Diversification

Diversification, a finance concept developed by Markowitz (born August 1927, PhD thesis in 1955, Nobel in 1990), is the basis for portfolio construction, assuming normally distributed assets. In order to measure if a portfolio is diversified enough, a technique is to ‘push’ the assets correlation to 1.0 and compare the portfolio with the historical assets…

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Bear Correlation

Bear correlation is the correlation between two marginal asset distributions during the first asset negative returns. Instead of computing a classical correlation between an asset and an index, it is better to compute the correlation during marginal asset distributions or conditional asset distributions. This will capture both assets non-normalities and codependence asymmetries. If the conditional…

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4 Moment CAPM

The 4-Moment Capital Asset Pricing Model is based on two academic papers (Jurcenzko and Maillet, The Four Moment CAPM: Some Basic Results , working paper, 2002, and Hwang and Satchell, Modeling Emerging Market Risk Premia Using Higher Moments , working paper, 1999). When financial assets are normally distributed, the historical asset return, the asset standard…

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Fund of Funds

Investing in funds requires qualitative and quantitative analysis. The investor should construct a portfolio combining different strategies and the latest quantitative techniques. AlternativeSoft provides a software platform to construct optimal portfolios with hedge funds, UCITS III, ETF, mutual funds and fund of hedge funds. The software platform is dedicated to portfolio managers, advisors, banks and…

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Skewness

Skewness measures the distribution asymmetry. A risk-averse investor does not like negative skewness. A distribution with positive skewness has more returns far away to the right of its mean return, as shown below.   Kurtosis measures the fat-tail degree of a distribution. A risk-averse investor prefers a distribution with low kurtosis (i.e. returns not far…

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Regression

The beta of the CAPM measures the linear market risk. The first to assign that the beta was not linear were G.Pettengill, S.Sundaram and I.Mathur, “The Conditional Relation Between Beta and Returns”, Journal of Financial and Quantitative Analysis , 1995. They showed that the beta of a stock is different depending if the market is…

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