for nye

[KrazyHorse]

Wait so KH, it is subsidizing losers (or softening the difference between gains and losses)?

So that seems like a positive of the CG tax though? My fee to play is reduced, so to speak if I lose. It's like risk mitigation.

It softens the difference, but ALSO taxes the excess returns! This is the point.

In fact, under all the simplifying assumptions I gave, it does so exactly proportionately.

Now, this by itself is not terrible (it doesn't affect the market price of risk to first order!)

It is NOT a subsidy to risk. And because of the asymmetric treatment of gains and losses in real life, it actually taxes risk significantly.

EDIT: by "taxes risk significantly" I mean "reduces incentive to take risk". Under full symmetry between gains and losses, in addition to the tax on rfr, such a tax also reduces the incentive to perform careful research on investments (assuming that individuals are liquidity-constrained which is generally true for at least some people). This is, by itself a net loss (it's like a tax on studying an investment; your time returns less than otherwise).

[Kuciwalker]

There is a risky asset I would LOVE to hold at 0 expected return.

A security whose value is always -1*[value of your portfolio at time t] + [expected value of your portfolio at time t]?

[KrazyHorse]

I'm not going to bother to read the details of what you just claimed, but I think you got it. Take an asset with beta = -1 (or, in fact, any negative number) with no idiosyncratic risk. Buy the S&P and enough of this asset to match betas. Lever up as much as possible. Buy Fiji and retire.

[KrazyHorse]

The arb assumes rfr = 0, BTW. In order to guarantee that it works, you need to know something about the relationship between expected returns on S&P, rfr and beta of asset

Too lazy to figure it out right now. Need to have that the locked in rate of return of riskless portfolio > rfr

[KrazyHorse]

dp

[Al B. Sure!]

wait. I said market return because I thought about a beta of -1 but don't you still need a positive return for that to work?

And technically, assuming you buy the market portfolio, it would be risk-free, not RISKY.

I was refreshing my memory of CAPM trying to see if that works before you posted when I came across this,

If it were possible to invest in an asset with positive returns and beta=-1 as well as in the market portfolio (which by definition has beta=1), it would be possible to achieve a risk-free profit. With the use of leverage, this profit would be unlimited. Of course, in practice it is impossible to find an asset with beta=-1 that does not introduce additional costs or risks.

Yeah. Don't you need it to be positive return?

[KrazyHorse]

wait. I said market return because I thought about a beta of -1 but don't you still need a positive return for that to work?

No, you need something else...see below

And technically, assuming you buy the market portfolio, it would be risk-free, not RISKY.

The asset is risky, dude. Stop trying to win points on quibbles that don't hold up

[Al B. Sure!]

Kuci:

CAPM: Expected RoR= risk-free rate+beta*market risk premium where market risk premium is (Expected market return- risk free rate).

the implication is a -1 beta is inversely correlated to the market so... arbitrage time.

[KrazyHorse]

The riskless portfolio consists of one unit of the market and -1/Beta units of the hypothetical asset.

The cost of this portfolio is 1 - 1/Beta
The amount of the return is M - H/Beta

Require (M - H/Beta)/(1 - 1/Beta) > r

should work out properly, but I haven't written it down///

[KrazyHorse]

The arb assumes rfr = 0, BTW. In order to guarantee that it works, you need to know something about the relationship between expected returns on S&P, rfr and beta of asset

Too lazy to figure it out right now. Need to have that the locked in rate of return of riskless portfolio > rfr

Just in case albert didn't see it the first time

[Al B. Sure!]

by "taxes risk significantly" I mean "reduces incentive to take risk". Under full symmetry between gains and losses, in addition to the tax on rfr, such a tax also reduces the incentive to perform careful research on investments (assuming that individuals are liquidity-constrained which is generally true for at least some people). This is, by itself a net loss (it's like a tax on studying an investment; your time returns less than otherwise)

Good point.

[Al B. Sure!]

Oh, I see KH. So if the rfr is 0, then yeah... but with a positive rfr, then you would need the return on the beta -1 asset to be positive?

I'm sorry. I haven't even thought about stuff like this since 2007. I'm very rusty.

[KrazyHorse]

Don't apologize. I was a bit rough on you earlier without much cause, and I apologize. You show willingness to learn in this area, and I should respect that.

This is not true for the nutrition stuff, but I'm willing to separate the two. Also, I think you should change your username.

[Al B. Sure!]

Would the other thing I said, basically a straddle, be relevant to a 0 expected return?

[KrazyHorse]

Summarize the idea in 30 words or less