Risk-Aversion-a(1) - preamble 1. Risk Aversion and...

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preamble
1. Risk Aversion and Investment StrategiesSpencer MartinInvestmentsSemester 2 2016
Today’s Class....TradingStrategiesClass TodayIntroductionObjectiveMeasuringPerformanceRisk AversionCapitalAllocationMultiperiodReturnsModelingrt:NormalityDeviation fromNormalityProbabilityDistribution ofTradingStrategyPayoffsConclusionReviewInvestments: 1. Risk Aversion and Investment Strategies -ccirclecopyrtMFG & JSM & NEG 20162 / 37This poor woman, Simone Wallmeyer, became theGerman face of the financial crisis as she was pho-tographed several times for a variety of media outlets.Why? She was sitting in front of the stock price boardat the Frankfurt stock exchange.We’ll start to analyze investmentstrategies todayStart simple, get more complexWe will also introduce a few ad-ditional statistical measures ofreturns
How Do We Quantify Trading Strategies?TradingStrategiesClass TodayIntroductionObjectiveMeasuringPerformanceRisk AversionCapitalAllocationMultiperiodReturnsModelingrt:NormalityDeviation fromNormalityProbabilityDistribution ofTradingStrategyPayoffsConclusionReviewInvestments: 1. Risk Aversion and Investment Strategies -ccirclecopyrtMFG & JSM & NEG 20163 / 37Consider the following cumulative performance of portfolios with tradingstrategies representing the concepts of value and momentum, plus a 50-50combination of the two:01/01/8001/01/9001/01/00-50050100150200250300350400450500!"#$%&’&("#)*$,$#&,-./$,0$-#1233#4053$($0#)4-!.6"(784’19:;<=>6"(&$.3?9;<@;184’$-#&’.3?9;<AB1%4’C4.3?9D<D>1How do we characterize the risk and return properties of these trading strategies?That is what we will do in this lecture by building from statistical measures.
What Do We Want To Be Able to Do?TradingStrategiesClass TodayIntroductionObjectiveMeasuringPerformanceRisk AversionCapitalAllocationMultiperiodReturnsModelingrt:NormalityDeviation fromNormalityProbabilityDistribution ofTradingStrategyPayoffsConclusionReviewInvestments: 1. Risk Aversion and Investment Strategies -ccirclecopyrtMFG & JSM & NEG 20164 / 37For most of you the central concern will be one ofAsset Allocation. This meanschoosing an optimal combination of risky and safe asset classes. In the mosttypically encountered form, this problem is simplified down to aggregate assets forStocks (Equity), Bonds, and Cash (Money Market). Here are some investmentbanks’ recommended allocations (from way back in 2001):Our statistical tools will allow breaking these classes down further to the level ofcountries, currencies, and individual assets.
ReturnsTradingStrategiesMeasuringPerformanceReturnsERER ExampleSigmaRisk AversionCapitalAllocationMultiperiodReturnsModelingrt:NormalityDeviation fromNormalityProbabilityDistribution ofTradingStrategyPayoffsConclusionReviewInvestments: 1. Risk Aversion and Investment Strategies -ccirclecopyrtMFG & JSM & NEG 20165 / 37First, define a return:r=P1-P0P0.

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Term
One
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Tags
Normal Distribution, Standard Deviation, Variance, probability density function

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