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Unformatted text preview: Financial Data Analysis Professor S. Kou, Department of IEOR, Columbia University Lecture 1.b Review of Mean Variance Analysis 1 Review of The Mean Variance Analysis Consider a one period economy as before with N risky assets, and a money market account with the risk-free rate r > being a &xed constant. The trading strategy is denoted by & = ( & , & 1 , ..., & N ), where & is the number of shares invested in the money market account, and & n is the number of shares invested in the n th risky asset. Let R be the return of such a strategy & at time 1. The mean-variance analysis assumes that an investor attempts to solve the following prob- lem: min & V ar [ R ] subject to E [ R ] = ; > r: The intuition is that for the same return, the investor prefers a portfolio with a smaller variance. Note that the mean variance problem does not take consideration of any distribution properties (e.g. skewness, kurtosis etc.) other than the mean and variance. This is a signi&cant drawback of the mean variance analysis. Let w n = & n S n (0) =V (0) , w = ( w 1 ;:::;w n ) > , where S n (0) is the values of the n th risky asset at time 0 and V (0)...
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This note was uploaded on 10/16/2010 for the course IEOR 4709 taught by Professor Stevenkou during the Fall '10 term at Columbia.
- Fall '10
- Financial Engineering