The Magic of Uncorrelated Returns
Most investors have an intuitive sense of the benefits of diversification: it’s easy to see how having all your eggs in one figurative basket could end very badly if the chosen basket were to hit the rocks at some point and most people are more comfortable spreading things around a bit to achieve more consistent and predictable results.
Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.
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Michael
:
Given volatility can be measured and risk can’t I am curious how you came up with a figure for risk or have you just substituted volatility ?
Tim Kelley
:
Hi Michael. As noted in the article, I’ve used standard deviation (or volatility) as the measure of risk. While far from perfect, standard deviation is the the industry standard metric when you need to express risk numerically.
Julian Watt
:
Well written article, as always. I think I even understood most of it. Are you describing Montaka?
Also where can I get 5% for cash?
Tim Kelley
:
Thanks Julian. Montaka should generally have a low correlation with the Australian equity market, making it a good portfolio diversifier for an investor with a large Australian equity exposure. Its correlation would be North of zero, however, as the fund typically has net market exposure.
Unfortunately, the 5% number is strictly illustrative for the time being!