1. Discuss on one page or less the mean-variance metrics associated with Markowitz as a risk management tool. To do that, listen carefully to the Taleb video where he refers “mean-variance nonsense”. Explain what he means by this. Recall and comment about what you learned about Markowitz.
2. Write in 2 pages or less an interpretive essay about the financial markets, using all of the following terms/phrases:
• liquidity and solvency
• capital rules and leverage
• credit default swap
• toxic security
• regulatory arbitrage
• systemic risk
• disintermediation and shadow banking
• God’s work,
comparing and contrasting the financial market structures in the US and Canada. View your essay as an overview of the causes of the global financial crisis and the proposed reforms, where you challenge yourself to string together these terms into a cohesive story. Avoid simplistic truisms and generalities.
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Taleb’s Mean-Variance Non-sense
Nassim Taleb is best known as the author of The Black Swan, which alludes to the fact that if you have only seen white swans in your life-time, you may think that there are no black swans. Similarly, in the financial markets, if you believe that returns are normally distributed, you may think there is little to no chance of very low (highly negative) return. Taleb’s point is that this is faulty non-sense thinking. He emphasizes that returns are not normally distributed. The distribution of returns to several securities, and even the market, is highly non-normal with distribution tails that are much “fatter” than the normal distribution implies. This means that portfolio optimization techniques based on only mean and variance are nonsense a well....
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