tag:blogger.com,1999:blog-7905515.post3241950275731641432..comments2022-04-28T06:50:16.225-05:00Comments on Falkenblog: Are High Beta Stocks Like Call Options?Eric Falkensteinhttp://www.blogger.com/profile/07243687157322033496noreply@blogger.comBlogger6125tag:blogger.com,1999:blog-7905515.post-30445105650623678162011-11-23T04:07:48.880-06:002011-11-23T04:07:48.880-06:00your articles are always interesting; thank you.your articles are always interesting; thank you.BigWhiskeyhttps://www.blogger.com/profile/08420444056304643922noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-18917425748234896702011-11-21T20:29:07.489-06:002011-11-21T20:29:07.489-06:00I think the article is pretty interesting, particu...I think the article is pretty interesting, particularly as it relates to the hedge fund return calculation. Thanks for point it out.<br /><br />I think the authors of the article are just saying that if the returns are asymmetric, the beta calculations are out of whack. And therefore, you can't just take a simple linear relationship between the beta and the market return. You have to compensate for the asymmetry first (they do that by selling calls).<br /><br />That makes sense to me. Does the standard model work independent of the distribution of the payouts? The concept of standard deviation seems pretty tied to the normal curve.<br /><br />I think you're saying that if you have a big enough sample size, it will adequately represent the entire payout curve and so the calculation of the beta itself should adjust to compensate (should fall). I have no idea if that's the case or not, or how the big the sample size has to be (particularly timewise) to meet that. <br /><br />In his graph, the high beta = high returns theory seemed ok during the 90s and started diverging only recently. Maybe it's only the recent conditions that highlight the asymmetry of high beta stocks.Kennoreply@blogger.comtag:blogger.com,1999:blog-7905515.post-86759208222244792272011-11-21T19:32:35.519-06:002011-11-21T19:32:35.519-06:00Hello Eric,Every time I see a really good article ...Hello Eric,Every time I see a really good article I do one of three thing:1.Share it with my relevant friends.2.save it in all of the favorite bookmarking websites.3.Be sure to return to the site where I came accross the post.After reading this article I’m really thinking of doing all 3!SEO Specialist Philippineshttp://onlineseomarketer.com/noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-43629918122507787212011-11-21T11:44:32.535-06:002011-11-21T11:44:32.535-06:00Eh, it gets into semantics. But think of it as a ...Eh, it gets into semantics. But think of it as a futures contract, not a levered ETF. If you take $1 in the SPY as your base, a futures that has a beta of 2 relative to this benchmark, can lose you $2.<br /><br />It depends how you define capital, as clearly your margin will increase as the futures goes against your.Eric Falkensteinhttps://www.blogger.com/profile/07243687157322033496noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-59767179648171457112011-11-21T11:34:16.389-06:002011-11-21T11:34:16.389-06:00I concur with B.A.
Saying that a 2x levered inves...I concur with B.A.<br /><br />Saying that a 2x levered investment can lead to a 200% loss is nonsense. You cannot lose more than your initial investment.<br /><br />The maximum loss in both cases is 100%.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7905515.post-86847816969131433302011-11-21T04:03:58.452-06:002011-11-21T04:03:58.452-06:00interesting point. the way I read it, the only sou...interesting point. the way I read it, the only source of convexity the authors claim to exist in a portfolio with a beta of 2 comes from the fact that beta on big downside moves is expected to be less than 2, nothing else. the guy who borrowed an amount equal to his capital and invested in beta of 1 will get stopped out at (close to) 50% of current prices, while the one who used the same capital to buy the high beta will still have some money and upside left (probably well below 50%, but still). if I could trust their assumptions, I would prefer the high beta. I don't see where they say that the convexity comes from the fact that maximum loss is twice as big. I can relate that to the idea that "any stock can be thought of as an option", but they don't seem to be making this point.B. A.noreply@blogger.com