Dog: I don’t know why you’re still killing yourself with this CFA program, always on the lookout for new information (sooo methodical investor!), hoping to learn how to beat the S&P. They’ve already told you how to do it!
Me: They have?!
Dog: Put all your money in the S&P for beta, borrow more around the risk free rate, put some of it into the beta too, and give what’s left to a 5-star small cap emerging markets active manager with positive security selection attribution, and short EWX so that you’re left with levered beta + portable alpha. Problem solved – NEXT!
Me: “But sometimes there’s contagion and currency-”
Dog: “Hedge it all with forward contracts! *switching to a whisper* That is… unless the forwards are showing an arbitrage situation. In which case, we’ll borrow more and…!”
Me: “WAIT! What about interest rate risk?! I’m borrowing at a floating rate!”
Dog: “Buy a cap!”
Me: “But the cost of the cap will offset-”
Dog: “Sell a floor! NEXT!”
I go over to my wife and make a joke about one particular learning outcome statement. “Describe how the phases of the moon affect short term and long term capital market expectations…Ha ha..” This is hard stuff, I tell her. Maybe you should get a life insurance policy on me in case I croak during the exam.
Wife: But you work in finance where salaries are tied to performance and are lumpy along with the market. And since lumpy equals high standard deviation, and high standard deviation equals high risk, the present value of all your future salaries are worth very little due to the high discount rate. Negligible present day financial impact, I’m afraid, should you snuffeth.
Doorbell! There’s the mailman! A care package again – this year from my parents. I tear it open quickly to find…
Dog bones. I get no respect.