Risk Premium
Capital Asset Pricing Model

Frequently Asked Questions

General

What is betonviews.com?
Who is your target audience?
What is portfolio optimization?
How does it work?
How can I benefit from betonviews.com as an investor?
What differentiate you from other portfolio optimization websites?
Do I need a PhD in science to use this website?
How do you recommend I use your tool?
Why only indices like the Dow Jones?

Technical

What are the numbers in the bargraph?
What is the exact meaning of SURE, FAIR, GOOD in the stocks table?
In the options, what does the "Interest Rates" value correspond to?
In the options, what do you mean by "Risk Premium" ?
Do you include dividends in returns ?
Where do the "neutral returns" come from ?

Troubleshooting

Why is it so slow on Internet Explorer?
Why does the model turn off sometimes ?
When I increase my view, why does the allocation go down?



General

What is betonviews.com?


Bet On Views is a website on portfolio optimization based on investors' views. Bet On Views implements a sophisticated allocation model while using an intuitive interface. At this stage, Bet On Views focuses on several major stock market indices including the Dow Jones and the CAC40. Bet On Views collects the data entered by the users and publishes statistics on its audience activity on its website. The more users, the more relevant the statistics. Additionnally, Bet On Views offers original analyses on long term stock returns.
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Who is your target audience?


American and Canadian Individual Investors
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What is portfolio optimization?


Portfolio optimization is a quantitative technique that computes the best portofolio allocation according to a certain criterion of return and risk.
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How does it work?


The home page of the website shows you a portfolio allocation even before you enter anything. This default allocation corresponds to the Market Portfolio. This tells you that if you have no clue on the stock market, the proposed allocation is the same as the market portfolio (think index fund). Now, you may have a particular view, not on all stocks, but on certain stocks (based on a tip, a thorough analysis or a gut feeling). This is were Bet On Views gets interesting. Using Bet On Views, you can express a set of views on certain shares and see the proposed allocation shift accordingly. Each time your enter a view, the website recalculates the optimal portfolio allocation using the constraints you indicated. In addition, it is possible to specify the degree of confidence you have in your view. In the home page, the two right-most columns should interests you particularly: Finally, the neutral returns column serves as a reference point. By clicking the corresponding "neutral returns" value of a stock, you remove any attached view to this stock.
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How can I benefit from betonviews.com as an investor?


betonviews.com does not tell you what security you should buy, hold or sell. Rather, it suggests a portfolio allocation based on two sets of data: This portfolio allocation must not be considered as a piece of advice from betonviews.com or an incentive to trade on the financial markets. Note also that certain market variables have default values that you can alter to suit your own opinions. These include the "Interest Rates" and the "Risk Premium". If you value computerized optimization, Bet On Views benefits you inasmuch (1) it relieves you from collecting market data, (2) it allows you to factor in rational framework your views. As an investor, you may also profit from the other resources available on betonviews.com whether optimization tools, articles or data on stocks. Be also aware that, as trafic to this website builds up, the statistics on investors' views may become interesting metrics of their own right.
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What differentiate you from other portfolio optimization websites?


Bet On Views trusts it offers an innovative service to the individual investor. Bet On Views takes care of collecting/updating market parameters and supplies user-specific and meaningful content. In addition, we intend to create a place for investors to share and exchange views on the stock market.
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Do I need a PhD in science to use this website?

The purpose of this website is to make available a sophisticated allocation tool to the average individual investor. Bet On Views believes investors should focus their attention on security analysis and researching relevant data in order to shape their views.
Although Bet On Views uses linear algebra and modern portfolio theory, the user is not expected to even know these. However, the user should be familiar with terms such as stock returns, diversification, portfolio allocation, interest rates, market risk premium and their exact meaning.
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How do you recommend I use your tool?

Bet On Views does not advise you to use its tool in any particular way. However, here is a word of caution. When using the optimization tool, it is tempting to revise one's views in the face of the model output. So, maybe it is best to write down your views prior to logging in and test them as is. Then you may decide either to
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Why only indices like the Dow Jones?

Bet on Views applies its model to a few indices including the Dow Jones. There is one practical reason: indices with numerous components such as S&P500 would involve too many lines in the model, which can be confusing. There is another technical reason: the Dow Jones is less volatile an index than the Nasdaq for example. This means that the correlations of Dow Jones are deemed more stable. Additionally, returns on Dow Jones stocks tend to be more predictable (but less lucrative) than High Tech companies.
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Technical

What are the numbers in the bargraph?

The numbers in the bargraph shown at the right side of the table are percentages. These are the same numbers as in the "ALLOCATION" column. They represent the percentage allocation of each stock in the optimized portfolio knowing the views you entered.
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What is the exact meaning of SURE, FAIR, GOOD in the stocks table?

