Tag Archives: Portfolio Theory

One place not to use the Sharpe ratio

Having worked in finance I am a public fan of the Sharpe ratio. I have written about this here and here.

One thing I have often forgotten (driving some bad analyses) is: the Sharpe ratio isn’t appropriate for models of repeated events that already have linked mean and variance (such as Poisson or Binomial models) or situations where the variance is very small (with respect to the mean or expectation). These are common situations in a number of large scale online advertising problems (such as modeling the response rate to online advertisements or email campaigns).


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Photo “eggs in a basket” copyright MicoAssist appropriate CC license

In this note we will quickly explain the problem. Continue reading One place not to use the Sharpe ratio

Fast Portfolio re-Balancing as a Fractional Linear Program

Fast Portfolio re-Balancing as a Fractional Linear Program is an example of the kind of work we have done encoding client problems (in this case optimal portfolio selection) as optimization problems (so we can use purchased software to solve them). Its a bit mathy- but we are excited we got permission to share this. Continue reading Fast Portfolio re-Balancing as a Fractional Linear Program

“Easy” Portfolio Allocation

This is an elementary mathematical finance article. This means if you know some math (linear algebra, differential calculus) you can find a quick solution to a simple finance question. The topic was inspired by a recent article in The American Mathematical Monthly (Volume 117, Number 1 January 2010, pp. 3-26): “Find Good Bets in the Lottery, and Why You Shouldn’t Take Them” by Aaron Abrams and Skip Garibaldi which said optimal asset allocation is now an undergraduate exercise. That may well be, but there are a lot of people with very deep mathematical backgrounds that have yet to have seen this. We will fill in the details here. The style is terse, but the content should be about what you would expect from one day of lecture in a mathematical finance course.

Continue reading “Easy” Portfolio Allocation