What is a good model?

A good model has strong predictive power

- It considers all the important parameters without over-simplifying the reality
- A good model does not need to factor in all the system parameters, as
many of them are not important!
- It provides you with trends and general performance characteristics
- It sheds light on how different parameters affect/interact with each other to
come up with an equilibrium price
- It provides you guidance on possibly “under-priced” or “over-priced”
instruments

Using models, we can “quantify,” and hence “optimize,” many investment
decisions and understand how a portfolio performs over time by varying
parameters.