article

This is the first part of a paper originally submitted to my computer science professor to fulfill a graduation requirement. It's probably a bit dry for many of our readers, but it offers a long-winded reply to the faq "so, what the hell have you been up to lately?" Lately, I've been spending a part of my copious free time re-examining the topics I researched in this paper in hopes of coding the theories into some sort of usable application.

"A person is smart. People are dumb, panicky, dangerous animals."
--Kay from Men in Black

I began my research by looking into Modern Portfolio Theory (MPT) specifically to examine whether or not the ideas behind it could be coded into a useful program. I found that the basic tenets of portfolio theory, as put forth by the two books Modern Portfolio Theory and A Random Walk Down Wall Street provide a more than adequate basis for a tool that could assist moderately experienced investors. Specifically, MPT readily translates into a tool or tools which can: a/ analyze a single stock's "risk" in relation to the overall market b/ select a particular set of stocks and analyze the overall riskiness of the portfolio, and possibly (but less likely), c/ select a stock in order to diversify an existing portfolio and thereby reduce that portfolio's risk.

As such however, MPT unfortunately provides few, if any, starting points for novice investors with no preferences for particular companies. Both books emphasize the seeming futility of attempting to analyze individual stocks. They outline a great many studies displaying that stock prices move in a random or near-random manner and preach that examining past performance cannot lead to useful predictions about future performance.

I feel that despite all this, more consideration must be paid to the selection of individual stocks. Perhaps, there is no perfect system for predicting which stocks will result in the highest returns, but there must be ways to weed out those with little to no hope of doing well in the future. By narrowing the pool of stocks to choose from, novice investors may have an easier time selecting stocks and are thereby more likely to benefit from the contributions of MPT.

I also feel that the two books are limited in the fact that they do not appear take into consideration very recent developments in online trading and information dispersal. I will continue with a more in depth description of ways to extend an MPT tool after a brief overview of the basic tenets.

Modern Portfolio Theory

The foundations of MPT lie in the belief that central criterion for investors to consider is risk. In simple terms, risk can be understood to be the probability for disappointment-- the probability that future returns will deviate from expected returns. "Investment risk... is the chance that expected security returns will not materialize an, in particular, that the securities you hold will fall in price." (Malkiel 201) This is more tangibly understood as a measure of the variability of returns.

One technique for quantifying risk is to examine the historic data of a particular stock, determine the set of monthly returns for the time period, and then calculate the standard deviation of this set. For instance, the S 500-Stock Index was found to have an average return of about 1 percent per month or about 11 percent per year with a standard deviation of about 4.5 percent per month (Malkiel 204). Given an extensive history of closing prices, which may be found at finance.yahoo.com, www.bigcharts.com and other financial websites, a script or program could easily compute the average monthly returns and the corresponding risks of individual companies.

MPT further states that by diversifying a portfolio, an investor can reduce his or her overall risk as long as the companies that comprise the portfolio do not move completely in tandem with each other. "As long as there is some lack of parallelism in the fortunes of the individual companies in the economy, diversification will always reduce risk." (Malkiel 209) Correlation coefficients can be calculated by examining the extent that companies hit their peaks and valleys at the same time. As I understand it, the mathematics are reasonably complex, but the upshot is that not even negative covariance is necessary to reduce the risks of a portfolio, "anything less that a perfect positive correlation can potentially reduce risk." (Malkiel 211) The more extensive a portfolio, the less variability in returns up to about ten stocks. At that point, adding more stocks to a portfolio does not appear to reduce risk further. The catch, however, is that there is no way to completely eliminate risk so that an investment will yield guaranteed outcomes.

It's an obvious assertion, but the reasoning behind this is that there are two types of risk associated with stocks. One is "systematic" risk, or the risks associated with the general market fluctuations. These risks stemmed from basic unpredictability of the economic movements as a whole and "the tendency for all stocks to go along with the general market, at least to some extent." (Malkiel 221) The other type of risk is called "unsystematic" risk and refers to the risks coming from the particular company being considered. Expected and unexpected contracts, new discoveries and shifts in management all contribute to a stock's unsystematic risk.

Diversification reduces the unsystematic risks particular to each of the companies but obviously reduce the risk of entering the market as a whole. Systematic risks are quantified with a measure called beta. Beta is very basically a comparison between the fluctuations of a particular stock and the fluctuations of a broad market index.

The calculation begins by assigning a beta of 1 to a broad market index, such as the S & P 500. If a stock has a beta of 2, then on average it swings twice as far as the market. If the market goes up 10 percent, the stock tends to rise 20 percent. If a stock has a beta of 0.5, it tends to be more stable than the market (it will go up or down 5 percent when the market rises or declines 10 percent). Professionals often call high-beta stocks aggressive investments and level low-beta stocks as defensive. (Malkiel 222)

What follows is that portfolios with betas equal 1 should close resemble the S & P 500 in its risks and expected returns. Investors who can stomach more volatility for greater expected returns have a method of systematically increasing the risks they take.

part 2

Part two will cover the limitations of beta as well as possible ways to extend MPT.

