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Stress Testing and Back Testing [23]

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Bullet points include: ‘Selection’ effects are a common problem in finance. E.g. Individuals buying annuities typically live longer than those who don’t. Suppose active manager focuses on mean/median outcome (because that is what he/she is paid to do). But when doing so selectively biases portfolio towards strategies carrying higher than average ‘tail risk’. ‘Average’ here means the average across all randomly chosen portfolios. See e.g. Kemp (2010a, 2010b, 2010c). Both meaning and magnitude are important

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