Selected resource-heavy industries and equity factors, namely value and momentum, can help to hedge against inflation.| Outcast Beta
Stocks are not an inflation hedge. Dividend return and earnings growth do hedge inflation, but valuation changes undermine the hedge.| Outcast Beta
Constructing a high Sharpe ratio portfolio, paired with sensible leverage, is the key to achieving meaningful returns with tolerable risk. We will make some simplifying assumptions to build intuition, derive a set of formulas with accompanying figures, and run a simple simulation to demonstrate what is required to construct and monetize a high Sharpe ratio … Some portfolio construction heuristics Read More » The post Some portfolio construction heuristics appeared first on Outcast Beta.| Outcast Beta
Historically, long-short equity factors have provided positive mean returns with low correlation to other assets. Most retail investors use long-only products, meaning they invest only in the long leg of the long-short factors. We will dissect factor returns into their long and short legs and further examine their performance in different states of the equity … Dissecting factor returns in bull and bear markets Read More » The post Dissecting factor returns in bull and bear markets appeare...| Outcast Beta
Correlations largely determine the benefits of diversification. The lower the correlation between assets, the better the diversification. It is common practice in finance to measure correlations using short-term returns. In this post, we investigate how correlations—and therefore our understanding of long-term diversification benefits—change when we measure correlations using long-term returns. Moving from monthly returns to … Correlations for the long run Read More » The post Correlat...| Outcast Beta
Why would anyone with a long enough time horizon invest in anything other than equities, given they have the highest expected return? The discussion has reignited following an article titled Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice by Anarkulova, Cederburg & O’Doherty [1], in which they argue that long-term retirement savers would be … Diversification and sensible leverage – a match made in heaven Read More » The post Diversification and sensible le...| Outcast Beta
“In the short run, the market is a voting machine but in the long run, it is a weighing machine” is attributed to Benjamin Graham. Another industry giant, John Bogle, categorized total stock market returns into two components: the fundamental return or investment return (dividend return plus earnings growth) and the speculative return (change in … A voting machine or a weighing machine? Read More » The post A voting machine or a weighing machine? appeared first on Outcast Beta.| Outcast Beta
Unlike the realized past, the future always involves uncertainty. The uncertainty related to risk has a variety of implications that are not widely recognized. We will show analytically and demonstrate empirically and by simulations that the expected geometric return and optimal full Kelly leverage decrease as uncertainty related to risk (volatility of volatility) increases. Conversely, … The Kelly criterion in the presence of uncertainty about risk Read More » The post The Kelly criterion...| Outcast Beta
Academics have long debated the concept of time diversification, which questions whether time reduces the risk for stock investors or not. Prominent academics, led by Paul Samuelson, have shown (usually mathematically, employing utility functions) that time doesn’t reduce risk. However, investors and financial advisors generally believe that risk decreases with time. A good summary of … Time diversification works (eventually) Read More » The post Time diversification works (eventually) a...| Outcast Beta
Consider a clairvoyant who can accurately predict two market parameters, Sharpe ratio and volatility, for the forthcoming 10-year period. Clairvoyant selects his stock allocation (leverage multiplier) based on these two parameters, rebalances back to target leverage monthly and holds his selected stock allocation for the 10-year period. The cost of leverage is equal to riskless … Market timing lessons drawn from a clairvoyant Read More » The post Market timing lessons drawn from a clairvoy...| Outcast Beta
We show analytically, simulate and demonstrate empirically that portfolio volatility normalized by Sharpe ratio predicts drawdown risk.| Outcast Beta
When considering geometric instead of arithmetic returns, diversification is a negative price lunch instead of a free lunch.| Outcast Beta