AuthorTopic: stochastic
CFAUSA
@2003-06-20 14:42:02
Dumb question, but what is the definition of stochastic?Thanks
schumi
@2003-06-28 07:13:06
without going into details (deterministic PDE vs. stochastic PDE) it means , "unknown input".applications were originally in dynamic engineering systems (like damped vibration systems)
CFAUSA
@2003-06-29 12:34:34
From the sounds of it then, Monte Carlo simulation would be a form of stochastic modeling?
schumi
@2003-07-01 08:26:24
Yes, but I think I'd phrase that a little differently in that I'd say you can use Monte Carlo simulation to solve problems which are stochastic.
CFAUSA
@2003-07-10 13:48:03
Thanks for your help. I do appreciate it. One more question though, would I correct to state that portfolio theory and portfolio optimization are stochastic problems?
schumi
@2003-07-17 10:59:05
Yes and no.
If a particle follows a stochastic path, if you release the particle under the same conditions many different times, it will follow different paths each time and you can't predict the exact path.
What you can do is predict the "average" path
-- if you did an experiment 1000 times and measured some quantity each time, you can predict the average.With optimal portfolio theory:
(a) the returns of all the individual assets are stochastic and you could run a Monte Carlo simulation if you wanted
(b) rather than do this, people work with the expected values of those returns which are assumed known with certainty, along with their variances and covariances. They're maximizing the expected return for a given level of risk.

CFA Discussion Topic: stochastic

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