Note: Further methods for the evaluation of the
Volatility are provided within the Volatility XML Web service.
Remarks on using Absolute or Relative Values
Within the application of portfolio theory using this component you have the
option of using either relative (i.e. percentage) or absolute values. However,
which ever unit convention you choose you will need to apply the convention consistently
throughout the given application. The reason for this is that some of the quantities
considered within portfolio theory are are dependent upon the unit. In particular,
the following two quantities will need to use the corresponding units of measurement
throughout a given application:
Historical Values: This is the source data which is given in absolute
or relative terms.
Expected Returns: The expected return of the investment over the period
considered which should be given and will be returned in the units used (i.e.
absolute or relative) by the historical values.
These units in turn will effect the following objects:
Utility Function: The values of the expected returns provided within the
definition of the utility function should be in accordance with the units
used to describe the historical values.
Efficient Frontier: The values of the expected return which are either
evaluated or given will be or will need to be in accordance with the units
used within the historical values.
Therefore, whenever wishing to apply our portfolio component you should
decide for the beginning whether you wish to use absolute or relative values
and then stick to this choice for the remainder of the application.
It should also be pointed out that some quantities do not depend on
the units used and so will be the same whichever convention is used. In particular,
the asset weights are unit-less and hence the weighting of the asset within the
optimal portfolio are not effected (as one might expect) by the units convention used.