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Extreme Events and Portfolio Construction [8]

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Bullet points include: E.g. draw X with prob p from N1 and prob (1-p) from N2. Quite different behaviour to linear combination mixtures, i.e. a.X1 + b.X2. If N1 and N2 have same mean but different s.d.’s then distributional mixture is fat-tailed (if p NE 0 or 1) but linear combination mixture isn’t. Time-varying volatility is similar, involves draws from different distributions at different times

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