# Tag Info

### The possible preferences of investors for higher than first 2 moments of return distribution?

Investor preferences for higher level moments are probably most easily explained by behavioral finance. Investors' tendency to overvalue out-sized positive and negative outcomes, such as gamblers' ...
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### How to annualize the correlation matrix?

No, because correlation is a unitless quantity. As you use volatilities to do the scaling, the $\sqrt{252}$ factor should already be taken into account in them. If you take a correlation of 1 between ...
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### Modeling Long-Term Mean Reversion in Asset Returns

You could use the two factor model of Schwartz-Smith. It's a very standard model in commodities, where you observe this kind of long term mean reversion (where "long-term" is here around a year). It'...
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### Expense ratio over time

Generally, anything on Investopedia needs to be taken with a big grain of salt. (Wikipedia sometimes has correct information, but Investopedia - almost never.) Let us try to reverse-engineer Sabrina ...
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### Modeling Long-Term Mean Reversion in Asset Returns

One economic model you could look at is the Habit model of Campbell and Cochrane (1999). The basic idea is that as the consumption of the representative investor approaches the (appropriately defined) ...
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### Discrete returns versus log returns of assets

To fill in the details of what "John" just explained above: Say that you have stock portfolio for several years: $t_0, t_1, \ldots, t_m$. Say that you have $n$ stocks, so that stock $i$ has ...
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### Normality or Log-Normality of Regular Returns

You're right but a GBM doesn't assume that percentage returns are normally distributed. It's about log-returns. If the log-return $r_t=\ln\left(\frac{S_{t+dt}}{S_t}\right)$ is normally distributed (...
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### Which financial time series have a PDF and/or CDF?

For a continuous variable the PDF is the derivative of CDF. So returns or prices don't have a pdf if the cdf is not differentiable, e.g. it "jumps" at some point. The simplest models we use, ...
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### Asset Allocation with near zero rates

Many pension funds use projected asset class returns (capital market assumptions or CMAs) and backward-looking estimates of volatilities and correlations to set the strategic asset allocation. A 10-...
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### Asset Allocation with near zero rates

I'll add some comments, recognizing that 1) they are highly opinionated, and 2) they don't actually offer any real solutions. Hopefully more thoughtful and useful answers will emerge. First of all, ...
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### Am I able to find individual returns from total weighted average of returns?

You have one equation and three unknowns, as you found out this canâ€™t work. You need at least as many independent equations as unknowns. I donâ€™t see how you can make this idea work.
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### Any portfolio theories not based on asset returns?

The "hedging theory of investment" (which I first heard about from R. C. Merton) says you should invest not for returns but to hedge your liabilities. LDI (Liability Driven Investment) is one name for ...
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### Does standardizing/normalizing asset returns change their skewness and kurtosis?

From the wikipedia on skewness and kurtosis, both are defined as expectations of standardised moments of the respective distributions. Hence, no.
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### Modeling Long-Term Mean Reversion in Asset Returns

I just wrote two papers on a related topic. Let us not use the log method right now as it was originally intended as an approximation from the time we used punch cards. You can, but we will come ...
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### Modeling Long-Term Mean Reversion in Asset Returns

Although I agree with jd8 answer, practical implementation issues may arise. Here I suggest a parsimonious engineering solution relying on economic intuition of Habit model of Campbell and Cochrane (...
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