from Alt investment, anyone remember the Q?

by increasing the time period… increasing the stale price assets % and writing out of money call options tht is FUND A

^ agreed

no, writing in the money call options is a better way to game. You collect the higher premium up front, but are essentially financing the portion in the money until exercise. Conversely, writing out of the money call options is not a game, it is a legit low risk (assuming they are covered) means of enhancing returns.

Sweet - that is what I choose, but afterwards doubted if the time period was increased or decreased??? I had a sort of strange idea that it might become more stable over time.

was this question in the north american test? i dont remember it.

I think a shorter time period leads to higher sharp…the monthy return is multipled by 12 but the std dev is by square root of 12…or something like that.

philly20 Wrote: ------------------------------------------------------- > I think a shorter time period leads to higher > sharp…the monthy return is multipled by 12 but > the std dev is by square root of 12…or > something like that. that’s right, it depresses the denominator, leading to an upwardly biased sharpe.

asdffdsa Wrote: ------------------------------------------------------- > philly20 Wrote: > -------------------------------------------------- > ----- > > I think a shorter time period leads to higher > > sharp…the monthy return is multipled by 12 > but > > the std dev is by square root of 12…or > > something like that. > > that’s right, it depresses the denominator, > leading to an upwardly biased sharpe. yessssssss

philly20 Wrote: ------------------------------------------------------- > asdffdsa Wrote: > -------------------------------------------------- > ----- > > philly20 Wrote: > > > -------------------------------------------------- > > > ----- > > > I think a shorter time period leads to higher > > > sharp…the monthy return is multipled by 12 > > but > > > the std dev is by square root of 12…or > > > something like that. > > > > that’s right, it depresses the denominator, > > leading to an upwardly biased sharpe. > > yessssssss Disagree I distinctly remember reading that longer periods lead to a higher sharpe.

philly20 Wrote: ------------------------------------------------------- > asdffdsa Wrote: > -------------------------------------------------- > ----- > > philly20 Wrote: > > > -------------------------------------------------- > > > ----- > > > I think a shorter time period leads to higher > > > sharp…the monthy return is multipled by 12 > > but > > > the std dev is by square root of 12…or > > > something like that. > > > > that’s right, it depresses the denominator, > > leading to an upwardly biased sharpe. > > yessssssss No way. Read CFA text or Schweser. Sharpe is influenced by longer time periods.

Annualizing a shorter period leads to a higher sharpe, due to reason stated above: you multiply the numerator by n, and the denominator by (n)^.5, so the higher the value of n, the greater the result. However, using less data points (quaterly vs. monthly) will bias standard deviation downward. Which one were they looking for? I’m not sure. I hope A was right.

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if you go say from monthly to quarterly valuations your sharpe goes up, not down. that is very clear from the material.

It’s the one with “write out-of-money options”. I think the above analysis is flawed. All options are priced to be zero arbitrage, your profit isn’t higher if you write in-the-money calls. Remember that a large reason why premiums are higher is because you owe money immediately - to cover the position you need to incur a loss. To game the Sharpe ratio you write wackloads of out-of-money options and hope that it doesn’t move against you. So every month you make premiums until it eventually blows up and you take a big loss (not normal dist, aka, gaming SR).

Aerius Wrote: ------------------------------------------------------- > It’s the one with “write out-of-money options”. > > I think the above analysis is flawed. All options > are priced to be zero arbitrage, your profit isn’t > higher if you write in-the-money calls. Remember > that a large reason why premiums are higher is > because you owe money immediately - to cover the > position you need to incur a loss. To game the > Sharpe ratio you write wackloads of out-of-money > options and hope that it doesn’t move against you. > So every month you make premiums until it > eventually blows up and you take a big loss (not > normal dist, aka, gaming SR). oh, now i remember this question. there were several criteria used to determine which HF manager was gaming. it was out of the money options, but i don’t remember the other criteria that supported that – there was 3 reasons why one of the four choices was correct.

This puts an end to it…I was wrong. Read the header before the article http://www.fool.com/workshop/2000/workshop001121.htm

Going to fewer data points increases the Sharpe. It smooths the volatility and reduces the (sigma) number in the denominator. Remember this is the concept in the Foundation IPS that says 3 year smoothing reduces volatility so the foundation can take more risk. Lower denominator means higher sharpe. Also, longer periods increase sharpe. Look at a 10 year sharpe. numerator = x * 120 denominatior = x * 120^.5 Actually if you look at the Sharpe paper you really multipy Sharpe Ratio by the square root of time and the number gives you a T-Stat for regression statistical significance of the excess returns. So the longer a manager can get excess returns the more significant he/she is. In other words, longer time means higher Sharpe Ratio.

With regard to the option premiums. In the money options do indeed own money, they just don’t own it immediately. They owe the money upon exercise. In the meantime they collext a far higher premium relative to out of the money calls. This higher premium can be booked as an immediate gain, which is obviously larger than the gain on out-of-the-money calls. The key word is “gaming”. Writing in the money options in gaming the returns by pumping up option premium received with a portion that is actually already owed. Conversely, out-of-money premiums reflect do not appear to be “gaming” anything, however they are risky. However, the question was about gaming the system, not taking risky positions. Anyone?

rkingston Wrote: ------------------------------------------------------- > With regard to the option premiums. In the money > options do indeed own money, they just don’t own > it immediately. They owe the money upon exercise. > In the meantime they collext a far higher premium > relative to out of the money calls. This higher > premium can be booked as an immediate gain, which > is obviously larger than the gain on > out-of-the-money calls. The key word is “gaming”. > Writing in the money options in gaming the > returns by pumping up option premium received with > a portion that is actually already owed. > Conversely, out-of-money premiums reflect do not > appear to be “gaming” anything, however they are > risky. However, the question was about gaming the > system, not taking risky positions. > > Anyone? the way i looked at it is that you would book a lot of small similar returns with out of the money options thus reducing the variance of the returns (that is unless one happens to go against you). if they were in the money you returns might be higher, but the variance would be much greater.