5 ms·

After taking a basic Mathematical Finance course, you'll find that nothing does better than the Prime Rate in the long term, unless you get lucky, or unlucky.

by kruhft 9y ago

kruhft 9y ago
I guess nobody here has taken that course?
- dcow 9y ago
  This is an empirical paper not a theoretical discussion on mathematically maximizing the formula for returns...
- cantrip 9y ago
  I think you need to elaborate more on what exactly you're talking about. Nothing does better than the prime rate? You mean in terms of interest rate? Isn't the definition of the prime rate the best you can get? In the long term? What does that even mean here? Can I get lucky and do better than the prime rate, whose definition is the best interest rate you can get? Saying this knowledge is basic Mathematical Finance is also very condescending. I haven't taken "that course" but I feel from your tone that you took a 101 college course which now guides your entire mode of economic thinking. Elaborate on your statements.
  - kruhft 9y ago
    4th year Introduction to Mathematical Finance, but basically 101 in a sense. Using a binomial model (essentially a random walk) and using 'the formulas' for portfolio calculation, you will find that in the 'long term' (in math, infinite, but 'a long time' in the real world') you will find that no investment portfolio will beat the Prime Rate, as this is what all returns are based off of. It was just the results I saw from the course. I know one can get 'lucky' and beat the Rate, but overall, as a zero sum game, someone else has to lose and overall the group rate of return is calculated as...the Prime Rate. Sorry for being condescending sounding; I thought this was common knowledege given it's taught in introductory finance.
    - gburt 9y ago
      The linked paper is empirical counterevidence to that theoretical model though. Admittedly, we can always just say "we're not in the long run," I'm not sure how useful that is. I'm not certain what model exactly you're talking about, but I think it also probably misses technological change as a real source of growth independent of any monetary musings.
      - kruhft 9y ago
        Theory is an 'efficient' market model. Practice is not. Reminds me of the old joke: An Efficient Market Theorist sees a $100 lying on the ground, and passes it by saying "If that existed, someone else would have picked it up by now!".
        FabHK 9y ago
        > An Efficient Market Theorist Milton Friedman, in the apocryphal story. And back in my days it was $20 :-)
      - AnimalMuppet 9y ago
        The paper's data set is from 1870 to 2015, which is 145 years. If that's not close enough to "the long run" for the theory to match reality, then the theory is either wrong or useless.
    - autokad 9y ago
      the sp500 is not zero sum. you are ignoring dividends, and I think stock buy backs throws a monkey wrench into that assumption as well. lastly, population and economy increases.
    - mcguire 9y ago
      Haven't taken a mathematical finance course... What is the long-term historical value of the prime rate? I've seen data showing the overall stock market returns 3% after taxes and inflation for any period longer than about 20 years.
    - 9y ago
ikeboy 9y ago
Better by what metric?
- kruhft 9y ago
  Overall Rate of Return over the long (infinite) term based on MC/random walk/binomial models. It was quite a dissapointing result when I learned it.
  - ikeboy 9y ago
    People don't invest for an infinite term. In the long run, we're all dead. Anyway models of low risk investments will underestimate long term crashes /Black swan. Also, are you comparing other assets directly or somehow including combinations of them? Can you point me to a specific theorem you seem to be referring to?
    - kruhft 9y ago
      True enough, we're all dead, but the mathematics can lead to a bit of depression when it comes to investing once you think about it a bit. Given all portfolio returns are based on the Prime Rate and modeled after random walks, it can be pretty easily seen that the rates of return based on modernish portfolio theory[1] will approach the Risk-Free (Prime) rate. I wish i could find the actual theorem, but it's been a few years since I took the course and have long lost the textbook[1]. It was pretty clear though when it was taught, or at least that's what I gleaned out of that lesson without the teacher having to say it. [1] https://en.wikipedia.org/wiki/Capital_asset_pricing_model https://en.wikipedia.org/wiki/Capital_asset_pricing_model
      - sreaching 9y ago
        Is the CAPM model an accurate description of reality?
        kruhft 9y ago
        It's what is taught, but I wouldn't say it's entirely accurate though unless the market is fully 'efficient', which we know it's not, or at least not all the time.
autokad 9y ago
its my understanding that its the sp500 that is very difficult to beat in the long run. Is that not correct?
- kruhft 9y ago
  The SP is not the 'risk free rate of return', but yes, it can be difficult to beat in the long run overall by individuals.
  - autokad 9y ago
    the risk free rate is not the best return. this is widely known. it is easy to beat the risk free rate, even if I take losses some years, I would destroy it in most others.
    - kruhft 9y ago
      'I' does not mean all. Individuals can, but overall, the net gains by all players is the risk free rate.
      - valuearb 9y ago
        If you actually passed that course the professor should have their tenure revoked. The S&P500 rate is a rough proxy for the return on invested capital in the country, and it always crushes the risk fee rate over time. I’ll give you a hint that may open your eyes. Volatility is not risk.
autokad 9y ago
I just checked, and a portfolio of just the sp500 absolutely destroys the prime rate. unless we are talking about two different things (what is the best thing to invest in to get the most returns over the long run), either you missed interpreted what the course was trying to teach you or its just factually wrong. I took historic data from 1950 till now and matched it with the prime rate. I even gave you the benefit of the doubt by taking the max prime rate of the given year. even if you invested at the peak of the dotcom bubble in 1999, you would have done better (100$=>255$ vs 246$)
losvedir 9y ago
You may find it in that course but that doesn't mean you'll find it in real life...
FabHK 9y ago
Eh? I'd argue that the basic "theoretical" result (from equilibrium models such as CAPM and its modern cousins) is not that, but: * for optimal portfolios: more risk -> more return * however, idiosyncratic risk of a security doesn't matter (as it can be diversified away) * what matters is systemic risk, ie correlation with the market return (or state of the economy): something that is negatively correlated (ie protects you by returning higher returns in a bad economy) is worth more, thus has lower returns

