Portfolio optimization is a formal mathematical approach to making investment decisions across a collection of financial instruments or assets. The classical approach, known as modern portfolio theory (MPT), involves categorizing the investment universe based on risk (standard deviation) and return, and then choosing the mix of investments that achieve a desired risk versus return tradeoff.
Common steps in optimizing portfolios include:
Estimating asset return and total return moments from price or return data
Performing constrained mean-variance,conditional value-at-risk, and mean-absolute-deviation optimization
Examining the time evolution of efficient portfolio allocations
For more information, seeMATLAB®andFinancial Toolbox™.
See also:portfolio optimization and analysis,Financial Toolbox,Optimization Toolbox,Global Optimization Toolbox,Black-Litterman model,portfolio optimization videos,smart beta
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