ETF Prophet

The environment for trading contains numerous sources of potential risk, from sovereign defaults to bank failure to war in the Middle East. The ability to follow broad and protracted trends across global markets and commodities has never been more difficult. This explains the recent popularity of volatility index trading and also asset allocation methods that [...]

Asset allocation receives much of the focus in the literature for optimization. Whether it is Minimum-Variance, Risk-Parity or Mean-Variance, we think of these tools as suitable primarily in the context of asset allocation. While these are key concepts to understand to be successful, they represent the tip of the iceberg in the quest for efficient alpha (arguably beta) generation.  [...]

The Omega ratio http://en.wikipedia.org/wiki/Omega_ratio is a relatively new performance metric  invented by Keating and Shadwick. It was designed to be a better way to capture all moments of the distribution to give a fair accounting of the upside versus the downside risk that is superior to the Sharpe Ratio. From a semantic perspective it does truly [...]

It is clear from looking at the current landscape that volatility is rapidly becoming a key focus for asset management. Witness the birth of “low-volatility” ETFs and the popularity of minimum-variance portfolios borne from empirical studies that demonstrate their superior performance to alternative methodologies.  It seems obvious from the research that volatility is an important factor [...]

The most common method of position sizing uses a fixed percentage risk divided by volatility to dictate the fraction of the account size to invest. In generic terms this is: P= F/V where F= typically 1% and V= daily volatility (non-annualized) P= portfolio position size example: if V=2% and F=1% then the P= 50% Standard [...]

Most conventional quantitative methods from forecasting to optimization suffer from the existence of large outliers in the data. There are many responses to remedy this problem, from using bootstrap/re-sampling techniques to winsorization. In either case these solutions are either computationally intensive or somewhat arbitrary in nature. Sampling intensive procedures are slow and cumbersome, while many [...]

In the last post we introduced the Gini Coefficient as a measure of inequality and statistical dispersion. The primary benefit to using the Gini versus standard deviation is the proper consideration of abnormally large values in the cumulative distribution. There are many applications of the Gini within quantitative finance. One example is the Mean-Gini framework, [...]

The Gini Coefficient is used widely by economists as a standardized measure to compare the degree of income inequality across different countries. It is an alternative measure of standard deviation because it better captures the degree of imbalance caused by significant outliers. The Gini Coefficient ranges between 0 and 1, where 0 would represent perfect [...]

One of the most important measures in finance is the notion of a central tendency. This is used in some form in both statistical applications and also in technical indicators. The most basic example is the mean– or the simple average of a set of data points. Other measures include the median– the middle or [...]

“The risk of a portfolio is not a linear function of the vector of its components. Rather, the variance of a portfolio is a quadratic function of its composition. This thwarts the intuition of most Analysts and Investors. Indeed, the nature of risk may be the single most important argument for the use of quantitative [...]

Investors and traders often take a one-dimensional view of time frames in the stock market. The media pundits often refer to the fact that it is a “bull” or “bear” market as if there was only one time frame required to make such an assertion. Contrast that with the fact that both traders and investors [...]

Jack Welch is one of the most recognizable names in business as the former CEO of General Electric. His skills and leadership in running one of the largest companies in the world have been the source of numerous books and case studies in the business literature. Running such a large corporation like GE that makes [...]

A desirable goal of relative strength investing or any type of portfolio algorithm would be to track the best stock/asset from a group of stocks/assets in hindsight. In other words, we wish to use an approach that can “follow the leader.” This goal is a close relative of universal portfolio algorithms (see Universal Portfolios http://www.stanford.edu/~cover/portfolio-theory.html  that [...]

I was very sad to hear the news that Steve Jobs- the  former CEO of Apple Computer– passed away today.  His life was an incredible story of innovation, and the ability to triumph in the face of constant adversity. The legacy that he left cannot possibly be missed– you can’t walk outside or inside for [...]

I will preface this post by saying that this is a concept that I have not yet had a chance to test out. That said, I usually start first with a theory or a logical observation and proceed to creating a quantitative method to capture that insight. The concept relates to everyone’s favorite topic–relative strength [...]

There is an interesting relationship between the “risk-free” rate (t-bill rate) and the benefits of diversification. When rates are close to zero, the risk reduction benefits from low or anti-correlated assets can offset the requirement for those assets to have a sufficient expected return to make diversification practical for enhancing risk adjusted returns. This extends [...]