September 2021
Intermediate to advanced
201 pages
5h
English
Content preview from Financial Theory with Python
Become an O’Reilly member and get unlimited access to this title plus top books and audiobooks from O’Reilly and nearly 200 top publishers, thousands of courses curated by job role, 150+ live events each month,
O’Reilly covers everything we've got, with content to help us build a world-class technology community, upgrade the capabilities and competencies of our teams, and improve overall team performance as well as their engagement.I wanted to learn C and C++, but it didn't click for me until I picked up an O'Reilly book. When I went on the O’Reilly platform, I was astonished to find all the books there, plus live events and sandboxes so you could play around with the technology.I’ve been on the O’Reilly platform for more than eight years. I use a couple of learning platforms, but I'm on O'Reilly more than anybody else. When you're there, you start learning. I'm never disappointed.I'm always learning. So when I got on to O'Reilly, I was like a kid in a candy store. There are playlists. There are answers. There's on-demand training. It's worth its weight in gold, in terms of what it allows me to do.
Chapter 3. Three-State Economy
The model is said to be complete if every contingent claim can be generated by some trading strategy. Otherwise, the model is said to be incomplete.
Stanley Pliska (1997)
Assume that an individual views the outcome of any investment in probabilistic terms; that is, he thinks of the possible results in terms of some probability distribution. In assessing the desirability of a particular investment, however, he is willing to act on the basis of only two parameters of this distribution—its expected value and standard deviation.
William Sharpe (1964)
The previous chapter is based on the most simple model economy, in which the notion of uncertainty in finance can be analyzed. This chapter enriches the two-state economy by just a single additional state while keeping the number of traded financial assets constant at two. In this slightly enriched static three-state economy, the notions of market incompleteness and indeterminacy of the martingale measure are discussed. Super-replication and approximate replication approaches are presented to cope with incompleteness and its consequences for the pricing of contingent claims. The chapter also presents the Capital Asset Pricing Model (CAPM), which builds on the mean-variance portfolio analysis and adds equilibrium arguments to derive prices for financial assets in mean-volatility space even if they are not replicable.
This chapter mainly covers the following topics from finance, mathematics, and Python ...
Become an O’Reilly member and get unlimited access to this title plus top books and audiobooks from O’Reilly and nearly 200 top publishers, thousands of courses curated by job role, 150+ live events each month,
and much more.
Read now
Unlock full access
More than 5,000 organizations count on O’Reilly
O’Reilly covers everything we've got, with content to help us build a world-class technology community, upgrade the capabilities and competencies of our teams, and improve overall team performance as well as their engagement.Julian F.
I wanted to learn C and C++, but it didn't click for me until I picked up an O'Reilly book. When I went on the O’Reilly platform, I was astonished to find all the books there, plus live events and sandboxes so you could play around with the technology.Addison B.
I’ve been on the O’Reilly platform for more than eight years. I use a couple of learning platforms, but I'm on O'Reilly more than anybody else. When you're there, you start learning. I'm never disappointed.Amir M.
I'm always learning. So when I got on to O'Reilly, I was like a kid in a candy store. There are playlists. There are answers. There's on-demand training. It's worth its weight in gold, in terms of what it allows me to do.