General Information

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Chapters overview

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• Discussion is started with the Correction of Historical Prices algorithm, which is used prior to other analysis procedures.
• Examination of various definitions of returns and rates of return takes place in Types of Returns.
• General lognormal continuous-time model of asset prices evolution is expounded in Analytical Model of Financial Market.
• Frequently used definitions and formulas related to portfolio and its dynamics are outlined in Portfolio Analytics.
• Definitions of utility functions and related measures are presented in Utility Functions and Measures of Risk Aversion respectively.
• Definitions and results related to a notion of efficient frontier are discussed in Efficient Frontier.
• Various approaches to portfolio optimization are outlined in Optimality Criteria. Also read extremely useful topic of Robust Optimization , which deals with frequently underestimated problem of parameter uncertainty.
• General framework of factor models is examined in Factor-based Asset Pricing Models. Particular cases are considered in Capital Asset Pricing Model and Fama-French 3-factor Model.
• The problem of estimating the model parameters (expected returns and covariances) plays the central role in portfolio analysis and optimization. Brief description of sample estimates is given in Sample Estimates for Means and Covariances, while more complicated techniques can be accessed through Advanced Estimates.
• Definitions of portfolio insurance strategies are given in Portfolio Insurance.
• Discussion of optimal portfolio strategies in the presence of proportional transaction costs takes place in Proportional Transaction Costs and Inaction Region.
• Definitions of Value-at-Risk and Conditional Value-at-Risk, coupled with several calculation techniques, are presented in Risk Management Tools.