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Probability Distributions and Investing
Probability Distributions and Investing
Probability Distributions
There has been a great deal of research on how to quantify uncertainty for 'random variables', such as the price of a stock. The classical approach is to try to estimate the probability of each possible value of a random variable, in our case, prices of a stock. Although much effort has been expended, until now, techniques for estimating probability distributions for stocks have not been very successful. See: Deriving Probability Distributions and Probability Distributions for Stocks for more details.
will be in the form of pairwise comparisons as is practiced in the Analytic Hierarchy Process.
The Analytic Hierarchy Process (AHP) is a process that has been used within tools such as Expert Choice for a wide variety of applications involving prioritization, including complex choice decisions, forecasting, and resource allocation. (You will find many citations if you Google AHP and almost any type of decision or business process, such as six sigma, TQM, Business Process Engineering, Energy Policy, etc.) In addition to relying on principles of aggregating judgments espoused on the Wisdom of Crowds, we will employ several principles of the Analytic Hierarchy Process, including structuring, making pairwise relative comparisons, deriving priorities from these comparisons with what is called the principle right hand eigenvector (which gives new meaning to GIGO) and different ways of aggregating judgments and priorities.
Strategies
Not only is knowing probability distributions necessary if we are to know if we are investing or gambling, the probability distributions we will be deriving will enable us to evaluate a wide variety of investment strategies, ranging from individual stocks, to portfolios of stocks, to derivatives such as covered calls, naked puts and options on futures.
Interested in Participating in the Experiment? If you are interested in participating in the experiment, please send an email to that effect to me at: forman@gwu.edu. See also: http://mdm.gwu.edu/forman and www.expertchoice.com