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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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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Black-Litterman

The Black-Litterman model was published in the Financial Analyst’s journal in 1992. It provides an estimate of future expected returns by combining equilibrium returns with an investor’s views. The resulting new vector of returns leads to potentially well diversified, intuitive, and stable portfolios. Implied returns are computed by using the following equation (reverse optimization):with risk…

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