After taking a basic Mathematical Finance course, you'll find that nothing does better than the Prime Rate in the long term, unless you get lucky, or unlucky.

by kruhft 9y ago

After taking a basic Mathematical Finance course, you'll find that nothing does better than the Prime Rate in the long term, unless you get lucky, or unlucky.

kruhft 9y ago

I guess nobody here has taken that course?

dcow 9y ago
This is an empirical paper not a theoretical discussion on mathematically maximizing the formula for returns...
cantrip 9y ago
I think you need to elaborate more on what exactly you're talking about. Nothing does better than the prime rate? You mean in terms of interest rate? Isn't the definition of the prime rate the best you can get? In the long term? What does that even mean here? Can I get lucky and do better than the prime rate, whose definition is the best interest rate you can get? Saying this knowledge is basic Mathematical Finance is also very condescending. I haven't taken "that course" but I feel from your tone that you took a 101 college course which now guides your entire mode of economic thinking. Elaborate on your statements.
- kruhft 9y ago
  4th year Introduction to Mathematical Finance, but basically 101 in a sense. Using a binomial model (essentially a random walk) and using 'the formulas' for portfolio calculation, you will find that in the 'long term' (in math, infinite, but 'a long time' in the real world') you will find that no investment portfolio will beat the Prime Rate, as this is what all returns are based off of. It was just the results I saw from the course. I know one can get 'lucky' and beat the Rate, but overall, as a zero sum game, someone else has to lose and overall the group rate of return is calculated as...the Prime Rate. Sorry for being condescending sounding; I thought this was common knowledege given it's taught in introductory finance.
  - gburt 9y ago
    The linked paper is empirical counterevidence to that theoretical model though. Admittedly, we can always just say "we're not in the long run," I'm not sure how useful that is. I'm not certain what model exactly you're talking about, but I think it also probably misses technological change as a real source of growth independent of any monetary musings.
    - kruhft 9y ago
      Theory is an 'efficient' market model. Practice is not. Reminds me of the old joke: An Efficient Market Theorist sees a $100 lying on the ground, and passes it by saying "If that existed, someone else would have picked it up by now!".
      - FabHK 9y ago
        > An Efficient Market Theorist Milton Friedman, in the apocryphal story. And back in my days it was $20 :-)
    - AnimalMuppet 9y ago
      The paper's data set is from 1870 to 2015, which is 145 years. If that's not close enough to "the long run" for the theory to match reality, then the theory is either wrong or useless.
  - autokad 9y ago
    the sp500 is not zero sum. you are ignoring dividends, and I think stock buy backs throws a monkey wrench into that assumption as well. lastly, population and economy increases.
  - mcguire 9y ago
    Haven't taken a mathematical finance course... What is the long-term historical value of the prime rate? I've seen data showing the overall stock market returns 3% after taxes and inflation for any period longer than about 20 years.
  - 9y ago

