottom of each curve represents the risk and return of an all-bond portfolio, while the darkened square at the top of the curve represents the risk and return of an all-stock portfolio.


pages: 302 words: 84,428

Mastering the Market Cycle: Getting the Odds on Your Side by Howard Marks

activist fund / activist shareholder / activist investor, Alan Greenspan, Albert Einstein, behavioural economics, business cycle, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, financial engineering, financial innovation, fixed income, Glass-Steagall Act, if you build it, they will come, income inequality, Isaac Newton, job automation, junk bonds, Long Term Capital Management, low interest rates, margin call, Michael Milken, money market fund, moral hazard, new economy, profit motive, quantitative easing, race to the bottom, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, secular stagnation, short selling, South Sea Bubble, stocks for the long run, superstar cities, The Chicago School, The Great Moderation, transaction costs, uptick rule, VA Linux, Y2K, yield curve

Words like “seem” and “appear” are the right ones, since they indicate that risk and potential return can only be estimated, and that the investment world doesn’t work like a machine. That makes those words highly appropriate—actually, compelling—for use when discussing investing. (For a more thorough discussion, see chapter 5 of The Most Important Thing.) People who immediately “get” concepts like risk and risk/return usually have an intuitive sense that prepares them to be good investors. I hope the reasons behind my interpretation of the graphic will become immediately clear once I have prompted you to think about it. Let’s suppose a logical investor is offered two investments with the same expected return, but in one case the return is virtually assured and in the other it is highly uncertain.

That’s the way it’s supposed to work, and in fact I think it generally does (although the requirements aren’t the same at all times). The result is a capital market line of the sort that has become familiar to many of us, as shown below. The process described above results in the formation of the risk/return continuum or “capital market line.” The process establishes the general level of return relative to risk, as well as the quantum of incremental promised return—or the “risk premium”—that will be expected for the bearing of incremental risk. In a rational world, the result will be as follows: Investments that seem riskier will be priced so that they appear to offer higher returns.

It is for these reasons that, as you’ll see in the next chapter, the shakiest financings are completed in the most buoyant economies and financial markets. Good times cause people to become more optimistic, jettison their caution, and settle for skimpy risk premiums on risky investments. Further, since they are less pessimistic and less alarmed, they tend to lose interest in the safer end of the risk/return continuum. This combination of elements makes the prices of risky assets rise relative to safer assets. Thus it shouldn’t come as a surprise that more unwise investments are made in good times than in bad. This happens even though the higher prices on risky investments may mean the prospective risk premiums offered for making those riskier investments are skimpier than they were in more risk-conscious times.


pages: 819 words: 181,185

Derivatives Markets by David Goldenberg

Black-Scholes formula, Brownian motion, capital asset pricing model, commodity trading advisor, compound rate of return, conceptual framework, correlation coefficient, Credit Default Swap, discounted cash flows, discrete time, diversification, diversified portfolio, en.wikipedia.org, financial engineering, financial innovation, fudge factor, implied volatility, incomplete markets, interest rate derivative, interest rate swap, law of one price, locking in a profit, London Interbank Offered Rate, Louis Bachelier, margin call, market microstructure, martingale, Myron Scholes, Norbert Wiener, Paul Samuelson, price mechanism, random walk, reserve currency, risk free rate, risk/return, riskless arbitrage, Sharpe ratio, short selling, stochastic process, stochastic volatility, time value of money, transaction costs, volatility smile, Wiener process, yield curve, zero-coupon bond, zero-sum game

Currency Forward Pricing 7.4 Stock Index Futures 7.4.1 The S&P 500 Spot Index 7.4.2 S&P 500 Stock Index Futures Contract Specifications 7.4.3 The Quote Mechanism for S&P 500 Futures Price Quotes 7.5 Risk Management Using Stock Index Futures 7.5.1 Pricing and Hedging Preliminaries 7.5.2 Monetizing the S&P 500 Spot Index 7.5.3 Profits from the Traditional Hedge 7.5.4 Risk, Return Analysis of the Traditional Hedge 7.5.5 Risk-Minimizing Hedging 7.5.6 Adjusting the Naive Hedge Ratio to Obtain the Risk-Minimizing Hedge Ratio 7.5.7 Risk Minimizing the Hedge Using Forward vs. Futures Contracts 7.5.8 Cross-Hedging, Adjusting the Hedge for non S&P 500 Portfolios 7.6 The Spot Eurodollar Market 7.6.1 Spot 3-month Eurodollar Time Deposits 7.6.2 Spot Eurodollar Market Trading Terminology 7.6.3 LIBOR3, LIBID3, and Fed Funds 7.6.4 How Eurodollar Time Deposits are Created 7.7 Eurodollar Futures 7.7.1 Contract Specifications 7.7.2 The Quote Mechanism, Eurodollar Futures 7.7.3 Forced Convergence and Cash Settlement 7.7.4 How Profits and Losses are Calculated on Open ED Futures Positions PART 2 Trading Structures Based on Forward Contracts CHAPTER 8 STRUCTURED PRODUCTS, INTEREST-RATE SWAPS 8.1 Swaps as Strips of Forward Contracts 8.1.1 Commodity Forward Contracts as Single Period Swaps 8.1.2 Strips of Forward Contracts 8.2 Basic Terminology for Interest-Rate Swaps: Paying Fixed and Receiving Floating 8.2.1 Paying Fixed in an IRD (Making Fixed Payments) 8.2.2 Receiving Variable in an IRD (Receiving Floating Payments) 8.2.3 Eurodollar Futures Strips 8.3 Non-Dealer Intermediated Plain Vanilla Interest-Rate Swaps 8.4 Dealer Intermediated Plain Vanilla Interest-Rate Swaps 8.4.1 An Example 8.4.2 Plain Vanilla Interest-Rate Swaps as Hedge Vehicles 8.4.3 Arbitraging the Swaps Market 8.5 Swaps: More Terminology and Examples 8.6 The Dealer’s Problem: Finding the Other Side to the Swap 8.7 Are Swaps a Zero Sum Game?

Using the settlement prices, is there contango or backwardation? c. Is the price of storage always positive? TABLE 6.1 CME Corn Contract Price Quotes Reprinted by permission of the CME Inc., 2014. ■ SELECTED CONCEPT CHECK SOLUTIONS Concept Check 1 a. The meaning of the words is: another portfolio of financial instruments that has the same risk, return characteristics as the actual T-bill. This means the same maturity, the same risk, and as we shall see in this example, the same yield. Another way to think about the synthetic instrument is as a replicating portfolio. When we synthesized forward contracts, we saw that a synthetic forward contract is a portfolio consisting of the underlying spot instrument fully financed by a zero-coupon bond maturing at the expiration date of the forward contract.

Currency Forward Pricing 7.4 Stock Index Futures 7.4.1 The S&P 500 Spot Index 7.4.2 S&P 500 Stock Index Futures Contract Specifications 7.4.3 The Quote Mechanism for S&P 500 Futures Price Quotes 7.5 Risk Management Using Stock Index Futures 7.5.1 Pricing and Hedging Preliminaries 7.5.2 Monetizing the S&P 500 Spot Index 7.5.3 Profits from the Traditional Hedge 7.5.4 Risk, Return Analysis of the Traditional Hedge 7.5.5 Risk-Minimizing Hedging 7.5.6 Adjusting the Naive Hedge Ratio to Obtain the Risk-Minimizing Hedge Ratio 7.5.7 Risk-Minimizing the Hedge Using Forward vs. Futures Contracts 7.5.8 Cross-Hedging, Adjusting the Hedge for non S&P 500 Portfolios 7.6 The Spot Eurodollar Market 7.6.1 Spot 3-month Eurodollar Time Deposits 7.6.2 Spot Eurodollar Market Trading Terminology 7.6.3 LIBOR3, LIBID3, and Fed Funds 7.6.4 How Eurodollar Time Deposits are Created 7.7 Eurodollar Futures 7.7.1 Contract Specifications 7.7.2 The Quote Mechanism, Eurodollar Futures 7.7.3 Forced Convergence and Cash Settlement 7.7.4 How Profits and Losses are Calculated on Open ED Futures Positions The crown jewels of futures contracts are the financial futures contracts which were introduced to the world in the late 1970s and early 1980s by the CME and the CBOT (since merged) in Chicago.


pages: 425 words: 122,223

Capital Ideas: The Improbable Origins of Modern Wall Street by Peter L. Bernstein

Albert Einstein, asset allocation, backtesting, Benoit Mandelbrot, Black Monday: stock market crash in 1987, Black-Scholes formula, Bonfire of the Vanities, Brownian motion, business cycle, buy and hold, buy low sell high, capital asset pricing model, corporate raider, debt deflation, diversified portfolio, Eugene Fama: efficient market hypothesis, financial innovation, financial intermediation, fixed income, full employment, Glass-Steagall Act, Great Leap Forward, guns versus butter model, implied volatility, index arbitrage, index fund, interest rate swap, invisible hand, John von Neumann, Joseph Schumpeter, junk bonds, Kenneth Arrow, law of one price, linear programming, Louis Bachelier, mandelbrot fractal, martingale, means of production, Michael Milken, money market fund, Myron Scholes, new economy, New Journalism, Paul Samuelson, Performance of Mutual Funds in the Period, profit maximization, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk free rate, risk/return, Robert Shiller, Robert Solow, Ronald Reagan, stochastic process, Thales and the olive presses, the market place, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, transfer pricing, zero-coupon bond, zero-sum game

They help investors deal with uncertainty. They provide benchmarks for determining whether expectations are realistic or fanciful and whether risks make sense or are foolish. They establish norms for determining how well a market is accommodating the needs of its participants. They have reformulated such familiar concepts as risk, return, diversification, insurance, and debt. Moreover, they have quantified those concepts and have suggested new ways of employing them and combining them for optimal results. Finally, they have added a measure of science to the art of corporate finance. Many of these innovations lay hidden in academic journals for years, unnoticed by Wall Street until the financial turbulence of the early 1970s forced practitioners to accept the harsh truth that investment is a risky business.

Still, research reveals that investors have a sharp nose for smelling out the truth for themselves. Thus, Modigliani and Miller put investors back in the catbird seat, with corporate managers at their mercy. Through arbitrage, profit-seeking investors can eliminate discrepancies in the perceived risk/return trade-offs of one security relative to another to the point where no one has any incentive to buy or sell. Trades take place only when investors disagree about the future of a company or when new information surfaces. Modigliani and Miller’s market is a market in equilibrium. And yet equilibrium is only a rough approximation of reality, because information pours into the marketplace constantly, in every shape and form.

But then he accepted: “If I had stayed at Merrill, they would have made me into a narrow quant.”39 A zealous editor, Treynor encouraged the publication of papers on the new theories, wrote a series of challenging short editorials, and contributed articles himself under the pseudonym Walter Bagehot. His role was not to be an easy one. Concepts like random walks, efficient markets, complicated versions of risk/return tradeoffs, and betas, with their complex mathematical formulations, scandalized the more traditional members of the Journal’s advisory board. James Vertin, then at Wells Fargo in San Francisco and an ally of Treynor’s on the board, recalls, “They were going to close it down because it had all this dumb stuff in it that nobody could understand!”


pages: 244 words: 79,044

Money Mavericks: Confessions of a Hedge Fund Manager by Lars Kroijer

activist fund / activist shareholder / activist investor, Bear Stearns, Bernie Madoff, book value, capital asset pricing model, corporate raider, diversification, diversified portfolio, equity risk premium, family office, fixed income, forensic accounting, Gordon Gekko, hiring and firing, implied volatility, index fund, intangible asset, Jeff Bezos, Just-in-time delivery, Long Term Capital Management, Mary Meeker, merger arbitrage, NetJets, new economy, Ponzi scheme, post-work, proprietary trading, risk free rate, risk-adjusted returns, risk/return, shareholder value, Silicon Valley, six sigma, statistical arbitrage, Vanguard fund, zero-coupon bond

There are employees, counterparties and investors to whom I wish I had shown more gratitude, either financially or verbally. The list goes on … There is nothing intrinsically wrong with hedge funds. This is an industry that attracts some of the best minds in finance and gives them a wide mandate to generate returns that greatly enhance the risk/return profile of any portfolio. If they do well, they are amply rewarded, and if they fail, they are fired. While the hedge-fund industry was still a fairly small sector that profitably exploited selected pockets of market inefficiencies, the premise worked. As the number of hedge funds exploded to the near 10,000 in existence today, I think too many mediocre managers were paid too much for the industry to make sense to the end investor (like Mrs Straw, mentioned earlier).

But if we assume that capital flows between different national markets are less efficient than flows within each market, we might be able to do better than simply allocate capital to each market in accordance with their relative market capitalisation (like the MSCI World does in the example above). In this case we should be able to enhance our risk/return profile by re-allocating capital on the basis of optimal portfolio theory, using inputs on expected market correlations, a reasonable estimate of the risk of each market, a return expectation (we can make this a function of the risk levels) and a few other fairly non-controversial assumptions. What we are trying to do is to create a portfolio of well-diversified liquid markets across the world in a way that is cheap to construct and where we have a reasonable estimate of the risk and expectation of an outperformance relative to the simple market capitalisation index.

In an earlier edition of this book I argued that investors could gain from buying protection against the market scenarios where correlations spiked in a broad-based slump. By buying deep out-of-the-money puts on the market we could protect ourselves against disaster scenarios. This protection would eliminate the high correlation drawdowns and the resulting portfolio would be a lower correlation combination of securities with a better risk/return profile. While a valid idea, in reality this purchase of downside protection is impractical for most investors. First and foremost, many investors are not set up to trade options and are generally inclined to stay away from the space of derivative trading (a healthy trait indeed). Second, consistently buying out-of-the-money puts in a high volatility environment can be prohibitively expensive, particularly when you include the large bid/offer spreads and commissions charged.


pages: 302 words: 86,614

The Alpha Masters: Unlocking the Genius of the World's Top Hedge Funds by Maneet Ahuja, Myron Scholes, Mohamed El-Erian

"World Economic Forum" Davos, activist fund / activist shareholder / activist investor, Alan Greenspan, Asian financial crisis, asset allocation, asset-backed security, backtesting, Bear Stearns, Bernie Madoff, book value, Bretton Woods, business process, call centre, Carl Icahn, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, en.wikipedia.org, family office, financial engineering, fixed income, global macro, high net worth, high-speed rail, impact investing, interest rate derivative, Isaac Newton, Jim Simons, junk bonds, Long Term Capital Management, managed futures, Marc Andreessen, Mark Zuckerberg, merger arbitrage, Michael Milken, Myron Scholes, NetJets, oil shock, pattern recognition, Pershing Square Capital Management, Ponzi scheme, proprietary trading, quantitative easing, quantitative trading / quantitative finance, Renaissance Technologies, risk-adjusted returns, risk/return, rolodex, Savings and loan crisis, short selling, Silicon Valley, South Sea Bubble, statistical model, Steve Jobs, stock buybacks, systematic bias, systematic trading, tail risk, two and twenty, zero-sum game

At any point in time, it would combine these 60 to 100 positions with any client-chosen benchmark. For the Kodak pension fund, an early client, Bridgewater managed Pure Alpha combined with a passive holding in long-duration bonds and inflation-indexed bonds. It was the best way to produce the best risk return. “Now it would be called innovative,” says Dalio. “Back then I guess it would be called crazy.” By doing this, the client could always specify beta. “This is how we manage money now,” says Dalio. “Clients tell us they would like an equity account and set a benchmark, like the S&P 500. We either replicate the benchmark or buy futures to equal the benchmark.

In addition to banks with two-tiered capital structures, Paulson also found opportunities in other financial companies with a holding company structure, such as insurance companies, and in leveraged buyouts. Almost all investors hated shorting bonds because most of the time the bonds paid out, and the negative carry from paying the interest on the short bond was a drag on performance. Paulson had not been dissuaded from this challenge. He liked the asymmetrical risk/return potential, and continued to pursue this area as an investment strategy with periodic success over time. By the spring of 2005, Paulson became increasingly alarmed by weak credit underwriting standards and excessive leverage being used by financial institutions. Credit quality had deteriorated to the point where the worst-performing companies could readily raise financing.

Since then, numerous obstacles had delayed the deal, and a significant amount of Paulson & Co.’s wealth was on the line. Paulson was doing everything he could to encourage Dow to execute. Paulson feels it is easy to compute returns from a spread, but his and his team’s expertise comes into play when evaluating the risk-return trade-off for a deal in trouble. Deal completion risks are exacerbated when the economy and market weaken. When the economy slipped into a deep recession after Lehman failed, Dow found that the price it had agreed to pay for the company was too high and it wanted to exit the transaction. The spread went from $2 when the deal was announced to $25 as the stock fell to the low 50s.


pages: 348 words: 99,383

The Financial Crisis and the Free Market Cure: Why Pure Capitalism Is the World Economy's Only Hope by John A. Allison

Affordable Care Act / Obamacare, Alan Greenspan, American ideology, bank run, banking crisis, Bear Stearns, Bernie Madoff, business cycle, clean water, collateralized debt obligation, correlation does not imply causation, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, disintermediation, fiat currency, financial innovation, Fractional reserve banking, full employment, Greenspan put, high net worth, housing crisis, inverted yield curve, invisible hand, life extension, low skilled workers, market bubble, market clearing, minimum wage unemployment, money market fund, moral hazard, negative equity, obamacare, open immigration, Paul Samuelson, price mechanism, price stability, profit maximization, quantitative easing, race to the bottom, reserve currency, risk/return, Robert Shiller, subprime mortgage crisis, The Bell Curve by Richard Herrnstein and Charles Murray, too big to fail, transaction costs, Tyler Cowen, yield curve, zero-sum game

The smaller banks will eventually follow; if they do not, they will end up with lower returns on equity than their bigger competitors and will be vulnerable to being acquired. The larger company can simply leverage the “excess” equity in the smaller company, acquiring it. Also, anytime there is a downturn in the economy, the Fed consistently “saves” the very large banks, creating an unbalanced risk/ return trade-off. If you manage a large financial institution, why not be leveraged, which increases your profits in good times, because the Fed will always bail out your company during bad times? During my career, the Fed has systematically effectively encouraged banks to increase their leverage (sometimes intentionally, sometimes not).

FDIC insurance primarily reduces the short-term risk of bank runs because depositors perceive their deposits to be insured by the federal government. However, I previously described the fact that FDIC insurance substantially increases the credit and liquidity risk that banks take by eliminating market discipline. Based on my long-term observation of the behavior of bank executives (human nature), the existence of FDIC insurance changes the risk/return trade-offs so significantly that in the good times (when bad loans are made), bankers take risks that they would never take in a free market. FDIC insurance is pro-cyclical; that is, it increases both the size of the bubble (the misinvestment) and the magnitude of the bust. In the short term, the Federal Reserve can be important in controlling liquidity risk.

Also, do not be surprised if it returns to the same high-risk financing strategy in the future. After all, there is no downside risk when you have a strong relationship with Big Brother. Many people have declared TARP a success because most of the money will be paid back. This is a totally improper measure of performance. Even if the taxpayers get most of their money back, the risk/return trade-off was irrational at the time the government investments were made. Private investors would not have taken this risk given the relatively low returns to be earned. More significantly, a rational assessment of TARP must consider its short-term and long-term economic consequences. This is a challenging question to answer, but there is a historical precedent that is useful for comparison.


pages: 1,082 words: 87,792

Python for Algorithmic Trading: From Idea to Cloud Deployment by Yves Hilpisch

algorithmic trading, Amazon Web Services, automated trading system, backtesting, barriers to entry, bitcoin, Brownian motion, cloud computing, coronavirus, cryptocurrency, data science, deep learning, Edward Thorp, fiat currency, global macro, Gordon Gekko, Guido van Rossum, implied volatility, information retrieval, margin call, market microstructure, Myron Scholes, natural language processing, paper trading, passive investing, popular electronics, prediction markets, quantitative trading / quantitative finance, random walk, risk free rate, risk/return, Rubik’s Cube, seminal paper, Sharpe ratio, short selling, sorting algorithm, systematic trading, transaction costs, value at risk

Maximum drawdown (vertical line) and drawdown periods (horizontal lines) The following code derives VaR values based on the log returns of the equity position for the leveraged trading strategy over time for different confidence levels. The time interval is fixed to the bar length of ten minutes: In [97]: import scipy.stats as scs In [98]: percs = [0.01, 0.1, 1., 2.5, 5.0, 10.0] In [99]: risk['return'] = np.log(risk['equity'] / risk['equity'].shift(1)) In [100]: VaR = scs.scoreatpercentile(equity * risk['return'], percs) In [101]: def print_var(): print('{} {}'.format('Confidence Level', 'Value-at-Risk')) print(33 * '-') for pair in zip(percs, VaR): print('{:16.2f} {:16.3f}'.format(100 - pair[0], -pair[1])) In [102]: print_var() Confidence Level Value-at-Risk --------------------------------- 99.99 162.570 99.90 161.348 99.00 132.382 97.50 122.913 95.00 100.950 90.00 62.622 Defines the percentile values to be used.

Calculating the cumulative sum over time with cumsum and, based on this, the cumulative returns by applying the exponential function np.exp() gives a more comprehensive picture of how the strategy compares to the performance of the base financial instrument over time. Figure 4-4 shows the data graphically and illustrates the outperformance in this particular case: In [55]: data[['returns', 'strategy']].cumsum( ).apply(np.exp).plot(figsize=(10, 6)); Figure 4-4. Gross performance of EUR/USD compared to the SMA-based strategy Average, annualized risk-return statistics for both the stock and the strategy are easy to calculate: In [56]: data[['returns', 'strategy']].mean() * 252 Out[56]: returns -0.019671 strategy 0.028174 dtype: float64 In [57]: np.exp(data[['returns', 'strategy']].mean() * 252) - 1 Out[57]: returns -0.019479 strategy 0.028575 dtype: float64 In [58]: data[['returns', 'strategy']].std() * 252 ** 0.5 Out[58]: returns 0.085414 strategy 0.085405 dtype: float64 In [59]: (data[['returns', 'strategy']].apply(np.exp) - 1).std() * 252 ** 0.5 Out[59]: returns 0.085405 strategy 0.085373 dtype: float64 Calculates the annualized mean return in both log and regular space.


pages: 162 words: 50,108

The Little Book of Hedge Funds by Anthony Scaramucci

Alan Greenspan, Andrei Shleifer, asset allocation, Bear Stearns, Bernie Madoff, business process, carried interest, corporate raider, Credit Default Swap, diversification, diversified portfolio, Donald Trump, Eugene Fama: efficient market hypothesis, fear of failure, financial engineering, fixed income, follow your passion, global macro, Gordon Gekko, high net worth, index fund, it's over 9,000, John Bogle, John Meriwether, Long Term Capital Management, mail merge, managed futures, margin call, mass immigration, merger arbitrage, Michael Milken, money market fund, Myron Scholes, NetJets, Ponzi scheme, profit motive, proprietary trading, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk-adjusted returns, risk/return, Ronald Reagan, Saturday Night Live, Sharpe ratio, short selling, short squeeze, Silicon Valley, tail risk, Thales and the olive presses, Thales of Miletus, the new new thing, too big to fail, transaction costs, two and twenty, uptick rule, Vanguard fund, Y2K, Yogi Berra, zero-sum game

Using a top-down approach, they attempt to anticipate macroeconomic trends and price changes on capital markets by analyzing the variables associated with the different countries in which they allocate their capital. To do so, they study how certain political events, global macroeconomic factors, and financial fundamentals influence the prices of securities, indices, options, futures contracts, and so on. Simultaneously, they analyze both developed and emerging markets worldwide and the risk/return potential of a given investment.4 Once they determine a global investment thesis, they make leveraged bets on the direction of the movements in the market and earn the difference between the borrowing cost and the profit from their directional bets going the way that they predict. Although global macro strategies are different from the strategies created by A.

Ultimately, the overall performance of a fund of hedge funds is a function of this strategic portfolio construction that is based on hedge fund strategy outlook, hedge fund manager selection, and liquidity and risk management. If done appropriately, this allocation will minimize volatility and maximize risk returns. The Specifics The best and brightest in the fund of funds industry do the following three things for their clients: 1. They have a deep understanding of the macroeconomic situations and the global economy, taking into account what the Federal Reserve and other central banks are doing and also what is going on in the world’s currency and commodities markets.


pages: 289 words: 95,046

Chaos Kings: How Wall Street Traders Make Billions in the New Age of Crisis by Scott Patterson

"World Economic Forum" Davos, 2021 United States Capitol attack, 4chan, Alan Greenspan, Albert Einstein, asset allocation, backtesting, Bear Stearns, beat the dealer, behavioural economics, Benoit Mandelbrot, Bernie Madoff, Bernie Sanders, bitcoin, Bitcoin "FTX", Black Lives Matter, Black Monday: stock market crash in 1987, Black Swan, Black Swan Protection Protocol, Black-Scholes formula, blockchain, Bob Litterman, Boris Johnson, Brownian motion, butterfly effect, carbon footprint, carbon tax, Carl Icahn, centre right, clean tech, clean water, collapse of Lehman Brothers, Colonization of Mars, commodity super cycle, complexity theory, contact tracing, coronavirus, correlation does not imply causation, COVID-19, Credit Default Swap, cryptocurrency, Daniel Kahneman / Amos Tversky, decarbonisation, disinformation, diversification, Donald Trump, Doomsday Clock, Edward Lloyd's coffeehouse, effective altruism, Elliott wave, Elon Musk, energy transition, Eugene Fama: efficient market hypothesis, Extinction Rebellion, fear index, financial engineering, fixed income, Flash crash, Gail Bradbrook, George Floyd, global pandemic, global supply chain, Gordon Gekko, Greenspan put, Greta Thunberg, hindsight bias, index fund, interest rate derivative, Intergovernmental Panel on Climate Change (IPCC), Jeff Bezos, Jeffrey Epstein, Joan Didion, John von Neumann, junk bonds, Just-in-time delivery, lockdown, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, Mark Spitznagel, Mark Zuckerberg, market fundamentalism, mass immigration, megacity, Mikhail Gorbachev, Mohammed Bouazizi, money market fund, moral hazard, Murray Gell-Mann, Nick Bostrom, off-the-grid, panic early, Pershing Square Capital Management, Peter Singer: altruism, Ponzi scheme, power law, precautionary principle, prediction markets, proprietary trading, public intellectual, QAnon, quantitative easing, quantitative hedge fund, quantitative trading / quantitative finance, Ralph Nader, Ralph Nelson Elliott, random walk, Renaissance Technologies, rewilding, Richard Thaler, risk/return, road to serfdom, Ronald Reagan, Ronald Reagan: Tear down this wall, Rory Sutherland, Rupert Read, Sam Bankman-Fried, Silicon Valley, six sigma, smart contracts, social distancing, sovereign wealth fund, statistical arbitrage, statistical model, stem cell, Stephen Hawking, Steve Jobs, Steven Pinker, Stewart Brand, systematic trading, tail risk, technoutopianism, The Chicago School, The Great Moderation, the scientific method, too big to fail, transaction costs, University of East Anglia, value at risk, Vanguard fund, We are as Gods, Whole Earth Catalog

Soon after, he was asked to help Japanese clients (at the time very wealthy clients indeed) put together global fixed-income portfolios. He went to Black for help. “Well, you know, my attitude is to start out simple, and if it doesn’t work, then you can always do something more complicated,” Black said. He suggested using a standard risk-return model based on Harry Markowitz’s Modern Portfolio Theory method that encouraged the multi-basket diversification approach (the very approach derided by Spitznagel and Taleb). It didn’t work, at least at first. Through a series of tweaks and new methods based in part on his work on vector autoregressions, Litterman ultimately designed a model that spit out optimal asset allocations depending on investors’ risk appetites.

Over thirteen years, Universa’s Black Swan risk-mitigation strategy, on average, had outperformed the S&P 500 by more than 3 percentage points a year. And it did so by “having far less risk,” Spitznagel claimed in Safe Haven. Spitznagel’s argument captivated Peter Coy, a financial writer for the New York Times. In a November 2021 review of Safe Haven called “The Risk-Return Trade-Off Is Phony,” he wrote: “Conventional wisdom in investing says there’s a trade-off between risk and return. To make a lot of money, you must take the chance of big losses. Play it safe and you’ll most likely have to settle for meager returns. The investor Mark Spitznagel says that reducing risk actually increases returns, and he has evidence.”

