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16. Portfolio Management

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MIT 18.S096 Topics in Mathematics with Applications in Finance, Fall 2013 View the complete course: http://ocw.mit.edu/18-S096F13 Instructor: Jake Xia This lecture focuses on portfolio management, including portfolio construction, portfolio theory, risk parity portfolios, and their limitations. License: Creative Commons BY-NC-SA More information at http://ocw.mit.edu/terms More courses at http://ocw.mit.edu
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Text Comments (301)
Bugsy (9 days ago)
buy btc
zizou357 (9 days ago)
I like the massive response he recieved at 51:54
Rob C (11 days ago)
This man's probably in his 90's but looks 40. Scary.
Oskar Wagner (11 days ago)
What studies is this?
Nabeel Ahmed (17 days ago)
i dont get it
ch282 (17 days ago)
man, this sounds complicated as derp
Yi Jiang (19 days ago)
No one in this class mentioned bitcoin
KO Investing (20 days ago)
All that math at 35:00 just to prove diversification lowers risk in a portfolio. SMH
XDa leXD (18 days ago)
that's how you do science
kafi mahmud (24 days ago)
This lecture helped me understand few terms very clearly
Í. S. Santana (1 month ago)
I don't know why I'm here. I just clicked.
LIM B (1 month ago)
Aiden Stonehouse (1 month ago)
What course is this?
MIT OpenCourseWare (1 month ago)
MIT 18.S096 Topics in Mathematics with Applications in Finance, Fall 2013 See http://ocw.mit.edu/18-S096F13 for more details and materials.
berlymbb (1 month ago)
uhmmmmmm.... i think i'm gonna stick to PER PBV PEG DER ratio
Eddie (1 month ago)
Where's the part of the equation that factors in the part where you fuck it up due to the fact that you couldn't keep your cool during a major downturn and thus you throw all your hard work for the year down the drain.
Olives Olive (1 month ago)
John Tumpich (1 month ago)
What a terrible disjointed lecture.
B T (1 month ago)
Where lessons 2-15?
tuttersbeats (1 month ago)
I like this lecture.
Trevor Berry (1 month ago)
I doubt historical volatility will reflect future volatility as EROEI approaches 1:1 and consumption of non-renewable natural resources per capita begins to fall...
Morris Kal B (1 month ago)
This guy has a likable smile lol
Big Neuton (1 month ago)
"mOdErN pOrTfOlIO tHeOrY" According to Buffett and Munger, it is retarded. Just invest in dividend stocks and do simple basic grade school math and become rich.
Xi Xu (1 month ago)
It doesn't look like he covers Bitcoin in this.
Justice Warrior (2 months ago)
Justice Warrior (1 month ago)
+Councilman Les Wynan He boug?
Councilman Les Wynan (1 month ago)
shut up
Adnil Rey (2 months ago)
what should I learn first so I can better understand this (like a pre-requisite)? thanks
MIT OpenCourseWare (2 months ago)
The prerequisites listed in the syllabus are: 18.01 Single Variable Calculus 18.02 Multivariable Calculus 18.03 Differential Equations 18.05 Introduction to Probability and Statistics or 18.440 Probability and Random Variables 18.06 Linear Algebra See the course on MIT OpenCourseWare for more information at http://ocw.mit.edu/18-S096F13. Best wishes on your studies!
Rich 91 (2 months ago)
3x leveraged etf combined with 3x bonds
Ryan (2 months ago)
All this math. Just buy the dip guys smh.
Councilman Les Wynan (1 month ago)
Exactly. I'll take low-cost index funds over all these shenanigans that go nowhere.
Gregg Jaclin (2 months ago)
Great lecture and interesting topics. Thanks for sharing.
