FINA 411 Lecture Notes - Lecture 5: Central Provident Fund, Credit Risk, Game Theory
25 Feb 2017
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** will not ask optimization in the mid term. Max (wi) sp = e (rp) rf s. t. Objective: maximize the sharpe ratio, which is an expected return of the portfolio minus risk free rate over standard deviation. Generally people don"t like variance, but there are exceptions in games of chance. A speculator doing penny stocks will not find this useful since he is looking for lottery-like returns, this model will never predict that. When to restrict short selling is generally a mutual fund manager, a hedge fund manager would allow weights to be negative because usually hedges are shorted, or have derivatives that similar to a short. Both can get crazy/multiple answers (mostly short selling) Any advantages to manual vs, computer computation for optimization: Calculus is continuous therefore a consistent and smooth graph. With 0 slope and check to each value to find the best value.
