by Rui Dai, Yang Liu, Zongxia Liang
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Suggested foundations for portfolio construction and options and derivatives pricing. Specialist prerequisites vary by paper.
Understand the covariance structure of portfolio risk.
Read objectives, constraints and optimality conditions.
Build replication and risk-neutral probabilities in a tractable model.
Distinguish pricing probabilities from physical forecasts.
Construct allocations and examine sensitivity to estimated inputs.
Turn mathematical weights into feasible portfolio decisions.
Connect the pricing equation, closed-form value and implied volatility.
Connect diversification, common risk factors, investor views, and the properties of a risk measure.
Start in discrete time, move to Brownian motion, then read the original pricing argument and simulate it.