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Could you expand a bit further on what you think the OP's misunderstanding of the market is?
by mpoon 6y ago
Could you expand a bit further on what you think the OP's misunderstanding of the market is?
- nlitened 6y agoOne huge example is an assumption that portfolio returns are normally distributed. That’s not a minor nitpick, this invalidates every formula that goes after.
- deleted 6y ago[deleted]
- mpoon 6y agoOP does address this near the end of the post.
- jannotti 6y agoWell, you did say you didn't finish it. So would it surprise you to learn that topic is addressed directly?
- nlitened 6y agoThats a fair assumption. But I did skim to the part that attempted to address non-normality—it doesn’t. Under non-normality, not a single formula in this post holds (“standard deviation” does not exist).
- smabie 6y agoHi, I wrote the post. I discussed the problem of non-normality in the post. Moreover, if non-normality is the problem, then pretty much all of modern finance is invalidated. Instead of saying its all bullshit, a better approach is to realize the assumptions of the model and use some discretion in trading based on its output.
- nlitened 6y ago> Moreover, if non-normality is the problem, then pretty much all of modern finance is invalidated. I’d say, finance from the 70s is invalidated. And it has been invalidated countless times with all the major mutual funds going bust. I’d love to encourage you to read more on this topic. Taleb’s “The Black Swan” is a good start, his other books are also good.
- smabie 6y agoBlack Scholes, VaR, factor models, CAPM, modern portfolio theory, etc are all based on the normal distribution and are all still used in industry today. Every quant fund in the world is using models that assume a log normal distribution of returns. Moreover, Taleb certainly used models based on log normal distributions at his hedge funds.