What is Maximum Likelihood Estimation? Maximum Likelihood Estimation (MLE) is a statistical method for estimating parameters in probability distributions. We select settings that maximise the a priori chance of the…
What is Arbitrage Pricing Theory? According to Stephen Ross’s Arbitrage Pricing Theory (APT), individual asset returns are a linear mixture of random elements. These random factors can be fundamental or…
What is Capital Asset Pricing Model? The Capital Asset Pricing Model (CAPM) compares the returns on individual assets or portfolios to the market as a whole. It introduces the ideas…
What is Modern Portfolio Theory? Harry Markowitz’s Modern Portfolio Theory (MPT) analyses investment portfolios based on individual asset returns and risk, as well as their relationships. Previously, investors would focus…
Introduction to Coherent Risk Measure A risk measure is called a coherent risk measure if it meets simple mathematical requirements. Some prominent metrics lack sub-additivity, which means that combining two…
What is CrashMetrics? CrashMetrics is a stress-testing methodology that evaluates portfolio performance during significant market swings. Similar to Capital Asset Pricing Model (CAPM), it only applies to significant changes in…
What is Value At Risk Value at Risk (VaR) measures the potential loss from a position, portfolio, desk, or bank. VaR refers to the greatest loss an investment can incur…
Simple Definition of Risk Simply put, risk is the potential for injury or loss. In the context of finance, risk alludes to the potential for financial loss on investments. A…
What is Central Limit Theorem? Central Limit Theorem defined as the distribution of the average of a lot of random numbers will be normal (also known as Gaussian) even when…
What is Arbitrage? Arbitrage is making a sure profit in excess of the risk-free rate of return. Quantitative finance terminology defines an arbitrage opportunity as a portfolio with zero value…
The Whispering Void