We were given a report task to determine the best way to invest $10,000 over a 5-month period in ASX 20 companies. What I understand so far is that I think I should analyse historical data and (unsure) somehow put this into a markov chain matrix. Can someone help me with what and how I should use maths to determine future market states.
Maths Report Task
- Thread starter chemAU
- Start date
The problem here is that you need to make economic assumptions before you can do any math. I have no idea what economic models you are supposed to work with. Moreover, what is "best"? There is an immense literature on this about risk frontiers, the historical alpha and beta of stocks, the efficient market hypothesis, the Miller-Modigliani hypothesis, random walks, and on and on. Personally, I reject the efficient market hypothesis because then there is no mechanism to maintain efficiency. To do a Markov process, you need probabilities. You could probably estimate those using historical data. Then what?
As this is Year 12 maths, my guess is that it does not have to be entirely accurate. Once I use historic data to find eg. When it goes down, up or remains the same the probability it goes back up, down again, remains the same is x, y, z then to use this matrix to find the probability it goes up, down or remains every day over the next 5 months, using that thing where you times it by the current state matrix.