Blog Posts

Abstract algebra, a fundamental branch of mathematics, is used in various aspects of finance and markets. Its application spans from risk management strategies to the optimization of trading algorithms. We look into the key concepts and applications of abstract algebra in finance.   Key Takeaways – Abstract Algebra in Finance & Markets Symmetry and Efficiency […]

Linear algebra, a branch of mathematics, is used in various financial applications. It provides a structured way to solve systems of linear equations, a common problem in finance.   Key Takeaways – Linear Algebra in Finance & Markets Risk and Return Modeling Linear algebra is used to quantify risk and optimize returns in portfolios through […]

Forward testing – often referred to as paper trading, walk-forward testing, stress testing, or forward simulation, depending on the context – is a process in trading and investing. Unlike backtesting, which evaluates strategies using historical data, forward testing in a paper trading context applies trading rules to current market conditions to predict future performance. This […]

Tail Risk Parity is a trading or investment strategy designed to address the asymmetrical risks inherent in financial markets. It extends the concept of risk parity, which emphasizes an equal distribution of risk across various asset classes, by specifically focusing on mitigating the impact of extreme market movements or “tail risks.” These tail events, though […]

Maslowian Portfolio Theory is a conceptual framework in finance that integrates psychological elements into investment strategy. It’s inspired by Abraham Maslow’s hierarchy of needs, a psychological theory that categorizes human needs into a pyramid, from basic survival needs like food, water, and shelter to self-actualization (achieving your aspirations).   Key Takeaways – Maslowian Portfolio Theory […]

Stochastic Portfolio Theory (SPT) is a mathematical framework used to analyze and manage portfolios of assets in probabilistic terms. It extends the classical Markowitz portfolio theory by incorporating the randomness inherent in financial markets.   Key Takeaways – Stochastic Portfolio Theory & Chance-Constrained Portfolio Selection Stochastic Portfolio Theory (SPT) focuses on understanding and exploiting patterns […]

Behavioral Portfolio Theory (BPT) is based on a newer understanding of how traders and investors construct portfolios based on psychological factors. This theory deviates from traditional models by emphasizing the influence of cognitive biases and emotions in trading and investment decisions.   Key Takeaways – Behavioral Portfolio Theory Multiple Goals Behavioral Portfolio Theory posits that […]

Roy’s Safety-First Criterion, formulated by A.D. Roy in 1952, is a risk management approach in portfolio selection. This criterion focuses on minimizing the probability of portfolio returns falling below a threshold level, known as the disaster level. It’s particularly relevant for investors who prioritize capital preservation over high returns.   Theoretical Framework Roy’s criterion is […]

The Kelly Criterion is a mathematical formula used to determine the optimal size of a series of bets. Developed by John L. Kelly Jr. in 1956, it has found application in gambling, trading, investing, and risk management. The criterion aims to maximize the logarithm of wealth. This offers a strategic edge in scenarios where the […]

Intertemporal portfolio choice is a financial strategy focusing on how investors allocate assets over time to optimize returns. It’s rooted in the theory that trading decisions made today impact future wealth and consumption. This approach contrasts with static portfolio choices where decisions are made for a single time period without considering future implications.   Key […]