Sunday, October 20, 2013

negative beta, sharpe, treynor

corr=1 means perfect positive corr, but doesn't tell us whether a 1 unit increase in X causes a 0.001 or 1000 units increase in Y.
When we compare returns of a fund or stock vs a stock index, we are interested in the relative size of change or "magnifying
effect". Beta helps here.

A "normal" beta close to 1.0 means when mkt grows[1] 5%, then ibm also grows about 5%. Note this growth is fast-changing. All prices
are volatile. As shown in other posts on beta, many other CAPM variables are not volatile, but could be slow-changing.

[1] assumeing low risk-free rate, so excess return and "return" are practically no-different.

A large beta like 1.5 is more volatile. A "magnifier" stock such as tech stocks. A 5% drop in the index is likely to see a 7.5% drop
in this asset.

Beta < 1 means a "stable" stock that moves in-sync with the market but at very low magnitude.

Negative beta means short positions or something else.

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A negative Sharpe ratio indicates your fund underperforms risk-less asset (like a gov bond in your fund's currency). The denominator
(std of the fund return), be it large or small, isn't responsible for this negativity.

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Treynor Ratio is negative if
case1: if beta is positive, then fund underperforming risk-free rate.
case2: if beta is negative, then fund outperforming risk-free rate. This means that the fund manger has performed well, managing to
reduce risk but getting a return better than the risk free rate

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New York (Time Square), NY, United States
http://www.linkedin.com/in/tanbin