Quote:
Originally Posted by aquaswim47
So Wall St. Golfer, are you suggesting that by having SSO or DDM that you're risk neutral; in other words, you don't get any marginal return for the additional risk taken on? If that's the case, he should invest in SPY or DIA. Or is it, that you get additional return due to the additional risk but on a risk/return basis, it's neutral?
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It's not risk neutral, that would imply there is no effective risk; SPY and SSO have the same
risk-adjusted return.
Let's say SPY returns 10%, since it's the index it's risk-adjusted return is just 10%.
If SPY had a 10% return, then SSO had a return of 20%, but it also had twice the deviation (inherent due to the shares properties) of the index (SPY) thus it's risk-adjusted return is also 10%.
This is the simplest way to adjust for risk, there are other methods to adjust for risk, but this usually works most of the time.