Black-Scholes Model: First Steps
Today we take a look at the most popular options pricing model. The Black Scholes Model, also known as the Black-Scholes-Merton method, is a mathematical model for pricing option contracts. It works by estimating the variation in financial instruments. The technique relies on the assumption that prices follow a lognormal distribution. Based on this, it […]
Sharpe Ratio and Risk-Adjusted Returns
In finance, one of the popular methods to adjust return rates of investments for risk is the Sharpe Ratio. William F. Sharpe developed the ratio in 1966 and revised it in 1994 to arrive at the formula we use today. Originally he called it the ‘reward-to-variability’ ratio. Later on, finance professionals started referring to it […]
Optimal Portfolios and the Efficient Frontier
There’s a widespread assumption in investing that more risk equals increased potential returns. The theory behind the Efficient Frontier and Optimal Portfolios states that there’s an optimal combination of risk and return. The theory relies on the assumption that investors prefer portfolios that generate the most substantial possible return with the least amount of involved […]
Understanding the Binomial Option Pricing Model
The Binomial Option Pricing Model is a risk-neutral method for valuing path-dependent options (e.g., American options). It is a popular tool for stock options evaluation, and investors use the model to evaluate the right to buy or sell at specific prices over time. Under this model, the current value of an option is equal to […]