New answers tagged risk
2
Let $n$ be the number of stocks (here $n=3$)
Let $T$ be the number of sequential returns to generate (for example $T=12$ if you want to generate a year's worth of monthly returns)
Let $M$ be the number of alternative scenarios to generate (for example $M=1000$ to generate 1000 different outcomes)
Then,
Step 1. You generate a $n \times T$ matrix RETS of ...
6
You're right. Euler's equation states $$p_t=\mathbb E^\mathbb P_t[M_{t+1}X_{t+1}],$$ that is pricing under $\mathbb P$ requires you to know the stochastic discount factor (SDF, aka pricing kernel) $M$. $M$ is (typically) found in a general equilibrium setting, depending on the marginal utility of investors. (Note: a strictly positive $M$ exists if the market ...
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