Christopher N (2 months ago)
1:19:22 The hell does that have to do with portfolio management?
kush kharel (2 months ago)
Hi professor, maybe you can order those cds, just bills, gambling based on liquidity and risk and returns. That'll be great
kush kharel (2 months ago)
Mandex (3 months ago)
He smiles like *The Big Short* hedge fund manager
Pavel Boico (3 months ago)
information density is so low, it have to be insulting for students
Егор maoli (3 months ago)
Аrе Yоu sеarсhing fоr gооd оnlіnе fіnance cоursеs . Ѕіmрly Gооglе sеаrсh аs "Zoe Talent Solutions"
g h (3 months ago)
investments with a positive convenience yield like real estate and cash should be below the average line of return
Amo Moloko (3 months ago)
This is a complete waste of time.
Aditya Singh (3 months ago)
The best practice in the capital markets is to invest for most returns with minimum possible risk. Although I'd like to add that no amount of quants can predict the stock prices in the future. Frankly government policies do effect the rise and fall of stocks, so in a way we can say that policy makers do have the power to push and pull the market.
Supernova (3 months ago)
1:07:32 Finally, the truth. Be sure to watch this part. I think the point is that risk measures based on historical data only work during the good times which make them useless when you need them the most. The irony! LOL 1:21:11 Bingo!
Luca (3 months ago)
Lecture, when prepared well, could have been very good. Unfortunately it was not, with gaps in finalizing the proposed use cases/examples. 6 - -. Resonances: portfolio management based on the results of risk/return analyses minimization is clearly working only with the assumption of a small % of actors operating on a blind stupid market. Like using apps for spotting low traffic routes or parks free in a congested metropolis. Once many are using those apps, the system behaviour is fuzzy...even AI is beated by fuzzy algorithms! :)))) So...what's missing are more studies on identifying e.g. the thresholds that change the system and the applicability of shared portfolios approaches, especially wrt stocks. A society full of equally behaving sheeps doesn't work, as in the classic accordion effect while queueing on the highway. I'm always that black sheep that stops the process by dumping the oscillations, and that I do for free.
comments comments (3 months ago)
What if people don't have money to have portfolio, that is the fundamental problem.
Supernova (3 months ago)
Has anyone told these finance professors that asset classes are correlated during market downturns? I don't see how the sharpe ratio or any other ratio protects someone from downside risk. Sharpe ratio tells us nothing about the financials of the investment or economic trends. Sharpe ratio is akin to using statistical data to gamble. The Sharpe ratio is descriptive rather than predictive. I suppose if the Sharpe ratio helps someone sleep at night with a false sense of security then so be it. However, I would not recommend picking investments or adjusting allocations based on this ratio. The one thing that stands true in finance is that if you want a higher reward you have to take higher risk - under fair market conditions. The art of investing comes down to the manager's ability to pick good investments that deliver returns over time. Its not easy to deliver consistent performance which is why few firms do it but most portfolio managers use dribble like Sharpe ratios to justify mediocre returns in the name of diversification.
Supernova (3 months ago)
Video starts ta 19:16. Thank me later. 26:41 if you already understand average or relative asset class risk as measured by standard deviation
connor wilson (4 months ago)
55:35 laughs at how simple it is to to make money from hedging
AriVovp (4 months ago)
School is school. It's not real life events. They deal with fix outcomes
이은굥 (4 months ago)
Smart Chinese.... 더티 마인드에 쓸데없는 일 만들고 쓸데없는 짓거리에 도가튼 이혜영과 그남편같은 한국과는 차원이 다르지
campeador94 (4 months ago)
I'm sure he's good at what he does but I cannot shake off the feeling that he looks like the CDO fund manager from The Big Short.
dlysele (4 months ago)
He said he worked in Morgan Stanley.
Rich M (5 months ago)
Seems like buying Berkshire was the easiest strategy.
