Absolute Measures of Portfolio Performance

Zachary BartschLeave a comment

The basic idea is that we want to compare the performance of different portfolios or their managers. This is relatively easy as long as the portfolios contain the same assets. Then, the portfolios are simply characterized by the different weights among the different assets. But how do we compare the performance of portfolios whose assets are different? In finance, we usually assume that everyone can invest in everything. But there are plenty of cases in which that’s a bad assumption: when clients want exposure to particular industries, when there are statutory limitations on holding certain assets, or when an individual company is considering specific projects within the same company under conditions of scarce financing.

The most primitive step is to compare the return and standard deviation of two different portfolios. However, higher risk investments tend to have higher returns in dynamic equilibrium. So, if we were to compare the returns of a tech company to a utility company, then we’d often see the tech companies performing better. But, if we compare the volatilities, then the utility companies would tend to perform better. Sharpe stepped in with a ratio to express the excess return (benefit) per standard deviation (the cost). This way, we can compare the price of volatilities between two portfolios. We’ll stick with just these basic 3 measures: return, standard deviation, and Sharpe ratio. (Others do exist)

Let’s put some meat on this with an example. Say that we have two portfolios, each composed of different assets. There’s a utility portfolio that’s composed of NEE, DUK, and SO. There’s also a tech portfolio that’s composed of AMD, MSFT, and NVDA. Both portfolios have weights of (0.33, 0.33, 0.34).  The results of the utility versus the tech portfolio are:

  • Returns: 14.2% vs 136.3%
  • Standard Deviation: 14.9% vs 32%
  • Sharpe: 0.684 vs 4.134

Goodness me! The tech portfolio returns much more in absolute terms and much more per unit of risk. It’s twice as volatile as the utility portfolio, but the returns are almost ten times as high. If you could, then many of us would choose the tech portfolio over the utility portfolio. But, what if, for one reason or another, you can only invest in one of the two industries? Or, what if you want to invest your money with a skilled manager, rather than a risky one?

One way to tackle this problem is to introduce the Markowitz cloud. Specifically, we can essentially list out all of the possible portfolios along with their return and standard deviations. Then, we can compare the actual performance to the entire menu of possible performances within each set of assets. Below are the possible performances for the utility (left) versus the tech (right) portfolio. The actual portfolios are marked with an X.

One way to evaluate the two portfolios is to compare their return, standard deviation, and Sharpe ratio to the other candidates that were achievable with the same assets. As we can see, conditional on the assets, neither portfolio minimized the volatility, maximized return, nor maximized the Sharpe ratio. Furthermore, assuming that the realized rate of return was the goal, neither portfolio minimized the conditional volatility. Assuming that the realized volatility was the goal, neither portfolio maximized the conditional return. Below are two tables that describe some candidate alternatives and how they differ from the realized portfolio.

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Read Grant’s Memoirs

James BaileyLeave a comment

I heard so many recommendations to read Julius Caesar on the Conquest of Gaul and Winston Churchill on the Second World War– and the recommendations were right. We’re incredibly lucky that some great wartime leaders also happened to be great writers who chose to take the time to share their perspective on the history they helped make.

I rarely heard Ulysses S Grant mentioned as being in the same class of writer- but after reading his memoirs I think he should be. He was obviously a central wartime leader like they were, the highest-ranking general in the victorious Union army by the end of the US Civil War. But I’d never heard how he was also a great writer. He makes history like the campaigns of the Mexican and Civil wars feel understandable, while also sharing funny human stories. Some of these asides feel like they could have been written by Mark Twain, who did in fact help Grant edit and publish his memoirs.

It’s the rare doorstopper book that I wish were much longer- Grant was a two-term US President but his memoirs don’t cover those years at all. I don’t know how much of this is because he wanted to avoid the topic (he’s usually considered a much better general than president) and how much is that he simply ran out of time by dying of cancer.

A few highlights to give you an idea of what Grant was like. Certainly more like a modern economist than I expected:

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The US is Building a Lot More Data Centers Than Five Years Ago, But We Are Still Building More Warehouses

Jeremy HorpedahlLeave a comment

Data centers seem to be popping up everywhere. And based on the value of current construction, the US is indeed building a lot more data centers than we were in 2020 or 2021, about four times as much data center construction (inflation adjusted).

