Flav

The Nature of Risk

My last post brought to my mind me some questions to Geoff Considine:

What kind of information did you use to build the graph "Projected Probability of Default vs. Annualized Volatility for Stocks", credit ratings, historic quotes (to compute the Std deviation)?

When you use the QPP to build a model portfolio, do you use some data of fundamentals for a given company?

Does technical analysis play any role at the moment of building a portfolio or making an investment decision (in your investment scheme)?

This question fits better your other articles, but as you have demonstrated before, a diversified asset class portfolio is better (more return with less risk) than one concentrated in one asset class (stock for example); but is there the posibility of an all stock portfolio that, maybe with more risk, it still locates on the efficient frontier (more return with more risk, but still on the frontier) ?

Thanks in advance

The Nature of Risk

Quote by PrudentMan,
CFA: "To use statistics to try and understand risk is lazy. Considering that human nature is impossible to explain, what makes anyone think a computer can make sense of what they are going to do"
I believe you're not understanding the message of this article. Using the Montecarlo simulation, you had that there was an increase in the probability of default when you had a larger standard deviation. So there's the link between statistics (hence, volatility) and risk. As Considine remarks, there was a considerable probability of a large price move in Bear Sterns stock based on past information. It's not that it will surely happen, but there's a high probability. As you're a financial adviser, i believe that, if you recommend a client to invest in a distressed company with the characteristics described above, just beacuse it went down in price and you think will get back to normal, ignoring the great volatility on the stock, maybe you should work on other area, like casino gambling or sports bets. That's akin to that kind of reasoning.
Another quote from this guy: "Good old fundamentals combined with technical analysis, intellect, skill and guts will trump any statistician"
Who in the hell ever told you that fundamental and technichal analysis are substitutes of statistical research? They complement each other. Of course, if you are a strong believer of the efficient market theory, then fundamental and technical analysis are useless, but otherwise, all three instruments are useful

Defining a Set of Core Asset Classes

Hello Geoff:

Thank you very much for your quick response. It does clarify.
I'm an economics and finance student, and i often have discussions with classmates and friends about several subjects regarding portfolio management. I must say that i have used some of your articles to support some of my arguments. I believe that for long term planning, there's nothing better than the analysis being made in your articles. But suppose that some investor or trader has a shorter time horizon; that person is willing to take on larger risks, in order to achieve larger returns. Would you still recommend this individual to diversify? Or given the shorter time frame and less risk aversion, should this investor have a more concentrated portfolio?

Again, thank you very much

Looking forward to read more of your articles

Defining a Set of Core Asset Classes

Hi Geoff. I made a question to you in other article that wasn't answered, so i will reformulate it in this one.
You say that hisorical data is of no use, but in order to obtain forward looking assets class combinations with QPP, you have to enter past information about those assets classes. So, as i asked before, to determine the correct weight asigned to each holding (the way that produces the highest return with a given level of risk), should the oldest available information be introduced? or is it sufficient with just a few years back?

Choosing Your Portfolio Risk Tolerance

Geoff:

Great article. Have one question for you: if you used historical data from a larger range than 5 years, let's say 20 years, would the assets' weight be more accurate? Or does the equal-weight still outperform?