SAT 1600

I received a perfect score on the SAT on March 9, 2019.

ACT 36

I received a perfect score on the ACT in December 2016.

SAT Subject Tests

I have perfect scores in SAT Chemistry, Math Level 2, and Physics.

Test Prep Tutoring

Click the picture above to read more from satisfied students and parents!

Letter from the CEO of ACT

If you get a perfect score, ACT's CEO sends you a letter!

November 22, 2020

Online Tutoring Q&A

How effective is online tutoring?  
My online students have seen some large score increases and high final scores

(This isn't a random sample, though: the students who search for and find my Web site tend to be highly motivated individuals.) 

SAT Math Level 2 problem solved on a Jamboard  

How does online tutoring work?  
Before each session starts, I'll share a Google Jamboard with you, which will allow us to write on the computer screen and save up to twenty pages of our work. (If necessary, we can save more than twenty pages of work by creating additional Jamboards.) 

We'll use either Skype or Facetime for the video-conferencing aspect of the session. 

After the session is finished, I'll send you a link to the Jamboard(s) we worked on. 


Do I need to install any software?  
It will be easiest for you to draw on the screen if you use a tablet or a laptop with a touch screen. (Desktops work too, but you'll either have to draw with your mouse or let me draw for you.) 

Jamboards function best in Google Chrome, but you can get by with Firefox if you need to. (Microsoft Edge and Safari are not recommended.) If you have an iPad, you can also use the Jamboard app from the App Store. 


How do I pay for my sessions?  
I'll send you a Venmo or Google Pay invoice after each session is finished. 

Alternatively, you can pre-pay for blocks of ten sessions at a time in order to get an additional 10% discount. 


How can I contact you?  
Please use the contact form at the bottom of my Tutoring page. I look forward to chatting with you! 

October 24, 2020

Five Things to Do the Week Before the SAT

It's the week before the SAT. 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.
Don't be this kid. Seriously.


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 SAT 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 SAT-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 SAT!

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 SAT? Comment below and share them with us!

Calculus: TI-Nspire CAS Instructional Videos


Update: The CX II CAS version of the calculator is now available; I've updated the Amazon link accordingly.

The TI-Nspire CX CAS calculator is notoriously difficult to learn. I've posted a list of videos below to help you learn the calculator and will add to the list over time.

Keep the following points in mind if you haven't bought the calculator yet:
  • The Nspire has a regular (CX) version and a more powerful (CX CAS) version. Make sure to get the CAS version, as the regular one doesn't have the algebra-solving features the Nspire is known for.
  • The Nspire will make it easy for you to check your work, as it will solve most math problems if you set them up correctly.
  • Most calculus teachers allow the use of the Nspire, but their tests may include non-calculator sections. In any case, if you need to show your work to receive credit, you'll have to know how to do problems by hand.
  • It's allowed on the SAT and on any SAT Subject Tests and AP tests that will let you use a calculator.
  • It's not allowed on the ACT.
  • The Nspire has a steep learning curve, so don't buy one unless you can devote several weeks to learning it. If you're going to use it on a standardized test, where speed really matters, plan to spend a couple of months getting used to your calculator.
  • You can switch quickly between the main calculator and graphing screens using the button with the picture of a calculator on it. (It's to the left of the left arrow key.)
  • Press the book key (above the division symbol) to get all of the calculator's functions listed in alphabetical order. If you want to learn how to use a function, type the first letter of its name, then scroll down and highlight the function you're interested in. The bottom of the screen will show you what you have to put in between the parentheses to get a function to work.
    • For example, the polyRoots function needs (Poly, Var) inside the parentheses. That means that you have to type a polynomial in, then a comma, and then the name of the variable you want to solve for. The Nspire will automatically set the function to zero and solve for that variable.
  • Menu > Analyze Graph > dy/dx is a quick way to get the derivative at various points of a function you've graphed. Mouse over various points on the graph, and the derivative will show up as a light gray number.
  • The numerical solve feature (Menu > Algebra > Numerical Solve) doesn't work correctly if the equation you're solving has more than one answer. For example, nSolve(x2=81,x) gives you 9 instead of {-9,9}. 
  • Texas Instruments publishes an Nspire reference guide that you can download and print out. Open the file and hit control-F on your computer keyboard to search.
  • If you're not planning to take AP Calculus, I suggest getting a different calculator. Check out my calculator review page for more information.

