Economics and similar, for the sleep-deprived
A subtle change has been made to the comments links, so they no longer pop up. Does this in any way help with the problem about comments not appearing on permalinked posts, readers?
Update: seemingly not
Update: Oh yeah!
Wednesday, May 11, 2011
Another squib on risk management
Felix writes:"At times of volatility, correlations move towards 1[fn1]. We saw that in every market during the crisis, and we saw it again in commodities on Thursday. Which is why protecting yourself with diversification is so dangerous. Just when you need the protection, it disappears"
I don't like that way of thinking, and it's a real example of how Talebian rhetoric about unpredictability of Big-Events-dont-call-them-tail-events leads you up some quite dangerous alleys.
When do you need the protection of diversification? All the time. You never don't need it. Diversification won't help you in a crisis, but nor will anything else; that's why they call it a "crisis".
There is only one thing that will save you in a crisis, and that is "having sufficient capital". And the only proven way to "have sufficient capital in a crisis" involves a risk management technique called "not pissing it away making silly mistakes during normal times". Of which, a sensible approach to diversification is a key part.
[1] Just by the way, a poor choice of day for this sermon. Not all correlations did move towards 1; only commodity futures did. If you had a diversified portfolio of commodities, bonds and shares, diversification worked for you just fine.
this item posted by the management 5/11/2011 03:03:00 AM
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