But… did you know that we build a lot more good-old manufacturing than data centers? Almost four times as much in recent months. And that’s even after a decline in manufacturing construction over the past year and a half.

The US also builds about the same amount of warehouses and chemical plants as we do data centers. Data centers may exceed those two categories in a few years, but for now they are pretty similar.

Keep in mind that manufacturing and chemical facilities also use a lot of electricity and water, and have plenty of local negative externalities! Warehouses probably have a lot less resource consumption and external effects, but it’s not zero either.

Are data centers popping up everywhere? Well, people are certainly noticing them. But so are lots of other types of buildings, which rarely register more than a peep from concerned citizens and local media, unless there is some clear and obvious external effect.

Guide to Using Microsoft’s Free “Scan Document to PDF” PC App

Scott BuchananLeave a comment

Regarding Free PDF Scanning Apps for Windows 11

According to Claude:   Windows 11 includes a built-in “Windows Scan” app (free in the Microsoft Store) that lets you scan documents directly to PDF — simple and reliable for everyday use. “Adobe Scan” offers a free mobile companion but also works via browser. For more features, “NAPS2” (Not Another PDF Scanner 2) is a popular open-source option with batch scanning, OCR, and direct PDF export. “IrfanView” with its scan plugin is another lightweight choice. For advanced control, “VueScan” offers a free version with core functionality. Most modern all-in-one printers also bundle free scanning software compatible with Windows 11.

Why I Chose “Scan Document to PDF”

My HP scanner software seemed pretty snoopy, not localized to my own PC. Not that I have anything dire to hide, but I’d rather not have my private affairs shooting off to a server who knows where. So I tried the built-in Windows “Scan” function for scanning documents on my trusty ink-jet printer/copier/scanner. It would run pages through the feeder, but then freeze up.

I’ve had mixed experiences with free software, often it gratuitously installs crap-ware on your PC. But surely not Microsoft… so I downloaded the free “Windows Fax and Scan” app mentioned by Claude. It did work, but was a bit clunky and limited. You have to first save a file in some graphic image format like PNG or JPEG, then go to Print, and choose “Microsoft Print to PDF”.

But then, I installed another free Microsoft app, “Scan Document to PDF”.  That seems like a sweet spot here. It seamlessly scans to PDF, but has a good deal of extra functions that are intuitively accessible. It can save files as images like jpg if that is what you want. You can activate OCR to make a scanned document searchable. You can scan individual pages, and decide which ones to bundle into a pdf file. You can brighten or rotate pages, etc.

Go to https://apps.microsoft.com/detail/9nwn2l7ncwlx?hl=en-US&gl=US (or go to the Microsoft Store and then to the app) to download and install. Finally, here are the user instructions I typed up as a reminder for my own use:

INSTRUCTIONS FOR “SCAN DOCUMENT TO PDF” ON WINDOWS 11 PC

( 1 ) Click Start icon, to left of Search bar at bottom of Windows screen. Click on Show All, for a list of all programs. Scroll down to Scan Document to PDF and click.

( 2 ) Check scan settings showing on left hand side. Can adjust them here, or by clicking Profiles button.    Paper Source: Glass for one sheet on scanner, or Feeder for auto feeding pages.    Resolution: Suggest 300 dpi.      Bit Depth: Color for a color scan, or usually Grayscale for a black & white final document (sometimes gives better resolution than the “Black & White” setting). 

( 3 ) Click Scan button (top left) to initiate scan. (Note: on the side of that button is a dropdown for options like setting up Batch Scans.)

( 4 ) Scanned pages will show on screen. To save them all as one PDF, click the Save PDF button. Default pdf file destination is /Downloads/ folder. (To save only selected pages into the final PDF, click on the dropdown on side of that button)

MORE OPTIONS

( 5 ) BEFORE SCANNING: (A) You can set up a different Profile of scan settings (scanner device, feeder, resolution, etc.) by clicking on Profiles button.  (B) Click on OCR button to make final pdf searchable (not just a static image).

