Optimal Composition of Equity Portfolio

Abstract

The goal of this thesis is to determine and analyze optimal compositions of equity portfolios in dependence on different risk attitudes. Portfolio management is related with financial strategies conventionally, which means don’t put all of your money in one place. So we disperse our money in portfolio of different types of investment products — equities, bonds, funds, commodities, properties, etc. Then we manage the portfolio according to risk or expected return objectives, and adjust the weights in portfolio. The structure of this thesis is five chapters; the first chapter is introduction, it is the outline of whole thesis. The last chapter is conclusion, which contains discussion of the results and summary of whole thesis. The second chapter of this thesis is theoretical introduction of investment decision making, it’s also generally procedures of set portfolio. The third chapter of this thesis is introduction the models which use to set equity portfolios. The fourth chapter is a significant chapter of the whole thesis; we will apply the models mentioned in Chapter two in Excel. In order to observe each model clearly, we assume we have same amount of money to invest each strategy at the beginning of analyses period. So in second part of Chapter four we will describe and interpret each strategy through wealth evolution. Beside the wealth evolution trend, we also have many measurements to inspect the strategy, for example Sharpe Ratio and Maximum Drawdown. And we make further explanation in this sub-chapter. From the thesis, there are nine different optimal strategies of equity portfolio. The first strategy set with Markowitz Model, the second strategy set with Black’s Model, and the other seven strategies set with Utility Function Optimization. In the conclusion chapter we will find the optimal strategy in 3 views: risk, return and combination of these. In the end of conclusion chapter, the student also states her own opinion about the strategies.