Producing the LEAST volt.

Discussion in 'Strategy Development' started by Sky123987, Dec 26, 2007.

  1. which method will produce the least volatility, or is more information need and if so which information.

    you enter ABC long and XYZ short in the beginning of the day and exit Exit End of day

    ABC - $100, average daily true range of $1 beta 1.0
    XYZ = $100, average daily true range of $2.50, beta 2.0

    Dollar Neutral
    $100,000 long ABC
    $100,000 short XYZ

    Beta Neutral
    $100,000 long ABC
    $50,000 short XYZ

    ATR Neutral
    $100,000 long ABC
    $40,000 short XYZ

    or another algo?
  2. oh c'mon someone has to know this
  3. ok i'll bite, only to serve as an educational example of what may be flawed assupmtion for someone more brilliant than I to show.. option 2 will produce the least volatility in the long run since betas are matched dollar for dollar. But the option 3 will produce the least day to day volatility.
  4. thank you for your reply...

    I'm really not too sure that the last option would yield the least volt per day,( of the choices I gave yes)..., as I wouldn't think that if you take for all the days and average absvalue(close of abc - close of xyz) it would be 2.5.

    I think that in order to do this, one really has to take the ratio of standard dev and then multiple that factor by the dollar amount to find the least volatility
  5. Need more info.

    As a matter of fact, why not test it yourself?
  6. MGJ


    There's a huge body of research on "volatility of returns", because (among other reasons) lots of people think that "volatility of returns" is a good approximate measure of "risk". So there are lots of different ways to measure "volatility of returns" and they give different answers. See for example, (this book)

    If you want to minimize volatility, first you must define volatility.

    Then, as other posters have suggested, why not just whip up a computer simulation, MEASURE volatility (according to your definition), and be done?