Maggiano's (Washington, DC)
I have an inordinate amount of experience with massive servings of food. I gained most of this experience over the last few years in the "Dining Capital of the North Shore." Evanston, despite being ridiculously backward and despite having a sophistic hatred for Northwestern students, feeds people remarkably well. Noodles come out on food barges at Joy Yee's, Dave's Italian Kitchen offers meatballs the size of softballs, the deep-dish pizzas at Giordano's are basically cheese buckets, and, to paraphrase a Milan, the neighborhood Chipotle serves burritos the size of rabbits. Large rabbits. Day in, day out, restaurants all over Evanston do great business shovelling sustenance into slobbering, happy mouths. And there's some mystery as to why America has been getting fatter.

I eat it all. I don't look like I can, but I do. I am very rarely beaten by the size of the plate in front of me. I am a student of the boa school of eating; eat enough in one sitting to survive for a week. I just happen do it almost every day. The upshot of all of this is that I almost never fear ridiculous excess when it come to food. Occasionally, a server will look me over after I order and say "um... that's a lot of food." My typical reply is a snort and a "well, good. I'm a lot of hungry."

I had the same exchange at Maggiano's in DC, but my waitress didn't respond with the standard roll of the eyes and shrug. There was genuine "you don't know what you're getting into" sympathy in her eyes. Nagging doubt. But, she challenged my masculinity... as defined by how much I can eat... somehow... Non-males may never fully understand. Atavistic male response: "oh yeah? I'll show you." And I did. I showed her my complete and utter defeat. I lost to a veritable wading pool of Rigatoni D. There was so much of it. Towards the end I was futilely poking at my plate to spread the contents around in an effort to hide my shame. It didn't help much considering there was still half a tub of pasta to be spread around.

I'm not complaining; the food was ecstatic. Chicken, mushrooms, random Italian stuffs. Every forkful dripped with succulent greatness. It ranks as some of the best Italian food I've ever had. If I was ever going to be killed se7en-style, this would be the food to do it with. One last bit of heaven before an eternity of "Sweating to the Oldies" for talking smack about the Man.

I wouldn't say that this is a full blown obsession so much as part of something I'm becoming increasingly interested in. The title comes from a CD my buddy Ethan and his band Continuum put together called Discontinudity. Lately, I've been listening to it with new ears and being totally blown away by all the lyricism and depth of wordplay. This is a new thing for me. I've never been one to listen to or even notice lyrics. I can listen to some songs a hundred times over without getting a single line closer to being able to sing along. I'll probably study this in greater detail if I ever make it into grad school for psych, but suffice it to say that I'm not the only one who doesn't comprehend lyrics and I haven't pegged the cause of it yet. Thinking back, the first and last time I paid attention to lyrics was back in the 80's when an older cousin came to visit and blared Depeche Mode's "People are People" in the living room.

People are people so, why should it be
you and I should get along so aw-ful-ly?

Lather. Rinse. Repeat. Perhaps my young brain recognized the overwhelmingly destructive power of the stupidity in these lyrics and sought to protect itself from further possible damage by denying any sort of higher processing of lyrics ever again. The words come and go, but I only hear the rhythms and the melodies; no meanings are stitched together into anything resembling coherency. I think this is very similar to the nag filters that go up when parental units want to "have a chat." Space your nods out to match sentence stops. Say "yea, you're so right" when you detect a pause. Think about what movies you haven't seen this summer yet, and if they're worth seeing. This rarely is even voluntary for me anymore. My brain has already decided that in lyrics, as in nagging, there is little worthwhile content to spend it's feeble resources processing. Considering that I've subjected myself to the stylings of Gravity Kills, my tendency to overlook lyrics is probably a very good thing. No telling what damage could be wrecked by lyrics like Hey hey hey / I'm guilty, and you're guilty too / hey hey hey. Pure undeniable genius.

Outside of a very few exceptions (Tool, They Might Be Giants-- diversity is a wonderful thing), I never considered lyrics to be an incredibly important part of the music I listened to until these last few weeks. When I went home for the weekend, I spent a great deal of time driving around in a car without a CD player, so I spent a great deal of time listening to the radio; subjecting myself to "what the kids listen to these days." One song that caught my attention was Eminem's "Without Me". Previously, I had simply dismissed the Eminem phenomenon as another manifestation of stompy fist-pumping angst music so prevalent these days. This time, however, something caught my attention:

I'm back, I'm on the rag and ovulating.

What the fuck? Something clicked. Maybe it's just my fascination with ovulation. I made a conscious effort to pay closer attention to the rest of the song and laughed through most of it. Fantastic. I had never cared about rap or hip-hop at all before because I didn't think that there was much to listen to if you weren't listening to the lyrics. (Don't talk to me about beats. I get my beats elsewhere.) On top of that, the few and far between lyrics I tuned into were usually about getting ho's and gangsta's and bling bling and getting ho's. The retardation that is Top 40 pervades every song it brings into its fold. I comprehended how Top 40 has perverted popular notions about what techno is and can be, but still, I had let it warp my views on what hip-hop and rap were. Fortunately, amidst the drivel there are one or two gems that got me finally interested in further exploring these genres (beyond the safe shores of Top 40.) And luckily, I have a slew of people to help me with my expedition.

