Comments on: Steady vs. Volatile http://www.dailydoseofexcel.com/archives/2008/02/10/steady-vs-volatile/ Daily posts of Excel tips…and other stuff Wed, 08 Feb 2012 23:58:05 +0000 hourly 1 http://wordpress.org/?v=3.2.1 By: Chris http://www.dailydoseofexcel.com/archives/2008/02/10/steady-vs-volatile/#comment-30812 Chris Tue, 19 Feb 2008 18:49:00 +0000 http://www.dailydoseofexcel.com/?p=1810#comment-30812 <p>Interesting that I heard exactly the same thing on the radio this morning (105.3 Kool FM in Kitchener, ON)...where Ross McKechnie (a financial advisor) said basically that "if you found out that gas was 20% off - but just for this Saturday, there would be lineups around the block...but when stocks are down a little bit ('on sale') people say 'maybe I won't buy'..."</p> <p>Cheers :)</p> Interesting that I heard exactly the same thing on the radio this morning (105.3 Kool FM in Kitchener, ON)…where Ross McKechnie (a financial advisor) said basically that “if you found out that gas was 20% off – but just for this Saturday, there would be lineups around the block…but when stocks are down a little bit (‘on sale’) people say ‘maybe I won’t buy’…”

Cheers :)

]]> By: Tushar Mehta http://www.dailydoseofexcel.com/archives/2008/02/10/steady-vs-volatile/#comment-30684 Tushar Mehta Thu, 14 Feb 2008 07:52:00 +0000 http://www.dailydoseofexcel.com/?p=1810#comment-30684 <p>Hi Dick: Interesting analysis. Four points to consider for refining the analysis.</p> <p>1) I believe this has already been pointed out but it's worth repeating. The random function you used leaves the price fluctuating around the starting value.</p> <p>2) The accepted method for modeling stock prices is a lognormal distribution rather than a uniform or a normal distribution since both of the latter can lead to negative stock prices. While modeling stock prices with a lognormal distribution may not be the easiest to understand see <a href="http://www.networthstrategies.com/Support/Files/Lognormal%20Random%20Walk%20-%20Part%20II%202-22-05.pdf" rel="nofollow">http://www.networthstrategies.com/Support/Files/Lognormal%20Random%20Walk%20-%20Part%20II%202-22-05.pdf</a></p> <p>3) When running the numbers through a set of random values, one cannot use a single result to reach a conclusion. You should run the simulation a few hundred, or better yet a few thousand, times and analyze the results of all those runs. This is essentially what a Monte Carlo simulation does.</p> <p>4) I am not sure how this suggestion stacks up against a Monte Carlo simulation. Rather than simulate the uncertainty of a hypothetical stock to check the value of dollar-cost-averaging, you could get the actual prices of any number of stocks for any number of months. You can get this information from a website like Yahoo! Now, one can check the pros and cons of DCA against any number of real stocks.</p> Hi Dick: Interesting analysis. Four points to consider for refining the analysis.

1) I believe this has already been pointed out but it’s worth repeating. The random function you used leaves the price fluctuating around the starting value.

2) The accepted method for modeling stock prices is a lognormal distribution rather than a uniform or a normal distribution since both of the latter can lead to negative stock prices. While modeling stock prices with a lognormal distribution may not be the easiest to understand see http://www.networthstrategies.com/Support/Files/Lognormal%20Random%20Walk%20-%20Part%20II%202-22-05.pdf

3) When running the numbers through a set of random values, one cannot use a single result to reach a conclusion. You should run the simulation a few hundred, or better yet a few thousand, times and analyze the results of all those runs. This is essentially what a Monte Carlo simulation does.

4) I am not sure how this suggestion stacks up against a Monte Carlo simulation. Rather than simulate the uncertainty of a hypothetical stock to check the value of dollar-cost-averaging, you could get the actual prices of any number of stocks for any number of months. You can get this information from a website like Yahoo! Now, one can check the pros and cons of DCA against any number of real stocks.

]]> By: Jon Peltier http://www.dailydoseofexcel.com/archives/2008/02/10/steady-vs-volatile/#comment-30634 Jon Peltier Tue, 12 Feb 2008 16:56:00 +0000 http://www.dailydoseofexcel.com/?p=1810#comment-30634 <p>In addition to using a good screen capture app (I also use SnagIt), make sure you save image files in the appropriate format. Excel screen shots should be saved as PNG or GIF, not as JPG. JPG is good for compressing images by fudging the gradual changes in color intensity of photographic images, but it sucks at images with sharp transitions between colors (like text, borders, charts, etc.).</p> In addition to using a good screen capture app (I also use SnagIt), make sure you save image files in the appropriate format. Excel screen shots should be saved as PNG or GIF, not as JPG. JPG is good for compressing images by fudging the gradual changes in color intensity of photographic images, but it sucks at images with sharp transitions between colors (like text, borders, charts, etc.).

]]> By: Dick Kusleika http://www.dailydoseofexcel.com/archives/2008/02/10/steady-vs-volatile/#comment-30632 Dick Kusleika Tue, 12 Feb 2008 16:30:00 +0000 http://www.dailydoseofexcel.com/?p=1810#comment-30632 <p>DH: I was adding and subtracting a couple of thousandths across the board to get the final price to work out. That's why one of them snuck over 10%.</p> <p>MM: SnagIt from Techsmith <a href="http://www.techsmith.com/screen-capture.asp" rel="nofollow">http://www.techsmith.com/screen-capture.asp</a> Without question, the best screen capture program I've ever used.</p> DH: I was adding and subtracting a couple of thousandths across the board to get the final price to work out. That’s why one of them snuck over 10%.