Tony Lozano (5 months ago)
Prof Xia, I stumbled onto your 16. PM video and surprised to read the negative comments. So, here is a real life portfolio, created using Markowitz portfolio therory explained by Francis and Archer. This portfolio was created based on the Dogs of the Dow starting Jan 1, 2018. The optimal weights are Verizon 2.03%, IBM 5.17%, Pfizer 18.18%, Exxon Mobile 11.87%, Chevron 12.40%, Merck 9.38%, Coca-Cola 6.67%, Cisco 13.75%, P&G 7.87% GE 12.67%. Even with big losses from Exxon, Cisco and GE the ROR as 12/13/2018 is +34.57%.
jason rosen (4 months ago)
Tony Lozano Tony Lozano dogs of the Dow isn’t a set portfolio rather it’s a portfolio that is made up of the 10 Dow component companies that have the biggest dividend that year. Every year on the first trading day in January investors following this theory would rebalance their portfolios according to that years data. It’s just one of those portfolios that just happen to work historically for no real reason.
tore på sporet (4 months ago)
+Jerry Dulin true
Jerry Dulin (4 months ago)
+tore på sporet it proves a 34.5% return, the next question is, can we repeat this consistently over time. If so then it's a model that's implemented and monitored very closely.
tore på sporet (4 months ago)
One year of good return proves nothing.
BookBaba (5 months ago)
some people in this class will fuck us up w this knowledge
MonkeySpecs301 (5 months ago)
why would he teach econ if he can make alot more money in the markets?
2RosarioVampire (4 months ago)
He's probably earning a third of a million dollars per year lecturing others in MIT. And unlike the market, his job if he is tenured is guaranteed for life. What other jobs out there in the market returns a high six figure (and sometimes seven figure) while having near zero risk on losing the job itself? Plus if teaching is his passion, why not? Also, he did make loads of money in the market before becoming a professor. He worked at Morgan Stanley for 17 years as Head of Global Structured Rates Trading in New York. This professor probably has more than enough wealth to have retired quite a while ago. I don't think earning is a concern for someone like him who probably regularly get offers from top financial firms in his e-mails.
dlysele (4 months ago)
Personal preference. Some people have earned so much money that they look for other type of work to satisfy his own interest in life. Money is not everything.
Yung Jewdie (5 months ago)
Maria Callous (5 months ago)
he's a mathematician applying mathematics to finance...an application. Wall street has to be dinplace or mathematics loses an application. We do wall street forf the mathematics. Golf is funny. A man plays golf. An industry is built from that. Golf courses, clubs, clubs, attire, tv, tournaments, fan clubs, loyalties, etc and all the money it generates. Golf becomes a financial industry.
김균태 (5 months ago)
Definitely mindblowing.
Melvin Simmons (5 months ago)
im blazed as fuck watching this rn
Nick Fleming (5 months ago)
I would add to the list of assets, intellectual property, and equitable interests/rights (like easements on land, or the option to buy a stock at a certain price)
Joy Cosmos (5 months ago)
I made 13000 $ dollars from my bitcoin miner .. I am so grateful I met him
David Porter (6 months ago)
its feedback not feedbacks
esperos kk (6 months ago)
stop employing teachers who cant make proper use of the language, is annoying , as a lecturer, speaking clearly and elegantly makes a difference
Kevin R (1 month ago)
Too bad most people who understand these concepts are foreign and can't speak English fluently...
Ethan C (6 months ago)
So none of these Ivy League college students put cryptocurrencies in their portfolio? Hm.
Benjamin Tallman (1 month ago)
But one did say lottery. Hilarious!!
Vince Morano (6 months ago)
Idea for a fund: Buy $SPY and $IWM and then just collect the 2 and 20 fees.
mikeyb (3 months ago)
TheOldSnake (7 months ago)
Please read Warren Buffett's paper: The Superinvestors of Graham-and-Doddsville @ https://www8.gsb.columbia.edu/articles/columbia-business/superinvestors
Tttt Y (7 months ago)
52:00 B -50% and 100%, shouldn't it be 75%?
