Ever heard of Semi-standard deviation and its relevance in investment management?

Semi-standard Deviation allows potential investors to understand how much downside volatility the ETF has experienced, versus standard deviation, which examines all volatility-upside + downside. It’s widely accepted that investors are more concerned about volatility on the downside in analyzing risk. – Morningstar

Just to give you a taste behind the concept of semi-standard deviation while managing investments, imagine this situation:

You are considering 2 assets for investment, both of while have same mean and standard deviation. (You may think that since both have same standard deviation, so they will be having same risk associated with them, let me tell you that you are not fully wrong though not fully rational as well!) 🙂

By being rational, I mean to have more preference for positive returns than negative returns. Now imagine, the distribution of the returns of asset A show some distant points in positive region making the tail in positive region fatter and showing a positive skew.

Asset B is normally distributed.

Now, when you know these characteristics what you need to see is the downside risk.

As per the definition of risk – It reflects uncertainty, it doesn’t distinguish between good or bad, positive or negative. Risk is everything which doesn’t fall in a range.

But, as an investor if an asset is supposed to give returns @ 7% and you get 3% (can be called as risk) or even a return of 15% from that asset will also be labelled as risk. But, that’s from theory point of view. Will you practically mind 15%? No, Right?

So, to come up with this dilemma, fund managers are evaluated with Sortino Ratio to measure their fund’s performance (Here the negative deviations/shortfall from the mean are only taken into account for risk and the positive deviations are not taken to calculated the risk associated with the fund/asset).

Semideviation [Source: Investopedia.com]

PC: Forbes.com

Want to manage risk? – Ask the Kurtosis!

Kurtosis: Peakedness of a normal probability distribution.

(Usually, what is seen is ‘excess’ kurtosis as for normal distribution, it is 3.

So, Kurtosis > 3 -> Leptokurtic i.e. More Peaked
So, Kurtosis < 3 -> Platykurtic i.e. Less Peaked.

In risk management, Kurtosis plays a huge role in determining the risks involved with that process/return from an investment etc. Distributions which are leptokurtic in nature have the data points more than 75% of the time within +/- 1 standard deviation as compared to 68% of normal distribution.

But, the irony is even after having most data points around the mean within a narrow band of standard deviation. It has a greater probability of large unexpected deviations as compared to Normal and Mesokurtic (excess kurtosis < 3). So, Fat tails exist for Leptokurtic Distributions

When a security has to be selected for investment, the returns are expected to be more of Platykurtic for those who are risk averse.In platykurtic, though the deviation from the mean is more than other distributions between a range of sigma (standard deviation). But the chances of getting surprising unexpected return (on either side i.e. profit or loss) is very less.UntitledChart 1: Risk Management: Kurtosis Analysis. (Please excuse the Axis titles of X and Y)

This chart shows the different kurtosis levels of a probability distributions i. e Lepto, Meso and Platy.

You can also think it like follows:

  1. Green line shows probability of returns from a portfolio of bonds (T-Bonds)
  2. Red line shows probability of returns of a very diversified portfolio of large cap equity, T-bonds and high quality Corporate Bonds.
  3. Blue line shows probability of returns from risky positions in equities and large proportion of non-linear derivatives position (with a focus on speculation).

Derivatives: Deadliest Weapon in the world for those who play it wrong!

Derivatives are risk management instruments being traded in the stock exchanges. They are the major volume drivers of the total trade that takes place in an exchange. Usually, the trade in derivatives contribute to nearly 70% of total volumes of the exchange.

Derivatives: As the name suggests, they are those instruments whose value is derived by some other underlying asset which can be equity share, benchmark (index), bond etc.

Derivatives have been claimed to be “Financial instruments of mass destruction” by famous investor Warren Buffet.

They have a tendency of being highly volatile. But, at the same time an immensely used financial instrument to hedge financial risks. They are excellent hedging tools but, I doubt if it is also an excellent trading tool. May be yes, if you manage to be on the right direction, at the right time and for the right duration, because there are numerous factors which effect the pricing and volatility of different types of derivative instruments.

They also bring some stances when there is a good possibility of low risk and high gain trades. E.g: Shorting options on Deep OTM.

Derivatives have certain instruments and positions where the trader has unlimited risk. So, it is essential to maintain strict stop losses in those cases.

Usually traders come for Derivative trading especially options trading by seeing profits of 2X-10X. But, it is essential to have a prior deep understanding of markets and the instruments in order to start trading in them. So, trade carefully if you want to. Else, leave it for the professionals to use it for hedging purposes (the reason it is meant for! ).


