Optimization of Stock Portfolio

Abstract

Portfolio optimization is the process of comparing and selecting the best portfolio from all of the portfolios that are alternative. The American economist Markowitz proposed the Portfolio Theory in 1952 in his paper “Portfolio Selection”. The goal of the diploma thesis is to compare the out-of-sample performance of portfolio allocation strategies we select. The selected strategies are Naive strategy, Markowitz model, minimum variance portfolio and Tobin model. The data we select are the adjusted stock prices of 30 stocks of Hang Seng Index. The data are weekly data between January 4th 2009 and December 30th 2018. The thesis is divided into 5 parts. The first and last parts are introduction and conclusion. The second part is the description of portfolio optimization. Chapter 3 is the description of portfolio backtesting and portfolio measures. We describe the backtesting framework and performance measures we choose, which are maximum drawdown, Sharpe ratio and Jensen’s alpha. In chapter 4, we divide our data into in-sample period and out-of-sample period. We apply strategies separately in these two periods, and backtest the strategies in out-of-sample period. Then we compare each strategy by performance measures and determine which one is the best.