[R-SIG-Finance] making sense of 100's of funds

[BBands]

On 8/19/07, paul sorenson <sf at metrak.com> wrote:
> John,
>
> The ranking idea sounds quite attractive.  If I understand you right
> though it wouldn't necessarily give me "diversity" metrics whatever they
> might be.  Ie as well as risk/reward of individual funds I would somehow
> want to achieve a mix of funds that did *not* correlate well
> (performance aside).
>
> So I am thinking along the lines of, when faced with 200+ funds:
>
>         - Put them in groups of highly correlated returns.
>
>         - Select from each group based on my preferred performance criteria.
> Maybe at this stage I would focus more on reward than risk.
>
>         - Then put together some kind of portfolio from this much smaller set
> based on holistic metrics with a balance of risk and reward that I am
> comfortable with.
>
> Then presumably repeat parts of the process at intervals yet to be
> determined.

I feared we'd get here.

The benefits of diversification are a myth, or, more properly, a
nightmare. (They did exist once upon a time, but that was long, long
ago.) In today's markets on the way up diversification averages down
returns, while on the way down diversification offers no benefits as
correlations converge on one.

Having said that, I'll crawl into my bunker and await the incoming.

    jab
--
John Bollinger, CFA, CMT
www.BollingerBands.com

If you advance far enough, you arrive at the beginning.