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January 31, 2020

Free Session (Quantitative Finance)

Students who love math and have a deep-seated interest the stock market will want to check out the curriculum for my Quantitative Finance course, developed from thirteen years of experience reading finance research and four years working as a quant.

Take a look at what others in the finance community are saying about my work:
"Just noticed that @ReformedTrader is bizarrely under-followed. He's curated, quoted, pasted, summarized, analyzed, organized and synthesized well over a hundred papers and articles on academic finance. Honestly, wtf are y'all reading if you aren't following his threads?" Adam ButlerCIO at ReSolve Asset Management (here as well)

"@ReformedTrader has put together an awesome series of Twitter “moments” that highlight research on risk premia, style premia, seasonality, and craftsmanship. Dig in." Corey HoffsteinCIO at Newfound Research and a member of Investopedia's Top 100 in finance (here as well)

"Gotta hand it to @ReformedTrader for his consistency in posting quality quant finance research links. Everyone who is interested in quant finance should follow him. Hidden gem." Pravit Chintawongvanich, Wells Fargo equity derivatives strategist

"Wow, good stuff. I didn't even know the Moments could be used like this. Really great reference and shows the power of info sharing and knowledge building on Twitter." Justin Carbonneaumanaging partner at Validea Capital Management

"Read this thread and become an expert on the quality factor. Fantastic work by
@ReformedTrader." Chris Cain, Quantitative Researcher at Connors Research and author of The Alpha Formula (here as well)

"Wow, Darren knows the paper way better than I do now." Cliff Asness, co-founder of AQR Capital Management

The charts below, taken from a paper written by my friend Pim van Vliet, describe one of the strategies covered in the course.

Note the strong performance in each decade, including the dot-com bust (2000-2002) and 2008 crisis periods. The Conservative leg of the strategy owns low volatility, high momentum, and high buyback yield stocks, leading to more reliable returns than those of the market as a whole.

 

This chart is from The Conservative Formula: Quantitative Investing Made Easy, one of the papers covered in my Quant Finance course.

Please contact me about tutoring and mention the words "Finance Offer" in order to get your first 90-minute session for free. (The offer expires on January 31, 2020.)

Your Name :


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January 24, 2020

ACT: The Best Prep Books

Update: I've updated my review of Steve Warner's books.

The Official ACT Prep Guide, 2019-2020 Edition

This is a much-needed update addressing the weaknesses of the 2018 and 2016-17 editions. The ACT essay changed in fall 2015 and again (slightly) in fall 2016, so all of the practice essay questions in the older editions were out-of-date.

The ACT has gradually been getting harder over time, and the 2019-2020 edition addresses that by making its own practice tests pretty tough and then making the scoring curves pretty generous to compensate. The first three tests are identical to the ones in the 2018 edition. The fourth one appears to be ACT Form 74C, which was administered June 2017. The fifth test is ACT Form A10 (December 2017).

Pros
This is one of the best and most convenient sources of practice material you'll find. The book is heavy and unwieldy, but you can tear out the practice tests and bubble sheets and take them on a flat surface.

Cons
The scoring instructions are hard to find. You'll find answer explanations immediately after each practice test, but the actual answer keys, scoring instructions, and score conversion tables are at the back of the book. It's important to use the correct score conversion table for each practice test you take, as harder tests also have more generous curves. You can miss some questions and still get 36 if you get a difficult section; this tends to happen most often for Math and English.


ACT Prep Black Book, Second Edition (Mike Barrett)

If your score goal is 30-33 and you don't have a tutor, this is the book to start with. Barrett's answer explanations are very detailed, about five to ten paragraphs per question, and he uses only official ACT practice tests.

This new second edition addresses the weaknesses of the first edition: it uses the updated (2018 and 2019-2020) Official ACT Prep guide as its companion, it explains every question on every practice test instead of skipping questions, and it presents solutions in a much more organized way.

You have to get either the Official ACT Prep Guide or the Official ACT Prep Pack, since Barrett's book has answer explanations for that edition but doesn't include the questions themselves.

Pros
A top tutor can explain any officially released ACT question to you in as much detail as you want. Barrett's answer explanations are almost as good. At $28, it's a lot more affordable than hiring a real tutor.

His book really shines in its strategy suggestions for the Reading and Science sections, where the right approach to the test is more important than reviewing content. If you apply Barrett's advice with enough practice tests, you can eventually reach a Reading score of 36 and a Science score of 34.

His treatment of ACT Math focuses on strategic guessing. It's faster to cross off three or four answer choices and choose from what's left than it is to solve problems traditionally. Unless you're very good, you'll need to use strategic guessing for the first forty questions in order to garner enough time for questions 41-60, which tend to be much harder.

The Math content review is limited. If you're shooting for a perfect score on the Math section, you really need to know guessing strategies and the "correct" methods in order to decide which approach is the fastest. Unless your math skills are already very strong, you might have trouble breaking above 32 without additional content review.

Barrett's English grammar strategies are very easy to learn: for example, he uses the term comma sandwich instead of the more common but technical term non-essential clause. This is a strength if you want to learn the material quickly but a drawback if you want a deeper understanding of the ACT's grammar rules.

Cons
Since Barrett chooses to use only official ACT practice questions, he doesn't include any practice questions in the content review chapters. You have to read the entire book and then take an official practice test. For this reason, I suggest treating your first test as un-timed practice.


Cracking the ACT with 8 Practice Tests

This is a good all-around study guide with content review, basic test-taking strategies, and six practice tests. It's a good choice if your final target score is 30 or lower.

Pros
For unofficial practice questions, these are pretty good. My students almost always buy this book and do some of the practice tests before deciding to hire me to review the material with them. I haven't seen the kinds of confusing, badly written questions and answer key errors that plague other unofficial study books.

The strategies in this book are basic and easy to apply.

Cons
The Princeton Review is all about giving you what you need and not one iota more. The ACT is a difficult test that requires students to think critically and pay attention to detail, and the basic strategies in this book may not be enough to reliably raise your ACT score above 30.

Its advice for ACT Reading, to skip directly to the questions without reading passages first, makes it hard for some students to grasp each passage's main point.


1,511 ACT Practice Questions

This is the best bank of unofficial practice questions I've seen. It's useful if your can't get access to official ACT practice tests.

Pros
For unofficial practice questions, these are pretty good. I haven't seen the kinds of confusing, badly written questions and answer key errors that plague other unofficial study books.

Cons
It's not a full prep guide. It has answer explanations but doesn't contain content review or organized strategy suggestions.