( 6 ) AFTER SCANNING:  (A) Click Import to import pages from existing PDF, that you can then add to newly scanned pages.  (B) Click Image button and select a page to crop, brighten, rotate, make black&white, etc.

Tall poppies don’t get the calls

mdmakowsky1 Comment

Ask anyone who grew up playing basketball as the tallest player on the court and they will, each and every one of them, tell you that players were allowed to foul them harder and more often. If you were tall you didn’t get the calls, full stop. Why? We could sort through a host of mechanisms, but they all boil down to “Being tall is an unfair advantage. It’s only fair that I, the shorter opposing player, am allow to slap you, chop you, kick you, trip you, grab you.” To be honest, I don’t think this is a particularly shocking phenomenon. “Tall poppies get cut down” is a cultural cliche for a reason. What is interesting is that it persists even amidst billions of dollars in market incentives pushing in the other direction.

The latest version is happening right now as the Oklahoma City Thunder are currently doing their best to end Victor Wembanyama’s nascent career each and every night, and the referees seem uninterested in realigning the incentives otherwise. At the moment the Spurs are currently up 65-43 in game 4 of the series. If the series goes 7, there’s at least a 20% change Wembanyama doesn’t make it to the end. Will they break his foot smashing down on it, break his leg tripping him, or dislocate his shoulder yanking down on it from a leveraged position? Don’t know, but they’re doing their best to make it happen.

Caitlin Clark came into the WNBA as the single greatest talent prospect in the history of women’s basketball. The abuse she suffers is well documented. Wayne Gretzky was the greatest hockey player of all time, but he was arguably only allowed to reach his potential because Bobby Orr’s careers was cut in half by a league that allowed teams to abuse him with little to know punishment. Bobby Orr’s sin was that he was such a better skater than everyone else that, if allowed to play without constant grabbing, hooking, and abuse tantamount to aggravated assault, he would have walked away with too many goals, wins, and Stanley Cups. It wasn’t fair that he was so much better, so they let the players even the odds. Having watched him limp away after only 7.5 seasons, the NHL took the unofficial position that Gretzky’s teammates (specifically, Dave Semenko and Marty McSorley) held carte blanche to assault anyone who touched Gretzkey. While perhaps not a culture-shifting solution, Gretzky did have a 20 year career that brought hockey to new heights of popularity, so it was ostensibly effective.

But none of that gets at the underlying economics. Elite players bring big audiences to sporting events, which in turn, brings in big money for everyone. The owners, players, and everyone in between gets richer when elite players shine under the biggest lights. So why chop them down? Well, first we have a collective action problem to solve, because, yes, the entire market benefits from superstars, but their opposition during the course of play in any one game have the individual incentives to do whatever they can get away with to win. That’s why we have referees, commissioners, and a players union: to solve those collective action problems. All of those rules and institutions are in place specifically to align incentives and bargain for outcomes that maximize welfare. So why aren’t they working?

When you find cliches at the front of your mind, decent chance you’re running up against psychology and behavioral economics. And as Victor Wembanyama is learning each and every night of the playoffs, “tall poppies get cut down”. It’s not fair that he’s the first 7’5″ player with elite NBA level skills to ever play the game. You know, I was never a fan of watching Shaq play basketball per se, but I always knew he should have scored at least 40 points every night. Yes, he committed 7 offensive fouls every game, but he also received 25 fouls that went uncalled. Players were allowed to maul him because it was unfair he was so much bigger, stronger, and more athletic. His career was only as long as it was because his body could endure the abuse. There has never been another player in NBA history who could have survived even 3 seasons receiving the abuse he did.

Putting aside simple behavioral explanations, we also should consider the possibility that NBA team owners and players are so far down the diminishing marginal returns to wealth, that the median participant would actually prefer to earn less money in order to maximize their own chance at winning a championship. They want parity, of a sort. Parity, but only once the playoffs arrive. The regular season is too long and everyone does, in fact, want to make money, so the abuse is minimal, but once the playoffs arrive, the collective preference is for parity delivered via weaker rule enforcement. There are only so many elite players, but everyone is capable of low-level violence. This preference for postseason parity may also explain why Oklahoma City’s best player, Shai Gilgeous-Alexander, has the reputation for simulating being fouled on every play. If you’re going to get fouled no matter what, you might was well maximize the probability of getting a foul call by forcing the referee to be observed observing the incident.

And, to be clear, parity may in fact be revenue maximizing. Just look at the NFL – the entire structure is designed to maximize the number of franchises who believe at the beginning of the season that their team has a chance to win it all. The players are relatively anonymous compared to NBA superstars, but fans are mostly there to root for laundry, and in the NFL, so long as that laundry doesn’t say NY Jets on it, there’s at least a glimmer of hope. Counter point, just look at the NFL. They understood that each team, especially once the playoffs started, had strong incentives to try to end the opposing quarterbacks career on each and every play. So the NFL introduced a battery of rules to protect quarterbacks, and it seems to have worked.

So maybe I’ve come full circle. Maybe this is what the NBA wants. But I really, really it’s hope not. Wemby is special. I’d like to see the very most of what he can become.

Someone I Know is Taking Wegovy

Joy BuchananLeave a comment

This person is buying the pills direct from the supplier, in consultation with a doctor. It is amazing. Resurrection. The Great Stagnation is over. Go get this stuff. It’s funny how many people are already on it, but it doesn’t come up until you initiate a conversation.

As a behavioral economist… it’s pretty wild. Folks were eating things that part of themselves wanted to eat and part of themselves did not want to eat. And, instead of getting rid of the junk food, or somehow training people out of overeating, we’ve chemically quieted the desires.

I feel like the healthy people could have done more on choice architecture, in the old days (pre-2025). It was hard for the people trying to lose weight to avoid junk food. I’m not trying to introduce the boot of the state into kids’ birthday cakes but just pausing to reflect on how many people died because of our choices. Humans are supposed to just walk past an aisle of candy bars? (My parents explicitly and intentionally trained me from a young age to never buy anything at the “check out aisle” because it’s always going to be a stupid impulse purchase. As an adult, I buy a chocolate bar at check out about once a year and feel like I’m getting away with robbing a children’s hospital.)

Here’s Paul pondering these issues 2000 years ago (shortened by me):
Romans 7:15-19
15 I do not understand what I do. For what I want to do I do not do, but what I hate I do. 16 And if I do what I do not want to do, I agree that the law is good. … For I have the desire to do what is good, but I cannot carry it out. 19 For I do not do the good I want to do, but the evil I do not want to do—this I keep on doing.

Joy: I think on net glp1 will increase fertility relative to not having it. It seems like good news for folks reaching their (reportedly) desired number of children. But I would not count on it to turn any country around to get back to replacement.

Breakfast Pudding

Zachary BartschLeave a comment

When I was a kid, my family didn’t get JELLO puddings – or any puddings for that matter. As an adult, I realized that a lot of those are just sugar, cornstarch, and stabilizers. So, they became less appetizing.

You’re going to laugh at me.

A few years ago my wife and I went to a nice little breakfast restaurant for brunch in old town Fredericksburg, VA. I got this coconut milk chia seed parfait. I was blown away. That seems silly to say, but it was really nice.

For years we spoke longingly of that chia parfait and we’d speculate about when we might go there again. It was one of those conversations that married people have.

“Hey, remember that really good thing?”

“Yeah, it was really good.”

“We should try that again sometime.”

Then one day, while visiting Virginia, we noticed that the restaurant had closed. It wasn’t surprising because the restaurant had only been ‘fine’, except for the healthy and delectable layered treat from years past.

Now we have a handful of kids and we try different things periodically to make the morning routines go more smoothly. Having a responsible treat to entice juveniles from their room isn’t the worst thing that we’ve tried.

My wife, in her laudable creativity, refined a new creation that’s inspired by our now frustrated longing for a nice chia parfait.

Below is a recipe for peanut butter chocolate chia seed pudding. Basically, you mix it the night before and stir it again in the morning and it’s ready to go. It’s a crowd pleaser.

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The Welfare-Productivity Tradeoff in US-China Trade

James BaileyLeave a comment

Who benefits from trade between the US and China? If China subsidizes their exporting industries, should the US see this as a threat that undermines our industries, or thank China for lowering prices for US consumers? Does it matter that China runs a persistent trade surplus (exporting more than they import), while the US runs a persistent trade deficit?

Everyone has a take on these questions, but the answers I hear even among economists rarely draw from the leading modern models in the international trade literature. Krugman (1980) (10k citations) shows how large home markets matter for industries with increasing returns to scale. In a simple increasing returns model, unlike with Econ 101 comparative advantage, temporary subsidies can permanently flip which country an industry efficiently operates in.

Melitz (2003) (20k citations) extends the Krugman model to include firm-level productivity differences. Rubini (2014) extends the Melitz model to include innovation. Now Xiao (2025) has extended the Rubini model to include unbalanced trade, then calibrated the model with data from the US and China. Now that the mathematical models are able to incorporate more and more features of the real world, what do they show?

China’s trade surplus and the US trade deficit have tradeoffs. Specifically, China’s trade surplus leads them to be more productive than they otherwise would be, but have lower welfare, because so much of the fruit of their production is enjoyed by other countries. Conversely the US trade deficit leads us to produce less than we otherwise would, but to have higher welfare thanks to consumers enjoying the cheaper foreign goods.

In one sense this recapitulates some of the same debates people had without the math. Some people like trade because it benefits US consumers and overall present-day US wellbeing. Some don’t like it because it harms US manufacturing and our resiliency in any potential future conflict.

One advantage of the models is that it puts numbers on the tradeoffs. In this case, the welfare benefit to the US may be small relative to China’s welfare loss and relative to both countries’ productivity changes:

the average productivity increase caused by trade surplus ranges from 1.2 percentage points to 5.46 percentage points when the innovation cost changes. These results explain China’s long-term export promotion policies and align with its new policy goal of developing “new productivity forces”. I also identify a negative effect on China’s trade partners’ productivity (namely, the US), of between -2.74 percentage points and -5.89 percentage points. This comes at a welfare cost, equivalent to between 3 percentage points and 5.7 percentage points of consumption units. Correspondingly, China’s cheaper goods increase welfare in the US by between 0.26 percentage points and 1.22 percentage points

In addition to the big complex model, Xiao’s paper shares nice background on the sheer size of Chinese export subsidies, noting that they account for 2/3 of all manufacturing subsidies in G20 countries, and that export tax rebates are almost 2/3 as large as Chinese net exports. In short, China’s trade surplus is not simply driven by differing preferences and production capabilities across countries, but is largely driven by deliberate policy choices.

P.S. The paper’s author, Aochen Xiao, is on the econ job market.

Fuel Costs Are Way Up, But It’s Still Pretty Affordable to Fill Up Your Tank (relative to wages)

Jeremy HorpedahlLeave a comment

Two months ago I wrote about gasoline prices and tried to give the current prices some historical context. Gas prices have, of course, only continued to increase since then. Here’s a chart I created to give a bit more context, using an idea from Ryan Radia: how much does it cost to drive a car 250 miles? Since fuel efficiency has increased over time, we might be understating how much it costs to drive today relative to the past. And of course, to give the “cost” proper context I have stated in terms of hours worked at the average wage (note: the final data point is from April 2026, as we don’t have wage data for May yet):

In April 2026 it took about 1.4 hours of work at the average wage ($32.23) to purchase enough gasoline to drive 250 miles (10.7 gallons) at the average fuel efficiency (23.4 miles per gallon). That average fuel efficiency figure is from 2024, the latest available, so it could be a bit higher today. Maybe it’s a little easier than 1.4 hours of work to buy it, but even if fuel efficiency had crept up to 25 mpg (that would be a big increase in 2 years, historically speaking), it would still be 1.3 hours of work.

1.4 hours of work is certainly a big jump from earlier in 2026, but you’ll notice it is still on the low end in this chart, and well below the peak we saw in June 2022 of just over 2 hours of work to buy 250 miles worth of gasoline.

But 23.4 miles per gallon is pretty low, as this is includes lots of trucks and SUVs with pretty bad fuel efficiency. What if we looked at some more fuel efficient vehicles?

