Invest through what we have learned so far

I think I could invest a stock or bond based on what I have learned so far in our class. There are three technical signs that you should know, and they are VaR, alpha, and beta. VaR gives the loss amount of the worst cases. For example, if a portfolio of stocks has a one-day 99% VaR of $2 million, it means that probability that you can lose more than $2 million is only 1%. Therefore, people could estimate budgets for their investment. However, VaR cannot detect Katrina or 911 events because VaR is generated based on historical data. After you estimate your budgets by VaR, you need to know alpha. We could think of alpha as how people reach their goals. For example, two people run 100 meters in Olympic, and the both people set their goals to finish in 10 seconds. One person is finished at 9.5 seconds and the other person is finished at 11 seconds. If I measure the two people by alpha, I can give positive number to person who is finished at 9 seconds, and give negative number to other person. In the real field, if a firm has positive alpha, its managers perform better than their CEO and shareholders expected. If it is negative, the managers did not reach what CEO and shareholders expected. Last, people should consider beta because it measures volatility to the markets movement. For example, if a beta of market is 1.0 and a firm has a beta .5, it means the firm does not depend on market. Thus, if the market crashes, the firm is less likely to crash down than other firms which have higher beta than the firm. Therfore, if you want to invest safer way, you could invest in less beta firms. However, if you are seeking for higher returns, you may invest in higher beta firms. In conclusion, you can make your own portfolios by the combination of VaR, alpha, and beta.


http://www.forbes.com/2008/08/18/alpha-beta-vanguard-pf-education-in_cp_0818investopedia_inl.html

http://www.forbes.com/2008/06/12/oneok-natuzzi-bp-pf-guru-in_jr_0612guruscreen_inl.html