Re:Show HN: Duedilly.io – Accuracy of Reddit Trading Ideas
by kqr on Saturday August 21, 2021 @07:08AM
(#28255975)
Sure, it does. But it does so in the same sense that MPT requires known mean and variance. In either case, we go with estimations.
In many practical cases, the joint distribution of outcomes is easier to estimate safely than the variance. The joint distribution of outcomes can be approximated by something very close to the actual observed distribution of outcomes. However, the variance has, in a sense, to be derived from a fitted model. This is one step further removed from reality which risks introducing more incorrect assumptions.
Other reasons are that the variance doesn't even exist for some assets (too heavy tailed distributions) and that errors in estimating the joint distribution can be smaller thanks to at least some level of central limit theorem.
In many practical cases, the joint distribution of outcomes is easier to estimate safely than the variance. The joint distribution of outcomes can be approximated by something very close to the actual observed distribution of outcomes. However, the variance has, in a sense, to be derived from a fitted model. This is one step further removed from reality which risks introducing more incorrect assumptions.
Other reasons are that the variance doesn't even exist for some assets (too heavy tailed distributions) and that errors in estimating the joint distribution can be smaller thanks to at least some level of central limit theorem.