Ses 13: Risk and Return II & Portfolio Theory I
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- čas přidán 2. 07. 2024
- MIT 15.401 Finance Theory I, Fall 2008
View the complete course: ocw.mit.edu/15-401F08
Instructor: Andrew Lo
License: Creative Commons BY-NC-SA
More information at ocw.mit.edu/terms
More courses at ocw.mit.edu
I could listen to this guy for hours. Get him on a podcast
Enjoy this burp @ 23:42
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I like the way how he thinks when he selects a new stock into a portfolio. "Are you contributing to my return and reducing my overall risks". Andrew is such an effective communicator.
40:34 Mutual funds don't lower volatility, except through diversification
41:01 Mutual funds that try to beat the market, on average, don't beat the market
41:53 On average, you'll do better in a passive index fund (says Vanguard and others)
43:24 Investing in mutual funds will cost you more than investing yourself
43:32 Key points:
*Average return on U.S. stocks from 1926-2004 is 11.2% per year
*Standard deviation per year is 16.4%
54:13 130-30 portfolio: 130% long, 30% short
Amazing lessons! Always love to take finance lessons from an economist who is good at math instead of a mathematician who knows economic models.
Greetings from Tsinghua University.
Nassim Taleb and Prof. Lo are two of the most logical market commentators I have ever heard. The point Prof. Lo made regarding physics dynamics vs. finance is everything an investor needs to understand in his decision making process.
5:23 - 9:08 : Great explanation of why market efficiency will negate almost all efforts to exploit any price patterns in the data, leading to randomness via the incorporation of information. Finance is indeed more challenging than physics as Professor Lo says!
hey can you tell me why patterns dont work when many people start following it ? for example when the chart is on peak , and as per pattern it should go down , so mostly people would sell the stock, tht means it will go down. That means pattern worked! right? so i did nt get the concept. can u please explain?
Let's say that most people are planning to sell the stock when it reaches the expected peak. A smart person will sell the stock before the peak to capture that profit. Everyone is trying to get ahead of the curve.
Good thing I live in America. Its rigged so it's easy to make the efficient projection of what should be reflected in stock prices since everyone is too busy taking on one strategy based on unlimited QE and fiscal stimulus....until there isnt and I make my money.
@@Diplomastronaut Hmm sounds like a Taleb strategy of buying an out of the money option and using a disaster scenario. Small loss if you're wrong, huge gains if you're right. Unfortunately, there are too many investor douchebags and corrupt leaders buying the official story that you may be waiting forever. Keynes was right, in the long run we're all dead.
@@gmshadowtraders official story will naturally fall apart soon so I dont worry. I have made a lot. Been value investing combined with my Tesla sale has helped me earn a ton without a lot of work that is done with more complex derivatives
Just a point on the physics comment at 6:11, I'd like to say that quantum physics which is the reality is exactly like that. i.e. when you measure and "test" things, the thing changes. :) all in all, great informative video
Exactly my thought when I heard him say physics is so predictable.
Not quite. In physics you know as I know that mere observation of the wave function collapses it. In finance this isn't the case. An investor has to actually act on buying or selling an asset so that the market changes, merely observing the asset won't change anything. So there is no analog between market and quantum state.
I love this guy!
thanks for this free video
I really REALLY wonder what Prof Lo thinks about the $GME insanity that's going on right now especially considering a chunk of this video detailed a healthy amount of how that wild ride works.
BEST ENGLISH OF THEM ALL
portfoli theory starts at 46:00
Thanks!
My dude. Let the bet ride hits hard regarding procrastination. Some loved ones have the thought that not making a decision or a move is "not making a bet" and therefore the safest bet. As if not moving from a train track was always the safest bet.
I'm going to use that "let the bet ride"
GOOD POINTS at the beginning 2:50. I am still rowing the boat in the jet stream. Merrily? Not really at all. Hahaha
trying to predict the market is like trying to predict a position of a particle in quantum physics, where the measure alters the state of the particle so there is no such a thing as a real/exact measure, only statistics and probabilities.
The price is not random but it is unpredictable.
finance assumes prices are in geometric brownian motion, this means that both momentum and mean-reversion are ephemeral in the time series. the only method to gain 'edge' or expected value of profit is critical economic information regarding the asset or quantitative/statistical based methods. being correct is the only way to profit.
The direction of the price is a Brownian motion. The magnitude, viz. volatility, has predictable components (Lo and McKinley 1987). You don't bet on predicting a single stock; you minimize the cost in case your prediction is wrong. If you want to check the common global and regional trends among international equity, it's my MSc. dissertation.
Aha, at 50:40 is that what we so called Margin Loan today? I think so. Wow this class is so fun that Andrew taught everything to the kids. Somehow someway, margin loan also gain the weight more than one; one the other way also become very negative 1 as well. It is kind a fire in an unexpected weather beyond your knowledge and you would be caught by the fire. I never dare to play it at all even though I know how to play fire. But this is a very risky game....STF.
@MIT OpenCourseeWare I get it, but the latest Archego Whatsoever got the real WILD FIRE in financial news.