ikeboy 9y ago

Better by what metric?

kruhft 9y ago
Overall Rate of Return over the long (infinite) term based on MC/random walk/binomial models. It was quite a dissapointing result when I learned it.
- ikeboy 9y ago
  People don't invest for an infinite term. In the long run, we're all dead. Anyway models of low risk investments will underestimate long term crashes /Black swan. Also, are you comparing other assets directly or somehow including combinations of them? Can you point me to a specific theorem you seem to be referring to?
  - kruhft 9y ago
    True enough, we're all dead, but the mathematics can lead to a bit of depression when it comes to investing once you think about it a bit. Given all portfolio returns are based on the Prime Rate and modeled after random walks, it can be pretty easily seen that the rates of return based on modernish portfolio theory[1] will approach the Risk-Free (Prime) rate. I wish i could find the actual theorem, but it's been a few years since I took the course and have long lost the textbook[1]. It was pretty clear though when it was taught, or at least that's what I gleaned out of that lesson without the teacher having to say it. [1] https://en.wikipedia.org/wiki/Capital_asset_pricing_model https://en.wikipedia.org/wiki/Capital_asset_pricing_model
    - sreaching 9y ago
      Is the CAPM model an accurate description of reality?
      - kruhft 9y ago
        It's what is taught, but I wouldn't say it's entirely accurate though unless the market is fully 'efficient', which we know it's not, or at least not all the time.

autokad 9y ago

its my understanding that its the sp500 that is very difficult to beat in the long run. Is that not correct?

kruhft 9y ago
The SP is not the 'risk free rate of return', but yes, it can be difficult to beat in the long run overall by individuals.
- autokad 9y ago
  the risk free rate is not the best return. this is widely known. it is easy to beat the risk free rate, even if I take losses some years, I would destroy it in most others.
  - kruhft 9y ago
    'I' does not mean all. Individuals can, but overall, the net gains by all players is the risk free rate.
    - valuearb 9y ago
      If you actually passed that course the professor should have their tenure revoked. The S&P500 rate is a rough proxy for the return on invested capital in the country, and it always crushes the risk fee rate over time. I’ll give you a hint that may open your eyes. Volatility is not risk.

autokad 9y ago

I just checked, and a portfolio of just the sp500 absolutely destroys the prime rate. unless we are talking about two different things (what is the best thing to invest in to get the most returns over the long run), either you missed interpreted what the course was trying to teach you or its just factually wrong. I took historic data from 1950 till now and matched it with the prime rate. I even gave you the benefit of the doubt by taking the max prime rate of the given year. even if you invested at the peak of the dotcom bubble in 1999, you would have done better (100$=>255$ vs 246$)

losvedir 9y ago

You may find it in that course but that doesn't mean you'll find it in real life...

FabHK 9y ago

Eh? I'd argue that the basic "theoretical" result (from equilibrium models such as CAPM and its modern cousins) is not that, but: * for optimal portfolios: more risk -> more return * however, idiosyncratic risk of a security doesn't matter (as it can be diversified away) * what matters is systemic risk, ie correlation with the market return (or state of the economy): something that is negatively correlated (ie protects you by returning higher returns in a bad economy) is worth more, thus has lower returns