MM: SnagIt from Techsmith http://www.techsmith.com/screen-capture.asp Without question, the best screen capture program I’ve ever used.

]]> By: Mike McLaughlin http://www.dailydoseofexcel.com/archives/2008/02/10/steady-vs-volatile/#comment-30628 Mike McLaughlin Tue, 12 Feb 2008 14:00:00 +0000 http://www.dailydoseofexcel.com/?p=1810#comment-30628 <p>On a different train of thought; how do you make such crisp screen shots? Unless I am using a Mac my screen shots of windows etc. tend to be pretty muddy. I am teaching a seminar on Word, and I am frustrated with the lousy quality of the screen shots that I get out of my windows machine when I use the print screen command. The mac is more versatile for this, but sometimes I need an image from windows.</p> On a different train of thought; how do you make such crisp screen shots? Unless I am using a Mac my screen shots of windows etc. tend to be pretty muddy. I am teaching a seminar on Word, and I am frustrated with the lousy quality of the screen shots that I get out of my windows machine when I use the print screen command. The mac is more versatile for this, but sometimes I need an image from windows.

]]> By: Robin Hammond http://www.dailydoseofexcel.com/archives/2008/02/10/steady-vs-volatile/#comment-30626 Robin Hammond Tue, 12 Feb 2008 13:32:00 +0000 http://www.dailydoseofexcel.com/?p=1810#comment-30626 <p>Dick,</p> <p>After 15 years in the markets, this is as good a summary of why timing counts as I've ever seen:</p> <p>(Not sure if the link will work)<br> <a></a></p> <a> <p>Robin.</p></a> <p></p> Dick,

After 15 years in the markets, this is as good a summary of why timing counts as I’ve ever seen:

(Not sure if the link will work)

Robin.

]]> By: Robin Hammond http://www.dailydoseofexcel.com/archives/2008/02/10/steady-vs-volatile/#comment-30627 Robin Hammond Tue, 12 Feb 2008 13:32:00 +0000 http://www.dailydoseofexcel.com/?p=1810#comment-30627 <p>OK. The link didn't work. Copy and paste because dinners on:</p> <p><a href="http://ozrisk.net/2007/10/30/sub-prime-a-lighter-view/" rel="nofollow">http://ozrisk.net/2007/10/30/sub-prime-a-lighter-view/</a></p> OK. The link didn’t work. Copy and paste because dinners on:

http://ozrisk.net/2007/10/30/sub-prime-a-lighter-view/

]]> By: David Harper http://www.dailydoseofexcel.com/archives/2008/02/10/steady-vs-volatile/#comment-30610 David Harper Tue, 12 Feb 2008 03:10:00 +0000 http://www.dailydoseofexcel.com/?p=1810#comment-30610 <p>Interesting. But the fallacy is that your volatile scenario necessarily has a higher expected return (where expected return = arithmetic average). Regardless of the outcome on the volatile scenario, if it equals the final price as the stable, it's average monthly return (i.e., the expected value under volatile) will be slightly higher than 0.8% per month. That's because arithmetic return = geometric return / (1/2 variance). Put another way, given equivalent arithmetic average (i.e., same expected monthly return), adding volatility always gets you to a lower final price. A different test would be to monte carlo the volatility scenario with the same expected return but just shocking volatility; that would be apples to apples but would like produce slightly lower final price. (also, how is 10.021%, isn't your rand maxed out at 1/10?)</p> Interesting. But the fallacy is that your volatile scenario necessarily has a higher expected return (where expected return = arithmetic average). Regardless of the outcome on the volatile scenario, if it equals the final price as the stable, it’s average monthly return (i.e., the expected value under volatile) will be slightly higher than 0.8% per month. That’s because arithmetic return = geometric return / (1/2 variance). Put another way, given equivalent arithmetic average (i.e., same expected monthly return), adding volatility always gets you to a lower final price. A different test would be to monte carlo the volatility scenario with the same expected return but just shocking volatility; that would be apples to apples but would like produce slightly lower final price. (also, how is 10.021%, isn’t your rand maxed out at 1/10?)

]]> By: Ola http://www.dailydoseofexcel.com/archives/2008/02/10/steady-vs-volatile/#comment-30601 Ola Mon, 11 Feb 2008 23:32:00 +0000 http://www.dailydoseofexcel.com/?p=1810#comment-30601 <p>Quick test:<br> <a href="http://www.box.net/shared/zhod0hdlw0" rel="nofollow">http://www.box.net/shared/zhod0hdlw0</a><br> //Ola</p> Quick test:
http://www.box.net/shared/zhod0hdlw0
//Ola

]]> By: Michael http://www.dailydoseofexcel.com/archives/2008/02/10/steady-vs-volatile/#comment-30599 Michael Mon, 11 Feb 2008 19:47:00 +0000 http://www.dailydoseofexcel.com/?p=1810#comment-30599 <p>Hi Dick -</p> <p>"Rejoice" may be too strong. Maybe "not fret" is better. What you highlight is that Dollar-cost averaging buys (more shares) low. Your job is to time the selling high.</p> <p>...mrt</p> Hi Dick -

“Rejoice” may be too strong. Maybe “not fret” is better. What you highlight is that Dollar-cost averaging buys (more shares) low. Your job is to time the selling high.

…mrt

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