Fund management in general

Replacing market indices

April 2, 2012 | Pat

If equity markets suddenly sprang into existence now, would we create market indices? I’m doubtful. Why an index? The Dow Jones Industrial Average was born in 1896. This was when computers were humans with adding machines (but they did do parallel processing). At that point boiling “the market” down to ... [Read more...]

What does ‘passive investing’ really mean?

February 20, 2012 | Pat

We know the words but what do they mean? Some definitions Here are some definitions of “passive investment management”. Investopedia says: A style of management associated with mutual and exchange-traded funds (ETF) where a fund’s portfolio mirrors a market index. Wikipedia says: Passive management (also called passive investing) is ... [Read more...]

Risk parity

October 31, 2011 | Pat

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 ... [Read more...]

Testing an S&P 500 prediction

July 10, 2011 | Pat

If a particular prediction comes true, how surprised should we be? The prediction The page that sparked my curiosity tells of a prediction made a year ago that the S&P 500 would beat its historic high by the end of 2011. It says that at the point the prediction was made, ... [Read more...]

Market arrows

June 16, 2011 | Pat

Graphs like Figure 1 are reasonably common. But they are not reasonable. Figure 1: A (log) price series with an explicit guide line. Some have the prices on a logarithmic scale, which is an improvement on the raw prices. The problem with this sort of plot is that two particular data points ... [Read more...]

Paying interest and the number e

January 24, 2011 | Pat

Suppose I borrow a dollar from you and I’ll pay you 100% interest at the end of the year. How much money will you have then? $1 * (1 + 1) = $2 What happens if instead the interest is calculated as 50% twice in the year? $1 * (1.5 * 1.5) = $2.25 After … Continue reading →

[Read more...]

Some market predictions

January 6, 2011 | Pat

We look at a few forecasts for the year 2011 that we’ve run across, and compare them with the prediction distributions presented in Revised market prediction distributions. FTSE 100 There is a “range forecast” on an Interactive Investor page of 5350 to 6565. It isn’t clear (to me at least) what this ...

[Read more...]

Revised market prediction distributions

January 4, 2011 | Pat

This provides revised plots of the prediction distributions published yesterday. The previous plots of prediction distributions should be ignored — they are not doing as advertised. We show the prediction distribution of levels of several equity indices (plus oil price) at the end of 2011 assuming nothing happens. That is, we’ve ...

[Read more...]

Creating prediction distributions

January 4, 2011 | Pat

Here we give details and code for the prediction distributions exhibited in yesterday’s blog post Tis the season to predict. Eight years of returns The equity indices use daily closing levels from the start of 2003. This data comes from Yahoo. A roughly equivalent technique of selecting the last 2000 daily ...

[Read more...]

Blog year 2010 in review

December 30, 2010 | Pat

The blog year started in August and consists of 30-something posts. Here is a summary. Quant concepts backtesting: Backtesting — almost wordless cointegration: American TV does cointegration efficient frontier: Anomalies meet volatility implied alpha: Implied alpha — almost wordless portfolio theory: Ancient portfolio theory random walk: The tightrope of the random walk ...

[Read more...]

The tightrope of the random walk

December 27, 2010 | Pat

We’re really interested in markets, but we’ll start with a series of coin tosses. If the coin lands heads, then we go up one; if it lands tails, we go down one. Figure 1: A coin toss path.Figure 1 is the result of one thousand coin flips. It is ...

[Read more...]

The ARORA guessing game

November 9, 2010 | Pat

The game ARORA (A random or real array) is a website that gives you two time series at a time. Your job is to guess which series is real market data and which is permuted data. It’s fun — try it. With some practice you will probably be able to ... [Read more...]

Physical economy v social economy

September 17, 2010 | Pat

There’s a hole in the bucket of traditional economics. Homo socialus seems to be on the rise, and homo economicus is getting harder to find. Vulcanism has become evident in the R community over the last several days. One of the visible eruptions has been over money. This resulted ...