“I think there’s something going on with blockchain” Author interview with Schmalbach. “We are witnessing a fundamental reordering” https://www.aon.com/reputation-risk-report-respecting-grey-swan/index.html. CHAPTER 23: THE GREAT DILEMMA OF RISK Spitznagel’s argument captivated Peter Coy Peter Coy, “The Risk-Return Trade-Off Is Phony,” New York Times, November 15, 2021, https://www.nytimes.com/2021/11/15/opinion/risk-investing-market-hedge.html. CHAPTER 24: DOORSTEP TO DOOM Bitcoin rallied in 2021, hitting an all-time high Elaine Yu and Caitlin Ostroff, “Bitcoin’s Price Climbs Above $20,000 After Sharp Crypto Selloff,” Wall Street Journal, June 19, 2022, https://www.wsj.com/articles/bitcoins-price-falls-below-20-000-11655542641.


pages: 433 words: 53,078

Be Your Own Financial Adviser: The Comprehensive Guide to Wealth and Financial Planning by Jonquil Lowe

AltaVista, asset allocation, banking crisis, BRICs, buy and hold, correlation coefficient, cross-subsidies, diversification, diversified portfolio, estate planning, fixed income, high net worth, money market fund, mortgage debt, mortgage tax deduction, negative equity, offshore financial centre, Own Your Own Home, passive investing, place-making, Right to Buy, risk/return, short selling, zero-coupon bond

Given the many potential sources of risk and the fact that investment products can often be used in different ways that may increase the M09_LOWE7798_01_SE_C09.indd 254 05/03/2010 09:51 9 n Saving and investing 255 inherent risk, there is no neat, definitive way to rank products in order of their risk–return balance. You will always have to look at each product individually to assess precisely where the balance lies. Nevertheless, Figure 9.1 gives an indication of rank as a rough starting point. The letters after each investment indicate the predominant risks in each case. Balancing risks It is impossible to eradicate all risk from your saving and investment strategies.

Asset allocation Although investment diversification has been described above in the context of shares, it applies equally to any other type of investment that is traded on a market, such as bonds and even residential property (see the discussion of buy-to-let on p. 330). Diversification also applies across the boundaries of different investments. Just as combining uncorrelated or weakly correlated shares reduces risk for any given level of return, combining different types of investments – called asset classes – also improves the risk-return balance, provided the classes are uncorrelated or only 3 www.advfn.com. Accessed 3 October 2009. 4 www.advfn.com. Accessed 3 October 2009. M10_LOWE7798_01_SE_C10.indd 299 05/03/2010 09:51 300 Part 3 n Building and managing your wealth weakly correlated. Traditionally, there are four main asset classes which, in ascending order of capital risk, are: OO Cash, meaning deposit-type investments where you earn interest and the risk to your capital is usually negligible.

Normally this refers to commercial property, for example, holding of office blocks, shopping centres and industrial parks or shares in companies that specialise in owning and managing these. Private investors often hold residential property as an investment. OO Equities. These are shares in companies. In general, these four classes tend to be sufficiently uncorrelated – responding to economic events in different ways – to improve the risk-return balance when they are combined in a portfolio. For example, equities and property tend to do well in times of inflation, unlike cash and bonds. But cash and bonds may produce solid returns in an economic downturn, while property and equities tend to suffer. The extent to which different investments or assets are correlated can be measured and represented by a statistic called a ‘correlation coefficient’.


pages: 270 words: 73,485

Hubris: Why Economists Failed to Predict the Crisis and How to Avoid the Next One by Meghnad Desai

3D printing, Alan Greenspan, bank run, banking crisis, Bear Stearns, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, BRICs, British Empire, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, correlation coefficient, correlation does not imply causation, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, demographic dividend, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, German hyperinflation, Glass-Steagall Act, Gunnar Myrdal, Home mortgage interest deduction, imperial preference, income inequality, inflation targeting, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, Long Term Capital Management, low interest rates, market bubble, market clearing, means of production, Meghnad Desai, Mexican peso crisis / tequila crisis, mortgage debt, Myron Scholes, negative equity, Northern Rock, oil shale / tar sands, oil shock, open economy, Paul Samuelson, Phillips curve, Post-Keynesian economics, price stability, purchasing power parity, pushing on a string, quantitative easing, reserve currency, rising living standards, risk/return, Robert Shiller, Robert Solow, Ronald Reagan, savings glut, secular stagnation, seigniorage, Silicon Valley, Simon Kuznets, subprime mortgage crisis, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, women in the workforce

Cash carries no risk and yields no return. From then on, one can rank assets by return as measured by the average yield and risk as measured by the variance of the return. The risk–return “frontier” is like a constraint. Each investor can then define his or her preference between risk and return, as with consumer utility functions. To maximize the preference we need the tangent of the preference function with the risk–return frontier, that is, the highest level of return consistent with the risk preference of the consumer. This gives us a theory of portfolio selection for investors, who may choose between cash, bonds, equities and other riskier assets.


pages: 236 words: 77,735

Rigged Money: Beating Wall Street at Its Own Game by Lee Munson

affirmative action, Alan Greenspan, asset allocation, backtesting, barriers to entry, Bear Stearns, Bernie Madoff, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, call centre, Credit Default Swap, diversification, diversified portfolio, estate planning, fear index, fiat currency, financial engineering, financial innovation, fixed income, Flash crash, follow your passion, German hyperinflation, Glass-Steagall Act, global macro, High speed trading, housing crisis, index fund, joint-stock company, junk bonds, managed futures, Market Wizards by Jack D. Schwager, Michael Milken, military-industrial complex, money market fund, moral hazard, Myron Scholes, National best bid and offer, off-the-grid, passive investing, Ponzi scheme, power law, price discovery process, proprietary trading, random walk, Reminiscences of a Stock Operator, risk tolerance, risk-adjusted returns, risk/return, Savings and loan crisis, short squeeze, stocks for the long run, stocks for the long term, too big to fail, trade route, Vanguard fund, walking around money

Modern Portfolio Theory (MPT) assumes that investors will be rational. If given two portfolios with the same expected return, an investor will choose the less risky one. Why would you choose something more risky if it does the same thing as another portfolio with less risk? You wouldn’t if there was a bulletproof way of knowing the risk return of every security. People have different opinions on the matter. What makes the whole exercise of finding the less risky portfolio more dubious is that we use past performance to get this so-called expected return. Did I mention that there is no one way of coming up with this number? There is a whole army of analysts—including people like me—that have our own special ways of guessing what an asset class is expected to do in the future.

That said, how is an investor supposed to commit large allocations of capital in fixed income ETFs with that sinking feeling that this 30-year party may be over? MLPs are neither stock nor bond, but they can be an alternative to a portfolio seeking diversification and income outside of traditional asset classes. If you were thinking of buying higher-volatility bond ETFs like HYG, JNK, or PFD, read on and find another way to capture higher risk return and diversification. In their simplest form, MLPs are publicly traded organizations that are structured as limited partnerships (LP) rather than corporations. MLPs combine the tax benefits of an LP with the liquidity of a publicly traded security. Because the MLP passes through income, the limited partner can achieve higher current cash flow, meaning the company doesn’t pay tax on income by passing that income to the investor.


pages: 537 words: 144,318

The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money by Steven Drobny

Albert Einstein, AOL-Time Warner, Asian financial crisis, asset allocation, asset-backed security, backtesting, banking crisis, Bear Stearns, Bernie Madoff, Black Swan, bond market vigilante , book value, Bretton Woods, BRICs, British Empire, business cycle, business process, buy and hold, capital asset pricing model, capital controls, central bank independence, collateralized debt obligation, commoditize, commodity super cycle, commodity trading advisor, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, diversification, diversified portfolio, equity premium, equity risk premium, family office, fiat currency, fixed income, follow your passion, full employment, George Santayana, global macro, Greenspan put, Hyman Minsky, implied volatility, index fund, inflation targeting, interest rate swap, inventory management, inverted yield curve, invisible hand, junk bonds, Kickstarter, London Interbank Offered Rate, Long Term Capital Management, low interest rates, market bubble, market fundamentalism, market microstructure, Minsky moment, moral hazard, Myron Scholes, North Sea oil, open economy, peak oil, pension reform, Ponzi scheme, prediction markets, price discovery process, price stability, private sector deleveraging, profit motive, proprietary trading, purchasing power parity, quantitative easing, random walk, Reminiscences of a Stock Operator, reserve currency, risk free rate, risk tolerance, risk-adjusted returns, risk/return, savings glut, selection bias, Sharpe ratio, short selling, SoftBank, sovereign wealth fund, special drawing rights, statistical arbitrage, stochastic volatility, stocks for the long run, stocks for the long term, survivorship bias, tail risk, The Great Moderation, Thomas Bayes, time value of money, too big to fail, Tragedy of the Commons, transaction costs, two and twenty, unbiased observer, value at risk, Vanguard fund, yield curve, zero-sum game

When we get into a trade, we try to have an idea of the risk versus reward, and what type of trade it is. For a short-term tactical trade, we are trying to get a base hit because something seems out of line for a day or a few days. When we have more conviction on a particular theme, we will run a bigger position, going for a double or a triple. In either case, we look for asymmetric risk/return profiles, risking, say, 5 percent to make 10 or 15 percent, or risking 25 percent to make 50 to 100 percent. In general, we always sell winners “too soon” because we are scaling out into strength. It’s more art than science on the upside. We try to balance how consensus our idea has become, what kind of price target makes sense for our time horizon and the market action.

This is compounded by the fact that managers putting on illiquid trades did not personally face the true costs, meaning real money funds most likely did not charge enough for this in the past. Second, many argue that the ability to control and know the cash flows makes private assets (e.g., real estate) useful liability hedges. This may or may not be true, though my inclination is that these assets can and should stand on their own risk/return merits. “Labeling” something a hedge does not necessarily make it one, leading to misspecified risks and asset weights. Third, there are the tax shield and operational efficiency arguments for private equity, though these have to be weighed against the high management fee structure associated with most private equity funds.

See Maximum Sharpe Ratio Multiyear horizons NASDAQ (1995-2003) index (1994-2003) mispricing Negative carry Negative skew risk New Deal New York Mercantile Exchange (NYMEX) Nikkei (1980-1998) Nominal GDP Non-Accelerating Inflation Rate of Unemployment (NAIRU) Nonconstant volatility, presence Nonequity assets, inclusion Nongovernmental organizations (NGOs), data Normal backwardation North Sea crude Notre Dame (university endowment) Ohio, pension fund loss Oil (1986-2009) Oil (1998-2009) Oil fields, Commodity Investor purchase 1% effect One time stimulus programs Optimal portfolio construction, real money funds failure Optionality, usage Options markets, day-to-day liquidity Options, usage Orange County pension fund, problem Outcomes, positive asymmetry (achievement) Overnight index, geometric average Overnight indexed swap (OIS) spreads (2006-2008) Overvaluation zones, examination Overvalued assets (portfolio ownership), diversification (absence) Oxford Endowment, asset management Passive asset mix, importance Passive commodity indices, avoidance Paulson, Henry Peak oil, belief Pension Benefit Guaranty Corporation (PBGC), corporation pension fund guarantees Pensioner, The CalPERS control, example dollar notional thinking illiquid asset avoidance illiquidity premium measurement process illiquidity risk, hedge process interview investment scenario lessons leverage, usage performance, compounding cost post-crash investment, peer performance returns, targeting risk management risk premiums, specification risk/return approach 60-40 policy, standardization Pension funds allocation base currency commodity investment reasons constraint increase investment implementation, changes talent, quality long-term investment horizon real risk swaps/futures, usage Pensions assets, conservative management cash level change contributions, delay funding levels plans, constraints profits structure, impact systems, demographic challenges (impact) underfunding, shortfall Perfection, paradox Personal budgets, problems Philippines, peso (1993-1994) Philosopher, The Physical commodities, front contract advantage Pioneering Portfolio Management (Swensen) Plan assets, value (estimate) Plasticine™ Plasticine Macro Trader, The China perspective commodities, ownership complacency context, creation contrarian perspective diversification interpretation equities, delusion Favorite Trade format disapproval,–370368 hedge funds usage ideas, generation (global macro perspective) information, filtration interview investment safety investment storm investor letter, impact Japan bullishness liquidity, importance long-only community, adaptation long-only investment market behavior entry, awareness irrationality, relationship mentor lessons pension fund portfolio management performance portfolio construction, rethinking creation operation predictability, degree risk management evolution importance lessons success, consideration trade development ideas, importance problem theses, development trading decisions trend, anticipation P&L trading Popper, Karl Portable alpha allocation Portfolio Commodity Hedger construction construction guidelines rethinking diversification risk diversity Equity Trader construction illiquid assets, leverage illiquidity level, risk management levering, risk collars (usage) liquidity management, difficulty management investor approach recipe marginal trade optimization P&L volatility, limits policy activity, increase (impact) real money manager construction replication/modeling risks concentration, increase management size, reduction stress tests, conducting structure Portfolio-level expected alpha Positioning, understanding Positions notional value oversizing running scaling Positive asymmetry, achievement Potash Corporation of Saskatchewan (2008) Precommitments, method Predator, The bearishness, development CalPERS operation inflection points, awareness information collection examination process interview lessons liquidity, valuation macro overlay, profitability markets fundamentals/psychology, impact psychology, understanding mental flexibility optimist, perspective risk management stock market increase, nervousness stocks long position picking, profitability style, evolution tactical approach time horizon trade problem quality trading ideas, origination uniqueness Premium.


pages: 431 words: 132,416

No One Would Listen: A True Financial Thriller by Harry Markopolos

Alan Greenspan, backtesting, barriers to entry, Bernie Madoff, buy and hold, call centre, centralized clearinghouse, correlation coefficient, diversified portfolio, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, family office, financial engineering, financial thriller, fixed income, forensic accounting, high net worth, index card, Long Term Capital Management, Louis Bachelier, low interest rates, Market Wizards by Jack D. Schwager, offshore financial centre, payment for order flow, Ponzi scheme, price mechanism, proprietary trading, quantitative trading / quantitative finance, regulatory arbitrage, Renaissance Technologies, risk-adjusted returns, risk/return, rolodex, Sharpe ratio, statistical arbitrage, too big to fail, transaction costs, two and twenty, your tax dollars at work

“In addition, experts ask why no one has been able to duplicate similar returns using the strategy and why other firms on Wall Street haven’t become aware of the fund and its strategy and traded against it, as has happened so often in other cases; why Madoff Securities is willing to earn commissions on the trades but not set up a separate asset management division to offer hedge funds directly to investors and keep all the incentive fees for itself, or conversely, why it doesn’t borrow money from creditors ... and manage the funds on a proprietary basis.” And then he presented Madoff’s responses, describing him as appearing “genuinely amused by the interest and attention aimed at an asset management strategy designed to generate conservative, low-risk returns that he notes are nowhere near the top results of well-known fund managers on an absolute return basis. “The apparent lack of volatility in the performance of the fund, Madoff says, is an illusion based on a review of monthly and annual returns. On an intraday, intraweek, and intramonth basis, he says, ‘the volatility is all over the place, with the fund down by as much as 1 percent.”

I had no personal relationship with any of them, and I certainly didn’t want Bernie Madoff to know we were tracking him. Like Access, these funds needed Bernie to survive; they didn’t need me. Where would their loyalty be? And what would happen to me when Madoff found out I had warned them? I did appreciate the fact that they were trapped. They had to have Madoff to compete. No one had a risk-return ratio like Bernie. If you didn’t have him in your portfolio, your returns paled in comparison to those competitors who did. If you were a private banker and a client told you someone he knew had invested with Madoff and was getting 12 percent annually with ultralow volatility, what choice do you have?

Bernie Madoff is willing to answer each of those inquiries, even if he refuses to provide details about the trading strategy he considers proprietary information. And in a face-to-face interview and several telephone interviews, Madoff sounds and appears genuinely amused by the interest and attention aimed at an asset management strategy designed to generate conservative, low risk returns that he notes are nowhere near the top results of well-known fund managers on an absolute return basis. Lack of Volatility Illusory The apparent lack of volatility in the performance of the fund, Madoff says, is an illusion based on a review of the monthly and annual returns. On an intraday, intraweek and intramonth basis, he says, “the volatility is all over the place,” with the fund down by as much as 1 percent.


pages: 1,544 words: 391,691

Corporate Finance: Theory and Practice by Pierre Vernimmen, Pascal Quiry, Maurizio Dallocchio, Yann le Fur, Antonio Salvi

"Friedman doctrine" OR "shareholder theory", accelerated depreciation, accounting loophole / creative accounting, active measures, activist fund / activist shareholder / activist investor, AOL-Time Warner, ASML, asset light, bank run, barriers to entry, Basel III, Bear Stearns, Benoit Mandelbrot, bitcoin, Black Swan, Black-Scholes formula, blockchain, book value, business climate, business cycle, buy and hold, buy low sell high, capital asset pricing model, carried interest, collective bargaining, conceptual framework, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, currency risk, delta neutral, dematerialisation, discounted cash flows, discrete time, disintermediation, diversification, diversified portfolio, Dutch auction, electricity market, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, eurozone crisis, financial engineering, financial innovation, fixed income, Flash crash, foreign exchange controls, German hyperinflation, Glass-Steagall Act, high net worth, impact investing, implied volatility, information asymmetry, intangible asset, interest rate swap, Internet of things, inventory management, invisible hand, joint-stock company, joint-stock limited liability company, junk bonds, Kickstarter, lateral thinking, London Interbank Offered Rate, low interest rates, mandelbrot fractal, margin call, means of production, money market fund, moral hazard, Myron Scholes, new economy, New Journalism, Northern Rock, performance metric, Potemkin village, quantitative trading / quantitative finance, random walk, Right to Buy, risk free rate, risk/return, shareholder value, short selling, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, Steve Jobs, stocks for the long run, supply-chain management, survivorship bias, The Myth of the Rational Market, time value of money, too big to fail, transaction costs, value at risk, vertical integration, volatility arbitrage, volatility smile, yield curve, zero-coupon bond, zero-sum game

By varying ρH,C between −1 and +1, we obtain: Proportion of C shares in portfolio (XC) (%) 0 25 33.3 50 66.7 75 100 Return on the portfolio: E(rH,C) (%) 6.0 7.8 8.3 9.5 10.7 11.3 13.0 Portfolio risk σ(rH,C) (%) ρH,C = −1 10.0 3.3 1.0 3.5 8.0 10.3 17.0 ρH,C = −0.5 10.0 6.5 6.2 7.4 10.1 11.7 17.0 ρH,C = 0 10.0 8.6 8.7 9.9 11.8 13.0 17.0 ρH,C = 0.3 10.0 9.7 10.0 11.1 12.7 13.7 17.0 ρH,C = 0.5 10.0 10.3 10.7 11.8 13.3 14.2 17.0 ρH,C = 1 10.0 11.8 12.3 13.5 14.7 15.3 17.0 Note the following caveats: If Criteo and Heineken were perfectly correlated (i.e. the correlation coefficient was 1), then diversification would have no effect. All possible portfolios would lie on a line linking the risk/return point of Criteo with that of Heineken. Risk would increase in direct proportion to Criteo’s stock added. If the two stocks were perfectly inversely correlated (correlation coefficient −1), then diversification would be total. However, there is little chance of this occurring, as both companies are exposed to the same economic conditions.

As long as the correlation coefficient is below 1, diversification will be efficient. There is no reason for an investor to choose a given combination if another offers a better (efficient) return at the same level of risk. Efficient portfolios (such as a combination of Criteo and Heineken shares) offer investors the best risk–return ratio (i.e. minimal risk for a given return). Efficient portfolios fall between Z and Criteo. The portion of the curve between Z and Criteo is called the efficient frontier. For any portfolio that does not lie on the efficient frontier, another can be found that, given the level of risk, offers a greater return or that, at the same return, entails less risk.

Continuing with the Heineken example, and assuming that rF is 3%, with 50% of the portfolio consisting of a risk-free asset, the following is obtained: Hence: For a portfolio that includes a risk-free asset, there is a linear relationship between expected return and risk. To lower a portfolio’s risk, simply liquidate some of the portfolio’s stock and put the proceeds into a risk-free asset. To increase risk, it is only necessary to borrow at the risk-free rate and invest in a stock with risk. 2. Risk-free assets and the efficient frontier The risk–return profile can be chosen by combining risk-free assets and a stock portfolio (the alpha portfolio on the chart below). This new portfolio will be on a line that connects the risk-free rate to the portfolio alpha that has been chosen. But as we can observe on the chart, this portfolio is not the best portfolio.


pages: 345 words: 86,394

Frequently Asked Questions in Quantitative Finance by Paul Wilmott

Abraham Wald, Albert Einstein, asset allocation, beat the dealer, Black-Scholes formula, Brownian motion, butterfly effect, buy and hold, capital asset pricing model, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, delta neutral, discrete time, diversified portfolio, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial engineering, fixed income, fudge factor, implied volatility, incomplete markets, interest rate derivative, interest rate swap, iterative process, lateral thinking, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, martingale, Myron Scholes, Norbert Wiener, Paul Samuelson, power law, quantitative trading / quantitative finance, random walk, regulatory arbitrage, risk free rate, risk/return, Sharpe ratio, statistical arbitrage, statistical model, stochastic process, stochastic volatility, transaction costs, urban planning, value at risk, volatility arbitrage, volatility smile, Wiener process, yield curve, zero-coupon bond

The expected return is then and the standard deviation of the return, the risk, is where ρij is the correlation between the ith and jth investments, with ρii = 1. Markowitz showed how to optimize a portfolio by finding the Ws giving the portfolio the greatest expected return for a prescribed level of risk. The curve in the risk-return space with the largest expected return for each level of risk is called the efficient frontier. According to the theory, no one should hold portfolios that are not on the efficient frontier. Furthermore, if you introduce a risk-free investment into the universe of assets, the efficient frontier becomes the tangential line shown below.

J. 35 917-926 Poundstone, W 2005 Fortune’s Formula. Hill & Wang Why Hedge? Short Answer ‘Hedging’ in its broadest sense means the reduction of risk by exploiting relationships or correlation (or lack of correlation) between various risky investments. The purpose behind hedging is that it can lead to an improved risk/return. In the classical Modern Portfolio Theory framework, for example, it is usually possible to construct many portfolios having the same expected return but with different variance of returns (‘risk’). Clearly, if you have two portfolios with the same expected return the one with the lower risk is the better investment.


pages: 332 words: 81,289

Smarter Investing by Tim Hale

Albert Einstein, asset allocation, buy and hold, buy low sell high, capital asset pricing model, classic study, collapse of Lehman Brothers, corporate governance, credit crunch, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, eurozone crisis, fiat currency, financial engineering, financial independence, financial innovation, fixed income, full employment, Future Shock, implied volatility, index fund, information asymmetry, Isaac Newton, John Bogle, John Meriwether, Long Term Capital Management, low interest rates, managed futures, Northern Rock, passive investing, Ponzi scheme, purchasing power parity, quantitative easing, random walk, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, South Sea Bubble, technology bubble, the rule of 72, time value of money, transaction costs, Vanguard fund, women in the workforce, zero-sum game

The second is usually something that sounds so fantastic that you get sucked into the upside and blinded to the risks (e.g. the true cases of firms peddling freeholds to apartment blocks in Beirut at the height of the troubles there, or repossessed homes in Florida). Alternatively, it is an investment strategy that is akin to picking up pennies in front of a steam roller. Good until you stumble. Any risk-return asymmetry is illusory. Mental tick box 6: If you get excited about a specific opportunity, stand back, take a deep breath and ask yourself where the catch is. Return and risk are always closely related. Ask yourself why, if the opportunity is so great, is someone trying to sell it to you? Surely they would keep it all to themselves.

Whisky and water – keeping it simple James Tobin’s Separation Theorem (Tobin, 1957) suggests that the most efficient portfolio available is the ‘market portfolio’, i.e. the market cap weighted global asset mix (i.e. all the bonds and equities in the world). No portfolio has a theoretically better set of risk/return characteristics as this equilibrium portfolio. Thus, in a theoretical world, investors should own this market portfolio and simply add risk-free assets to it to create lower risk/lower reward portfolios, or leverage it if they wish to increase the risk of the portfolio beyond that of the market portfolio.


pages: 482 words: 161,169

Corporate Warriors: The Rise of the Privatized Military Industry by Peter Warren Singer

Apollo 13, barriers to entry, Berlin Wall, blood diamond, borderless world, British Empire, colonial rule, conceptual framework, disinformation, failed state, Fall of the Berlin Wall, financial independence, full employment, Global Witness, Jean Tirole, joint-stock company, Machinery of Freedom by David Friedman, market friction, military-industrial complex, moral hazard, Nelson Mandela, new economy, no-fly zone, offshore financial centre, Peace of Westphalia, principal–agent problem, prisoner's dilemma, private military company, profit maximization, profit motive, RAND corporation, risk/return, rolodex, Ronald Coase, Ronald Reagan, Scramble for Africa, South China Sea, supply-chain management, The Nature of the Firm, The Wealth of Nations by Adam Smith, vertical integration

"Threat of Terror Abroad Isn't New for Oil Companies like Occidental," Wall Street JournaL February 7, 2002; Alfredo Rangel Suarez, "Parasites and Predators: Guerillas and the Insurrection Economy of CAy\omh'vA," Journal of International Affain33, no. 2 (Spring 2000): 577-O01: Nancy Dunne. "Dope Wars (Part II): Crackdown on Colombia," Financial Times, August C), 2000. 26. Jimmy Burns, "Corporate Security: Anxiety Stirred by Anti-Western Sentiment," Financial Times. April l l, 2002. 27. "Corporate Security: Risk Returns," Economist, November 20. 1999. 28. "Risky Returns: Doing Business in Chaotic and Violent Countries,'* The Economist, November 20, lcjcjg. 2C). The new nature of warfare has meant that this presence of mining and lucrative returns will often be intimately connected with the potential for conflict, as noted in chapter 4. 30.

Natural Resources, and Violent Political Economies." Social Science Forum, March 21, 2000. Available at http://www.social-science-iorum.org/ new_page_27.htm. This contract, in turn, was guaranteed by loans from the \S.S. government and the World Bank. NOTES TO PAGES 82-89 32. "Corporate Security: Risk Returns." 33- www.airpartner.com. Another competitor is International SOS, a firm that offers global medical assistance, www.internationalsos.com. 34. Herbst. "The Regulation of Private Security Forces," p. 125. 35. Correspondence with the firm Frost & Sullivan. 36. Anna Leander, "Global Ungovemance: Mercenaries, States and the Control over Violence."

