Wednesday, March 02, 2011

"Risk" adjusted

Be very, very wary of risk measures that focus on historical volatility (or Beta). Bubble formation and explosion is the more beneficial analysis, but it suffers from quantification difficulties, which will forever banish it from academic circles.

Which is alright by me.

Gold for example. Firms falling over each other to design the latest "innovation" that will "track the value of gold" (while still having only a CLAIM to physical gold somewhere).

If one reads the prospectuses from some of these firms, it becomes very clear that the ability to secure your supply of gold during times when its most needed is handicapped.

This is curious. Gold is ostensibly a hedge against social and political unrest. But the purchasers of these gold ETF structures are assuming that the legal infrastructure to secure their contractual rights will somehow remain intact and escape the unrest...and there contains NO RISK PREMIUM for a holder of these ETS to be fairly compensated for the RISK these provisions create.

For example, one large Gold ETF structure contains the language that physical gold will not be provided if "delivery, disposal, or evaluation of gold is not reasonable".

So what is "reasonable"?

No comments: