Re: Risk = ??
Posted: 20 Feb 2012 16:28
IOW it worked then but past performance is no guarantee of future results...NormR wrote:Not necessarily.
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IOW it worked then but past performance is no guarantee of future results...NormR wrote:Not necessarily.
Well, even worse, go back farther and/or swap geography and it hasn't.kcowan wrote:IOW it worked then but past performance is no guarantee of future results...NormR wrote:Not necessarily.
Good question. I don't know the answer.NormR wrote:I don't remember off the top of my head, but how stable are skewness and kurtosis? That is, is the past a good guide to the future for these items?
I've seen a number of papers looking at semi-var instead of var. My recollection is that using semi-var doesn't buy you much, if anything, in terms of explaining prices or returns.Also, if one goes to where the math is hard, why not opt for semi-var instead of var? Perhaps that makes it too hard?
Isn't all of financial analysis just quantifying factors that behaviourally we find important? After all, what is the rationale for risk aversion other than a fundamental human bias of not liking risk? Then we run around and try to put a number on it and call it "the price of risk".Isn't that just putting a behavioural argument into math speak? It doesn't really explain why.
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As I write this introduction in mid-2010, few investors need to be reminded of the importance of risk management. Risk was not invented in 2008, of course, but it did begin one of its periodic spells on center stage. Risk is an elusive concept. It means different things at different times to different people. Stock market investment felt like a bleak prospect in the depths of March 2009 when valuations were little more than half their peak value and the possibility of further declines with no floor in sight felt all too real. Risk in that situation is both quantitatively and qualitatively different than in the midst of a bull market.
Ah, sorry. I'll let the grown ups continue talking then.kcowan wrote:I always interpret discussions of risk here as Risk that return on capital will be less than planned.
I would agree with that.Rooster wrote: ...but "risk" itself is just the chance of [insert undesirable outcome] happens.
When you "derisk," be sure you understand whether you are eradicating risk—or just replacing old risks with new ones... When everyone seems to want to unload the same risks at once, it is a good idea to ask yourself whether joining them might be the biggest risk of all.
That's what I do but I call it profits, smooth equity line, and the last 2 are profit/max drawdown. I also try to estimate my confidence in the results.ghariton wrote:this approach looks at expected return, variance, skewness and kurtosis.
The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability -- the reasoned probability -- of that investment causing its owner a loss of purchasing power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. And as we will see, a nonfluctuating asset can be laden with risk.
A very important step that, unfortunately, almost no individual investors take.newguy wrote:I also try to estimate my confidence in the results.
It becomes obvious and difficult when discussing max DD. If you're largest peak to valley loss of money (max DD) in one year is 20% how much will it be over 10 years? In 1987?.ghariton wrote:So congratulations on being one of the very few to take randomness seriously.
I learned that lesson when I started reading about safe withdrawal rates in retirement. People insist on a single number like x% that's cast in concrete and guaranteed to survive, no matter what. It's futile trying to explain why that's impossible (unless you make 100/x much, much larger than they can ever hope to amass. (Even an all RRB portfolio or an annuity has its risks...))ghariton wrote:Then I entered the work force, and was told that people didn't want all that clutter -- just the point forecast, please. Forty years later, people still don't want to know about uncertainty.
Yes. But look at what's really going on. Buffett is looking at both expected return and volatility. If the expected return is high enough, then large downward volatility is acceptable, because even large drops will still leave the investment "above water". By contrast, if the expected return is lower, the acceptably volatility is lower because then even medium drops will result in a loss.George$ wrote:Some words from Warren Buffett in his recent article in Fortune:
Warren Buffett: Why stocks beat gold and bonds
and a short bit with my emphasis in bold -The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability -- the reasoned probability -- of that investment causing its owner a loss of purchasing power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. And as we will see, a nonfluctuating asset can be laden with risk.
Not necessarily, although that makes it more likely.newguy wrote:For skewness are all your positive results from one large trade or something like that?
Yup. Annuities have credit risk -- another reason to delay their purchase, and to do lots of due diligence on the issuer.Bylo Selhi wrote:Even an all RRB portfolio or an annuity has its risks...
I think that all those professors teaching Investing 101 to absorbing students should be required to write the following out 1,000 times before they are allowed to teach the next class - "VOLATILITY IS NOT THE SAME AS LONGER TERM INVESTMENT RISK"For U.S. equities, the study found that the least volatile 10% of stocks had an average return of 12.2% over the period, while the most volatile 10% combined for an average decline of 8.8%.
“We found that in every one of the world's markets, higher volatility equals lower returns,” Mr. Haugen said. “Does this fly in the face of modern portfolio theory? You're damn right it does.”
Canadian 90-day T-bill rates are at Selected treasury bill yields - Bank of Canada.LadyGeek wrote:I'm a little confused on your question. Are you trying to compare performance of stocks against long-term bonds? "Equity risk premium" is compared to a "risk-free" baseline. In the US, the risk-free baseline is the 90 day (short-term) US Treasury bill. (I don't know the Canadian risk-free baseline.) The reason that short-term bonds are used is due to the stability of the return - it's practically guaranteed.
Except T-Bills are not risk free. Also, they might be 'guaranteed' but they come with counterparty risk that has bitten investors in G7 economies in the past. At last check, the U.S. was only a AA credit. A permanent impairment of purchasing power is a definite probability.LadyGeek wrote:I'm a little confused on your question. Are you trying to compare performance of stocks against long-term bonds? "Equity risk premium" is compared to a "risk-free" baseline. In the US, the risk-free baseline is the 90 day (short-term) US Treasury bill. (I don't know the Canadian risk-free baseline.) The reason that short-term bonds are used is due to the stability of the return - it's practically guaranteed.
Correct, but that's what was used as the "risk free" baseline in the data.NormR wrote:Except T-Bills are not risk free. Also, they might be 'guaranteed' but they come with counterparty risk that has bitten investors in G7 economies in the past. At last check, the U.S. was only a AA credit. A permanent impairment of purchasing power is a definite probability.LadyGeek wrote:I'm a little confused on your question. Are you trying to compare performance of stocks against long-term bonds? "Equity risk premium" is compared to a "risk-free" baseline. In the US, the risk-free baseline is the 90 day (short-term) US Treasury bill. (I don't know the Canadian risk-free baseline.) The reason that short-term bonds are used is due to the stability of the return - it's practically guaranteed.
The Bank of Canada Interest Rates only go back 10 years, compared to the 83 year historical information available for the US markets. (Perhaps there is a better website, but RBC is the official source of information.)Shakespeare wrote:Canadian 90-day T-bill rates are at Selected treasury bill yields - Bank of Canada.