Military Posture for the Post-Cold War Era. Project on Defense Alternatives Briefing Report 9, March 1, 1998. Contamine, Phillipe. War in the Middle Ages. New York: Basil Blackwell, 1984. g26 BIBLIOGRAPHY Copetas, Craig. "It's Off to War Again for Big U.S. Contractor." Wall Street Join nal, April 4, 1999, p. A21. "Corporate Security: Risk Returns." The Economist, November 20, lyyy. Coney, Stan. "The Business of Cybersecurity—the War Against Privacy?" Australian Broadcasting Corporation, August 20, 2000. http://www.abc.net.au/rn/talks/ bbing/siOyi io.htm Croatian Foreign Press Bureau. Daily Bulletin, July 15, 1996. Cross, Tim. "Logistic Support for UK Expeditionaiy Operations."


pages: 823 words: 220,581

Debunking Economics - Revised, Expanded and Integrated Edition: The Naked Emperor Dethroned? by Steve Keen

accounting loophole / creative accounting, Alan Greenspan, banking crisis, banks create money, barriers to entry, behavioural economics, Benoit Mandelbrot, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, book value, business cycle, butterfly effect, capital asset pricing model, cellular automata, central bank independence, citizen journalism, clockwork universe, collective bargaining, complexity theory, correlation coefficient, creative destruction, credit crunch, David Ricardo: comparative advantage, debt deflation, diversification, double entry bookkeeping, en.wikipedia.org, equity risk premium, Eugene Fama: efficient market hypothesis, experimental subject, Financial Instability Hypothesis, fixed income, Fractional reserve banking, full employment, Glass-Steagall Act, Greenspan put, Henri Poincaré, housing crisis, Hyman Minsky, income inequality, information asymmetry, invisible hand, iterative process, John von Neumann, Kickstarter, laissez-faire capitalism, liquidity trap, Long Term Capital Management, low interest rates, mandelbrot fractal, margin call, market bubble, market clearing, market microstructure, means of production, minimum wage unemployment, Money creation, money market fund, open economy, Pareto efficiency, Paul Samuelson, Phillips curve, place-making, Ponzi scheme, Post-Keynesian economics, power law, profit maximization, quantitative easing, RAND corporation, random walk, risk free rate, risk tolerance, risk/return, Robert Shiller, Robert Solow, Ronald Coase, Savings and loan crisis, Schrödinger's Cat, scientific mainstream, seigniorage, six sigma, South Sea Bubble, stochastic process, The Great Moderation, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, total factor productivity, tulip mania, wage slave, zero-sum game

These investments give the highest return and the lowest risk possible. Any other combination that is not on the edge of the cloud can be topped by one farther out that has both a higher return and a lower risk.12 If this were the end of the matter, then the investor would choose the particular combination that coincided with their preferred risk–return trade-off, and that would be that. 11.3 Investor preferences and the investment opportunity cloud However, it’s possible to combine share-market investments with a bond that has much lower volatility, and Sharpe assumed the existence of a bond that paid a very low return, but had no risk.

This portfolio was represented by a straight line linking the riskless bond with a selection of shares (where the only selection that made sense was one that was on the Investment Opportunity Curve, and tangential to a line drawn through the riskless bond). Sharpe called this line the ‘capital market line’ or CML (ibid.: 425). 11.4 Multiple investors (with identical expectations) With borrowing, the investor’s risk–return preferences no longer determined which shares he bought; instead, they determined where he sat on the CML. An ultra-conservative investor would just buy the riskless bond and nothing else: that would put him on the horizontal axis (where risk is zero) but only a short distance out along the horizontal axis – which means only a very low return.

With these handy assumptions under his belt, the problem was greatly simplified. The riskless asset was the same for all investors. The IOC was the same for all investors. Therefore all investors would want to invest in some combination of the riskless asset and the same share portfolio. All that differed were investor risk–return preferences. Some would borrow money to move farther ‘northeast’ (towards a higher return with higher risk) than the point at which their indifference map was tangential to the IOC. Others would lend money to move ‘southwest’ from the point of tangency between their indifference map and the IOC, thus getting a lower return and a lower risk.


pages: 297 words: 91,141

Market Sense and Nonsense by Jack D. Schwager

3Com Palm IPO, asset allocation, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, Brownian motion, buy and hold, collateralized debt obligation, commodity trading advisor, computerized trading, conceptual framework, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, diversified portfolio, fixed income, global macro, high net worth, implied volatility, index arbitrage, index fund, Jim Simons, junk bonds, London Interbank Offered Rate, Long Term Capital Management, low interest rates, managed futures, margin call, market bubble, market fundamentalism, Market Wizards by Jack D. Schwager, merger arbitrage, negative equity, pattern recognition, performance metric, pets.com, Ponzi scheme, proprietary trading, quantitative trading / quantitative finance, random walk, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, selection bias, Sharpe ratio, short selling, statistical arbitrage, statistical model, subprime mortgage crisis, survivorship bias, tail risk, transaction costs, two-sided market, value at risk, yield curve

See Minimum acceptable return (MAR) ratio Marcus, Michael Margin Margin calls Marginal production loss Market bubbles Market direction Market neutral fund Market overvaluation Market panics Market price delays and inventory model of Market price response Market pricing theory Market psychology Market risk Market sector convertible arbitrage hedge funds and CTA funds hidden risk long-only funds market dependency past and future correlation performance impact by strategy Market timing skill Market-based risk Maximum drawdown (MDD) Mean reversion Mean-reversion strategy Merger arbitrage funds Mergers, cyclical tendency Metrics Minimum acceptable return (MAR) ratio and Calmar ratio Mispricing Mocking Monetary policy Mortgage standards Mortgage-backed securities (MBSs) Mortgages Multifund portfolio, diversified Mutual fund managers, vs. hedge fund managers Mutual funds National Futures Association (NFA) Negative returns Negative Sharpe ratio, and volatility Net asset valuation (NAV) Net exposure New York Stock Exchange (NYSE) Newsletter recommendation NINJA loans Normal distribution Normally distributed returns Notional funding October 1987 market crash Offsetting positions Option ARM Option delta Option premium Option price, underlying market price Option timing Optionality Out-of-the-money options Outperformance Pairs trading Palm Palm IPO Palm/3 Com Past high-return strategies Past performance back-adjusted return measures evaluation of going forward with incomplete information visual performance evaluation Past returns about and causes of future performance hedge funds high and low return periods implications of investment insights market sector past highest return strategy relevance of sector selection select funds and sources of Past track records Performance-based fees Portfolio construction principles Portfolio fund risk Portfolio insurance Portfolio optimization past returns volatility as risk measure Portfolio optimization software Portfolio rebalancing about clarification effect of reason for test for Portfolio risks Portfolio volatility Price aberrations Price adjustment timing Price bubble Price change distribution The price in not always right dot-com mania Pets.com subprime investment Pricing models Prime broker Producer short covering Professional management Profit incentives Pro-forma statistics Pro-forma vs. actual results Program sales Prospect theory Puts Quantitative measures beta correlation monthly average return Ramp-up period underperformance Random selection Random trading Random walk process Randomness risk Rare events Rating agencies Rational behavior Redemption frequency notice penalties Redemption liquidity Relative velocity Renaissance Medallion fund Return periods, high and low long term investment S&P performance Return retracement ratio (RRR) Return/risk performance Return/risk ratios vs. return Returns comparison measures relative vs. absolute objective Reverse merger arbitrage Risk assessment of for best strategy and leverage measurement vs. failure to measure measures of perception of vs. volatility Risk assessment Risk aversion Risk evaluation Risk management Risk management discipline Risk measurement vs. no risk measurement Risk mismeasurement asset risk vs. failure to measure hidden risk hidden risk evaluation investment insights problem source value at risk (VaR) volatility as risk measure volatility vs. risk Risk reduction Risk types Risk-adjusted allocation Risk-adjusted return Risk/return metrics Risk/return ratios Rolling window return charts Rubin, Paul Rubinstein, Mark Rukeyser, Louis S&P 500, vs. financial newsletters S&P 500 index S&P returns study of Sasseville, Caroline Schwager Analytics Module SDR Sharpe ratio Sector approach Sector funds Sector past performance Securities and Exchange Commission (SEC) Select funds, past returns and Selection bias Semistrong efficiency Shakespearian monkey argument Sharpe ratio back-adjusted return measures vs.


All About Asset Allocation, Second Edition by Richard Ferri

activist fund / activist shareholder / activist investor, Alan Greenspan, asset allocation, asset-backed security, barriers to entry, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, book value, buy and hold, capital controls, commoditize, commodity trading advisor, correlation coefficient, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, equity premium, equity risk premium, estate planning, financial independence, fixed income, full employment, high net worth, Home mortgage interest deduction, implied volatility, index fund, intangible asset, inverted yield curve, John Bogle, junk bonds, Long Term Capital Management, low interest rates, managed futures, Mason jar, money market fund, mortgage tax deduction, passive income, pattern recognition, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, selection bias, Sharpe ratio, stock buybacks, stocks for the long run, survivorship bias, too big to fail, transaction costs, Vanguard fund, yield curve

Investments that were once noncorrelated may become correlated in the future, and vice versa. Past correlations are a hint to future correlations, but not a reliable hint. Don’t trust any research report or book that says, “The correlation between asset class 1 and asset class 2 is X,” because by the time those words are printed, the correlation may have changed. The future risks, returns, and asset-class correlations cannot be known with any degree of certainty. Consequently, a perfect blend can never be known in advance. 3. During a time of extreme volatility when you want low correlation among asset classes, positive correlation can increase dramatically across all asset classes.

A FINAL WORD ABOUT MULTI-ASSETCLASS INVESTING There are several ways to select a multi-asset-class portfolio. One way is to answer a few questions on a questionnaire and feed those answers into a computer. The problem with this approach is that the computer is purely mathematical and relies too much on past risks, returns, and correlations. Basically, the computer simulation assumes that whatever happened in past is the most probable scenario for the future. This is an extremely unreliable way to make investment decisions. The world is constantly changing, and no computer simulation can accurately predict the changes that will occur or how these changes will affect a portfolio. 82 CHAPTER 4 In addition, a computer does not know who you are and cannot assess your personality profile so that the allocation it recommends truly fits your needs.


pages: 447 words: 104,258

Mathematics of the Financial Markets: Financial Instruments and Derivatives Modelling, Valuation and Risk Issues by Alain Ruttiens

algorithmic trading, asset allocation, asset-backed security, backtesting, banking crisis, Black Swan, Black-Scholes formula, Bob Litterman, book value, Brownian motion, capital asset pricing model, collateralized debt obligation, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, delta neutral, discounted cash flows, discrete time, diversification, financial engineering, fixed income, implied volatility, interest rate derivative, interest rate swap, low interest rates, managed futures, margin call, market microstructure, martingale, p-value, passive investing, proprietary trading, quantitative trading / quantitative finance, random walk, risk free rate, risk/return, Satyajit Das, seminal paper, Sharpe ratio, short selling, statistical model, stochastic process, stochastic volatility, time value of money, transaction costs, value at risk, volatility smile, Wiener process, yield curve, zero-coupon bond

Tim BOLLERSLEV, “Generalized autoregressive conditional heteroskedasticity”, Journal of Econometrics, 31(3), (1986), pp. 307–327. 9. Tim BOLLERSLEV, Glossary to ARCH (GARCH), CREATES, School of Economics and Management, University of Aarhus, Denmark, 2008, working paper. 10. E. GHYSELS, P. SANTA-CLARA, R. VALKANOV, “There is a risk-return trade-off after all”, Journal of Financial Economics, vol. 76, 2005, pp. 509–548. 10 Option pricing in general 10.1 INTRODUCTION TO OPTION PRICING An option is a contract granting: the right to its holder, the option buyer – but the obligation to its issuer, the seller, to negotiate, that is, either to buy (call option) or to sell (put option), if the option buyer exercises its right, at a price, fixed in advance and called the exercise price or strike price some quantity of underlying instrument (stock, currency, bond, etc.), at a given maturity date or until a given maturity date: in the first case, one refers to a European option, in the second, to an American option.

But more and more market participants, like hedge funds, traded these securities in a pseudo-arbitrage way, by combining for example a long position in CB with a short position in equivalent regular bond and call option, so that the market liquidity increased significantly, contributing to make disappear the price anomalies and related pseudo-arbitrage operations. So that, today, funds active on the CB market are more traditionally playing with the traditional advantages of the product, namely offering an intermediate risk/return profile between bonds and stocks, with some opportunities to play the volatility. Before looking after CB pricing, we need to specify some typical parameters of CBs. These will be illustrated with the following CB issue, in EUR: CB issue: DELHAIZE 2.75% 2009 (5 years) coupon: 2.75% (annual) issued amount: EUR 300 M denomination: EUR 250 000 issuing date: 30 April 2004 maturity date: 30 April 2009 conversion date: 24 April 2009 issuing price: 100% redemption amount: 100% conversion price: EUR 57.00 conversion ratio: 4385.9649 per EUR 250 000 call protection: Hard Call 3 years (until 15 May 2007) stock price at issuance date: EUR 40.50 Conversion Ratio For a given nominal value (i.e., a portion of the issued nominal amount), conversion ratio = number of ordinary shares offered in case of conversion “Hard” Call Protection CBs are generally issued with a period during which the issuer cannot early redeem his bond.


pages: 289 words: 113,211

A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation by Richard Bookstaber

affirmative action, Albert Einstein, asset allocation, backtesting, beat the dealer, behavioural economics, Black Swan, Black-Scholes formula, Bonfire of the Vanities, book value, butterfly effect, commoditize, commodity trading advisor, computer age, computerized trading, disintermediation, diversification, double entry bookkeeping, Edward Lorenz: Chaos theory, Edward Thorp, family office, financial engineering, financial innovation, fixed income, frictionless, frictionless market, Future Shock, George Akerlof, global macro, implied volatility, index arbitrage, intangible asset, Jeff Bezos, Jim Simons, John Meriwether, junk bonds, London Interbank Offered Rate, Long Term Capital Management, loose coupling, managed futures, margin call, market bubble, market design, Mary Meeker, merger arbitrage, Mexican peso crisis / tequila crisis, moral hazard, Myron Scholes, new economy, Nick Leeson, oil shock, Paul Samuelson, Pierre-Simon Laplace, proprietary trading, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk tolerance, risk/return, Robert Shiller, Robert Solow, rolodex, Saturday Night Live, selection bias, shareholder value, short selling, Silicon Valley, statistical arbitrage, tail risk, The Market for Lemons, time value of money, too big to fail, transaction costs, tulip mania, uranium enrichment, UUNET, William Langewiesche, yield curve, zero-coupon bond, zero-sum game

Even with Hilibrand’s efforts, over time it became increasingly difficult to execute a trade without that trade revealing the new opportunity, and then before long the opportunity would vanish. 112 ccc_demon_097-124_ch06.qxd 7/13/07 2:43 PM Page 113 LT C M R I D E S THE LEVERAGE CYCLE TO HELL While opaqueness may have actually been beneficial in normal times, it was a different story when the firm was on the ropes. Short-term lenders have a stunted sense of risk-return trade-offs. Unlike commercial banks, whose creditors can look to the Federal Deposit Insurance Corporation (FDIC) or to the “too big to fail” doctrine, securities firms have no declared sugar daddy to deter runs. It is not a matter of simply paying a higher price if lenders perceive that their capital is at risk.

It would be like opening up a program to study all objects made of materials other than wood, or initiating research on contemporary history for every country but France. You could do so, but I don’t know how that study would be much different from simply having a study of all materials or of all modern history. In fact, the proper study of hedge funds cannot be differentiated from a general study of investments. Issues of risk, return, and liquidity apply to all hedge fund strategies, and indeed to the whole range of possible investments. Consider the following scan of articles from various issues of the Journal of Alternative Investments, just one of a number of journals on hedge funds: “Currency Market Trading Performance”; “Timber Investment”; “Current Attitudes to Private Equity”; “Convertible Arbitrage: A Manager’s Perspective”; “Macro Trading and Investment Strategies”; “Commodity Trading Advisor Survey”; “Stock Selection in Eastern European Markets”; “Market Neutral versus Long/Short Equity”; “Merger Arbitrage: Evidence of Profitability”; “Analysis of Real Estate Investments in the U.S.”; “Benefits of International Small Cap Stocks.”


pages: 141 words: 40,979

The Little Book That Builds Wealth: The Knockout Formula for Finding Great Investments by Pat Dorsey

Airbus A320, barriers to entry, book value, business process, call centre, carbon tax, creative destruction, credit crunch, discounted cash flows, intangible asset, John Bogle, knowledge worker, late fees, low cost airline, Network effects, pets.com, price anchoring, risk tolerance, risk/return, rolodex, search costs, shareholder value, Stewart Brand

The short answer is “very carefully.” The long answer is that it takes practice and a fair amount of trial and error to become skilled at identifying undervalued stocks, but I think the following five tips will give you better odds of success than most investors. 1. Always remember the four drivers of valuation: risk, return on capital, competitive advantage, and growth. All else being equal, you should pay less for riskier stocks, more for companies with high returns on capital, more for companies with strong competitive advantages, and more for companies with higher growth prospects.Bear in mind that these drivers compound each other.


pages: 483 words: 141,836

Red-Blooded Risk: The Secret History of Wall Street by Aaron Brown, Eric Kim

Abraham Wald, activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, Asian financial crisis, Atul Gawande, backtesting, Basel III, Bayesian statistics, Bear Stearns, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Black Swan, book value, business cycle, capital asset pricing model, carbon tax, central bank independence, Checklist Manifesto, corporate governance, creative destruction, credit crunch, Credit Default Swap, currency risk, disintermediation, distributed generation, diversification, diversified portfolio, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, experimental subject, fail fast, fear index, financial engineering, financial innovation, global macro, illegal immigration, implied volatility, independent contractor, index fund, John Bogle, junk bonds, Long Term Capital Management, loss aversion, low interest rates, managed futures, margin call, market clearing, market fundamentalism, market microstructure, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, natural language processing, open economy, Pierre-Simon Laplace, power law, pre–internet, proprietary trading, quantitative trading / quantitative finance, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, shareholder value, Sharpe ratio, special drawing rights, statistical arbitrage, stochastic volatility, stock buybacks, stocks for the long run, tail risk, The Myth of the Rational Market, Thomas Bayes, too big to fail, transaction costs, value at risk, yield curve

The sports bettor types were the best at analyzing the data to determine what should happen, but they were often lousy at communicating it in a way traders could use. You can’t explain to a trader that, say, he should be willing to leave bigger positions open over a weekend because he had a greater risk-return ratio on those trades than on intraday or intraweek trades. That’s like telling a basketball player he missed more free throws long than short, so in future he should aim a foot in front of the basket instead of at the basket. Your observation might be true statistically, but your advice will just mess up his whole shot.

It’s something the risk manager usually exploits privately, by giving the green light to projects that take advantage of it. People know the risk manager approves some projects and vetoes others, but they seldom ask why. If someone does ask, she is usually satisfied with “It was too risky” if the answer was no, and “It had a risk-return trade-off within our appetite” if the answer was yes. People don’t like long discussions about risk. Adding pure artificial risk to things is the hardest of the three unspeakable truths to explain, and in my experience it is the least known outside the profession. There is a tendency in large organizations to standardize everything.


pages: 461 words: 128,421

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox

"Friedman doctrine" OR "shareholder theory", Abraham Wald, activist fund / activist shareholder / activist investor, Alan Greenspan, Albert Einstein, Andrei Shleifer, AOL-Time Warner, asset allocation, asset-backed security, bank run, beat the dealer, behavioural economics, Benoit Mandelbrot, Big Tech, Black Monday: stock market crash in 1987, Black-Scholes formula, book value, Bretton Woods, Brownian motion, business cycle, buy and hold, capital asset pricing model, card file, Carl Icahn, Cass Sunstein, collateralized debt obligation, compensation consultant, complexity theory, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, democratizing finance, Dennis Tito, discovery of the americas, diversification, diversified portfolio, Dr. Strangelove, Edward Glaeser, Edward Thorp, endowment effect, equity risk premium, Eugene Fama: efficient market hypothesis, experimental economics, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, George Akerlof, Glass-Steagall Act, Henri Poincaré, Hyman Minsky, implied volatility, impulse control, index arbitrage, index card, index fund, information asymmetry, invisible hand, Isaac Newton, John Bogle, John Meriwether, John Nash: game theory, John von Neumann, joint-stock company, Joseph Schumpeter, junk bonds, Kenneth Arrow, libertarian paternalism, linear programming, Long Term Capital Management, Louis Bachelier, low interest rates, mandelbrot fractal, market bubble, market design, Michael Milken, Myron Scholes, New Journalism, Nikolai Kondratiev, Paul Lévy, Paul Samuelson, pension reform, performance metric, Ponzi scheme, power law, prediction markets, proprietary trading, prudent man rule, pushing on a string, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, road to serfdom, Robert Bork, Robert Shiller, rolodex, Ronald Reagan, seminal paper, shareholder value, Sharpe ratio, short selling, side project, Silicon Valley, Skinner box, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, statistical model, stocks for the long run, tech worker, The Chicago School, The Myth of the Rational Market, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, Thorstein Veblen, Tobin tax, transaction costs, tulip mania, Two Sigma, Tyler Cowen, value at risk, Vanguard fund, Vilfredo Pareto, volatility smile, Yogi Berra

They followed the 150-year-old “Prudent Man” rule, a legal doctrine that instructed trustees of others’ money to “observe how men of prudence, discretion, and intelligence manage their own affairs” and conduct themselves accordingly.7 This had long been long interpreted to mean that trustees should stick the money in their charge in high-grade bonds and maybe a few blue-chip stocks. That approach was sorely tested in the 1960s, when imprudent investors seemed to be having all the fun and making all the money. It was tested even more in the 1970s, when neither bonds nor blue chips proved safe, leaving a big opening for the new approach to risk, return, and diversification that was introduced two decades before by Harry Markowitz. In this view it wasn’t the riskiness of an individual stock or bond that mattered, but the way it fit in to a portfolio. By the mid-1970s, this approach had a name—modern portfolio theory—and was beginning to make slight inroads in the institutional investing world.

., Studies in the Theory of Capital Markets (New York: Praeger, 1972), Black, Jensen, and Scholes found that low-beta stocks had higher returns than predicted by the original CAPM, but that the relationship between beta and returns seemed to fit an asset-pricing model in which borrowing limits and costs were taken into account. Meanwhile, Fama and James D. MacBeth, in “Risk, Return, and Equilibrium: Empirical Tests,” Journal of Political Economy (May–June 1973), concluded that “although there are ‘stochastic nonlinearities’ from period to period,” they could “not reject the hypothesis that in making a portfolio decision, an investor should assume that the relationship between a security’s portfolio risk and its expected return is linear” as CAPM implied. 31.


pages: 1,088 words: 228,743

Expected Returns: An Investor's Guide to Harvesting Market Rewards by Antti Ilmanen

Alan Greenspan, Andrei Shleifer, asset allocation, asset-backed security, availability heuristic, backtesting, balance sheet recession, bank run, banking crisis, barriers to entry, behavioural economics, Bernie Madoff, Black Swan, Bob Litterman, bond market vigilante , book value, Bretton Woods, business cycle, buy and hold, buy low sell high, capital asset pricing model, capital controls, carbon credits, Carmen Reinhart, central bank independence, classic study, collateralized debt obligation, commoditize, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, deal flow, debt deflation, deglobalization, delta neutral, demand response, discounted cash flows, disintermediation, diversification, diversified portfolio, dividend-yielding stocks, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, framing effect, frictionless, frictionless market, G4S, George Akerlof, global macro, global reserve currency, Google Earth, high net worth, hindsight bias, Hyman Minsky, implied volatility, income inequality, incomplete markets, index fund, inflation targeting, information asymmetry, interest rate swap, inverted yield curve, invisible hand, John Bogle, junk bonds, Kenneth Rogoff, laissez-faire capitalism, law of one price, London Interbank Offered Rate, Long Term Capital Management, loss aversion, low interest rates, managed futures, margin call, market bubble, market clearing, market friction, market fundamentalism, market microstructure, mental accounting, merger arbitrage, mittelstand, moral hazard, Myron Scholes, negative equity, New Journalism, oil shock, p-value, passive investing, Paul Samuelson, pension time bomb, performance metric, Phillips curve, Ponzi scheme, prediction markets, price anchoring, price stability, principal–agent problem, private sector deleveraging, proprietary trading, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Robert Shiller, savings glut, search costs, selection bias, seminal paper, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, stock buybacks, stocks for the long run, survivorship bias, systematic trading, tail risk, The Great Moderation, The Myth of the Rational Market, too big to fail, transaction costs, tulip mania, value at risk, volatility arbitrage, volatility smile, working-age population, Y2K, yield curve, zero-coupon bond, zero-sum game

Chapter 15 concluded that pure volatility risk may not be well rewarded because, while index option selling has been profitable, single-stock option selling has not. A correlation risk premium seems better than a volatility risk premium at explaining index option richness. Given the tradeoff between reward and risk, what would be more natural than to find a positive relation between expected volatility and expected returns? • While a positive risk–return relation tends to work in long-run average returns across asset classes (recall Figure 2.1), cross-sectional relations within asset classes, surprisingly, have the opposite pattern. High-volatility stocks underperform low-volatility stocks, long-duration bonds underperform shorter ones, and credit risk taking at long maturities likewise may earn a negative reward.

Lo; and Igor Makarov (2004), “An econometric model of serial correlation and illiquidity in hedge-fund returns,” Journal of Financial Economics 74, 529–609. Ghayur, Khalid; Ronan G. Heaney; Stephen A. Komon; and Stephen C. Platt (2010), Active Beta Indexes: Capturing Systematic Sources of Active Equity Returns, Hoboken, NJ: John Wiley & Sons, Inc. Ghysels, Eric; Pedro Santa-Clara; and Rossen Valkanov (2005), “There is a risk–return tradeoff after all,” Journal of Financial Economics 76, 509–548. Gibson, Rajna; and Songtao Wang (2010), “Hedge fund alphas: Do they reflect managerial skills or mere compensation for liquidity risk bearing?” Swiss Finance Institute research paper 08-37. Giesecke, Kay; Francis A. Longstaff; Stephen Schaefer; and Ilya Strebulaev (2010), “Corporate bond default risk: A 150-year perspective,” UCLA working paper.

Lopez de Silanes, Florencio; Ludovic Phalippou; and Oliver Gottschalg (2009), “Giants at the gate: Diseconomies of scale in private equity,” working paper, available at SSRN: http://ssrn.com/abstract=1363883 Lustig, Hanno; and Adrien Verdelhan (2007), “The cross-section of foreign currency risk premia and US consumption growth risk,” American Economic Review 97(1), 89–117. Lustig, Hanno; and Adrien Verdelhan (2010), “Business cycle variation in the risk–return tradeoff,” UCLA working paper. Ma, Cindy; and Andrew MacNamara, (2009), “The price of illiquidity: Valuation approaches across asset classes,” Houlihan Lokey research report. Macaulay, Frederick (1938), The Movements of Interest Rates, Bond Yields and Stock Prices in the United States since 1856, New York: National Bureau of Economic Research.


Working the Street: What You Need to Know About Life on Wall Street by Erik Banks

accounting loophole / creative accounting, borderless world, business cycle, corporate governance, deal flow, estate planning, fixed income, greed is good, junk bonds, old-boy network, PalmPilot, risk/return, rolodex, Savings and loan crisis, telemarketer

Bad markets, lack of transaction flow, some bad trades, or a few lost deals can spell the end of a producer’s career. That’s not necessarily true of staffers, who are generally much more insulated, living a bit farther away from the edge of the precipice. Someone still has to keep the books, do the audits, and look after the technology, regardless of how business is faring. So it follows from the risk/return equation we talked about earlier that the relative lack of job security commands a higher risk premium—payable in the form of a larger bonus. Remember, there can be no “free lunch.” If you want more return, you have to take more risk. But there actually is a bit of a free lunch out there. Though it’s true that producers earn more than staffers, an excellent staffer can earn more than a mediocre producer, and sometimes almost as much as a good producer.


pages: 197 words: 53,831

Investing to Save the Planet: How Your Money Can Make a Difference by Alice Ross

"World Economic Forum" Davos, activist fund / activist shareholder / activist investor, An Inconvenient Truth, barriers to entry, British Empire, carbon footprint, carbon tax, circular economy, clean tech, clean water, coronavirus, corporate governance, COVID-19, creative destruction, decarbonisation, diversification, Elon Musk, energy transition, Extinction Rebellion, family office, food miles, Future Shock, global pandemic, Goldman Sachs: Vampire Squid, green transition, Greta Thunberg, high net worth, hiring and firing, impact investing, Intergovernmental Panel on Climate Change (IPCC), Jeff Bezos, lockdown, low interest rates, Lyft, off grid, oil shock, passive investing, Peter Thiel, plant based meat, precision agriculture, risk tolerance, risk/return, sharing economy, Silicon Valley, social distancing, sovereign wealth fund, TED Talk, Tragedy of the Commons, uber lyft, William MacAskill

One reason that it could be unsuitable for venture capitalists, according to the report, is that such investors have a typical time horizon of between three and five years to make their money back, and thus are impatient for technology to be developed and scaled up faster. The correct lesson from the failure of cleantech between 2006 and 2011 is that it ‘clearly does not fit the risk, return, or time profiles of traditional venture capital investors. And as a result, the sector requires a more diverse set of actors and innovation models.’ Breakthrough Energy, with its ‘patient capital’ approach, is one such model. Institutional investors like pension funds and sovereign wealth funds, which can wait for decades to make returns but are often inexperienced technology investors, are another source.


pages: 353 words: 148,895

Triumph of the Optimists: 101 Years of Global Investment Returns by Elroy Dimson, Paul Marsh, Mike Staunton

asset allocation, banking crisis, Berlin Wall, Black Monday: stock market crash in 1987, book value, Bretton Woods, British Empire, buy and hold, capital asset pricing model, capital controls, central bank independence, classic study, colonial rule, corporate governance, correlation coefficient, cuban missile crisis, currency risk, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, European colonialism, fixed income, floating exchange rates, German hyperinflation, index fund, information asymmetry, joint-stock company, junk bonds, negative equity, new economy, oil shock, passive investing, purchasing power parity, random walk, risk free rate, risk tolerance, risk/return, selection bias, shareholder value, Sharpe ratio, stocks for the long run, survivorship bias, Tax Reform Act of 1986, technology bubble, transaction costs, yield curve

The Sharpe ratio is defined in terms of excess Triumph of the Optimists: 101 Years of Global Investment Returns 112 returns in recognition of the fact that investors can blend an investment in equities with lending or borrowing at the interest rate to achieve any desired level of risk. To illustrate use of the Sharpe ratio, we compare the risk/return trade-off for US equities versus the world index. From 1900–2000, US real equity returns had a standard deviation of 20.16 percent per year, versus 17.04 percent for the world portfolio (see Table 8-2). A US investor could have achieved the same risk as on the world portfolio by starting each year with a proportion 17.04/20.16 = 84.5 percent in US equities and the remaining 15.5 percent in risk free bills.

