Standard deviation and 'risk free' investments

[KrazyHorse]

Originally posted by lord of the mark

I think we're not helping Dauphin at all.

Speak for yourself. I explained to him why Sharpe ratios are pretty silly. There is no earthly reason that you should favour investments whose returns are positively correlated with interest rates over those which are negatively correlated with interest rates, yet the Sharpe ratio does precisely that.

[LordShiva]

Risk

[Kuciwalker]

LordShiva

[Dauphin]

Originally posted by KrazyHorse


Speak for yourself. I explained to him why Sharpe ratios are pretty silly. There is no earthly reason that you should favour investments whose returns are positively correlated with interest rates over those which are negatively correlated with interest rates, yet the Sharpe ratio does precisely that.

Yes there is, if you are borrowing in order to invest.

[KrazyHorse]

The cost of borrowing is related to the risk-free rate, but hardly follows directly, and certainly does not respond instantaneously.

[Dauphin]

So no-one has has ever had a variable rate loan that matches Central Bank rates (which are often assumed to be the risk free rate) or LIBOR or EURIBOR etc +x ?

[KrazyHorse]

I'm sure some have, but is that really a common situation?

[Dauphin]

Umm, yes.

[Grandpa Troll]

Originally posted by LordShiva
Risk

Reward

[KrazyHorse]

Originally posted by Dauphin
Umm, yes.

Then use the sigma of (x - Rf).

If, however, you are insulated from interest rate fluctuations, then use simple sigma of x

[Vanguard]

If 'Rf' is a fixed rate, it cannot be "volatile". If it is, then it is a variable.

Which mean that you will have two variables. In which case, you have to decide which one to solve for.

[KrazyHorse]

Originally posted by Vanguard
If 'Rf' is a fixed rate, it cannot be "volatile". If it is, then it is a variable.

Which mean that you will have two variables. In which case, you have to decide which one to solve for.

Do you have any idea what's going on?

[Vanguard]

Yes. He's trying to figure out how to solve a problem without first figuring out what he wants to know.

IE, does he want to decide among investments with different rates of return? Or does he want to determine which investment is more volatile?

Until you know that you can't decide what statistical formulation is better. All the terms in your equation can't be variable.

[KrazyHorse]

Originally posted by Vanguard
Yes. He's trying to figure out how to solve a problem without first figuring out what he wants to know.

IE, does he want to decide among investments with different rates of return? Or does he want to determine which investment is more volatile?

Until you know that you can't decide what statistical formulation is better. All the terms in your equation can't be variable.

He's not ****ing solving for risk or for return.

He's using projected risk and return to make decisions about preferred investments.

[Dauphin]

Originally posted by KrazyHorse


Then use the sigma of (x - Rf).

If, however, you are insulated from interest rate fluctuations, then use simple sigma of x

You have made two assertions which are false already, I'm not overly confident in your latest assertion.

Whilst you may be shielded from interest rate changes on borrowings or investments I am not convinced that you can ignore the local risk free rate in favour of your personalised risk free rate as the fixed personalised rate you can get at any instant will vary with the risk free rate.