Stage 5
48 questions
When does an extra investment make your portfolio calmer?
As soon as its correlation with the other positions is below one.
Which two building blocks can every sensible mix be built from?
A safe investment and a single broadly diversified basket of shares.
Why do simple rules often beat calculated optimisation?
Because optimisation reacts very sensitively to errors in estimated returns.
What does the usual correlation not capture?
Relationships that aren't straight line, especially in extreme moves.
Why do correlations rise in crises?
Because many people need money at once, leveraged positions are force sold and a shared risk factor dominates everything.
How do you realistically check whether diversification protects you?
By also calculating correlation only for phases of sharp declines.
What happens without rebalancing?
The weighting shifts towards the investment with the higher return, and risk rises without you wanting it to.
Does rebalancing always bring more return?
No. If trends run one way for a long time, it costs return, because the stronger investment keeps being reduced.
How do you do it cheaply?
By putting new money into the part that's currently too small instead of selling anything.
Why is volatility an incomplete measure of risk?
Because it treats swings in both directions the same and doesn't capture permanent losses.
When does the usual calculation underestimate fluctuation?
For investments valued rarely and smoothly, because returns there aren't independent.
What does it mean that swings come in clusters?
Turbulent phases are usually followed by more. That's why volatility can be forecast in the short term.
What does an option's price consist of?
Intrinsic value and time value. Time value shrinks to zero by expiry.
What does theta measure?
How much value the option loses per day as time runs out.
What is implied volatility?
The fluctuation the market expects, built into the option's price. It's a central number in the options market.
Why does permanent hedging cost return?
Because the expected fluctuation in option prices is on average above the actual one, and the buyer pays that difference.
Is there a hedge without costs?
No. You can only shift when you win and when you lose, for example by capping gains.
What's the simpler solution for private investors?
Permanently holding a lower equity allocation.
How does a future differ from an option?
With an option the buyer has a right, with a future both sides are obliged.
What does daily settlement mean?
Gains and losses are settled every day, so with losses you keep having to top up collateral.
What is your risk with a future measured by?
By the full value of the contract, not by the collateral deposited.
Why is the loss in short selling unlimited?
Because the price can rise without limit while it can only fall to zero.
Which risk exists regardless of the price?
That the lender demands their shares back and you have to close.
How does a short squeeze happen?
A rising price forces short sellers to buy back, and those purchases drive the price further, especially if many have shorted and little is traded.
Why does the execution price get worse with large orders?
Because the order works its way through the order book one price level at a time.
What three things does a market maker's spread cover?
Their costs, the risk of a position moving against them and the danger of trading with better informed people.
How do high frequency traders behave in stress phases?
They often withdraw, and that can amplify short crashes.
When is a strategy fully defined?
When a stranger could carry it out without asking anything.
Which question is most often forgotten?
When the strategy doesn't apply and you don't trade at all.
Why does a rule need a reason?
Because without a cause you can name, a rule that looks good in old data can't be told apart from a lucky hit.
What is survivorship bias in a backtest?
The data set only contains companies that still exist today. The failed ones are missing.
Why are figures from annual reports a problem?
Because they get corrected afterwards and today's databases don't show what was known at the time.
Why isn't a test period split off once enough?
Because it loses its independence as soon as you use it several times and change your rules in between.
Why does the number of tested variants matter so much?
Because with many attempts, results that look significant turn up by chance alone.
What does a very smooth results curve tell you?
Usually that it was adjusted until the bad phases disappeared.
What are you checking when you change the settings slightly?
Whether the result stays stable. If it collapses, it probably rests on chance.
What's the real benefit of a program?
That the strategy is carried out exactly as it's written down.
What safeguards does an automated system need?
Limits on order size and number of orders, a position check, defined behavior if the connection drops and a kill switch.
Why is selling a trading system a warning sign?
Because the profits of a working strategy grow with capital, while software sales only grow with the number of customers.
Where does staking income mainly come from?
From newly issued coins, so from a redistribution at the expense of those who don't take part.
What do audit reports cover and what not?
They check the code at a particular version, but not price sources, keys with special rights or chain risks.
Why is interest paid in a project's own token deceptive?
Because the payouts keep bringing new tokens onto the market and the interest figure stays high while the price falls.
Why is the name impermanent loss misleading?
Because the loss is only temporary if prices return to the old ratio, and mostly they don't.
What business does supplying a pool correspond to?
Selling volatility: many small gains and rare large losses.
How do you deal with smart contract risk?
By using different independent platforms and only putting in a small part of your money.
Why does a written plan work?
Because you make the decisions while you're calm and only have to read them in a crisis.
What must go in besides your rules?
An explicit list of what you don't do, and a sentence for a crisis.
When is it right to adjust the plan?
When your life or your time frame changes, not as a reaction to what markets are doing right now.