Results asset allocation project

Theodor Munteanu: Quant Analyst

Contents
Portfolio optimization and risk budgeting .................................................................................................... 1
Sigma problems..................................................................................................................................... 3
Risk budgeting portfolio results ................................................................................................................ 4
Part 2: Net Zero Portfolios ............................................................................................................................ 5
Additional constraints ............................................................................................................................... 6

Portfolio optimization and risk budgeting

1. Covariance matrix Σ of stock returns

Table 1: Covariance matrix of the asset returns

Covariance 𝑨𝟏 𝑨𝟐 𝑨𝟑 𝑨𝟒 𝑨𝟓
𝑨𝟏 𝟎. 𝟎𝟒𝟎 𝟎. 𝟎𝟐𝟐 𝟎. 𝟎𝟏𝟓 𝟎. 𝟎𝟐𝟐 𝟎. 𝟎𝟑𝟔
𝑨𝟐 𝟎. 𝟎𝟐𝟐 𝟎. 𝟎𝟒𝟖 𝟎. 𝟎𝟏𝟕 𝟎. 𝟎𝟐𝟒 𝟎. 𝟎𝟑𝟎
𝑨𝟑 𝟎. 𝟎𝟏𝟓 𝟎. 𝟎𝟏𝟕 𝟎. 𝟎𝟔𝟑 𝟎. 𝟎𝟐𝟕 𝟎. 𝟎𝟕𝟗
𝑨𝟒 𝟎. 𝟎𝟐𝟐 𝟎. 𝟎𝟐𝟒 𝟎. 𝟎𝟐𝟕 𝟎. 𝟎𝟑𝟐 𝟎. 𝟎𝟐𝟒
𝑨𝟓 𝟎. 𝟎𝟑𝟔 𝟎. 𝟎𝟑𝟎 𝟎. 𝟎𝟕𝟗 𝟎. 𝟎𝟐𝟒 𝟎. 𝟐𝟎𝟑

Table 2: Long/Short 𝛾 −problem structures for granular values of 𝛾 + volatilities 𝜎(𝑥), Sharpe
ratios 𝑆𝑅(𝑥|𝑟), expected returns 𝜇(𝑥)

Structures 𝒙(𝜸 = 𝟎) 𝒙(𝜸 = 𝟎. 𝟏) 𝒙(𝜸 = 𝟎. 𝟐) 𝒙(𝜸 = 𝟎. 𝟓) 𝒙(𝜸 = 𝟏. 𝟎)

𝑨𝟏 𝟒𝟐. 𝟕% 𝟒𝟔. 𝟐% 𝟓𝟎. 𝟏% 𝟔𝟏. 𝟕% 𝟖𝟐. 𝟖%
𝑨𝟐 𝟏𝟗. 𝟏% 𝟐𝟓. 𝟑% 𝟐𝟖. 𝟐% 𝟑𝟕. 𝟏% 𝟓𝟎. 𝟏%
𝑨𝟑 𝟑𝟏. 𝟐% 𝟒𝟑. 𝟏% 𝟓𝟎. 𝟐% 𝟕𝟏. 𝟕% 𝟏𝟎𝟔. 𝟗%
𝑨𝟒 𝟏𝟗. 𝟑% 𝟎. 𝟖% −𝟏𝟏. 𝟖% −𝟒𝟗. 𝟓% −𝟏𝟏𝟐. 𝟐%
𝑨𝟓 −𝟏𝟐. 𝟑% −𝟏𝟓. 𝟒% −𝟏𝟔. 𝟕% −𝟐𝟎. 𝟗% −𝟐𝟕. 𝟕%
𝝈(𝒙) 𝟏𝟓. 𝟗% 𝟏𝟓. 𝟗% 𝟏𝟔. 𝟏% 𝟏𝟕. 𝟏% 𝟐𝟎. 𝟓%
𝑺𝑹(𝒙|𝒓) 𝟏𝟖. 𝟏% 𝟏𝟗. 𝟔% 𝟐𝟎. 𝟓% 𝟐𝟐. 𝟐% 𝟐𝟐. 𝟔%
𝝁(𝒙) 𝟒. 𝟖% 𝟒. 𝟗% 𝟓. 𝟎% 𝟓. 𝟑% 𝟓. 𝟒%
 Table 3:Long/Short portfolios’ risk-contributions of the standard deviation of the above
portfolios

