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Essay / Research Paper Abstract
A 9 page overview of the applicability of financial models to investment. The author reveals the investment strategy of the “Long Term Capital Management” fund to contend that this strategy was based largely on models such as that accounted for by the Black-Scholes Formula. The failure of this fund serves to exemplify the fact that models are based on normal behavior, when normal behavior is replaced by abnormal behavior even the most advanced financial models fail to perform. Bibliography lists 3 sources.
Page Count:
9 pages (~225 words per page)
File: AM2_PPinvest.rtf
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Unformatted sample text from the term paper:
opportunities and risks of hedge funds and highly leveraged investment strategies. As you are aware, our modern day investment environment is
replete with risks. As the old adage states, however, to make money you have to endure certain risks. These risks can be minimized, however, through a careful evaluation
of the investment environment and a clear understanding of how the financial market works. If only investment can be reduced to a scientific formula, if only with to come
up with a mathematical means of analyzing the various factors around which investment strategies revolve, risks could indeed be minimized or even eliminated. This hope is not a new one.
Indeed, just such an analysis was attempted by a French graduate student named Louis Bachelier at the turn of the twentieth century in his doctoral thesis in which he
compared the process of buying and selling in the stock market to random particular movement! Although Bachelier envisioned stock prices as a random phenomenon, a phenomenon which was impossible
to predict exactly, he proposed a way to control investment risk (Public Broadcasting System, 2000). Bachelier proposed to do this is something he called an option. Bachelier envisioned
this scare financial contract as a means to protecting investors from the fluctuations which characterize the investment environment (Public Broadcasting System, 2000). Although Bachelier was unsuccessful in convincing investors
of the time that options were a viable alternative in minimizing risks, todays stock options are a common component of the modern investing environment. They are, in fact, a
common component of long-term capital management. In effect, an option is a contract which specifies the right of an investor to either buy or sell a particular stock at
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