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In asset pricing and portfolio management the Fama–French three-factor model is a statistical model designed in 1992 by Eugene Fama and Kenneth French to describe stock returns. Fama and French were colleagues at the University of Chicago Booth School of Business, where Fama still works. In 2013, Fama shared the Nobel Memorial Prize in ...
The Sortino ratio measures the risk-adjusted return of an investment asset, portfolio, or strategy. [1] It is a modification of the Sharpe ratio but penalizes only those returns falling below a user-specified target or required rate of return, while the Sharpe ratio penalizes both upside and downside volatility equally.
Post-modern portfolio theory. Simply stated, post-modern portfolio theory ( PMPT) is an extension of the traditional modern portfolio theory (MPT) of Markowitz and Sharpe. Both theories provide analytical methods for rational investors to use diversification to optimize their investment portfolios. The essential difference between PMPT and MPT ...
Internal rate of return. Internal rate of return ( IRR) is a method of calculating an investment 's rate of return. The term internal refers to the fact that the calculation excludes external factors, such as the risk-free rate, inflation, the cost of capital, or financial risk . The method may be applied either ex-post or ex-ante.
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 formalization and extension of diversification in investing, the idea that owning different kinds of financial assets is less risky than owning ...
In finance, the Monte Carlo method is used to simulate the various sources of uncertainty that affect the value of the instrument, portfolio or investment in question, and to then calculate a representative value given these possible values of the underlying inputs. [1] (". Covering all conceivable real world contingencies in proportion to ...
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 portfolios of the given securities.
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 overcome problems that institutional investors have encountered in applying modern portfolio theory in practice.