Commonly Used Keys
  • The Catalog key (right above the multiplication key) is an easy way to access the calculator's advanced functions quickly.


The Blue Keys


The Pi Key



Storing and Deleting Variables
  • Storing a value into a variable and then typing (or pasting in) an expression is a very fast way to solve problems.
  • If you store a value into x and then take a derivative with respect to x, your calculator will display the answer as a number instead of as an expression in terms of x. This can be a curse rather than a blessing if you actually wanted the value in terms of x.
    • For example, 7→x (7, ctrl, var, x) stores the value 7 into the variable x. Your calculator will think of x as "7" instead of thinking about it as a letter.
      Typing 100x will then return 700.
      d/dx (x2) will return 14.
    • If you then erase the variable (Menu > Actions > Clear a-z), your calculator will think of x as a letter again.
      Typing 100x will give you 100•x.
      d/dx (x2) will return 2•x.
  • If your calculator "breaks" and refuses to display answers in terms of x (showing you only numbers instead), you probably stored a number in x and forgot to delete the variable.
    • "If you plan to do symbolic computations using undefined variables, avoid storing anything into commonly used, one-letter variables such as a, b, c, x, y, z, and so on." (Nspire reference guide, page 234 / PDF page 238)
  • Sometimes it's hard to tell whether the answer your calculator spits out is the same as what you got solving by hand. If that happens, plug in 2 for x for both the calculator's answer and your own answer and make sure that the results match.
    • You can do this by storing 2→x (2, ctrl, var, x), then scrolling to highlight the answer your calculator gave you, then hitting Enter twice to evaluate that expression with the assumption "x=2". Notice that your calculator will spit out an actual number this time instead of an answer in terms of x; you can compare that number to what you'd get by plugging 2 into the answer you derived by hand.
    • Remember to erase the variable (Menu > Actions > Clear a-z) when you're finished! If you forget, your calculator will assume that x=2 for all future calculations, not necessarily an assumption you want to make.


Converting Between Fractions and Decimals



Using Copy/Paste Features to Avoid Re-Typing Functions
  • The easiest way to copy and paste is to use the "up" arrow key to scroll up and highlight some text. Hit the Enter key in order to automatically copy and paste that text into a new line that you can then edit.
  • Control (blue key)-C copies text, and control-V pastes it. Your calculator's keyboard isn't labeled with copy and paste functions, but they function like they would for a computer. It's a useful way to copy text and paste it inside an integral or derivative symbol.
  • Watch the video below if you're interested in using Copy/Paste features to store notes on your calculator.


Defining a Function and Finding Its Derivative



Finding the Equation of a Function's Tangent Line



Implicit Differentiation


  • Note: You can also do implicit differentiate without using the impDif function. Use the Catalog key (located above the multiplication key), choose d/dx, and type your equation in.
    • For example, you can implicitly differentiate the volume of a cylinder with respect to time this way:
      d/dx ( v(t) = πr(t)2h(t) )

