Mean-Variance Optimal Portfolios

Mean-Variance Optimal Portfolios

MATT BRIGIDA

Associate Professor of Finance (SUNY Polytechnic Institute) & Financial Education Advisor, Milken Institute

Where do we get assets and parameters?

In the original paper, it is assumed we simply know the set of assets, and their expected returns and covariances. However to actuallly implement the portfolio we'll have to determine each of these.

• The slides below discuss choosing which stocks to include in your portfolio, and how to estimate their parameters.
• First, however is an app to give you an intuitive feel for the effect of diversification.

Choosing Assets

What should be clear from the previous app is that we want assets with low, or negative correlations.

• So you wouldn't want to create a porfolio entirely consisting of oil refining stocks.
• However, a portfolio combining oil refiners with insurance and tech stocks may make sense.
• Note, assets of all types can be considered---not simply stock.

Estimating Parameters

Sensitivity Analysis