SYNOPSIS OF THE THESIS ON

PORTFOLIO OPTIMIZATION
IMPROVED RISK ADJUSTED
RETURN

SUBMITTED BY:
ROHIT KUMAR VERMA
MBA SEMESTER IV (2009-11)

SUBMITTED TO:
MR. MOHAMMAD MURTUJA
 FACULTY SUPERVISOR (IUJ)
INTRODUCTION:
In this thesis, portfolio optimization is used to evaluate if a specific sample of portfolios have

a higher risk level or lower expected return, compared to what may be obtained through

Optimization. It also compares the return of optimized portfolios with the return of the original

Portfolios. The risk analysis software Aegis Portfolio Manager developed by Barra is used for

the optimizations. With the expected return and risk level used in this thesis, all portfolios can

obtain a higher expected return and a lower risk. Over a six-month period, the optimized

portfolios do not consistently outperform the original portfolios and therefore it seems as

though the optimization do not improve the return of the portfolios. This might be due to the

Uncertainty of the expected returns used in this thesis.

THERE ARE DIFFERENT ISSUES TO CONSIDER WHEN INVESTORS CONSTRUCT A STOCK PORTFOLIO . THROUGH

MAGAZINES , FRIENDS AND FINANCIAL ADVISORS THEY OBSERVE INTERESTING COMPANIES TO INVEST IN AND

ADD TO THEIR PORTFOLIOS . I NVESTMENT OPPORTUNITIES CAN BE EVALUATED IN DIFFERENT WAYS . A

COMMON METHOD IS TO USE FUNDAMENTAL ANALYSIS TO EVALUATE IF A COMPANY IS CORRECTLY VALUED AT

THE STOCK EXCHANGE . I F THE COMPANY IS UNDERVALUED ACCORDING TO THIS METHOD , THE INVESTOR WILL

BUY SHARES AND ASSUME THAT THE MARKETS VIEW OF THE COMPANY WILL CHANGE SO THAT THE STOCK

PRICE WILL INCREASE . WHEN THE STOCK PRICE HAS RISEN SO THAT THE COMPANY IS OVERVALUED OR IF THE

STOCK PRICE DOES NOT DEVELOP AS PREDICTED , THE INVESTOR WILL SELL THE STOCK.

ANOTHER POSSIBILITY IS TECHNICAL ANALYSIS WHERE THE INVESTORS USE DIFFERENT METHODS TO FIND

INTERESTING STOCKS FOR THEIR PORTFOLIOS . ONE WAY IS TO FIND STOCKS WHERE THE STOCK PRICE FOLLOWS

AN UPWARD TREND SINCE THEY BELIEVE THAT THIS TREND WILL CONTINUE . T HESE INVESTORS ALSO SEARCH

FOR PATTERNS IN THE DEVELOPMENT OF THE STOCK PRICE. T HEY BELIEVE THAT THE MARKET WILL ACT IN THE

SAME WAY IN SIMILAR SITUATIONS AND THEREFORE ASSUME THAT THE STOCK PRICE WILL DEVELOP AS THEY
PREDICT . THEIR PRIMARY BELIEF IS THAT BY ANALYSING STOCK CHARTS , IT IS POSSIBLE TO CAPTURE THE

PSYCHOLOGY OF THE MARKET .

WHEN THE INVESTORS HAVE CONSTRUCTED A PORTFOLIO OF SEVERAL STOCKS ONE POSSIBILITY IS TO TRY TO

IMPROVE THE PERFORMANCE OF THE PORTFOLIO WITH MEAN-VARIANCE OPTIMISATION . GIVEN THE

EXPECTED MEAN , VARIANCE AND COVARIANCE OF THE STOCKS IN A PORTFOLIO , THE OPTIMISATION TRIES TO

FIND THE OPTIMAL COMBINATIONS OF THE STOCKS . T HEREBY THE VARIANCE OF THE PORTFOLIO IS

MINIMISED AND THE EXPECTED RETURN IS MAXIMISED ACCORDING TO THE INVESTOR ’ S PREFERENCES . T HIS

METHOD IS NOT WIDELY USED , WHICH MIGHT BE DUE TO THE FACT THAT THE VARIANCE AND THE COVARIANCE

MEASURES OF STOCKS AND PORTFOLIOS ARE NOT AS EXTENSIVELY AVAILABLE AS THEIR PRICE SERIES .
measures of stocks and portfolios are not as extensively available as their
price series.