Replies to post #35095 on A.I.M. Users Bulletin Board (AIMUSERS)

[ls7550]

Hi aimdeveloper I've thought of that, but then was wondering since they 'cancel' each other out, would AIM still make $?

Two investments, both start at a price of $100 and you buy $50,000 of each (500 shares).

One rises to a price of $120 ($60,000 value), the other falls to $80 ($40,000 value). In total you've gained or lost nothing i.e. the total value is still $100,000 (same as at the start).

You rebalance both back to equal (50%) weightings, so you reduce the winner by selling $10,000 at $120 price (83 shares) and buy (add to the loser) $10,000 at $80 price (125 shares).

Whilst the total fund value is still $100,000, you now hold 417 shares of the $120 priced stock and 625 shares of the $80 priced stock.

Assuming both stocks revert back to a $100 price, you're holding 1042 shares in total, worth $104,200 and have made a 4.2% capital gain - compared to a buy and holder who would be at +/- 0% gain/loss.

Inverse correlations can be great if that low correlation persists. If for example an asset achieves an average 15% yearly gain with a 30% standard deviation, typically that compounds to generate a 11% annualised gain (CAGR). Two such assets, but that have a perfect inverse correlation (-1.0) with equal amounts invested in both and periodically rebalanced back to 50% weights will typically generate a 15% annualised with a 0% standard deviation - i.e. higher rewards with much lower risk (standard deviation/volatility).

Best. Clive.