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The Pareto distribution, named after the Italian civil engineer, economist, and sociologist Vilfredo Pareto, [2] is a power-law probability distribution that is used in description of social, quality control, scientific, geophysical, actuarial, and many other types of observable phenomena; the principle originally applied to describing the distribution of wealth in a society, fitting the trend ...
The standard deviation is the square root of the variance. The standard deviation of the continuously compounded returns of a financial instrument is called volatility . The (yearly) volatility in a given asset price or rate over a term that starts from t 0 = 0 {\displaystyle t_{0}=0} corresponds to the spot volatility for that underlying, for ...
σ M = standard deviation of the market portfolio σ P = standard deviation of portfolio (R M – I RF)/σ M is the slope of CML. (R M – I RF) is a measure of the risk premium, or the reward for holding risky portfolio instead of risk-free portfolio. σ M is the risk of the market portfolio. Therefore, the slope measures the reward per unit ...
Volatility (finance) In finance, volatility (usually denoted by "σ") is the degree of variation of a trading price series over time, usually measured by the standard deviation of logarithmic returns. Historic volatility measures a time series of past market prices. Implied volatility looks forward in time, being derived from the market price ...
Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It is a formalization and extension of diversification in investing, the idea that owning different kinds of financial assets is less risky than owning ...
Price dispersion. In economics, price dispersion is variation in prices across sellers of the same item, holding fixed the item's characteristics. Price dispersion can be viewed as a measure of trading frictions (or, tautologically, as a violation of the law of one price). It is often attributed to consumer search costs or unmeasured attributes ...
The capital allocation line is a straight line that has the following equation: In this formula P is the risky portfolio, F is riskless portfolio, and C is a combination of portfolios P and F. The slope of the capital allocation line is equal to the incremental return of the portfolio to the incremental increase of risk.
The variance of a random variable is the expected value of the squared deviation from the mean of , : This definition encompasses random variables that are generated by processes that are discrete, continuous, neither, or mixed. The variance can also be thought of as the covariance of a random variable with itself: