Understanding Risk & Return
Because investors are, on average, risk averse, we should expect that there is a positive relation between expected returns and expected volatility—the greater the expected volatility, the greater the rate of return required. Conversely, we should expect to see a negative relationship between returns and unexpected volatility as investors increase the discount rate they use to value future expected earnings on risky assets.
We should also expect, during periods of heightened uncertainty, that investors, in a flight to safety, would be willing to accept lower required returns on safe assets.
The Sharpe ratio was developed to create a measure of risk-adjusted returns. It measures returns per unit of risk, with “risk” being defined as volatility. Importantly, the Sharpe ratio assumes returns are normally distributed, which is not always the case.
While volatility is certainly a measure of risk, and a good one, it’s not the only one. There are other measures of risk that investors care > SEE MORE
Ignore Politics In Investing
The economy is clearly doing well, with real GNP growing 4.1% in the second quarter and expected real growth of 3% in this quarter. In addition, unemployment has fallen to 3.7% (the lowest since 1969), and inflation remains well under control. In September, the Consumer Price Index for All Urban Consumers increased 0.1% on a seasonally adjusted basis, rising just 2.3% over the last 12 months.
Given these sets of facts, you would think investors’ views of the economic outlook would be good. And you would be both right and wrong!
Tale Of 2 Economies
The September monthly survey from Spectrem Group, which conducts ongoing primary research on investors, found amazingly > SEE MORE
The Happiness Equation
To say that “money isn’t everything” is more than a cliché. Studies in the early 1970s demonstrated that a sense of well-being, or happiness, had not increased commensurately with income over the previous half century.1
That trend continues as the modern world has arguably made well being more elusive than ever. Fortunately, positive psychology arose in the 1990s, attempting to find the key to understanding what makes people flourish. It has spawned the so-called happiness literature that seeks modern truth by weaving together science and ancient wisdom. How to be happier is now the most popular course at Harvard and Yale.2
Business people and entrepreneurs are also contemplating some of these age-old questions. Mo Gawdat, a serial entrepreneur and Chief Business Officer at Google X, tried to engineer a path to joy in his book, Solve for Happy, by expressing happiness as an equation.
HAPPINESS ≥ Your Perception of the EVENTS of your life − Your EXPECTATIONS of how life should behave
According to Gawdat’s model, if you perceive events as equal to or greater than your expectations, then you’re happy—or at least > SEE MORE