FINE 4050 Chapter Notes - Chapter 10: Random Variable, Phenylalanine, Market Risk
12 Dec 2015
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E[wi] = p * 2m + (1 - p) * 0 = 2pm. Independent investments: to observe this phenomenon, the outcomes cannot be correlated. Chapter 10 the mathematics of portfolio diversification. Performance claims: usually based on chance, not ability; very difficult to distinguish chance and ability; must be wary of performance claims. Mutual & hedge funds: many funds with different risk levels and slants; shut down funds that do not do well, keep those that perform well; creates a focus on good performance. Total payoff: the payoff of the portfolio of investments over n bernoulli trials; follows a binomial distribution; no covariance terms when deriving portfolio variance because, for now, it is assumed that the investments operate independently of one another. Var[wi] = p(2m - 2pm)2 + (1 - p)(0 - 2pm)2. Var [w] = n i=1 var[wi] = n * var[wi] E[w] = e[n i=1 w] = n * e[wi] = n2pm.
