Post-Modern Portfolio Theory


Practical Example


Asset Management

Executive summary

In this report, we aim to discuss Markowitz model of Modern Portfolio Theory. It is important to consider this model when going into our practical assessment, where we aim to provide investment advice through the influence of Post-Modern Portfolio Theory. With efficient diversification the optimal investment decision can be attained. We will use the Mean-Variance optimization (MVO) concept, which states that an investor will aim to seek the highest possible return at the lowest risk.

We will start by explaining the origins of the Mean-Variance Optimization and Portfolio theory, followed by an explanation of the data set we used for our practical analysis. In the next section we have set up three strategies and their results over the last five years (which we used as our period for investment) 1st January 1998 - 1st January 2003.

In order to work out the returns of our investment for the period of five years we used the Holding Period Return formula. We did not estimate expected returns because all of our calculations in our five-year period are based on actual results. This is why we used HPR to calculate the final wealth after the five-year period of investment.

Once we have calculated the return on our set of assets and identified the optimal investment we will evaluate the factors behind the returns calculated. We will then consider the weaknesses of portfolio theory and the mean-variance optimization approach

In this report we aim to demonstrate how the mean-variance optimization approach can be used to display different investment strategies. This report is UK based and so diversification discussed does not consider international portfolio diversification, which may offer additional risk advantages.

Modern Portfolio Theory

Harry Markowitz (Born: 1927) was a highly regarded professor of finance that was probably best known for...

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