Gilt, Bond, Bill, Bund, Debenture?? – Confusing Fixed Income instruments, Defined!

Fixed Income securities are debt instruments whose payout is well known before investing (assuming there is no default) provided that the instrument is held till maturity instead of trading them. There are various terms used for these fixed income instruments but they have different meanings attached to them. These terms are quite confusing in the way they are used in internet, my objective in this post will be to clarify what these terms actually mean:

    • Sovereign Bonds: Bonds which are issued by central government of a country. The are assumed to have minimal default risk. Hence, spread of other bonds issued by other authorities/corporations in that country are added to the yield from sovereign bonds.
    • US Treasury: These are government backed securities, mostly used in U.S terms.
    • Gilt: These are also government backed securities, but are used in U.K.
    • Bunds: These are German sovereign bonds with maturity of 10 and 30 years.
    • Bills: These are debt instruments which have maturity period less than a year.
    • Bonds: These are long-term debt instruments.

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Indicators for efficient Mutual Funds selection ~ Simplified.

Mutual Funds- Mysterious Investment instruments about which some people are very happy (gainers) and some people are very terrified (losers). Depending upon the side, people have a broad perception of good/bad upon this instrument. Both of which are dangerous as it might lead to overconfidence about selection of funds or fear acting as de-motivator to invest in MF at all (losing out on opportunities).

Just to be clear: Mutual Funds are financial instruments where a large corpus (collected by a large group of people including retail, trust, companies, partnerships etc. depending upon the objectives) is managed by a professional team working for an AMC (Asset Management Company). The benefit of large corpus is of diversification. Instruments need not necessarily be of equity, it is often times in debt too. (Note: Companies usually park their excess cash in liquid debt MFs to get better return for their idle cash at very low risk).

I have brought out few indicators/criteria which have been my instruments for choosing efficient funds:Read More »

This Graphic Explains Monday’s Stock-Market Crash

A glimpse on the reasons for China Meltdown and its Global ripple effects


The Dow Jones Industrial Average plummeted more than 1,000 points Monday morning, taking millions of Americans’ 401(k) plans down with it. While stocks regained some of their lost ground by Monday afternoon, continued uncertainty over factors as far-ranging as China’s economy to global commodity prices could continue to wreak havoc on the markets for the rest of the week and beyond.

How can an economic slowdown in China take money out of your pocket? Check out the TIME infographic below to learn more:

Dow-drop-online[time-brightcove videoid=4387540519001]

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PC: Forbes.com

Understanding these investment terminologies will make your life easier and more Profitable $$

Few years ago, when I started studying investments I used to get confused between the terminologies used in investments arena. In this post, I will explain various investment terminologies which are used frequently which will enhance your understanding and will help you make more informed decisions.

  • Market Risk: You have read it in numerous Mutual Fund advertisements- “Investments are subject to market risk”. Lets try to decode this.Risks can be classified in two types: Risks that are present in that particular instrument and Risks that are prevailing throughout the market.
    For example: Apple, a giant in area of technology getting bust because of its internal reasons (though it is not that likely), but still its a risk. This risk only effects instruments (like shares) of that particular company.
    Now, lets take the economic meltdown in China. It shows the risk prevailing in the whole market no matter what company we are talking about. This is Market risk a.k.a Systematic risk. One can’t diversify these risks. Though you can reduce these risk by having exposure in international markets, but still there is market risk of global economic turmoil.
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Infographic on currency depreciation

This is my info graphic for showing that currency depreciation is not always a bad thing. Everything has its own good and bad.

INR Depreciation

Here’s why piled stocks of ‘idle’ Gold are dampening India’s economic growth.

India, a net importer of Gold faces trouble paying for its import bills every year. Gold is the second largest imported commodity (by value) after Crude Oil. Most of the imported gold find their way no other than bank lockers and vaults by the household.

We can say that culture plays an important role in investment actions of a person. But, lately it has raised tremendous issues which are weighing the economy down (or not letting it grow up to its potential). To ease the understanding about how stocks of gold has been a spoilsport for India’s bright future, I am putting my view point wise.Read More »

Money Multiplier in India

A more practical approach to understand monetary supply and money multiplier calculations.

Mostly Economics

RBI releases a lot of data on monetary aggregates on a weekly basis. Though, analysing monetary data is not in fashion anymore, it does throw long term trends. Take the case of money multiplier (MM).  It is a common measure mentioned in most text books. When it comes to practice or seeing research on monetary policy, you hardly find a mention. With this crisis we expect renewed focus on monetary variables etc. So, I thought to describe it a bit.

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