The solution allows us not only to evaluate the risk involved in financial operations but also to establish and justify mechanisms which reduce the risk. Portfolio Selection Let us touch now another problem, namely portfolio selection. Apparently it does not make sense to reject any risk and to keep your money only in cash, but also it would not be wise to invest all money into stocks. So, it is clear that a part of the money should be kept in cash, and a part in stocks, but what part-this is not a trivial question. Millions of people, some rich and some of modest means, must decide each day what part of their money it is reasonable to keep in cash, what part in stocks and in which stocks, what part in bonds, etc.
Some people make decisions using heuristic reasoning, while some appeal to specialists.
The Emphasis in Financial Mathematics Over the years there has been a great deal of interest in these problems, and one essential ingredient in the growth of the area under discussion has been the introduction of sophisticated mathematical tools, developing a fruitful mathematical theory of financial markets and optimal behavior of their participants. The increase in financial activity has seen a growth in the employment of graduates in mathematics and related disciplines by banks and investment houses. An understanding of the mathematics of financial modeling and pricing is essential to being able to offer solutions and to give a financial house a competitive edge in the market. Providing these solutions and managing optimal strategies require people with mathematical expertise. They also open up new career prospects for those with good mathematical ability, understanding and knowledge.