Chaos Theory Could Make Wall Street More Manageable
Your story confuses portfolio theory with capital-asset pricing theory ("Chaos hits Wall Street--the theory," Special Report, Nov. 2). Portfolio theory is the use of statistical tools to optimize the risk/return performance of a portfolio. It does not require nor does it assume rational investors and efficient markets. In fact, its most successful use has been in thinly traded foreign markets that typically are not considered efficient. If chaos theory proves useful, it will only provide additional statistical tools that improve risk assessment, such as semivariance, lower partial moment, and entropy. These measures assume a market that operates according to an adaptive feedback-information system without any efficiency assumptions, just like chaos theory.
David Nawrocki, PhD
Professor of Finance