2 ms·
Yes and no. You are referring to calculating the variance of a portfolio which takes into the consideration the covariance of components. You can assume your no
by anonu 6y ago
Yes and no. You are referring to calculating the variance of a portfolio which takes into the consideration the covariance of components. You can assume your normal or lognorm distribution of returns. All fine and good.
But if INTC becomes the ire of r/wsb, you can throw any sort of historical covariance out the window. There is NO hedge for this.
- harry8 6y ago>You can assume your normal or lognorm distribution of returns. I think we're seeing how that all comes unstuck on a grand scale right about now. The assumption doesn't hold at the times you really need it and boom!
- anonu 6y agoIf you're talking about GME its not really a grand scale. The US Stock market cap is $50 trillion. GME is $22bn as of Friday afternoon or 5 basis points of the rest of the market. Yes, big SD moves happen frequently enough that we have to revisit our normal distribution models. But GME isn't really the reason to do this.
- harry8 6y agoHave you tried that advice at Melvin? Size of the market doesn't change the risk you carry of wrong assumptions. Have LTCM if you want another spectacular failure of risk management with wrong assumptions like these. There's plenty more when you're done with that one.