We should not generalize from this, however, and over the second half-century from 1950–2000, both US bond and equity investors would have gained significantly from investing worldwide. Many textbooks give a misleading impression of the gains from international diversification by presenting ex post efficient frontiers of the risk-return tradeoff based on hindsight about returns. Sadly, we can usually spot the high-return, low-risk markets only after the event, and past performance is a poor guide to the future. So looking ahead, and while we know there is no guarantee, our best guess is that international investment will offer a higher reward for risk than domestic investment, because of the risk reduction from diversification.


pages: 226 words: 59,080

Economics Rules: The Rights and Wrongs of the Dismal Science by Dani Rodrik

airline deregulation, Alan Greenspan, Albert Einstein, bank run, barriers to entry, behavioural economics, Bretton Woods, business cycle, butterfly effect, capital controls, carbon tax, Carmen Reinhart, central bank independence, collective bargaining, congestion pricing, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Donald Davies, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, Fellow of the Royal Society, financial deregulation, financial innovation, floating exchange rates, fudge factor, full employment, George Akerlof, Gini coefficient, Growth in a Time of Debt, income inequality, inflation targeting, informal economy, information asymmetry, invisible hand, Jean Tirole, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labor-force participation, liquidity trap, loss aversion, low skilled workers, market design, market fundamentalism, minimum wage unemployment, oil shock, open economy, Pareto efficiency, Paul Samuelson, price elasticity of demand, price stability, prisoner's dilemma, profit maximization, public intellectual, quantitative easing, randomized controlled trial, rent control, rent-seeking, Richard Thaler, risk/return, Robert Shiller, school vouchers, South Sea Bubble, spectrum auction, The Market for Lemons, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, trade liberalization, trade route, ultimatum game, University of East Anglia, unorthodox policies, Vilfredo Pareto, Washington Consensus, white flight

And it didn’t hurt that these views were shared by some of the top economists in government, such as Larry Summers and Alan Greenspan. In sum, economists (and those who listened to them) became overconfident in their preferred models of the moment: markets are efficient, financial innovation improves the risk-return trade-off, self-regulation works best, and government intervention is ineffective and harmful. They forgot about the other models. There was too much Fama, too little Shiller. The economics of the profession may have been fine, but evidently there was trouble with its psychology and sociology. Errors of Commission: The Washington Consensus In 1989, John Williamson convened a conference in Washington, DC, for major economic policy makers from Latin America.


pages: 442 words: 39,064

Why Stock Markets Crash: Critical Events in Complex Financial Systems by Didier Sornette

Alan Greenspan, Asian financial crisis, asset allocation, behavioural economics, Berlin Wall, Black Monday: stock market crash in 1987, Bretton Woods, Brownian motion, business cycle, buy and hold, buy the rumour, sell the news, capital asset pricing model, capital controls, continuous double auction, currency peg, Deng Xiaoping, discrete time, diversified portfolio, Elliott wave, Erdős number, experimental economics, financial engineering, financial innovation, floating exchange rates, frictionless, frictionless market, full employment, global village, implied volatility, index fund, information asymmetry, intangible asset, invisible hand, John von Neumann, joint-stock company, law of one price, Louis Bachelier, low interest rates, mandelbrot fractal, margin call, market bubble, market clearing, market design, market fundamentalism, mental accounting, moral hazard, Network effects, new economy, oil shock, open economy, pattern recognition, Paul Erdős, Paul Samuelson, power law, quantitative trading / quantitative finance, random walk, risk/return, Ronald Reagan, Schrödinger's Cat, selection bias, short selling, Silicon Valley, South Sea Bubble, statistical model, stochastic process, stocks for the long run, Tacoma Narrows Bridge, technological singularity, The Coming Technological Singularity, The Wealth of Nations by Adam Smith, Tobin tax, total factor productivity, transaction costs, tulip mania, VA Linux, Y2K, yield curve

A Working Hypothesis 27 27 30 33 The Basics Price Trajectories Return Trajectories Return Distributions and Return Correlation 38 The Efficient Market Hypothesis and the Random Walk The Random Walk 38 vi contents 42 45 A Parable: How Information Is Incorporated in Prices, Thus Destroying Potential “Free Lunches” Prices Are Unpredictable, or Are They? 47 Risk–Return Trade-Off Chapter 3 49 What Are “Abnormal” Returns? financial crashes are “outliers” 49 51 51 54 Drawdowns (Runs) Definition of Drawdowns Drawdowns and the Detection of “Outliers” Expected Distribution of “Normal” Drawdowns 56 60 60 62 65 69 70 73 75 Chapter 4 positive feedbacks 81 Drawdown Distributions of Stock Market Indices The Dow Jones Industrial Average The Nasdaq Composite Index Further Tests The Presence of Outliers Is a General Phenomenon Main Stock Market Indices, Currencies, and Gold Largest U.S.

Preserving the same qualitative pattern, during the 1897–1997 DJIA period, the weekly decline (rise) probability is 43.98% (55.87%). For the Nasdaq from 1962 to 1995, the daily decline (rise) probability is 46.92% (52.52%). For the IBM stock from 1962–1996, the daily decline (rise) probability is 47.96% (48.25%). RISK–RETURN TRADE-OFF One of the central insights of modern financial economics is the necessity of some trade-off between risk and expected return, and although Samuelson’s version of the efficient markets hypothesis places a restriction on expected returns, it does not account for risk in any way. In particular, if a security’s expected price change is positive, it may be just the reward needed to attract investors to hold the asset and bear the associated risks.


pages: 239 words: 69,496

The Wisdom of Finance: Discovering Humanity in the World of Risk and Return by Mihir Desai

activist fund / activist shareholder / activist investor, Albert Einstein, Andrei Shleifer, AOL-Time Warner, assortative mating, Benoit Mandelbrot, book value, Brownian motion, capital asset pricing model, Carl Icahn, carried interest, Charles Lindbergh, collective bargaining, corporate governance, corporate raider, discounted cash flows, diversified portfolio, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, follow your passion, George Akerlof, Gordon Gekko, greed is good, housing crisis, income inequality, information asymmetry, Isaac Newton, Jony Ive, Kenneth Rogoff, longitudinal study, Louis Bachelier, low interest rates, Monty Hall problem, moral hazard, Myron Scholes, new economy, out of africa, Paul Samuelson, Pierre-Simon Laplace, principal–agent problem, Ralph Waldo Emerson, random walk, risk/return, Robert Shiller, Ronald Coase, short squeeze, Silicon Valley, Steve Jobs, Thales and the olive presses, Thales of Miletus, The Market for Lemons, The Nature of the Firm, The Wealth of Nations by Adam Smith, Tim Cook: Apple, tontine, transaction costs, vertical integration, zero-sum game

The reason that the logic of diversification, the capital asset pricing model, and the idea of betas matches the Aristotelian taxonomy of relationships is that the underlying portfolio problem is the same. In finance, we are trying to figure out how to invest our assets and manage toward the best risk-return tradeoff. In life, we are trying to figure out how to allocate our time and energies across many people. It also matches because the underlying logic of insurance is present in both settings. For me, this parallel prompted several questions: Am I providing insurance to my loved ones and friends?


pages: 305 words: 69,216

A Failure of Capitalism: The Crisis of '08 and the Descent Into Depression by Richard A. Posner

Alan Greenspan, Andrei Shleifer, banking crisis, Bear Stearns, Bernie Madoff, business cycle, collateralized debt obligation, collective bargaining, compensation consultant, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, diversified portfolio, equity premium, financial deregulation, financial intermediation, Glass-Steagall Act, Home mortgage interest deduction, illegal immigration, laissez-faire capitalism, Long Term Capital Management, low interest rates, market bubble, Money creation, money market fund, moral hazard, mortgage debt, Myron Scholes, oil shock, Ponzi scheme, price stability, profit maximization, proprietary trading, race to the bottom, reserve currency, risk tolerance, risk/return, Robert Shiller, savings glut, shareholder value, short selling, statistical model, subprime mortgage crisis, too big to fail, transaction costs, very high income

The pooling of the mortgages that backed each security diversified the risk of default geographically and thus reduced it; a rise in defaults in Florida might be offset by a decline in defaults in New York. So far, so good, as far as management of risk was concerned. In addition, each security was sliced into different risk-return combinations and a purchaser could pick the one he wanted. (In other words, shares in each security were sold.) The top tier would have the first claim on the income generated by the pool of mortgages that backed the security, and so it had the highest credit rating and paid the lowest interest rate.


pages: 661 words: 185,701

The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance by Eswar S. Prasad

access to a mobile phone, Adam Neumann (WeWork), Airbnb, algorithmic trading, altcoin, bank run, barriers to entry, Bear Stearns, Ben Bernanke: helicopter money, Bernie Madoff, Big Tech, bitcoin, Bitcoin Ponzi scheme, Bletchley Park, blockchain, Bretton Woods, business intelligence, buy and hold, capital controls, carbon footprint, cashless society, central bank independence, cloud computing, coronavirus, COVID-19, Credit Default Swap, cross-border payments, cryptocurrency, deglobalization, democratizing finance, disintermediation, distributed ledger, diversified portfolio, Dogecoin, Donald Trump, Elon Musk, Ethereum, ethereum blockchain, eurozone crisis, fault tolerance, fiat currency, financial engineering, financial independence, financial innovation, financial intermediation, Flash crash, floating exchange rates, full employment, gamification, gig economy, Glass-Steagall Act, global reserve currency, index fund, inflation targeting, informal economy, information asymmetry, initial coin offering, Internet Archive, Jeff Bezos, Kenneth Rogoff, Kickstarter, light touch regulation, liquidity trap, litecoin, lockdown, loose coupling, low interest rates, Lyft, M-Pesa, machine readable, Mark Zuckerberg, Masayoshi Son, mobile money, Money creation, money market fund, money: store of value / unit of account / medium of exchange, Network effects, new economy, offshore financial centre, open economy, opioid epidemic / opioid crisis, PalmPilot, passive investing, payday loans, peer-to-peer, peer-to-peer lending, Peter Thiel, Ponzi scheme, price anchoring, profit motive, QR code, quantitative easing, quantum cryptography, RAND corporation, random walk, Real Time Gross Settlement, regulatory arbitrage, rent-seeking, reserve currency, ride hailing / ride sharing, risk tolerance, risk/return, Robinhood: mobile stock trading app, robo advisor, Ross Ulbricht, Salesforce, Satoshi Nakamoto, seigniorage, Sheryl Sandberg, Silicon Valley, Silicon Valley startup, smart contracts, SoftBank, special drawing rights, the payments system, too big to fail, transaction costs, uber lyft, unbanked and underbanked, underbanked, Vision Fund, Vitalik Buterin, Wayback Machine, WeWork, wikimedia commons, Y Combinator, zero-sum game

A US investor who has an account at a financial services firm such as Fidelity or Vanguard can simply buy an international index fund offered by those brokerages. Investment managers at those funds manage the foreign investments so all that an investor has to do is pick a fund that gives her the diversification she is looking for. Of course, there are risk-return trade-offs even among international funds. Investing in an emerging market fund could yield higher returns but is also riskier; by contrast, investing in advanced economy government bonds is safe but typically yields low returns. International index funds are readily available to all US investors, although fees and minimum investment amounts can deter investors who might have limited funds.

This proposition holds independently of where in the world the investor lives, although factors such as the tax laws in their country regarding domestic and foreign investments could influence the structure of this desirable portfolio. Investors in fact exhibit extensive home bias—they tend to heavily favor investments in their domestic stock markets rather than diversifying their portfolios. In principle, they could do far better to improve the risk-return trade-off of their portfolios through international diversification. In plainer language, judiciously buying stock in companies around the world, or simply investing in financial products that track other countries’ stock market indexes, would allow investors to attain higher average returns over a long period for a given degree of risk.


pages: 318 words: 77,223

The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse by Mohamed A. El-Erian

"World Economic Forum" Davos, activist fund / activist shareholder / activist investor, Airbnb, Alan Greenspan, balance sheet recession, bank run, barriers to entry, Bear Stearns, behavioural economics, Black Monday: stock market crash in 1987, break the buck, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, collapse of Lehman Brothers, corporate governance, currency peg, disruptive innovation, driverless car, Erik Brynjolfsson, eurozone crisis, fear index, financial engineering, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, fixed income, Flash crash, forward guidance, friendly fire, full employment, future of work, geopolitical risk, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, income inequality, inflation targeting, Jeff Bezos, Kenneth Rogoff, Khan Academy, liquidity trap, low interest rates, Martin Wolf, megacity, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, Norman Mailer, oil shale / tar sands, price stability, principal–agent problem, quantitative easing, risk tolerance, risk-adjusted returns, risk/return, Second Machine Age, secular stagnation, sharing economy, Sheryl Sandberg, sovereign wealth fund, The Great Moderation, The Wisdom of Crowds, too big to fail, University of East Anglia, yield curve, zero-sum game

They are also at the basis of work on driverless cars, remote health diagnoses, and a lot more. But this is, in fact, far from a simple dichotomy. Yes, the phenomenon of a “race against the machines” is being felt in the labor market, the value of education, employment remuneration, and the composition of jobs in a modern economy.4 It is also altering the risk/return configuration for new investments, amplifying “winner takes all” effects. The more innovative the economy, the higher the turnover, and the greater the importance of safety nets. Moreover, the dual transformative forces of these innovations—enabling and displacing—come with the potential for both good and bad.


pages: 263 words: 79,016

The Sport and Prey of Capitalists by Linda McQuaig

anti-communist, Bernie Sanders, carbon footprint, carbon tax, clean water, Cornelius Vanderbilt, diversification, Donald Trump, energy transition, financial innovation, Garrett Hardin, green new deal, Kickstarter, low interest rates, megaproject, Menlo Park, Money creation, Naomi Klein, neoliberal agenda, new economy, offshore financial centre, oil shale / tar sands, Paris climate accords, payday loans, precautionary principle, profit motive, risk/return, Ronald Reagan, Sidewalk Labs, Steve Jobs, strikebreaker, Tragedy of the Commons, union organizing

So, it wasn’t really the case that Canada was the disadvantaged partner desperately hoping to seize this “once-in-a-generation opportunity” to solve a problem — a problem that may not even have existed. If anything, the shoe was on the other foot. It was institutional capital that was seeking a once-in-a-generation opportunity to earn high-yield, low-risk returns at a time when few such opportunities seemed to exist in the global marketplace. So, it actually looks more like it was “advantage Canada” in this multi-billion-dollar infrastructure sweepstakes. But you’d sure never know it from the report put out by this council of advisers, who highlight all the things Canada must do to attract institutional capital.


pages: 241 words: 81,805

The Rise of Carry: The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis by Tim Lee, Jamie Lee, Kevin Coldiron

active measures, Alan Greenspan, Asian financial crisis, asset-backed security, backtesting, bank run, Bear Stearns, Bernie Madoff, Bretton Woods, business cycle, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, collapse of Lehman Brothers, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, currency risk, debt deflation, disinformation, distributed ledger, diversification, financial engineering, financial intermediation, Flash crash, global reserve currency, implied volatility, income inequality, inflation targeting, junk bonds, labor-force participation, Long Term Capital Management, low interest rates, Lyft, margin call, market bubble, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, negative equity, Network effects, Ponzi scheme, proprietary trading, public intellectual, purchasing power parity, quantitative easing, random walk, rent-seeking, reserve currency, rising living standards, risk free rate, risk/return, sharing economy, short selling, short squeeze, sovereign wealth fund, stock buybacks, tail risk, TikTok, Uber and Lyft, uber lyft, yield curve

The volatility of this strategy is also modest at just under 5 percent per year, similar to a 5-year Treasury bond. The ratio of these two figures—what asset managers call the information ratio (IR)—is around 0.4. This combination of a solid IR but low absolute returns presents asset managers with a conundrum. The risk-return trade-off appears good, but the strategy does not generate high enough levels of absolute returns. The “solution” is often to apply more leverage. This can generate higher abso- THE RISE OF CARRY 50 lute returns but, of course, comes with the trade-off of potentially much higher risk. In order to provide a set of returns that we can compare with familiar asset classes, we chose a leverage level of 1,000 percent ($5 short and $5 long for every $1 of capital).


Buy Then Build: How Acquisition Entrepreneurs Outsmart the Startup Game by Walker Deibel

barriers to entry, Blue Ocean Strategy, book value, Clayton Christensen, commoditize, deal flow, deliberate practice, discounted cash flows, diversification, drop ship, Elon Musk, family office, financial engineering, financial independence, high net worth, intangible asset, inventory management, Jeff Bezos, knowledge worker, Lean Startup, Mark Zuckerberg, meta-analysis, Network effects, new economy, Peter Thiel, risk tolerance, risk/return, rolodex, software as a service, Steve Jobs, subscription business, supply-chain management, Y Combinator

If it goes wrong you could end up bankrupt, upside down on your investment, and divorced. Further, selling a privately held company is not quick and easy like a publicly traded stock. It’s critical you understand the risks. The ROI on small business ownership can be great, but just how risky is small business acquisition? 25 MARGIN OF SAFETY Risk is relative. The risk-return spectrum dictates that the more risk an investor takes the greater the return needs to be. Unfortunately, the “high risk, high return” model frequently plays out in the high-risk part winning out and 24 producing lower returns. Warren Buffett, widely considered one of the most successful investors in the world, practices what’s called value investing.


pages: 265 words: 75,202

The Heart of Business: Leadership Principles for the Next Era of Capitalism by Hubert Joly

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, behavioural economics, big-box store, Blue Ocean Strategy, call centre, carbon footprint, Clayton Christensen, clean water, cognitive dissonance, commoditize, company town, coronavirus, corporate governance, corporate social responsibility, COVID-19, David Brooks, do well by doing good, electronic shelf labels (ESLs), fear of failure, global pandemic, Greta Thunberg, imposter syndrome, iterative process, Jeff Bezos, lateral thinking, lockdown, long term incentive plan, Marc Benioff, meta-analysis, old-boy network, pension reform, performance metric, popular capitalism, pre–internet, race to the bottom, remote working, Results Only Work Environment, risk/return, Salesforce, scientific management, shareholder value, Silicon Valley, social distancing, Social Responsibility of Business Is to Increase Its Profits, supply-chain management, TED Talk, Tim Cook: Apple, young professional, zero-sum game

In its 2020 annual letter to CEOs, BlackRock head Larry Fink explained that climate change, in particular, creates investment risks. “Climate change,” he wrote, “has become a defining factor in companies’ long-term prospects […] Our investment conviction is that sustainability- and climate-integrated portfolios can provide better adjusted-risk returns to investors.”8 Business leaders, nongovernmental organizations (NGOs), and academics surveyed by the World Economic Forum in its 2020 Global Risks Report ranked the failure to mitigate and adapt to climate change as the top threat facing the world over the next 10 years.9 Shareholders’ expectations are shifting because investors themselves are not soulless entities unable to lift their gaze past the next quarterly results.


pages: 294 words: 82,438

Simple Rules: How to Thrive in a Complex World by Donald Sull, Kathleen M. Eisenhardt

Affordable Care Act / Obamacare, Airbnb, Apollo 13, asset allocation, Atul Gawande, barriers to entry, Basel III, behavioural economics, Berlin Wall, carbon footprint, Checklist Manifesto, complexity theory, Craig Reynolds: boids flock, Credit Default Swap, Daniel Kahneman / Amos Tversky, democratizing finance, diversification, drone strike, en.wikipedia.org, European colonialism, Exxon Valdez, facts on the ground, Fall of the Berlin Wall, Glass-Steagall Act, Golden age of television, haute cuisine, invention of the printing press, Isaac Newton, Kickstarter, late fees, Lean Startup, Louis Pasteur, Lyft, machine translation, Moneyball by Michael Lewis explains big data, Nate Silver, Network effects, obamacare, Paul Graham, performance metric, price anchoring, RAND corporation, risk/return, Saturday Night Live, seminal paper, sharing economy, Silicon Valley, Startup school, statistical model, Steve Jobs, TaskRabbit, The Signal and the Noise by Nate Silver, transportation-network company, two-sided market, Wall-E, web application, Y Combinator, Zipcar

One recent study of alternative investment approaches pitted the Markowitz model and three extensions of his approach against the 1/N rule, testing them on seven samples of data from the real world. This research ran a total of twenty-eight horseraces between the four state-of-the-art statistical models and the 1/N rule. With ten years of historical data to estimate risk, returns, and correlations, the 1/N rule outperformed the Markowitz equation and its extensions 79 percent of the time. The 1/N rule earned a positive return in every test, while the more complicated models lost money for investors more than half the time. Other studies have run similar tests and come to the same conclusions.


pages: 303 words: 83,564

Exodus: How Migration Is Changing Our World by Paul Collier

Ayatollah Khomeini, Boris Johnson, charter city, classic study, Edward Glaeser, experimental economics, first-past-the-post, full employment, game design, George Akerlof, global village, guest worker program, illegal immigration, income inequality, informal economy, language acquisition, mass immigration, mirror neurons, moral hazard, open borders, radical decentralization, risk/return, Silicon Valley, sovereign wealth fund, Steven Pinker, tacit knowledge, The Wealth of Nations by Adam Smith, transaction costs, University of East Anglia, white flight, zero-sum game

High-income countries have a manifest interest in the success of postconflict situations: in recent decades the costs of trying to shore them up have been stupendous. Historically, close to half of them have reverted to violence, so if migration policy can be helpful, it is sensible to make it so. However, if restrictions on immigration from the country are tightened once peace has been restored, those who fled during conflict may be less inclined to risk return: will they be able to get back if necessary? The right time to adopt migration policies that would be helpful in postconflict situations is during the conflict. Both from the perspective of the duty of rescue, and to help preserve the country’s human capital from violence, during conflict a migration policy needs to be exceptionally generous.


pages: 389 words: 81,596

Quit Like a Millionaire: No Gimmicks, Luck, or Trust Fund Required by Kristy Shen, Bryce Leung

Affordable Care Act / Obamacare, Airbnb, Apollo 13, asset allocation, barriers to entry, buy low sell high, call centre, car-free, Columbine, cuban missile crisis, Deng Xiaoping, digital nomad, do what you love, Elon Musk, fear of failure, financial independence, fixed income, follow your passion, Great Leap Forward, hedonic treadmill, income inequality, index fund, John Bogle, junk bonds, longitudinal study, low cost airline, Mark Zuckerberg, mortgage debt, Mr. Money Mustache, obamacare, offshore financial centre, passive income, Ponzi scheme, risk tolerance, risk/return, side hustle, Silicon Valley, single-payer health, Snapchat, Steve Jobs, subprime mortgage crisis, supply-chain management, the rule of 72, working poor, Y2K, Zipcar

Expected return, measured as a percentage, is the expected annualized return of an asset. Volatility, measured as a standard deviation, is the day-to-day gyration of said asset. The higher the standard deviation, the more volatile the asset. Let’s take two assets: equities, as represented by the S & P 500, and bonds. If we were to plot the risk/return numbers of these two assets, it would look like this: On the vertical axis is expected return, and on the horizontal axis is standard deviation. The S & P 500’s position at the top right indicates that it’s a high-return, highly volatile asset, while bonds, on the bottom left, are lower return and less volatile.


pages: 321

Finding Alphas: A Quantitative Approach to Building Trading Strategies by Igor Tulchinsky

algorithmic trading, asset allocation, automated trading system, backpropagation, backtesting, barriers to entry, behavioural economics, book value, business cycle, buy and hold, capital asset pricing model, constrained optimization, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, currency risk, data science, deep learning, discounted cash flows, discrete time, diversification, diversified portfolio, Eugene Fama: efficient market hypothesis, financial engineering, financial intermediation, Flash crash, Geoffrey Hinton, implied volatility, index arbitrage, index fund, intangible asset, iterative process, Long Term Capital Management, loss aversion, low interest rates, machine readable, market design, market microstructure, merger arbitrage, natural language processing, passive investing, pattern recognition, performance metric, Performance of Mutual Funds in the Period, popular capitalism, prediction markets, price discovery process, profit motive, proprietary trading, quantitative trading / quantitative finance, random walk, Reminiscences of a Stock Operator, Renaissance Technologies, risk free rate, risk tolerance, risk-adjusted returns, risk/return, selection bias, sentiment analysis, shareholder value, Sharpe ratio, short selling, Silicon Valley, speech recognition, statistical arbitrage, statistical model, stochastic process, survivorship bias, systematic bias, systematic trading, text mining, transaction costs, Vanguard fund, yield curve

In the case of bad news, if a mispricing is detected, the fund manager can go long the equity and short the bond. Another way to play the same trade is to use CDSs instead of bonds: the fund manager can go long equity and buy undervalued CDS protection. There are many ways to construct the same trade, and it is up to the fund manager to conduct due diligence to find the one with the best risk-return profile. A second type of capital structure arbitrage involves finding mispricings between different categories of debt (for example, senior versus junior, secured versus unsecured, and bank loans versus bonds). During periods of stress or financial distress for the issuer company, discrepancies will occur in the relative prices of these debt instruments.


pages: 338 words: 85,566

Restarting the Future: How to Fix the Intangible Economy by Jonathan Haskel, Stian Westlake

"Friedman doctrine" OR "shareholder theory", activist fund / activist shareholder / activist investor, Andrei Shleifer, Big Tech, Black Lives Matter, book value, Boris Johnson, Brexit referendum, business cycle, business process, call centre, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, Charles Lindbergh, charter city, cloud computing, cognitive bias, cognitive load, congestion charging, coronavirus, corporate governance, COVID-19, creative destruction, cryptocurrency, David Graeber, decarbonisation, Diane Coyle, Dominic Cummings, Donald Shoup, Donald Trump, Douglas Engelbart, Douglas Engelbart, driverless car, Edward Glaeser, equity risk premium, Erik Brynjolfsson, Estimating the Reproducibility of Psychological Science, facts on the ground, financial innovation, Francis Fukuyama: the end of history, future of work, general purpose technology, gentrification, Goodhart's law, green new deal, housing crisis, income inequality, index fund, indoor plumbing, industrial cluster, inflation targeting, intangible asset, interchangeable parts, invisible hand, job-hopping, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, knowledge economy, knowledge worker, lockdown, low interest rates, low skilled workers, Marc Andreessen, market design, Martin Wolf, megacity, mittelstand, new economy, Occupy movement, oil shock, patent troll, Peter Thiel, Phillips curve, postindustrial economy, pre–internet, price discrimination, quantitative easing, QWERTY keyboard, remote working, rent-seeking, replication crisis, risk/return, Robert Gordon, Robert Metcalfe, Robert Shiller, Ronald Coase, Sam Peltzman, Second Machine Age, secular stagnation, shareholder value, Silicon Valley, six sigma, skeuomorphism, social distancing, superstar cities, the built environment, The Rise and Fall of American Growth, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, total factor productivity, transaction costs, Tyler Cowen, Tyler Cowen: Great Stagnation, Uber for X, urban planning, We wanted flying cars, instead we got 140 characters, work culture , X Prize, Y2K

And still others involve using cryptocurrencies to finance new businesses or new organisational structures like special purpose acquisition companies. Some of these products look like unimpeachably valuable financial innovations, connecting willing providers of capital to willing firms. Others look more questionable. Some critics have claimed that some consumer bonds and crowdfunding issues offer bad risk–return trade-offs to investors too naive to know better. In addition, some crowdfunding leverages investors’ goodwill towards a particular type of business to provide capital at a submarket rate. It is no coincidence that some subsectors with ferociously passionate customers, such as microbreweries and CrossFit gyms, are disproportionate users of crowdfunding.


pages: 287 words: 85,518

Please Report Your Bug Here: A Novel by Josh Riedel

Burning Man, Chuck Templeton: OpenTable:, financial independence, Golden Gate Park, invisible hand, Joan Didion, Mason jar, Menlo Park, messenger bag, off-the-grid, Port of Oakland, pre–internet, risk/return, Sand Hill Road, shareholder value, Silicon Valley, tech bro, tech worker, Whole Earth Catalog, work culture

I scrolled through the documentation on Portals in our internal wiki, trying to make sense of what was happening. The wiki included a live feed of feedback from various employees. A major known issue with the Portals app, in its private alpha stage, was that you could not bring anything back. Users had to return with only what they brought—yourself and what you packed, no souvenirs—or else risk returning with damaged goods. Certain employees, however, ignored this rule. A product designer, a fashionable guy who never wore the same pair of sneakers twice, was horrified one day to spot three of his colleagues in the same shoes he was wearing. “Where’d you find those?” he asked. “We got them on our lunch break, at that shop in Shoreditch you told us about,” his colleague answered.


