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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 (242)
Mandex (1 day ago)
He smiles like *The Big Short* hedge fund manager
Pavel Boico (8 days ago)
information density is so low, it have to be insulting for students
Егор maoli (9 days ago)
Аrе Yоu sеarсhing fоr gооd оnlіnе fіnance cоursеs . Ѕіmрly Gооglе sеаrсh аs "Zoe Talent Solutions"
g h (9 days ago)
investments with a positive convenience yield like real estate and cash should be below the average line of return
Amo Moloko (16 days ago)
This is a complete waste of time.
Aditya Singh (21 days 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 (22 days 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 (24 days 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.
Ludwig Beethoven (27 days ago)
Stick it all in gold/silver lol central banking is going down in the next 50 years on this planet...ok now off to my minimum wage job at the mall in Central California, unemployment rate 8.9 percent in December 2018, yay...hi kids would you like to try our virtual reality ride today? Or transcend your false self in augmented reality? Or our latest Great Courses advanced investing course with Collen Fullenkamp? Tao Te Ching 2090.
comments comments (28 days ago)
What if people don't have money to have portfolio, that is the fundamental problem.
Supernova (22 days 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 (29 days 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 (1 month ago)
55:35 laughs at how simple it is to to make money from hedging
AriVovp (1 month ago)
School is school. It's not real life events. They deal with fix outcomes
이은굥 (1 month ago)
Smart Chinese.... 더티 마인드에 쓸데없는 일 만들고 쓸데없는 짓거리에 도가튼 이혜영과 그남편같은 한국과는 차원이 다르지
campeador94 (1 month 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 (1 month ago)
He said he worked in Morgan Stanley.
Rich M (2 months ago)
Seems like buying Berkshire was the easiest strategy.
Tony Lozano (2 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 (1 month 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 (1 month ago)
+Jerry Dulin true
Jerry Dulin (1 month 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 (1 month ago)
One year of good return proves nothing.
BookBaba (2 months ago)
some people in this class will fuck us up w this knowledge
MonkeySpecs301 (2 months ago)
why would he teach econ if he can make alot more money in the markets?
2RosarioVampire (1 month 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 (1 month 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 (2 months ago)
sawadika!
Maria Callous (2 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 (2 months ago)
Definitely mindblowing.
Melvin Simmons (2 months ago)
im blazed as fuck watching this rn
Nick Fleming (2 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 (2 months ago)
I made 13000 $ dollars from my bitcoin miner .. I am so grateful I met him
David Porter (3 months ago)
its feedback not feedbacks
esperos kk (3 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
Ethan C (3 months ago)
So none of these Ivy League college students put cryptocurrencies in their portfolio? Hm.
Vince Morano (3 months ago)
Idea for a fund: Buy $SPY and $IWM and then just collect the 2 and 20 fees.
mikeyb (10 days ago)
Lol
TheOldSnake (3 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 (3 months ago)
52:00 B -50% and 100%, shouldn't it be 75%?
Lejonet (4 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! (4 months ago)
cryptocurrencies.
Li Wang (4 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 (4 months ago)
1.25x speed makes the blackboard writing a little faster
Carl Wells (4 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?
Swapneel Naphade (4 months ago)
How is Cash an asset class? Doesn't the value of cash decrease over time?
Swapneel Naphade (1 month ago)
+2RosarioVampire Thanks for the clarification. Now, it makes perfect sense.
2RosarioVampire (1 month 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 (4 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 (4 months ago)
Bro, you need to complete an accounting class...not being sarcastic. ...
The Chosen One (5 months ago)
gentleman at 1:26:00 was really interesting to hear from, glad he was included in the video
Sagar Saxena (5 months ago)
Great teaching style
Equality-in-Democracy Li (5 months ago)
Great teacher Jake Xia!
K L (5 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 (5 months ago)
Lol: 100% Commercial real estate, 0% bonds
Briggston Dade (4 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 (6 months ago)
There are 15 lessons missing?
MIT OpenCourseWare (6 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 (7 months ago)
look at the way holds his chalk like a cigar.... lots of negotiations under his belt
rbfishcs123 (4 months ago)
That is not how you hold a cigar.
Louis lee (7 months ago)
good professor.
Fredo Corleone (7 months ago)
I wonder if Warren Buffett does all this
LiptiC (7 days 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 (7 months ago)
For MIT you got really bad chalk erasers.