      You must remember to explicitly state which letters are functions. For example, v(t) tells your calculator that v is a function of t. The example below will not work, since we've forgotten to tell the calculator that v, r, and h are functions of t:
      d/dx ( v = πr2h )
    • If you do implicit differentiation this way, you must remember to clear your variables using Menu > Actions > Delete Variable or Menu > Actions > Clear a-z. If you have a number stored in the letter v, for example, and haven't cleared variables from your calculator's memory, your calculator will think of v as a number and not a letter even if you explicitly type v(t).
    • Sometimes your calculator will give you a huge mess as the answer. You can either algebraically rearrange the mess to confirm that it's the same as the answer you got when you solved by hand, or you can plug a number like 2.5 into both your calculator's answer and your own answer to make sure you get the same answer.
      • It's relatively easy to plug numbers in once your calculator has given you an answer. Store 2.5→x using cntrl-var, then use the arrow keys to highlight the expression you want to copy, and hit the enter key to paste it. Your calculator will re-evaluate the expression assuming that x=2.5.
      • You must remember to delete the variable when you're finished (Menu > Actions > Clear a-z). If you don't, your calculator will assume that you mean 2.5 every time you type x, a result you almost certainly don't want.

Differential Equation Solver




October 9, 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!

September 1, 2020

Quantitative Finance Course

Update: I've recently started trading a combination of strategies from the course, including risk parity, long/short futures factors, long/short equity factors, and long/short volatility. Here's the live performance (March 2019 through September 2020):  

Return (CAGR): 16.6%/year  
CAPM Alpha: 18.5%/year  
AQR alpha: 8.6%/year (controlling for SMB, HML-Dev, Mom Large, QMJ, and BAB)
Sharpe ratio: 1.00  
Sortino ratio: 3.13 = 2.21√2  
CAPM Information Ratio: 4.22

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.

Passive Investing

The Rate of Return on Everything
Our new, comprehensive data set includes total returns for equity, housing, bonds, and bills in 16 advanced economies from 1870-2015, revealing new insights and puzzles.

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.

Short-Term Momentum (Almost) Everywhere
Contrary to stock-level evidence, we find a short-term momentum pattern in five major asset classes: the most recent month’s return positively predicts future performance.

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.

Two Centuries of Trend Following
Trend following on commodities/currencies/stock indices/bonds is profitable using spot data going back as far as 1800 (both before and after accounting for upward drift).

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

Can Sustainable Withdrawal Rates Be Enhanced by Trend Following?
While diversification across asset classes leads to higher withdrawal rates than equity/bond portfolios, trend following itself is far more powerful.

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.

Will Value Survive Its Long Winter?
Value and other premiums carry the risk of being negative for as long as a decade. Allocating to value, even when it is not providing a premium, reduces long-term portfolio risk.

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.

Leverage Aversion and Risk Parity
Consuming the high risk-adjusted returns of safer assets requires leverage. Risk parity portfolios exploit this opportunity by equalizing the risk allocation across asset classes.

Fact and Fiction about Low-Risk Investing
This article presents five facts and dispels five fictions about low-risk investing within equities and across other asset classes.

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

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

Limiting the universe to large cap stocks and applying more sophisticated portfolio construction to lower turnover reduces short-term reversal's trading costs.

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

The Short of It: Investor Sentiment and Anomalies
Following high levels of market-wide sentiment:
* Anomalies in individual stocks tend to be stronger
* The short leg becomes more profitable
* The long leg's returns are not affected

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.

Stocks with high borrowing fees tend to underperform their peers over the short term, but persistence of high borrowing fees is fast-decaying and not systematically predictable.

Equity loan fees are the best predictor of cross-sectional returns. 28% is explained by the best-performing anomalies; 72% is from unique information.

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.

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.

Investing with Style
Value, Momentum, Carry and Defensive deliver positive returns with low correlation in out-of-sample tests across a multitude of asset classes and time periods using very liquid securities.

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.

Factor Performance 2010-2019: A Lost Decade?
There appears to be a clear dichotomy in recent factor performance: while generally accepted factors struggled, various factors that are considered to be inferior or redundant remained effective.

Exploiting Commodity Momentum Along the Futures Curves
Momentum strategies that invest in contracts on the futures curve with the largest expected roll-yield or the strongest momentum earn higher risk-adjusted returns.

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.

