Portfolio Optimization
Finding the mathematical ideal.
Portfolio Optimization involves selecting the best portfolio (asset distribution) out of the set of all portfolios being considered, according to some objective. The objective typically maximizes factors such as expected return, and minimizes costs like financial risk.
Modern Portfolio Theory (MPT)
MPT assumes investors are risk-averse. Given two portfolios that offer the same expected return, investors will prefer the less risky one. Optimization finds the weights that offer the highest return for a defined level of risk.
Key Takeaways
Diversification is the only free lunch.
Relies heavily on accurate correlation inputs.
Garbage in, garbage out.
Portfolio Optimization
Finding the mathematical ideal.
Portfolio Optimization involves selecting the best portfolio (asset distribution) out of the set of all portfolios being considered, according to some objective. The objective typically maximizes factors such as expected return, and minimizes costs like financial risk.
Modern Portfolio Theory (MPT)
MPT assumes investors are risk-averse. Given two portfolios that offer the same expected return, investors will prefer the less risky one. Optimization finds the weights that offer the highest return for a defined level of risk.
Key Takeaways
Diversification is the only free lunch.
Relies heavily on accurate correlation inputs.
Garbage in, garbage out.
Apply This Knowledge
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