J M (3 months ago)
So fucking true, can't agree more !!!!!!
shivansh krishna (8 months ago)
In such an easy way he teaches difficult concepts
Mark Freeman (8 months ago)
Take home - The more we think alike, the more we think like the herd - The more danger we are in.
Mark Freeman (8 months ago)
I would only add that cash is not risk free and that stocks have out-performed commodities over last 100 years.
Shawn Afshar (8 months ago)
What major teaches these subjects ?
Jerry Jin (1 month ago)
MIT sloan school, business and finance
Yan Wang (8 months ago)
Finance
Mr. Y (8 months ago)
I hope I had this professor to teach me investment
dbsk06 (8 months ago)
Actually like him more than Andrew lo
Kiryenski Jones (9 months ago)
The "efficient frontier"[email protected] 26:00
William Boyle (9 months 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 (9 months ago)
start 3.00
Deff Pluto (10 months ago)
in 2018, 100% Cryptocurrencies lol
Angie Jeffrey (9 months ago)
Deff Pluto only the fools and thieves are till in crypto. The thieves will fleece the fools.
kevin shen (10 months ago)
randomly step on this "the math is very neat" half an hour im like wtf??
Vivek Buddhbhatti (10 months ago)
Awesome professor!!
Michel Hua (10 months ago)
Nice suit professor.
Matt N (10 months 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 (4 months ago)
Matt, watch the whole playlist...
Euan Austin (9 months ago)
Matt N Durham represent! 💪🏻 Procrastinating Law watching financial modelling videos
Matt N (9 months ago)
Kathmandu finance, and yep
Kathmandu (9 months ago)
Matt N what course at Durham? And the uk Durham right?
Anand Mishra (10 months ago)
where are the other videos?
cheeriooss (10 months ago)
he lost me completely at 32:00
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Shailesh B Shah (10 months ago)
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Anand Mishra (11 months ago)
Cryptocurrency asset class should be added now :)
Chan ps Love (4 months ago)
Chris G (4 months ago)
How about now lol
Angie Jeffrey (9 months ago)
Anand Mishra He put it on the board. GAMBLING
Anand Mishra (10 months 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
Eryk Pyc (10 months ago)
crypto-currencies' long-term expected value is zero, so they're not really an asset
Omar Farhan Khan (11 months ago)
Is this a undergraduate course or MBA level course?
Nick Kravitz (2 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 (4 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 (9 months ago)
Kathmandu yes it is. Corporate finance/Financial management is the first finance class everyone takes
Kathmandu (9 months ago)
LionsRBoss no it isn't loooool
LeverUp (10 months ago)
It’s a undergrad course. First class everyone takes for a finance degree
Garik Gevorgyan (11 months ago)
https://sincrenete.blogspot.am/2018/01/portfolio-optimization-markowitz-method.html Portfolio optimization Markowitz Method explained with example and excel spreadsheet.
cwaddle (11 months ago)
Will i become richer from learning this
California Dude (10 months ago)
Eryk Pyc ... True.
Eryk Pyc (10 months ago)
no, you won't become richer: even finance PhDs don't really know what they're doing
Bay Moo (11 months 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...
Aditya Singh (21 days 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 (11 months ago)
the ego of this man is far too big.
k678kk (7 months ago)
Koen De Vriendt why is that a problem?
Rachid EL MOUKI (1 year ago)
Thank you for sharing this rich knowledges
Bhaskar Bholo (1 year ago)
What are the other applications of MPT other than finance
Bhaskar Bholo (1 year ago)
Nice teaching
Dan Friedman (1 year ago)
i wish the metronome video was longer
Marina Sapir (1 year ago)
He said he will talk about real-life investing. Instead, he gave some examples of Modern Portfolio Management theory for two assets. Then he said that the variance does not, actually, measure risk. It makes whole MPM theory useless and wrong. Now what? He did not say.
Nick Fleming (2 months ago)
Variance does not measure "risk" in true investments, read Benjamin Graham
emikami1 (5 months ago)
I don't know if it makes Modern Portfolio Theory useless and wrong if variance does not explain risk in its entirety. The specific application of using variance as the only way to measure risk using Modern Portfolio Theory might be not perfect or as you say wrong. There might be other ways to measure risk then apply Modern Portfolio Theory to it. In which case, the MPT itself would neither be incorrect nor worthless, it is an inspirational building block for first year MBA finance students.
