November 09, 2004
Mean-Variance Analysis
We construct a budget constraint from the aX+b rules for statistics, and we construct indifference curves from the utility-based analysis of risk.
Our mean-variance analysis diagram explains how people determine their optimal portfolio. Given that the parameters of the assets change every day with the arrival of news affecting the future, the diagram also explains why agents keep trading after they reach the optimal portfolio at one particular date.
