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Risk

You have some spare money and are excited! You want to make this money work for you but you hear all the talk of a bubble coming soon you are worried. What will happen if you invest the spare cash? Will you make some money or will you lose it! This is uncertainty, this is a risk.

Risk is uncertainty. Uncertain your portfolio will return a profit. Risk is a very important topic in the financial markets and in the business world at large. Some risks are listed here.

  • Country risk
  • Systemic risk
  • Foreign exchange risk
  • Sector risk
  • Idiosyncratic risk
  • Political risk
  • Market risk
  • Credit risk
  • Liquidity risk
  • Company risk
  • Contagion
  • and many more…

When building your portfolio you need to be aware of the risks that affect the assets in your portfolio.

When managing a portfolio the quantifiable risk, volatility is the standard deviation of the portfolio return.

When analysing stock you have to remember that this is a time series. What this means is that you can carry out analysis on different time windows.

For example, Analysis of the daily return for one year, analysis of monthly return of one year or yearly return over 5 years.

How do we measure risk one way to measure risk is by using volatility.

Portfolio Analysis – Sharpe Ratio

To understand what a portfolio is please read my article here.

What is Sharpe ratio? It is a measure that adjust returns for risk. It enables you in a quantitative way to chose between two or more stocks.

Why and when will you need to use it? The simple answer to this is, if you are building a portfolio and are looking at instruments which seem to have the same performance, for example they rise 2% each month. You only have money to select three out of twenty such stocks what do you do?

Well one of the measures you can use is the Sharpe ratio developed by William Sharpe. This takes into account the volatility and risk free interest.

Historically, risk-free rate used for the calculation, were for example LIBOR and 3 month T-bill (90days). In more recent years this is set to 0%.

The Sharpe ratio can be viewed as return vs risk ratio i.e. how much risk was taken to obtain the return.

  • A high Sharpe ratio with a high portfolio return shows return to risk ratio was low
  • A Low Sharpe ratio with a high portfolio return shows return to risk ration was high. So a lot of risk was taken.

Portfolio

Construction

In the financial sector an investment portfolio is a collection or basket of weighted set of assets. The holder has a finite amount of cash and wishes to optimise the profit of this portfolio.

How do you create a portfolio?

  1. Have money to invest in something
  2. A broker that can execute on your behalf this can be an online broker or one where you need to call to place orders
  3. Open an account
  4. Analyse and allocate percentage of your money to the shares you want to buy

Yahoo is a very good tool for building dummy portfolios. This does not send your trades to the broker. Below is a dummy portfolio to illustrate a portfolio construction.

How you select the stocks to put into your portfolio is a whole new discussion.

Suppose I had $14,000 in 2019, I decided to buy some stock. Having done some analysis I allocate a proportion of my capital to purchasing the stocks. Below is my percentage allocation and the date of purchase.

Dummy portfolio
Starting Capital$14,000
StockTrade DatePurchase PriceQuantityCommissionTotal Cost/sharePortfolio %
TTD20190201197.4251493637%
MDB2019020198.351211181.29%
AYX2019020176.31101764.16%
AAPL20190204170.411011705.113%
PSMT2019020164.66101647.65%
STNE2019020130.41101305.12%
PDD2019020129.94201599.84%
TSLA20190201319.88511600.412%
GS20190201196.751984.57%
IBM20190201138.1351691.655%
13415.45100%

As of today this dummy portfolio will be worth just over $22,000 a rise year on year of 65%.

Note: For the purpose of this exercise all the stocks are in the US stock market and are denominated in dollars. There are no other asset type.

Disclaimer

THE ARTICLES WRITTEN ON THIS SITE DOES NOT GIVE INVESTMENT ADVICE AND ANY OPINIONS EXPRESSED OR DISCUSSIONS THAT TAKE PLACE HERE CANNOT BE DEEMED TO BE INVESTMENT ADVICE.

Technology – Weather meets scheduling

To all those out there who view technological advancements as a hype. Let me introduce you to storm ciara. Ciara is the storm that battered the UK today. See article

To all those out there who view technological advancements as a hype. Let me introduce you to storm Ciara. Ciara is the storm that battered the UK today. See article

The effect was cancellations and more cancellations of trains, outdoor events, flights, etc.

Flight cancellations today at Heathrow T5.

I was set to take a flight at 14:30 (UK) today. Yesterday, yes yesterday, at 11 am or thereabout, I got a notification from BA saying my flight had been canceled. I had options to rebook which I did.

Now yesterday was sunny and dry and lovely. How wonderful that they were able to predict the exact time range the storm will hit the island and based on this reschedule/cancel affected flights.

A brief look into weather forecasting. Several models are used for weather forecasting with the aid of a supercomputer. Read a brief history here

Without meaningful insight into their operations, I can only assume that there was no army of schedulers rescheduling the flights and sending out emails. Perhaps someone to glance over but not entirely manual.

The display board immediately displays the cancellation message for the respective flights. Have you ever wondered what technology sits behind these? There are many out there. One of the technology in the ecosystem could be any message streaming application like Apache Kafka. What process exists to generate emails to all booked passengers in canceled flights? RPython, SQL batch job, Java? What email server is used to send out bulk emails to notify passengers? Outlook?

Technology is everywhere these days you might be forgiven for taking it all for granted.

So when next you are going about your daily routine see how technology is improving your quality of life.

Further reading:

To all those out there who view technological advancements as a hype. Let me introduce you to storm ciara. Ciara is the storm that battered the UK today. See article

The effect was cancellations and more cancellations of trains, outdoor events, flights etc.

Flight cancellations today at Heathrow T5.

I was set to take a flight at 14:30 (UK) today. Yesterday, yes yesterday, at 11am or there about, I got a notification from BA saying my flight had been cancelled. I had options to rebook which I did.

Now yesterday was sunny and dry and lovely. How wonderful that they were able to predict the exact time range the storm will hit the island and based on this reschedule/cancel affected flights.

A brief look into weather forecasting. Several models are used for weather forecasting with the aid of a super computer. Read a brief history here

Without meaningful insight into their operations, I can only assume that there was no army of schedulers rescheduling the flights and sending out emails. Perhaps someone to glance over but not entirely manual.

The display board immediately displays the cancellation message for the respective flights. Have you ever wondered what technology sits behind these? There are many out there. One of the technology in the ecosystem could be any message streaming application like Apache Kafka. What process exists to generate email to all booked passengers in cancelled flights? R, python, SQL batch job, Java? What email server is used to send out bulk email to notify passengers? Outlook?

Technology is every where these days you might be forgiven for taken it all for granted.

So when next you are going about your daily routine see how technology is improving your quality of life.

Further reading: