Tag Info

New answers tagged modern-portfolio-theory

1

That's the way you apply. Usually you get the closest number of shares possible. However, if you use that strategy you are very likely to underperform the market. Check table 3 on this paper for the Out of sample performance of the Markowitz strategy. Over their sample the Sharpe Ratio is 0.07 whereas a simple naive strategy 1/N yielded 0.18.

1

You are correct in your basic approach. Given the correlation matrix $\textbf{C}$ and standard deviation matrix $\textbf{S}$ where standard deviations occupy the diagonal and zeros the rest (i.e. $s_{i,j} = \sigma_i | i = j$ and $s_{i,j} = 0 | i \neq j$), the covariance matrix can be found as $\textbf{R} = \textbf{SCS}$. Then your portfolio standard ...

1

Suppose we have no dividends like in Black-Scholes-Merton and in your example. Expected return between time $t$ and $t+\Delta t$ is defined as $$\mathbb{E}_t\left[R_{t+\Delta t}\right]\equiv\mathbb{E}_t\left[\frac{S_{t+\Delta t} - S_t}{S_t}\right] = \mathbb{E}_t\left[\frac{\Delta S_t}{S_t}\right]$$ You can see that, as $\Delta t \to dt$, ...

Top 50 recent answers are included