Portfolio Analytics: An Introduction to Return and Risk Measurement

216 Pages·2015·3.25 MB·English

by  Wolfgang Marty (auth.)

Springer Texts in Business and Economics
Wolfgang Marty
Portfolio
Analytics
An Introduction to
Return and Risk Measurement
Second Edition
Springer Texts in Business and Economics
More information about this series at
http://www.springer.com/series/10099
Wolfgang Marty
Portfolio Analytics
An Introduction to Return and Risk
Measurement
Second Edition
WolfgangMarty
Zurich
Switzerland
ISSN2192-4333 ISSN2192-4341 (electronic)
SpringerTextsinBusinessandEconomics
ISBN978-3-319-19811-8 ISBN978-3-319-19812-5 (eBook)
DOI10.1007/978-3-319-19812-5
LibraryofCongressControlNumber:2015949241
SpringerChamHeidelbergNewYorkDordrechtLondon
©SpringerInternationalPublishingSwitzerland2015
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Preface
While getting acquainted with a series of topics relating to the banking industry I
realizedthatscientificmethodsandterminologiesdescribemanyaspectsoffinan-
cial markets and that many notions that are used in finance have a scientific
background. In the daily activities of the finance industry, we often fail to realize
thatmathematicalconceptsarebeingapplied.Theuseofmathematicsrangesfrom
basicarithmeticmanipulationssuchasaddingpositionsonanaccountorcalculat-
ing interest payments to sophisticated problems such as investing times series or
portfolio optimization. In my view, the connection between science and financial
mathematics is particularly apparent in portfolio analysis. The illustration of this
factisoneofthegoalsofthisbook.
Inthetraditional asset managementindustry,Iwas confrontedwith statements
likethefollowing:“Iamapractitioner;Idon’tneedsomeabstracttheory.”Nothing
could be further from the truth. Using portfolio analysis, I intend to explain why
concepts that are based on mathematics can enhance the decision-making process
of the participants in the financial community. Furthermore, the approach we
describe here helps to standardize the terminology and provides a concise use of
thenotions.
Financial markets are inundated by data. In other words, they are literally
producedcontinuously.Inportfolioanalysis,theamalgamationandreconciliation
ofdataisanimportantaspect.Weseektoanswerthequestion“Whatinformationis
relevantinportfolio analysis?” and toexplain the figures thatare used toassessa
specificportfolio.
In this book, the basic notions in portfolio analysis are introduced using math-
ematicalnotation.Formoreadvancedconceptsandideas,welimitourexposition
tointuitivedescriptions.Thebookpresentsnotonlyconventionalmaterialbutalso
some current research topics in portfolio analysis. We also refer to relevant liter-
atureforfurtherreading.
v
vi Preface
As the book’s approach is independent of market movement and market infer-
ences,itallowsustodescribethebasicprinciplesmoreclearlyandmoreaccurately.
Inaddition,weonlyintroducethemostessentialtoolsforbeingabletodescribethe
materialinthisbook,providingadhocdefinitionsofspecificmathematicalnotions
accompaniedbyintuitiveillustrations.
Preface to the Second Edition
Portfolio Analytics has been published about a year ago. I have received many
valuablefeedbacks.Thecontentsofthebookledtomanyinterestingdiscussions.I
realizedthatmybookhasbeenstudiedthoroughly.Improvingatextisanicetask
andIhopethatthebookgetsmorereadable.IamgratefulthattheEditorgivesme
theopportunityforpublishingasecondedition.
Ihavepublishedacontributioninthe“BONDYEARBOOK2015”(www.fixed-
income.org)entitled“PortfolioAnalytics.”Thetextdoesnotuseanyformulaand
givesthemainideasofthebook.
A book is only a snapshot of my professional development and I decided to
includetwoadditionsreflectingmymorerecentresearchactivities.
FirstlyIaddedasectiononBondAnalytics.Idiscusstheapproximationofthe
solutionoftheinternalrateofreturnequation.IsummarizethefindingsoftheSBC
(SwissBondCommission)workinggroup“PortfolioAnalytics.”
SecondlyIaddedanexampleinSect.3.5.Itillustratesthecalculationintroduced
inthischapterandopensfurtherresearchactivities.Forinstance,theapplicationof
this example assesses the difference between normal distributed times series and
distributionsobservedinthemarketplace.
Stallikon,Switzerland WolfgangMarty
27.03.2015
vii
ThiSisaFMBlankPage
Conventions
This book consists of five chapters. The chapters are divided into sections and
whereneededsectionsaredividedintosubsections.(1.2.3)denotesformula(3)in
Section2ofChapter1.Ifwerefertoformula(2)inSection2ofChapter1,weonly
write(2);otherwise,weusethefullreference(1.2.3).Withinthechapters,assump-
tions, definitions, figures, remarks, tables, theorems, and examples are numerated
continually, e.g., Theorem2.1 refers toTheorem 1 inChapter 2. These points are
numeratedcontinually.
Theendofatheorem,lemma,orexampleismarkedwithe.Squarebrackets[]
indicate references. The details of the references are provided at the end of
thebook.
ix