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An Evolutionary Approach in Financial Forecast (A Random thought)

An Evolutionary Approach in Financial Forecast (A Random thought). VEAM 2010 at Cualo Le Hong Nhat. The Classical Theory of Finance Risk and Return: A Brief Review. Investors prefer high expected levels of return and dislike risk.

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An Evolutionary Approach in Financial Forecast (A Random thought)

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  1. An Evolutionary Approach in Financial Forecast(A Random thought) VEAM 2010 at Cualo Le Hong Nhat

  2. The Classical Theory of FinanceRisk and Return: A Brief Review • Investors prefer high expected levels of return and dislike risk. • It would be a mistake to ask the question as: Which investments are most attractive? • By creating a portfolio, one can achieve the same level of return as any single asset, but with a less volatility.

  3. The Classical Theory of FinanceThe One-Fund Portfolio: Illustration Mean return C (CAPM): One fund M A (Single Asset) r Standard deviation (Risk)

  4. The Classical theory of FinanceImplication of The One Fund: CAPM • CAPM: Which says that the expected return of a security equals the riskless rate of interest, r, plus a risk premium, associated with the security’s beta. • Rationally, If this expected return does not meet or beat the required return, then investors should not hold this asset or security.

  5. The Classical theory of FinanceMatching CAPM with the Real World • Assumption on rational expectation. • Rational behavior and adjustment mechanism. • Embedded in the mechanism is EMH: prices can never be too far out of line.

  6. The Classical theory of FinanceRandom Walk (EMH) & ARCH paradigm EMH: ARCH Pricingerror time (unbiased) Variance is time varying:

  7. An evolutionary ApproachBounded rationality and learning • Bounded Rationality • Adaptive Learning and Risk Dominance • Stochastically Stable State • Forecast in Adaptive Learning Environments. • EMH in Adaptive Learning

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