Financial Modelling Coursework (Word): Portfolio Optimisation Analysis

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This research paper is centered around the aim to find the best portfolio with respect to the risk-adjusted returns. Apropos to that arises two questions, which stocks to choose and the allocation of weights across these stocks. 10 stocks are selected from the currently emerging economy, New Zealand, of the year 2010-2017, and asset allocation to each stock has been computed to find the best risk-return tradeoff by maximising the Sharpe ratio.

This research paper is centered around the aim to find the best portfolio with respect to the risk-adjusted returns. Apropos to that arises two questions, which stocks to choose and the allocation of weights across these stocks. 10 stocks are selected from the currently emerging economy, New Zealand, of the year 2010-2017, and asset allocation to each stock has been computed to find the best risk-return tradeoff by maximising the Sharpe ratio. The Market Portfolio Theory (MPT) framework is used as the basis for empirical study. In compliance with the framework, the author assumes investors are rational and seek to maximise return and minimise risk while owning a diversified portfolio. Therefore, stocks which have been chosen, originate from different sectors to spread risk. These 10 stocks were then subjected to 4 portfolios, which are the equally-weighted portfolio, market-weighted portfolio, minimum variance portfolio and optimal risky portfolio. Conditions of short sell and no short sale has been applied to the sets of portfolios, determining the best strategical portfolio with differentiated weights, and thus its risk-return trade off. Subsequent to these computations, each set of portfolios were compared by their performance with the year 2018’s actual returns to ascertain if they outperformed the market. Further research on resampling and rebalancing was conducted to improve the optimal risky portfolio. The results were analysed and the best portfolio allocation was presented.

Educational Level

Higher Education

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