Articles by R on OSM

Performance anxiety

June 24, 2020 | 0 Comments

In our last post, we took a quick look at building a portfolio based on the historical averages method for setting return expectations. Beginning in 1987, we used the first five years of monthly return data to simulate a thousand possible portfolio weights, found the average weights that met our risk-return ...
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Portfolio simulations

June 11, 2020 | 0 Comments

In our last post, we compared the three most common methods used to set return expectations prior to building a portfolio. Of the three—historical averages, discounted cash flow models, and risk premia models—no single method dominated the others on average annual returns over one, three, and five-year periods. ...
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Mad methods

May 28, 2020 | 0 Comments

Over the past few weeks, we’ve examined the three major methods used to set return expectations as part of the portfolio allocation process. Those methods were historical averages, discounted cash flow models, and risk premia models. Today, we’ll bring all these models together to compare and contrast their ...
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Implied risk premia

May 14, 2020 | 0 Comments

In our last post, we applied machine learning to the Capital Aset Pricing Model (CAPM) to try to predict future returns for the S&P 500. This analysis was part of our overall project to analyze the various methods to set return expectations when seeking to build a satisfactory portfolio. Others ...
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Machined risk premia

May 7, 2020 | 0 Comments

Over the last few posts, we’ve discussed methods to set return expectations to construct a satisfactory portfolio. These methods are historical averages, discounted cash flow models, and risk premia. our last post, focused on the third method: risk premia. Using the Capital Asset Pricing Model (CAPM) one can derive ...
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Risk premia

April 19, 2020 | 0 Comments

Our last post discussed using the discounted cash flow model (DCF) as a method to set return expectations that one would ultimately employ in building a satisfactory portfolio. We noted that if one were able to have a reasonably good estimate of the cash flow growth rate of an asset, ...
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Discounted expectations

April 14, 2020 | 0 Comments

After our little detour into GARCHery, we’re back to discuss capital market expectations. In Mean expectations, we examined using the historical average return to set return expectations when constructing a portfolio. We noted hurdles to this approach due to factors like non-normal distributions, serial correlation, and ultra-wide confidence intervals. ...
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April 3, 2020 | 0 Comments

In our last post, we discussed using the historical average return as one method for setting capital market expectations prior to constructing a satisfactory portfolio. We glossed over setting expectations for future volatility, mainly because it is such a thorny issue. However, we read an excellent tutorial on GARCH models ...
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Mean expectations

March 27, 2020 | 0 Comments

We’re taking a break from our extended analysis of rebalancing to get back to the other salient parts of portfolio construction. We haven’t given up on the deep dive into the merits or drawbacks of rebalancing, but we feel we need to move the discussion along to keep ...
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Rebalancing history

March 19, 2020 | 0 Comments

Our last post on rebalancing struck an equivocal note. We ran a thousand simulations using historical averages across different rebalancing regimes to test whether rebalancing produced better absolute or risk-adjusted returns. The results suggested it did not. But we noted many problems with the tests—namely, unrealistic return distributions and ...
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Rebalancing ruminations

March 12, 2020 | 0 Comments

Back in the rebalancing saddle! In our last post on rebalancing, we analyzed whether rebalancing over different periods would have any effect on mean or risk-adjusted returns for our three (equal, naive, and risky) portfolios. We found little evidence that returns were much different whether we rebalanced monthly, quarterly, yearly, ...
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Drawdowns by the data

February 28, 2020 | 0 Comments

We’re taking a break from our series on portfolio construction for two reasons: life and the recent market sell-off. Life got in the way of focusing on the next couple of posts on rebalancing. And given the market sell-off we were too busy gamma hedging our convexity exposure, looking ...
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Rebalancing! Really?

February 20, 2020 | 0 Comments

In our last post, we introduced benchmarking as a way to analyze our hero’s investment results apart from comparing it to alternate weightings or Sharpe ratios. In this case, the benchmark was meant to capture the returns available to a global aggregate of investable risk assets. If you could ... [Read more...]

Benchmarking the portfolio

February 13, 2020 | 0 Comments

In our last post, we looked at one measure of risk-adjusted returns, the Sharpe ratio, to help our hero decide whether he wanted to alter his portfolio allocations. Then, as opposed to finding the maximum return for our hero’s initial level of risk, we broadened the risk parameters and ...
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SHARPEn your portfolio

February 6, 2020 | 0 Comments

In our last post, we started building the intuition around constructing a reasonable portfolio to achieve an acceptable return. The hero of our story had built up a small nest egg and then decided to invest it equally across the three major asset classes: stocks, bonds, and real assets. For ...
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Portfolio starter kit

January 24, 2020 | 0 Comments

Say you’ve built a little nest egg thanks to some discipline and frugality. And now you realize that you should probably invest that money so that you’ve got something to live off of in retirement. Or perhaps you simply want to earn a better return than stashing your ...
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Skew who?

January 14, 2020 | 0 Comments

In our last post on the SKEW index we looked at how good the index was in pricing two standard deviation (2SD) down moves. The answer: not very. But, we conjectured that this poor performance may be due to the fact that it is more accurate at pricing larger moves, ...
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January 12, 2020 | 0 Comments

The oil-to-gas ratio was recently at its highest level since October 2013, as Middle East saber-rattling and a recovering global economy supported oil, while natural gas remained oversupplied despite entering the major draw season. Even though the ratio has eased in the last week, it remains over one standard deviation above ...
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SKEWed perceptions

December 19, 2019 | 0 Comments

The CBOE’s SKEW index has attracted some headlines among the press and blogosphere, as readings approach levels not see in the last year. If the index continues to draw attention, doomsayers will likely say this predicts the next correction or bear market. Perma-bulls will catalogue all the reasons not ...
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Null hypothesis

December 12, 2019 | 0 Comments

In our previous post we ran two investing strategies based on Apple’s last twelve months price-to-earnings multiple (LTM P/E). One strategy bought Apple’s stock when its multiple dropped below 10x and sold when it rose above 20x. The other bought the stock when the 22-day moving average ...
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