Here’s a few I checked on (all for 2026 models, with gas and electricity at current national averages):

  • Toyota Camry: 0.71 hours of work
  • Chrysler Pacifica Hybrid: 0.61 hours on electric, 1.18 hours on gasoline
  • Tesla Model Y: 0.37 hours of work

It will probably not surprise you that the all-electric Tesla Model Y is cheaper than the average car to operate at current prices, but you may not have realized that it is almost four times cheaper. But the Toyota Camry, with all models operating as hybrids now, also comes in pretty good at about half the cost of the average vehicle to operate (and the Camry is a very affordable car to purchase). The Chrysler Pacifica hybrid minivan does pretty well too, though even operating only on electricity (30 miles at a time), it’s only slightly more fuel efficient than the Camry.

PhD Chemical Engineer Finds New Career Booty Hooping

Scott Buchanan1 Comment

I read Straw Dogs, a critique of modern society by English political philosopher John Gray, shortly after it was published in 2002. (No relation to the movie with the same name). Wikipedia summarizes the author’s view as, “Gray blames humanism, and its central view of humanity, for much of the destruction of the natural world, and sees technology as just a tool by which humans will continue destroying the planet and each other.”  I cannot recommend the book as a whole – the reader is left in a state of despairing passivity. My AI justly notes, “Critiques of John Gray’s Straw Dogs: Thoughts on Humans and Other Animals generally center on its extreme pessimism, logical inconsistencies, and rhetorical excesses.”  

All that said, the book did contain many interesting observations. One line of thought that struck me at the time was that, with increasing efficiencies in the production of basic goods and services, more and more human effort will go into simply entertaining or “distracting” each other:

The days when the economy was dominated by agriculture are long gone. Those of industry are nearly over. Economic life is no longer geared chiefly to production. To what then is it geared? To distraction. Contemporary capitalism is prodigiously productive, but the imperative that drives is not productivity. It is to keep boredom at bay. With wants so quickly sated, the economy soon comes to depend on the manufacture of ever more exotic needs.

I was reminded of that line of thought when, at a recent gathering of PhD chemical engineers, I heard that one of our number has become somewhat well-known for a late-career shift. She goes by the name Andrea Hulamyhoop these days. (I happen to know her real last name and approximate age, but she wishes to keep those private).

Her father was a chemical engineering professor, and she earned a PhD in the discipline at Princeton University. She was just going along living a fairly normal sort of life, with a regular job, when without warning, it happened:

Then one day, she saw a girl hula hooping. “She looked really free and happy, and I thought, interesting, maybe I’ll try it.” A few minutes at a time quickly became an obsession. Turns out, there are whole online communities of hula hoopers who share tips and support. Conferences. And many shows and events looking for a pro to dazzle and inspire audiences.

“The hula hoop has changed everything in my life,” she says. “I didn’t know I could become a fit, sporty person. I didn’t know I was one. I love performing, and I love people, and I love parties.

“I always thought my life was a bit OK. My kids were grown up. I was enjoying my job,” she says. “But you know, we kind of think, is this all there is? And then to realize there’s this whole world — it’s been incredible. I’m happier than I’ve ever been in my life.”

Andrea Hulamyhoop doesn’t just swirl a hoop around her waist. She can twirl multiple hoops around multiple body parts, with style. She is perhaps best known for her appearance on America’s Got Talent in 2025, where she smashed previous records by bending over and twirling a hoop around her rear end for just over an hour and fifteen minutes. The crowd went wild.

The physics of this feat seem almost impossible, but seeing is believing. Andrea gives a gracious tutorial here.

When I asked who is the most famous holder of a Princeton chemical engineering PhD, both ChatGPT and Claude insisted that former GE president Jack Welch is more well-known than Andrea the butt-hooper, but I doubt that is true below a certain audience age bracket. She has some 17,000 Instagram followers. I’d be willing to bet that in a crowd of under-40’s today, if you asked “Have you heard about the guy who was president of GE in the 1980’s and 90’s?” or “Have you heard about the gal who can twirl a hula hoop on her butt?”, Andrea Hulamyhoop would win.

All this brought back to my mind the notion that as a society we are able to afford to devote a great deal of time to sheer entertainment, rather than growing potatoes.   A comment by a certain @petesounds9321 on Andrea’s epic 2025 AGT YouTube showed he had evidently not read Straw Dogs:

“I’d say we need more scientists than hula hoopers but hey…maybe I’m way off.”