The Complete Guide to ACT English, Fourth Edition (Erica Meltzer)

This book is a winner: it has grammar rules, practice questions, and answer explanations. It's a great choice if you're shooting for a 30-36 in ACT English.

The new Fourth Edition adds a Parts of Speech Preliminary Exercise (p. 14), includes answer explanations for the practice problems (p. 247), and fixes some typos, including a major problem with the practice tests (incorrectly labeled problems).

Pros
If you understand every grammar rule Erica teaches, ACT English questions become objective, and you can tackle them like math questions. This doesn't mean they're easy, but it does mean that you can figure out why the wrong choices are actually wrong.

Erica also has some grammar quizzes on her Web site.

Cons
Erica's strategies are great for all of the question types except those that involve adding and deleting sentences. For those, read the Relevance and Purpose article on the College Panda's blog.

Her book is like a textbook (long and possibly boring). Decide now that you're going to be dedicated enough to read the whole thing, including the answer explanations at the end of the book.

Minor annoyances include
  • the way that practice questions are numbered (passage number, followed by question number)
  • the fact that you have to remember to flip to page 247 to grade the practice problems
  • the lack of any guidance regarding the use of the score conversion chart (p. 304).

The Complete Guide to ACT Reading (Erica Meltzer)

Another winner from Erica, this book has great strategies for managing time, skimming, taking notes, and answering tricky questions. It's a good choice if you want a 30-36 in ACT Reading.

Pros
Erica includes a lot of practice questions, including two full practice tests with answer explanations. Her book is more convenient than the ACT Prep Black Book, which requires you to buy an out-of-date edition of the Real ACT Prep guide.

Erica's Web site also offers several reading quizzes.

Cons
Erica's practice questions are good, but they're not as good as real ACT questions. You should supplement her book with real ACT practice tests or consider getting the ACT Prep Black Book instead, which has excellent answer explanations for official ACT Reading questions.



This unusual book addresses vocabulary skills that can help with multiple sections of the SAT and ACT.

Pros
Instead of drilling vocab words using flash cards, Erica groups words by their function in the English language and provides practice questions for those functions. This is a practical approach that will pay dividends in college later: words like hypothesis, tentative, and analogous often occur in science-related passages, so it makes sense to group them together.

Because Erica's focus is on practical reading, her book is equally helpful for ACT English and Reading passages. The section on passage-based vocabulary for science passages (pages 31-35) will even help you on the ACT's Science section.

Erica's Web site has a complete list of grammar rules and and reading/grammar quizzes.

Cons
If you already score higher than 700 on SAT Verbal and 30 on ACT English/Reading/Science, this book might be too easy. You'd benefit more from taking practice tests and reading 10th-to-12th grade level books to build an advanced vocabulary.


Ultimate Guide to ACT Math (Richard Corn)

This is the closest thing to an ACT Math textbook I've seen. It organizes content review and practice drills by topic. If you don't feel comfortable with high school math, start your prep with this book.

Students who get A's in school math often struggle with the ACT. A school test focuses on one chapter of your book at a time, and a good teacher tells you exactly what's going to be on that test. The ACT, on the other hand, tests knowledge that ranges from 7th grade to precalculus and includes Common Core material that not all students have seen yet.

Pros
Richard Corn's book is enough like a textbook to get you comfortable with the topics that are tested on the ACT, but it's not long enough to be truly intimidating.

Cons
The main strength of Corn's book, its textbook-style organization, is also its weakness. The real ACT won't tell you whether a particular problem is testing the standard-form equation of a circle, the area of a circle, or right triangles within the unit circle. It could potentially test all three topics at the same time!

To truly be ready for the ACT, you have to learn how to think on your feet. Corn's book is great if you need content review as a primer, but you'll want to graduate quickly to more advanced practice materials.


28 ACT Math Lessons to Improve Your Score in One Month: ADVANCED Course (Steve Warner)

28 ACT Math Lessons to Improve Your Score in One Month: INTERMEDIATE Course (Steve Warner)

28 ACT Math Lessons to Improve Your Score in One Month: BEGINNER Course (Steve Warner)

320 ACT Math Problems arranged by Topic and Difficulty Level (Steve Warner)

These excellent practice books can get your ACT Math score into the 30-36 range. They're banks of practice problems with detailed answer explanations.

Pros
The practice material is very similar to real ACT Math tests.

The problems are arranged by topic and difficulty level, so students who don't need any content review can jump straight to the chapters that contain what they want to work on.

The answer explanations provide more than one way to do each problem, and the fastest method is marked with a star.

Cons
Content review is minimal. Dr. Warner does define terms like range and domain in his answer explanations, but his book doesn't have an index. You'll need to label important pages with Post-It notes.

If you need content review, start with Richard Corn's Ultimate Guide to ACT Math and come back to Warner's book later.

If you feel rushed on ACT Math practice tests - a common problem - you need to make answer choice elimination and guessing your primary strategy on the easiest 80% of the test. If you correctly eliminate four choices, the fifth one has to be right, even if you haven't solved the problem traditionally. Eliminating answer choices is usually fast and less error-prone than traditional solutions, but (unfortunately) isn't taught directly in Richard Corn's and Steve Warner's books.

Errata
#1 on page 86 of the Advanced book has three possible correct answers: A, D, and E.

#4 on page 121 of the Advanced book is unsolvable unless you assume that the marbles need to be close to evenly distributed between the boxes.

#2 on page 242 of the Advanced book is unsolvable unless you assume that shape at the upper left of the picture is a semicircle. (You should not make assumptions unless they're explicitly stated on the ACT, so the book shouldn't expect you to, either.)

#8 on page 244 of the Advanced book is unsolvable unless you assume that the two triangles shown are right triangles. (Again, you should not be expected to make assumptions that are not explicitly stated in the problem.)

#11 on page 328 of the Advanced book should state that the pyramid has five isosceles triangular faces (not four) and needs to point out that the pyramid is a right pyramid (in which the height is perpendicular to the base).


For the Love of ACT Science (Michael Cerro)

Cerro's book is an excellent strategy guide that can get your ACT Science score into the 30-34 range. He goes over each question type in detail and provides drills, practice tests, and answer explanations.

Pros
It's hard to write good practice questions for ACT Science. I suspect this is because most teachers don't know how to read scientific literature. You have to read journals regularly to understand concepts like correlation and causation, experiment design, and hypothesis evaluation, and even then, most scientific articles read like alien writing.

Given the difficulties involved, Cerro does a great job putting realistic-looking questions together. If you want a dedicated book for ACT Science that's written by a tutor and not a big test prep company, Cerro's book is the only option.