𝜸 − 𝒑𝒃 𝑹𝑪𝒊 𝛾 = 0.0 𝛾 = 0.1 𝛾 = 0.2 𝛾 = 0.5 𝛾 = 1.0

𝐴𝑠𝑠𝑒𝑡 1 0.0692 0.0731 0.0786 0.0913 0.1051
𝐴𝑠𝑠𝑒𝑡 2 0.0299 0.0401 0.0443 0.0549 0.0618
𝐴𝑠𝑠𝑒𝑡 3 0.0484 0.0709 0.0851 0.1270 0.1849
𝐴𝑠𝑠𝑒𝑡 4 0.0309 0.0012 −0.0171 −0.0589 −0.0854
𝐴𝑠𝑠𝑒𝑡 5 −0.0197 −0.0263 −0.0305 −0.0431 −0.0616
𝑇𝑜𝑡𝑎𝑙 𝑟𝑖𝑠𝑘: 𝜎(𝑥) 0.1586 0.1589 0.1605 0.1713 0.2048

Table 4: Long/Only 𝛾 −problem structures for different values of 𝛾

Structure (𝑥) 𝒙(𝜸 = 𝟎) 𝒙(𝜸 = 𝟎. 𝟏) 𝒙(𝜸 = 𝟎. 𝟐) 𝒙(𝜸 = 𝟎. 𝟓) 𝒙(𝜸 = 𝟏. 𝟎)

𝑨𝟏 𝟑𝟑. 𝟓% 𝟑𝟒. 𝟒% 𝟑𝟔. 𝟏% 𝟒𝟎. 𝟏% 𝟑𝟒. 𝟏%
𝑨𝟐 𝟏𝟖. 𝟎% 𝟐𝟎. 𝟑% 𝟏𝟗. 𝟕% 𝟐𝟓. 𝟒% 𝟐𝟑. 𝟎%
𝑨𝟑 𝟏𝟓. 𝟕% 𝟏𝟗. 𝟏% 𝟐𝟒. 𝟏% 𝟑𝟒. 𝟔% 𝟒𝟐. 𝟗%
𝑨𝟒 𝟑𝟐. 𝟖% 𝟐𝟔. 𝟐% 𝟐𝟎. 𝟏% 𝟎. 𝟎% 𝟎. 𝟎%
𝑨𝟓 𝟎. 𝟎% 𝟎. 𝟎% 𝟎. 𝟎% 𝟎. 𝟎% 𝟎. 𝟎%
𝝈(𝒙) 𝟏𝟔. 𝟑% 𝟏𝟔. 𝟑% 𝟏𝟔. 𝟒% 𝟏𝟔. 𝟗% 𝟏𝟕. 𝟑%
𝑺𝑹(𝒙|𝒓) 𝟏𝟕. 𝟒% 𝟏𝟕. 𝟗% 𝟏𝟖. 𝟓% 𝟏𝟗. 𝟖% 𝟏𝟗. 𝟗%
𝝁(𝒙|𝒓) 𝟒. 𝟖% 𝟒. 𝟗% 𝟓. 𝟎% 𝟓. 𝟑% 𝟓. 𝟒%

Table 5 : Minimum variance portfolio

𝒙𝒊 (𝑳𝑺) 𝒙𝒊 (𝑳𝑶) 𝑹𝑪𝒊 , 𝑳𝑺 𝑹𝑪𝒊 𝑳𝑶

Asset1 𝟒𝟐. 𝟐𝟕% 𝟑𝟏. 𝟗𝟒% 𝟔. 𝟕% 𝟓. 𝟐%
Asset2 𝟐𝟐. 𝟑𝟗% 𝟏𝟖. 𝟎𝟗% 𝟑. 𝟓% 𝟐. 𝟗%
Asset3 𝟑𝟓. 𝟗𝟓% 𝟏𝟓. 𝟏𝟒% 𝟓. 𝟕% 𝟐. 𝟓%
Asset4 𝟏𝟑. 𝟑𝟔% 𝟑𝟒. 𝟖𝟑% 𝟐. 𝟏% 𝟓. 𝟕%
Asset5 −𝟏𝟑. 𝟗𝟕% 𝟎. 𝟎𝟎% −𝟐. 𝟐% 𝟎. 𝟎%
Table 6: Marginal risk, Risk Contributions and Risk Adjusted Contributions for Long Only Minimum
Variance Portfolio

