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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 ...
Financial correlation. Financial correlations measure the relationship between the changes of two or more financial variables over time. For example, the prices of equity stocks and fixed interest bonds often move in opposite directions: when investors sell stocks, they often use the proceeds to buy bonds and vice versa.
Markowitz model. In finance, the Markowitz model ─ put forward by Harry Markowitz in 1952 ─ is a portfolio optimization model; it assists in the selection of the most efficient portfolio by analyzing various possible portfolios of the given securities.
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.
In modern portfolio theory, the efficient frontier (or portfolio frontier) is an investment portfolio which occupies the "efficient" parts of the risk–return spectrum. Formally, it is the set of portfolios which satisfy the condition that no other portfolio exists with a higher expected return but with the same standard deviation of return (i ...
The correlation reflects the noisiness and direction of a linear relationship (top row), but not the slope of that relationship (middle), nor many aspects of nonlinear relationships (bottom). N.B.: the figure in the center has a slope of 0 but in that case, the correlation coefficient is undefined because the variance of Y is zero.
Correlation trading. In finance, correlation trading is a strategy in which the investor gets exposure to the average correlation of an index. The key to correlation trading is being able to predict when future realized correlation amongst the stocks of a particular index will be greater or less than the "implied" correlation level derived from ...
Merton's portfolio problem. Merton's portfolio problem is a problem in continuous-time finance and in particular intertemporal portfolio choice. An investor must choose how much to consume and must allocate their wealth between stocks and a risk-free asset so as to maximize expected utility.
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