Mike Barrett's ACT Prep Black Book also has excellent strategies for ACT Science, but it requires you to buy The Official ACT Prep Guide.

Cons
The pro is also a con: Cerro's attempt at the impossible, writing accurate ACT Science questions, results in a book that's very good but has some weaknesses. You might feel that a few of his questions and answer explanations are written in a confusing way. If that bothers you, get Barrett's book instead and stick to official ACT questions.

If you want a 34-36 in ACT Science but struggle with finishing the test on time, Cerro's book probably won't be enough. You'll need to work on using your background knowledge to identify the answer that's probably correct before looking at the passage and then use the passage to verify that answer you chose. I'm not aware of any book that teaches this strategy, but I use it in my own tutoring.


The Master Key to ACT Science (Hugh Hung Q. Vo)

There is a noticeable lack of advanced prep guides for ACT Science on the market. My own preference is that students work on building their background knowledge so that they can reduce their reliance on reading the (often long and confusing) passages.

I don't know of any prep book that will teach you how to do this, so if you can't sign up for tutoring, the next best thing is probably this Hugh Hung Q. Vo's book.

It's very dense and will require a lot of self-discipline to get through, as the author's purpose is to help you look at science passages and break down experiments as an actual scientist would. There's also less of an emphasis on background knowledge than I would prefer.

Pros
The table of contents clearly lists the types of questions that students struggle with. If you've taken and reviewed your own practice tests and know exactly what you need help with, this book can be a useful reference manual.

Cons
There's a lot of information packed into this book's pages, and you could easily get cross-eyed trying to figure out what's going on. Unless you're a very serious student, it's probably better to go with Michael Cerro's book.

ACT Essay Sample Responses

Because the ACT essay has changed over the past few years, old editions (pre-2019) of the Official ACT Prep Guide have the wrong essay instructions. If you have one of those older editions, you'll have to go to the ACT's essay page to see the most recent version. That page also has sample essays written by students along with comments on how the essays were graded. There are a total of six sample essays; click on the links in the horizontal, purple Sample Essays bar in order to see all six.

Here's a copy of the updated instructions as of June 2018. Note that instead of having to write about all three perspectives, you can pick only one, giving you the ability to write with more clarity and focus.

The test describes an issue and provides three different perspectives on the issue. You are asked to read and consider the issue and perspectives, state your own perspective on the issue, and analyze the relationship between your perspective and at least one other perspective on the issue. Your score will not be affected by the perspective you take on the issue.

Books to Avoid

Kaplan's series of ACT prep books generally focuses on material that's too easy. The initial diagnostic practice test may give you an inflated score that is unlikely to repeat itself in a real ACT sitting.

Working with Official Practice Tests

If you find unofficial questions to be inaccurate or confusing, you can still prep for the ACT using only official practice tests.
  1. Take a practice test under timed conditions.
  2. Score your test and clearly mark the questions you missed. Use a different symbol to mark the questions that you got right by guessing.
  3. Review the questions you missed or had to guesss on. Spend at least ten minutes on each one. You have to prove to yourself that each question objectively has one right answer and three incorrect ones.
  4. Make a list of the questions you're not able to figure out on your own. Use Mike Barrett's answer explanations, the Internet, or a tutor's help to get to the point where you can clearly identify one correct answer and three incorrect ones for every single question. Your job isn't done until you can do this.
  5. Repeat the process using a new practice test. Keep the cycle going until you're happy with your scores.
This method can work really well if you have a tutor. Do a practice test and hire a tutor to go over some of the answers with you, then spend time at home going over the remaining answers on your own. In your next session, you can go over any questions that are still confusing. When you and your tutor are satisfied that you fully understand the first practice test, repeat the process with a new test.

Going for a Perfect Score

Since the ACT is an established test, you have plenty of resources to draw on if you want to practice for a perfect score.

If you get two 35's and two 36's, the four scores will round to a composite of 36. In addition, difficult test sections give you free points, so you might potentially miss one or even two questions on a section and still get a 36 on it.

Take an official test to get a baseline score and then go through all the books in the list above. After you're done, do as many official practice tests as you can. Since the ACT gives you some leeway to get questions wrong, you should work on improving your speed and accuracy on official tests rather than on unofficial books with questions that are intentionally harder than the real thing.

Most of all, go easy on yourself if you don't make it. Colleges want students who will bring them glory, and the difference between a 34 and a 36 doesn't say much about that potential in the long run.


January 21, 2020

Five Things to Do the Week Before the ACT

It's the week before the ACT. You don't know what to do, you say?

1. Re-take a practice test.

With only a week before the test, any studying needs to build confidence and reinforce what you've already learned. Don't spend time learning new material: cramming isn't very effective, and it'll just stress you out.

Choose a practice test you've done before, preferably a long time ago, and take it again under timed conditions. If you've been studying, you should see a large score increase over your first attempt. Review your answers and spend a little bit of time brushing up on any concepts you still need to practice.

Review stuff you already know.

2. Drive by your test center.

Knowing your exact driving route will build confidence and avoid stress on the morning of your actual test. If you do your practice drive on a Saturday morning, you'll get a good idea of what kind of traffic you'll run into and where to pick up food in case you can't eat at home.

3. Pack your bag.

The day before your test, pack a clear Ziploc bag with everything you'll need and put the bag in your car.

Your admission ticket is really important, as you won't be allowed to enter the test center without it. I usually print three copies of my ticket and leave one in the car, one in my Ziploc bag, and one in my pocket. If you leave the room during the break and forget to bring your admission ticket and photo ID, the proctors won't let you back in!

You can print your admission ticket online by signing into your ACT account.

Here's a complete list of stuff to pack:

  • Multiple copies of your admission ticket
  • Lots of No. 2 pencils with good erasers (bringing too many is better than having too few)
  • A small handheld pencil sharpener to use during breaks
  • A wristwatch with a disabled speaker
  • An ACT-approved calculator
  • A backup calculator
  • Snacks to last through the morning (fruit and nuts are good; starchy or sugary snacks that will spike your blood sugar are bad)
  • Bottled water (avoid any drink that contains sugar)

Leave these in the car:

  • Books and study materials
  • Highlighters
  • Electronic devices other than your calculator
  • Your cell phone (unless it's completely switched off)

4. Get tired.

The day before the test, don't spend too much time studying or doing homework. A good night's sleep is going to help a lot more than a few hours of studying.

Try to make yourself so tired that you can't stay up all night worrying about the test. An afternoon of aerobic exercise is good:
  • Hiking
  • Biking
  • Dancing
  • Yard work

5. Set your alarm.

You'll want to fall asleep without having to worry about whether you'll get up again. The day will come when you never wake from slumber, but that hopefully won't be due to the ACT!

