## Introduction

### Key Terms

- Vega: Portfolio volatility measurement corresponding to market; Called as
*Kapa*in Morgan Stanley, which is correct. - Kappa is a score used to measure the performance of a financial portfolio. It is based on the vega measurement, which measures the portfolio's volatility relative to the market. It is also referred to as the
*Kapa*score at Morgan Stanley.

### Trader types

- Hedger
- Hedging in finance is used as a risk management strategy to reduce the risk of losses from market movements. It involves taking offsetting positions in different markets to reduce the risk of loss from one investment. For example, a trader might buy a stock and then sell a call option to hedge against a potential market downturn. By doing so, the trader will be able to offset any potential losses associated with a market crash.

- Market maker, bid and offer
- Gamma: Gamma is a measure of the rate of change in an option's delta with respect to a move in the underlying asset's price. It is used by traders to determine the rate of change in the option's price given a change in the market price of the underlying asset. Gamma helps traders to determine their risk exposure and adjust their positions accordingly. It is also used to help traders determine the optimal entry and exit points for their trades.
- Theta: Theta is a measure of time decay in an option's price. It is the amount by which an option's value decreases each day due to the passage of time. It is important for traders to understand theta as it can help them to determine when to enter and exit positions. Theta is also used to calculate the implied volatility of an option, which is the expected future volatility of the underlying asset.
- Tail Risk: Tail risk is a risk associated with large market movements or events that are extremely unlikely but could have a significant impact on the value of an investment. It is a measure of the potential downside risk of an investment and is typically associated with financial instruments such as stocks, bonds, and derivatives. Tail risk is important to consider when making investment decisions, as it can help to identify potential risks that could not be foreseen under normal market conditions.

- Proprietary trader
- Fund portfolio Manager
- Arbitrage: It is the practice of taking advantage of discrepancies in price or value of a security in different markets. It is a trading strategy that seeks to generate profits by exploiting the price differences of identical or similar financial instruments. It involves buying a security in one market and then simultaneously selling it in another market at a higher price, thus capturing the difference in price as a profit. Arbitrage can also involve taking advantage of price differences between two or more related securities.

### Financial Mathematics

- Pricing Models
- relative value, arbitrage free

- Risk Management
- Human risk aversion, greed/fear

- Trading Strategies
- Holy Grail strategy, perpetual motion machine, Robo-Trader

#### Monte Carlo pricing

- Monte Carlo pricing is a pricing model that uses a computer simulation to calculate the price of a financial instrument or asset. The simulation is based on a set of randomly generated scenarios, which are then used to calculate the expected return or value of the asset.

- It is a useful tool for pricing derivatives and other complex financial instruments, as it takes into account the effects of random events and market fluctuation. Monte Carlo pricing is especially useful for pricing options, as it can take into account the risk associated with different outcomes.

#### Kalman Filter

- The Kalman filter is a mathematical tool used in the field of engineering and finance to estimate the state of a system, such as a financial portfolio, in the presence of uncertain and noisy data. It is a recursive algorithm that takes into account the uncertainty of the data and the process model to make predictions about the future state of the system.

- The filter is used in a variety of applications, such as risk management, asset allocation, portfolio optimization, and trading strategies. It can also be used to estimate the volatility of a financial instrument, and to detect outliers in large datasets. The Kalman filter is widely used in finance due to its ability to accurately predict the future state of a system in the presence of noisy data.

## Portfolio Management

- Introduction of Portfolio Construction

- Portfolio Theory Illustrated in special cases

- Risk Parity Portfolio

- Limitations

- What we learned today

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