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A Practitioner's Guide to Asset Allocation by Harry M. Markowitz, David Turkington, Mark P. Kritzman, William Kinlaw

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CHAPTER 18Statistical and Theoretical Concepts

This chapter provides a brief introduction to concepts in statistics and portfolio theory. We include a fair amount of math, but we do our best to avoid excessive complexity. Our intent is to establish a sufficient foundation for this book that is reasonably clear, but this review is by no means comprehensive. We therefore include references to other sources that provide a more thorough and technical explanation of these topics.

DISCRETE AND CONTINUOUS RETURNS

We define the discrete return images for an asset from time images to images as the change in price over some period plus any income generated, all divided by the price at the beginning of the period:

(18.1)images

Next, we denote the log return of the asset using a lowercase images:

Here images is the natural logarithm ...

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