Dress in layers on the morning of the test. You'll be able to remove layers as the room gets warmer without having to get anything from your backpack.

Plan to leave early enough that you get to the test center ten minutes before the doors open. You can entertain yourself with your phone while you're waiting as long as you remember to turn it completely off before the test starts.

Bonus

If you're serious about achieving consistent performance in stressful situations, check out the two podcasts episodes below:

How To! with Charles Duhigg
In this special episode of Happiness Lab, we feature an episode of the podcast How To! with Charles Duhigg. Mike’s dream job of playing bass in a Chicago orchestra is within reach — if only he can conquer his nerves and master the audition. Duhigg brings in Dr. Don Greene, a peak performance psychologist who’s worked with Wall Street traders and Olympic athletes, to see if he can help Mike perform his best under the spotlight. The secret? Jumping jacks, extra sleep, and watching reruns of The Office.

How to Perform Your Best Under Pressure
After serving as an Army Ranger and Green Beret, and getting his PhD in sports psychology, Don has spent decades coaching Olympic divers, professional athletes, race car drivers, opera singers, classical musicians, and Wall Street traders in how not to choke under pressure. He shares the principles he uses as a stress coach in Fight Your Fear and Win: Seven Skills for Performing Your Best Under Pressure. Today we talk about those skills, beginning with why people choke in the first place, and what’s going on in your mind when that happens. We then talk about the fundamentals of managing performance anxiety and staying in right brain flow, including making adrenaline work for instead of against you, getting your mind centered, ignoring distractions, and becoming mentally tough. We also discuss how to thwart negative self-talk through a practice Don calls “thought monitoring,” and his 5-step strategy for recovering when you do make a mistake. 


Do you have other tips for the week before the ACT? Comment below and share them with us!

January 20, 2020

How to Raise Your SAT Score by Reading Biographies

Update: I've added The Man Who Solved the Market and Hedge Fund Market Wizards to the reading list.

The easiest way to raise your SAT Reading score is to read. The skills the SAT tests - knowing vocabulary, literal and careful reading, expressing complex ideas in subtle and clever ways - will naturally become part of you.

Reading is the cheapest and most enjoyable way to expand your knowledge. It's less annoying that paying a professor to force you through a curriculum. It's the way you're expected to train yourself if you go for a graduate degree or run your own business. It's arguably the only way to become the best in your field: you have to read to know what's going on and what projects to pursue.

There's no way for the SAT to test all that directly, so it measures the byproducts: skills like vocabulary, faithfulness to an author's intention, and the ability to restate complex ideas. Ironically, most test prep companies teach you to game the SAT by drilling the byproduct skills while missing the the original point: reading as a life-long learning tool.

You get more of what you measure. 

It's okay to teach to the test and study to the test if you want a 1400. Test prep companies guarantee that you can reach a 1400 because they know that most people can achieve it by learning simple techniques and guessing strategies. The biggest companies train newly recruited tutors to 1400+ and release them into the wild.

If, however, you want to be in the coveted 1520-1600 range, it's better to start early and learn the valuable core skills that the SAT tests only indirectly. It's one thing to fudge a 700 on SAT Math by plugging answer choices back into problems; it's quite another to solve math problems just by looking at them. Similarly, skimming strategies and answer choice elimination can get you a good Critical Reading score (35/40) but probably not a perfect one.

The challenge is to find books that are interesting to you as an individual without simply rehashing what you already know.

To that end, I've begun recommending biographies. These ubiquitous library items combine interesting narrative (resembling fiction), background knowledge (history and social science), and deep knowledge of a subject (natural science, sports, music, or whatever else the biography is about).

Biographies, especially autobiographies, are ideal if you like reading fiction. You can choose ones that focus on your hobbies or challenge yourself by studying subjects that are similar to the ones you struggle with the most on practice tests.

Don't torture yourself with boring books. Books become interesting as you gain background knowledge, so don't force yourself too early. If you struggle with science passages, go to the science shelves at the library, flip through the biographies you find there, and take the most interesting ones home with you. As you learn more science through fun books, the harder ones will become more relevant.

A book is at the right reading level for you if there's about one word per page that you have to look up. If you're still not sure, err on the side of fun rather than hard.

In case you want suggestions, I've compiled a list of biographies I've read, sorted by topic, below. Story-like books that aren't strictly biographies are marked with *stars.

TEST PREP (of course)

The Perfect Score Project by Debbie Stier


NATURAL SCIENCE




SOCIAL SCIENCE

*Freakonomics: A Rogue Economist Explores the Hidden Side of Everything by Steven Levitt and Stephen Dubner

*Superfreakonomics by Steven Levitt and Stephen Dubner


*Next: The Future Just Happened by Michael Lewis


HISTORY AND GEOGRAPHY

The Great Depression: A Diary by Benjamin Roth

Cheaper by the Dozen by Frank and Ernestine Gilbreth



*Wealth, War, and Wisdom by Barton Biggs


FINANCE



Mr. China: A Memoir by Tim Clissold




*The Big Short: Inside the Doomsday Machine by Michael Lewis

*Flash Boys: A Wall Street Revolt by Michael Lewis

*The Quants by Scott Patterson

*Hedgehogging by Barton Biggs



PERSONAL GROWTH


Seven Ways to Improve Your Vocabulary

Update: I've added While America Aged to the reading list.

Whether you're preparing for the ACT or SAT, working toward an A in AP English, or writing your college application essays, a stronger vocabulary will make you a better reader and writer. Here are seven ways to work on your vocabulary:

1. Use the dictionary, but AVOID FLASH CARDS.

A truly nuanced vocabulary isn't something you can create by pure memorization. Good writers like to play with words, so you have to be familiar with how each word is used in a variety of contexts.

Watch the video below and then answer the vocabulary question that follows:



When Mrs. Bennett tells Mary to "find some useful employment," the word employment most nearly means
(a) paid work
(b) trade
(c) profession
(d) task

To answer this question, stick each of the choices into Mrs. Bennett's sentence to see which one works:

"Mary, put that away at once. Find some useful _________."

The first three choices don't work because in the context of the story, Mrs. Bennett is trying to get the house ready for some unexpected guests, and she needs Mary to help tidy up. She's not offering any money, so choice A isn't an option. She's not asking Mary to find a useful career, either, so choices B and C are out. The word task fits: it's consistent with Mrs. Bennett's implied request to clean the house up right away.

Choices A, B, and C are the three definitions that Google's dictionary provides for the word employment. Choice D isn't one of Google's definitions, but it's the correct answer!

