Skip to main content
This Board Has Moved

This board has been migrated to our new platform! Check out the new home page at or click below to go directly to the new Board on the new site.

Go to the New Site
Message Font: Serif | Sans-Serif
No. of Recommendations: 0

the above plot is an output from a well known (and highly regarded) analysis program marketed by a very successful company that portfolio managers use to evaluate the "risk" of their portfolios, risk here being a measure of volatility relative to the volatility of the S&P500. i am not criticizing the software - or the business that markets it - it's a terrific piece of portfolio management software. in this chart, a value of "risk" equal to 100 corresponds to the same expected volatilty of the S&P500. a value less than 100 means that the portfolio is less "risky" than the S&P500 and a value higher than 100 corresponds to a portfolio with higher risk than the S&P500. standard MPT stuff.

so, how in the world could a partly hedged portfolio with 18% cash and a projected risk 31% lower than that of the S&P500 spike in three days (no portfolio changes in those three days) to 6% higher than the S&P500? obviously the correlation coefficients of the portfolio's individual assets changed dramatically in those three days.

i post this, as a lesson to all who enter - MPT risk management is a rear view mirror approach that is highly sensitive to the correlations of the assets.

despite what those highly respected individuals tought you in college with Brealy and wary of your idols!


Print the post  


When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.