Garched Investment Decision Making With Real Risk

Emma Anyika, Patrick Weke, and Thomas Achia.

Abstract

Actual future market risks (systematic or non-diversifiable) of investment portfolios are determined in this paper. Future returns are first forecasted
using past returns and GARCH (General Autoregressive Conditional Heteroskedastic) models. A Real Risk Weighted Pricing Model (RRWPM) is used to estimate future systematic risk among other parameters and determines the future costs of the portfolios. Forecasted random error is then calculated as a random variable and used to
determine probability density estimates of portfolios market risk. This enables future actual market risks of portfolio investments to be derived hence facilitating proper future investment decision making.

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