Portfolio Selection” and its published version was one of the role of quantitative techniques in business and industry pdf efforts in economics journals to formally adapt mathematical concepts to finance. Markowitz formalized a notion of mean return and covariances for common stocks which allowed him to quantify the concept of “diversification” in a market. He showed how to compute the mean return and variance for a given portfolio and argued that investors should hold only those portfolios whose variance is minimal among all portfolios with a given mean return. Merton was motivated by the desire to understand how prices are set in financial markets, which is the classical economics question of “equilibrium,” and in later papers he used the machinery of stochastic calculus to begin investigation of this issue.
It provided a solution for a practical problem, that of finding a fair price for a European call option, i. Such options are frequently purchased by investors as a risk-hedging device. Master’s graduates are also in demand as quantitative analysts. Historically this was a distinct activity from trading but the boundary between a desk quantitative analyst and a quantitative trader is increasingly blurred, and it is now difficult to enter trading as a profession without at least some quantitative analysis education. Front office work favours a higher speed to quality ratio, with a greater emphasis on solutions to specific problems than detailed modeling. FOQs typically are significantly better paid than those in back office, risk, and model validation. Although highly skilled analysts, FOQs frequently lack software engineering experience or formal training, and bound by time constraints and business pressures tactical solutions are often adopted.
Quantitative analysis is used extensively by asset managers. Some, such as FQ, AQR or Barclays, rely almost exclusively on quantitative strategies while others, such as Pimco, Blackrock or Citadel use a mix of quantitative and fundamental methods. Major firms invest large sums in an attempt to produce standard methods of evaluating prices and risk. LQs spend more time modeling ensuring the analytics are both efficient and correct, though there is tension between LQs and FOQs on the validity of their results.