A traders perspective on volatility and risk.
http://www.mercenarytrader.com/2012/12/ ... r-nitiots/
To begin, let us define our terms:
Modern Portfolio Theory (via investopedia): “A theory on how risk averse investors can construct portfolios to optimize or maximize expected return based on a given level of market risk, emphasizing that risk is an inherent part of higher reward.”
Nit: In poker parlance, an über-conservative player who constantly folds and only enters pots with “premium” hands.
Nitiot: The player who is so fearful of risk, he (or she) will make terrible decisions to avoid it – laboring under the mistaken assumption that volatility and risk are the same thing
But getting back to Nitiots: On top of wrongly equating volatility with risk, these folks make an even nuttier mistake. The MPT Nitiot assumes skill has no bearing on outcome… perhaps the most fool-headed assumption academia has ever put forth!
According to these goofballs, factors like asset valuation, supply and demand, entry and exit prices, and basic risk management — all of which require skill to assess — don’t matter to the process at all. All that stuff is skipped in favor of “asset allocation,” where the chief decision is whether to (passively) accept a mix of 60 percent equities, 40 percent bonds or what have you.