Value at Expiration and Profit for Call and Put Options

In an options contract, two parties transact simultaneously. The buyer of a call or a put option is the long position in the contract while the seller of the option, also known as the writer of the option, is the…

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ESG Considerations in Portfolio Planning and Construction

Environmental, social and governance factors are collectively referred to by the acronym “ESG”. ESG integration is the practice of considering environmental, social, and governance factors in the investment process, and can be implemented across all asset classes, including equities, fixed…

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The Asset Management Industry

Buy-Side vs. Sell-Side Asset managers are typically referred to as being on the buy-side. This simply means they buy the products of sell-side firms. Buy-side firms include asset managers, hedge funds, institutional investors, and retail investors. On the other hand,…

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CFA Level 1 Study Notes – Economics

Study Session 4 Reading 12 – Topics in Demand and Supply Analysis – LOS 12a: calculate and interpret price, income, and cross-price elasticities of demand and describe factors that affect each measure – LOS 12b: compare substitution and income effects –…

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Monte Carlo Simulation Vs Historical Simulation

Monte Carlo simulation and historical simulation are both methods that can be used to determine the riskiness of a financial project. However, each method uses different assumptions and techniques in order to come up with the probability distribution of possible…

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Monte Carlo Simulations

Monte Carlo simulations involve the creation of a computer-based model into which the variabilities and interrelationships between random variables are entered. A spread of results is obtained when the model is run many times – 100s or 1000s. The method…

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Continuous Compounding

Continuous compounding applies when either the frequency with which we calculate interest is infinitely large or the time interval is infinitely small. Put quite simply, under continuous compounding, time is viewed as continuous. This differs from discrete compounding where we…

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Lognormal Distribution Vs the Normal Distribution

A variable X is said to have a lognormal distribution if Y = ln(X) is normally distributed, where “ln” denotes the natural logarithm. In other words, when the logarithms of values form a normal distribution, we say that the original…

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Shortfall Risk, Safety-first Ratio and Selection of an Optimal Portfolio Using Roy’s Safety-first Criterion

Shortfall risk Shortfall risk refers to the probability that a portfolio will not exceed the minimum (benchmark) return that has been set by the investor. In other words, it is the risk that a portfolio will fall short of the…

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The standard Normal Distribution: Calculation and Interpretation of Probabilities

The standard normal distribution refers to a normal distribution that has been standardized such that it has a mean of 0 and a standard deviation of 1. The shorthand notation used is:

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