3 ms·

One of the most common critiques of modern portfolio theory is that it defines risk by volatility rather than downside risk. While a stock will never have price

One of the most common critiques of modern portfolio theory is that it defines risk by volatility rather than downside risk. While a stock will never have price-to-book multiple less than 1 (unless fraud has occurred) a cryptocurrency has no such limit on how far it can fall.

smabie 6y ago
Well a crypto currency can only fall 100%, so it's not unlimited. Moreover, some stocks do actually have a P/B ratio below one, for example Deutsche Banks PB is currently around 0.3. You could instead look at downside deviation instead of volatility, but in my experience standard volatility and upside/downside deviation look very similar for most securities. This is somewhat paradoxical for me personally, but it is what it is.
Blammar 6y ago
I just wanted to point out that stocks have had price to book multiples less than one, per various comments by Buffett and Benjamin Graham. Also, for another example, there are funds that sell at a discount to the total value of shares held by the fund.
- repsilat 6y ago
  > stocks have had price to book multiples less than one It's not even that unusual, or newsworthy. It's pretty common for banks, basically the rule for European banks. I'm still not convinced the numbers are "real" though. As I understand it, there are a few main arguments as to why "buy and strip" price arbitrage doesnt happen, and I'm not sure which is/are true: - Regulatory barriers. JPM or Apple can't just buy Deutsche Bank because lawmakers won't allow it. - They're too big to be bought out out by (European?) private equity, or controlling stakes aren't available. - That's not real book value. Try to wind it down and it'll evaporate. Maybe there are more. I understand that dividends and buybacks are currently limited by regulators in Europe, and that closes one valve for the price arbitrage, but still...

smabie 6y ago

Well a crypto currency can only fall 100%, so it's not unlimited. Moreover, some stocks do actually have a P/B ratio below one, for example Deutsche Banks PB is currently around 0.3. You could instead look at downside deviation instead of volatility, but in my experience standard volatility and upside/downside deviation look very similar for most securities. This is somewhat paradoxical for me personally, but it is what it is.

Blammar 6y ago

I just wanted to point out that stocks have had price to book multiples less than one, per various comments by Buffett and Benjamin Graham. Also, for another example, there are funds that sell at a discount to the total value of shares held by the fund.

repsilat 6y ago
> stocks have had price to book multiples less than one It's not even that unusual, or newsworthy. It's pretty common for banks, basically the rule for European banks. I'm still not convinced the numbers are "real" though. As I understand it, there are a few main arguments as to why "buy and strip" price arbitrage doesnt happen, and I'm not sure which is/are true: - Regulatory barriers. JPM or Apple can't just buy Deutsche Bank because lawmakers won't allow it. - They're too big to be bought out out by (European?) private equity, or controlling stakes aren't available. - That's not real book value. Try to wind it down and it'll evaporate. Maybe there are more. I understand that dividends and buybacks are currently limited by regulators in Europe, and that closes one valve for the price arbitrage, but still...