Ravinder Dahiya (1 year ago)
Great teacher
ravi kumar mandati (1 year ago)
Thanks for providing this video
Nouer Uz-Zaman (1 year ago)
41:53 it is wrong calculation, you can verify it later .lol
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Tianyu Lu (1 year ago)
Helpful!!!
Nana Hoshino (1 year ago)
very clear!
Ilyas Bashir (1 year ago)
i didn't understand the three risk ratio, and the whole three asset class factors
Ilyas Bashir (1 year ago)
America is back word they still use black board. we in Australians use white board. believe it's more clean
Vale Rian (2 months ago)
Black board is typically a tradition in math/science college and some people (like me) like it better than white board
Syncme Android (2 months ago)
In Australia you don't use "black" boards because you are a community of racists. 😁
Akemi Warren (4 months ago)
NO, it is not more clean. There is more waste created by using markers made of plastic.
Mallu K (4 months ago)
Bashir, if there was any truth in what you said you & entire world would not be watching an American lecture....You are welcome to apply though...
RB Colbert (7 months ago)
It's backwards idiot!
optiuCum dignitate (1 year ago)
Download Investment Analysis and Portfolio Management 10th Edition by Frank K. Reilly , Keith C. Brown in website: http://seamlessfiles.com/file/0586Cw
Bruce Levy (1 year ago)
I was hoping we'd get an efficient frontier joke at some point
pgo eds (4 months ago)
Or at 45:34 a Kelly's Formula joke (that's my other dog imitation). With his negative probability I thought he was going https://www.science20.com/hammock_physicist/quantum_casino_less_zero_chance-95615
NGE0001 (1 year ago)
all i want to know is how much real return per year has this guy made and for how long
Dilshod (3 months ago)
😂
Joshua Omokehinde (1 year ago)
Does Gauss distribution a better function than students't in a market where information enters market asymmetrically?
vl vl (1 year ago)
The lecturer looks into notes too often for such a basic stuff and for such a prestigious school.....
Angie Jeffrey (9 months ago)
His style was effective. End of story.
George W. Kush (1 year ago)
vl vl Maybe because he’s trying to follow a course structure and needs to see what follows next
mengstab Spartacus (1 year ago)
it is nice
personalperspective (1 year ago)
Anyone follow the question at 1:19:20? Money management also involves HR and managing talent and people and moving forward in their careers? I think that's obvious and goes without saying? smh.
lloydyjonesy (2 months ago)
+Syncme Android yeah lol. fucking amazing contribution from her.
Syncme Android (2 months ago)
Look who was the one that asked the question. It tells you everything.
iliavko (1 year ago)
@35:30 How are you getting any return? Shouldn't the return be 0 since both assets move in exact opposite directions and are equally weighted?
SHARIUL HASHMI (1 year ago)
use pen and paper to calculate
Bruce Lendrum (1 year ago)
My Grand father told me he made money every month of the 1930's and the postman brought it to him! Also every bought more,
it is a travesty i have only one *uprate* to give to this video!!!!!
Gia Hy Le Pham (1 year ago)
Why cash has return? not count inflation, unless you put it in a bank or some kind of CDs, an amount of cash will remain the same for a hundred years! So basically cash is 0% return and 0% standard deviation right?
Nima Zarrabi (1 month ago)
I assume hes referring to ‘cash equivalents’, you could then think of money market instruments: Tbills, BAs, ...
secretbonus (2 years ago)
Kelly criterion is better if you believe market has exploitable inefficiencies but to adapt it to multivariant uncertain expectations and optimize portfolio is a little challenging.
Hardik Patel (2 years ago)
Superb.. thnk you Sir :)
lbevanlb (2 years ago)
absolutely incredible lecture.
Joe Areerob (2 years ago)
Why is the standard deviation of the lottery close to 0, not 100?
Eric Leclercq (1 year ago)
With lottery you have almost 0% chance of winning. There is almost 0 chance that it is not always loosing. There is almost no deviation from the same outcome.
Warren Buffet (2 years ago)
I'm not sure about the US powerball payout, but, standard deviation is a measure of the deviations from the mean. The mean return for the lottery is close to 0 right? (as most tickets will lose and very few will win) and most of the data points would be 0 (where the data points are the actual sampled returns). So the average deviation from the mean is very low, and the square root of that average deviation is even lower. Hence, you have a standard deviation that is very close to 0.
Claire Gao (2 years ago)
he is incredible
Thames Khi (1 year ago)
sweet
aruna nzogbia (2 years ago)
Thank you very much MIT for sharing this knowledge. Jake Xia, excellent teaching.

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