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Old 12-06-2014, 06:28 PM
 
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Mathjak, I think you are splitting hairs. For an individual stock risk is related to volatility. A highly volatile stock exhibits large fluctuates in pricing and hence is riskier. There are certainly other reasons that a stock might have a high risk.
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Old 12-06-2014, 07:02 PM
 
Location: Warwick, RI
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Quote:
volatility and risk are not the same thing.
I disagree. Volitility CAN be a risk, because high volitility is one of the most common reasons that unsophisticated retail investors panic and sell at the worst possible time. Investing ignorance combined with lack of discipline are the biggest risks to individual investors, much more so than individual company risk imo, and volitility is often the trigger for poor investment decisions.

With that said, market volitilty can also be an investors best friend by providing advantageous entry points, especially for us value investor types.

Last edited by treasurekidd; 12-06-2014 at 07:43 PM..
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Old 12-06-2014, 08:16 PM
 
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If true, this:
Shows how wrong the Modern Portfolio Theory is, and how VAR (value at risk) models of portfolio management miss the true picture of risk.
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Old 12-06-2014, 09:06 PM
 
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Quote:
Originally Posted by concept_fusion View Post
If true, this:
Shows how wrong the Modern Portfolio Theory is, and how VAR (value at risk) models of portfolio management miss the true picture of risk.
Very well said.
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Old 12-06-2014, 09:39 PM
 
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So how to best exploit this anomaly?
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Old 12-06-2014, 11:21 PM
 
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Quote:
Originally Posted by Potential_Landlord View Post
So how to best exploit this anomaly?
Ah. Now we are getting somewhere.

I think "anomaly" was a poor choice of words, but we are stuck with it for historical reasons. Anyway, the anomaly is a matter of empirical fact. Plenty of studies since the '70s have verified that over the long term the yield for high risk stocks is lower than for low risk stocks. Of course that does not stop the speculators from trying to win. There will always be those who believe they can play the game better than other people and will win. Maybe there are a few who can indeed win at this. I look at the anomaly as being related to the idea of an efficient market. An efficient market also means that a strategy of speculation and frequent trades will on average result in lower yields. So put the two together and we get the lazy man's approach to investing; i.e., buy low risk, high quality stock and bond funds with low management fees.

MPT often seems excessively esoteric and complex with endless permutations and versions. I get the part about diversification between asset classes, such as stocks and bonds. That can spread risk, help to mitigate the possibility of major losses and may provide the best long term yield. I would be happy to learn more from anyone who can understand and explain more detailed aspects.
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Old 12-07-2014, 03:10 AM
 
106,238 posts, read 108,237,907 times
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Quote:
Originally Posted by jrkliny View Post
Mathjak, I think you are splitting hairs. For an individual stock risk is related to volatility. A highly volatile stock exhibits large fluctuates in pricing and hence is riskier. There are certainly other reasons that a stock might have a high risk.
risk is always related to volatility but they are still two different parameters ,yet folks use one when they really mean the other..

the are loads of white papers on this very subject as to why risk and volatility can be very different.

in fact if you think of an elevator ride it can almost be an analogy.

depending on how many people get on or off the elevator it can take shorter or longer to reach your destination.

some days you creep and some days you fly but there is little question eventually you will reach your floor.

that is the volatility of the ride..

but there are risks too, the elevator cables can snap , the elevator can get stuck , the emergency brakes can fail.

as you see the volatility of the ride is very seperate from the risks of the ride. in many cases the risks are so low that you really do not even consider them as much risk at all..

an index fund for example has lots of volatility but long term little risk , in fact the longer you go out the less riskier an s&p 500 fund gets but the volatility still can be just as high. but shorten the time frame up and the risks increase of selling at a loss.

going out 20-30 years has an s&p 500 fund ever been a risk? not that i know of. but it sure has been a volatile ride.

there are many large cap stocks like coke that have been raising dividends for more than 50 years. they can be extremely volatile but they are far less risky than some new biotech company .you need to look at both risk and volatility as two different parameters in any investment.


at this stage of my life there is no doubt even 100% equites long term would do well , and i only invest in equities for the long term , but i don't want the volatility of the ride and that has little to do with the risk of carrying higher equity allocations which are actually very low risk long term.


see why i bring this up? volatility -risk-reward are the 3 parameters you need to look at , not just 2 and merge volatility and risk into one..

Last edited by mathjak107; 12-07-2014 at 04:17 AM..
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Old 12-07-2014, 07:52 AM
 
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OK one way to relatively easily exploit this is via low volatility ETFs. Anyone own ACWV? Seems like the logical choice as it covers global low vol equities, like a total stock market low vol index fund with reasonable expense ratio. Am I mistaken here?
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Old 12-07-2014, 10:38 AM
 
Location: The Pacific NW.
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I think people are jumping to some incorrect conclusions here. It's well-known that smallcaps generally outperform largecaps over the long-term, not the other way around. And naturally, smallcaps are more volatile than largecaps:

Quote:
From 1926 through 2012, small-cap stocks averaged an annual return of 12.28 percent, compared to 10.08 percent for large cap, according to Morningstar Ibbotson data.
http://www.bankrate.com/finance/investing/small-cap-funds-versus-large-
This particular study referred to in the OP could have all kinds of misleading issues. (I didn't read the actual study because one needs to sign up/log in.) For example, they took the "riskiest 25% of stocks." What exactly does that mean? Often the WORST stocks/sectors tend to be measured as the most volatile, but that doesn't mean the volatility is the REASON for their poor performance. It's the ever-popular "confusing correlation with causation."

Those coming to the conclusion that, for example, an S&P 500 index fund will reap a greater return over the next 20 or 30 years than a more-volatile smallcap index fund are betting against the odds, based on history.

Quote:
Originally Posted by jrkliny
This is known as the "low volatility anomaly." Portfolios with low volatility, low risk stocks tend to perform better than high volatility portfolios.
The low volatility anomaly actually claims that low volatility portfolios tend to perform better on a RISK-ADJUSTED RETURN basis, which is NOT the same thing as saying RETURNS are better outright.

Quote:
Originally Posted by jrkliny
Plenty of studies since the '70s have verified that over the long term the yield for high risk stocks is lower than for low risk stocks.
First, "yield," in terms of equities, refers specifically to dividends/distributions. What I think you mean is "return" or "total return." Why don't you point me to one of these many studies so I can address it specifically rather than trying to guess what about the study, or your interpretation of the findings, might be misleading?

And if you really did mean "yield," then yes, of course one would expect the stocks of larger, established companies (which are less volatile on average) to have higher dividend payouts (yield). But, of course, that's not relevant to this particular discussion.

Last edited by LongArm; 12-07-2014 at 11:31 AM..
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Old 12-08-2014, 02:27 AM
 
Location: Los Angeles
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Quote:
Boston-based asset manager GMO recently looked at risk and return data for U.S. stocks from 1970 to 2011, and what the researchers found is surprising: The riskiest 25 percent of stocks—those most vulnerable to swings of the broad market—logged an average annual return of just over 7 percent per year. The least-risky 25 percent of stocks returned 10.6 percent per year. On a $10,000 investment over those four decades, the lower-risk stocks would have yielded more than $450,000.
Is that ALL stocks including microcaps? When you include small stocks this skew these studies. For example 39% of 3,000 stocks lost money from 1983 to 2007 according to Longboard Asset Management. The S&P went up 829%.
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