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Risk-Efficient Portfolios; Estimation Error In Essence
Mälardalen University, School of Education, Culture and Communication.
2016 (English)Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesis
Abstract [en]

This thesis primarily looks at estimation error problems and other related issues arising in connection with portfolio optimization. With some available assets, a portfolio program or optimizer seeks to distribute a fixed amount of capital among these available assets to optimize some cost function. In this regard, Markowitz portfolio selection basis defines the variance of the portfolio return to being that of the portfolio risk and tries to find an allocation that reduces or minimizes the risk subject to a target mean or expected return. Should the mean return vector and the covariance matrix of returns for the underlying assets be known, the Markowitz problem is said to have a closed-form solution.

In practice, however, an estimation is made from historical data for unknown expected returns and the covariance matrix of the returns, and this brings into the domain several problems such as estimation problems and renders the Markowitz theory impracticable in real-life portfolio applications. Estimators necessary to remedy these problems would be made bare to show how possible it is to tackle such issues.

In the concept demonstration sections, the analysis starts with the price data of 40 stocks and the S\&P index. The efficient frontier is introduced and used to show how the estimators take effect.

Finally, implementation is made possible using the R Programming Language to demonstrate the necessary concepts with the conclusion presented at the end.

Place, publisher, year, edition, pages
2016. , 67 p.
Keyword [en]
Financial Engineering
National Category
Other Mathematics
Identifiers
URN: urn:nbn:se:mdh:diva-32329OAI: oai:DiVA.org:mdh-32329DiVA: diva2:946245
Subject / course
Mathematics/Applied Mathematics
Presentation
2016-06-10, U3-083, Högskoleplan 1, Vasteras, 19:10 (English)
Supervisors
Examiners
Available from: 2016-07-08 Created: 2016-07-04 Last updated: 2016-07-08Bibliographically approved

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CiteExportLink to record
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Citation style
  • apa
  • ieee
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  • Other style
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Language
  • de-DE
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More languages
Output format
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