Creating portfolio risk and return models [32]

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Bullet points include: Bonds and non-linear instruments such as options may react approximately linearly to factor movements over short enough time periods But not necessarily approximately linear over longer time periods Pull to par (bonds) Non-linear derivatives, e.g. options Moreover, for e.g. bonds we need model of evolution of entire yield curve (rather than of just a single interest rate) as behaviours of instruments with different maturities differ In general requires a valuation engine

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