Trading Note

Trading Note - Every optimized portfolio has the SAME sharp...

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No risk free profit – No arbitrage opportunities. Markoviz portfolio optimization. Assumptions: Stocks volatility is somewhat forecastible based on historical data. Correlation. Intel and Apple. Chips – Handset sold by apple. IBM: hardware to services. Thus correlation changed accordingly. Diversification to create better risk to return ratio. Sharp Ratio: [asset return-risk free return (3-mon t-bill, no inflation, default risks)]/volatility of the asset’s return With same expected return, take the one with less volatility With the same volatility, take the one with higher expected return. Thus chasing for the highest sharp ratio in the portfolio. By combining assets with correlation less than one, get higher ratio. Market Capitalization Weight is the best Markov portfolio. (Tangency to the mkt portfolio) Borrow bond to by index or allocate part of the money into index fund!
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Unformatted text preview: Every optimized portfolio has the SAME sharp ratio! i.e. same slope. ___________________________________________________________________________ ___________ Forward contract: agree at now but no cash settlement. Fix a price. The forward price F. Obligation to deliver and sell. Obligation to buy too. Borrow money to buy actual commodity at the same time enter a future contract to sell in future. Risk free profit. F=e^(r+s)t s=storage cost. (see spot price too low relative to forward price) Vice versa: Short spot and buy future. S(0) Spot P put C call X exercise price F forward price T time R return Put call parity: +: 1 Stock, 1 put-: 1 Call-: 1 Stock 1 put +: 1 Call F=S e^(rf)(T-t) Or rf+s if there’s storage cost. So-C+P=X/e^rT If X is the smaller one, then short. Vice versa....
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This note was uploaded on 10/20/2011 for the course ECON 196 taught by Professor Darity,w during the Spring '08 term at Duke.

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Trading Note - Every optimized portfolio has the SAME sharp...

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