Apocalypse revisited: Do you know where your optimizer is at night?.

Portfolio theory is rich, containing mathematical algorithms, statistical analysis, risk measures, utility theory, expectations and investor behavior. Portfolio theory is simply a toolbox of statistical and mathematical tools trying to improve investment decision-making under risk or uncertainty. Portfolio theory is valuable under the right conditions. The problem with portfolio theory, however, derives from Godel's Incompleteness Theorem that states that a mathematical algorithm cannot prove its own validity. Portfolio optimization is a set of simultaneous equations that are solved mathematically in order to minimize expected risk and to maximize expected return. One approach to using portfolio optimization correctly is to generate a macro forecast of the economy. Planners should remember that optimization software is properly used only when it reflects expectations and forecasts.

Main Author: Nawrocki, David.
Language: English
Published: 1996
Online Access: http://ezproxy.villanova.edu/login?url=https://digital.library.villanova.edu/Item/vudl:178228
Summary: Portfolio theory is rich, containing mathematical algorithms, statistical analysis, risk measures, utility theory, expectations and investor behavior. Portfolio theory is simply a toolbox of statistical and mathematical tools trying to improve investment decision-making under risk or uncertainty. Portfolio theory is valuable under the right conditions. The problem with portfolio theory, however, derives from Godel's Incompleteness Theorem that states that a mathematical algorithm cannot prove its own validity. Portfolio optimization is a set of simultaneous equations that are solved mathematically in order to minimize expected risk and to maximize expected return. One approach to using portfolio optimization correctly is to generate a macro forecast of the economy. Planners should remember that optimization software is properly used only when it reflects expectations and forecasts.