L/O 𝑴𝑹𝒊 𝑹𝑪𝒊 𝑹𝑪 𝒂𝒅𝒋𝒊

Asset 1 𝟏𝟔. 𝟑% 𝟓. 𝟐% 𝟑𝟏. 𝟗%
Asset 2 𝟏𝟔. 𝟑% 𝟐. 𝟗% 𝟏𝟖. 𝟏%
Asset 3 𝟏𝟔. 𝟑% 𝟐. 𝟓% 𝟏𝟓. 𝟐%
Asset 4 𝟏𝟔. 𝟑% 𝟓. 𝟕% 𝟑𝟒. 𝟖%
Asset 5 𝟐𝟐. 𝟗% 𝟎. 𝟎% 𝟎. 𝟎%

Table 7: Marginal risk, risk contributions and risk adjusted contributions for Long/Short Minimum
Variance portfolio

Long/Short 𝑀𝑅𝑖 𝑅𝐶𝑖 𝑅𝐶 𝑎𝑑𝑗𝑖

Asset 1 15.8% 6.7% 42.3%
Asset 2 15.8% 3.5% 22.4%
Asset 3 15.9% 5.7% 36.0%
Asset 4 15.8% 2.1% 13.4%
Asset 5 15.9% −2.2% −14.0%

Sigma problems
Table 1.3.1: Structure of the maximized return portfolios with vol constraints + Risk Contributions

𝒙 𝝈 = 𝟏𝟔% 𝝈 = 𝟐𝟎% 𝑹𝑪𝒊 , 𝝈 = 𝟏𝟔% 𝑹𝑪𝒊 (𝝈 = 𝟐𝟎%)

Asset 1 0.320 0.205 0.052 0.023
Asset 2 0.181 0.149 0.030 0.017
Asset 3 0.150 0.580 0.024 0.136
Asset 4 0.349 0.000 0.057 0.000
Asset 5 0.000 0.066 0.000 0.023
𝝁(𝒙) 0.048 0.057 0.000 0.000
Risk budgeting portfolio results
1. Maximum diversification portfolios.

Table 1.1 : Maximum diversification portfolio (MDP) : Risk contributions and structure for
Long/Short and Long/Only

Type L/S L/O 𝑹𝑪(𝑳𝑺) 𝑅𝐶(𝐿𝑂) 𝑅𝐶(𝑎𝑑𝑗)(𝐿𝑆) 𝑹𝑪 𝒂𝒅𝒋(L/O)

Asset 1 0.29 0.29 0.04 4.36% 23.99% 23.99%
Asset 2 0.31 0.31 0.05 5.12% 28.17% 28.17%
Asset 3 0.23 0.23 0.04 4.30% 23.65% 23.65%
Asset 4 0.06 0.06 0.01 0.78% 4.31% 4.31%
Asset 5 0.11 0.11 0.04 3.61% 19.88% 19.88%
Total 100% 18.2% 100.00%

2. ERC portfolio results

In the first column I consider the results of equally risk contribution portfolio (ERC), in the second a risk
budgeted portfolio where the vector of budgets is 𝑅𝐵 = (25%, 25%, 16.66%, 16.66%, 16.66%)

Table 1.2.2: Structure of ERC and RB portfolio + Risk Contributions.

