{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

lec1new2 - Financial Data Analysis Professor S Kou...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
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 > 0 being a °xed constant. The trading strategy is denoted by ° = ( ° 0 , ° 1 , ..., ° N ), where ° 0 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) is the total initial amount of money at time 0. In other words,
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}