Factor-Based Commodity Investing
A multi-factor portfolio combining the momentum, basis, basis-momentum, hedging pressure and value commodity factor portfolios outperforms widely used commodity benchmarks.


Craftsmanship Alpha

Leveraged Trading (Robert Carver)
* Systematic > discretionary
* Be careful with leverage
* Execution costs and financing spreads matter
* Adjust signals for volatility
* Measure position sizes in dollar × standard deviation units
* Diversification works wonders: add markets and create ensembles

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.

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 are subsumed by those of the long legs.
* Only the short (not long) legs of HML, low vol, and low beta are subsumed by FF5.

Shorting Costs and Profitability of Long–Short Strategies
Shorting costs amount to almost 40 percent of gross long–short returns. If other trade-related transaction costs were considered, long–short profits would be reduced further.

Equity Factors: To Short Or Not To Short, That is the Question
A long-short implementation leads to better risk-adjusted returns than its hedged long-only counterpart, at least when AUM are not too large.

To Trade or Not to Trade? Informed Trading With Short-Term Signals for Long-Term Investors
Strategic trade modification [timing] provides exposure to short-term signals without imposing additional transaction costs/capacity limits.

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.

Conquering Misperceptions about Commodity Futures Investing
Three misperceptions:
(1) Commodities are a play on commodity prices
(2) Commodity prices provide an inflation hedge
(3) Commodity markets can absorb abundant capital

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.

Tax Benefits of Separating Alpha from Beta
The turnover of a strategy that separates α from β is concentrated on the long-short component and enables the deferral of capital gains on the passive market component.

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.

Understanding the Tax Efficiency of Relaxed-Constraint Equity Strategies
* Tax benefits of relaxed-constraint (130/30) equity strategies (character and deferral components)
* Potential impact of the Tax Cuts & Jobs Act of 2017

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)

Real Estate

Modeling private real estate is not straightforward. We consider theoretical arguments, historical average returns, and forward-looking yields.

Financial Advisors

Misguided Beliefs of Financial Advisors
Advisors trade frequently, chase returns, prefer expensive, actively managed funds, and underdiversify. Their net returns [alphas] of −3%/year are similar to their clients'.

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!

Your Name :


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


August 26, 2020

Free Sessions for September 2020 (Quantitative Finance)

Recent large losses in standard stock/bond portfolios emphasize the need for greater diversification and risk control. At the same time, students are quarantined at home without access to the educational resources they're accustomed to.

As a result, I'm offering free weekly quant finance sessions for the month of September. Please contact me using the form at the bottom of this page for more information.


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.

I've recently started trading a combination of strategies from the course, including risk parity, long/short futures factors, long/short equity factors, and long/short volatility. Here's the live performance (March 2019 through September 2020):

Return (CAGR): 16.6%/year  
CAPM Alpha: 18.5%/year  
AQR alpha: 8.6%/year (controlling for SMB, HML-Dev, Mom Large, QMJ, and BAB)
Sharpe ratio: 1.00  
Sortino ratio: 3.13 = 2.21√2  
CAPM Information Ratio: 4.22

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) 
"I enjoy these long threads Darren does on some great financial books." Jim O'Shaughnessy, founder of O'Shaughnessy Asset Management and author of What Works on Wall Street

"Wow, Darren knows the paper way better than I do now." Cliff Asness, billionaire co-founder of AQR Capital Management, which makes hedge fund strategies available to investors at mutual-fund-level fees

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."

Your Name :


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


August 15, 2020

SAT Practice Tests

Update: I've removed Practice Tests 2 and 4 from the list, since the College Board no longer recommends that students take those two tests.

Table of Contents

College Board SAT practice tests
Ivy Global SAT practice tests, including answer explanations
PSAT practice tests

Suggestions

The PSAT practice tests at the end of the list provide useful diagnostic scores until you hit 700 in either Verbal or Math. If you're worried that you'll run out of practice tests, start with the PSAT.

