Stock Portfolio Optimization
Portfolio Optimization
A Selection of Stocks from the Heng Seng Index
17 August 2012
Introduction
A typical investor purchases an asset with the hope that it will generate income or appreciate in the future. Given the plethora of choices in the market, a rational investor would choose an investment with the highest expected return.
The Hong Kong Stock Exchange is the sixth largest stock exchange in the world with 1,477 listed companies and a combined market capitalization of HKD 17 trillion. Trading stocks from the Hong Kong stock market has become one of the most popular forms of investment in the region. The question is – how do we find out which asset is the best to invest on? Very often, investors hold a selection, instead of a single stock, in order to maximize their return in the long run. Why is it so?
This report contains the explanation on fundamental methodologies employed in selection of stocks and composition of portfolios. In addition, several attempts had been made to construct optimized portfolios with the greatest long-term expected return.
Objective
To construct a portfolio with greatest long-term expected return from the 46 stocks constituting the main board of Hong Kong Stock Exchange.
It is assumed that stock prices follow a normal distribution. Hence the calculations of long-term expected returns of single stocks as well as portfolios are based on the historical data, dated 8/31/1981 to 7/31/2011.
Modern Portfolio Theory
Under the current uncertain economic outlook, one should not be difficult to perceive that volatile investments may not result in a good long-term return. And the idea of diversification is widely accepted way of ensuring a good return, also in the long run. This phenomenon can be explained by the Modern Portfolio Theory (MPT).
Modern portfolio theory (MPT) is theory which attempts to maximize portfolio expected return for a given amount of portfolio risk, or in other words, to minimize risk for a given
A Selection of Stocks from the Heng Seng Index
17 August 2012
Introduction
A typical investor purchases an asset with the hope that it will generate income or appreciate in the future. Given the plethora of choices in the market, a rational investor would choose an investment with the highest expected return.
The Hong Kong Stock Exchange is the sixth largest stock exchange in the world with 1,477 listed companies and a combined market capitalization of HKD 17 trillion. Trading stocks from the Hong Kong stock market has become one of the most popular forms of investment in the region. The question is – how do we find out which asset is the best to invest on? Very often, investors hold a selection, instead of a single stock, in order to maximize their return in the long run. Why is it so?
This report contains the explanation on fundamental methodologies employed in selection of stocks and composition of portfolios. In addition, several attempts had been made to construct optimized portfolios with the greatest long-term expected return.
Objective
To construct a portfolio with greatest long-term expected return from the 46 stocks constituting the main board of Hong Kong Stock Exchange.
It is assumed that stock prices follow a normal distribution. Hence the calculations of long-term expected returns of single stocks as well as portfolios are based on the historical data, dated 8/31/1981 to 7/31/2011.
Modern Portfolio Theory
Under the current uncertain economic outlook, one should not be difficult to perceive that volatile investments may not result in a good long-term return. And the idea of diversification is widely accepted way of ensuring a good return, also in the long run. This phenomenon can be explained by the Modern Portfolio Theory (MPT).
Modern portfolio theory (MPT) is theory which attempts to maximize portfolio expected return for a given amount of portfolio risk, or in other words, to minimize risk for a given