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Extreme Events and Portfolio Construction [15]

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Bullet points include: EVT an enticing prospect. Appears to offer a mathematically sound way of identifying shape of the ‘tail’ of a distribution, and hence identifying likelihood of extreme (i.e. rare) events. Capital adequacy seeks to protect against (we hope) relatively rare events. Insurance and credit risk pricing can be dominated by potential magnitude and likelihood of large losses. But bear in mind. Inherent unreliability of extrapolation, including into tail of a probability distribution. Possibility (indeed probability) that the world is not time stationary. Portfolio construction is inherently multivariate, i.e. choosing between different alternatives

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