ACT and SAT vocab questions look a lot like the one we just did. The most obvious answer is almost always wrong; it's there to trap people who memorize definitions using flash cards. The tests' writers are trying to see if you really understand what you read.

The dictionary can help, since there is some overlap between the meanings of the words employment and task. Just make sure you pay attention to the author's meaning as opposed to your own preconceived notions!

2. Enjoy what you read.

I can't emphasize this enough. Your brain has to draw connections between what you're learning and what you already know, and it's not going to do that very effectively if you're bored.

What you read doesn't matter very much as long as you really enjoy it. Just make sure that, on average, there's at least one vocabulary word you can learn on each page.

I keep a stash of Post-It notes inside the cover of whatever book I'm currently reading. If I run across a word I can't figure out in context, I put a Post-It under the word and use Google to look it up when I have time.

I went to the library last week and flipped through copies of some of the books in the list below. I've put them roughly in order from easiest to hardest. At the hardest level, there are words that even I don't know. You can always find something interesting to learn no matter what your current reading level is.

Roll of Thunder, Hear My Cry (Mildred Taylor)
Hatchet (Gary Paulsen)
The Outsiders (S.E. Hinton)
The Catcher in the Rye (J.D. Salinger)
The Joy Luck Club (Amy Tan)
The Hunger Games (Suzanne Collins)
Body Brokers: Inside America's Underground Trade in Human Remains (Annie Cheney)
Bitcoin Billionaires: A True Story of Genius, Betrayal, and Redemption (Ben Mezrich)
The Great Beanie Baby Bubble by Zac Bissonnette
One Flew Over the Cuckoo's Nest (Ken Kesey)
The Perfect Score Project: One Mother's Journey to Discover the Secrets of the SAT (Debbie Stier)
White Fang (Jack London)
Cat's Cradle (Kurt Vonnegut)
How We Decide (Jonah Lehrer)
Freakonomics: A Rogue Economist Explores the Hidden Side of Everything (Steven Levitt and Stephen Dubner)
Next: The Future Just Happened (Michael Lewis)
While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis by Roger Lowenstein
Harry Potter and the Sorcerer's Stone (J.K. Rowling)
Boomerang: Travels in the New Third World (Michael Lewis)
Flash Boys: A Wall Street Revolt (Michael Lewis)
The Quants (Scott Patterson)
The Blind Side (Michael Lewis)
Moneyball (Michael Lewis)
The Big Short: Inside the Doomsday Machine (Michael Lewis)
Interpreter of Maladies (Jhumpa Lahiri)
Jurassic Park (Michael Crichton)
33 Questions about American History You're Not Supposed to Ask (Thomas Woods)
Sophie's World: A Novel About the History of Philosophy (Jostein Gaardner)
Church Refugees (Josh Packard and Ashleigh Hope)
Animals in Translation (Temple Grandin)
When Genius Failed: The Rise and Fall of Long-Term Capital Management (Roger Lowenstein)
The Great Depression: A Diary (Benjamin Roth)
Wealth, War, and Wisdom (Barton Biggs)
Bad Blood: Secrets and Lies in a Silicon Valley Startup (John Carreyrou)
The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution (Gregory Zuckerman)
Anticancer: A New Way of Life (David Servan-Schreiber)
The Great Gatsby (F. Scott. Fitzgerald)
The Screwtape Letters (C.S. Lewis)
The Great Depression: A Diary (Benjamin Roth)
Cheaper by the Dozen (Frank and Ernestine Gilbreth)
The Hobbit (J.R. Tolkien)
The Construction of Modern Science (Richard Westfall)
Pride and Prejudice (Jane Austen)
Frankenstein (Mary Shelley) This edition of the book includes definitions of the vocabulary words.
The Structure of Scientific Revolutions (Thomas Kuhn)

You can use magazines and blogs, too, as long as there's at least one vocabulary word you can learn on each page.

Newsweek
The New York Times
The Wall Street Journal - This is my personal favorite!
The Economist
Scientific journals: If you're interested in these, find a science blog on a topic you like and download the articles it recommends.

3. Use Professor Word.

Professor Word is a tool that automatically pulls up SAT and ACT words as you're reading on the Internet. If you click on a word, the tool will offer several definitions for it.

You'll be able to literally see how good writing relies on interesting, offbeat definitions of otherwise "easy" words.

4. Listen to audiobooks in the car.

Audiobooks aren't quite as effective as the printed page, but they still offer a way to turn otherwise wasted driving time into something useful.

The app Podcast Republic searches for podcasts and plays them on your Android phone. It also works with audiobooks you've saved on your phone's memory card. (Overcast is a great podcast app for the iPhone.)

Here are a few podcasts I've enjoyed. (I didn't go to Stanford intending to become interested in combining science, technology, and business, but it looks like the school had a good influence on me.)

The Science of Success Podcast
This podcast focuses on using science to help you become successful in life. Its evidence-based focus sets it apart from typical business success and pop psychology shows.

Vaya's podcast focuses on recent research about business and psychology.

Advanced Worldview Analysis (Dr. Ronald Nash)
Dr. Ronald Nash provides one particular point of view on how the Bible interacts with the world's philosophies.

History of Philosophy and Christian Thought (Dr. Ronald Nash)
Dr. Nash teaches the history of philosophy from a Christian point of view.

Seth Godin's Startup School
This is a series of excerpts from Godin's seminars on developing a creative business.

The Meb Faber Show
This is an excellent research-based podcast about what works in investing and what doesn't.

The Politically Incorrect Guide to American History Podcast
If you find the SAT's American History passages to be challenging, this is the podcast to listen to. It covers the American Revolution, the Constitution, the Civil War, and abolitionism. The only major topic on the SAT this podcast doesn't cover is early feminism. The author, Thomas Woods, is a senior fellow in history at the libertarian Mises Institute, so he tilts overtly toward individual and state rights rather than toward a large federal government.

The American Military History Podcast
This podcast takes the interesting approach of telling American history through the eyes of people who served in the military. Its focus on engagements keeps the episodes interesting.

It's History Podcast
This started out as a series of episodes covering the history of the Cold War and has since expanded to a variety of topics.

Pride and Prejudice (written by Jane Austen and read by Elizabeth Klett)
This is the most beautiful rendition of Austen's work that I've ever heard.

MIT courses on various topics
These courses are for advanced students who want to "sit in" on college classes.

5. Watch TV with the subtitles turned on.

Some shows are better than others. Generally speaking, shows that describe a unfamiliar world use advanced vocabulary to tell the viewer what's going on. Science fiction, fantasy, documentaries, and movie adaptations of classic books are all in this category. Music videos also work if the songs are very sophisticated.

