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Portfolio optimization using the quadratic optimization system and publicly available information on the WWW

Portfolio optimization using the quadratic optimization system and publicly available information... Purpose – The purpose of this paper is to describe some optimization exercises which have proved to be very useful for introducing students to Markowitz‐style mean‐varience optimization. Design/methodology/approach – This paper describes two exercises that walk students through the process of gathering security price and dividend data, estimating the parameters of the joint distribution of asset returns, and then using a portfolio optimizer to construct mean‐variance efficient portfolios. It describes the basic methodology, and the more complex formulations of the portfolio optimization problem that are used in practice. Practical implications – Portfolio selection is typically taught in finance courses as an abstract solution to a system of equations, and does little to connect the portfolio construction process to Exchange Traded Funds, stocks, bonds and other assets that are traded in markets. This study offers a practical approach to teaching portfolio optimization, that starts with gathering market data and shows how a quadratic optimization system is used to construct mean‐variance optimal portfolios. Originality/value – The exercises in this case study prepare students to construct mean‐variance efficient portfolios for asset allocation with Exchange Traded Funds, and for building stock and bond portfolios, using market data and a portfolio optimizer. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Managerial Finance Emerald Publishing

Portfolio optimization using the quadratic optimization system and publicly available information on the WWW

Jivendra K. Kale
Managerial Finance , Volume 35 (5): 12 – Apr 10, 2009
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References (13)

Publisher
Emerald Publishing
Copyright
Copyright © 2009 Emerald Group Publishing Limited. All rights reserved.
ISSN
0307-4358
DOI
10.1108/03074350910949808
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to describe some optimization exercises which have proved to be very useful for introducing students to Markowitz‐style mean‐varience optimization. Design/methodology/approach – This paper describes two exercises that walk students through the process of gathering security price and dividend data, estimating the parameters of the joint distribution of asset returns, and then using a portfolio optimizer to construct mean‐variance efficient portfolios. It describes the basic methodology, and the more complex formulations of the portfolio optimization problem that are used in practice. Practical implications – Portfolio selection is typically taught in finance courses as an abstract solution to a system of equations, and does little to connect the portfolio construction process to Exchange Traded Funds, stocks, bonds and other assets that are traded in markets. This study offers a practical approach to teaching portfolio optimization, that starts with gathering market data and shows how a quadratic optimization system is used to construct mean‐variance optimal portfolios. Originality/value – The exercises in this case study prepare students to construct mean‐variance efficient portfolios for asset allocation with Exchange Traded Funds, and for building stock and bond portfolios, using market data and a portfolio optimizer.

Journal

Managerial Finance – Emerald Publishing

Published: Apr 10, 2009

Keywords: Portfolio investment; Variance; Assets management; Money markets

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