Blog Archives

Alpha decay in portfolios

November 30, 2011
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Alpha decay in portfolios

How does the effect of our expected returns change over time?  This is not academic  curiosity, we want to know in the context of our portfolio if we can.  And we can — we visualize the effect of expected returns in situ. First step The idea is to look at the returns of portfolios that … Continue reading...

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Asynchrony in market data

November 21, 2011
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Asynchrony in market data

Be careful if you have global daily data. The issue Markets around the world are open at different times.  November 21 for the Tokyo stock market is different from November 21 for the London stock market.  The New York stock market has yet a different November 21. The effect The major effect is that correlations … Continue reading...

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Performance measurement is about decisions

November 16, 2011
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Performance measurement is about decisions

The return of a hypothetical fund was 17.9% in 2010.  We want to know if that is good or bad. The benchmark method The assets in the portfolio are constituents of the S&P 500, so we can compare our fund return to the return of the index. Figure 1: 2010 returns of: the fund and … Continue reading...

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Another look at autocorrelation in the S&P 500

November 11, 2011
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Another look at autocorrelation in the S&P 500

Casting doubt on the possibility of mean reversion in the S&P 500 lately. Previously A look at volatility estimates in “The mystery of volatility estimates from daily versus monthly returns” led to considering the possibility of autocorrelation in the returns.  I estimated an AR(1) model through time and added a naive confidence interval to the … Continue reading...

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The mystery of volatility estimates from daily versus monthly returns

November 8, 2011
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The mystery of volatility estimates from daily versus monthly returns

What drives the estimates apart? Previously A post by Investment Performance Guy prompted “Variability of volatility estimates from daily data”. In my comments to the original post I suggested that using daily data to estimate volatility would be equivalent to using monthly data except with less variability.  Dave, the Investment Performance Guy, proposed the exquisitely … Continue reading...

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Variability of volatility estimates from daily returns

November 3, 2011
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Variability of volatility estimates from daily returns

Investment Performance Guy has a post “Periodicity of risk statistcs (and other measures)” in which it is wondered how valid volatility estimates are from a month of daily returns. Here is a quick look.  Figure 1 shows the variability (and a 95% confidence interval) of volatility estimates for the S&P 500 index in January 2011.  … Continue reading...

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Risk parity

October 31, 2011
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Risk parity

Some thoughts and resources regarding a popular fund management buzzword. The idea Given asset categories (like stocks, bonds and commodities) create a portfolio where each category contributes equally to the portfolio variance. Two operations There are two cases in creating a risk parity portfolio: the universe is the asset categories the universe is the assets … Continue reading...

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Introduction to “Numerical Methods and Optimization in Finance”

October 27, 2011
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Introduction to “Numerical Methods and Optimization in Finance”

The book is by Manfred Gilli, Dietmar Maringer and Enrico Schumann.  I haven’t actually seen the book, so my judgement of it is mainly by the cover (and knowing the first two authors). The parts of the book closest to my heart are optimization, particularly portfolio optimization, and particularly particularly portfolio optimization via heuristic algorithms.  … Continue reading...

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How to compute portfolio returns badly

October 24, 2011
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How to compute portfolio returns badly

For those who naturally compute portfolio returns correctly here are some lessons in how to do it wrong. The data Random portfolios were generated from constituents of the S&P 500 with constraints: long-only exactly 20 assets in the portfolio no more than 10% weight for any asset (just for fun) the sum of the 5 … Continue reading...

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Does the S&P 500 exhibit seasonality through the year?

October 20, 2011
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Does the S&P 500 exhibit seasonality through the year?

Are there times of the year when returns are better or worse? Abnormal Returns prompted this question with “SAD and the Halloween indicator” in which it is claimed that the US market tends to outperform from about Halloween until April. Data The data consisted of 15,548 daily returns of the S&P 500 starting in 1950.  … Continue reading...

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