Usually “getting” a joke requires some subject knowledge. For example, you have to know who Michael Jackson is in order to understand Michael Jackson jokes. I came up with a joke which requires partial knowledge as well as partial ignorance. The joke is:
What emoji is missing on Chinese phones?
The character is “shǎo,” meaning “to lack.” To me it also looks like a smiley face. But to someone who knows the language, it doesn’t look like a smiley face—it looks like shǎo.
I think you can see the predicament. In order to get the joke, you have to know the character, but not well enough to sight-read it. This reminds me of stories about catching Soviet spies with the Stroop effect. Supposedly, suspects were presented with Russian words for colors, but typeset in different colors than what the words said. Then they were asked to go through the list and say what color each word was printed in. If you can’t read Russian, it’s very easy. But if you can read the word, your brain gets confused. In this way, you can test somebody for a lack of knowledge.
I’ve been meaning to learn the math behind stock trading for a while, but I’ve found it’s hard to find quality information. Most of the stuff online is (1) non-technical, (2) trying to sell you something, or (3) both. So I decided to collect my own notes on modern portfolio theory (MPT). Here’s the pdf: Notes on Itô calculus and quantitative trading.
The information comes from various lecture slides and articles. I didn’t put specific references in there, since it’s standard, textbook stuff. Just search for any piece you’d like more information about.
Here is a rough outline:
How to select stocks, given their risk and return statistics
How to model risk and return in the first place
The first part takes the “Minimum Variance” approach due to Markowitz. To model stock prices, I give an overview of Itô calculus (one form of stochastic calculus) and geometric Brownian motion (GBM). This is the model used by the Black-Scholes formula for pricing derivatives.
I suspect that a simple index fund might beat a portfolio selected with this recipe. In the future, I’d like to test on historical data and find out if there really is an advantage to picking your own stocks.