My buddy Ethan and I were his place playing a couple rounds of chess. I told him about recently becoming fascinated with hip-hop and lyrics. He decided that my education should begin at the beginning, so he put on a De La Soul album to play in the background. As the chess game progressed, I stopped paying attention to the music. I thought about Nabakov and how he saw the chess board as a square pool of limpid water with rare shells and stratagems rosily visible upon the smooth tessellated bottom, which to [his] confused adversary was all ooze and squid-cloud.. My move. Look. Pieces hinting at utter domination. Think. One move in advance. Two. Three. Sweet. Awesome-ness is about to be unleashed. Pause. Look over everything again. Calm before the storm.

I'm like Bruce Lee
Beatin up the cootchie
profusely

Fuck. I forgot what I was about to do. I was laughing too hard. Slick Rick replaced all the strategy and forethought with an image of Bruce Lee posing in classic Bruce Lee style, tensing his arms, making his crazy face while he... uh... beats up the cootchie profusely, I guess.

Yeah. Something like that. In any case, my interest was piqued. I went to a hip-hop show last Friday night to check out Ethan's band / group Continuum in action. There, I was absolutely blown away by a guest freestyler / poet / artist named Abacus. Whereas before my recent epiphamy, I would've only heard bluhblahbluhblahblublublahblahblah to which I'd respond, "Damn. He's saying a lot. Awesome." This time, I strained to follow along. I strained to undo years of habit and conditioning and strained to follow the words, to follow the story of a guy trying to talk to a girl, to someone, to anyone. Anyone to just hear what he was trying to say without dismissing him as a lunatic. It's a story similar to one we've all experienced; nobody sees me for who I am, nobody hears me as I want to be heard. The difference is that Abacus told his story without angst, without anger, without whining. He told it as one who was incredulous, but resigned to his situation. And he told it at 500 words a second weaving sound and meaning together into a stream of amused desperation. Incredible. Awe-inspiring. Nothing would short of watching the performance first hand and realizing that "oh my fucking hell; dude is freestyling" does the man or his art any sort of justice. It was too good, it was too amazing. And as my friend Chuck pointed out, "It's just not fair."

Since then, I have gone to another show, I'm planning on going to several more, and I'm trying to put a dent in this monstrous stack of CD's recommended by just about anyone with a decently formed opinion about hip-hop. And so the journey begins. The first few tentative steps have been taken. I will try to keep posting of my travels.

Frequent readers of the site and others who keep close tabs on me understand that my life is not one that would be called "particularly interesting." As such, I spent one evening rummaging through old pictures I took with my digital camera. I forgot that I had amassed quite a collection of photos of tabletops I started sometime last summer for lack of anything else to take pictures of (neighbors got a new set of curtains.) Here is the first of what will be a regular feature.

July 20, 2001 in dorm room (Evanston, IL)
This is why I thought I was cool enough to have a website. It is the top of my fridge and shelf-thing in my dorm room and it just happened to show a good cross section of most of my interests at the time. Last summer I had absolutely nothing to do. I was taking one class that met 3 hours a week and that was taught by a friend of mine. I was playing ultimate frisbee three or four times a week. Outside of that, the only thing I had scheduled was occasionally sleeping. Most of my friends had left the area or were working more than a few hours a week. The people who lived around me in the dorm were all taking Orgo-- one of the hardest classes here at NU-- so none of them intended to see any daylight that summer. After a few weeks, I figured I had to find something better to do before they killed me out of sheer irritation. There were a few times I bumped into them as they came back from 8 hours of class whereas I was wandering out of my room having just woken up at 5 in the afternoon (did I mention that I had a night class?) Whenever that happened, they didn't say much, but those eyelids got a little twitchy.

The only arranging I did for the picture was to move the case logic in the back to where it would be more readable. In it, you can barely see two DVD rips; Rounders and Chasing Amy. That case logic contains about 80 DVD rips-- the rest of my collection is elsewhere. The stack of books on the left contains Idoru by William Gibson, the Screwtape Letters by CS Lewis, Hold'em Excellence by Lou Krieger and Modern Portfolio Theory by Robert Hagin. Next to that, there's my Brood War CD caught in a rare moment outside my computer. For a few years, I think my interest in the game Starcraft and the expansion set Brood War could be classified as "near fanatic." My cool friends (as opposed to my dork friends) think they appreciate how much of a complete dork I can be. They have absolutely no idea. I can be downright embarassing without even trying. The stack of CD's was meant to introduce and educate me in the ways of misc rock (popular and non) as was the Rolling Stone magazine. I read, skimmed, and referenced the stack of books on the right to learn Perl and to create the dynamic and magnificient site you see before you today.

Then, of course, there's a Red Bull to help me get through everything. The water and Gatorade are to keep my piss from coming out like toothpaste. Like I said before, I played a ton of ultimate. It's humid as hell out here during the summer; I basically irrigate the field with my sweat every time I play.

So that's what I spent a bunch of my time on. I didn't sleep any earlier or any less, but I guess staying in my dorm room more kept me from wandering around in my pyjamas and annoying my suitemates to violence.