This is the process of changing the mix and/or choice of investments in a portfolio so as to produce the maximum expected return for a given level of risk.
Underlying portfolio optimization is the concept of diversification where the specific risk of a portfolio may be reduced and removed altogether by holding investments that have a low or negative correlation.
However, unlike volatility, correlation is the enemy here because in times of stress, historically observed correlations tend to breakdown (previously uncorrelated investments become highly correlated) and eliminate any advantages of diversification.
Take a look at the Advance Risk management course to get comfortable with an Excel Solver based spreadsheet for optimizing portfolio allocation using historical data and investment policy goals.
- Duration & Convexity Calculation Example
- What is Risk?
- Liquidity Stress Testing
- Advance Risk Management Workshop – Portfolio Optimization & Greeks
- Calculating Value at Risk (VaR)
- Market Risk Metrics
- Fixed Income Investment Portfolio Management & Optimization Case Study – Risk Training
- Liquidity Stress Testing a fixed income securities portfolio
- Convexity & Duration calculator for US Treasuries
- Five steps to hedging Vega and Gamma exposure in Excel
- Portfolio Optimization Models in EXCEL, 3rd Ed.
- Calculating Portfolio Holding Period Return
- Evaluating portfolio performance. A single metric to rule them all?
- The difference between value and growth investing
- Impact of taxes and fees on retirement savings and spending
- The case for Optimal portfolio alpha.
- Portfolio alpha stability and allocation optimization models.
- Value investing lessons from the Big Short (film) – Part II
- The Big Short case study
- Higher moment Portfolio models. Skewness preference.