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I'm very much among the (small) camp of people who thinks that standard portfolio theory isn't worth a whole lot even when the assets are stocks. It just fails
by jtraffic 9y ago
I'm very much among the (small) camp of people who thinks that standard portfolio theory isn't worth a whole lot even when the assets are stocks. It just fails to describe important features of the data. To me, this ruins the value of work that uses it as a base.
- Chris2048 9y agoWhich important features are missing?
- jtraffic 9y agoFat tails, long-term autocorrelation, discontinuities in price changes, divergent variances. Aside from missing those observable features of the data, the theory is missing much about market agents: herding and contagion, information asymmetries, slow convergence to equilibrium, non-normally distributed errors, heterogeneous strategies and objectives, interaction effects, confirmation bias. I'm just repeating Taleb, and his mentor Mandelbrot, of course: https://www.amazon.com/Black-Swan-Improbable-Robustness-Fragility/dp/081297381X/ref=sr_1_1?ie=UTF8&qid=1494426362&sr=8-1&keywords=the+black+swan https://www.amazon.com/Black-Swan-Improbable-Robustness-Frag... https://www.amazon.com/Misbehavior-Markets-Fractal-Financial-Turbulence/dp/0465043577/ref=sr_1_1?ie=UTF8&qid=1494426381&sr=8-1&keywords=misbehavior+of+markets https://www.amazon.com/Misbehavior-Markets-Fractal-Financial...
- soVeryTired 9y agoMarkowitz theory takes the asset means and covariances as 'given', whereas in reality estimating those quantities is extremely difficult. Essentially, portfolio theory solves the easiest part of the problem, while leaving the hard bits as an exercise for the reader.