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Portfolio Optimization

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:
  1. Market Capital Weightage Model
  2. Equal Weightage Model
  3. Global Minimum Volatility Model (GMV)
  4. 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.

 

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