By Svetlozar T. Rachev, Stoyan V. Stoyanov, Frank J. Fabozzi CFA
This groundbreaking ebook extends conventional techniques of danger size and portfolio optimization through combining distributional versions with probability or functionality measures into one framework. all through those pages, the professional authors clarify the basics of chance metrics, define new ways to portfolio optimization, and speak about various crucial threat measures. utilizing quite a few examples, they illustrate a variety of functions to optimum portfolio selection and danger idea, in addition to functions to the realm of computational finance that could be worthwhile to monetary engineers.
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Extra resources for Advanced Stochastic Models, Risk Assessment, and Portfolio Optimization: The Ideal Risk, Uncertainty, and Performance Measures (Frank J. Fabozzi Series)
Consider the returns on the stocks of two companies in one and the same industry. The future return X on the stocks of company 1 is not unrelated to the future return Y on the stocks of company 2 because the future development of the two companies is driven to some extent by common factors since they are in one and the same industry. g. g. Y ≤ −10%? Essentially, the conditional probability is calculating the probability of an event provided that another event happens. If we denote the first event by A and the second event by B, then the conditional probability of A provided that B happens, denoted by P(A|B), is given by the formula, P(A|B) = P(A ∩ B) , P(B) which is also known as the Bayes formula.
For additional examples on the application of optimization theory to portfolio management, the reader is referred to Fabuzzi et al. (2007). In optimization theory, we distinguish between two types of optimization problems depending on whether the set of feasible solutions is constrained or unconstrained. If the optimization problem is a constrained one, then the set of feasible solutions is defined by means of certain linear and/or nonlinear equalities and inequalities. These functions are often said to be forming the constraint set.
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