Thursday, November 3, 2011

Efficient Portfolio of Assets: Application of Markov Chain (CON)


In this article, I am willing to explain why I wrote previous article of “Efficient Portfolio of Assets: Application of Markov Chain”. The reasons are as follows:

1) As you can see, the most crucial thing to apply the model of Markov Chain for the transactions in finance is to assume the constant rate for Risk and Expected Return. In fact, key factors are to be fixed them. But how can we secure a constant rate for risk and expected return? It can be done by injecting the money as fuel. Let me bring you a real example about the transactions of Crude Oil as an asset during the period of 24 hours on May 7, 2010 as follows:
Crude Oil Price
May 7, 2010
Hour
Minute
Second
Pr (USD)
Ra
11
43
19
75.41
12
1
20
76.18
1.02%
12
14
32
75.23
-1.25%
12
55
30
76.04
1.08%
23
40
35
75.41
-0.83%

Where we have:
Real Price (USD) = Pr
Expected Price (USD) = Pe
Return Rate (%) = Ra
Expected Return (%) = Re
Referring to above mentioned, we have variable return rate on each exact time. If we want to have the constant return rate (Re), the Expected Prices (Pe) will be changed as follows:
Pr
Pe
Re
75.41
76.18
76.18
1.02%
75.23
76.96
1.02%
76.04
76
1.02%
75.41
76.815
1.02%

In fact, in the staring of deals, the price is $75.41 and after the first transaction, the return rate will be revealed by the price of $76.18. If we want to control and have a constant returning rate, we should take the action as follows:

We have formula of return rate:
Re = (Pe -76.18) / 76.18
Regarding to above table, to fix expected return rate and to have a constant Re, we have two states as follows:
-Sometimes Pr > Pe: Our strategy in action will be the injection and investment of the money on others assets to fall down the real prices
-Sometimes Pr < Pe: Our strategy in action will be the injection and investment of the money on Crude Oil asset to increase of the real prices.
Of course, this is a game and maybe the application of the Game Theory will help us to find the best analysis. Because we have the limited internal resource and are not be able to purchase so many numbers of the shares to increase or decrease of the share prices (Which asset is the better to buy? How much percentage should we buy?).
Application of the Game Theory after PEST, Industry and SWOT analysis will guide us to find how much percentage of the shares and which ones should be purchased in which the total action will be affected on Pr and Pe.
As the result of this model, a fluctuation will be raised among the whole of the stock markets when there is the lack of the Value Chain throughout the world in which it can be linked the scarce resources. In this case, we have not enough money (Energy) to handle the model of Markov Chain. As the matter of fact, it means there is the lack of liquation on assets to reach the critical points.
This model can be also expanded for corporate strategy where the shareholders move among the Corporations.

2) Referring to above mentioned (Reason 1), we are speaking about the constant rates (numbers) such as Risk and Expected Return, the types of the states (Assets), money, liquation and critical points.
Now, I can remind you about my first article of “Actually, what is the problem?” that I sent this article on https://www.xing.com/net/pri46ffacx/mathe/general-interest-remarks-and-links-5223/actually-what-is-the-problem-14781292/on Oct 25, 2008 (link of this blog: http://emfps.blogspot.com/2010/10/actually-what-is-problem-part1.html).
My question was: Can we join Gibbs’s formula (F = C – P + 2) and phase diagrams in thermodynamic to all of systems in the world?”
The answer is yes. Because of below cited:


-In above model of Markov Chain, we have three variables of the Time, Risk and Expected Return
- In phase diagrams, we have three variables matched by Risk to Pressure and Expected Return to Temperature and the time
-We have the money matched to the Energy, the types of the states for both of them, material matched to assets, liquation and critical points for both of them.
- The most important thing is that there are the critical points for each two systems in which the variables will be the constant numbers (boundaries)in this critical points.
You can see both systems are completely matched together.

3) Referring to Reason (2), I found an example or application for my first article after 36 months. Three days ago, I posted the article of “The Constant Issues, Universal Laws and Boundaries Conditions in Physics Theory” on the link of “http://emfps.blogspot.com/2011/10/constant-issues-universal-laws-and.html “and I told that I am working on a new constant natural number. Maybe I will find an example or application during the period of the next 36 months???

4) What will be the strategy in action?
Referring to Reason (1), it can be proved that we need to discover new resources of the energy other than the existing resources to eliminate the fluctuation on the stock markets.
One of the ideas to discover new resources of energy is to save the energy during the period of time accompanied by the constant conditions (refer to above model and the constant rate). In this case, each 1 KJ of energy saving will be just equal to 1 KJ discovered energy. What are the constant conditions? The methods, which are applied by energy –saving, should not be suffering the whole of the people in the world. In the other word, the people should feel that they are convenience before and after energy –saving. This is the constant conditions. Of course, this strategy needs that the people in the world cooperate to abandon their wrong habits. I had already brought an example of energy saving in article of “Saving Techniques: Optimization in Boiling Water Consumption on the link of “http://emfps.blogspot.com/2010/10/saving-techniques-part-1-optimization.html
As you can find on Recommendation of this paper:
“What is the Influence of energy saving by the people on environment and business in the world?
International Energy Outlook 2010 (IEO) stated that total world energy consumption rises by an average annual 1.4% from 2007 to 2035. If we assume only 61% population of these 39 countries care about energy saving on the case of boiling water, AE can be calculated just equal to 1.4%. It proves that this method as well as works”.



Note:  “All spreadsheets and calculation notes are available. The people, who are interested in having my spreadsheets of this method as a template for further practice, do not hesitate to ask me by sending an email to: soleimani_gh@hotmail.com or call me on my cellphone: +989109250225. Please be informed these spreadsheets are not free of charge.”