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COMMENTS STATS

382 Comments

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## Housing Stocks: No More Outsized Returns [View article]

## Seeking Refuge From Market Turbulence With Low Beta Opportunities: Part 1 [View article]

There is an explanation here:

http://seekingalpha.co...

This shows a table with some calulations

http://seekingalpha.co...

The parameters, volatility and correlations, are calculated from monthly returns for both SPY and the select security. Let me know if this answers your question.

## Applying The Sharpe Ratio To Low Beta Investments [View article]

## Applying The Sharpe Ratio To Low Beta Investments [View article]

I would agree that trying to determine specific return projection is simply a lesson in futility. Furthermore, if someone could really figure out future returns were, they wouldn't worry about the risk component, just choose the highest return. But that is not the case so we have make educated comparisons and balance what we think returns are against the risk of the investment.

Backing up further, there is a question of what you think about the future and what good investments could look like based on that. How strongly do you hold those beliefs - are you all in or going to hedge a bit? Sharpe ratios and many other analytical finance tools provide ways to help understand and discern which types of investments might be good depending on your world view. I buy emerging equities not because I believe they will do well when the U.S. markets do poorly (they are generally pretty well correlated, there is some diversification benefit here, but not as much as conventional intuition might say), but because I believe they are home to most of world's future economic growth. (It is true though that many companies are multi-national in nature and so can prosper by that dimension as well). Just my opinion.

## Applying The Sharpe Ratio To Low Beta Investments [View article]

So your next point about negative returns. I'll first clarify between rate and return. In my calculation, return was a historical measure. It looked at the return on IEF from three years ago to present time. Due to declining interest rates and flight to safety the security appreciated substantially accounting for much of the return. If one is looking around to compare yields or future expected returns, it would make most sense to take the treasury bond yield, which was something like 1.6% today. Possibly, if I buy IEF today and wait 3 years, I might have a negative return due to deprecation in the security if interest rates go up (not down).

From a practical point of view, what should a small, casual investor view as the risk free rate of return? Do they really have access to Treasury Bonds due to minimum size purchases - Not always. they can perhaps purchase the ETF or at least get a savings rate. So this then links back to my earlier point, that even if you move the risk free rate around some, the relative rankings remain quite similar.

## Applying The Sharpe Ratio To Low Beta Investments [View article]

On a looking forward basis, one typically uses the risk free rate as noted in a treasury bond which is just the yield. This is a yield to maturity and ignores the ups and downs of security appreciation and depreciation as rates change. Once purchased you've locked in a set rate that is risk free to the extent that the U.S. government does not default or have other issues.

In terms of choosing an appropriate benchmark, large differences can shift the results in a few position. Note that for example it is possible for the excess return to shift from postive to negative if it is near teh risk free rate of return. However, large positives typically remain large positives, etc.. Since it is a relative ranking system it would take very different risk free rates of return to alter the ordering.

Note the table with some substitutes for the RF. In general if a security ranked near the top with one rf, it did well with others, not always, but reasonably close. Note it is a relative ranking.

Ticker Sharpe Ratio (rf = 0%) Sharpe Ratio RF = 27% Sharpe Ratio RF = 10%

PCY 18.1x 7.6x 15.0x

MCD 12.4x 5.5x 10.4x

GLD 8.0x 3.5x 6.7x

LQD 17.2x 1.6x 12.6x

SPY 6.9x 1.5x 5.4x

XLU 9.2x 0.9x 6.8x

IEF 14.0x 0.0x 9.9x

TIP 18.5x -0.8x 12.9x

PCG 1.6x -4.4x -0.2x

VXX -4.8x -6.0x -5.1x

SHY 0.5x -104.9x -30.5x

Inflation is a separate consideration and in theory is reflected within the risk free rate which in concept is a real risk free rate as well as an inflation component. Hence looking at todays 10-year treasury bond yield - it is most likely insufficient to cover inflation looking forward. However, this notion should not impact the relative ranking created by the sharpe ratio, it simply says that you are effectively paying to have a safe "risk free" investment.

## Why Did Warren Buffett Sell Johnson & Johnson? [View article]

Mr Roche's comment is quite interesting. In any case, he has been clearly disappointed by JNJ. I highlighted book equity, since that is often a favorite aspect for Buffett. I would agree that ROE is another important metric, especially in that it is related. If ROE is dropping and book equity is growing very slowly that suggests future growth will be anemic as well. I would wager that from Buffett's perspective the inability to grow book equity is a sign that the stock will underperform. Will be interesting to see what happens going forward. Alternatively, Buffett might think that there are better places for his capital and ultimately JNJ could still do well.

## Electric Cars: A Matter Of Cost [View article]

## 7 Investments With Low Correlation To The S&P 500 [View article]

## 7 Investments With Low Correlation To The S&P 500 [View article]

## Looking For Low Beta Investment Opportunities [View article]

## 7 Investments With Low Correlation To The S&P 500 [View article]

http://seekingalpha.co...

Thanks for reading my arictles.

## 7 Investments With Low Correlation To The S&P 500 [View article]

You are correct on the notion of how certain asset classes can correlate together in extreme time periods, while others maintain their independence. While emerging market equities, have lower correlations (albeit not low by my metric) their correlations did ramp up post 2008 when everyone was shunning most "risky" assets.

I do have a few articles that look at the topic you mention:

http://seekingalpha.co...

This is another take on low correlation investments from march 2011 that I wrote. Allows you to compare correlations from today with those from the past.

http://seekingalpha.co...

Here is a link to a list of my articles grouped by topic:

http://bit.ly/TsbAPJ

Check under beta and diversification. This is still a work in process.

## Using EBITDA Multiples To Compare Steel Companies [View article]

## 7 Investments With Low Correlation To The S&P 500 [View article]