If possible, watch with the subtitles on! Reading and writing happen with actual words.

Science Fiction


Fantasy


Documentaries


Classics


Sophisticated Music

6. Become friends with the "smart kids."

Peer pressure works. I usually consider mob psychology to be a bad thing, but you can sometimes harness it to push yourself to do something amazing.

If you go to a good college, you'll make friends with intelligent, ambitious people. They'll prod you to learn faster, work harder, and accomplish more than you would have on your own. Your vocabulary will improve as a result. Why not start that process today?

7. Find a tutor with good grammar and an excellent vocabulary.

Every section of the ACT requires you to be a good reader. ACT Math has word problems, and the Science section is one huge word problem. Recent changes to the SAT have made it even more reading-dependent than the ACT.

A good tutor is the ultimate "smart kid." You'll pick up strong reading and writing skills that will carry you through classes, standardized tests, and college application essays. In the process, you might even become an independent thinker and an effective communicator.

The best way to get into top schools is, after all, to be what they're looking for.

January 18, 2020

Quantitative Finance Course

Update: I've added links to the papers Alpha Momentum and Alpha Reversal in Country and Industry Equity Indexes, Superstar Investors, and Tax-Managed Factor Strategies.

Here's the curriculum I've put together for Quantitative Finance students.

It starts at a fairly basic level (an introduction to diversification, trend following, and relative momentum) and culminates with advanced reading in academic papers.

Prerequisites

  • A deep-seated interest in how financial markets work
  • An A grade in either precalculus or high school statistics (AP Calculus AB or AP Statistics preferred)
  • Ability to commit a minimum of six hours per week to finance homework

Introductory Books

The Ivy Portfolio (Meb Faber)

I've screened dozens of books and have chosen this one because of its readability and balanced introduction to a variety of topics.

Part I discusses how the well-known Yale and Harvard endowments invest and how individual investors can replicate those strategies using index funds.

Part II provides a brief introduction to private equity and hedge fund strategies.

Part III introduces a simple trend-following system that has historically increased risk-adjusted returns while cutting the size of large losses in half.

For example, adding a 10-month moving average filter to the S&P 500 increased its return from 9.3% to 10.6% and lowered its volatility from 15.6% to 11.9%, nearly doubling the risk-adjusted return. The maximum drawdown (largest peak-to-trough loss) was cut from 45% to 23%.

The book also discusses a 13F strategy that can be used to track the stocks that hedge funds buy, cloning their exposures without paying fees.


The Way of the Turtle (Curtis Faith)

Curtis Faith's book is the most accessible introduction to building trading strategies that I've seen.

Chapters 1 and 2 cover the trader's greatest enemy: himself and his own biases. We can reduce these effects by using objective trading strategies that have historically had consistent performance across asset classes, especially if the results survive small tweaks to the strategies' rules.

Chapters 3-8 introduces trend following trading, risk management, and basic statistical metrics that are used to evaluate strategies.

Chapters 9-10 discuss specific indicators that are used to build trend-following trading systems.

Chapters 11-14 go into some of the pitfalls of building systems, including overfitting, small sample sizes, and under-diversification.

The epilogue presents the full-fledged trend trading system that the author, one of the original Turtle traders, used when he was in his twenties working for Richard Dennis.

Strategy Research and Paper Trading

To practice screening for stocks, students initially sign up for StockRover's free plan.

When they're ready to start testing to start testing stock market strategies, they'll need to sign up for Portfolio123. Students that are serious about doing their own research will find the Ultimate plan to be most helpful, as it will allow them to use variable position sizing (as opposed to equally weighting all the stocks) when they run their tests.

Paper trading for stocks and options can be done for free through TD Ameritrade's ThinkorSwim platform. (It's the paperMoney feature.) Your broker probably also offers a paper-trading system, though it may not be as sophisticated as Thinkorswim's.

Students who are interested in futures trading should start with the free Web site FuturesBacktest.

Academic Research (organized by topic)

Within each topic, I've sorted the research so that the easiest material is at the top of the list.

Read These First

A friend asked me to summarize factor investing in a simple way. I didn't do a good job of it over lunch, so here's a (hopefully) better attempt.

Does Higher Risk Actually Lead to Higher Returns?
This is a thread for weird stuff that's hard to explain. In my opinion, there's a lot evidence against the random walk and Capital Asset Pricing Model interpretations of the Efficient Market Hypothesis. That suggests that finance has the same difficulties as other fields in finding a model that works both conceptually and empirically.

Momentum

AQR addresses criticisms of momentum by pointing to its strong premium, pervasive evidence (both through time and across markets), and negative correlation to value.

Adaptive Asset Allocation
Estimates of parameters for portfolio optimization based on long-term observed average values are inferior to estimates based on observations over much shorter time frames.
NOTE #1: You can play around with Portfolio Visualizer's mean-variance optimizer if you want to get a hands-on idea of what the paper is talking about.
NOTE #2: This is one of the papers featured in my $10,000 financial adviser offer.

Volatility-Adjusted Momentum
Incorporating volatility estimates in constructing stock momentum leads to a Sharpe ratio increase (0.34 to 1.14) and strongly reduced crash risk. Similar improvements are found in corporate bonds.

Alpha Momentum and Alpha Reversal in Country and Industry Equity Indexes
Past short-term (long-term) alphas positively (negatively) predict future returns, subsuming their return-based counterparts.

Trend Following

We show that the returns of Managed Futures funds and CTAs can be explained by time series momentum strategies and we discuss the economic intuition behind these strategies. Time series momentum strategies produce large correlations and high-R-squares with Managed Futures indices and individual manager returns, including the largest and most successful managers. While the largest Managed Futures managers have realized significant alphas to traditional long-only benchmarks, controlling for time series momentum strategies drives the alphas of most managers to zero. We consider a number of implementation issues relevant to time series momentum strategies, including risk management, risk allocation across asset classes and trend horizons, portfolio re-balancing frequency, transaction costs, and fees.

Time Series Momentum
A diversified portfolio of time series momentum strategies across asset classes delivers abnormal returns with little exposure to standard asset pricing factors & performs best during extreme markets.

Trends Everywhere
AQR examines out-of-sample evidence for trend following in factors and alternative assets. They find that it works, provides substantial diversification, and isn't explained by vol targeting.

Enduring Effect of Time-Series Momentum on Stock Returns Over Nearly 100 Years
Trend following works in individual U.S. (1927-2014) and international (1975-2014) stocks without January losses or momentum crashes.

