B. Jacobsen
Option pricing and allocation tools in portfolio construction should be prospective - based on assumptions about how prices will change in the future. Most capital market assumptions used in portfolio construction are based on retrospective analysis, boiling down to simple calculations of historical correlations. A better method is to take advantage of the self-similarity of returns where tick-by-tick returns are scaled up to daily returns, or where daily returns are scaled up to monthly returns. Distributional scaling can be used for this purpose.