1. Volatility Surviving or Thriving With New Market Challenges Navellier Applied Research
2. Volatility Defined Please see important disclosures at the end of the presentation Volatility: A measure of risk based on the standard deviation of the asset return. Source: Prof. Campbell R. Harvey’s Hypertextual Finance Glossary
3. This is the formula for standard deviation, a common measure for risk. Please see important disclosures at the end of the presentation
4. Will NOT be seen for the remainder of this presentation Rest easy…..let’s discuss some ideas! Please see important disclosures at the end of the presentation
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6. Remember what standard deviation is measuring! Degree of movement from the average Please see important disclosures at the end of the presentation. Graphs for discussion purposes only.
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8. Trampoline Example Of the two, wouldn’t this be the preferred investment manager? Semi standard deviation or “downside risk” #1 #2 Please see important disclosures at the end of the presentation. Graphs for discussion purposes only.
9. Here is the Trampoline Math Standard Deviation = Please see important disclosures at the end of the presentation 5 9 -5 -1 5 9 -5 -1 5 9 -5 -1 5.48 5.48
10. Assume equal standard deviation. Which investment is getting riskier? Less risky? Time Risk Manager “A” Risk is Rising Manager “B” Risk is Falling Please see important disclosures at the end of the presentation. Graphs for discussion purposes only.
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14. Standard deviation and the current “credit crisis” Please see important disclosures at the end of the presentation
15. Is this the root of the problem? Please see important disclosures at the end of the presentation. Graphs for discussion purposes only.
16. “ Deal or No Deal?” Normal or Not Normal? Twenty Year Histogram of Monthly Index Returns ≠ ≠ Please see important disclosures at the end of the presentation. Graphs for discussion purposes only.
17. Everything hides in the assumptions! A physicist, a chemist and an economist are stranded on an island, with nothing to eat. A can of soup washes ashore. The physicist says, "Lets smash the can open with a rock." The chemist says, "Lets build a fire and heat the can first." The economist says……………………………………… Please see important disclosures at the end of the presentation
18. “ Let’s assume we have a can opener!” Please see important disclosures at the end of the presentation
19. Are possible small model errors compounding to result in major disruptions? Are academic practitioners building financial models that assume normal distributions? Please see important disclosures at the end of the presentation
20. Reality vs. models The standard statistical approach to risk management is based on a “bell curve” or normal distribution, in which most results are in the middle and extremes are rare. It is the bell curve to which investors are referring when they talk about a “nine standard deviation event”. But financial history is littered with bubbles and crashes, demonstrating that extreme events or so-called “fat tails” occur far more often than the bell curve predicts. Spooking investors Oct 25th 2007 From The Economist print edition Please see important disclosures at the end of the presentation
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22. Illustration of financial crisis rarity. Source: Bloomberg. Used with permission. Link: http://www.bloomberg.com/apps/news?pid=20601109&sid=acw1G8iS8oXc&refer=home -4.04% As of 2/13/09 For Financial Advisor One on One Use Only Please read important disclosures at end of presentation.. Graphs are for discussion purposes only. Number of standard deviations
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27. R What? R-Squared Example Not = = Large Growth Manager Russell 1000 Growth Index Large Growth Manager Russell 2000 Value Index Small Value Benchmark Large Growth Benchmark Please see important disclosures at the end of the presentation
28. R-Squared: Where is the “validity zone?” 70 -75 Below 70 75 - 100 = = Statistics Unreliable. Tip off is that statistical results appear strange. Statistics Valid. Please see important disclosures at the end of the presentation
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Editor's Notes
Title page is self explanatory. It offers contact information for the creator of the slides to follow.
Twenty year examination of historical returns.
A “Black Swan Event” is defined as an event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult to predict. As evidenced in the chart, the stress in Global Markets typifies a “Black Swan Event” by the precipitous decline seen in 2008.
The illustration of “fat tails” brings up an interesting problem for effie