Refuge: Transforming a Broken Refugee System by Alexander Betts, Paul Collier

Alvin Roth, anti-communist, centre right, charter city, corporate social responsibility, Donald Trump, failed state, Filter Bubble, global supply chain, informal economy, it's over 9,000, Kibera, mass immigration, megacity, middle-income trap, mobile money, Mohammed Bouazizi, mutually assured destruction, open borders, Peace of Westphalia, peer-to-peer, race to the bottom, randomized controlled trial, rising living standards, risk/return, school choice, special economic zone, structural adjustment programs, tail risk, trade route, urban planning, zero-sum game

This was a reaction to the immediate antecedent to UNHCR – the UN relief and rehabilitation agency, operational between 1943 and 1946. That agency had indeed sought to facilitate repatriation. But in 1947 the US terminated the agency and briefly created its own International Relief Organization (IRO) with a focus on resettling those who risked return to the East. Its condition for backing the embryonic UNHCR regime was that it too held this focus on nonreturn to persecution.3 Other governments had different goals that were also the result of their particular interests, but these were largely thwarted. Against the US position, the refugee-hosting countries of Western Europe wanted UNHCR to operationally provide material assistance to populations on their territories.


pages: 327 words: 90,542

The Age of Stagnation: Why Perpetual Growth Is Unattainable and the Global Economy Is in Peril by Satyajit Das

"there is no alternative" (TINA), "World Economic Forum" Davos, 9 dash line, accounting loophole / creative accounting, additive manufacturing, Airbnb, Alan Greenspan, Albert Einstein, Alfred Russel Wallace, Anthropocene, Anton Chekhov, Asian financial crisis, banking crisis, Bear Stearns, Berlin Wall, bitcoin, bond market vigilante , Bretton Woods, BRICs, British Empire, business cycle, business process, business process outsourcing, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, Carmen Reinhart, Clayton Christensen, cloud computing, collaborative economy, colonial exploitation, computer age, creative destruction, cryptocurrency, currency manipulation / currency intervention, David Ricardo: comparative advantage, declining real wages, Deng Xiaoping, deskilling, digital divide, disintermediation, disruptive innovation, Downton Abbey, Emanuel Derman, energy security, energy transition, eurozone crisis, financial engineering, financial innovation, financial repression, forward guidance, Francis Fukuyama: the end of history, full employment, geopolitical risk, gig economy, Gini coefficient, global reserve currency, global supply chain, Goldman Sachs: Vampire Squid, Great Leap Forward, Greenspan put, happiness index / gross national happiness, high-speed rail, Honoré de Balzac, hydraulic fracturing, Hyman Minsky, illegal immigration, income inequality, income per capita, indoor plumbing, informal economy, Innovator's Dilemma, intangible asset, Intergovernmental Panel on Climate Change (IPCC), it is difficult to get a man to understand something, when his salary depends on his not understanding it, It's morning again in America, Jane Jacobs, John Maynard Keynes: technological unemployment, junk bonds, Kenneth Rogoff, Kevin Roose, knowledge economy, knowledge worker, Les Trente Glorieuses, light touch regulation, liquidity trap, Long Term Capital Management, low interest rates, low skilled workers, Lyft, Mahatma Gandhi, margin call, market design, Marshall McLuhan, Martin Wolf, middle-income trap, Mikhail Gorbachev, military-industrial complex, Minsky moment, mortgage debt, mortgage tax deduction, new economy, New Urbanism, offshore financial centre, oil shale / tar sands, oil shock, old age dependency ratio, open economy, PalmPilot, passive income, peak oil, peer-to-peer lending, pension reform, planned obsolescence, plutocrats, Ponzi scheme, Potemkin village, precariat, price stability, profit maximization, pushing on a string, quantitative easing, race to the bottom, Ralph Nader, Rana Plaza, rent control, rent-seeking, reserve currency, ride hailing / ride sharing, rising living standards, risk/return, Robert Gordon, Robert Solow, Ronald Reagan, Russell Brand, Satyajit Das, savings glut, secular stagnation, seigniorage, sharing economy, Silicon Valley, Simon Kuznets, Slavoj Žižek, South China Sea, sovereign wealth fund, Stephen Fry, systems thinking, TaskRabbit, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, the market place, the payments system, The Spirit Level, Thorstein Veblen, Tim Cook: Apple, too big to fail, total factor productivity, trade route, transaction costs, uber lyft, unpaid internship, Unsafe at Any Speed, Upton Sinclair, Washington Consensus, We are the 99%, WikiLeaks, Y2K, Yom Kippur War, zero-coupon bond, zero-sum game

The shadow banking system, a network of bank-like financing vehicles and investment funds created by banks to circumvent regulation, added to the problem. In a version of the financial shell game, banks shuffled assets to these vehicles so as to reduce capital and boost returns. In theory, banks were not exposed to potential losses from these transactions. In practice, the risk returned to the banks under certain conditions, especially if the ability of the vehicles to raise money was impaired, exposing banks to large losses. Further adding to the problem was the conflict of interest between: banks and rating agencies; investment managers and their institutional clients; and bonus-driven traders and the managers and shareholders of banks.


The End of Accounting and the Path Forward for Investors and Managers (Wiley Finance) by Feng Gu

active measures, Affordable Care Act / Obamacare, Alan Greenspan, barriers to entry, book value, business cycle, business process, buy and hold, carbon tax, Claude Shannon: information theory, Clayton Christensen, commoditize, conceptual framework, corporate governance, creative destruction, Daniel Kahneman / Amos Tversky, discounted cash flows, disruptive innovation, diversified portfolio, double entry bookkeeping, Exxon Valdez, financial engineering, financial innovation, fixed income, geopolitical risk, hydraulic fracturing, index fund, information asymmetry, intangible asset, inventory management, Joseph Schumpeter, junk bonds, Kenneth Arrow, knowledge economy, moral hazard, new economy, obamacare, quantitative easing, quantitative trading / quantitative finance, QWERTY keyboard, race to the bottom, risk/return, Robert Shiller, Salesforce, shareholder value, Steve Jobs, tacit knowledge, The Great Moderation, value at risk

Record the progress over recent periods in the success of products under development in clinical tests, the number of products/devices in advanced state (Phase III clinical tests, FDA review), the extent of diversification of the development portfolio across therapeutic areas (an important risk measure), and the total size of the market for the main drugs under development (growth potential). These product-development dimensions provide a thorough risk–return profile of the major strategic asset of pharma companies. Regarding products already on the market: consider their therapeutic market share (e.g., HIV drugs) and the patent duration (time to expiration) of the leading drugs. These are the major indicators of the sustainability of the on-the-market drug portfolio.


pages: 335 words: 94,657

The Bogleheads' Guide to Investing by Taylor Larimore, Michael Leboeuf, Mel Lindauer

asset allocation, behavioural economics, book value, buy and hold, buy low sell high, corporate governance, correlation coefficient, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, endowment effect, estate planning, financial engineering, financial independence, financial innovation, high net worth, index fund, John Bogle, junk bonds, late fees, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, margin call, market bubble, mental accounting, money market fund, passive investing, Paul Samuelson, random walk, risk tolerance, risk/return, Sharpe ratio, statistical model, stocks for the long run, survivorship bias, the rule of 72, transaction costs, Vanguard fund, yield curve, zero-sum game

The mutual fund prospectus is the single best way to find out about the objectives, costs, past performance figures, and other important information about any mutual fund you're considering investing in. Although reading a prospectus may cause your eyes to glaze over, it's a very important step to help you determine if a particular fund satisfies your investment objectives (risk, return, etc.). Since you are planning on investing for the long-term (you are, aren't you?), reading a prospectus and understanding what you're investing in will be well worth the time and effort. We can't emphasize it enough: Read the fund's prospectus and understand what you re investing in! There are at least 10 advantages of investing in mutual funds: 1.


pages: 293 words: 88,490

The End of Theory: Financial Crises, the Failure of Economics, and the Sweep of Human Interaction by Richard Bookstaber

asset allocation, bank run, Bear Stearns, behavioural economics, bitcoin, business cycle, butterfly effect, buy and hold, capital asset pricing model, cellular automata, collateralized debt obligation, conceptual framework, constrained optimization, Craig Reynolds: boids flock, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, dark matter, data science, disintermediation, Edward Lorenz: Chaos theory, epigenetics, feminist movement, financial engineering, financial innovation, fixed income, Flash crash, geopolitical risk, Henri Poincaré, impact investing, information asymmetry, invisible hand, Isaac Newton, John Conway, John Meriwether, John von Neumann, Joseph Schumpeter, Long Term Capital Management, margin call, market clearing, market microstructure, money market fund, Paul Samuelson, Pierre-Simon Laplace, Piper Alpha, Ponzi scheme, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, Richard Feynman, risk/return, Robert Solow, Saturday Night Live, self-driving car, seminal paper, sovereign wealth fund, the map is not the territory, The Predators' Ball, the scientific method, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, tulip mania, Turing machine, Turing test, yield curve

“Intertemporal Asset Pricing under Knightian Uncertainty.” Econometrica 62, no. 2: 283–322. doi: 10.2307/2951614. Evans, George W., and Seppo Honkapohja. 2005. “An Interview with Thomas J. Sargent.” Macroeconomic Dynamics 9, no. 4: 561–83. doi: 10.1017/S1365100505050042. Fama, Eugene F., and James D. MacBeth. 1973. “Risk, Return, and Equilibrium: Empirical Tests.” Journal of Political Economy 81, no. 3: 607–36. http://www.jstor.org/stable/1831028. Farmer, J. Doyne. 2002. “Market Force, Ecology and Evolution.” Industrial and Corporate Change 11, no. 5: 895–953. doi: 10.1093/icc/11.5.895. Farmer, J. Doyne, and John Geanakoplos. 2009.


Concentrated Investing by Allen C. Benello

activist fund / activist shareholder / activist investor, asset allocation, barriers to entry, beat the dealer, Benoit Mandelbrot, Bob Noyce, Boeing 747, book value, business cycle, buy and hold, carried interest, Claude Shannon: information theory, corporate governance, corporate raider, delta neutral, discounted cash flows, diversification, diversified portfolio, Dutch auction, Edward Thorp, family office, fixed income, Henry Singleton, high net worth, index fund, John Bogle, John von Neumann, junk bonds, Louis Bachelier, margin call, merger arbitrage, Paul Samuelson, performance metric, prudent man rule, random walk, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, shareholder value, Sharpe ratio, short selling, survivorship bias, technology bubble, Teledyne, transaction costs, zero-sum game

In fact, the reader will probably be quite surprised by how large the bets can be calculated to be. Once again, placing bets of significant size depends on appropriately skewed probabilities, and these types of probabilities are uncommon, but both the mathematics and the investors argue for large bets when situations with unusual risk/return arise. It is important to note that the risk referred to here is the risk of permanent loss of capital and not the more commonly used academic metric of volatility. The investors in this book are willing to suffer through periods of temporary (but significant) loss of capital in an attempt to find opportunities where the probability of the permanent loss of capital is small.


Work Less, Live More: The Way to Semi-Retirement by Robert Clyatt

asset allocation, backtesting, buy and hold, currency risk, death from overwork, delayed gratification, diversification, diversified portfolio, do what you love, eat what you kill, employer provided health coverage, estate planning, Eugene Fama: efficient market hypothesis, financial independence, fixed income, future of work, independent contractor, index arbitrage, index fund, John Bogle, junk bonds, karōshi / gwarosa / guolaosi, lateral thinking, Mahatma Gandhi, McMansion, merger arbitrage, money market fund, mortgage tax deduction, passive income, rising living standards, risk/return, Silicon Valley, The 4% rule, The Theory of the Leisure Class by Thorstein Veblen, Thorstein Veblen, transaction costs, unpaid internship, upwardly mobile, Vanguard fund, work culture , working poor, zero-sum game

Then the high-tech part comes in, with reams of computer-based simu­ lations of various combinations of assets over different time periods. These systems, known as Portfolio Optimizers, find a cluster of optimal blends for a portfolio or the best combinations of asset classes to achieve desired rates of risk and return—at least as seen through the rear-view mirror of historical returns. Depending on where you want to be in the risk/return tradeoff, choose your proportions of asset classes and, to extend the metaphor, create a perfect soup. But Portfolio Optimizers are not foolproof. They can point you in the right direction when choosing an optimal blend of asset classes, but they have foibles. First, optimizers can tell you only what the optimal mix was during past years.


pages: 571 words: 105,054

Advances in Financial Machine Learning by Marcos Lopez de Prado

algorithmic trading, Amazon Web Services, asset allocation, backtesting, behavioural economics, bioinformatics, Brownian motion, business process, Claude Shannon: information theory, cloud computing, complexity theory, correlation coefficient, correlation does not imply causation, data science, diversification, diversified portfolio, en.wikipedia.org, financial engineering, fixed income, Flash crash, G4S, Higgs boson, implied volatility, information asymmetry, latency arbitrage, margin call, market fragmentation, market microstructure, martingale, NP-complete, P = NP, p-value, paper trading, pattern recognition, performance metric, profit maximization, quantitative trading / quantitative finance, RAND corporation, random walk, risk free rate, risk-adjusted returns, risk/return, selection bias, Sharpe ratio, short selling, Silicon Valley, smart cities, smart meter, statistical arbitrage, statistical model, stochastic process, survivorship bias, transaction costs, traveling salesman

Paper trading will take place for as long as it is needed to gather enough evidence that the strategy performs as expected. Graduation: At this stage, the strategy manages a real position, whether in isolation or as part of an ensemble. Performance is evaluated precisely, including attributed risk, returns, and costs. Re-allocation: Based on the production performance, the allocation to graduated strategies is re-assessed frequently and automatically in the context of a diversified portfolio. In general, a strategy's allocation follows a concave function. The initial allocation (at graduation) is small.


pages: 304 words: 97,603

The Last Punisher: A SEAL Team THREE Sniper's True Account of the Battle of Ramadi by Kevin Lacz, Ethan E. Rocke, Lindsey Lacz

operational security, risk/return, traumatic brain injury

The hasty patrol had me feeling alive. It was a nice change to get out of the conventional routine and do some real Frogman work. We had to walk this full patrol and do our best to find the lost KYK. If we didn’t find it, we’d turn around and that would be it. Losing a KYK is nothing to take lightly, but the risk-return ratio wasn’t going to hold together beyond the mission we were already running. About halfway to the building where Chris had shot the two guys on the moped, he halted the patrol and took a knee. Carefully, he raised his M4 and lased a target about one hundred meters ahead. “Hey, I got a guy moving with an AK, creeping around in the shadows,” Chris said over comms.


Systematic Trading: A Unique New Method for Designing Trading and Investing Systems by Robert Carver

asset allocation, automated trading system, backtesting, barriers to entry, Black Swan, buy and hold, cognitive bias, commodity trading advisor, Credit Default Swap, diversification, diversified portfolio, easy for humans, difficult for computers, Edward Thorp, Elliott wave, fear index, fixed income, global macro, implied volatility, index fund, interest rate swap, Long Term Capital Management, low interest rates, margin call, Market Wizards by Jack D. Schwager, merger arbitrage, Nick Leeson, paper trading, performance metric, proprietary trading, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Sharpe ratio, short selling, survivorship bias, systematic trading, technology bubble, transaction costs, Two Sigma, Y Combinator, yield curve

In principle my framework can deal equally well both with assets whose returns naturally have low standard deviations and those that are very risky. It can also cope with changes in volatility over time. However instruments which have extremely low risk like pegged currencies should be excluded. Firstly, when risk returns to normal it is liable to do so very sharply, potentially creating significant losses. Secondly, these positions need more leverage to achieve a given amount of risk, magnifying the danger when they do inevitably blow up. Even if you don’t use leverage they will limit the risk your overall trading system can achieve.74 Finally, they also tend to be more costly to trade, as you will discover in chapter twelve, ‘Speed and Size’.


pages: 391 words: 97,018

Better, Stronger, Faster: The Myth of American Decline . . . And the Rise of a New Economy by Daniel Gross

"World Economic Forum" Davos, 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, Affordable Care Act / Obamacare, Airbnb, Alan Greenspan, American Society of Civil Engineers: Report Card, asset-backed security, Bakken shale, banking crisis, Bear Stearns, BRICs, British Empire, business cycle, business process, business process outsourcing, call centre, carbon tax, Carmen Reinhart, clean water, collapse of Lehman Brothers, collateralized debt obligation, commoditize, congestion pricing, creative destruction, credit crunch, currency manipulation / currency intervention, demand response, Donald Trump, financial engineering, Frederick Winslow Taylor, high net worth, high-speed rail, housing crisis, hydraulic fracturing, If something cannot go on forever, it will stop - Herbert Stein's Law, illegal immigration, index fund, intangible asset, intermodal, inventory management, Kenneth Rogoff, labor-force participation, LNG terminal, low interest rates, low skilled workers, man camp, Mark Zuckerberg, Martin Wolf, Mary Meeker, Maui Hawaii, McMansion, money market fund, mortgage debt, Network effects, new economy, obamacare, oil shale / tar sands, oil shock, peak oil, plutocrats, price stability, quantitative easing, race to the bottom, reserve currency, reshoring, Richard Florida, rising living standards, risk tolerance, risk/return, scientific management, Silicon Valley, Silicon Valley startup, six sigma, Skype, sovereign wealth fund, Steve Jobs, superstar cities, the High Line, transit-oriented development, Wall-E, Yogi Berra, zero-sum game, Zipcar

So I bit the bullet and bought subscriptions. The result: a savings of $748 while I received the same product, plus the benefit of time-saving delivery and digital access. That’s like buying a stock that doubles in a year and then pays a 124 percent annual dividend. Investments in energy efficiency carry even better risk-return-reward profiles. Like many Americans whose homes are blessed (or cursed) with a swimming pool, I’ve come to look forward to the summers with a certain amount of dread. A wave of ecoguilt washes over me each time the hiss of the propane-fueled water heater pierces the air. It is then replaced by nausea when the propane bill arrives.


pages: 273 words: 34,920

Free Market Missionaries: The Corporate Manipulation of Community Values by Sharon Beder

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, Alan Greenspan, anti-communist, battle of ideas, business climate, Cornelius Vanderbilt, corporate governance, electricity market, en.wikipedia.org, full employment, Herbert Marcuse, Ida Tarbell, income inequality, invisible hand, junk bonds, liquidationism / Banker’s doctrine / the Treasury view, minimum wage unemployment, Mont Pelerin Society, new economy, old-boy network, popular capitalism, Powell Memorandum, price mechanism, profit motive, Ralph Nader, rent control, risk/return, road to serfdom, Ronald Reagan, school vouchers, shareholder value, spread of share-ownership, structural adjustment programs, The Chicago School, the market place, The Wealth of Nations by Adam Smith, Thomas L Friedman, Torches of Freedom, trade liberalization, traveling salesman, trickle-down economics, two and twenty, Upton Sinclair, Washington Consensus, wealth creators, young professional

They would be less bolshie and more understanding of what management and owners are trying to achieve, as they would all be rewarded along similar lines.52 In its submission, BHP told the same inquiry that employees owned shares or options worth 7.6 per cent of the company’s capital and that its motivation in providing this opportunity was to help wage earners to understand and experience private enterprise; to justify ‘the profit motive in terms of risk return for investors’; and to encourage ‘employees to take a more active interest as co-owners of the company and for them to look beyond their local domain’. 53 Rob Donkersley, Employee Relations Director for Coca-Cola Amatil, told the inquiry about his company’s employee share ownership plan: We feel we have captured the minds of our employees through this plan.


pages: 398 words: 105,917

Bean Counters: The Triumph of the Accountants and How They Broke Capitalism by Richard Brooks

"World Economic Forum" Davos, accounting loophole / creative accounting, Alan Greenspan, asset-backed security, banking crisis, Bear Stearns, Big bang: deregulation of the City of London, blockchain, BRICs, British Empire, business process, Charles Babbage, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Strachan, Deng Xiaoping, Donald Trump, double entry bookkeeping, Double Irish / Dutch Sandwich, energy security, Etonian, eurozone crisis, financial deregulation, financial engineering, Ford Model T, forensic accounting, Frederick Winslow Taylor, G4S, Glass-Steagall Act, high-speed rail, information security, intangible asset, Internet of things, James Watt: steam engine, Jeremy Corbyn, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, junk bonds, light touch regulation, Long Term Capital Management, low cost airline, new economy, Northern Rock, offshore financial centre, oil shale / tar sands, On the Economy of Machinery and Manufactures, Ponzi scheme, post-oil, principal–agent problem, profit motive, race to the bottom, railway mania, regulatory arbitrage, risk/return, Ronald Reagan, Savings and loan crisis, savings glut, scientific management, short selling, Silicon Valley, South Sea Bubble, statistical model, supply-chain management, The Chicago School, too big to fail, transaction costs, transfer pricing, Upton Sinclair, WikiLeaks

‘You’ve got to be inside the industry and inside the thinking and inside the regulator’s mind, otherwise you can’t do the job,’ he insisted. ‘I feel really strongly about multi-disciplinary partnerships . . . Doing more than just audit [is] not just desirable but fundamental for audit quality because we might be auditing bank X but we might be doing risk returns or regulatory investigations for banks Y and Z. Without the ability to take an industry-wide view, to have the expertise in complex financial instruments and their accountancy treatment, our chances of auditing well and sceptically would be really low.’ It seemed not to matter that when put to the test in the years leading up to the financial crisis, this optimistic theory had failed spectacularly.


pages: 362 words: 108,359

The Accidental Investment Banker: Inside the Decade That Transformed Wall Street by Jonathan A. Knee

AOL-Time Warner, barriers to entry, Bear Stearns, book value, Boycotts of Israel, business logic, call centre, cognitive dissonance, commoditize, corporate governance, Corrections Corporation of America, deal flow, discounted cash flows, fear of failure, fixed income, Glass-Steagall Act, greed is good, if you build it, they will come, iterative process, junk bonds, low interest rates, market bubble, market clearing, Mary Meeker, Menlo Park, Michael Milken, new economy, Ponzi scheme, pre–internet, proprietary trading, risk/return, Ronald Reagan, shareholder value, Silicon Valley, SoftBank, technology bubble, young professional, éminence grise

Second, young companies can do irreparable harm to themselves by going public too early. You (usually) only get to go public once. This is your chance to tell your story to the market, establish financial and operating metrics that you want to be judged by, and describe your strategic direction. A company that goes public before these elements are ready risks returning to the very investors who bought its stock in the IPO and saying, “Never mind.” It is almost impossible to recover credibility from this fundamental breach of trust. The number of “fallen angels”—highflying issues that fail to meet expectations and become penny stocks—that ever come back to life can be counted on one hand.


pages: 389 words: 108,344

Kill Chain: The Rise of the High-Tech Assassins by Andrew Cockburn

airport security, anti-communist, Bletchley Park, drone strike, Edward Snowden, friendly fire, Google Earth, license plate recognition, military-industrial complex, no-fly zone, RAND corporation, risk/return, Ronald Reagan, Seymour Hersh, Silicon Valley, South China Sea, Suez crisis 1956, TED Talk, Teledyne, too big to fail, vertical integration, WikiLeaks

In the drug business, pilots had been willing to fly cocaine base from Peru to Colombia for little reward because there was minimal risk. Once that risk went up, as it did when they started getting shot down, the reward for the pilots became insufficient, and they refused to fly. In the insurgency it was people who were working for the money, such as the men digging holes to bury the bombs, who were susceptible to increased risk. Returning to Washington, Rivolo briefed his superiors on his conclusions, bluntly suggesting that the “attack-the-leaders” strategy enjoying the highest priority was “completely unproductive.” Far better, he insisted, to concentrate on those lower down. Later, he would calculate the precise degree of risk involved in planting a bomb.


pages: 350 words: 103,270

The Devil's Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street . . . And Are Ready to Do It Again by Nicholas Dunbar

Alan Greenspan, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, behavioural economics, Black Swan, Black-Scholes formula, bonus culture, book value, break the buck, buy and hold, capital asset pricing model, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, commoditize, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, delayed gratification, diversification, Edmond Halley, facts on the ground, fear index, financial innovation, fixed income, George Akerlof, Glass-Steagall Act, Greenspan put, implied volatility, index fund, interest rate derivative, interest rate swap, Isaac Newton, John Meriwether, junk bonds, Kenneth Rogoff, Kickstarter, Long Term Capital Management, margin call, market bubble, money market fund, Myron Scholes, Nick Leeson, Northern Rock, offshore financial centre, Paul Samuelson, price mechanism, proprietary trading, regulatory arbitrage, rent-seeking, Richard Thaler, risk free rate, risk tolerance, risk/return, Ronald Reagan, Salesforce, Savings and loan crisis, seminal paper, shareholder value, short selling, statistical model, subprime mortgage crisis, The Chicago School, Thomas Bayes, time value of money, too big to fail, transaction costs, value at risk, Vanguard fund, yield curve, zero-sum game

And suppose that the VAR system—the policing mechanism keeping the firm safe—said that the bet had low VAR and didn’t require much capital. Think for a moment about the relationship between traders and those who provide them with capital. As in any business, different traders compete for this capital by trying to offer the best risk-return proposition. If the bottleneck is a mechanism that defines how questions of risk should be addressed, then the winner in the struggle for capital will be the one who best plays that mechanism to their advantage. Presented with this incentive, traders gave statistics and economic theory a much warmer welcome on the trading floor.