A professional hedge fund played the multiple leverage little fires. Once he run out or doing m magic trick, this fire will be a big wild fire and need JP Morgan wipe that guy's a** to bail out. HAHAHA then back to equilibrium, it went to FAR northwest negative territory. HAHAHA even smaller than 0.🤣🤣🤣
thank you it was a good lesson.
Good class for next gen modern baron, thief, and robber. Bravo
You sound like a salty loser.
HAHAHA Robber? No need such epic education at all. Just number high or low and in or out, Looser.
Yeah, about that... It turns out that astrophysicists & engineers who don't know a thing about finance are the ones being hired by financial institutions & paid multi-millions of dollars to find new ways to quickly solve equations that make their firms wildly rich. The people who work for Elon Musk or Mark Zuckerberg are worse than a greedy Gekko.
ty for sharing free education !
Thanks Prof.
But if these are undergraduate students then these are some brilliant guys.
Anyone could explain me or give me more insight on what he means about the 1.33 weighted portfolio in min 57:00? Thanks in advance
130/30 portfolio. Is short selling 30% of the portfolio value and using the loan to buy 30% more on the long. Every portfolio's weighting ends up being equal to 100(%). The cash position you start with could be altered or reduced by using securities to lend against. In a 130/30 portfolio, if we started with $100,000 and shorted 30%, we now have $70,000 in a long cash position. Though we start with a portfolio value of $130,000, knowing that $30,000 will need to be paid back at some point in time.
@@brandoncable5243 Does this (and the entire Portfolio Theory section) explain the 140% short interest in Gamestop that has retail traders in such an uproar?
@@dodgingdurangos924 Somewhat. That's simply the motivation for the behavior. The methodology is a little more nuanced. It has more to do with the T+3 settlement rules for buying and selling stocks. Essentially the hedge funds were borrowing phantom shorts from each other before the "date of record" aka the actual day you are recorded as either being or not being a shareholder. The order is filled immediately, and the funds debited or credited immediately, however the official record is still T+3. To short a share that has not cleared the official record is called naked shorting, which is supposedly illegal.
@@bhe8336 So, regular settlement rules also apply. There seems to be a bit of double-counting that happens with every transaction. It seems like the extra 40% is kinda like a transitory glitch that will last until the short seller unwinds the trade, returns the shares and the percentage will reflect the original actual number of shares outstanding. What would the short seller's portfolio weights look like during and after the short sale? Something similar to the 130/30 calculation?
@@dodgingdurangos924 I'm not sure but they are adding a more negative weighting to the portfolio by trading phantom shorts.
Excellent lecture.
look at the year of this semester.
I am eagerly searching part second of this session. Can anyone recommend pls
The full playlist is: czcams.com/video/HdHlfiOAJyE/video.html. Visit the course on MIT OpenCourseWare at: ocw.mit.edu/15-401F08 to see the complete materials. Best wishes on your studies!
The TA during recitation? Will the TA do the real lecture with examples?
Of course finance is more challenging. That's because most of today's physicists are still working on that "dropping a ball in a gravitational field" problem. If one day we discover that, like in finance, observation of a physical system will change the state of that system, then maybe we can compare the two.
It is actually like that in quantum physics
Hedge funds move the overton window =)
This teacher speaks so clearly.
GET TO THE BETA FORMLA THROUGH THE CORRELATION COEFFICIENT MULTIPLIED BY THE COIENTE BETWEEN THE DIVERSION OF ASSETS AND DIVERSION OF THE MARKET ?
My english is not too good.
Beta is the slope of the line formed by running a regression of an individual security against the market.
Im confused, in coming up with the relationship between the risk reward trade off of 2 assets, it showed if the 2 assets have 0 correlation, the relationship was a curve, however, when you combine a risk free asset with the market portfolio, the relationship is linear despite the fact that they have a correlation of 0 as well, why is this?
Award for asking the best question goes to you.
I'm 4 years late so I'm posting this for anyone else who has this question.
The risk free rate is a guaranteed amount of money. You simply cannot lose money on a tbill if you hold it until maturity.
Therefore the graph for the portfolio is shifted upwards by an amount equal to the risk free rate multiplied by the percentage of the portfolio dedicated to risk free assets.
It's like solidifying part of your returns. The S&P500 could go down 5% in a year, but you are guaranteed to have Return = riskyReturn * riskyComposition + riskfreeReturn*riskfreeComposition.
It's like looking at a graph of y=x. If you add 2 so it's y=x+2 it's the same line just translated up 2 units.
50:10 does he want to say "what does it mean for a security to be *smaller* than 1?"?
It's possible
Market is not random
he is satoshi
Volatility is not risk.
Risk is a probability of a bad outcome.
it depends on the definition, mate.
As Dr. Andrew already mentioned in the lecture, there are several ways to measure risk. Some professionals choose to focus only on the downside instead of both sides. But this is out of scope of the course. In this course, the volatility is measured using the standard deviation
in finance risk refers to the change of price of any asset, whether it is up or down. even volatile positive profit in a portfolio is seen as too risky
Same thing
no risk is no volatility mathematically... you need movement since seeking a profit includes risk.
