Thursday, February 10, 2005

Fractals, power law, risk etc.

I just finished reading Mandelbrot's (Mis)behavior of markets. A good book that argues that conventional methods underestimate risk/volatility and that the bell curve is overused/abused and misapplied.

One important conclusion is that so called outliers are much more frequent than most expect them to be. It naturally follows then that the current magic number of 30-40 (different stocks) to provide safe diversification is an underestimation. In reality, the author argues, the number may be 3 times higher! Having just made a post titled How many is too many, I agree completely.

Be warned that the book contains a few equations and Greek symbols! This book will make me go back and read a few more pure-math books soon (love those equations!), but I promise not to blog about them.

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