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Greek-efficient Portfolios and Predictability of Powers of Returns
KTH, School of Engineering Sciences (SCI), Mathematics (Dept.), Mathematical Statistics.
2015 (English)Independent thesis Basic level (degree of Bachelor), 10 credits / 15 HE creditsStudent thesisAlternative title
Prediktion av potenser av avkastningar (Swedish)
Abstract [en]

This paper will introduce the notion of Greek-efficient portfolios as first described in 'Portfolio Selection with Options' by Professor Semyon Malamud (2014). I will discuss the need of introducing an analogy of mean-variance efficient portfolios with stocks to apply to portfolios with options.

These portfolios will be shown to be replicated by trading contingent claims on stocks paying out powers of returns. As suggested by Malamud (2014), the construction of Greek-efficient portfolios in practice is feasible if the power returns of stocks are predictable. This project finds that squared and cubic returns indeed are predictable by variables observable in the market for stocks in the Nasdaq100 index. The results were however inconclusive for stocks in the larger S&P500 index mainly due to the frequency of changes in the index and scarcity of data for stocks with a less varied option chain.

Thus, this project suggests that the construction of Greek-efficient portfolios is feasible without having unrealistically high transaction costs.

Place, publisher, year, edition, pages
TRITA-MAT-K, 2015:15
Keyword [en]
Greeks, Greek-efficient portfolios, power returns
National Category
Mathematical Analysis
URN: urn:nbn:se:kth:diva-170158OAI: diva2:839186
Subject / course
Applied Mathematical Analysis
Educational program
Master of Science in Engineering - Industrial Engineering and Management
Available from: 2015-07-02 Created: 2015-06-28 Last updated: 2015-08-30Bibliographically approved

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