Liz Cheval and Negative Correlation
Posted: Wed Apr 13, 2011 7:29 pm
Hey guys,
I came across this very interesting link from a presentation by Elizabeth Cheval (original turtle) talking about the value of CTAs as an alternative asset and most importantly giving a very intuitive explanation of linera correlation. However i have a question. Somewhere in PART II she shows an asset (Ugly Asset A) and says "it has no long-term return, although i must mention at this point it has a positive average monthly return, the positive monthly return is erased over time by the high volatility the effects of compounding and the timing of the big drawdown" but then she still goes on to prove that because it has a perfect negative correlation of -1 with the other asset in the portfolio it 's still an amazing addition. I am not sure i understand how the asset can have "no long-term return" but have a "positive average monthly return" (she specifies at the beginning that for an asset to improve the portfolio in a mean-variance sense it must have positive returns and negative correlation) If anyone has seen this presentation before or is interested to take a look please share your thoughts.
http://www.emccta.com/correlation/
I came across this very interesting link from a presentation by Elizabeth Cheval (original turtle) talking about the value of CTAs as an alternative asset and most importantly giving a very intuitive explanation of linera correlation. However i have a question. Somewhere in PART II she shows an asset (Ugly Asset A) and says "it has no long-term return, although i must mention at this point it has a positive average monthly return, the positive monthly return is erased over time by the high volatility the effects of compounding and the timing of the big drawdown" but then she still goes on to prove that because it has a perfect negative correlation of -1 with the other asset in the portfolio it 's still an amazing addition. I am not sure i understand how the asset can have "no long-term return" but have a "positive average monthly return" (she specifies at the beginning that for an asset to improve the portfolio in a mean-variance sense it must have positive returns and negative correlation) If anyone has seen this presentation before or is interested to take a look please share your thoughts.
http://www.emccta.com/correlation/