The client was looking for a model for managing the equities portfolios of a financial institution.
The following decisions were required to be made in order to optimize the equities portfolio:
- to allocate capital across a number of available assets,
- to meet certain pre-defined objectives,
- to mitigate financial risks and ensure better preparedness for uncertainties,
- to establish mathematical and computational methods on realistic constraints,
- to manage profit and loss of the portfolio and,
- to provide stability across inter and intraday market fluctuations etc.
Our Approach, Findings and Solutions
- Engaged with the client in order to understand their need of optimization.
- Initially, we analyzed individual equities of the portfolio in order to find various parameters like annualized returns, volatility, skewness, excess kurtosis, etc.
- Applied Markowitz Modern Portfolio Theory and Monte Carlo Simulation to design optimization models and also analyze the Efficient Frontier plot.
- We builtvarious models in order to find one which mitigates risk as well as gives optimal return. Models that we built were as given below:
- Market Capital Weightage Model
- Equal Weightage Model
- Global Minimum Volatility Model (GMV)
- Maximum Sharpe Ratio Model (MSR)
- We applied the CAPM model on individual securities as well as on whole portfolio in order to check expected returns with comparison to benchmark index.
- We found that Market Capital Weightage model was giving the highest return and the GMV Model was giving the lowest.
- All the securities were giving annualized returns above the benchmark individually.