lecture18 - Lecture 18 Portfolio Theory Steven Skiena...

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Lecture 18: Portfolio Theory Steven Skiena Department of Computer Science State University of New York Stony Brook, NY 11794–4400 http://www.cs.sunysb.edu/ skiena
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Investment Strategies Thus far we have studied the basic mechanics of markets, options pricing, and financial data analysis. A money or investment manager uses these tools to develop a strategy to invest capital to best achieve financial goals. Such goals include some combination of maximizing returns, subject to limiting risk and providing adequate liquidity over a given time period. A trader seeks to implement a given strategy with maximum efficiency and minimum costs. In this section of the course we will study several aspects of trading and investment strategies.
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Managing Portfolios The view that investment strategies involve picking the right stock is naive. More important is constructing and managing portfolios of sizable numbers of different securities, and adjusting the weighting to accomplish different objectivies. Often messy factors outside pure risk-return come into play such as (1) tax liabilities and (2) liquidity/market impact. Portfolio theory provides the tools to reason about construct- ing optimal collections of holdings.
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Portfolio Theory Both Markowitzian portfolio theory and the simplified Capital Assets Pricing Model (CAPM) relate returns on an asset to the level of risk associated with the asset. Risk
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This note was uploaded on 01/02/2012 for the course FINANCE 347 taught by Professor Bayou during the Fall '11 term at NYU.

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lecture18 - Lecture 18 Portfolio Theory Steven Skiena...

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