Jerry Xu (2 months ago)
let me show you the math so you start with 100% of your equity then in year one you lose 50% of it, therefore, 100% x 50% = 50% of the asset, is what you lost 100%-50% = 50% is what you are left with then in year two you gain 100% therefore, 50% x 100% = 50%, is what you gain from year one you had 50%, so you add another 50% 50% + 50% = 100% hope that helps
Lejonet (7 months ago)
haha, "the closest thing to a free lunch in investment.. is diversification". Im sure he came up with that on the stop. Great lecturer!
YoIts LemonBoy! (7 months ago)
Li Wang (7 months ago)
Mr. Jake Xia has been Managing Director and Chief Risk Officer at Harvard Management Company, Inc. (HMC) since June 2013. In this role, Mr. Xia manages risk exposure arising from both the internal and external investment portfolios. Prior to joining HMC, Mr. Xia spent 17 years at Morgan Stanley, lastly serving as its Head of Global Structured Rates Trading in New York and managing trading groups across the globe, including New York, London, Tokyo, Hong Kong, and Sydney. Prior to this role, he served as Head of Global Fixed Income Trading Risk at Morgan Stanley in New York, where he was responsible for trading risks in all fixed income products, including interest rates, foreign exchange, emerging markets, credit, and real estate securities. Previously, Mr. Xia served as a Co-Head of Fixed Income in Japan at Morgan Stanley. Prior to joining Morgan Stanley, Mr. Xia served as Vice President of Fixed Income Research at Salomon Brothers and was a Research Scientist at Schlumberger-Doll Research. He holds a PhD in Electrical Engineering and Computer Science from Massachusetts Institute of Technology.
Infinity 1 (7 months ago)
1.25x speed makes the blackboard writing a little faster
Carl Wells (7 months ago)
These models seem really interesting, but I'm pretty clueless as to the concept of weighted returns; the meaning of std. dev. as he uses it; and how variance applies to any of this. Could anyone clear me up?
Bob gates (2 months ago)
using them as indicators as to how much real outcomes could differ from what is projected. variance, in this case, can show the spread of outcomes that will occur in simple terms, and st dev will show what we can expect as a normal range of outcomes. both used to predict how volatile the outcome will be.
Swapneel Naphade (7 months ago)
How is Cash an asset class? Doesn't the value of cash decrease over time?
Swapneel Naphade (4 months ago)
+2RosarioVampire Thanks for the clarification. Now, it makes perfect sense.
2RosarioVampire (4 months ago)
+Swapneel Naphade When people consider cash, they consider risk free investments (0 risks). In the US, those are generally considered: (Especially short term) Treasuries (and TIPS), Certificate of Deposits under $250,000, Savings bond. These are considered 0 risk because if the above fails, it means the dollar (cash) is no longer a valid currency since the dollar is run by the faith of the government and the treasury is the government itself. About 32% of the time cash has outperformed the equity market. Now, I'm ignoring long term treasuries here because those have interest rate risks (and hence why it's generally not considered for cash equivalents). However, if you bought US treasuries back when it was guaranteed 15+% a year, then for 30 years, you would have beaten all the market with just cash since you were guaranteed 15% a year for 30 years straight. But those are rare occurrences and something people do not wish to happen (because if government can assure 15+% a year for 30 years in the first place, then the economy is already screwed up).
Swapneel Naphade (7 months ago)
I agree that my knowledge of accounting is close to nil but what I understand is, if you have loads of cash in your hand, its value will decrease overtime due to inflation unless you invest the cash in assets. (Obviously it is not guaranteed that value of your investment will increase overtime. That will depend on how you invest.) This is my definition of "Cash". If there is another definition, please let me know.
Mallu K (7 months ago)
Bro, you need to complete an accounting class...not being sarcastic. ...
Raptors for the Win (8 months ago)
gentleman at 1:26:00 was really interesting to hear from, glad he was included in the video
Sagar Saxena (8 months ago)
Great teaching style
Leekee Li (8 months ago)
Great teacher Jake Xia!
