Optimal Composition of International Equity Portfolio

Abstract

The objective of the diploma thesis is to find optimal composition of portfolio containing equity only. For solution of this problem CAMP model and Markowitz model will be applied to find the efficient set and then show the finding of the optimal portfolio composition. The diploma thesis is divided into three main parts. In the first part it will be described the investment decision-making and financial institutions. Moreover, attention will be paid to the investment analysis like risk, investment psychology, etc. Next, financial markets will be described – how the financial system works, partial markets (money markets and capital markets), and main financial instruments of these markets (funds, stocks, bonds, etc). Last part of the chapter is dedicated to the description of the financial markets participant’s, i.e. financial institutions. In the second part, methodology of portfolio choice is described and explained including fundamentals of portfolio management. Attention will be paid primarily to the assumptions and theory of Markowitz portfolio selection. Furthermore, principles, assumption and application of the capital asset pricing model and the security market line will be described here including main variables for efficient portfolio selection - risk and return. Last part will be focused on the financial statements analysis, such as corporate valuation and investment ratios. Third part is the application and the most important part of the diploma thesis. The first part is focused on the CAPM application, the second one on the efficient set selection. In the case of the CAPM application, first the description of the input data is made. Next, the CAPM model is applied for the valuation purposes. In the case efficient composition selection, Markowitz model will be employed to get portfolio composition. First, the description of the input data and the function of Markowitz model is made. Afterwards the procedure of efficient composition is described. In the end, optimal equity portfolio composition will be found.

The objective of the diploma thesis is to find optimal composition of portfolio containing equity only. For solution of this problem CAMP model and Markowitz model will be applied to find the efficient set and then show the finding of the optimal portfolio composition. The diploma thesis is divided into three main parts. In the first part it will be described the investment decision-making and financial institutions. Moreover, attention will be paid to the investment analysis like risk, investment psychology, etc. Next, financial markets will be described – how the financial system works, partial markets (money markets and capital markets), and main financial instruments of these markets (funds, stocks, bonds, etc). Last part of the chapter is dedicated to the description of the financial markets participant’s, i.e. financial institutions. In the second part, methodology of portfolio choice is described and explained including fundamentals of portfolio management. Attention will be paid primarily to the assumptions and theory of Markowitz portfolio selection. Furthermore, principles, assumption and application of the capital asset pricing model and the security market line will be described here including main variables for efficient portfolio selection - risk and return. Last part will be focused on the financial statements analysis, such as corporate valuation and investment ratios. Third part is the application and the most important part of the diploma thesis. The first part is focused on the CAPM application, the second one on the efficient set selection. In the case of the CAPM application, first the description of the input data is made. Next, the CAPM model is applied for the valuation purposes. In the case efficient composition selection, Markowitz model will be employed to get portfolio composition. First, the description of the input data and the function of Markowitz model is made. Afterwards the procedure of efficient composition is described. In the end, optimal equity portfolio composition will be found.