"Warren Buffett, I don't think, knows how to calculate these covariances, but he's done okay." - what a gem of a quote and one of the best insights in this lecture series. here's all this financial theory. now, don't consider it sacrosanct. use it as a guide to the real world and take it with a grain of salt. brilliant
The professor claims that the inner curve is just as good as anywhere else along the efficient frontier, but going back to what he said in the video about slicing different bonds into different tranches, it seems to me that you're much better off accepting higher *known* portfolio variance. When you're inevitably wrong in your initial assumptions, you'll be pleasantly surprised instead of unexpectedly destroyed
AL ever envied the scientific overall process from the coming up notion to experiment while he was little. Now, I really REGRATE my statistic textbook directly sold back to book store after finishing the class and numerous and tedious long fuction practice back in homework. Mannnnnnnn.... Now this time I really need to do my own mindset to analyze all equilibrium he said in each of his class. Man............STF..........
So basically correlation is higher among market participants when there is some strong emotional sentiment in the market. Either positive "Economic recovery after Covid-19" (Then all investors will buy) or negative "Covid itself" (Then all will sell) at that time behavior is highly correlated. At that time market could become highly irrational and inefficient. While if there is not a significant event then behaviour would not be correlated and it would be effecient
This is a difference in semiotics, I agree the assumption is a forecast in human behaviour remaining constant with respect to a derivative. You forecast the variance is zero by assuming the stable preference. Which he explains is not true when correlations become 1 everything follows the trend regardless of any assumption made MAKING YOUR FRAMEWORK InVALiD I.e. 2008, 2010 2:45 flash crash, COVID is this problem ^80….
@@6lack5ushi Yes, those and other discrete points in time prove that this and no other framework cannot be valid continuously 100% of the time when it comes to capital markets. I guess the question becomes then, which framework has adequate validity within a long enough time frame.
@@estepans I just did my diss on how economic frameworks are more idealogical than rooted in “merit”(measurable observables). So I honestly don’t know its a great question. And one that keeps the entire field from reaching consensus, which makes finding said framework a bit of a fools errand unless used to capitalise on the markets then it deepens the problem…. Catch22
Of course you cannot find two stocks with perfectly negative correlation since that would imply one stock would fall when the other rises in price meaning one of the stocks would be on the same level of risk but on the opposite return (negative of the other stock) meaning that the piecewise function would converge symmetrically on a return of 0, assuming no dividends. Besides that point this is a great lecture.
Isn't that the case when the expected rates of return are the same? In the example if the rate of return for Motorola and GM change by the opposite amounts percentually you would gain money if the rising stock was Motorola. You could get the -1 correlation with expected value 0 (minus expenses) by shorting a stock and buying a corresponding amount.
LOLOLOLOLLLL That's pretty scary when you read/check up uncorrelated asset in your portfolio today. Then next day one of them which is subprime mortgage got defaulted and everyone tried to get out of this hot potato. Now this asset became into correlated within just a day. LOLOLOLLL... That would be a surprised nightmare for me to get rid of it out of my port. VERY HARD. And My Port will be dragged into bloody red very fast and long........... damn.
Yes, i'm sure it is non-intuitive because rational individuals will be reluctant to assume a higher risk (moving eastward) for a lower return (southward). Have you cleared your tests successfully? =) Comments@Taiwan
I am not completely sure but i don't think that the statement that There are no assets with perfect negative correlation is true? For example a long stock and long derivative that has the return of (- Stock), or long and short the same stock from two different accounts makes the perfect hedge, or long an ETF that's long a basket of stocks and long another ETF that's short on the same basket of stocks in equal weights. The returns (both actual and expected) would be 0, so there's no arbitrage or anything else. If there is perfect positive correlation, then long one of the stocks and short the other would also be the same. Am I doing something wrong or did he just make a minor mistake with that statement?
no you are right. Going long and short the same stock you basically pay twice the fees and make 0 return with 100% certainty. The point is finding two assets which have high negative correlation, high return and the correlation is consistent through time (the hardest part, which is an assumption in portfolio theory)
Just FYI, the majority of real-world non-theoretical physics deals with complex nonlinear dynamic systems without analytic solutions whose states are uncertain. Also, mathematicians and physicists like Jim Simons know darn well that correlations can change, and are far more sophisticated in their modeling than I’d venture 99.99% of MIT MBAs, so I’m not sure why this guy has such a problem (or inferiority complex?) with physicists and mathematicians.