Aug

8

A Currency Note is akin to a Time Insensitive Zero Coupon Bond with zero regard to the idea of Inflation. Whether you present it now or a year later the Promissory Note that a Currency Note is will provide you with goods or whatever you have agreed to obtain against it at the face value that day.

Over simplification being a standard problem of modelling, the diversification with cash idea propounded by Markowitz is a numerical illusion. Since the face value of cash does not change it dampens volatility. We understand high school level Mathematica. Thank you very much Mr. Markowitz for showing us how by doing nothing one can reduce risk. I as a student of markets am interested in figuring out how can I reduce my risk while I am still doing something.

Yet, things could have been still tolerable had the negative rate of return on cash implicit due to unavoidable inflation would have been plugged in somewhere in the diversification model.

Holding cash for dampening volatility for a very short period of time is fine. But then Portfolio Management is such an aggrandized term that traders cannot even come remotely close to it and has to be a long term religion. How does anyone ever reduce risk by holding onto a guaranteed to lose investment in their portfolios?

Using even my high School standards only Maths I cannot accept to believe ever that cash that keeps getting trashed over time in value will ever add anything but negative returns in my portfolio and even if a theoretically flawed calculation of a dampened volatility is accepted as still correct then too bring me to a higher utility curve.

The higher investment utility curves built using cash to me appear similar to claims of reaching higher states of consciousness by starving. All I have known people reaching is altered states of consciousness by starving.

Hold cash and starve. Simple. Why do I need a celebrated model and an entire marketplace revolving around such a flawed reasoning. Well I need this since without such mass hysteria, where is the money to be made?

Mr. Krisrock writes: 

Cash is a proxy for the currency… that's why the Japanese bond market can be among the best performers despite near zero rates. Smart bond men are willing to accept zero if the total return is simply the currency appreciation. Ask John Taylor he called all this…

Sushil Kedia replies: 

I cannot agree more with your point here. Accepting zero interest is fine if the interest rates on other currencies are higher and thus the currency in which the zero interest rate bond is denominated will appreciate.

Yet that is a different point.

I am only crying over the years consumed in living with Portfolio Theory that was drilled down my brains in the MBA days.


Comments

Name

Email

Website

Speak your mind

Archives

Resources & Links

Search