Financial Crisis

Efficient Markets Hypothesis

Technical Analysis

Behavioural Finance

Hedge Funds



Trading Systems


Market Timing

Market Making

Fund Performance

Pairs Trading

Day Trading and Day Traders

Investment Newsletters

Option Pricing

Order Book

Portfolio Optimization

Portfolio Performance Measurement

Stylized Facts

Market Microstructure




Finance studies and addresses the ways in which individuals, businesses and organizations raise, allocate and use monetary resources over time, taking into account the risks entailed in their projects.
Wikipedia (2006)
Finance - Wikipedia

Economics (from the Greek ????? [oikos], 'house', and ??�?? [nomos], 'rule', hence "household management") is a social science that studies the production, distribution, trade and consumption of goods and services. Economics is said to be normative when it recommends one choice over another, or when a subjective value judgment is made. Conversely, economics is said to be positive when it tries objectively to predict and explain consequences of choices, given a set of assumptions and/or a set of observations. The choice of which assumptions to make in building a model as well as which observations to highlight is, however, normative.
Wikipedia (2006)
Economics - Wikipedia

Investment or investing1 is a term with several closely-related meanings in finance and economics. It refers to the accumulation of some kind of asset in hopes of getting a future return from it. Technically, the word means the "action of putting something in to somewhere else" (perhaps originally related to a person's garment or 'vestment').
Note 1: UK and U.S. English, respectively.
Wikipedia (2006)
Investment - Wikipedia

Modern Portfolio Theory (MPT)

Modern portfolio theory (MPT) is a theory of investment which attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully choosing the proportions of various assets.’
Wikipedia (2011)
Modern portfolio theory - Wikipedia

Modern portfolio theory (MPT).
‘Principles underlying analysis and evaluation of rational portfolio choices based on risk-return trade-offs and efficient diversification.’
Bodie, Kane and Marcus (2005), p. 1054

Modern portfolio theory.
‘Widely used term, but without precise definition. Usually implies a belief in the efficient market theory and the capital asset pricing model or some other asset-pricing model that quantifies the relationship between risk and return.’
Lofthouse (1994), p. 540

Modern Portfolio Theory (MPT) The blanket name for the quantitative analysis of portfolios of risky assets based on expected return, or the mean expected value, and the risk, or standard deviation of a portfolio of securities. According to MPT, investors would require a portfolio with the highest expected return for a given level of risk.’
Peters (1996)

Diversification is a measure of the commonality of a population. Greater diversification denotes a wider variety of elements within that population. Diversification is of central importance in investments. Diversification reduces the risk of a portfolio. It does not necessarily reduce the returns. This is why diversification is referred to as the only free lunch in finance.
Wikipedia (2006)
Diversification - Wikipedia

Institutional fund management - Wikipedia

Active management refers to a portfolio management strategy where the manager makes specific investments with the goal of outperforming a benchmark index. Ideally, the manager selects securities that expose the portfolio to more risk than its index. If the additional risk generates excess return, the active management strategy has succeeded.
The reality of active management is as follows: the majority of actively managed mutual funds, ETF, Hedge fund, etc. very rarely outperform their index counterparts (assuming that it is benchmarked correctly), and when successful only usually by a few percentage points. Even if successful, the odds of beating the market decrease as time progress. When all expenses are taken into account one might actually see a negative ROR even if the securities outperform the Market. However, if it was not for active management, passive management would become a crapshoot, thus the incentives for active management will aways exist.
Active management is the opposite of passive management, where the manager does not seek to outperform his index.
Active management - Wikipedia Wikipedia (2006)

"Statistical arbitrage, as opposed to (deterministic) arbitrage, is the mispricing of one or more assets based on the expected value of these assets. For example, consider a game in which one flips a coin and collects $1 on heads or pays $0.50 on tails. In any single flip it is uncertain if one will win or lose money. However, in the statistical sense, there is an expected value of $1x50% - $0.50x50% = $0.25 for each flip. According to the law of large numbers, the mean return on actual flips will approach this expected value as the number of flips increases. This is precisely the way in which a gambling casino makes a profit."
Trading Strategy:
"As a trading strategy, Statistical Arbitrage, or StatArb, is a heavily quantitative and computational approach to equity trading. It describes a variety of automated trading systems which commonly make use of data mining, statistical methods and artificial intelligence techniques. A popular strategy is pairs trading, in which stocks are put into pairs by fundamental or market-based similarities. One stock in the pair is bought long, the other is sold short. This hedges risk from whole-market movements. Stephen N. P. Smith is one of the founders of this approach."
Wikipedia (2006)
Statistical arbitrage - Wikipedia

In finance, the efficient market hypothesis (EMH) asserts that financial markets are "efficient", or that prices on traded assets, e.g. stock prices, already reflect all known information and therefore are accurate in the sense that they reflect the collective beliefs of all investors about future prospects. The efficient market hypothesis implies that it is not possible to consistently outperform the market - appropriately adjusted for risk - by using any information that the market already knows, except through luck or obtaining and trading on inside information. It further suggests that the future flow of news (that which will determine future stock prices) is random and unknowable in the present. The EMH is the central part of Efficient market theory (EMT).
It is a common misconception that EMH requires that investors behave rationally. This is not in fact the case. EMH allows that when faced with new information, some investors may overreact and some may underreact. All that is required by the EMH is that investors' reactions be random enough that the net effect on market prices cannot be reliably exploited to make an abnormal profit. Under EMH, the market may, in fact, behave irrationally for a long period of time. Crashes, bubbles and depressions are all consistent with efficient market hypothesis, so long as this irrational behavior is not predictable or exploitable.

There are three common forms in which the efficient market hypothesis is commonly stated - weak form efficiency, semi-strong form efficiency and strong form efficiency, each of which have different implications for how markets work.
Wikipedia (2006)
Efficient market hypothesis - Wikipedia

Efficient market theory is a field of economics which seeks to explain the workings of capital markets such as the stock market. According to University of Chicago economist Eugene Fama, the price of a stock reflects a balanced rational assessment of its true underlying value (i.e., rational expectations); its price will have fully and accurately discounted (taken account of) all available information (news).
The theory assumes several things including (1) perfect information, (2) instantaneous receipt of news, and (3) a marketplace with many small participants (rather than one or more large ones with the power to influence prices). The theory also assumes that (4) news arises randomly in the future (otherwise the non-randomness would be analysed, forecast and incorporated within prices already). The theory predicts that the movements of stock prices will approximate stochastic processes, and that technical analysis and statistical forecasting will most likely be fruitless.
This efficient process of price determination can be contrasted with an inefficient market in which, according to the theory, the pre-conditions for efficient pricing (perfect information, many small market participants) have not been met and prices may be determined by factors such as insider trading, institutional buying power, misinformation, panic and stock market bubbles and other collective cognitive or emotional behavioral biases.
A central part of this theory is the Efficient market hypothesis.
Efficient market theory - Wikipedia
Wikipedia (2006)

Category:Financial markets - Wikipedia