[Q&A] 100 million to invest
Q: how will you invest 100 million?
A: before getting down to the assets allocation, first of all we should make some assumptions and identify the question:
1. who will I invest for? If for myself, I will follow a more aggressive investment strategy, because I need the return for this investment and can handle some risk. But if for my grandparents, I will choose a risk-averse strategy. Here we assume I invest the 100 million for myself.
2. region. To make it simple, we assume to invest in U.S. financial market.
3. duration. I assume the investment is in a 2 year horizon.
3. duration. I assume the investment is in a 2 year horizon.
Do you have any other restrictions?
Q: no, go ahead.
A: my strategy is diversification. To be specific, put 60% in stock, 40% in 2-year treasuries.
For the stock, I will make it industrial-diversified. I will allocate my assets in financial, healthcare, technology, manufacturing and real estate. [JP Morgan, Pflize, CA, Eaton, American Tower]
Q: pitch me a stock
A: [refer to earlier blog].
Q: then why treasury?
A: because treasuries are backed by full faith of the U.S. government, so their default risk is almost zero. Although the return rate is lower compared with stock and corporate bond, we buy them to lower the risk.
Q: tell me the difference among treasury bond/note/bill
A: treasury bond is the long term basic security (30 yr); note is of intermediate-term (2/5/7/10 yr); bills is short term (13/26/52 wk).
Q: current 2/10 year bond yield?
A: 2 yr: U.S 2.8%, China 3.2%; 10 yr: U.S. 3.2%, China 3.6%, Japan 0.15%, England 1.6%
Q: how to evaluate portfolio risk?
A: [FRM below]
1. absolute risk: measures the shortfall to the investment's initial value
- sd(△p/p)*p=sd(Rp)*p
2. relative risk: measures to a benchmark index and represent active management risk. If B refers to the benchmark:
- sd(e)*p=sd(Rp-Rb)*p=sd(△p/p-△b/b)*p=w*p
- tracking error: Rp-Rb
- tracking error volatility (active risk): sd(△p/p-△b/b)
- var(w)=var(p)+var(b)+2*cor*sd(p)*sd(b)
3. surplus risk: surplus is the difference between the current value of assets and liabilities
- rs=△s/A=(△A-△L)/A=ra-rl*L/A
4. risk-adjusted performance management:
(1) sharp ratio: SR=[E(Rp)-Rf]/sd(Rp)
(2) sortino ratio: SOR=[E(Rp)-Rf]/semi-sd(Rp)
(3) information ratio:
- IR=[E(Rp)-E(Rb)]/w
- w=sd(△p/p-△b/b)
(4) Treynor ratio: TR=[E(Rp)-Rf]/βp
(5) risk-adjusted performance (RAP) = Rf+[sd(B)/sd(P)]*[E(Rp)-Rf]
5. marginal risk: the change in total porfolio risk due to a sumall change in position i:
- MRISK=cov(Ri,Rp)/sd(p)=β(i,p)*sd(p)
risk contribution: a component of total portfolio risk due to one position:
- CRISK=wi*β(i,p)*sd(p)
A: Value at Risk estimates how much a portfolio might lose, given a normal market condition and in a set time period. It always used by financial institutions to calculate the amount of assets needed to cover possible losses.
For a given portfolio, time horizon and probability p, the VaR can be defined as the max possible loss during the time if we exclude worse outcomes whose probability is less than p.
It assumes Mark-to-Market pricing and no trading in the portfolio.
If a portfolio has a one-day 5% VaR of 1 million, it means there is a 0.05 probability that the portfolio will fall in value by more than 1 million over a day.
评论
发表评论