Risk-Adjusted Return
Categories: Metrics, Managed Funds
See: Sharpe Ratio.
The basic idea: you spent a dollar to buy a California Lottery ticket. You won a million. Million-to-one odds. And you won. Was this a good risk-adjusted return? No, not at all.
Why? Well, in fact, your real odds were not a million-to-one; they were a billion to one. You just got ungodly lucky to end up winning, and not just donating that dollar to the state teacher's pension fund. Hopefully you're now one-and-done on the whole lottery ticket buying thing. The risk was 1 in a billion, yet you returned "only" 1 in a million. That is, you were 1,000x luckier than the odds said you should have been...or for what the compensation should have been, had it equally reflected the massive risk you took.
High returns are good, but if you roll the dice often you'll regress to the mean, meaning that you'll likely basically reproduce the odds of winning in the first place. Hence it being important to know what the risks are, and what the potential returns are.
And our thought: if you ever win a lottery like this, don't ever play again. Keyword: muni bonds.
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Finance: When Can the Data Do You Wrong?20 Views
Finance a la shmoop.. when can the data do you wrong? At least leave you and do
beliefs you probably shouldn't have okay so you know the term caveat emptor
or buyer beware right well the same applies to advice givers [Man approaches woman at psychiatric help stall]
or rather advice give-ees... so here's our little story there's this football
stadium it pulled 65,536 people exactly it's filled the announcer comes on tells
the very cooperative crowd to all stand and take out a quarter from their [Woman announcers addresses football crowd]
pockets magically every attendee has one the announcer she then says alright flip
the coin and despite a few jingles of missed coins...
...alright well everyone flips the
announcer says okay, if you flipped a tails sit down.. there are now 32768 people standing and she says okay
flip again and then a few jingles yeah like if you can't catch your own coin [Persons coins fall to the floor]
should you really even be at a game that's all about catching things anyway
half the people sit she has him do it again 16,384 people are left and again
8,192 people are left and again and again and again and again and again
again again again.... until there were just two people left
standing she says flip again and they do and one gets another head the other gets [Person flips coin on heads]
tail so only Bob is left here Bob the accountant from Reseda, he flipped a head
on his quarter it was a legal quarter sixteen times in a row that fact will [Bobs gravestone appears]
probably be on his tombstone and everyone will be impressed for all
eternity so what is Bob do - well Bob writes books on how to flip heads
he gives lectures he has his own website how to flip heads.com and Chapter four
is on you know on angling the thumb, chapter six is on all the humidity
levels, chapter eight is on what happens if you drop the coin you know Bob we're
looking at you the reality is in real life people would actually listen to him [Man talking in football stadium]
he would sell lots and lots of books when flipping a head be sure you've
thoroughly washed your hands and I recommend propel you know that sticky
stuff and don't forget to let your fingernails grow out a little bit Bob
yes Bob this guy formerly this guy is now the expert on how [Bob with two women]
flip a head point here when you take advice about patterns particularly from
Wall Street commissioning kind of people be sure you know why and how it's being
given and what your in theory paying them for that loving advice where did
the data come from and how did the giver become the expert and was this
real expertness or just odds and luck and everything at work do they
really know what they're talking about or you know where they just Bob the
lucky flipper [Bob dancing with two women in a club]