Actually, I erased that because of a typo. I figure that if you're going to make fun of an MIT professor, you had probably best come correct.
20:10 haha, powell and boomers said “hold my bear"
LOL, beat me to it!
if the market as Professor said the efficient market is unpredictable for trading. So does that mean all the traders are gambling?
Well essentially yes. But that does not mean that the people trading don't have convincing evidence to back their position. The timing is just next to impossible since everyone else would have to agree with you right AFTER you take on your position. Doesn't stop people from trying though.
Many market move heavily on human emotion and human emotion is predictable, especially on big numbers.
They do.
It's better than Netflix
27:20 did not scale up or shown crash of 2008. was likely 2x volatility spike of 1987 ...umm no 20x lol?
YOU CANNOT PREDICT THE FUTURE. PERIOD.
6:10 - Of course finance is much more challenging than physics or engineering, suuure
A good hint was getting your comment flagged as spam :) After all, we don't want to be too harsh on our colleagues. I mean, look at how dressed for success they come to class. Not many courses can beat that ^^
whats the role of probability in portfolio theory
9:00 The two dimensional space of the chart is curved.
This is really mind opening and educational ! A real lesson on investment ! I am planning to apply this on crypto stable coins like OUSD because it's a mirror of real time usd and it yields an yearly 25% which I find it way better then stocks.
You need money to do research on physics or chemistry or biology. So finance is like the mum of all sciences.
I am not from economics background. want to learn about stock markets.considering me as a total beginner can tell me if I can do this course. Please reply
This course can make you understand the basics of the finance, which is very critical if you want to specialize in any equity or asset trading or investing. Especially net present value concept will help you understand the time value of money. The professor is amazing with his teaching skills and could give you the essence of the most complex concepts. But i still think that you could have hard times for understanding or getting motivated in, if you never heard of the concepts or instruments explained in the courses.
After finishing the course you will still need to specialize yourself in stocks value investing or trading based on your preference. Technical analysis based trading i believe is more like a craft and could be learnt from practitioners rather than professors. There are a lot of sources in udemy, youtube and even twitter. I would also recommend you learn from the people who is active in the country you want to trade in as the dynamics of the market could differ a lot.
Investing based on valuation is a craft too but luckily there is a very famous professor Damodaran who has shared his lectures in youtube.
Financial skills are hard to improve but when you do it might open the gates of wealth for a dedicated person who has no realistic chance of getting rich while only working in 9-5 jobs.
@@merteraltinoz thank you soooo much for such a clean explanation of things and I'll definitely take your suggestion. Thank you so much again
Can anyone explain the 5:1 leverage ratio, is it not 4:1. (Total debt/Total Equity)
Equity is Asset plus Liability.
Asset= 100000$
Liability=400000$
I can't tell from your response whether you know I was being sarcastic in my previous comment and that I also found the good professor's comment patently absurd.
Markets are hard to forecast indeed, but it seems one thing is almost (not always), but almost always certain, and that is our beloved fed put.
Does anyone have suggestions on how I can learn more about investing?
Books, and what do you mean by learn more about investing :)
20:30 oh so 4,17% rates is low yield? 🤣😅
Lmao frl nowadays people panic when it “spikes” a little from 1-2% 🤣💀
Motorola?
IT IS NO MORE!
(100 % probability that it is GONE!)
😀
71 to 91...we in 2021...dyno lectures...noone talked bout crypto...dynosaurs dying out
One year rate is no different 10 yrs rate. HAHAHA This is THE phenomena of 21 century everywhere. Great to experience the 87 economic bubble time with 1/10 interest rate. HAHAHA
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damn, didn't know kanye attended mit
he was singing for the school band
One mistake in the subtitles at 47:33 "let the BET ride"
He is wrong the ball itself changes the gravitational field in general relativity, thereby changes the behavior of the mass which changes the behavior of the field etc. The whole thing in a 4 dimensional curved spacetime, with 10 independent field equations. Finance more complicated then Physics… sure if you stop physics at the 3rd grade. But good finance lecture
Only 4% annual return on a 30 year treasury seemed bizzare then 😔....
Quantum physics is the hardest field of science , fight me
just buy all small stocks with low pb ratio in dec😆
ບບ
@@oihd9979 لا
Imagine all this to get beaten in ROI by a 15 year old holding doge
Yolo crypto
लोन, शत्रु, और रोग को खतम कर देना चाहिए!!!
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Investing is boring. Get paid fast isn't a real thing
Believe me, physics is way more difficult than finance
But physics is predictable while studying.
Financial market is not
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There are countless problems in engineering which have to solve implicit problems (variables). I don't want to criticize too much, but that comment of the professor was just flattering to his students at the expense of other student groups. Weather I consider this to be complete nonsense is my problem, but comments like these are completely unnecessary.
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This guy has no investing experience.
are you sure, please check his profile and check his net worth, you will be shocked.