CAPM beta – phrasebook


  • regression — beta is named in the context of a regression against the market factor
  • cov/var — beta is defined mathematically as this ratio
  • excess return — in the regression, both the explanatory variable and the dependent variable are excess returns.
  • portfolio — (due to regression) a portfolio beta can be computed from weighted average

above 1 — means the regression slope is steeper than the “market”
equals 1 — is the market itself or any “normal” security
below 1 — means the regression slope is more gentle than the “market”

fwd contract often has negative value, briefly

An option “paper” is a right but not an obligation, so its holder has no obligation, so this paper is always worth a non-negative value.

if the option holder forgets it, she could get automatically exercised or receive the cash-settlement income. No one would go after her.

In contrast, an obligation requires you to fulfill your duty.

A fwd contract to buy some asset (say oil) is an obligation, so the pre-maturity value can be negative or positive. Example – a contract to “buy oil at $3333” but now the price is below $50. Who wants this obligation? This paper is a liability not an asset, so its value is negative.

fwd contract arbitrage concept – less useful

label – fwd deal

The basic relationship (between spot price, fwd contract price, T-maturity bond price..) is intuitive, low-math, quite accessible to the layman, so I decided to really understand it, but failed repeatedly. Now I feel it’s not worth any further effort. It’s not quitting. It’s saving effort.

– interviewers won’t ask this
– real projects won’t deal with it, because the (arbitrage-enforced) precision mathematics simply doesn’t manifest in the real data, perhaps due to bid/ask spread
– Only financial math literature makes extensive use of it

I think this is like the trigonometry or the integration techniques — you seldom need them outside academics.

a few benchmarks in finance #vwap, sharpe…

Investment Performance benchmark – Sharpe
Investment performance benchmark – various indices
Investment performance benchmark – risk free rate
Investment performance benchmark – value benchmark and size benchmark. See the construction

Execution benchmark – vwap. I feel this is the natural, logical benchmark. “Did I sell my 5000 shares at yesterday morning’s average price?”
Execution benchmark (2nd most common) — implementation shortfall (very similar to arrival price)

finance model — various meanings, very briefly

I feel a financial model is any math that describes/explains/relates/predicts economic numbers.

A “model” means something different in buy-side than in derivative pricing including complex structured products.

On the buy-side, I feel a model is like a regression formula that Predicts a (single?) dependent variable using several explanatory variables. In simple words, such a model is an alpha model, which is related to a trading strategy.