The College Board no longer recommends that students take Practice Tests 2 and 4, so I've removed those tests from the list below and replaced them with newly available Practice Tests 9 and 10.

If you find yourself making small mistakes or running out of time on one or more sections of the test, consider following an objective set of timing rules so that you won't feel rushed.

I strongly suggest printing practice tests out onto real paper. It's almost impossible to take notes, cross off answer choices, or double-check your bubbling unless you're working on paper!


College Board SAT Practice Test 1

Test (Print this out onto real paper!)
Answer Sheet
Essay
Answers and Scoring Chart (This document has the scoring instructions!)
Answer Explanations (These are the College Board's explanations. The SAT Black Book has better ones.)

I've written detailed answer explanations for some of the supporting evidence questions in SAT Practice Test 1.

I've also written a detailed answer explanation for #29 in section 4 (calculator-based math).

College Board SAT Practice Test 3

Test (Print this out onto real paper!)
Answer Sheet
Essay
Answers and Scoring Chart (This document has the scoring instructions!)
Answer Explanations (These are the College Board's explanations. The SAT Black Book has better ones.)

College Board SAT Practice Test 5

Test (Print this out onto real paper!)
Answer Sheet
Essay
Answers and Scoring Chart
Answer Explanations

College Board SAT Practice Test 6

Test (Print this out onto real paper!)
Answer Sheet
Essay
Answers and Scoring Chart
Answer Explanations

College Board SAT Practice Test 7

Test (Print this out onto real paper!)
Answer Sheet
Essay
Answers and Scoring Chart
Answer Explanations

College Board SAT Practice Test 8

Test (Print this out onto real paper!)
Answer Sheet
Essay
Answers and Scoring Chart
Answer Explanations

College Board SAT Practice Test 9

Test (Print this out onto real paper!)
Answer Sheet
Essay
Answers and Scoring Chart
Answer Explanations

College Board SAT Practice Test 10

Test (Print this out onto real paper!)
Answer Sheet
Essay
Answers and Scoring Chart
Answer Explanations


IvyGlobal online SAT Practice Test 1

Test, Answer Sheet, and Scoring Chart (Print this out onto real paper!)
Online Scoring

Answer Explanations
Note: This practice test has an answer key error. The answer to Critical Reading question #18 is A, not D.

IvyGlobal's SAT questions are accurate, and their answer explanations are very well-written. Their practice tests are an excellent way to learn by doing, especially if you don't have a tutor.

IvyGlobal online SAT Practice Test 2

Test, Answer Sheet, and Scoring Chart (Print this out onto real paper!)
Online Scoring

Answer Explanations


College Board PSAT/NMSQT Practice Test 1

Test (Print this out onto real paper!)
Answer Sheet
Answers and Scoring Chart
Answer Explanations

College Board PSAT/NMSQT Practice Test 2

Test (Print this out onto real paper!)
Answer Sheet
Answers and Scoring Chart
Answer Explanations

IvyGlobal online PSAT Practice Test

Test, Answer Sheet, and Scoring Chart (Print this out onto real paper!)

Additional Practice

IvyGlobal's practice tests are almost as good as College Board tests, and the IvyGlobal answer explanations are detailed and complete. You'll find links to IvyGlobal's materials (11 practice tests in print and 2 online) in my list of recommended SAT books.

Use Khan Academy to practice for SAT Critical Reading. The answer explanations aren't great, and the practice questions haven't been tested as extensively as real SAT questions have, but it's still College Board material. If you really want to challenge yourself, you can prep for SAT Literature Subject Test and AP English Language, which make SAT Reading questions seem like child's play.

ACT English and SAT Grammar/Writing are nearly identical. The SAT gives you more time per question, but it also gives you a slightly higher proportion of passage interpretation and adding/deleting sentence questions. Khan Academy is also good here.

You can find several SAT Math practice resources in my list of recommended SAT booksKhan Academy also provides decent practice, but its answer explanations may leave you a bit frustrated.