Investment ratio over t years, comparing r1 to r2 :

y1 (t) Per1t
(r r )t
rt e 1 2
2
y2 (t) Pe

Chance of stock in N days

increasing by a percent with probability p1
decreasing by b percent with probability p2
Say we want to know n days average to increase by p percent

Interest rate ODE:

dy r(t) ydt
t

r (s)ds
y(t) y(0)e0

Constant removal of money

dy
r(t) y k
dt
k
y(t) c0 ert
r
k
If c0 y(0) , then
r
k
k
y(t) y(0) ert
r
r
Investment with Coorperate Tax T
dy
1 T ry
dt
y(t) Pe(1T )rt

(1 a) n(1 b) Nn 1 p
n

1 a
1 p

1 b

(1 b) N

1 a
1 p
ln
N
1 b

(1 b)

n ln

Find it's probability of occuring between two values

1 if increases ~0.5% on day i
0 if decreases ~0.6% on day i

Xi

n2
1

1
1

n1 Xi n2 P N
Z N

p1 p2
p1 p2

i1

N
N

Chance of stock in N days

increasing by a with probability p1
decreasing by b with probability p2
remain constant with probability p3

ap1 bp2 0 p3
Invest B dollars at T tax and recieve C gains
y(t) (B C)ert ( B C)ert B T
Bond Prices, pay p

pce rt dt pe rT

Change in bond value with time,

dP / dT e yT (c y)

2 (a )2 p1 (b )2 p2 (0 )2 p3
Chance will neither lose or gain D dollars
N

D
D0
P D Xi D P
Z

/ N

/ N
i1

Integration by Parts

udv uv vdu.
Brownian motion properties:

DURATION (percentage change in value per for a change in y)

1. B 0 0

D (1 / P)(dP / dy)

2. B(t) is continuous.

At time T, cupon c, periods p per year, and yield to maturity y:

Price of present bond value is which ends in n years is,
n

c/ p
1
+
j
(1 y/ p) n
j1 (1 y/ p)

3. If 0 t1 t2 t3 t4 , then [B(t4) B(t3)] is independent

of [B(t2) B(t1)].
4. If 0 t1 t2 , then [B(t2 ) B(t1 )] has mean zero and
variance (t2 t1 ).
Brownian motion from t1 to t2 :
mean t2 t1

Variance

t t
1

Poisson Process from t1 to t2 :

before t2 t1 , where is the intensity

Matrix to component notation:

vT ABT x vi Aij BTjk xk vi Aij Bkj xk
i, j ,k

i, j,k

Component notation to Matrix:

M
i, j,k

M
i, j,k

x L jk Alk xi M ijT L jk AklT xT M T LAT

ji i

x L jk Alk xi MijT L jk AklT xT M T LAT

ji i

AklT LTkj M ji xi AT LT Mx
Note: vector must be at the begining or end
Differentiation
x Ax

xi

A
k

x Ajk k Ajk ki Aij I Aij A

xi
k
k

jk k

If dependent and equal amounts are invested in each asset

i.e. wi 1/ n, i :

1
1
V wR i2 1 ij
n
n

Where 12 is the average variance and ij is the cov.

Daily return

St St1
.
St1

Autocorrelation between times s and t: R(s,t)

Variance Ratio: VR V2 / (2V1 )

E[( Xt t )( Xs s )]
t s