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Portfolio123 » List all forums » Forum: General Comments » Thread: Modern Portfolio Theory |
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Total posts in this thread: 4 |
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moonrunreport1
Advanced Member
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I'd like a layman's explanation of modern portfolio theory. I saw an interview with the author in SFO and am confused by all the terminology. I had once believed that a Sharpe ratio of 1 or better is good. Is this a mistake? Bryan Johnson |
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stoctoni
Advanced Member
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Here's some basic info from investopedia.com: http://www.investopedia.com/articles/06/MPT.asp]http://www.investopedia.com/articles/06/MPT.asp Sharpe of over 1.00 is good... over 2.00 is very good... over 3.00 is outstanding. ---------------------------------------- [Edit 1 times, last edit by stoctoni at Jul 3, 2008 12:33:35 PM] |
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grokkalot
Advanced Member
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Grinold and Kahn's book is pretty easy to read if you know linear algebra: http://www.amazon.com/Active-Portfolio-Management-Quantitative-Controlling/dp/0070248826/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1215107509&sr=8-1 It does a good job of explaining how to use modern portfolio theory to guide your investments - if you care to. One should understand that portfolio theory has nothing to say about which stocks are good investments. Roughly speaking, it has a lot to say about how to balance risk and expected return if your beliefs about the joint probability distribution for a set of investments is adequately summarized by some multivariate normal distribution. |
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olikea
Advanced Member
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I'm not a big fan of MPT, it really makes far too many assumptions, such as stocks following random walks, persistant correlations etc. I'm also not a big fan of the Sharpe ratio either:- who said that risk and reward should have a inversly linear payoff, and who said that risk should be defined in terms of statistical standard deviations either? Much like the PEG ratio (which I don't like either), you cannot simply take two things that are different and divide them. As my old maths teacher said, you cannot divide banana's by kneecaps! Obviously people like to quantify everything into a nice single number, but it really isn't as simple as that. |
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