Dual Momentum – A Craftsman’s Perspective
Our objectives were twofold:
1.Verify the strength and robustness of the Dual Momentum concept and specifically the Global Equity Momentum strategy
2.Describe how to use ensemble methods to preserve expected performance while minimizing the probability of adverse outcomes

You Can't Always Trend When You Want
Trend following has continued to profit from market moves and diversification. However, the average size of global market moves has been more muted than usual.

Glitch
The convexity profile for a short-term trend following system is most significant when measured over weekly or monthly horizons. Long-term systems, on the other hand, exhibit negative or insignificant convexity profiles over these horizons.

Cross-Sectional and Time-Series Tests of Return Predictability: What Is the Difference?
The difference between the performances of TS and CS strategies is largely due to a time-varying net-long investment in risky assets.

Do Stocks Outperform Treasury Bills?
The best-performing 4% of listed companies explain the net gain for the entire U.S. stock market since 1926; other stocks collectively matched Treasury bills.


Value

Fact, Fiction, and Value Investing
With characteristic wit, AQR corrects misconceptions. Topics include concentration, profitability, momentum, value in other asset classes, composite metrics, and large caps.

Equal-Weight Benchmarking: Raising the Monkey Bars
In the period from 1969 to 2011, if you had picked stocks at random, there is a 99.9% chance you would have beaten the market. It is certainly remarkable that, at a time when the vast majority of hypothetical monkeys flinging darts at the financial pages outperformed, less than half of active managers managed to do so.
NOTE: This is the paper featured in my Introduction to Quantitative Finance page.

Combination Metric Backtest and Comparison of Value Deciles (1951 to 2013)
Over the long run, and with some regularity, cheap stocks tend to outperform more expensive stocks. The PB, PE and PCF ratios are all very useful metrics for sorting cheap stocks from expensive stocks, but we can’t know which will be the better bet at any given point in time. The combo spreads the risk of underperformance relative to any single metric, and, in doing so, generates reliable investment performance over the full period without lagging far behind the front-runner at any point.

Do 'Dogs of the World' Bark or Bite? Evidence From Single-Country ETFs
Mean reversion in financial markets is commonly accepted as a powerful force. This paper examines the performance of a simple mean-reversion-based strategy -- Dogs of the World -- designed to take advantage of return reversals in national equity markets. Both a simulated application of the strategy using indexes since 1971 and application using single-country ETFs since 1997 produces higher compounded average returns than those of a comparable market index. Although the Dogs strategy also produces higher volatility than the index, the information ratio for the strategy suggests that the return more than compensates. An advantage of this strategy is that its implementation using single-country ETFs is straightforward and inexpensive. [NOTE: This paper is no longer available at the SSRN link provided.]

Industry Long-Term Return Reversal
Long-term reversals (3-10 year formations): all U.S. stocks are grouped into 48 industries, and the industries are ranked and traded L/S against each other.


Betting-Against-Beta

We present a model with leverage and margin constraints that vary across investors and time. We find evidence consistent with each of the model’s five central predictions: (1) Since constrained investors bid up high-beta assets, high beta is associated with low alpha, as we find empirically for U.S. equities, 20 international equity markets, Treasury bonds, corporate bonds, and futures; (2) A betting-against-beta (BAB) factor, which is long leveraged low beta assets and short high-beta assets, produces significant positive risk-adjusted returns; (3) When funding constraints tighten, the return of the BAB factor is low; (4) Increased funding liquidity risk compresses betas toward one; (5) More constrained investors hold riskier assets.

Betting Against Correlation
What drives BAB - leverage constraints or behavioral effects? AQR digs in by dividing BAB into B.A.Correlation and B.A.Volatility factors.

Quality

Accounting for both quality and value yields dramatic performance improvements over traditional value strategies. Gross profitability is particularly powerful, especially for large cap stocks and long-only investors.

Higher-quality stocks have higher prices (P/B) on average, but not by a very large margin. A quality-minus-junk (QMJ) factor earns significant risk-adjusted returns in the U.S. and globally.

Size

In the earliest days of empirical work in academic finance, the size effect was the first market anomaly to challenge the standard asset pricing model and prompt debates about market efficiency. The notion that small stocks have higher average returns than large stocks, even after risk-adjustment, was a pathbreaking discovery, one that for decades has been taken as an unwavering fact of financial markets. In practice, the discovery of the size effect fueled a crowd of small cap indices and active funds to a point where the investment landscape is now segmented into large and small stock universes. Despite its long and illustrious history in academia and its commonplace acceptance in practice, there is still confusion and debate about the size effect. We examine many claims about the size effect and aim to clarify some of the misunderstanding surrounding it by performing simple tests using publicly available data.

Short-Term Reversal

Only the component of short-term reversal which isolates reaction to recent “nonfundamental” price changes is significant and positive; it generates a risk-adjusted return 3x as large.

Seasonality

Halloween and turn-of-the month (TOM) are the strongest calendar effects, fully diminishing the other three (the January effect, weekend effect and holiday effect) to zero.


* Stocks, L/S factors, commodities, and country indices have seasonality
* Factor seasonalities are comparable in size to factors themselves
* Stock seasonality may originate from factor seasonality

Using a sample of 97 stock return anomalies, we find that returns are 6 times higher on earnings announcement days. Results are consistent with biased expectations being at least partially corrected.

Sentiment

Why Do Short Interest Levels Predict Stock Returns?
Short sellers are sophisticated investors who have value relevant information about firms and position themselves in stocks with deteriorating fundamentals.

Want Smart Beta? Follow the Smart Money: Market and Factor Timing Using Relative Sentiment
We present a real-time, cross-asset, positions-based relative sentiment indicator derived from the COT report to predict the U.S. equity market.

Multi-Factor

A simple formula based on low vol, high net payout yield, and 12-1 momentum provides "full and efficient exposure to the most important factor premiums" worldwide.

Value and Momentum Everywhere
Value and momentum are more positively correlated across asset classes than the asset classes are themselves. However, value and momentum are negatively correlated both within and across asset classes.

Superstar Investors
Identify structural edges and commit to seeing them through inevitable periods of underperformance. As each of our superstars shows, “merely good” edges over time compound to great long-term performance.

Buffett's Alpha
AQR finds that Berkshire Hathaway's large 13% CAPM alpha and 0.79 Sharpe ratio become insignificant after controlling for BAB and QMJ. Warren Buffett may have been the first multifactor investor.
NOTE #1: Here's a thread about Berkshire Hathaway's factor loadings. You can also check them yourself at Portfolio Visualizer.
NOTE #2: This is one of the papers featured in my $10,000 financial adviser offer.