K L (8 months ago)
Most of the time, we are on the "inefficient frontier". Performance is never always win. It's about knowing how to take losses, whether it being stocks, options, commodities, etc... and learn WELL from mistakes. You learn how it's like being burned when you trade real money in the markets. The difference between AIs and Humans is that AI WILL understand human tendencies and will instant trade to kill day traders, but have no particular advantage towards technical analysis or anything longer than a 3 months time span. Lecturer is a professional professor, but that doesn't necessarily mean he will provide the best trading advice by asking him his experience. His mentioned he a conservative method (play safe, low risk tolerance), but it's a lousy strategy for someone who wants to generate aggressive cash flow.
Lewis Johnson (9 months ago)
Lol: 100% Commercial real estate, 0% bonds
Briggston Dade (7 months ago)
Lewis Johnson as long as your strategy works that’s what matters, I feel as if people start to lose grasp of that
JohnEnergy2012 (9 months ago)
There are 15 lessons missing?
MIT OpenCourseWare (9 months ago)
Nope. Here is the playlist, it should help you: https://www.youtube.com/playlist?list=PLUl4u3cNGP63ctJIEC1UnZ0btsphnnoHR. Best wishes on your studies!
danial dunson (10 months ago)
look at the way holds his chalk like a cigar.... lots of negotiations under his belt
rbfishcs123 (7 months ago)
That is not how you hold a cigar.
Louis lee (10 months ago)
good professor.
Fredo Corleone (10 months ago)
I wonder if Warren Buffett does all this
Américo (2 months ago)
+LiptiC so what warren buffet does to be so darn good?
LiptiC (3 months ago)
No, he says modern portfolio theory is nonsense (not investing regarding him) and diversification is for dummies who don't know what they're doing...
gomenaros (10 months ago)
For MIT you got really bad chalk erasers.
Ayoub El Asry (22 days ago)
It's part of the charm lol
Fgsd DsgF (6 months ago)
So fucking true, can't agree more !!!!!!
shivansh krishna (11 months ago)
In such an easy way he teaches difficult concepts
Mark Freeman (11 months ago)
Take home - The more we think alike, the more we think like the herd - The more danger we are in.
Mark Freeman (11 months ago)
I would only add that cash is not risk free and that stocks have out-performed commodities over last 100 years.
David (21 days ago)
Commodities, specifically gold, will outperform stocks during a financial crisis. Always good to have some gold for the bad times, because everyone buys gold when the stock market crashes and the price goes way up and the dollar reduces in value which gives a double wammy if you live someone other than the US.
Shawn Afshar (11 months ago)
What major teaches these subjects ?
kai (2 months ago)
we also have it in the finance department at my school. its cool stuff
Jerry Jin (4 months ago)
MIT sloan school, business and finance
Yan Wang (11 months ago)
Mr. Y (11 months ago)
I hope I had this professor to teach me investment
dbsk06 (11 months ago)
Actually like him more than Andrew lo
Kiryenski Jones (1 year ago)
The "efficient frontier"[email protected] 26:00
William Boyle (1 year ago)
Lotteries generally (almost always) have poor expected values, but actually Voltaire became wealthy due to a kind of lottery that was foolishly priced to have a favorable expected value.
12345 678910 (1 year ago)
start 3.00
Deff Pluto (1 year ago)
in 2018, 100% Cryptocurrencies lol
Angie Jeffrey (1 year ago)
Deff Pluto only the fools and thieves are till in crypto. The thieves will fleece the fools.
kevin shen (1 year ago)
randomly step on this "the math is very neat" half an hour im like wtf??
zSkandal (1 month ago)
hahahaha same 😂😂😂
Vivek Buddhbhatti (1 year ago)
Awesome professor!!
Michel Hua (1 year ago)
Nice suit professor.
Matt N (1 year ago)
I mean I was expecting a little more. I go to Durham and this is standard, I was expecting at least an upgrade for arguably the best university in the world
Mallu K (7 months ago)
Matt, watch the whole playlist...
