Jensen's alpha
In finance, Jensen's alpha (or Jensen's Performance Index, ex-post alpha) is used to determine the abnormal return of a security or portfolio of securities over the theoretical expected return. It is
Mutual fund separation theorem
In portfolio theory, a mutual fund separation theorem, mutual fund theorem, or separation theorem is a theorem stating that, under certain conditions, any investor's optimal portfolio can be construct
Merton's portfolio problem
Merton's portfolio problem is a well known problem in continuous-time finance and in particular intertemporal portfolio choice. An investor must choose how much to consume and must allocate their weal
Principled reasoning
Principled reasoning (also known as principles-based reasoning and principle-centered reasoning) is an alternative to modern portfolio theory based on a different conception of risk.
Dedicated portfolio theory
Dedicated portfolio theory, in finance, deals with the characteristics and features of a portfolio built to generate a predictable stream of future cash inflows. This is achieved by purchasing bonds a
Portfolio optimization
Portfolio optimization is the process of selecting the best portfolio (asset distribution), out of the set of all portfolios being considered, according to some objective. The objective typically maxi
Modern portfolio theory
Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It is a
Behavioral portfolio theory
Behavioral portfolio theory (BPT), put forth in 2000 by Shefrin and Statman, provides an alternative to the assumption that the ultimate motivation for investors is the maximization of the value of th
Intertemporal portfolio choice
Intertemporal portfolio choice is the process of allocating one's investable wealth to various assets, especially financial assets, repeatedly over time, in such a way as to optimize some criterion. T
Risk parity
Risk parity (or risk premia parity) is an approach to investment management which focuses on allocation of risk, usually defined as volatility, rather than allocation of capital. The risk parity appro
Sortino ratio
The Sortino ratio measures the risk-adjusted return of an investment asset, portfolio, or strategy. It is a modification of the Sharpe ratio but penalizes only those returns falling below a user-speci
Smart beta
Smart beta investment portfolios are long-only rules-based investment strategies that aim to outperform a capitalization-weighted benchmark. A comprehensive analysis of smart beta strategies has found
Maslowian portfolio theory
Maslowian portfolio theory (MaPT) creates a normative portfolio theory based on human needs as described by Abraham Maslow. It is in general agreement with behavioral portfolio theory, and is explaine
Asymmetric payoff
An asymmetric payoff (also called an asymmetric return) is the set of possible results of an investment strategy where the upside potential is greater than the downside risk. Derivative contracts call
Kelly criterion
In probability theory, the Kelly criterion (or Kelly strategy or Kelly bet), is a formula that determines the optimal theoretical size for a bet. It is valid when the expected returns are known. The K
Post-modern portfolio theory
Post-Modern Portfolio Theory (PMPT) is an extension of the traditional Modern Portfolio Theory (MPT), an application of mean-variance analysis (MVA). Both theories propose how rational investors can u
Markowitz model
In finance, the Markowitz model ─ put forward by Harry Markowitz in 1952 ─ is a portfolio optimization model; it assists in the selection of the most efficient portfolio by analyzing various possible
Arbitrage pricing theory
In finance, arbitrage pricing theory (APT) is a multi-factor model for asset pricing which relates various macro-economic (systematic) risk variables to the pricing of financial assets. Proposed by ec
Style drift
Style drift occurs when a mutual fund's actual and declared investment style differs. A mutual fund’s declared investment style can be found in the fund prospectus which investors commonly rely upon t
GE multifactoral analysis
GE multifactoral analysis is a technique used in brand marketing and product management to help a company decide what products to add to its portfolio and which opportunities in the market they should
Universal portfolio algorithm
The universal portfolio algorithm is a portfolio selection algorithm from the field of machine learning and information theory. The algorithm learns adaptively from historical data and maximizes the l
Vanna–Volga pricing
The Vanna–Volga method is a mathematical tool used in finance. It is a technique for pricing first-generation exotic options in foreign exchange market (FX) derivatives.
Treynor–Black model
In Finance the Treynor–Black model is a mathematical model for security selection published by Fischer Black and Jack Treynor in 1973. The model assumes an investor who considers that most securities
Risk–return spectrum
The risk–return spectrum (also called the risk–return tradeoff or risk–reward) is the relationship between the amount of return gained on an investment and the amount of risk undertaken in that invest
Black–Litterman model
In finance, the Black–Litterman model is a mathematical model for portfolio allocation developed in 1990 at Goldman Sachs by Fischer Black and Robert Litterman, and published in 1992. It seeks to over
Tail risk parity
Tail risk parity is an extension of the risk parity concept that takes into account the behavior of the portfolio components during tail risk events. The goal of the tail risk parity approach is to pr
Sharpe ratio
In finance, the Sharpe ratio (also known as the Sharpe index, the Sharpe measure, and the reward-to-variability ratio) measures the performance of an investment such as a security or portfolio compare
Two-moment decision model
In decision theory, economics, and finance, a two-moment decision model is a model that describes or prescribes the process of making decisions in a context in which the decision-maker is faced with r
Growth–share matrix
The growth–share matrix (aka the product portfolio matrix, Boston Box, BCG-matrix, Boston matrix, Boston Consulting Group analysis, portfolio diagram) is a chart created in a collaborative effort by B
Roy's safety-first criterion
Roy's safety-first criterion is a risk management technique, devised by A. D. Roy, that allows an investor to select one portfolio rather than another based on the criterion that the probability of th
Chance-constrained portfolio selection
This article describes the original implementation of the portfolio selection under Loss aversion. Its formulation, itself based upon the seminal work of Abraham Charnes and William W. Cooper on stoch
Low-volatility anomaly
In investing and finance, the low-volatility anomaly is the observation that low-volatility stocks have higher returns than high-volatility stocks in most markets studied. This is an example of a stoc
Efficient frontier
In modern portfolio theory, the efficient frontier (or portfolio frontier) is an investment portfolio which occupies the "efficient" parts of the risk–return spectrum. Formally, it is the set of portf
Returns-based style analysis
Returns-based style analysis is a statistical technique used in finance to deconstruct the returns of investment strategies using a variety of explanatory variables. The model results in a strategy's
Stochastic portfolio theory
Stochastic portfolio theory (SPT) is a mathematical theory for analyzing stock market structure and portfolio behavior introduced by E. Robert Fernholz in 2002. It is descriptive as opposed to normati