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Simply stated, post-modern portfolio theory (PMPT) is an extension of the traditional modern portfolio theory (MPT) of Markowitz and Sharpe. Both theories provide analytical methods for rational investors to use diversification to optimize their investment portfolios.
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 ...
Portfolio optimization is the process of selecting an optimal portfolio (asset distribution), out of a set of considered portfolios, according to some objective.The objective typically maximizes factors such as expected return, and minimizes costs like financial risk, resulting in a multi-objective optimization problem.
Warren Buffett is arguably the world’s most famous investor, and his investment moves are closely followed. Each quarter, the company he runs, Berkshire Hathaway, discloses its current holdings ...
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US financial inflation crisis with stock market graph , economy problem , investment analysis concept The Consumer Price Index inflation report shows that December saw a 2.9% rise on top of a ...
The author shows that the slope of the implied volatility smile is a significant predictor of stock returns, even after controlling for traditional risk factors. Specifically, stocks with steeper implied volatility smiles (i.e., higher jump risk) have higher expected returns, consistent with the equity premium puzzle.
The implication is that at the end of the period the portfolio would have appreciated at the rate implied by the APT, whereas the mispriced asset would have appreciated at less than this rate. The arbitrageur could therefore: Today: 1 short sell the mispriced asset 2 buy the portfolio with the proceeds. At the end of the period: 1 sell the ...