14. The Stock Market: Strategies Based on Data versus Strategies Based on Ideology

  1. James R. Thompson

Published Online: 29 NOV 2011

DOI: 10.1002/9781118109656.ch14

Empirical Model Building: Data, Models, and Reality, Second Edition

Empirical Model Building: Data, Models, and Reality, Second Edition

How to Cite

Thompson, J. R. (2011) The Stock Market: Strategies Based on Data versus Strategies Based on Ideology, in Empirical Model Building: Data, Models, and Reality, Second Edition, John Wiley & Sons, Inc., Hoboken, NJ, USA. doi: 10.1002/9781118109656.ch14

Publication History

  1. Published Online: 29 NOV 2011
  2. Published Print: 24 OCT 2011

ISBN Information

Print ISBN: 9780470467039

Online ISBN: 9781118109656

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Keywords:

  • capital asset pricing model (CAPM);
  • capital market line (CML);
  • geometric Brownian motion;
  • Ito's lemma;
  • Markowitz's efficient frontier;
  • MaxMedian rule;
  • Sharpe diagonal model;
  • stock market

Summary

This chapter discusses the strategies of stock market for reducing the risk to an investor as a well defined constrained optimization problem. The capital market line (CML) is linear and it represents the combination of a risky portfolio and a riskless security. The Sharpe model simplifies the input problem by making it directly amenable to simple regression analysis. A major advantage of transferring the discussion into beta terminology is that the regression coefficient can be used directly to estimate the systematic risk of the asset. The capital asset pricing model (CAPM) is the common name for the security market line (SML). The chapter analyzes the stock progression as geometric Brownian motion. It discusses how a portfolio of stocks has, historically, been a superior investment over the long run for retirement purposes. The chapter presents a simple nonproprietary rule which appears significantly to enhance the return to an individual investor.

Controlled Vocabulary Terms

capital asset pricing model (CAPM)