Risk-Aversion-a(1) - preamble 1 Risk Aversion and Investment Strategies Spencer Martin Investments Semester 2 2016 Todays Class Trading Strategies Class

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

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preamble
1. Risk Aversion and Investment Strategies Spencer Martin Investments Semester 2 2016
Today’s Class .... Trading Strategies Class Today Introduction Objective Measuring Performance Risk Aversion Capital Allocation Multiperiod Returns Modeling r t : Normality Deviation from Normality Probability Distribution of Trading Strategy Payoffs Conclusion Review Investments: 1. Risk Aversion and Investment Strategies - c circlecopyrt MFG & JSM & NEG 2016 2 / 37 This poor woman, Simone Wallmeyer, became the German 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 board at the Frankfurt stock exchange. We’ll start to analyze investment strategies today Start simple, get more complex We will also introduce a few ad- ditional statistical measures of returns
How Do We Quantify Trading Strategies?TradingStrategiesClass TodayIntroductionObjectiveMeasuringPerformanceRisk AversionCapitalAllocationMultiperiodReturnsModelingrt:NormalityDeviation fromNormalityProbabilityDistribution ofTradingStrategyPayoffsConclusionReviewConsider 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. Investments: 1. Risk Aversion and Investment Strategies - c circlecopyrt MFG & JSM & NEG 2016 3 / 37
What Do We Want To Be Able to Do? Trading Strategies Class Today Introduction Objective Measuring Performance Risk Aversion Capital Allocation Multiperiod Returns Modeling r t : Normality Deviation from Normality Probability Distribution of Trading Strategy Payoffs Conclusion Review Investments: 1. Risk Aversion and Investment Strategies - c circlecopyrt MFG & JSM & NEG 2016 4 / 37 For most of you the central concern will be one of Asset Allocation . This means choosing an optimal combination of risky and safe asset classes. In the most typically encountered form, this problem is simplified down to aggregate assets for Stocks (Equity), Bonds, and Cash (Money Market). Here are some investment banks’ recommended allocations (from way back in 2001): Our statistical tools will allow breaking these classes down further to the level of countries, currencies, and individual assets.
Returns Trading Strategies Measuring Performance Returns ER ER Example Sigma Risk Aversion Capital Allocation Multiperiod Returns Modeling r t : Normality Deviation from Normality Probability Distribution of Trading Strategy Payoffs Conclusion Review Investments: 1. Risk Aversion and Investment Strategies - c circlecopyrt MFG & JSM & NEG 2016 5 / 37 First, define a return: r = P 1 - P 0 P 0 .

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