Blog Posts

Stochastic Dominance is a concept used in decision theory and economics to compare and rank different probability distributions based on their expected utilities. It provides a method for deciding whether one trade or investment is preferable to another (under uncertainty) without making specific assumptions about an investor’s/trader’s utility function.   Key Takeaways – Stochastic Dominance […]

Jensen’s Alpha is a performance metric used in finance to determine the excess return of an investment portfolio over the expected return predicted by the Capital Asset Pricing Model (CAPM). Developed by Michael Jensen in the 1960s, this metric is a popular tool for evaluating the skill of portfolio managers.   Calculation & Formula of […]

The Simple Dietz Method and the Modified Dietz Method are both performance measurement techniques used to calculate the rate of return on an investment portfolio. These methods are particularly useful for calculating returns over short time periods and are widely used due to their simplicity and effectiveness. Key Takeaways – Simple Dietz Method vs. Modified […]

Maximum Downside Exposure (MDE) is a risk metric used in finance to measure the most significant loss that an investment or a portfolio could have experienced over a specified period. This measure is useful for understanding the worst-case scenario risk. So, it gives an idea of the potential losses a trade or investor might face […]

The Modigliani Risk-Adjusted Performance (M2, RAP) is a performance measure for an investment or trading portfolio. It extends the concept of the Sharpe Ratio by adjusting a portfolio’s returns for risk. But it presents the results in a more intuitive, percentage-rate-of-return format.   Calculation and Components Formula M2 is calculated by first determining the Sharpe […]

Conic solvers are used in financial optimization, where accuracy and computational efficiency are most important. Financial optimization involves the use of mathematical models to make optimal decisions regarding trading and investment decisions and risk management. This field often requires dealing with complex constraints and objectives. This is where conic solvers come into play.   Key […]

Downside Beta and Upside Beta, collectively referred to as Dual-Beta, are concepts in finance used to measure the volatility of an asset in relation to a benchmark but in two different scenarios: negative (downside) and positive (upside) market movements This bifurcation allows traders/investors to understand how an asset behaves under varying market conditions. This provides […]

The Upside Potential Ratio is a financial metric used to evaluate the performance of an investment relative to its risk, with a specific focus on the upside, or positive return, potential. This ratio is particularly useful in assessing investments where the concern is not just the volatility, but the nature of the volatility – emphasizing […]

The Bias Ratio is a relatively lesser-known risk-adjusted performance metric. It is designed to quantify and understand the skewness and kurtosis (shape characteristics) of the distribution of investment returns. Essentially, the Bias Ratio helps in identifying whether the returns of a portfolio or asset are normally distributed or if they exhibit a bias due to […]

What Is Multicollinearity? Multicollinearity occurs when two or more predictor variables in a regression model are highly correlated. This correlation can cause problems with model estimation and interpretation. When multicollinearity is present, the coefficient estimates for the individual predictors can be very sensitive to small changes in the data. This means that the estimates may […]