𝑬𝑹𝑪 𝑹𝑩𝑷 𝑹𝑩 % 𝑹𝑪 𝑬𝑹𝑪

Asset 1 𝟐𝟑. 𝟖𝟕% 𝟐𝟒. 𝟏𝟑% 𝟐𝟓. 𝟎𝟎% 𝟑. 𝟓𝟓%
Asset 2 𝟐𝟐. 𝟒𝟏% 𝟐𝟑. 𝟖𝟐% 𝟐𝟓. 𝟎𝟎% 𝟑. 𝟓𝟓%
Asset 3 𝟏𝟖. 𝟓𝟓% 𝟕. 𝟗𝟔% 𝟏𝟔. 𝟔𝟕% 𝟑. 𝟓𝟓%
Asset 4 𝟐𝟒. 𝟐𝟔% 𝟏𝟑. 𝟎𝟎% 𝟏𝟔. 𝟔𝟕% 𝟑. 𝟓𝟓%
Asset 5 𝟏𝟎. 𝟗𝟏% 𝟑𝟏. 𝟏𝟎% 𝟏𝟔. 𝟔𝟕% 𝟑. 𝟓𝟓%
Total 𝟏𝟕. 𝟕𝟔%

3. Maximum sharpe ratio results :

Table 1.2.3: Structure and Risk Contributions of Long Only and Long-Short (LS)

Structure 𝒙(𝑳𝑶) 𝒙(𝑳𝑺) 𝑹𝑪 (LO) 𝑹𝑪(𝑳𝑺)

Asset 1 0.369 0.752 0.056 0.099
Asset 2 0.229 0.472 0.035 0.062
Asset 3 0.402 0.965 0.081 0.170
Asset 4 0.000 -0.932 0.000 -0.082
Asset 5 0.000 -0.256 0.000 -0.056
 Volatility 0.171 0.193
Exp
return 0.054 0.064
Sharpe 0.199 0.227

Structure (𝒙) 𝒙(𝑳𝑶) 𝒙(𝑳𝑺)

Asset 1 𝟑𝟔. 𝟗𝟏% 𝟕𝟓. 𝟏𝟔%
Asset 2 𝟐𝟐. 𝟖𝟖% 𝟒𝟕. 𝟏𝟖%
Asset 3 𝟒𝟎. 𝟐𝟎% 𝟗𝟔. 𝟓𝟑%
Asset 4 𝟎. 𝟎𝟎% −𝟗𝟑. 𝟐𝟑%
Asset 5 𝟎. 𝟎𝟎% −𝟐𝟓. 𝟔𝟒%

4. Risk decompositions of Equally weighted portfolio (𝑬𝑾)

EW 𝑹𝑪𝒊
Asset 1 2.7%
Asset 2 2.8%
Asset 3 4.0%
Asset 4 2.6%
Asset 5 7.5%
Total risk 19.7%

Part 2: Net Zero Portfolios

1. Covariance matrix of sector index returns (see excel file Results allocation.xlsx)

2. Details of the sectors: volatility (𝝈), Sharpe ratio (𝑺𝑹), risk premiums = 𝝁𝒊 − 𝒓 = 𝑹𝑷𝒊 ,
expected returns 𝝁𝒊

Table 2.1:

Sector 𝝈 𝑺𝑹(𝒙|𝒓) 𝑹𝑷𝒊 𝝁𝒊

Communications 0.32 0.25 0.08 0.11
Consumer Disc 0.39 0.25 0.10 0.13
Consumer
Staples 0.23 0.25 0.06 0.09
Energy 0.44 0.25 0.11 0.14
Financials 0.33 0.25 0.08 0.11
HealthCare 0.30 0.25 0.07 0.10
Industrials 0.33 0.25 0.08 0.11
IT 0.36 0.25 0.09 0.12
Materials 0.37 0.25 0.09 0.12
 Real Estate 0.32 0.25 0.08 0.11
Utilities 0.27 0.25 0.07 0.10

Table 2.2 Portfolio results for decarbonization (Scopes 1+2) (Initial reduction of carbon intensity = 30%,
Yearly reduction = 7%)

