Category Archives: Quant finance
Risk parity
Some thoughts and resources regarding a popular fund management buzzword. The idea Given asset categories (like stocks, bonds and commodities) create a portfolio where each category contributes equally to the portfolio variance. Two operations There are two cases in creating a risk parity portfolio: the universe is the asset categories the universe is the assets … Continue reading
Posted in Fund management in general, Quant finance, R language
Tagged equal risk contribution, risk parity
7 Comments
How to compute portfolio returns badly
For those who naturally compute portfolio returns correctly here are some lessons in how to do it wrong. The data Random portfolios were generated from constituents of the S&P 500 with constraints: long-only exactly 20 assets in the portfolio no more than 10% weight for any asset (just for fun) the sum of the 5 … Continue reading
Posted in Quant finance, R language
Leave a comment
Does the S&P 500 exhibit seasonality through the year?
Are there times of the year when returns are better or worse? Abnormal Returns prompted this question with “SAD and the Halloween indicator” in which it is claimed that the US market tends to outperform from about Halloween until April. Data The data consisted of 15,548 daily returns of the S&P 500 starting in 1950. … Continue reading
Linear constraints with risk fractions
A different sort of generalization of variance partitions. Previously The post “Generalizing risk fractions” described additional (to version 1.04 of Portfolio Probe) ways of dividing the variance among the assets. This post describes the other major addition in the new version. Linear constraints Linear constraints on sectors, industries and countries are quite common. These constrain … Continue reading
Generalizing risk fractions
More ways of constraining the variance attributable to individual assets. Introduction This post describes some additions to the 1.04 version of Portfolio Probe. A beta of that version was released last week. We’ve also added Linux 32-bit and 64-bit as platforms on which Portfolio Probe is for sale. Unfortunately demo and academic versions are still … Continue reading
Predictability of kurtosis and skewness in S&P constituents
How much predictability is there for these higher moments? Data The data consist of daily returns from the start of 2007 through mid 2011 for almost all of the S&P 500 constituents. Estimates were made over each half year of data. Hence there are 8 pairs of estimates where one estimate immediately follows the other. … Continue reading
Time series equivalence of brains and markets
fMRI data from 90 locations in the brain look somewhat like daily closing prices on 116 stocks if you squint just right. Marginal Revolution was nice enough to point to “Topological isomorphisms of human brain and financial market networks”. I’ve only just glanced through the paper. I find it interesting, but I’m fairly skeptical. The … Continue reading
Beta and expected returns
Some pictures to explore the reality of the theory that stocks with higher beta should have higher expected returns. Figure 2 of “The effect of beta equal 1” shows the return-beta relationship as downward sloping. That’s a sample of size 1. In this post we add six more datapoints. Data The exact same betas of … Continue reading
Posted in Quant finance, R language
Tagged beta in finance, Capital Asset Pricing Model, CAPM, low volatility investing, S&P 500
Leave a comment
A brief history of S&P 500 beta
Data The data are daily returns starting at the beginning of 2007. There are 477 stocks for which there is full and seemingly reliable data. Estimation The betas are all estimated on one year of data. The times that identify the betas mark the point at which the estimate would become available. So the betas … Continue reading
Posted in Quant finance, R language
Tagged beta in finance, Capital Asset Pricing Model, CAPM
6 Comments
Realized beta and beta equal 1
What does beta look like in the out-of-sample period for the portfolios generated to have beta equal to 1? In the comments Ian Priest wonders if the results in “The effect of beta equal 1” are due to a shift in beta from the estimation period to the out-of-sample period. (The current post will make … Continue reading
Posted in Quant finance, R language
Tagged beta equal 1, beta in finance, Capital Asset Pricing Model, CAPM
2 Comments
