Acrary is a genius!

Maestro,

With due respect, it's obvious you can infer many fascinating things from Asby's work that may apply to trading.

But going form "infer" from his work to claiming his work "proves" something conclusive about trading when it never deals directly with trading seems like a stretch.

Still you may be right about the risk/reward ratio.

As regards to "smoothing" the equity curve. That would seem logical at least in the areas when the draw down and run up happen out of phase with each other.

Perhaps you theorize that there will be points on the curve were the draw downs will coincide anyway and still produce a collective risk.

Intuitively that doesn't make sense. But it practice it just might.

Has anyone ever actually "proved" in the literal sense (not infer'ed) that to be the case?

Modern and even Post-Modern Portfolio Theory seem to have directly proven, at least to some degree, a reduction of risk.

What are your thoughts?

Sincerely,
Wayne

 

Yes, works of Professor Burke Brown form UFT in behavioral finance have conclusively proved the fact that diversification and other methods of Modern Portfolio theory have been wildly overstated and, therefore, misleading. He is 80 years old and he is my best friend and the mentor. His simple, very efficient and mind bugling discoveries all stem out from the Ashby's discoveries of the homeostatic behavior first presented in his "construction of the brain" book. I have spent countless hours being his sounding board and trying to be a devil’s advocate. Unfortunately, his findings are 100% golden and I am convinced that you will find yourself thinking the same way after reading Ashby's books.

 

I've heard about this as well.

"Mind bugling," eh? Sounds like a clarion call. I can hear the medieval trumpets now.

 

Your statement is incomplete. Balance it out. To do this you need to consider time passing and how being uncorrolated works.

 

i have system A with a sharpe of 1. i have system B with
a sharpe of 1.

the lower the correlation, the higher the chance that the
portfolio AB has a sharpe above 1.

i am quite certain about that.

 

OOps, I did it again! Boggling would be a good word to use, but bugling works too, don't you think?

 

MAESTRO, would it be possible to get your definition of risk/reward ratio? It seems to be at least somewhat uncorrelated to sharpe or (more generally speaking) smoothness of equity curve, which appears to be a key element for many in defining it.

Thanks for introducing to me the works of Mr. Ashby, by the way. Looks fascinating.

 

do you intend to be funny? is that supposed to be a
reasonable sentence or are you sarcastic?

 

The risk/reward ratio is the relationship between the probability of the loss multiplied by the absolute value of the loss and the probability of the profit multiplied by the absolute value of the profit.

 

No, I am absolutely serious. There are other benefits of the diversification (margin, less money stress, time extension etc) it's just risk/reward ratio is not the one.