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Off-topic TalkWhere overpaid, underworked S2000 owners waste the worst part of their days before the drive home. This forum is for general chit chat and discussions not covered by the other off-topic forums.
Originally Posted by Harpoon,Aug 12 2006, 06:24 PM
Where in this post did you disclose that you'd receive compensation? The only word I saw was "free".
Everything I'm doing here is free; I'm not receiving any compensation.
If people here like the kind of analysis our software can provide, they may be inclined to buy a copy when it's available, after we finish the beta testing.
I hope so.
If not, they've still received everything here for free, just as advertised.
Again, I modeled the cash with ten-year US Treasury Bonds.
These securities are quite risky by themselves:
The annualized risk for each security is between 100% and 750%. However, this mix of securities in a portfolio is very good because of the very low correlations:
No security has an average correlation with the rest of the portfolio that exceeds 30%. When we look at the efficient frontier we get a very interesting picture:
Two features should jump out: the risk of every efficient portfolio is much less than that of the individual securities for the same level of return, and it is possible to create a portfolio with a higher average return than the average returns of any of the constituent securities. (Most people - even experienced portfolio managers - would say that this latter characteristic is, in fact, impossible; they would be wrong.)
What's truly interesting is that the efficient portfolio at the same level of risk as the original portfolio still uses 12 of the original 14 stocks:
Note, too, that the two securities that were dropped were the two with the highest correlations with the other securities.
The original portfolio - $238,778.10 on February 8, 2006 - would have grown to $242,416.28 by August 8: a profit of 1.52%. The efficient portfolio would have grown to $247,561.11: a profit of 3.68%, $5,144.83 more than the original.
Once again, adding a bond fund that is not strongly, positively correlated with the rest of the securities may have improved the performance. Nevertheless, the stock selection in this portfolio is excellent.
Because of Google I can only get historical data for the entire portfolio for 19 months. Over that period of time, the stocks have the following returns and volatilities:
and the following correlations:
This is an extremely risky portfolio.
If we created the efficient portfolio with the same expected return we get:
From 2/8/06 to 8/8/06 the original portfolio would have lost 27.4%, dropping from $251,317.90 to $182,483. The efficient portfolio with the same expected return but a lower risk would have lost 12.9%, dropping from $251,317.90 to $218,827.69. While the efficient portfoliowould have lost money, it would still come out $36,344.69 better than the original.
Once again, the addition of some lower risk or lower correlation securities would improve the portfolio considerably.
Originally Posted by magician,Aug 16 2006, 03:15 PM
This is an extremely risky portfolio.
I'm disappointed and sad to hear this. But since then, I've gotten rid of some of the riskier ones. Fortunately, I profited. Thanks for the analysis! You're very much appreciated!
Some of the stocks are quite risky by themselves, but note the correlations:
Here are the historical returns:
Because of the large spike in returns ending about February, 2002, I chose to use 4 years of historical data for risks, returns, and correlations.
The original portfolio has an annual risk of 89.5% and an expected annual return of 0.75%: pretty risky for an extremely low expected return.
I created two efficient portfolios: one with minimum risk - 48.8% - and an expected annual return of 11.5% and another with an expected return of 15%, and risk of 49.7%. The former allocation is:
AMAT $0.00
ARTG $0.00
BA $139,589.77
EBAY $0.00
HOG $85,255.84
KKD $0.00
NOK $0.00
NSANY $308,914.78
ORCL $0.00
PAYX $6,073.00
SBUX $271,325.82
SGP $188,840.80
The latter is:
AMAT $0.03
ARTG $0.00
BA $118,363.80
EBAY $0.00
HOG $138,640.06
KKD $0.03
NOK $0.00
NSANY $274,299.68
ORCL $0.03
PAYX $26,135.55
SBUX $207,276.68
SGP $235,284.12
The original portfolio would have grown from $1,000,000.00 on 2/17/06 to $1,063,280.66 on 8/17/06: a profit of 6.3%. The minimum risk efficient portfolio would have dropped to $992,279.00: a loss of 0.77%. The 15% efficient portfolio would have grown to $1,007,644.02: a profit of 0.76%.
In this case, the inefficient portfolio did better than either of the efficient portfolios, at least for the first six months: sometimes even the best analysis cannot predict the future. It will be interesting to see what happens over the next six months.
But since then, I've gotten rid of some of the riskier ones. Fortunately, I profited. Thanks for the analysis! You're very much appreciated! 