Euan Austin (1 year ago)
Matt N Durham represent! 💪🏻 Procrastinating Law watching financial modelling videos
Matt N (1 year ago)
Kathmandu finance, and yep
Kathman (1 year ago)
Matt N what course at Durham? And the uk Durham right?
Anand Mishra (1 year ago)
where are the other videos?
cheeriooss (1 year ago)
he lost me completely at 32:00
Threelly AI (9 months ago)
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Shailesh B Shah (1 year ago)
We discover a new wealth management strategy for long-term investment. We call it Index Long-Term Strategy. Here we invest in Nifty and take insurance of our investment so that we protect our wealth while market falls. It also gives unbelievable returns while market rise. It also beat index returns in long term. To know more share your contact details at https://goo.gl/Ks35EN
Anand Mishra (1 year ago)
Cryptocurrency asset class should be added now :)
Chan ps Love (7 months ago)
Chris G (7 months ago)
How about now lol
Angie Jeffrey (1 year ago)
Anand Mishra He put it on the board. GAMBLING
Anand Mishra (1 year ago)
So are all the fiat currencies trading right now, entire forex market has a long term expected value of zero since no currency is backed after breton woods
Epък Pyc (1 year ago)
crypto-currencies' long-term expected value is zero, so they're not really an asset
Omar Farhan Khan (1 year ago)
Is this a undergraduate course or MBA level course?
Bob gates (2 months ago)
+LeverUp this is math related to finance. also not an undergrad course at most colleges. MIT might be the exception along with a couple other higher level colleges.
Nick Kravitz (5 months ago)
We took a similar class in my MBA program; some prerequisites (time series analysis etc. seem to indicate an undergrad education) But MIT undergrad basically operates at a high level.
Quicksylver G (7 months ago)
It can be both, it all depends whether your first degree is general or specialized. In my country, we usually dont have Mbas but very broad undergrad business degrees and then you specialize.
LeverUp (1 year ago)
Kathmandu yes it is. Corporate finance/Financial management is the first finance class everyone takes
Kathman (1 year ago)
LionsRBoss no it isn't loooool
Garik Gevorgyan (1 year ago)
https://sincrenete.blogspot.am/2018/01/portfolio-optimization-markowitz-method.html Portfolio optimization Markowitz Method explained with example and excel spreadsheet.
cwaddle (1 year ago)
Will i become richer from learning this
California Dude (1 year ago)
Eryk Pyc ... True.
Epък Pyc (1 year ago)
no, you won't become richer: even finance PhDs don't really know what they're doing
Bay Moo (1 year ago)
So based on this whole video, the market has MANY variables that can affect your investments. And everyone to this day is always trying to figure out the best way to maximize their returns while trying to understand these variables. But in general, you can still make money as long as you know the basics of the world of finance. That's the summary of this video lol. Correct me if I'm wrong...
Jack Attack (1 month ago)
+Aditya Singh :) a real quant fund doesn't predict prices... They play the game of statistics... just a 1% edge will win the game. You should probably read up on Ed. Thorp. How do you think blackjack was beaten with card counting ;) simple statistics. Gain a 2% edge on the dealer... and you'll win in the long run. Same goes with investing. Hence Nassim Taleb's retirement. Literally just played the statistics and retired xD tail risk was invented.
Aditya Singh (3 months ago)
The best practice in the capital markets is to invest for most returns with minimum possible risk. Although I'd like to add that no amount of quants can predict the stock prices in the future. Frankly government policies do effect the rise and fall of stocks, so in a way we can say that policy makers do have the power to push and pull the market.
Koen De Vriendt (1 year ago)
the ego of this man is far too big.
k678kk (10 months ago)
Koen De Vriendt why is that a problem?
Rachid EL MOUKI (1 year ago)
Thank you for sharing this rich knowledges

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