Applications of Monte Carlo Methods
Markowitz Portfolio Optimisation seeks to find a set of weights for N assets in a portfolio such that the risk adjusted return of the portfolio is maximised (aka the Sharpe Ratio).
This is the portfolio the so called “rational investor” would choose as clearly no one would want a portfolio that did not generate the best risk adjusted return right?
Let us introduce this with a little bit of mathematics to accompany this. Capital “Sigma” is the covariance matrix of asset returns, with entries measuring the strength with which one assets returns tend to move…
A company’s performance relative to its peers will be ultimately driven by management’s strategic decision making ability to drive growth and position the organisation for changing market conditions.
Whilst investors ultimately care about picking stocks with management teams that can generate returns for shareholders, it is also important to be able to correctly time these investments or trades. An extreme example would be to short a stock that where goes bankrupt, but in the near term skyrockets, forcing you to close at a loss.
The UCD Investors & Entreprenuers Finance Research Publication