ABSTRACT
This chapter discusses portfolio management and its theoretical underpinnings in the mean-variance mode. The former requires as much art as technical understanding, knowledge, and judgment as a facility with present value formulas or forward rate computation. The latter rests on a very weak statistical foundation usually only appreciated by experts, who have dealt with reams of real data, whether scientific or economic, and come to understand that the world is not random. The mathematics of the basis for linear correlation will be thoroughly explored so that you can be aware of the very strong assumptions made to adopt an inappropriate statistical model for financial risk. The chapter concludes with a suggestion on how to do better at portfolio management.
