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At 10:50 AM -0800 3/29/01, Monte C. Smith wrote:
>Quick question. By what means do you change the leverage on the index
>until the volatility of the leveraged index equals the volatility of the
>trading results (or adjust the volatility of the portfolio to match that
>of the index)? (Sorry to task you with a "portfolio analysis 101"
>question). Thanks.
If you want to invest in the index leveraged 2-to-1, you buy an index
product such as "SPY" or "QQQ" on margin. You can also buy one of
many mutual funds such as those by Rydex or ProFunds that have a
built-in beta of 2.0. (Not recommended in a bear market...)
If you want to see the effect on a spreadsheet, you calculate the
percent change in the index in each period, such as each week or each
month, then double the values for 2-to-1 leverage, simulating what
you would get if you were actually investing at the 2-to-1 leverage.
You would calculate the Average and Standard_deviation using Excel
functions.
If you want to adjust the leverage so that the Standard_deviation of
the index matches some number, you can multiply all of the weekly or
monthly returns in the spreadsheet by some factor in some spreadsheet
cell. You can then have Excel find the value of that factor required
to set the Standard deviation equal to some number by using the "Goal
seek" tool in Excel.
Bob Fulks
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