pages: 387 words: 106,753

Why Startups Fail: A New Roadmap for Entrepreneurial Success by Tom Eisenmann

Airbnb, Atul Gawande, autonomous vehicles, Ben Horowitz, Big Tech, bitcoin, Blitzscaling, blockchain, call centre, carbon footprint, Checklist Manifesto, clean tech, conceptual framework, coronavirus, corporate governance, correlation does not imply causation, COVID-19, crowdsourcing, Daniel Kahneman / Amos Tversky, data science, Dean Kamen, drop ship, Elon Musk, fail fast, fundamental attribution error, gig economy, growth hacking, Hyperloop, income inequality, initial coin offering, inventory management, Iridium satellite, Jeff Bezos, Jeff Hawkins, Larry Ellison, Lean Startup, Lyft, Marc Andreessen, margin call, Mark Zuckerberg, minimum viable product, Network effects, nuclear winter, Oculus Rift, PalmPilot, Paul Graham, performance metric, Peter Pan Syndrome, Peter Thiel, reality distortion field, Richard Thaler, ride hailing / ride sharing, risk/return, Salesforce, Sam Altman, Sand Hill Road, side project, Silicon Valley, Silicon Valley startup, Skype, social graph, software as a service, Solyndra, speech recognition, stealth mode startup, Steve Jobs, TED Talk, two-sided market, Uber and Lyft, Uber for X, uber lyft, vertical integration, We wanted flying cars, instead we got 140 characters, WeWork, Y Combinator, young professional, Zenefits

Many aspiring entrepreneurs fail to consider the full range of financing alternatives available to them. Venture capital is the default, especially for graduates of elite MBA programs, where venture capital investors are lionized. But the pressure that comes with venture capital is not well suited for all businesses, nor is this risk/return profile suited for all entrepreneurs’ temperaments. For example, Quincy’s VCs pushed the founders to “swing for the fences,” saddling the startup with aggressive growth targets. Nelson recounted, “The investors advised us to keep a lot of inventory. They said stockouts were the worst thing that could happen to a retailer.


pages: 397 words: 112,034

What's Next?: Unconventional Wisdom on the Future of the World Economy by David Hale, Lyric Hughes Hale

"World Economic Forum" Davos, affirmative action, Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, behavioural economics, Berlin Wall, biodiversity loss, Black Swan, Bretton Woods, business cycle, capital controls, carbon credits, carbon tax, Cass Sunstein, central bank independence, classic study, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, currency risk, Daniel Kahneman / Amos Tversky, debt deflation, declining real wages, deindustrialization, diversification, energy security, Erik Brynjolfsson, Fall of the Berlin Wall, financial engineering, financial innovation, floating exchange rates, foreign exchange controls, full employment, Gini coefficient, Glass-Steagall Act, global macro, global reserve currency, global village, high net worth, high-speed rail, Home mortgage interest deduction, housing crisis, index fund, inflation targeting, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), inverted yield curve, invisible hand, Just-in-time delivery, Kenneth Rogoff, Long Term Capital Management, low interest rates, Mahatma Gandhi, Martin Wolf, Mexican peso crisis / tequila crisis, Mikhail Gorbachev, military-industrial complex, Money creation, money market fund, money: store of value / unit of account / medium of exchange, mortgage tax deduction, Network effects, new economy, Nicholas Carr, oil shale / tar sands, oil shock, open economy, passive investing, payday loans, peak oil, Ponzi scheme, post-oil, precautionary principle, price stability, private sector deleveraging, proprietary trading, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, risk/return, Robert Shiller, Ronald Reagan, Savings and loan crisis, sovereign wealth fund, special drawing rights, subprime mortgage crisis, technology bubble, The Great Moderation, Thomas Kuhn: the structure of scientific revolutions, Tobin tax, too big to fail, total factor productivity, trade liberalization, Tragedy of the Commons, Washington Consensus, Westphalian system, WikiLeaks, women in the workforce, yield curve

FRAGILE STATES: States that fail to provide basic services to poor people because they are unwilling or unable to do so. FREE TRADE AREA: A group of countries within which tariffs and nontariff trade barriers between members are generally abolished. The group lacks a common trade policy toward nonmembers. FRONTIER MARKET: Emerging market countries with high volatility, low liquidity, and higher risk/return ratios that are not as prominent as major emerging market countries such as China and Brazil. GAAP (GENERALLY ACCEPTED ACCOUNTING PRINCIPLES): The common set of accounting principles, standards, and procedures that companies use to compile their financial statements. They are a combination of formal standards and traditional practices.


pages: 416 words: 118,592

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing by Burton G. Malkiel

accounting loophole / creative accounting, Alan Greenspan, Albert Einstein, asset allocation, asset-backed security, backtesting, Bear Stearns, beat the dealer, Bernie Madoff, book value, BRICs, butter production in bangladesh, buy and hold, capital asset pricing model, compound rate of return, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, dogs of the Dow, Edward Thorp, Elliott wave, Eugene Fama: efficient market hypothesis, experimental subject, feminist movement, financial engineering, financial innovation, fixed income, framing effect, hindsight bias, Home mortgage interest deduction, index fund, invisible hand, Isaac Newton, Japanese asset price bubble, John Bogle, junk bonds, Long Term Capital Management, loss aversion, low interest rates, margin call, market bubble, Mary Meeker, money market fund, mortgage tax deduction, new economy, Own Your Own Home, PalmPilot, passive investing, Paul Samuelson, pets.com, Ponzi scheme, price stability, profit maximization, publish or perish, purchasing power parity, RAND corporation, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, stock buybacks, stocks for the long run, sugar pill, survivorship bias, The Myth of the Rational Market, the rule of 72, The Wisdom of Crowds, transaction costs, Vanguard fund, zero-coupon bond

Neither fundamental analysis of a stock’s firm foundation of value nor technical analysis of the market’s propensity for building castles in the air can produce reliably superior results. Even the pros must hide their heads in shame when they compare their results with those obtained by the dartboard method of picking stocks. Sensible investment policies for individuals must then be developed in two steps. First, it is crucially important to understand the risk-return trade-offs that are available and to tailor your choice of securities to your temperament and requirements. Part Four provided a careful guide for this part of the walk, including a number of warm-up exercises concerning everything from tax planning to the management of reserve funds and a life-cycle guide to portfolio allocations.


pages: 422 words: 113,830

Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism by Kevin Phillips

"World Economic Forum" Davos, Alan Greenspan, algorithmic trading, asset-backed security, bank run, banking crisis, Bear Stearns, Bernie Madoff, Black Swan, Bretton Woods, BRICs, British Empire, business cycle, buy and hold, collateralized debt obligation, computer age, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency peg, diversification, Doha Development Round, energy security, financial deregulation, financial engineering, financial innovation, fixed income, Francis Fukuyama: the end of history, George Gilder, Glass-Steagall Act, housing crisis, Hyman Minsky, imperial preference, income inequality, index arbitrage, index fund, interest rate derivative, interest rate swap, Joseph Schumpeter, junk bonds, Kenneth Rogoff, large denomination, Long Term Capital Management, low interest rates, market bubble, Martin Wolf, Menlo Park, Michael Milken, military-industrial complex, Minsky moment, mobile money, money market fund, Monroe Doctrine, moral hazard, mortgage debt, Myron Scholes, new economy, oil shale / tar sands, oil shock, old-boy network, peak oil, plutocrats, Ponzi scheme, profit maximization, prosperity theology / prosperity gospel / gospel of success, Renaissance Technologies, reserve currency, risk tolerance, risk/return, Robert Shiller, Ronald Reagan, Satyajit Das, Savings and loan crisis, shareholder value, short selling, sovereign wealth fund, stock buybacks, subprime mortgage crisis, The Chicago School, Thomas Malthus, too big to fail, trade route

Kindleberger, Manias, Panics, and Crashes (New York: Harper Torchbooks, 1978), pp. 106, 254-56. 2 David Fromkin, Europe’s Last Summer (New York: Knopf, 2004), p. 168. 3 “The Loan Comes Due,” New York Times, August 5, 2007, Week in Review. 4 “Inside the Sub-prime Storm,” Schwab Investing Insights, August 16, 2007, p. 2. 5 “Risk Returns with a Vengeance,” Fortune, August 20, 2007; www.cnnmoney.com, August 21, 2007. 6 “Mortgage Fraud Is the Thing to Do Now,” Chicago Tribune, September 22, 2007; www.foreclosurepulse.com, July 12, 2007. 7 www.ml-implode.com. 8 Niall Ferguson, The Pity of War (New York: Basic Books, 1999), p. 192. 9 “Loan by Loan, the Making of a Credit Squeeze,” New York Times, Sunday Business, August 19, 2007. 10 S&P/Case-Shiller from “U.S.


pages: 402 words: 110,972

Nerds on Wall Street: Math, Machines and Wired Markets by David J. Leinweber

"World Economic Forum" Davos, AI winter, Alan Greenspan, algorithmic trading, AOL-Time Warner, Apollo 11, asset allocation, banking crisis, barriers to entry, Bear Stearns, Big bang: deregulation of the City of London, Bob Litterman, book value, business cycle, butter production in bangladesh, butterfly effect, buttonwood tree, buy and hold, buy low sell high, capital asset pricing model, Charles Babbage, citizen journalism, collateralized debt obligation, Cornelius Vanderbilt, corporate governance, Craig Reynolds: boids flock, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Danny Hillis, demand response, disintermediation, distributed generation, diversification, diversified portfolio, electricity market, Emanuel Derman, en.wikipedia.org, experimental economics, fake news, financial engineering, financial innovation, fixed income, Ford Model T, Gordon Gekko, Hans Moravec, Herman Kahn, implied volatility, index arbitrage, index fund, information retrieval, intangible asset, Internet Archive, Ivan Sutherland, Jim Simons, John Bogle, John Nash: game theory, Kenneth Arrow, load shedding, Long Term Capital Management, machine readable, machine translation, Machine translation of "The spirit is willing, but the flesh is weak." to Russian and back, market fragmentation, market microstructure, Mars Rover, Metcalfe’s law, military-industrial complex, moral hazard, mutually assured destruction, Myron Scholes, natural language processing, negative equity, Network effects, optical character recognition, paper trading, passive investing, pez dispenser, phenotype, prediction markets, proprietary trading, quantitative hedge fund, quantitative trading / quantitative finance, QWERTY keyboard, RAND corporation, random walk, Ray Kurzweil, Reminiscences of a Stock Operator, Renaissance Technologies, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Metcalfe, Ronald Reagan, Rubik’s Cube, Savings and loan crisis, semantic web, Sharpe ratio, short selling, short squeeze, Silicon Valley, Small Order Execution System, smart grid, smart meter, social web, South Sea Bubble, statistical arbitrage, statistical model, Steve Jobs, Steven Levy, stock buybacks, Tacoma Narrows Bridge, the scientific method, The Wisdom of Crowds, time value of money, tontine, too big to fail, transaction costs, Turing machine, two and twenty, Upton Sinclair, value at risk, value engineering, Vernor Vinge, Wayback Machine, yield curve, Yogi Berra, your tax dollars at work

The reason for this underweighting, rather than eliminating an unattractive stock completely, is because of index tracking risk. Totally eliminating a company increases the risk of the portfolio return differing substantially from the index if these forecasts are wrong and the stock moves in an opposite direction. The sizes of these decisions, called “active bets,” are constrained by the willingness to risk returns that stray from the index in either direction, in the hope of adding value by straying in a positive direction. 116 Nerds on Wall Str eet Constraints on Active Managers These constraints require active managers to keep a certain portion of their assets in an indexlike subportfolio, either by replication or by sampling, and to use the rest of the portfolio to make active bets trying to outperform the index.


pages: 504 words: 126,835

The Innovation Illusion: How So Little Is Created by So Many Working So Hard by Fredrik Erixon, Bjorn Weigel

Airbnb, Alan Greenspan, Albert Einstein, American ideology, asset allocation, autonomous vehicles, barriers to entry, Basel III, Bernie Madoff, bitcoin, Black Swan, blockchain, Blue Ocean Strategy, BRICs, Burning Man, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, classic study, Clayton Christensen, Colonization of Mars, commoditize, commodity super cycle, corporate governance, corporate social responsibility, creative destruction, crony capitalism, dark matter, David Graeber, David Ricardo: comparative advantage, discounted cash flows, distributed ledger, Donald Trump, Dr. Strangelove, driverless car, Elon Musk, Erik Brynjolfsson, Fairchild Semiconductor, fear of failure, financial engineering, first square of the chessboard / second half of the chessboard, Francis Fukuyama: the end of history, general purpose technology, George Gilder, global supply chain, global value chain, Google Glasses, Google X / Alphabet X, Gordon Gekko, Greenspan put, Herman Kahn, high net worth, hiring and firing, hockey-stick growth, Hyman Minsky, income inequality, income per capita, index fund, industrial robot, Internet of things, Jeff Bezos, job automation, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, joint-stock company, Joseph Schumpeter, Just-in-time delivery, Kevin Kelly, knowledge economy, laissez-faire capitalism, low interest rates, Lyft, manufacturing employment, Mark Zuckerberg, market design, Martin Wolf, mass affluent, means of production, middle-income trap, Mont Pelerin Society, Network effects, new economy, offshore financial centre, pensions crisis, Peter Thiel, Potemkin village, precautionary principle, price mechanism, principal–agent problem, Productivity paradox, QWERTY keyboard, RAND corporation, Ray Kurzweil, rent-seeking, risk tolerance, risk/return, Robert Gordon, Robert Solow, Ronald Coase, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, Silicon Valley, Silicon Valley startup, Skype, sovereign wealth fund, Steve Ballmer, Steve Jobs, Steve Wozniak, subprime mortgage crisis, technological determinism, technological singularity, TED Talk, telemarketer, The Chicago School, The Future of Employment, The Nature of the Firm, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, transaction costs, transportation-network company, tulip mania, Tyler Cowen, Tyler Cowen: Great Stagnation, uber lyft, University of East Anglia, unpaid internship, Vanguard fund, vertical integration, Yogi Berra

Providers of private retirement savings, especially with defined benefits, do not have the same luxury. They cannot always cut pensions or invent their own financial rules. Private providers can change their products away from defined benefits, but generally not retroactively. Naturally, private pension providers will push the risk–return profile when they invest, but when the regulatory environment is pulling in the opposite direction, investment gets ever more complex. And this is where gray capitalism gets grayer, or changes color. Gray capital has in fact another option to manage the quest for cash. Given their ownership role in the economy, investment institutions representing retirement savers can turn to their cash-strong investees and demand that they return more capital to shareholders.


pages: 433 words: 125,031

Brazillionaires: The Godfathers of Modern Brazil by Alex Cuadros

"World Economic Forum" Davos, affirmative action, Asian financial crisis, benefit corporation, big-box store, bike sharing, BRICs, buy the rumour, sell the news, cognitive dissonance, creative destruction, crony capitalism, Deng Xiaoping, Donald Trump, Elon Musk, facts on the ground, family office, financial engineering, high net worth, index fund, invisible hand, Jeff Bezos, Mark Zuckerberg, megaproject, NetJets, offshore financial centre, profit motive, prosperity theology / prosperity gospel / gospel of success, rent-seeking, risk/return, Rubik’s Cube, savings glut, short selling, Silicon Valley, sovereign wealth fund, stem cell, stock buybacks, tech billionaire, The Wealth of Nations by Adam Smith, too big to fail, transatlantic slave trade, We are the 99%, William Langewiesche

As he shook my hand, he effusively thanked me as if I personally had anything to do with the list. Then he launched straight into an attack on his own industry. He blamed his fellow bankers in the United States and Europe for the financial crisis. “The money people were making on Wall Street didn’t make sense,” he said. “It was too easy. Obviously the risk/return was imperfect. A guy would make millions and millions of dollars without running any personal risk. He would screw everything up, switch jobs, and not lose a thing. It can’t be like this.” What he described was Eike’s system, meritocracy gone amok, on a much grander scale. I wondered how much of Esteves’s criticism was just arrogance.


pages: 320 words: 33,385

Market Risk Analysis, Quantitative Methods in Finance by Carol Alexander

asset allocation, backtesting, barriers to entry, Brownian motion, capital asset pricing model, constrained optimization, credit crunch, Credit Default Swap, discounted cash flows, discrete time, diversification, diversified portfolio, en.wikipedia.org, financial engineering, fixed income, implied volatility, interest rate swap, low interest rates, market friction, market microstructure, p-value, performance metric, power law, proprietary trading, quantitative trading / quantitative finance, random walk, risk free rate, risk tolerance, risk-adjusted returns, risk/return, seminal paper, Sharpe ratio, statistical arbitrage, statistical model, stochastic process, stochastic volatility, systematic bias, Thomas Bayes, transaction costs, two and twenty, value at risk, volatility smile, Wiener process, yield curve, zero-sum game

Most firms, especially financial firms, claim to have well-thought-out risk management policies, but few actually state trade-offs between risks and returns. Attention to risk limits may be unwittingly reinforced by regulators. Of course it is not the role of the supervisory authorities to suggest risk–return trade-offs; so supervisors impose risk limits, such as value at risk relative to capital, to ensure safety and xxii Foreword fair competition in the financial industry. But a regulatory limit implies severe penalties if breached, and thus a probabilistic constraint acquires an economic value.


pages: 482 words: 121,672

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Eleventh Edition) by Burton G. Malkiel

accounting loophole / creative accounting, Alan Greenspan, Albert Einstein, asset allocation, asset-backed security, beat the dealer, Bernie Madoff, bitcoin, book value, butter production in bangladesh, buttonwood tree, buy and hold, capital asset pricing model, compound rate of return, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, Detroit bankruptcy, diversification, diversified portfolio, dogs of the Dow, Edward Thorp, Elliott wave, equity risk premium, Eugene Fama: efficient market hypothesis, experimental subject, feminist movement, financial engineering, financial innovation, financial repression, fixed income, framing effect, George Santayana, hindsight bias, Home mortgage interest deduction, index fund, invisible hand, Isaac Newton, Japanese asset price bubble, John Bogle, junk bonds, Long Term Capital Management, loss aversion, low interest rates, margin call, market bubble, Mary Meeker, money market fund, mortgage tax deduction, new economy, Own Your Own Home, PalmPilot, passive investing, Paul Samuelson, pets.com, Ponzi scheme, price stability, profit maximization, publish or perish, purchasing power parity, RAND corporation, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Salesforce, short selling, Silicon Valley, South Sea Bubble, stock buybacks, stocks for the long run, sugar pill, survivorship bias, Teledyne, the rule of 72, The Wisdom of Crowds, transaction costs, Vanguard fund, zero-coupon bond, zero-sum game

Neither fundamental analysis of a stock’s firm foundation of value nor technical analysis of the market’s propensity for building castles in the air can produce reliably superior results. Even the pros must hide their heads in shame when they compare their results with those obtained by the dartboard method of picking stocks. Sensible investment policies for individuals must then be developed in two steps. First, it is crucially important to understand the risk-return trade-offs that are available and to tailor your choice of securities to your temperament and requirements. Part Four provided a careful guide for this part of the walk, including a number of warm-up exercises concerning everything from tax planning to the management of reserve funds and a life-cycle guide to portfolio allocations.


pages: 436 words: 124,373

Galactic North by Alastair Reynolds

back-to-the-land, Buckminster Fuller, hive mind, information retrieval, Kickstarter, risk/return, stem cell, time dilation, trade route

Just spewed out a lot more neutrons than normal, too much for the shielding to contain. Then it went into emergency shutdown mode. Some people were killed by the radiation but most died of the cold that came afterward.” “Hm. Except you.” Iverson nodded. “If I hadn't had to go back for that component, I'd have been one of them. Obviously, I couldn't risk returning. Even if I could have got the reactor working again, there was still the problem of the contaminant.” He breathed in deeply, as if steeling himself to recollect what had happened next. “So I weighed my options, and decided dying -- freezing myself -- was my only hope. No one was going to come from Earth to help me, even if I could have kept myself alive.


The Party: The Secret World of China's Communist Rulers by Richard McGregor

activist lawyer, banking crisis, corporate governance, credit crunch, Deng Xiaoping, financial innovation, Gini coefficient, glass ceiling, global reserve currency, Great Leap Forward, haute couture, high-speed rail, hiring and firing, income inequality, invisible hand, kremlinology, land reform, Martin Wolf, megaproject, Mikhail Gorbachev, military-industrial complex, old-boy network, one-China policy, Panopticon Jeremy Bentham, pre–internet, reserve currency, risk/return, Shenzhen special economic zone , South China Sea, sovereign wealth fund, special economic zone, Upton Sinclair

In between times, he completed an MBA at City University in London, where he still sends up-and-coming finance officials from China on scholarships for an education in liberal finance and economics. When the state banks were being restructured, Liu relentlessly drilled his subordinates on the importance of global regulatory norms, like capital ratios, risk returns and non-performing loan rates. On lazy Friday afternoons at the regulator, lower-level officials joked that Liu would terrify them by landing unannounced in their departments and putting them through an impromptu grilling on ‘Basel II’, the formula named after the Swiss city which dictates the optimum level of bank reserves.


pages: 419 words: 130,627

Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase by Duff McDonald

"World Economic Forum" Davos, Alan Greenspan, AOL-Time Warner, bank run, Bear Stearns, Blythe Masters, Bonfire of the Vanities, book value, business logic, centralized clearinghouse, collateralized debt obligation, conceptual framework, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Exxon Valdez, financial innovation, fixed income, G4S, Glass-Steagall Act, Greenspan put, housing crisis, interest rate swap, Jeff Bezos, John Meriwether, junk bonds, Kickstarter, laissez-faire capitalism, Long Term Capital Management, margin call, market bubble, Michael Milken, money market fund, moral hazard, negative equity, Nelson Mandela, Northern Rock, profit motive, proprietary trading, Renaissance Technologies, risk/return, Rod Stewart played at Stephen Schwarzman birthday party, Saturday Night Live, sovereign wealth fund, statistical model, Steve Ballmer, Steve Jobs, technology bubble, The Chicago School, too big to fail, Vanguard fund, zero-coupon bond, zero-sum game

With a number of defections from Salomon, most prominently John Meriwether and his team at the powerful hedge fund Long-Term Capital Management, other firms were using similar if not identical strategies, with the inevitable result that the arbitrage opportunity was shrinking. This, in turn, meant that the risk-return trade-off on the unit’s big bets was heading in the wrong direction. The arbitrage group’s members had also done a surprisingly poor job of ingratiating themselves with their new bosses. In his insightful indictment of financial innovation, A Demon of Our Own Design, Richard Bookstaber recalls a series of meetings in which the heads of Salomon’s proprietary trading—Rob Stavis, Costas Kaplanis, and Sugar Myojin—were tasked with making Weill, Dimon, and Travelers’ CFO Heidi Miller comfortable with their strategies and positions.


pages: 385 words: 128,358

Inside the House of Money: Top Hedge Fund Traders on Profiting in a Global Market by Steven Drobny

Abraham Maslow, Alan Greenspan, Albert Einstein, asset allocation, Berlin Wall, Bonfire of the Vanities, Bretton Woods, business cycle, buy and hold, buy low sell high, capital controls, central bank independence, commoditize, commodity trading advisor, corporate governance, correlation coefficient, Credit Default Swap, currency risk, diversification, diversified portfolio, family office, financial engineering, fixed income, glass ceiling, Glass-Steagall Act, global macro, Greenspan put, high batting average, implied volatility, index fund, inflation targeting, interest rate derivative, inventory management, inverted yield curve, John Meriwether, junk bonds, land bank, Long Term Capital Management, low interest rates, managed futures, margin call, market bubble, Market Wizards by Jack D. Schwager, Maui Hawaii, Mexican peso crisis / tequila crisis, moral hazard, Myron Scholes, new economy, Nick Leeson, Nixon triggered the end of the Bretton Woods system, oil shale / tar sands, oil shock, out of africa, panic early, paper trading, Paul Samuelson, Peter Thiel, price anchoring, proprietary trading, purchasing power parity, Reminiscences of a Stock Operator, reserve currency, risk free rate, risk tolerance, risk-adjusted returns, risk/return, rolodex, Sharpe ratio, short selling, Silicon Valley, tail risk, The Wisdom of Crowds, too big to fail, transaction costs, value at risk, Vision Fund, yield curve, zero-coupon bond, zero-sum game

If you get stopped out, think it through, and still have very strong views, then the expected return is still pretty good but with one very important proviso:You have to add in the loss to your trade because you’ve already incurred it.Thus the risk/reward must be less the second time than it was the first. Your risk/return ratio should at least be 4 to 1 in any given trade (the great traders think in terms of 8 to1 or 10 to 1).After you’ve hit the 1 a couple of times, all of a sudden what was a 4 to 1 trade is now a 4 to 3 trade, at which point you should move on to another trade, even if you don’t want to. Do you think managers should have specific rules regarding when they can get back in a trade after a stop-loss gets hit, such as a cooling-off period or the trade has to move back your way by X percent?


The Cleaner: The True Story of One of the World’s Most Successful Money Launderers by Bruce Aitken

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", air freight, airport security, Asian financial crisis, Boeing 747, Bonfire of the Vanities, foreign exchange controls, junk bonds, Maui Hawaii, Michael Milken, offshore financial centre, profit motive, risk/return, South China Sea

The market is “black” By noon, I was out and about in Hong Kong, thinking about how I was going to double my money as soon as I got to Saigon. First stop, American Express. Next stop, the chemist. You never know about customs when you arrive in Saigon, so I cashed a check for two thousand dollars, asking for twenty crisp hundred-dollar bills. That was a hell of a lot of money in those days, and more than I wanted to risk. Returning to my hotel, I wrapped the money in plastic and stuffed it into the back of a large tube of Colgate toothpaste I had sliced open with a razor blade. The flight to Saigon the next afternoon arrived on time. After dropping my things off at the company villa, I jumped into a taxi and headed downtown to the Astor Hotel.


pages: 473 words: 132,344

The Downfall of Money: Germany's Hyperinflation and the Destruction of the Middle Class by Frederick Taylor

Albert Einstein, anti-communist, banking crisis, Berlin Wall, British Empire, central bank independence, centre right, collective bargaining, falling living standards, fiat currency, fixed income, full employment, German hyperinflation, housing crisis, Internet Archive, Johann Wolfgang von Goethe, mittelstand, offshore financial centre, plutocrats, quantitative easing, rent control, risk/return, strikebreaker, trade route, zero-sum game

If Lloyd George was disappointed – his coalition government, already in serious difficulties, finally fell in October – the French were furious, interpreting the separate agreement between Germany and Russia both as a cause of Genoa’s failure and as a typical act of bad faith. As for Rathenau himself, he had fought against the Rapallo Treaty, believing that Germany risked returning relations with the Western powers to the dark days of 1919. Only when it became clear that the Russians might otherwise make a deal with Britain and France and the rest which would leave Germany out in the cold again, did the Foreign Minister relent. The final decision to sign the Russian treaty came during what was described as a ‘pyjama party’ in Rathenau’s hotel suite during the night of 15/16 April.


pages: 483 words: 134,377

The Tyranny of Experts: Economists, Dictators, and the Forgotten Rights of the Poor by William Easterly

air freight, Andrei Shleifer, battle of ideas, Bretton Woods, British Empire, business process, business process outsourcing, Carmen Reinhart, classic study, clean water, colonial rule, correlation does not imply causation, creative destruction, Daniel Kahneman / Amos Tversky, Deng Xiaoping, desegregation, discovery of the americas, Edward Glaeser, en.wikipedia.org, European colonialism, Ford Model T, Francisco Pizarro, fundamental attribution error, gentrification, germ theory of disease, greed is good, Gunnar Myrdal, income per capita, invisible hand, James Watt: steam engine, Jane Jacobs, John Snow's cholera map, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, low interest rates, M-Pesa, microcredit, Monroe Doctrine, oil shock, place-making, Ponzi scheme, public intellectual, risk/return, road to serfdom, Robert Solow, Silicon Valley, Steve Jobs, tacit knowledge, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, Thomas L Friedman, urban planning, urban renewal, Washington Consensus, WikiLeaks, World Values Survey, young professional

Condliffe faced a problem that would recur again and again throughout the history of development. The horrible political situation in China seemed itself to be a huge barrier to development. Anyone mixed up in this politics would seem to be part of the problem, not part of the solution. But if he didn’t deal with the Guomindang, Condliffe risked returning home empty-handed. In this environment, the technocratic approach, which ignored politics, came to the rescue. The technocratic mind-set would allow Chinese economists to present themselves as neutral experts, no politics implied. In particular, Chinese economists who had been educated in the United States would have expert qualifications, some apparent distance from internal Chinese politics, and the ability to communicate with their funders.


pages: 349 words: 134,041

Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives by Satyajit Das

accounting loophole / creative accounting, Alan Greenspan, Albert Einstein, Asian financial crisis, asset-backed security, Bear Stearns, beat the dealer, Black Swan, Black-Scholes formula, Bretton Woods, BRICs, Brownian motion, business logic, business process, buy and hold, buy low sell high, call centre, capital asset pricing model, collateralized debt obligation, commoditize, complexity theory, computerized trading, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, currency peg, currency risk, disinformation, disintermediation, diversification, diversified portfolio, Edward Thorp, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, financial engineering, financial innovation, fixed income, Glass-Steagall Act, Haight Ashbury, high net worth, implied volatility, index arbitrage, index card, index fund, interest rate derivative, interest rate swap, Isaac Newton, job satisfaction, John Bogle, John Meriwether, junk bonds, locking in a profit, Long Term Capital Management, low interest rates, mandelbrot fractal, margin call, market bubble, Marshall McLuhan, mass affluent, mega-rich, merger arbitrage, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mutually assured destruction, Myron Scholes, new economy, New Journalism, Nick Leeson, Nixon triggered the end of the Bretton Woods system, offshore financial centre, oil shock, Parkinson's law, placebo effect, Ponzi scheme, proprietary trading, purchasing power parity, quantitative trading / quantitative finance, random walk, regulatory arbitrage, Right to Buy, risk free rate, risk-adjusted returns, risk/return, Salesforce, Satyajit Das, shareholder value, short selling, short squeeze, South Sea Bubble, statistical model, technology bubble, the medium is the message, the new new thing, time value of money, too big to fail, transaction costs, value at risk, Vanguard fund, volatility smile, yield curve, Yogi Berra, zero-coupon bond

New fund managers sprang up everywhere. DAS_C04.QXP 8/7/06 110 8:39 PM Page 110 Tr a d e r s , G u n s & M o n e y Fund managers competed with each other on the basis of returns and new investment products. They used derivatives for higher returns, leverage, access or to provide different types of risk/return tradeoffs. Private banks and investors also discovered derivatives as returns plummeted. Dealers had worked out how to embed derivatives in a note so that investors could trade them without trading them. Now all investors did derivatives. Today 70% + of derivatives activity is with investors. It is with your money.


pages: 495 words: 136,714

Money for Nothing by Thomas Levenson

Albert Einstein, asset-backed security, bank run, British Empire, carried interest, clockwork universe, credit crunch, do well by doing good, Edmond Halley, Edward Lloyd's coffeehouse, experimental subject, failed state, fake news, Fellow of the Royal Society, fiat currency, financial engineering, financial innovation, Fractional reserve banking, income inequality, Isaac Newton, joint-stock company, land bank, market bubble, Money creation, open economy, price mechanism, quantitative easing, Republic of Letters, risk/return, side project, South Sea Bubble, The Wealth of Nations by Adam Smith, tontine

They also got a “new” South Sea share in the trading side of the Company, now severed from the purely financial operation. This maneuver eliminated the confusion that Hutcheson had tried so hard to explain in 1720. Now there was a stable, liquid financial asset that had a publicly known and low-risk return—and another business playing in the high-risk, occasionally high-reward arena of transoceanic commerce.*2 It’s one of the oddities of the Bubble year that this step actually revitalized the venturing side of the South Sea experiment. The persistent disappointments of the trading ventures of the 1710s were part of what had goaded Blunt and his comrades toward bigger and bigger financial gambles.


Principles of Corporate Finance by Richard A. Brealey, Stewart C. Myers, Franklin Allen

3Com Palm IPO, accelerated depreciation, accounting loophole / creative accounting, Airbus A320, Alan Greenspan, AOL-Time Warner, Asian financial crisis, asset allocation, asset-backed security, banking crisis, Bear Stearns, Bernie Madoff, big-box store, Black Monday: stock market crash in 1987, Black-Scholes formula, Boeing 747, book value, break the buck, Brownian motion, business cycle, buy and hold, buy low sell high, California energy crisis, capital asset pricing model, capital controls, Carl Icahn, Carmen Reinhart, carried interest, collateralized debt obligation, compound rate of return, computerized trading, conceptual framework, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-border payments, cross-subsidies, currency risk, discounted cash flows, disintermediation, diversified portfolio, Dutch auction, equity premium, equity risk premium, eurozone crisis, fear index, financial engineering, financial innovation, financial intermediation, fixed income, frictionless, fudge factor, German hyperinflation, implied volatility, index fund, information asymmetry, intangible asset, interest rate swap, inventory management, Iridium satellite, James Webb Space Telescope, junk bonds, Kenneth Rogoff, Larry Ellison, law of one price, linear programming, Livingstone, I presume, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, market bubble, market friction, money market fund, moral hazard, Myron Scholes, new economy, Nick Leeson, Northern Rock, offshore financial centre, PalmPilot, Ponzi scheme, prediction markets, price discrimination, principal–agent problem, profit maximization, purchasing power parity, QR code, quantitative trading / quantitative finance, random walk, Real Time Gross Settlement, risk free rate, risk tolerance, risk/return, Robert Shiller, Scaled Composites, shareholder value, Sharpe ratio, short selling, short squeeze, Silicon Valley, Skype, SpaceShipOne, Steve Jobs, subprime mortgage crisis, sunk-cost fallacy, systematic bias, Tax Reform Act of 1986, The Nature of the Firm, the payments system, the rule of 72, time value of money, too big to fail, transaction costs, University of East Anglia, urban renewal, VA Linux, value at risk, Vanguard fund, vertical integration, yield curve, zero-coupon bond, zero-sum game, Zipcar

John doesn’t reply. Marsha: John, what’s wrong? Have you been selling yen again? That’s been a losing trade for weeks. John: Well, yes. I shouldn’t have gone to Goldman Sachs’s foreign exchange brunch. But I’ve got to get out of the house somehow. I’m cooped up here all day calculating covariances and efficient risk-return trade-offs while you’re out trading commodity futures. You get all the glamour and excitement. Marsha: Don’t worry, dear, it will be over soon. We only recalculate our most efficient common stock portfolio once a quarter. Then you can go back to leveraged leases. John: You trade, and I do all the worrying.

It assumes that all investors have similar tastes: The hedging motive does not enter, and therefore they hold the same portfolio of risky assets. Merton has extended the capital asset pricing model to accommodate the hedging motive.6 If enough investors are attempting to hedge against the same thing, the model implies a more complicated risk–return relationship. However, it is not yet clear who is hedging against what, and so the model remains difficult to test. So the capital asset pricing model survives not from a lack of competition but from a surfeit. There are too many plausible alternative risk measures, and so far no consensus exists on the right course to plot if we abandon beta.

See Portfolio risk present value and, 22–23 project, 219–222, 226–232, 333, 883 return and, 883–884 short-termism and, 874 in term structure of interest rates, 58–59 Risk aversion, 8 Risk class, 81 Risk-free rate of interest, 520n Risk management, 659–684, 887 agency problem, 660, 661–662 derivatives in, 662, 665–677 evidence on, 662 forward contracts, 665 hedging defined, 659–660, 665 with futures contracts, 666–672, 677–679 setting up hedge, 677–681 insurance, 550, 662–664 international risks in, 693–714 options, 664 reasons for, 659–662 swaps, 673–677 Risk-neutral option valuation, 537–540 Risk premium calculating, 164 defined, 164n dividend yields and, 166–167 historic, 197 market. See Market risk premium in Sharpe ratio, 196, 196n Risk-return trade-off, financial leverage and, 428–433 Risk shifting game, in financial distress, 460–461 Ritter, J. R., 330n, 380, 380n, 382n, 383n, 389n, 392 Ritz Carlton, 807 RJR Nabisco, 462, 837–839 ROA (return on assets), 305n, 597, 727, 728, 731 Road show, 378 Robert Bosch, 867 Roberts, M. R., 467n, 624n, 627n ROC (return on capital), 305n, 726, 727–728 Roche, 706–709 Rockefeller Center, 465n Rockefeller Center Properties, 465n Rodriguez, Alex, 301 ROE (return on equity), 85–89, 727, 728, 734 Roe, M., 855n Röell, A., 878 Rogalski, R.


Investment: A History by Norton Reamer, Jesse Downing

activist fund / activist shareholder / activist investor, Alan Greenspan, Albert Einstein, algorithmic trading, asset allocation, backtesting, banking crisis, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, book value, break the buck, Brownian motion, business cycle, buttonwood tree, buy and hold, California gold rush, capital asset pricing model, Carmen Reinhart, carried interest, colonial rule, Cornelius Vanderbilt, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, debt deflation, discounted cash flows, diversified portfolio, dogs of the Dow, equity premium, estate planning, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, family office, Fellow of the Royal Society, financial innovation, fixed income, flying shuttle, Glass-Steagall Act, Gordon Gekko, Henri Poincaré, Henry Singleton, high net worth, impact investing, index fund, information asymmetry, interest rate swap, invention of the telegraph, James Hargreaves, James Watt: steam engine, John Bogle, joint-stock company, Kenneth Rogoff, labor-force participation, land tenure, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, managed futures, margin call, means of production, Menlo Park, merger arbitrage, Michael Milken, money market fund, moral hazard, mortgage debt, Myron Scholes, negative equity, Network effects, new economy, Nick Leeson, Own Your Own Home, Paul Samuelson, pension reform, Performance of Mutual Funds in the Period, Ponzi scheme, Post-Keynesian economics, price mechanism, principal–agent problem, profit maximization, proprietary trading, quantitative easing, RAND corporation, random walk, Renaissance Technologies, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Sand Hill Road, Savings and loan crisis, seminal paper, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spinning jenny, statistical arbitrage, survivorship bias, tail risk, technology bubble, Teledyne, The Wealth of Nations by Adam Smith, time value of money, tontine, too big to fail, transaction costs, two and twenty, underbanked, Vanguard fund, working poor, yield curve

This is known as the constant beta approach and is indeed the most straightforward way to forecast beta, though there are more mathematically sophisticated alternative approaches as well. Fama-French Three-Factor Model In 1992, Eugene Fama and Kenneth French wrote a famous paper entitled “The Cross-Section of Expected Stock Returns” that appeared in The Journal of Finance, in which they said that beta alone is insufficient to capture the risk-return trade-off. They introduced two additional factors—size (as measured by the market capitalization) and value (as measured by the book-to-market equity ratio)—as explanatory variables in the performance of stocks. They found that value firms (or firms with low price-to-book value, as compared with growth firms) and small firms (low market capitalization) have higher expected returns in the aggregate but also have higher risk.


pages: 443 words: 51,804

Handbook of Modeling High-Frequency Data in Finance by Frederi G. Viens, Maria C. Mariani, Ionut Florescu

algorithmic trading, asset allocation, automated trading system, backtesting, Bear Stearns, Black-Scholes formula, book value, Brownian motion, business process, buy and hold, continuous integration, corporate governance, discrete time, distributed generation, fear index, financial engineering, fixed income, Flash crash, housing crisis, implied volatility, incomplete markets, linear programming, machine readable, mandelbrot fractal, market friction, market microstructure, martingale, Menlo Park, p-value, pattern recognition, performance metric, power law, principal–agent problem, random walk, risk free rate, risk tolerance, risk/return, short selling, statistical model, stochastic process, stochastic volatility, transaction costs, value at risk, volatility smile, Wiener process

This model includes the subjective expectations of investors in a risk variance optimization model. An alternative line of research is to use the scores of boosting instead of the subjective expectations of the investors. Creamer (2010) has followed this approach combining the optimal predictive capability of boosting with a risk return optimization model. Finally, this research can also be extended using boosting for the design of the enterprise BSC and by including other perspectives of those reviewed in this study. References 69 Initially, the corporate governance variables did not seem to be very relevant to predicting corporate performance.


pages: 467 words: 154,960

Trend Following: How Great Traders Make Millions in Up or Down Markets by Michael W. Covel

Albert Einstein, Alvin Toffler, Atul Gawande, backtesting, Bear Stearns, beat the dealer, Bernie Madoff, Black Swan, buy and hold, buy low sell high, California energy crisis, capital asset pricing model, Carl Icahn, Clayton Christensen, commodity trading advisor, computerized trading, correlation coefficient, Daniel Kahneman / Amos Tversky, delayed gratification, deliberate practice, diversification, diversified portfolio, Edward Thorp, Elliott wave, Emanuel Derman, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, fiat currency, fixed income, Future Shock, game design, global macro, hindsight bias, housing crisis, index fund, Isaac Newton, Jim Simons, John Bogle, John Meriwether, John Nash: game theory, linear programming, Long Term Capital Management, managed futures, mandelbrot fractal, margin call, market bubble, market fundamentalism, market microstructure, Market Wizards by Jack D. Schwager, mental accounting, money market fund, Myron Scholes, Nash equilibrium, new economy, Nick Leeson, Ponzi scheme, prediction markets, random walk, Reminiscences of a Stock Operator, Renaissance Technologies, Richard Feynman, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, shareholder value, Sharpe ratio, short selling, South Sea Bubble, Stephen Hawking, survivorship bias, systematic trading, Teledyne, the scientific method, Thomas L Friedman, too big to fail, transaction costs, upwardly mobile, value at risk, Vanguard fund, William of Occam, zero-sum game

Tiger’s spiral downward started in the fall of 1998 when a catastrophic trade on dollar-yen cost the fund billions. An ex-Tiger employee was quoted as saying: “There’s a certain amount of hubris when you take a position so big you have to be right and so big you can’t get out when you’re wrong. That was something Julian never would have done when he was younger. That isn’t good risk-return analysis.”17 The problem with Tiger was its philosophically shaky foundation. Robertson stated: “Our mandate is to find the 200 best companies in the world and invest in them, and find the 200 worst companies in the world and go short on them. If the 200 best don’t do better than the 200 worst, you probably should go into another business.”


pages: 565 words: 151,129

The Zero Marginal Cost Society: The Internet of Things, the Collaborative Commons, and the Eclipse of Capitalism by Jeremy Rifkin

3D printing, active measures, additive manufacturing, Airbnb, autonomous vehicles, back-to-the-land, benefit corporation, big-box store, bike sharing, bioinformatics, bitcoin, business logic, business process, Chris Urmson, circular economy, clean tech, clean water, cloud computing, collaborative consumption, collaborative economy, commons-based peer production, Community Supported Agriculture, Computer Numeric Control, computer vision, crowdsourcing, demographic transition, distributed generation, DIY culture, driverless car, Eben Moglen, electricity market, en.wikipedia.org, Frederick Winslow Taylor, Free Software Foundation, Garrett Hardin, general purpose technology, global supply chain, global village, Hacker Conference 1984, Hacker Ethic, industrial robot, informal economy, information security, Intergovernmental Panel on Climate Change (IPCC), intermodal, Internet of things, invisible hand, Isaac Newton, James Watt: steam engine, job automation, John Elkington, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Julian Assange, Kickstarter, knowledge worker, longitudinal study, low interest rates, machine translation, Mahatma Gandhi, manufacturing employment, Mark Zuckerberg, market design, mass immigration, means of production, meta-analysis, Michael Milken, mirror neurons, natural language processing, new economy, New Urbanism, nuclear winter, Occupy movement, off grid, off-the-grid, oil shale / tar sands, pattern recognition, peer-to-peer, peer-to-peer lending, personalized medicine, phenotype, planetary scale, price discrimination, profit motive, QR code, RAND corporation, randomized controlled trial, Ray Kurzweil, rewilding, RFID, Richard Stallman, risk/return, Robert Solow, Rochdale Principles, Ronald Coase, scientific management, search inside the book, self-driving car, shareholder value, sharing economy, Silicon Valley, Skype, smart cities, smart grid, smart meter, social web, software as a service, spectrum auction, Steve Jobs, Stewart Brand, the built environment, the Cathedral and the Bazaar, the long tail, The Nature of the Firm, The Structural Transformation of the Public Sphere, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, too big to fail, Tragedy of the Commons, transaction costs, urban planning, vertical integration, warehouse automation, Watson beat the top human players on Jeopardy!, web application, Whole Earth Catalog, Whole Earth Review, WikiLeaks, working poor, Yochai Benkler, zero-sum game, Zipcar

The Economist, in an editorial titled “Capital Markets with a Conscience” described the evolution of social entrepreneurialism. The notion of social capital markets can seem incoherent because it brings together such a diverse group of people and institutions. Yet there is a continuum that connects purely charitable capital at one extreme and for-profit capital at the other, with various trade-offs between risk, return and social impact in between. Much of the discussion . . . is expected to focus on that continuum and to figure out, for any given social goal, which sort of social capital, or mix of different sorts of it, is most likely to succeed.33 For example, while the benefit corporation is an attempt to modify the profit-making drive of capitalist firms to edge closer to the social and environmental priorities of nonprofits in the social Commons, nonprofit organizations are making their own modifications, edging closer to the profit orientation of capitalist firms.


pages: 524 words: 143,993

The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis by Martin Wolf

air freight, Alan Greenspan, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, break the buck, Bretton Woods, business cycle, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, currency risk, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, foreign exchange controls, forward guidance, Fractional reserve banking, full employment, Glass-Steagall Act, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, Les Trente Glorieuses, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, low interest rates, mandatory minimum, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, Minsky moment, Modern Monetary Theory, Money creation, money market fund, moral hazard, mortgage debt, negative equity, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, proprietary trading, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, subprime mortgage crisis, tail risk, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen, Tyler Cowen: Great Stagnation, vertical integration, very high income, winner-take-all economy, zero-sum game

Finally, the central bank can sterilize reserves by changing reserve requirements, and it can decide how onerous to make such requirements by determining the rate of interest it pays on reserves. Figure 41. US ‘Money Multiplier’ Source: Federal Reserve Bank of St Louis If interest rates were to remain at zero when a normal appetite for risk returns, credit and money would start to grow too fast, the economy would overheat, and everything would end up as critics fear. But the conditions that caused interest rates to fall to zero are the very conditions that prevent such a credit explosion. When the conditions change, policies must change.


pages: 506 words: 151,753

The Cryptopians: Idealism, Greed, Lies, and the Making of the First Big Cryptocurrency Craze by Laura Shin

"World Economic Forum" Davos, 4chan, Airbnb, altcoin, bike sharing, bitcoin, blockchain, Burning Man, cloud computing, complexity theory, Credit Default Swap, cryptocurrency, DevOps, digital nomad, distributed ledger, Dogecoin, Donald Trump, Dutch auction, Edward Snowden, emotional labour, en.wikipedia.org, Ethereum, ethereum blockchain, fake news, family office, fiat currency, financial independence, Firefox, general-purpose programming language, gravity well, hacker house, Hacker News, holacracy, independent contractor, initial coin offering, Internet of things, invisible hand, Johann Wolfgang von Goethe, Julian Assange, Kickstarter, litecoin, low interest rates, Mark Zuckerberg, minimum viable product, off-the-grid, performance metric, Potemkin village, prediction markets, QR code, ride hailing / ride sharing, risk tolerance, risk/return, Satoshi Nakamoto, sharing economy, side project, Silicon Valley, Skype, smart contracts, social distancing, software as a service, Steve Jobs, Turing complete, Vitalik Buterin, Wayback Machine, WikiLeaks

“I practice this myself and it requires a kind of diligence.”5 The following day, one of the most influential Bitcoin industry players, Barry Silbert, a strawberry blond, baby-faced Wall Street wunderkind who had been successful in the traditional financial markets and by now had founded Digital Currency Group (DCG), which had been investing in all kinds of Bitcoin companies, tweeted, Bought my first non-bitcoin digital currency… Ethereum Classic (ETC) At $0.50, risk/return felt right. And I’m philosophically on board6 Vitalik was stunned. He had met with Barry at the DCG offices in March, and at that time Barry had offered to help him and be his advisor. Now he was finding out that despite the friendly overture, Barry had never bought ether and now instead had bought ether classic.


Debtor Nation: The History of America in Red Ink (Politics and Society in Modern America) by Louis Hyman

Alan Greenspan, asset-backed security, bank run, barriers to entry, Bretton Woods, business cycle, business logic, card file, central bank independence, computer age, corporate governance, credit crunch, declining real wages, deindustrialization, diversified portfolio, financial independence, financial innovation, fixed income, Gini coefficient, Glass-Steagall Act, Home mortgage interest deduction, housing crisis, income inequality, invisible hand, It's morning again in America, late fees, London Interbank Offered Rate, low interest rates, market fundamentalism, means of production, mortgage debt, mortgage tax deduction, p-value, pattern recognition, post-Fordism, profit maximization, profit motive, risk/return, Ronald Reagan, Savings and loan crisis, Silicon Valley, statistical model, Tax Reform Act of 1986, technological determinism, technology bubble, the built environment, transaction costs, union organizing, white flight, women in the workforce, working poor, zero-sum game

Revolvers who borrowed because they spent more than they earned— persistently—made for bad business. No model could screen for these kinds of revolvers. But computer models, in general, had begun to acquire an accuracy that was impossible only a decade earlier, and it was on the basis of these models that lenders delved further down the risk/return curve, relying on their ability to transfer that default risk to the holders of the credit card securities and, ultimately, the insurance companies that backed those tranches. The Seduction of the Risk Model Beginning in 1987, Household Finance Company, by now one of the largest credit card issuers in the United States, began to segment its existing portfolio ever finer, building on the discriminant analysis techniques of the 1970s.


pages: 512 words: 162,977

New Market Wizards: Conversations With America's Top Traders by Jack D. Schwager

backtesting, beat the dealer, Benoit Mandelbrot, Berlin Wall, Black-Scholes formula, book value, butterfly effect, buy and hold, commodity trading advisor, computerized trading, currency risk, Edward Thorp, Elliott wave, fixed income, full employment, implied volatility, interest rate swap, Louis Bachelier, margin call, market clearing, market fundamentalism, Market Wizards by Jack D. Schwager, money market fund, paper trading, pattern recognition, placebo effect, prediction markets, proprietary trading, Ralph Nelson Elliott, random walk, Reminiscences of a Stock Operator, risk tolerance, risk/return, Saturday Night Live, Sharpe ratio, the map is not the territory, transaction costs, uptick rule, War on Poverty

BEING RIGHT IS MORE IMPORTANT THAN BEING A GENIUS I think one reason why so many people try to pick tops and bottoms is that they want to prove to the world how smart they are. Think about winning rather than being a hero. Forget trying to judge trading success by how close you can come to picking major tops and bottoms, but rather by how well you can pick individual trades with merit based on favorable risk/return situations and a good percentage of winners. Go for consistency on a trade-to-trade basis, not perfect trades. 24. DON’T WORRY ABOUT LOOKING STUPID Last week you told everyone at the office, “My analysis has just given me a great buy signal in the S&P. The market is going to a new high.” Now as you examine the market action since then, something appears to be wrong.


pages: 543 words: 157,991

All the Devils Are Here by Bethany McLean

Alan Greenspan, Asian financial crisis, asset-backed security, bank run, Bear Stearns, behavioural economics, Black-Scholes formula, Blythe Masters, break the buck, buy and hold, call centre, Carl Icahn, collateralized debt obligation, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, diversification, Dr. Strangelove, Exxon Valdez, fear of failure, financial innovation, fixed income, Glass-Steagall Act, high net worth, Home mortgage interest deduction, interest rate swap, junk bonds, Ken Thompson, laissez-faire capitalism, Long Term Capital Management, low interest rates, margin call, market bubble, market fundamentalism, Maui Hawaii, Michael Milken, money market fund, moral hazard, mortgage debt, Northern Rock, Own Your Own Home, Ponzi scheme, proprietary trading, quantitative trading / quantitative finance, race to the bottom, risk/return, Ronald Reagan, Rosa Parks, Savings and loan crisis, shareholder value, short selling, South Sea Bubble, statistical model, stock buybacks, tail risk, Tax Reform Act of 1986, telemarketer, the long tail, too big to fail, value at risk, zero-sum game

Plus, they’d often told investors that the funds operated like a boring, old-fashioned bank—they were supposed to earn the difference between their cost of funds (a good chunk of which were provided through the repo market) and the yield on the super-safe, mostly triple- and double-A-rated securities that they owned. Investors expected fairly steady, low-risk returns. Any losses, no matter how small, could spook them. The Bear team had made money on short positions they had placed on the ABX, but the volatility was worrisome. Because the higher-rated securities were supposed to be nearly riskless, the Bear Stearns hedge funds were highly leveraged: only about $1.6 billion of the $20 billion was equity.


pages: 726 words: 172,988

The Bankers' New Clothes: What's Wrong With Banking and What to Do About It by Anat Admati, Martin Hellwig

Alan Greenspan, Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, bonus culture, book value, break the buck, business cycle, Carmen Reinhart, central bank independence, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, diversified portfolio, en.wikipedia.org, Exxon Valdez, financial deregulation, financial engineering, financial innovation, financial intermediation, fixed income, George Akerlof, Glass-Steagall Act, Growth in a Time of Debt, income inequality, information asymmetry, invisible hand, Jean Tirole, joint-stock company, joint-stock limited liability company, junk bonds, Kenneth Rogoff, Larry Wall, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, margin call, Martin Wolf, Money creation, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Nick Leeson, Northern Rock, open economy, Paul Volcker talking about ATMs, peer-to-peer lending, proprietary trading, regulatory arbitrage, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Satyajit Das, Savings and loan crisis, shareholder value, sovereign wealth fund, subprime mortgage crisis, technology bubble, The Market for Lemons, the payments system, too big to fail, Upton Sinclair, Yogi Berra

Innovation, ‘Pure Information’ and the SEC Disclosure Paradigm.” Texas Law Review 90: 1601–1715. Huertas, Thomas F. 2010. Crisis: Cause, Containment and Cure. Houndmills, Basingstoke, Hampshire, England: Palgrave Macmillan. Hughes, Joseph P., and Loretta J. Mester. 2011. “Who Said Large Banks Don’t Experience Scale Economies? Evidence from a Risk-Return Driven Cost Function.” Financial Institutions Center, Wharton School, University of Pennsylvania, Philadelphia. Hull, John. 2007. Risk Management and Financial Institutions. Upper Saddle River, NJ: Pearson Prentice Hall. Hyman, Louis. 2012. Borrow: The American Way of Debt. New York: Vintage.


pages: 584 words: 187,436

More Money Than God: Hedge Funds and the Making of a New Elite by Sebastian Mallaby

Alan Greenspan, Andrei Shleifer, Asian financial crisis, asset-backed security, automated trading system, bank run, barriers to entry, Bear Stearns, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, book value, Bretton Woods, business cycle, buy and hold, capital controls, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, currency peg, deal flow, do well by doing good, Elliott wave, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, financial deregulation, financial engineering, financial innovation, financial intermediation, fixed income, full employment, German hyperinflation, High speed trading, index fund, Jim Simons, John Bogle, John Meriwether, junk bonds, Kenneth Rogoff, Kickstarter, Long Term Capital Management, low interest rates, machine translation, margin call, market bubble, market clearing, market fundamentalism, Market Wizards by Jack D. Schwager, Mary Meeker, merger arbitrage, Michael Milken, money market fund, moral hazard, Myron Scholes, natural language processing, Network effects, new economy, Nikolai Kondratiev, operational security, pattern recognition, Paul Samuelson, pre–internet, proprietary trading, public intellectual, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, risk-adjusted returns, risk/return, Robert Mercer, rolodex, Savings and loan crisis, Sharpe ratio, short selling, short squeeze, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical arbitrage, statistical model, survivorship bias, tail risk, technology bubble, The Great Moderation, The Myth of the Rational Market, the new new thing, too big to fail, transaction costs, two and twenty, uptick rule

