Outline of Approaches
In this report, we attempt to optimize the portfolios through different optimization techniques. We produce an evidence-based report and investigate the issue for an equity fund. The four approaches that we have used in this report to generate the optimal portfolios under each strategy are:
An equally weighted approach
A risk minimizing approach
A mean variance approach
Maximum Diversification Approach
Under the equally weighted approach, equal weights are assigned to each asset and then based on that we have generated the portfolio returns and the portfolio risk computations(Mahdavi, 2013). Under the risk minimizing portfolio, we have targeted the reduction in the portfolio risk and made use of the solver to achieve the target risk of the portfolio and the mean return for the portfolio(Picerno, 2012).
Then in the mean variance approach we invest in each of the selected five assets in specific quantities so that the expected return is maximized at the same level of the risk, which is defined as the variance. Mean variance portfolio is the component of the modern portfolio theory, it provides us with more efficient investment choices, and the variance becomes the lowest for the given expected return(Manager, 2006). Under this theory, we have assumed that all the investors think rational and they expect a higher rate of return. Expected return and the variance are the two main components of this model.
Lastly, we have generated the optimal portfolio based on the maximum diversification approach. The basic idea behind this approach is to implement the strategy that generates the highest degree of diversification and it maximizes the diversification ratio(Choueifaty, 2008). The strategic allocation of the assets for this purpose becomes dynamic and it is regularly adjusted with respect to the conditions of the market.
Portfolio Management Assignment Harvard Case Solution & Analysis
The main assumption in implementing all of the four approaches for portfolio optimization is that short selling has been allowed and the short selling has generated negative weights within the mean variance portfolio. This is quite possible when short selling is allowed in constructing the mean variance portfolio(Doganoglu, 2007). Along with this, we have also rebalanced the portfolios based on each of the four approaches.
The weights also change as the amount invested also changes and this can be seen for each of the four approaches of portfolio optimization. Finally, the mean returns, risks and the Sharpe ratios have been computed for each rebalancing exercise to evaluate the performance of each of the four approaches and recommend the best approach for the equity investment fund(Bruce, 2003).
Summary of Data Modeling Results
The results for the portfolio asset allocation based on four different approaches are calculated in the excel spreadsheet and these are discussed below:
Equally Weighted Approach
Under this approach, equal weights have been assigned to each of the five asset classes and based on that we have computed the portfolio risk and return(Mahdavi, 2013). Before computing the portfolio risk and returns, we have generated the means and standard deviations of each of the five asset classes..................
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