Message Font: Serif | Sans-Serif
 
UnThreaded | Threaded | Whole Thread (6) | Ignore Thread Prev | Next
Author: peterxyz Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 297  
Subject: Re: MPT and Efficient Frontier Date: 7/18/2000 3:19 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
solaris writes;
first off, MPT relies on linear mathematics and normal or Gaussian statistics. i don't care what aspect of the market you look at, market behavior does not fit simple Gaussian assumptions. MPT assumes that prices change in a random walk - that is also not true as the market is complex adaptive. [snip]

I couldn't agree more - it would be interesting to look at somesort of non-linear correlation coefficient where you could break down the correlation between markets - for example based on the size of price changes, where you'd probably find much higher correlations for large & sudden price movements (say >2%) than for small ones.

I think that for the markets to get better analysis someone needs to teach the economists some more math (or maybe the reduced number of math PhD's not going to the NSA now will help somewhat). I think that until you have experience with working on (or modelling) complex/non-linear systems it can be hard to grasp how counter-intutive they can be.

On the Berkshire board a couple of us were trying to explain a while ago to a poster why we thought that a couple of big catastrophies (which might cost the company $200-500m) would be the best thing that could happen to the company - simply because the insurance/reinsurance markets would adapt to the events, eliminating capital, rasing prices, etc. Not very linear, but perhaps not a bad model for the industry. The counter arguement was gut instinct :( Hopefully not by engineers :)

peter xyz
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (6) | Ignore Thread Prev | Next

Announcements

Pencils of Promise - Back to School Drive
"Pencils of Promise works with communities across the globe to build schools and create programs that provide education opportunities for children."
Managing Your Wealth
Our own TMFHockeypop from Rule Your Retirement fame on the TV show Managing Your Wealth.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Post of the Day:
Macro Economics

Should You Be an Index Investor?
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement