mydoghatescats

From The Horse’s Mouth: Yale's Endowment Officer Makes Financial Sense

I always look forward to your stuff. I read this one a while ago but I'm working on my CFP and ran across something similar.

In studying for my CFP we are told to use CV (Coefficient of Variability) or Standard Deviation divided by Return (SDev/Ret) as a comparison tool in picking portfolios. I say your measure, Return divided by Standard Deviation, the inverse of CV, is more intuitive.

It directly, proportionally measures, as opposed to inversely measures, the thing we are looking for: stability, gain with the least pain, the biggest return-bang for the smallest risk-buck. It also directly measures the degree of foolishness we are exhibiting by believing it can be much much greater than 1 (or what the broad market action of portfolios, passive and active, tell us what is currently feasible).

Thanks for your great articles. I guess I will always be looking in the rear view mirror when investing, but your work helps me turn around and look out the front.

I used to be a deck officer in the merchant marine. When I was starting out, I can remember that on more than one occasion a captain would come up on the bridge and catch me with my head glued to the radar on a perfectly sunny, high visibility day. Then they would point to the window and shake their head at my ninnyness for not appreciating that radars, or any tools we create to measure things are all fine and good, but sometimes you need to look out the window at reality.

If the ratio you describe is unclaimed you should name it: CDS, or Considine's Coefficient of Stability. It's basically just showing the Efficient Frontier, and they already gave out the Nobel Prize for that piece of work, but they name ships after people for far less, so lay claim. And it's a hell of lot more lucid and plainspeaking way to describe the Efficient Frontier than the way it is described in my CFP textbook.

Hope you sell lots of QPP software. Maybe when I get my CFP and figure out how to use this HP10BII Business Calculator I'll be needing it.