1.

3 MATHEMATICAL AND STATISTICAL PROBLEMS

Within the equities part, the mathematical problems concern optimisation. The
optimisation
can also include additional constraints, exemplified by Sharpe’s development of
returns-based style analysis. Beta is estimated as the slope coefficient in a linear
regression.
Options are valued in the risk-neutral framework as statistical expectations. The normal
distribution of log equity prices can be approximated by an equivalent discrete binomial
distribution. This binomial distribution provides the framework for calculating the
expected option value.
1.4