Strategic Allocation to Commodity Factor Premiums
Portfolios of commodity factor premiums exhibit significantly better risk-adj performance than the commodity market portfolio and add value to a stock/bond portfolio.

Two Centuries of Commodity Futures Premia: Momentum, Value and Basis
* Commodity factors work in hand-collected pre-sample data (back to 1877)
* Long commodities + factor tilts earn higher Sharpes and are still able to hedge inflation

Global Factor Premiums
New sample evidence reveals that the large majority of global factors are strongly present under conservative p-hacking perspectives, with limited out-of-sample decay.

Ignored Risks of Factor Investing
The risks of factor investing are usually understated (perhaps, severely so), and the diversification benefits tend to be overstated.

Factor Momentum and the Momentum Factor
Factors are positively autocorrelated [and time-series momentum strategies work on them]. Momentum is not a distinct risk factor; it aggregates the autocorrelations found in other factors.

Craftsmanship Alpha

Seemingly inconsequential design decisions can actually matter a lot. The skillful targeting and capturing of style premia may constitute a form of alpha on its own.

Death of Diversification Has Been Greatly Exaggerated
Factor diversification is the best answer for the many investors whose risk is dominated by stock market directionality and who will take the time to understand the approach.

Long-Only Style Investing: Don't Just Mix, Integrate
AQR compares "mixing" styles via stand-alone portfolios and "integrating" by combining signals during the stock selection process. Integrating is better b/c it minimizes the impact of constraints.

Role of Shorting, Firm Size, and Time on Market Anomalies
AQR dives into the sources of alpha for L/S size, value, and momentum and whether the alphas have weakened over time.

When Equity Factors Drop Their Shorts
* The alphas of equity factor short legs is subsumed by those of the long legs.
* Only the short (not long) legs of HML, low vol, and low beta are subsumed by FF5.

Commodities

Returns of commodity futures indexes have, on average, been positive over the long run. Commodities are a potentially attractive asset class in portfolios of stocks and bonds.

Commodity Futures Risk Premium: 1871–2018
* New database (newspaper data)
* Non-surviving contracts have a minor impact
* Unlike stocks, median commodity has a positive return
* Long-only, carry, and trend strategies work but have prolonged drawdowns


Carry

Carry predicts returns cross-sectionally and in time series for a host of different asset classes, including global equities, global bonds, commodities, US Treasuries, credit, and options.

Anatomy of Commodity Futures Risk Premia
A single factor, high-minus-low from basis sorts, explains the cross-section of spot premia. Two additional basis factors are needed to explain the term premia.

Tax Alpha

Tax-managed factor tilts (β=1) generated average tax alphas of 1.6%-1.9%/year. Alpha for tax-managed indexing was 2.3%/year. This can be attributed to loss harvesting and the tax rate differential.

The authors construct basic value and momentum strategies. The long-short portfolio has a tax BENEFIT of 0.3%, which can be increased to 6.1% through tax-aware stock selection and timing.

Relaxing the long-only constraint results in a large increase in their tax benefits in particular due to an increase in the character benefit.

Volatility Targeting

The authors look at a strategy that uses volatility to adjust the leverage of individual factors (SMB, HML, Mom, RMW, CMA, Carry) as well as country equity indices.

This paper looks at volatility targeting over equities, futures and bonds. Volatility is generally autocorrelated, BUT targeting works better for equity and credit than Treasuries and commodities.

Options

Options as a Strategic Investment (Lawrence McMillan)

Selling a call against stock does NOT provide a reliable cushion against declines. The cushion comes from the call's negative delta and its exposure to the volatility risk premium, not from the premium that you initially collect.

Delta-hedged covered calls outperform unhedged covered calls. This is the case in equity indices throughout the world. The VRP appears to add more diversification than the equity component of the strategy.

Equity index covered calls have historically provided attractive risk-adjusted returns largely because they collect equity and volatility risk premia. However, they also embed exposure to an uncompensated risk, a naïve equity market reversal strategy.

(1) Long-short trend-following and (2) covered calls each have higher Sharpes than buy-and-hold but negative correlations to each other. [This paper is no longer available at the original SSRN download page.]

Collaring the Cube: Protection Options for a QQQ ETF Portfolio
Diagonal collars on QQQ, 3/1999-3/2008, generated higher returns, lower volatility, lower drawdowns, and lower kurtosis than QQQ itself. Purchases were made at ask and sales at bid.

Embedded Leverage
Many financial instruments are designed with embedded leverage such as options and leveraged exchange traded funds (ETFs). Embedded leverage alleviates investors' leverage constraints and, therefore, we hypothesize that embedded leverage lowers required returns. Consistent with this hypothesis, we find that asset classes with embedded leverage offer low risk-adjusted returns and, in the cross-section, higher embedded leverage is associated with lower returns. A portfolio which is long low-embedded-leverage securities and short high-embedded-leverage securities earns large abnormal returns, with t-statistics of 8.6 for equity options, 6.3 for index options, and 2.5 for ETFs. We provide extensive robustness tests and discuss the broader implications of embedded leverage for financial economics.

Portfolio Strategies for Volatility Investing
The degree of VIX futures contango has been shown to hold predictive power over volatility returns. This study proposes a conditional strategy which allocates to market and volatility risk.

Risk Premia and the VIX Term Structure
A single principal component, Slope, predicts the excess returns of S&P 500 variance swaps, VIX futures, and S&P 500 straddles for all maturities to the exclusion of the rest of the term structure.

Risk Parity is Not Short Volatility (Not That There's Anything Wrong with Short Volatility)
The two strategies’ similarities are overstated, and we find no empirical evidence to support the claimed hidden exposure.

Volatility Trading (Euan Sinclair)

More Strategies

I stay abreast of current research via the FinTwit community and maintain lists of the more interesting developments below (organized by topic):
  1. Benchmarks
  2. Value, Long-Term Reversal, Low Volatility, and Quality
  3. Trend-Following, Cross-Sectional Momentum, and Carry
  4. Volatility Risk Premium
  5. Calendar and Diagonal Spreads
  6. Real Estate, Commodities, and Bonds
  7. Seasonality, Sentiment, Macro, and Short-Term Mean Reversion
  8. Craftsmanship Alpha
  9. Tax Alpha
  10. Sarlacc Pits (things to avoid buying)
  11. Market Psychology and Bubbles
You'll also find a very useful collection of research summaries at CXO Advisory, though you'll have to pay for a membership if you want to access any material written after July 2017.

If you're interested in learning more, please use the form below to contact me. I look forward to meeting you!

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Why are you interested in quantitative finance, and what are your eventual goals? (required)