Appendices

The following sections are included:Appendix A Efficient MarketsModern Portfolio TheoryBrownian Stock PricesIto’s LemmaThe Black–Scholes Differential EquationThe Black–Scholes Option Pricing EquationErgodic ProcessesThe St. Petersburg ParadoxDiscount Factors, Zero Rates and Forward RatesThe Hull–White ModelChooser NotesKnock-in Reverse ConvertiblesEquity Worst-of OptionsPulsar Protected NotesAppendix B Discretionary AdventuresThe Gordon Growth ModelA Brief Glossary of Corporate EventsCorporate mergersSpin-offsPrivate saleRights issueInitial public offeringCompany restructuringBalance sheet re-leveragingBalance sheet deleveragingLBOs and MBOsPotential LBOsShare buybacksAcquisitionsSpecial dividend recapDistressedPresent Valuing CashflowsBond YieldsFloating Rate NotesPar Asset SwapThe Stochastic Default ModelThe Reduced Form ModelCredit Event DefinitionsPricing Credit Default SwapsNormal Copula Model for Correlated Default TimesCredit Curve TradesSharpe RatioValue-at-RiskAppendix C Systematic ProfitsGeneric Signal MethodologySignal Z-scoresCombining signalsSignal response functionsPosition risk-scalingBasic Time Series ManipulationSimple moving averageExponentially weighted moving averageExponentially weighted volatilityFundamental SignalsOutput gapPhillips curveTaylor ruleCTA Momentum SignalMomentum using kernelsCTA Carry SignalCTA Value SignalCTA Credit TradingCTA Spread TradingExecution and SlippageEmpirical market impact equationAppendix D The Factor GameAlpha and BetaCapital Asset Pricing ModelArbitrage Pricing TheoryThe Fama–French Three-Factor ModelThe Cahart Four-Factor ModelA Quality DefinitionJoel Greenblatt’s “Magic Formula” InvestingImplied Volatility FactorsStatistical ArbitrageDistance methodCointegration methodCopula methodPrincipal Components AnalysisAppendix E AI AgainMachine Learning Basic DefinitionsLinear Regression ModelThe PerceptronkNN MethodologyGranger Causality