Stochastic Portfolio Theory [Hardcover]

E. Robert Fernholz (Author)

Book Description

ISBN-10: 0387954058 | ISBN-13: 978-0387954059 | Publication Date: April 12, 2002 | Edition: 1

Stochastic portfolio theory is a mathematical methodology for constructing stock portfolios and for analyzing the effects induced on the behavior of these portfolios by changes in the distribution of capital in the market. Stochastic portfolio theory has both theoretical and practical applications: as a theoretical tool it can be used to construct examples of theoretical portfolios with specified characteristics and to determine the distributional component of portfolio return. This book is an introduction to stochastic portfolio theory for investment professionals and for students of mathematical finance. Each chapter includes a number of problems of varying levels of difficulty and a brief summary of the principal results of the chapter, without proofs.

Editorial Reviews

Review

From the reviews:

MATHEMATICAL REVIEWS

"We recommend this monograph to all researchers and graduate students in mathematical finance; it is easy to read, self-contained, not boring at all, and with lots of ideas for further research."

"The monograph introduces stochastic portfolio theory, a novel mathematical framework for analyzing portfolio behavior and equity market structure, and which is intended for investment professionals and students of mathematical finance. … We recommend this monograph to all researchers and graduate students in mathematical finance; it is easy to read, self-contained, not boring at all, and with lots of ideas for further research." (Gheorghe Stoica, Mathematical Reviews, 2003 a)

"This book develops a descriptive theory of portfolios in financial markets. … It can be used as a theoretical tool to provide insight into questions of market equilibrium and arbitrage, and to construct portfolios with controlled behaviour. In practice, it can be applied to portfolio optimization and performance analysis, and the tools developed will be useful for these purposes. … it will help to understand why certain investment strategies produce certain results … ." (Martin Schweizer, Zentralblatt MATH, Vol. 1049, 2004)

 

From the Back Cover

Stochastic portfolio theory is a novel mathematical framework for constructing portfolios, analyzing the behavior of portfolios, and understanding the structure of equity markets. This new theory is descriptive as opposed to normative, and is consistent with the observed behavior and structure of actual markets. Stochastic portfolio theory is important for both academics and practitioners, for it includes theoretical results of central importance to modern mathematical finance, a well as techniques that have been successfully applied to the management of actual stock portfolios for institutional investors. Of particular interest are the logarithmic representation stock prices for portfolio optimization; portfolio generating functions and the existence of arbitrage; and the use of ranked market weight processes for analyzing equity market structure.
For academics, the book offers a fresh view of equity market structure as well as a coherent exposition of portfolio generating functions. Included are many open research problems related to these topics, some of which are probably appropriate for graduate dissertations.
For practioners, the book offers a comprehensive exposition of the logarithmic model for portfolio optimization, as well as new methods for performance analysis and asset allocation.
E. Robert Fernholz is Chief Investment Officer of INTECH, an institutional equity manager. Previously, Dr. Fernholz taught mathematics and statistics at Princeton University and the City University of New York.

Product Details

• Hardcover: 192 pages
• Publisher: Springer; 1 edition (April 12, 2002)
• Language: English
• ISBN-10: 0387954058
• ISBN-13: 978-0387954059
• Product Dimensions: 9.3 x 6.5 x 0.7 inches
• Shipping Weight: 14.9 ounces (View shipping rates and policies)
• Average Customer Review: 5.0 out of 5 stars  See all reviews (1 customer review)
• Amazon Best Sellers Rank: #1,536,878 in Books (See Top 100 in Books)

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Customer Reviews

Most Helpful Customer Reviews

6 of 6 people found the following review helpful:

5.0 out of 5 stars A great book to have, September 23, 2007

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jmathb "jmathb" - See all my reviews

This review is from: Stochastic Portfolio Theory (Hardcover)

The book does not have a problem about distinguishing between real world measure and the risk neutral measure as another reviewer has stated. The reason being is that return on the market portfolio can be used as the correct deflator to price securities. One can check the Heath and Platen's work on benchmarking to discover that the risk neutral measure may not always exist, while fair pricing in incomplete markets can still be attained. Fernholz's book actually tells how to construct a market portfolio and readjust it depending on performance and distribution assumptions. Moreover, it can be used as a good source to tie the language of stochastic processes with the classical portfolio theories in economics.