- Mean, Variance, Standard Deviation and Correlation
- Constructing an Efficient Frontier
- Minimum Variance Hedge Ratio
- What is Serial Correlation (Autocorrelation)?
- Diversification and Portfolio Risk
- Value at Risk (VaR) of a Portfolio
- Probability of One Portfolio Outperforming Another Portfolio
- Probability of Attaining a Return Goal
Probability of Attaining a Return Goal
Earlier we looked at calculating the probability of beating a fixed target. Now we will look at calculating the probability of beating a benchmark which is itself stochastic.
Let us consider two assets A and B with the following details:
We have a total of $10 million to invest. Our objective is to beat a benchmark.
Let us take the 50-50 portfolio, which has the following returns:
Suppose the benchmark has the following returns:
We need to find that probability that our portfolio will beat the benchmark index, i.e.,
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