When entering views in the model you will notice that column "SELECT CONFIDENCE LEVEL" presents you with three optional choices: "SURE", "FAIR", "POOR". These options indicates the degree of confidence in your view. By default, it is set to "SURE". This means that there is no uncertainty on your view: the actual stock returns will be equal to your view with 100% certainty.
"FAIR" means that actual returns will be somewhere off your view by less than 2% with a 80% probability. Let's make an example. Your view on stock A is that it will achieve a 6.5% returns with "FAIR" certainty. This means that in 80% of the times, the actual returns will be between 4.5% and 8.5%. "POOR" means that actual returns will be somewhere off your view by less than 5% with a 50% probability
You will notice that whether you choose "SURE", "FAIR", "POOR" this will affect your portfolio allocation only marginally, in general. This is in most cases, uncertainty on returns on a particular stock correspond to market uncertainty. The uncertainty effect would show more clearly were a sensitivity analysis performed.
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In the options, what does the "Interest Rates" value correspond to?

Just below the stocks table, you will notice an options field for the "Interest Rates". It actually corresponds to annualized risk-free interest rates. The closest thing to a risk-free interest rate in the US is Treasury Yield interest rate. Depending on your investment horizon, the value may change, usually increasing with maturity. Say your investment horizon is 3 years. As of November 30, 2012, the annualized Treasury Yield interest rate was 0.34%.
The value for "Interest Rates" is defaulted at what Bet On Views deem a reasonable value. Nonetheless, the default value shall not be considered as an estimate of future interest rates. In fact, it is likely to be wrong and you should not rely on it. Please consider altering it to suit your own needs and your own expectations.
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In the options, what do you mean by "Risk Premium" ?

Like the "Interest Rates" option, there is an option for "Risk Premium". The risk premium is basically what you get paid for forgoing current consumption and putting your money in risky assets - hoping you will increase your purchasing power over time. In particular, this is the excess returns you obtain over the risk-free interest rate. Here, the "Risk Premium" value stands for annualized market risk premium. As was the case with interest rates, it is annualized because it depends on your investment time horizon.
The market risk premium is constantly changing depending on economic circumstances. When shareholders becomes fearful, it increases. When they become greedy, it decreases. Bet On Views estimates a value of the market risk premium based on historical analysis.
Actually, there are some good reasons to believe that the extraordinary performance of the American stock market (and to a lesser extent the Canadian stock market) in the twentieth century will be difficult to repeat. Among them: increased competition, reduced resources, aging of population, increasing inequalities. Please be aware that you should decide what value to use for "Risk Premium" based on your own hindsight.
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Do you include dividends in returns ?

It depends what you use as your "Risk Premium" value. If the "Risk Premium" value takes into account dividend payments then stock returns implicity includes dividend payments. If not, then stock returns should correspond to the ratio of change in stock price over initial price.
Likewise, if dividends are reinvested in your estimate of the market risk premium, then stock returns calculed by Bet On Views wil reflect that. Please also note: returns calculated are pre-tax and do not include transaction costs.
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Where do the "neutral returns" come from ?

In the table of stocks, you have noticed a column titled "NEUTRAL RETURNS". These are the returns an investor with no views would compute based on market data including: interest rates, market risk premium, variance-covariance matrix of returns and market capitalization. The computing relies on the CAPM (Capital Asset Pricing Model) from Sharpe.
This column does not change as you enter your view and serves a double purpose:
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Troubleshooting

Why is it so slow on Internet Explorer?

This website functions best using Mozilla Firefox, Chrome, or Safari. It works on Internet Explorer but is not optimized for it. Sorry about that. Additionnaly, Internet Explorer has to load additional files, which increases the time to load the page. When using Internet Explorer, make sure the page has fully loaded before you start using the allocation model. If you are experiencing a problem, try the following:
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Why does the model turn off sometimes ?

When you enter one very bearish view or several bearish views, the model can go "off": the proposed allocation is set to zero for all securities and the graph disappears. Before that happens, you may notice that the values displayed for the portfolio allocation become less and less realistic. At this point, the software disables the display but is still working. Continue to enter your other views and you might end up with a more balanced portfolio that the program will not be ashamed to show.
What's actually happening in the optimization process when this occurs ? The model goes off when, in order to get any incremental return per risk, the program has to swing the portfolio allocation in a massive way.
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When I increase my view, why does the allocation go down?

When your view on the return of a stock goes up, you expect the share of this stock to increase in your portfolio. This makes perfect sense. Now, using the model, you may notice that sometimes when you increase your expectations on a stock return, the allocation decreases. Here is why: once you enter one or more views, this affects not only the expected return of this stock but of all others. You can see this if you compare the "RETURNS" and the "NEUTRAL RETURNS". Bet On Views made the choice to keep the default "NEUTRAL RETURNS" values in the column "ENTER YOUR VIEW on RETURNS". This is because each time you enter a view, the natural starting point should be the "NEUTRAL RETURNS" value (the "no view" value).
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