Skip to main content
Message Font: Serif | Sans-Serif
 
No. of Recommendations: 0

This is getting a bit off the topic of the thread, but there's an error in your logic.

 

"1st buys S&P for 100k and gains 20% - profit 20k"

 

That's not what a CAPS outperform call is. More importantly, what if over this period of time the S&P went up by more than 20%? You include the difference between the benchmark and the stock in question when you make your underperform example, but not here in your outperform example. I think that's a mistake.

 

In a nutshell, CAPS is tracking whether or not your call was correct, and by how much, relative to the market. It was never intended to be a portfolio simulation game. You are right that there's no such thing as an 'underperform' call per se (though it can be mimiced) - but what you miss is that there's no such thing as an 'outperform' call either. One is either long or short, not outperform or underperform. The same issue exists with both outperform calls and underperform calls - why people only take issue with it on the underperfome side is beyond me.

 

That said, if one insists on finding a mechanism in the real market that duplicates the score seen in CAPS, they do exist.

 

An underperform call is the same thing as shorting the company in question, and investing the proceeds from the short sale in the S&P.

 

An outperform call is the same thing as shorting the S&P, and investing the proceeds from the short sale in the individual stock in question. (Note this is quite different from the way you presented it)

 

Margin interest and transactions costs ignored in both examples above.

 

 

 

 

 

Print the post  

Announcements

What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
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.
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.