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Risk-Return Analysis, Volume 2: The Theory and Practice of Rational Investing by Harry M. Markowitz

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8

GAME THEORY AND DYNAMIC PROGRAMMING

INTRODUCTION

The previous chapter explored the use of simulation in financial analysis. The present chapter is our first on optimization. Specifically, in this chapter we seek relationships that hold generally; in the next chapter we present the optimum solution to a highly simplified but historically important model; and Chapter 11 explores the use of approximation and judgment for models beyond our optimization capabilities. But the models whose solutions we approximate in Chapter 11 are themselves enormous simplifications of the real world. The section that follows this introduction fantasizes as to what a “more realistic model” might contain.

PRWSim (A POSSIBLE REAL-WORLD SIMULATOR)

To visualize ...

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