The Backward Binomial Model Of Hybrid Program For The Portfolio Selection

The modern Portfolio Theory which someone calls Portfolio Theory orDecentralize Investment Theroy,was devised by Markowitz firstly.The PortfolioTheory was built to solve two fundamental questions which had puzzled theeconomists to invest for a long times.One is why to portfolio and how to portfolio inthe stock market where there are a lot of chances to invest.The second is how theinvestor to realize the optimum selection in the stock market,in spite of reducing therisk of investment by using portfolio.Option is a very important finance derivative tool.Option gives the holder theright to buy or sell the underlying asset by a certain date for a vertain price.Theunderlying assets include stocks,stock indices,forergn currencies,debt instruments,commodities,and futures contracts.To stock,the holder has the right to sell the stock ornot in the future.This right can be seen as the intrinsic value which can be caculatedwith option pricing formulasIn the paper, the stock's intrinsic value is the income of the stock.Then,theinvestors won't choose the portfolio only by the temporary value of the stock,instead,he will consider the long term value .In this paper ,the backward binomial model isused to price the intrinsic value of the stocks,which is based on the future value butnot the historic value.The new portfolio model based on the instrinsic value of thestocks will accord with the notions of the investors more in the fact.