Conventional methods of financial modeling are often overly
exact, to the point that their purpose--to aid in financial
decision making--is easily lost. Tarrazo's approach, the use of
approximation, gives professionals in finance, economics, and
portfolio management a sound and sophisticated way to improve their
decision making, particularly in such tasks as economic prediction,
financial planning, and portfolio management. Tarrazo reviews how
to build models, especially those with simultaneous equation
systems, then provides a simple way to use approximate equation
systems to solve them. Down to earth, readable, and meticulously
explained throughout, the book is not only an important tool in
practical problem solving situations, but it also provides valuable
methods and guidance for upper level students and their
instructors.
Among the book's important contributions is its chapter on
portfolio optimization. Tarrazo helps clarify the theory and
application of modern portfolio theory, especially in regard to its
implementation with commonly available information management tools
(such as EXCEL). He also provides innovative ways to optimize
portfolios under realistic conditions and a method to obtain
optimal weights in interval form that does not rely on probability;
instead, it relies on the mathematical quality of the matrix in the
optimization. Another chapter shows that approximate equations are
a general-purpose optimization tool, one that subsumes all other
known optimization tools such as classical and mathematical
programming. Tarrazo closes with an unusually full bibliography,
containing more than 200 references spanning several areas of
analysis and various disciplines.
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