Sfo Project
Group 22: S&P/ASX 200 Australia
Introduction
Assets allocation is the most import and technical step for investors when they want to invest in the financial market. This report will give an example of how to use Portfolio Theory and the Efficient Frontier to distribute weight among the selected 20 stocks to make an optimal portfolio. Lastly, it will compare the six constructed models and find the best one. There are some terms that will be used in this report. Efficient frontier is be used by rational investor to choose the best combination of risk and return among all possible combinations (Essential Investment,2003).Optimal market portfolio is regarded by Doeswijk, Lam and Swinkels (2012) as the best choose or benchmark choose of portfolio for any ordinary investor because it includes all assets’ value among the market.Minimum variance portfolio (MVP) focuses on the goal of reaching the lowest risk through determining appropriate weight of each asset. “MVPs illustrated returns similar to their benchmark capitalization weighted indices but with 25-30% lower standard deviation.”(Haugen and Baker (1991), Clarke, Silva, and Thorley (2006), and Poullaouec (2008) cited in Bausys)
Section 1
The No Short-selling Portfolios
1.1 Briefing the Selected Shares In order to estimate the efficient frontier and figure out the “market portfolio” in the S&P/ASX 200 Australia market, 20 reliable stocks were selected. Moreover, monthly price and market capital from October 2002 to September 2012 were collected from Bloomberg. To be specific, there is an important assumption of the classical portfolio theory that returns are normally distributed (Alexander, 2008). As shown in the chart 1, the stocks are collected by different capitalization magnitudes. The red bars represent the historic average market capitalizations, while the blue bars tell the current market capitalizations.
1
Group 22: S&P/ASX 200 Australia Chart 1 Market Capitalizations of 20 Stocks
Introduction
Assets allocation is the most import and technical step for investors when they want to invest in the financial market. This report will give an example of how to use Portfolio Theory and the Efficient Frontier to distribute weight among the selected 20 stocks to make an optimal portfolio. Lastly, it will compare the six constructed models and find the best one. There are some terms that will be used in this report. Efficient frontier is be used by rational investor to choose the best combination of risk and return among all possible combinations (Essential Investment,2003).Optimal market portfolio is regarded by Doeswijk, Lam and Swinkels (2012) as the best choose or benchmark choose of portfolio for any ordinary investor because it includes all assets’ value among the market.Minimum variance portfolio (MVP) focuses on the goal of reaching the lowest risk through determining appropriate weight of each asset. “MVPs illustrated returns similar to their benchmark capitalization weighted indices but with 25-30% lower standard deviation.”(Haugen and Baker (1991), Clarke, Silva, and Thorley (2006), and Poullaouec (2008) cited in Bausys)
Section 1
The No Short-selling Portfolios
1.1 Briefing the Selected Shares In order to estimate the efficient frontier and figure out the “market portfolio” in the S&P/ASX 200 Australia market, 20 reliable stocks were selected. Moreover, monthly price and market capital from October 2002 to September 2012 were collected from Bloomberg. To be specific, there is an important assumption of the classical portfolio theory that returns are normally distributed (Alexander, 2008). As shown in the chart 1, the stocks are collected by different capitalization magnitudes. The red bars represent the historic average market capitalizations, while the blue bars tell the current market capitalizations.
1
Group 22: S&P/ASX 200 Australia Chart 1 Market Capitalizations of 20 Stocks