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Title:
HOW TO USE THE MARKOWITZ MEAN-VARIANCE OPTIMIZATION TO DIVERSIFY THE RISK OF A PORTFOLIO WHILE MAXIMIZING THE EXPECTED RETURNS

Authors:
Jiayang Wen

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Jiayang Wen
Beijing Huijia Private School

MLA 8
Wen, Jiayang. "HOW TO USE THE MARKOWITZ MEAN-VARIANCE OPTIMIZATION TO DIVERSIFY THE RISK OF A PORTFOLIO WHILE MAXIMIZING THE EXPECTED RETURNS." Int. j. of Social Science and Economic Research, vol. 6, no. 10, Oct. 2021, pp. 3923-3953, doi.org/10.46609/IJSSER.2021.v06i10.020. Accessed Oct. 2021.
APA 6
Wen, J. (2021, October). HOW TO USE THE MARKOWITZ MEAN-VARIANCE OPTIMIZATION TO DIVERSIFY THE RISK OF A PORTFOLIO WHILE MAXIMIZING THE EXPECTED RETURNS. Int. j. of Social Science and Economic Research, 6(10), 3923-3953. Retrieved from doi.org/10.46609/IJSSER.2021.v06i10.020
Chicago
Wen, Jiayang. "HOW TO USE THE MARKOWITZ MEAN-VARIANCE OPTIMIZATION TO DIVERSIFY THE RISK OF A PORTFOLIO WHILE MAXIMIZING THE EXPECTED RETURNS." Int. j. of Social Science and Economic Research 6, no. 10 (October 2021), 3923-3953. Accessed October, 2021. doi.org/10.46609/IJSSER.2021.v06i10.020.

References

[1]. Elton, Edwin J. and Gruber, Martin J. and Spitzer, Jonathan F., Improved Estimates of Correlation Coefficients and Their Impact on the Optimum Portfolios (2004). NYU Working Paper No. S-DRP-04-02, SSRN: https://ssrn.com/abstract=1295853
[2]. Ledoit, Olivier and Wolf, Michael, Honey, I Shrunk the Sample Covariance Matrix (June 2003). UPF Economics and Business Working Paper No. 691, Available at SSRN: https://ssrn.com/abstract=433840 or http://dx.doi.org/10.2139/ssrn.433840
[3]. Mean-Variance Optimization and the CAPM http://www.columbia.edu/~mh2078/FoundationsFE/MeanVariance-CAPM.pdf
[4]. Roche, Cullen O., Understanding Modern Portfolio Construction (February 22, 2016).SSRN: https://ssrn.com/abstract=2740027 or http://dx.doi.org/10.2139/ssrn.274 0027

Abstract:
Mean-Variance Model (Modern portfolio theory) maybe the most famous model in financial field. It assesses a portfolio which’s the expected return (mean) is maximized under a given risk (variance). It comes from assumption that investor want as high as return while as low as risk as he could when he invested a couple of assets (a portfolio is the collection of many assets). This model could give us many optimal portfolio (efficient portfolio frontier) when every asset’s expect return and their covariance matrix are known. The accuracy estimating the covariance matrix is the most essential part implementing portfolio optimization. Thus, in this project, we will perform the mean variance portfolio of the targeted portfolio with Ledoit-Wolf shrinkage methodology which can give us robust estimation of covariance matrix. Then we will use the optimal portfolio to visualize the efficient frontier and compare the optimal portfolio with index or other randomly chosen portfolio.

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