In the financial markets, the definition of volatility is assumed to be standard deviation. However, in practice, people seem to either forget the definition or completely substitute it with the mean absolute deviation.For example, a time series of 29 zeroes followed by a single value of 1000 (i.e., 0, 0 ,0… , 1000) has a …
“Correlation” has to be one of the most commonly used terms in the business and finance world. It facilitates the communication of ideas and gives the speaker just enough to sound sophisticated but not pedantic. The trouble is: we haven’t stopped and asked ourselves “what we talk about when we talk about correlation?”1 they don’t …
This implies that we don’t need the entire universe (or a large set) of investors to correct mispriced assets. We only need one investor to identify the arbitrage window, and that investor alone, by taking an infinite position, should bring enough pressure to restore equilibrium.
There is a mirage that mixes headcount, sophistication, and results → “the larger the team, the more sophisticated it is, the better the results.”
It misses the master factor…
What type of asset-liability matching am I talking about Asset-liability matching means different things to different people, even when you think you’re dealing with a specific situation and therefore talking about the same thing. Painting with broad strokes, there’s asset-liability matching (ALM) when managing a pension fund, an insurance business, or a corporation’s balance sheet. …
For money managers (and for our personal investments), rate of return is the most important number that is expressed in percentage terms. But how do we calculate it? Do we use the simple and intuitive total rate of return formula? Not so fast… A distinction without a difference In the absence of intraperiod external cash flows, …
Realized return of buybacks When we think about returns on buyback programs, we normally look back and estimate the realized return of holding the company’s stock. For example, company X has the following characteristics: Stock price (beginning of period) → Pb=$100 Stock price (end of period) → Pe=$150 Dividends → D=$10 Buybacks: 1 share repurchased …
Swaps is one of those topics that is perceived to be basic, easy, and intuitive. But not really. We study them briefly in business school and in the CFA curriculum, but that happens in a vacuum. We cannot see the thing*. Later on in life, we find ourselves in meetings with financial advisors discussing swaps. …
As of January 2022, this site is set up and maintained with a few tools. hardware and apps I use a MacBook Pro (14-inch, 2021) with the Apple M1 Pro chip and 16 gigs of RAM. It’s connected to a 34-inch curved monitor, an Apple Magic Keyboard (with keypad), and a Microsoft Surface Precision mouse. Everything is silver(ish) …
Over the years, I’ve asked this question to my banker friends: “what’s our minimum cash balance?” The topic would come up from time to time, but not very often because in the high margin industries of biopharma and high tech, there’s always been ample cash lying around. Unsatisfactory answers The responses I received were typically …