Scenarios for Risk Management and Global Investment Strategies (The Wiley Finance Series)

334 Pages·2008·3.25 MB·english

by  Rachel E. S. Ziemba

Scenarios for Risk Management and
Global Investment Strategies
For other titles in the Wiley Finance Series
please see www.wiley.com/finance
Scenarios for Risk Management and
Global Investment Strategies
Rachel E. S. Ziemba
and
William T. Ziemba
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Ziemba,Rachel.
Scenariosforriskmanagementandglobalinvestmentstrategies/Rachel
E.S.ZiembaandWilliamT.Ziemba.
p.cm.–(Wileyfinanceseries)
Includesbibliographicalreferencesandindex.
ISBN978-0-470-31924-6 (cloth)
1.Investments,Foreign.2.Riskmanagement.3.Internationalfinance.
4.Investmentanalysis.I.Ziemba,W.T.II.Title.
HG4538.Z572007
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2007026413
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Contents
Acknowledgements xi
Preface xiii
About the authors xix
PART I INVESTMENT STRATEGIES: USING THE KELLY CAPITAL
GROWTH CRITERION 1
1 Take a chance 3
The colocation of money and math 6
Changing a gamble into an investment 6
2 The capital growth theory of investment 9
Blackjack 12
Commodity trading: Investing in the turn of the year effect with Index Futures 13
3 Betting on unpopular lotto numbers using the Kelly criterion 21
4 Good and bad properties of the Kelly criterion 29
5 Calculating the optimal Kelly fraction 37
How to stay above a given wealth path 37
6 The great investors, their methods and how we evaluate them: Theory 43
The various efficient/inefficient market camps: can you beat the stock market? 43
How do investors and consultants do in all these cases? 47
The importance of getting the mean right 50
7 The Great Investors, a way to evaluate them 53
8 The methods and results of managing top US university endowments 63
viii Contents
PART II INVESTMENT STRATEGIES: HEDGE FUNDS 77
9 Hedge fund concepts and a typical convergence trade: Nikkei put warrant
risk arbitrage 79
Gamblers as hedge fund managers 82
A typical convergence trade: the Nikkei put warrant market of 1989–90 85
NSA puts and calls on the Toronto and American stock exchanges, 1989–92 86
10 The recipe for disaster: How to lose money in derivatives 91
Derivative disasters 91
11 Hedge Fund Risk, Disasters and Their Prevention: The Failure of Long
Term Capital Management 95
The failure of the top hedge fund team ever assembled 95
12 The imported crash of October 27 and 28, 1997 101
A week on the wild side 101
Postscript 104
13 The 2006 Amaranth Advisors natural gas hedge fund disaster 111
Background 116
The trade and the rogue trader 117
Is learning possible? 118
Possible utility functions of hedge fund traders 119
Winners and losers 120
PART III TOWARDS SCENARIOS: COUNTRY STUDIES 123
14 Letter from Cairo 125
Some challenges: Currency depreciation 126
The challenge in attracting investment 126
Postscript: Riding the petrodollar boom: Is recent growth sustainable? 130
15 Threats, challenges and opportunities of China 131
Costs of development 133
Overseas investment 136
Postscript 142
16 Chinese investment markets: Hedge fund scenario analysis 143
China’s economy 144
The effect of Chinese demand for resources 145
Chinese stock markets 145
The share alphabet: Definitions of shares available in mainland Chinese
Companies 147
Estimating the returns on the Chinese stock markets: IPOs, ownership and
returns 148