Two-Period Model: Mean-Variance Approach

摘要: Indeed we will start our journey to financial markets with only one step: the step from time period (in which invest into assets) another assets pay off). To make this two-period model even simpler, assume in chapter mean-variance preferences. We see later that is a special case of models more general preferences (Chap. 4) and can extend arbitrarily many time-periods 5). Finally generalize continuous models, where does not any longer consists discrete steps 8). For now, assumptions two periods allow us get some intuition on without being overwhelmed by an overdose mathematical formalism. Nevertheless, want point out simplicity comes at price: need impose strong very natural assumptions. In Sec. 2.3, have seen potential problems approach. practical applications, however, approach still standard. use it develop first asset pricing, so-called “Capital Asset Pricing Model” (CAPM). This has been praised researchers finance, 1990 Markowitz Sharpe were awarded Nobel Prize economics for its development.