The third uncorrelated position would add only $32 million of risk to the portfolio, even if, taken by itself, it threatened a loss of $100 million.19 The fifth uncorrelated position would add $24 million of risk; the tenth would add only $16 million; and so on. Through the magic of diversification, risk could almost disappear. Trades that seemed crazy to others on a risk/return basis could appear highly profitable to Meriwether and his partners. Ten years later, when the credit bubble imploded in 2007–2009, value-at-risk calculations fell out of favor. Warren Buffett admonished fellow financiers to “beware of geeks bearing formulas.” Nevertheless, Meriwether’s metric represented an advance on the traditional leverage ratio as a way of gauging risk.


pages: 741 words: 179,454

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", "there is no alternative" (TINA), "World Economic Forum" Davos, affirmative action, Alan Greenspan, Albert Einstein, algorithmic trading, Andy Kessler, AOL-Time Warner, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, book value, Bretton Woods, BRICs, British Empire, business cycle, buy the rumour, sell the news, capital asset pricing model, carbon credits, Carl Icahn, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, Daniel Kahneman / Amos Tversky, deal flow, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Dr. Strangelove, Dutch auction, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Fall of the Berlin Wall, financial engineering, financial independence, financial innovation, financial thriller, fixed income, foreign exchange controls, full employment, Glass-Steagall Act, global reserve currency, Goldman Sachs: Vampire Squid, Goodhart's law, Gordon Gekko, greed is good, Greenspan put, happiness index / gross national happiness, haute cuisine, Herman Kahn, high net worth, Hyman Minsky, index fund, information asymmetry, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", job automation, Johann Wolfgang von Goethe, John Bogle, John Meriwether, joint-stock company, Jones Act, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, low interest rates, margin call, market bubble, market fundamentalism, Market Wizards by Jack D. Schwager, Marshall McLuhan, Martin Wolf, mega-rich, merger arbitrage, Michael Milken, Mikhail Gorbachev, Milgram experiment, military-industrial complex, Minsky moment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, Naomi Klein, National Debt Clock, negative equity, NetJets, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, Paul Samuelson, pets.com, Philip Mirowski, Phillips curve, planned obsolescence, plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, proprietary trading, public intellectual, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, Reminiscences of a Stock Operator, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Thaler, Right to Buy, risk free rate, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, Satyajit Das, savings glut, shareholder value, Sharpe ratio, short selling, short squeeze, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, stock buybacks, survivorship bias, tail risk, Teledyne, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, the new new thing, The Predators' Ball, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, two and twenty, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond, zero-sum game

Philip Falcone’s Harbinger Capital, Mike Burry’s Scion Funds and Lahde Capital, a Santa-Monica-based fund set up by Andrew Lahde, all recorded substantial returns. Burry wrote to his investors: “The opportunity in 2005 and 2006 to short subprime mortgages was an historic one.” Lahde, a small fund, returned money to investors, recognizing that: “The risk/return characteristics are far less attractive than in the past.”17 The funds that profited from the collapse were generally smaller funds, outside the mainstream. Before the crisis, when asked about John Paulson, a banker at Goldman Sachs told a potential investor that he was “a third rate hedge fund guy who didn’t know what he was talking about.”18 One person noted: “In the hedge-fund industry the only bad thing you can do is lose people’s money.”19 Even that wasn’t strictly speaking true.


pages: 272 words: 19,172

Hedge Fund Market Wizards by Jack D. Schwager

asset-backed security, backtesting, banking crisis, barriers to entry, Bear Stearns, beat the dealer, Bernie Madoff, Black-Scholes formula, book value, British Empire, business cycle, buy and hold, buy the rumour, sell the news, Claude Shannon: information theory, clean tech, cloud computing, collateralized debt obligation, commodity trading advisor, computerized trading, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, diversification, diversified portfolio, do what you love, Edward Thorp, family office, financial independence, fixed income, Flash crash, global macro, hindsight bias, implied volatility, index fund, intangible asset, James Dyson, Jones Act, legacy carrier, Long Term Capital Management, managed futures, margin call, market bubble, market fundamentalism, Market Wizards by Jack D. Schwager, merger arbitrage, Michael Milken, money market fund, oil shock, pattern recognition, pets.com, Ponzi scheme, private sector deleveraging, proprietary trading, quantitative easing, quantitative trading / quantitative finance, Reminiscences of a Stock Operator, Right to Buy, risk free rate, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Rubik’s Cube, Savings and loan crisis, Sharpe ratio, short selling, statistical arbitrage, Steve Jobs, systematic trading, technology bubble, transaction costs, value at risk, yield curve

Sometimes I have no directional trades on, and sometimes directional trades dominate my book. Basically, I like buying stuff cheap and selling it at fair value. How you implement a trade is critical. I develop a macro view about something, but then there are 20 different ways I can play it. The key question is: Which way gives me the best risk/return ratio? My final trade is rarely going to be a straight long or short position. How would you characterize yourself as a trader? I don’t have any tolerance for trading losses. I hate losing money more than anything. Losing money is what kills you. It is not the actual loss. It’s the fact that it messes up your psychology.


Money and Government: The Past and Future of Economics by Robert Skidelsky

"Friedman doctrine" OR "shareholder theory", Alan Greenspan, anti-globalists, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, barriers to entry, Basel III, basic income, Bear Stearns, behavioural economics, Ben Bernanke: helicopter money, Big bang: deregulation of the City of London, book value, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, constrained optimization, Corn Laws, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Graeber, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, Donald Trump, Eugene Fama: efficient market hypothesis, eurozone crisis, fake news, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, forward guidance, Fractional reserve banking, full employment, Gini coefficient, Glass-Steagall Act, Goodhart's law, Growth in a Time of Debt, guns versus butter model, Hyman Minsky, income inequality, incomplete markets, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Rogoff, Kondratiev cycle, labour market flexibility, labour mobility, land bank, law of one price, liberal capitalism, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, long and variable lags, low interest rates, market clearing, market friction, Martin Wolf, means of production, Meghnad Desai, Mexican peso crisis / tequila crisis, mobile money, Modern Monetary Theory, Money creation, Mont Pelerin Society, moral hazard, mortgage debt, new economy, Nick Leeson, North Sea oil, Northern Rock, nudge theory, offshore financial centre, oil shock, open economy, paradox of thrift, Pareto efficiency, Paul Samuelson, Phillips curve, placebo effect, post-war consensus, price stability, profit maximization, proprietary trading, public intellectual, quantitative easing, random walk, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, rising living standards, risk/return, road to serfdom, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, shareholder value, short selling, Simon Kuznets, structural adjustment programs, technological determinism, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, tontine, too big to fail, trade liberalization, value at risk, Washington Consensus, yield curve, zero-sum game

Indeed, one of the main advantages of fiscal policy is that a government can direct the flow of the new spending in the economy. When a recession hits, private investment spending falls far more than consumption spending, and this cannot be wholly explained as a rational response to a fall in the long-run risk-return profile of investment – ‘animal spirits’ must be at play. Keynes recognized this psychological aspect to investment spending. In this event, the government can use fiscal policy to maintain a ‘normal’ level of 286 t h e n e w mon e t a r i s m investment, in order to avoid the erosion of the economy’s productive capacity.


What Makes Narcissists Tick by Kathleen Krajco

Albert Einstein, anti-communist, British Empire, experimental subject, junk bonds, Norman Mailer, risk/return

One slick technique I have observed is what I call the Drive-By: The narcissist barges into a room loudly talking to drown out and stifle the extant conversation. Thus he butts in on it to take attention away from whoever is talking and suck it to himself. But he is only passing through, so he doesn't risk return fire. That is, he needn't be there for a reply to his announcement or remark. Nobody can get him to pause long enough to hear one short sentence. He just accelerates to exit the other end of the room faster if someone draws a breath and opens their mouth to speak to him. OperationDoubles.com © 2004 – 2007, Kathleen Krajco — all rights reserved worldwide.


pages: 829 words: 187,394

The Price of Time: The Real Story of Interest by Edward Chancellor

"World Economic Forum" Davos, 3D printing, activist fund / activist shareholder / activist investor, Airbnb, Alan Greenspan, asset allocation, asset-backed security, assortative mating, autonomous vehicles, balance sheet recession, bank run, banking crisis, barriers to entry, Basel III, Bear Stearns, Ben Bernanke: helicopter money, Bernie Sanders, Big Tech, bitcoin, blockchain, bond market vigilante , bonus culture, book value, Bretton Woods, BRICs, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, cashless society, cloud computing, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, commodity super cycle, computer age, coronavirus, corporate governance, COVID-19, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cryptocurrency, currency peg, currency risk, David Graeber, debt deflation, deglobalization, delayed gratification, Deng Xiaoping, Detroit bankruptcy, distributed ledger, diversified portfolio, Dogecoin, Donald Trump, double entry bookkeeping, Elon Musk, equity risk premium, Ethereum, ethereum blockchain, eurozone crisis, everywhere but in the productivity statistics, Extinction Rebellion, fiat currency, financial engineering, financial innovation, financial intermediation, financial repression, fixed income, Flash crash, forward guidance, full employment, gig economy, Gini coefficient, Glass-Steagall Act, global reserve currency, global supply chain, Goodhart's law, Great Leap Forward, green new deal, Greenspan put, high net worth, high-speed rail, housing crisis, Hyman Minsky, implied volatility, income inequality, income per capita, inflation targeting, initial coin offering, intangible asset, Internet of things, inventory management, invisible hand, Japanese asset price bubble, Jean Tirole, Jeff Bezos, joint-stock company, Joseph Schumpeter, junk bonds, Kenneth Rogoff, land bank, large denomination, Les Trente Glorieuses, liquidity trap, lockdown, Long Term Capital Management, low interest rates, Lyft, manufacturing employment, margin call, Mark Spitznagel, market bubble, market clearing, market fundamentalism, Martin Wolf, mega-rich, megaproject, meme stock, Michael Milken, Minsky moment, Modern Monetary Theory, Mohammed Bouazizi, Money creation, money market fund, moral hazard, mortgage debt, negative equity, new economy, Northern Rock, offshore financial centre, operational security, Panopticon Jeremy Bentham, Paul Samuelson, payday loans, peer-to-peer lending, pensions crisis, Peter Thiel, Philip Mirowski, plutocrats, Ponzi scheme, price mechanism, price stability, quantitative easing, railway mania, reality distortion field, regulatory arbitrage, rent-seeking, reserve currency, ride hailing / ride sharing, risk free rate, risk tolerance, risk/return, road to serfdom, Robert Gordon, Robinhood: mobile stock trading app, Satoshi Nakamoto, Satyajit Das, Savings and loan crisis, savings glut, Second Machine Age, secular stagnation, self-driving car, shareholder value, Silicon Valley, Silicon Valley startup, South Sea Bubble, Stanford marshmallow experiment, Steve Jobs, stock buybacks, subprime mortgage crisis, Suez canal 1869, tech billionaire, The Great Moderation, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thorstein Veblen, Tim Haywood, time value of money, too big to fail, total factor productivity, trickle-down economics, tulip mania, Tyler Cowen, Uber and Lyft, Uber for X, uber lyft, Walter Mischel, WeWork, When a measure becomes a target, yield curve

In 2014, Larry Summers suggested that in the post-crisis period interest rates that were consistent with full employment were not consistent with financial stability.fn7 Seasoned market observers had no doubt that ultra-low rates were behind the frantic search for yield and that financial risks were mispriced. ‘[N]ever … have investors reached so high in price for so low a return,’ wrote PIMCO’s Bill Gross.49 ‘The Federal Reserve policy of zero per cent interest rates and monetary expansion,’ commented James Grant, ‘has, by design, forced investors further out on the risk–return spectrum than they would otherwise have been had short-term real interest rates been positive.’ Grant compared low interest rates to ‘beer goggles’ which blinded investors to financial risk.50 Christopher Cole of Artemis Capital suggested that monetary policymakers had brought investment returns from the future into the present, while pushing financial risk from the present into the future.51 To be fair, some central bankers expressed concerns about the impact of monetary policy on investors’ behaviour.


pages: 935 words: 197,338

The Power Law: Venture Capital and the Making of the New Future by Sebastian Mallaby

"Susan Fowler" uber, 23andMe, 90 percent rule, Adam Neumann (WeWork), adjacent possible, Airbnb, Apple II, barriers to entry, Ben Horowitz, Benchmark Capital, Big Tech, bike sharing, Black Lives Matter, Blitzscaling, Bob Noyce, book value, business process, charter city, Chuck Templeton: OpenTable:, Clayton Christensen, clean tech, cloud computing, cognitive bias, collapse of Lehman Brothers, Colonization of Mars, computer vision, coronavirus, corporate governance, COVID-19, cryptocurrency, deal flow, Didi Chuxing, digital map, discounted cash flows, disruptive innovation, Donald Trump, Douglas Engelbart, driverless car, Dutch auction, Dynabook, Elon Musk, Fairchild Semiconductor, fake news, family office, financial engineering, future of work, game design, George Gilder, Greyball, guns versus butter model, Hacker Ethic, Henry Singleton, hiring and firing, Hyperloop, income inequality, industrial cluster, intangible asset, iterative process, Jeff Bezos, John Markoff, junk bonds, Kickstarter, knowledge economy, lateral thinking, liberal capitalism, Louis Pasteur, low interest rates, Lyft, Marc Andreessen, Mark Zuckerberg, market bubble, Marshall McLuhan, Mary Meeker, Masayoshi Son, Max Levchin, Metcalfe’s law, Michael Milken, microdosing, military-industrial complex, Mitch Kapor, mortgage debt, move fast and break things, Network effects, oil shock, PalmPilot, pattern recognition, Paul Graham, paypal mafia, Peter Thiel, plant based meat, plutocrats, power law, pre–internet, price mechanism, price stability, proprietary trading, prudent man rule, quantitative easing, radical decentralization, Recombinant DNA, remote working, ride hailing / ride sharing, risk tolerance, risk/return, Robert Metcalfe, ROLM, rolodex, Ronald Coase, Salesforce, Sam Altman, Sand Hill Road, self-driving car, shareholder value, side project, Silicon Valley, Silicon Valley startup, Skype, smart grid, SoftBank, software is eating the world, sovereign wealth fund, Startup school, Steve Jobs, Steve Wozniak, Steven Levy, super pumped, superconnector, survivorship bias, tech worker, Teledyne, the long tail, the new new thing, the strength of weak ties, TikTok, Travis Kalanick, two and twenty, Uber and Lyft, Uber for X, uber lyft, urban decay, UUNET, vertical integration, Vilfredo Pareto, Vision Fund, wealth creators, WeWork, William Shockley: the traitorous eight, Y Combinator, Zenefits

Rock and his partner articulated an approach to risk management that would resonate with future venture capitalists. Modern portfolio theory, the set of ideas that was coming to dominate academic finance, stressed diversification: by owning a broad mix of assets exposed to a wide variety of uncorrelated risks, investors could reduce the overall volatility of their holdings and improve their risk-return ratio. Davis and Rock ignored this teaching: they promised to make concentrated bets on a dozen or so companies. Although this would entail obvious perils, these would be tolerable for two reasons. First, by buying just under half of a firm’s equity, the Davis & Rock partnership would get a seat on the board and a say in its strategy: in the absence of diversification, a venture capitalist could manage his risk by exercising a measure of control over his assets.


pages: 801 words: 209,348

Americana: A 400-Year History of American Capitalism by Bhu Srinivasan

activist fund / activist shareholder / activist investor, American ideology, AOL-Time Warner, Apple II, Apple's 1984 Super Bowl advert, bank run, barriers to entry, Bear Stearns, Benchmark Capital, Berlin Wall, blue-collar work, Bob Noyce, Bonfire of the Vanities, British Empire, business cycle, buy and hold, California gold rush, Carl Icahn, Charles Lindbergh, collective bargaining, commoditize, Cornelius Vanderbilt, corporate raider, cotton gin, cuban missile crisis, Deng Xiaoping, diversification, diversified portfolio, Douglas Engelbart, Fairchild Semiconductor, financial innovation, fixed income, Ford Model T, Ford paid five dollars a day, global supply chain, Gordon Gekko, guns versus butter model, Haight Ashbury, hypertext link, Ida Tarbell, income inequality, information security, invisible hand, James Watt: steam engine, Jane Jacobs, Jeff Bezos, John Markoff, joint-stock company, joint-stock limited liability company, junk bonds, Kickstarter, laissez-faire capitalism, Louis Pasteur, Marc Andreessen, Menlo Park, Michael Milken, military-industrial complex, mortgage debt, mutually assured destruction, Norman Mailer, oil rush, peer-to-peer, pets.com, popular electronics, profit motive, punch-card reader, race to the bottom, refrigerator car, risk/return, Ronald Reagan, Sand Hill Road, self-driving car, shareholder value, side project, Silicon Valley, Silicon Valley startup, Steve Ballmer, Steve Jobs, Steve Wozniak, strikebreaker, Ted Nelson, The Death and Life of Great American Cities, the new new thing, The Predators' Ball, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, trade route, transcontinental railway, traveling salesman, Upton Sinclair, Vannevar Bush, Works Progress Administration, zero-sum game

As an undergrad at Berkeley in the 1960s, Milken had come across a study by an economist named Walter Braddock Hickman. In a look at nearly every corporate bond that had existed between 1900 and 1945, Hickman’s research revealed that a diversified portfolio of the lowest-rated bonds, the bonds that seemed to present the most risk, returned substantially more than a portfolio of middle-grade bonds. There were, as is the case now, very few companies at the highest tier of credit known as triple-A, but this middle grade of bonds was the bulk of the corporate bond market. However, investors mistakenly assumed that the middle tier of companies was safer than it really was and that the bottom tier was riskier than it actually was.


pages: 897 words: 210,566

Shake Hands With the Devil: The Failure of Humanity in Rwanda by Romeo Dallaire, Brent Beardsley

airport security, colonial rule, disinformation, failed state, global village, invisible hand, Khartoum Gordon, Kickstarter, land reform, risk/return, Ronald Reagan

After sending Tikoka to check out the current state of unrest north of Kadafi Crossroads, I decided the convoy would not be safe coming back that afternoon and issued an order for them not to return but to stay in Mulindi until the all-clear was given. But the Belgian escort deliberately disobeyed that order; they decided to risk returning to Kigali after dark with the whole convoy rather than spend an uncomfortable night camped out in their vehicles. They had just entered the suburb north of Kadafi Crossroads, which had been a major flashpoint that day, when a grenade was tossed at the lead vehicle, followed by machine-gun fire.


Americana by Bhu Srinivasan

activist fund / activist shareholder / activist investor, American ideology, AOL-Time Warner, Apple II, Apple's 1984 Super Bowl advert, bank run, barriers to entry, Bear Stearns, Benchmark Capital, Berlin Wall, blue-collar work, Bob Noyce, Bonfire of the Vanities, British Empire, business cycle, buy and hold, California gold rush, Carl Icahn, Charles Lindbergh, collective bargaining, commoditize, Cornelius Vanderbilt, corporate raider, cotton gin, cuban missile crisis, Deng Xiaoping, diversification, diversified portfolio, Douglas Engelbart, Fairchild Semiconductor, financial innovation, fixed income, Ford Model T, Ford paid five dollars a day, global supply chain, Gordon Gekko, guns versus butter model, Haight Ashbury, hypertext link, Ida Tarbell, income inequality, information security, invisible hand, James Watt: steam engine, Jane Jacobs, Jeff Bezos, John Markoff, joint-stock company, joint-stock limited liability company, junk bonds, Kickstarter, laissez-faire capitalism, Louis Pasteur, Marc Andreessen, Menlo Park, Michael Milken, military-industrial complex, mortgage debt, mutually assured destruction, Norman Mailer, oil rush, peer-to-peer, pets.com, popular electronics, profit motive, punch-card reader, race to the bottom, refrigerator car, risk/return, Ronald Reagan, Sand Hill Road, self-driving car, shareholder value, side project, Silicon Valley, Silicon Valley startup, Steve Ballmer, Steve Jobs, Steve Wozniak, strikebreaker, Ted Nelson, The Death and Life of Great American Cities, the new new thing, The Predators' Ball, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, trade route, transcontinental railway, traveling salesman, Upton Sinclair, Vannevar Bush, Works Progress Administration, zero-sum game

As an undergrad at Berkeley in the 1960s, Milken had come across a study by an economist named Walter Braddock Hickman. In a look at nearly every corporate bond that had existed between 1900 and 1945, Hickman’s research revealed that a diversified portfolio of the lowest-rated bonds, the bonds that seemed to present the most risk, returned substantially more than a portfolio of middle-grade bonds. There were, as is the case now, very few companies at the highest tier of credit known as triple-A, but this middle grade of bonds was the bulk of the corporate bond market. However, investors mistakenly assumed that the middle tier of companies was safer than it really was and that the bottom tier was riskier than it actually was.


pages: 1,042 words: 266,547

Security Analysis by Benjamin Graham, David Dodd

activist fund / activist shareholder / activist investor, asset-backed security, backtesting, barriers to entry, Bear Stearns, behavioural economics, book value, business cycle, buy and hold, capital asset pricing model, Carl Icahn, carried interest, collateralized debt obligation, collective bargaining, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, diversification, diversified portfolio, fear of failure, financial engineering, financial innovation, fixed income, flag carrier, full employment, Greenspan put, index fund, intangible asset, invisible hand, Joseph Schumpeter, junk bonds, land bank, locking in a profit, Long Term Capital Management, low cost airline, low interest rates, Michael Milken, moral hazard, mortgage debt, Myron Scholes, prudent man rule, Right to Buy, risk free rate, risk-adjusted returns, risk/return, secular stagnation, shareholder value, stock buybacks, The Chicago School, the market place, the scientific method, The Wealth of Nations by Adam Smith, transaction costs, two and twenty, zero-coupon bond

While traders today typically price put and call options via the Black-Scholes model, one can instead use value-investing precepts—upside potential, downside risk, and the likelihood that each of various possible scenarios will occur—to analyze these instruments. An inexpensive option may, in effect, have the favorable risk-return characteristics of a value investment—regardless of what the Black-Scholes model dictates. Institutional Investing Perhaps the most important change in the investment landscape over the past 75 years is the ascendancy of institutional investing. In the 1930s, individual investors dominated the stock market.


pages: 892 words: 91,000

Valuation: Measuring and Managing the Value of Companies by Tim Koller, McKinsey, Company Inc., Marc Goedhart, David Wessels, Barbara Schwimmer, Franziska Manoury

accelerated depreciation, activist fund / activist shareholder / activist investor, air freight, ASML, barriers to entry, Basel III, Black Monday: stock market crash in 1987, book value, BRICs, business climate, business cycle, business process, capital asset pricing model, capital controls, Chuck Templeton: OpenTable:, cloud computing, commoditize, compound rate of return, conceptual framework, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, currency risk, discounted cash flows, distributed generation, diversified portfolio, Dutch auction, energy security, equity premium, equity risk premium, financial engineering, fixed income, index fund, intangible asset, iterative process, Long Term Capital Management, low interest rates, market bubble, market friction, Myron Scholes, negative equity, new economy, p-value, performance metric, Ponzi scheme, price anchoring, proprietary trading, purchasing power parity, quantitative easing, risk free rate, risk/return, Robert Shiller, Savings and loan crisis, shareholder value, six sigma, sovereign wealth fund, speech recognition, stocks for the long run, survivorship bias, technology bubble, time value of money, too big to fail, transaction costs, transfer pricing, two and twenty, value at risk, yield curve, zero-coupon bond

However, such benefits need to outweigh any potential unintended consequences that inevitably arise with the complexity of financial engineering. This section considers three of the more common tools of financial engineering: derivative instruments that transfer company risks to third parties, off-balance-sheet financing that detaches funding from the company’s credit risk, and hybrid financing that offers new risk/return financing combinations. Derivative Instruments With derivative instruments, such as forwards, swaps, and options, a company can transfer particular risks to third parties that can carry these risks at a lower cost. For example, some airlines hedge their fuel costs with derivatives to be less exposed to sudden changes in oil prices.


Hawaii by Jeff Campbell

airport security, big-box store, California gold rush, carbon footprint, centre right, Charles Lindbergh, commoditize, company town, creative destruction, Drosophila, Easter island, G4S, haute couture, land reform, lateral thinking, low-wage service sector, machine readable, Maui Hawaii, off-the-grid, Peter Pan Syndrome, polynesian navigation, risk/return, sustainable-tourism, upwardly mobile, urban sprawl, wage slave, white picket fence

In certain areas, it’s an accepted way to get around easily (sometimes as noted in the text). However, hitchhiking anywhere is not without risks, and Lonely Planet does not recommend it. Get local advice, never hitchhike alone and size up each situation carefully before getting in a car. Travelers should understand that, by hitchhiking, they are always taking a small but serious risk. Return to beginning of chapter MOPED & MOTORCYCLE Motorcycle hire is not common in Hawaii, but mopeds are a transportation option in some resort areas. You can legally drive either vehicle in Hawaii as long as you have a valid driver’s license issued by your home country. The minimum age for renting a moped is 16; for a motorcycle it’s 21.


pages: 1,202 words: 424,886

Stigum's Money Market, 4E by Marcia Stigum, Anthony Crescenzi

accounting loophole / creative accounting, Alan Greenspan, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Bear Stearns, Black-Scholes formula, book value, Brownian motion, business climate, buy and hold, capital controls, central bank independence, centralized clearinghouse, corporate governance, credit crunch, Credit Default Swap, cross-border payments, currency manipulation / currency intervention, currency risk, David Ricardo: comparative advantage, disintermediation, distributed generation, diversification, diversified portfolio, Dutch auction, financial innovation, financial intermediation, fixed income, flag carrier, foreign exchange controls, full employment, Glass-Steagall Act, Goodhart's law, Greenspan put, guns versus butter model, high net worth, implied volatility, income per capita, intangible asset, interest rate derivative, interest rate swap, inverted yield curve, junk bonds, land bank, large denomination, locking in a profit, London Interbank Offered Rate, low interest rates, margin call, market bubble, market clearing, market fundamentalism, Money creation, money market fund, mortgage debt, Myron Scholes, offshore financial centre, paper trading, pension reform, Phillips curve, Ponzi scheme, price mechanism, price stability, profit motive, proprietary trading, prudent man rule, Real Time Gross Settlement, reserve currency, risk free rate, risk tolerance, risk/return, Savings and loan crisis, seigniorage, shareholder value, short selling, short squeeze, tail risk, technology bubble, the payments system, too big to fail, transaction costs, two-sided market, value at risk, volatility smile, yield curve, zero-coupon bond, zero-sum game

If we were to fear that a company might be dramatically downgraded or in the worst case go bankrupt, we would take that company out of the market well before that time. That is the theory of the liquidity backup lines that go with commercial paper issuance.” Dealers steer clear of issuing unrated commercial paper. Most dealers will not touch the stuff; said one, “Even if you charge 25 bp to sell shaky paper, the risk-return just is not there. You have to invest more in credit monitoring, which carries costs; and if one of your shaky issuers goes under, you have to have sold a lot of paper for 25 or 50 bp to recoup the costs and the anguish of resolving that.” Years ago, Drexel was the primary issuer of unrated paper, at one point doing business with 50 to 60 issuers.


Ireland (Lonely Planet, 9th Edition) by Fionn Davenport

air freight, Berlin Wall, Bob Geldof, British Empire, carbon credits, carbon footprint, Celtic Tiger, centre right, classic study, country house hotel, credit crunch, Easter island, glass ceiling, global village, haute cuisine, Intergovernmental Panel on Climate Change (IPCC), Jacquard loom, Kickstarter, McMansion, new economy, period drama, reserve currency, risk/return, sustainable-tourism, three-masted sailing ship, urban planning, urban renewal, urban sprawl, young professional

Be prepared too for signs hidden behind vegetation, signs pointing the wrong way, signs with misleading mileage or no signs at all. Many minor roads are single-vehicle width: stay alert for oncoming vehicles around blind corners. Most of all, prepare yourself for reckless young drivers who put the lives of their fellow motorists at risk. Return to beginning of chapter DONEGAL TOWN pop 2339 Pretty Donegal town occupies a strategic spot at the mouth of Donegal Bay, on the River Eske in the shadow of the Blue Stack Mountains. It was once a stamping ground of the O’Donnells, the great chieftains who ruled the northwest from the 15th to 17th centuries, who left behind an atmospheric old castle.