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Intuitive Explanation for Shannon's Demon?

Whether it's called volatility pumping, rebalancing premium, or Shannon's Demon it would just be a form of replicating a short gamma option strategy (eg. selling straddles). Intuitively, you are ...
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How to choose a stock?

This seems like a terrible idea. If you can have such an automated system for one stock, you can have it for many stocks. Then, since you're a serious investor, you want to take into account the ...
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Do equity mutual funds typically have industry-level diversification constraints?

You would typically find such information in a prospectus. For example the prospectus of the Vanguard World Equity fund (VGHEX) doesn't have any wording putting hard limits on industry allocation or ...
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How can beta be negative?

An index that represents all of the market is a CAPM assumption, but in reality $m$ is typically some stock index (like the S&P 500, which represent U.S. large cap stocks). It's not practical to ...
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Why is standard error used to show diversification effect for unsystematic risk?

OK, short answer, think of it this way. For a more formal explanation, google the distinction between what statisticians call a "confidence interval" versus a "prediction interval"....
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How can beta be negative?

A negative beta just means there is a negative covariance (and thus correlation) between your asset in question and your reference “market” portfolio. Perhaps the most intuitive example of this is ...
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Formula for underdiversification

A variant of the Herfindahl-Hirschman index, specifically its inverse, is probably the most widely used for this sort of thing. It's a measure of portfolio or market concentration, where an equally-...
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Which Maximum Diversification Approach in MATLAB is correct?

Is the formula for code #1 $\max D(S)=\frac{S^{\top}\Sigma_S}{\sqrt{S^{\top}V_S S}}$? or is it $\max D(S)=\frac{1}{\sqrt{S^{\top}V_S S}}$ s.t. constraints $\Gamma$? Both appear on the same page, 41, ...
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Decreasing dependence during the financial crisis?

From my experience, I think your results are plausible. Due to the globalization, economies and stock markets from different countries are much more connected than in the past. Furthermore, since the ...
1 vote

Value-at-Risk "hiding risk in the tail" and diversification?

Exactly, VaR is nothing more than a threshold loss value. But it does not tell you how big your loss can be (no information about the shape of the tail). To get more information about it you can use ...
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What can I use to measure of diversification?

Alex C's and Kiwiakos' answers are definitely the most realistic approaches. If you are open to consider also other kinds of risk measures, further alternatives might be thought of. Variance / ...
1 vote
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Can adding an uncorrelated high vol strategy to a low vol portfolio result in a portfolio with even lower volatility?

The total volatility of a portfolio is calculated as follows: Recall that Cov(a,b) is just (Correlation a,b)/(StD A * StD B). So in this case, no the portfolio could not have a total volatility of ...
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