The Random Matrix Theory

The Random Matrix Theory has come into the recent financial news.

This is the fancy term for an application of mathematical science used for securities evaluation. I have discussed it in past blogs with regard to how different types of securities act in various markets; how they are “correlated.” Or how different stocks within the S&P 500 relate.

The idea is to improve an investment portfolio’s risk management.

In general, practical terms, and to give a simple example, when stocks go down, bonds were usually supposed to go up. This supposedly mitigated market risk. Or when domestic stocks drop, overseas stocks rise. Or the opposite.

Of course, this doesn’t always happen. Both sectors in each instance can go down or up at the same time. The subject is complicated. ( See the Earl J. Weinreb NewsHole® comments.)