All models are wrong, some models are more wrong than others. The streetlight model Exponential decay models are quite common.  But why? One reason a model might be popular is that it contains a reasonable approximation to the mechanism that generates the data.  That is seriously unlikely in this case. When it is dark and you’ve lost your keys, where do you look?  Under the streetlight.  You look there not because you think that’s the most likely spot for the keys to be; you look...

Only puny secrets need protection. Big discoveries are protected by public incredulity. – Marshall McLuhan Random portfolios have the power to improve the practice of asset management in several ways.  Here are six. 1) Measure active managers There is no convincing evidence that more than a handful of funds have consistently outperformed.  This should tell every active fund manager on the planet that the present form of performance measurement is inadequate. Active fund managers...

US large cap market returns. Fine print The data are from Yahoo Almost all of the S&P 500 stocks are used The initial post was “Replacing market indices” The R code is in marketportrait_funs.R Subscribe to the Portfolio Probe blog by Email

Constraining the maximum asset-portfolio correlation gave bigger returns and smaller volatility. Previously “Portfolio diversity” introduced the topic of asset-portfolio correlations.  It also generated four sets of long-only random portfolios as of the start of 2011 using constituents of the S&P 500: exactly 20 names, weights between 1% and 10% exactly 20 names, maximum asset-portfolio correlation of 60% exactly 200 names, weights between 0.1% and 1% exactly 200 names, maximum...

US large cap market returns.   Fine print The data are from Yahoo Almost all of the S&P 500 stocks are used The initial post was “Replacing market indices” The R code is in marketportrait_funs.R Subscribe to the Portfolio Probe blog by Email

You can win money by saying how to get people to treat themselves better. InnoCentive has a challenge: How do we best get people to understand how important it is to plan for, and take specific action steps today, to create a steady and reliable stream of income for their retirement years? What would be the best, most compelling way to spur people to take important action for themselves TODAY in this very important arena – in a way that does not overwhelm people with the complex issues...

Most popular posts in 2012 April Information flows like water Replacing market indices The top 7 portfolio optimization problems A tale of two returns (posted in 2010) Cross-sectional skewness and kurtosis: stocks and portfolios Three things factor models do Beta is not volatility What the hell is a variance matrix? (posted in 2010) The quality of variance matrix estimation Low (and high) volatility strategy effects   Most popular posts in 2012 As of 2012 April 30. The top 7 portfolio...

Not quite expected behavior of skewness and kurtosis. The question In each time period the returns of a universe of stocks will have some distribution — distributions as displayed in “Replacing market indices” and Figure 1. Figure 1: A cross-sectional distribution of simple returns of stocks. In particular they will have values for skewness and kurtosis.  When we aggregate stocks into portfolios, we would expect the cross-sectional distribution of the portfolios to be closer...

they ought at least be allowed to state why they didn’t do anything and also to explain the process by which they didn’t do anything. First blush One of the nice things about R is that new statistical techniques fall into it.  One such is the glasso (related to the statistical lasso) which converts degenerate variance matrices into positive definite ones. Once I was in my local R session, all I had to do to try out glasso was: > install.packages('glasso') > require(glasso)...

The focus on tracking error rules out a low volatility strategy. Simply put, most money managers are focused on outperforming their benchmarks without adding risk. And because risk is measured on a relative basis, a portfolio that moves up and down less than its benchmark is perceived as more risky on a relative basis because it is considered less correlated. from “Is modern portfolio theory bunk?” (my emphasis) Subscribe to the Portfolio Probe blog by Email