Sep 10, 2007 - Issue #075
Risk-Adjusted Return on Investment (ROI)
Risk-adjusted return on investment (ROI) relates the anticipated profit to the
amount at risk only, rather than the total amount invested.
Last weeks' example, buying JNY stock at 19.22 plus the Feb 20 put at 2.35 equaled 21.57
as the total amount invested. However, because of the put option, the amount at risk was
only 1.57, excluding dividends.
If the position should gain 8 points, for instance, the ROI on the amount invested would
be 37% (not bad) but the risk-adjusted ROI (on the amount at risk only) would be 510%
(better). Quite a difference. And you'd sleep a lot better also.
So while the folks at CNBC debate what the Fed should or should not be doing, which none
of us have control over anyway, you can be going about the business of being a "serial
opportunist" (Thank you, Sam Zell! I really like that term. It says it all.) methodically
looking for favorable risk/reward opportunities.
Dow score card for the week ending 9/7/07.
DJ-30: 13113.38 -244.36 -1.83%. The Real World DJ-30: 53.77 -1.00 -1.83%.
UP: 3, Down: 27.
Trends (weekly charts): This is the subjective part.
Rising (Generally Higher Highs/Higher Lows) 7 (+1) 23%:
GM, +*HPQ, IBM, INTC, KO, MMM, UTX.
Consolidating (Generally Lower Highs/Higher Lows) 18 (-1) 60%:
AA, AXP, BA, CAT, DD, +*DIS, GE, HD, HON, JPM, MCD, MRK, MSFT, PFE, PG, T, VZ, XOM.
Declining (Generally Lower Highs/Lower Lows) 5 (n/c) 17%:
AIG, C, JNJ, MO, -*WMT.
+/- denotes change of direction.
* denotes change of category.
Comments? Ideas? Feedback? Let me have it, right between the eyes! I'd love to hear from you. Just reply to this zine and tell me what you think!