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Thanks Bob, I learned some interesting and valuable things. I had never
thought of Beta in terms of leverage, though it seems obvious now. I
also see how you level the playing field to make comparisons of the sort
discussed earlier. This ties a lot of things together for me. You're a
good teacher.
Regards,
Monte
Bob Fulks wrote:
>
> 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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