Modern Portfolio Theory ( MPT ) has done many wonderful things in the investment world ever since it became popularized in the university finance classes. They have indeed produced quite reasonable returns in most of cases when properly used. One of the weaknesses, however, has been that various probability return parameters are calculated by using historical data. As everyone knows, history never repeats in the future.
Today, there is persistent tendency that historical stock return volatility is being replaced with forward looking volatility using derivative pricing formula. In fact, some researchers have begun to reject the volatility measures we often calculate from traditional time series analyses. The option embedded volatility is not entirely devoid of its own drawback to implement, as it turned out to be a function of options exercise prices and the term to maturity meaning that the stock return volatility is not unique. We take a nonparametric approach to guarantee the uniqueness of return volatility embedded in derivative pricing formula, which looks forward.
Our recent discoveries have been to compute the stock’s forward looking covariance, which is extremely important in portfolio formation. Our betas are not history dependent but market driven. We are proud that we are the first in the industry that actually implements these new techniques in the real world investment portfolios.
If interested, please send us a note with your brief introduction and contact information, and we will furnish you with our technical notes.