Sector 𝑡=0 𝑡=1 𝑡=2 𝑡=5 𝑡 = 10

Communications 𝟖. 𝟓% 𝟖. 𝟔% 𝟖. 𝟔% 𝟖. 𝟖% 𝟖. 𝟗%
Consumer Disc 𝟏𝟐. 𝟓% 𝟏𝟐. 𝟓% 𝟏𝟐. 𝟓% 𝟏𝟐. 𝟔% 𝟏𝟐. 𝟕%
Consumer Staples 𝟕. 𝟓% 𝟕. 𝟔% 𝟕. 𝟕% 𝟕. 𝟗% 𝟖. 𝟐%
Energy 𝟐. 𝟗% 𝟐. 𝟗% 𝟐. 𝟗% 𝟐. 𝟗% 𝟐. 𝟖%
Financials 𝟏𝟑. 𝟔% 𝟏𝟑. 𝟕% 𝟏𝟑. 𝟕% 𝟏𝟑. 𝟗% 𝟏𝟒. 𝟏%
HealthCare 𝟏𝟑. 𝟎% 𝟏𝟑. 𝟎% 𝟏𝟑. 𝟏% 𝟏𝟑. 𝟑% 𝟏𝟑. 𝟒%
Industrials 𝟏𝟎. 𝟒% 𝟏𝟎. 𝟓% 𝟏𝟎. 𝟓% 𝟏𝟎. 𝟔% 𝟏𝟎. 𝟕%
IT 𝟐𝟑. 𝟑% 𝟐𝟑. 𝟑% 𝟐𝟑. 𝟒% 𝟐𝟑. 𝟓% 𝟐𝟑. 𝟔%
Materials 𝟒. 𝟐% 𝟒. 𝟐% 𝟒. 𝟏% 𝟒. 𝟎% 𝟑. 𝟗%
Real Estate 𝟑. 𝟎% 𝟑. 𝟏% 𝟑. 𝟏% 𝟑. 𝟐% 𝟑. 𝟒%
Utilities 𝟏. 𝟎% 𝟎. 𝟔% 𝟎. 𝟑% −𝟎. 𝟔% −𝟏. 𝟕%

Table 2.3: Portfolio decarbonization structure results for Scopes 1+2+3 (trajectory of dynamic allocation)

Sector 𝒕=𝟎 𝒕=𝟏 𝒕=𝟐 𝒕=𝟓 𝒕 = 𝟏𝟎

Communications 𝟖. 𝟖% 𝟖. 𝟗% 𝟗. 𝟎% 𝟗. 𝟐% 𝟗. 𝟓%
Consumer Disc 𝟏𝟐. 𝟔% 𝟏𝟐. 𝟔% 𝟏𝟐. 𝟕% 𝟏𝟐. 𝟖% 𝟏𝟐. 𝟗%
Consumer Staples 𝟕. 𝟓% 𝟕. 𝟔% 𝟕. 𝟕% 𝟖. 𝟎% 𝟖. 𝟑%
Energy 𝟐. 𝟖% 𝟐. 𝟕% 𝟐. 𝟕% 𝟐. 𝟓% 𝟐. 𝟒%
Financials 𝟏𝟑. 𝟗% 𝟏𝟒. 𝟏% 𝟏𝟒. 𝟐% 𝟏𝟒. 𝟓% 𝟏𝟒. 𝟖%
HealthCare 𝟏𝟑. 𝟐% 𝟏𝟑. 𝟑% 𝟏𝟑. 𝟒% 𝟏𝟑. 𝟕% 𝟏𝟒. 𝟎%
Industrials 𝟏𝟎. 𝟓% 𝟏𝟎. 𝟔% 𝟏𝟎. 𝟔% 𝟏𝟎. 𝟕% 𝟏𝟎. 𝟗%
IT 𝟐𝟑. 𝟓% 𝟐𝟑. 𝟓% 𝟐𝟑. 𝟔% 𝟐𝟑. 𝟖% 𝟐𝟒. 𝟎%
Materials 𝟒. 𝟎% 𝟑. 𝟗% 𝟑. 𝟖% 𝟑. 𝟔% 𝟑. 𝟒%
Real Estate 𝟑. 𝟑% 𝟑. 𝟒% 𝟑. 𝟒% 𝟑. 𝟔% 𝟑. 𝟖%
Utilities −𝟎. 𝟏% −𝟎. 𝟔% −𝟏. 𝟏% −𝟐. 𝟒% −𝟒. 𝟎%

Additional constraints
Weight constraint above benchmark:
1
Table 2.2.1: Weight constraint: 𝑤 ≥ 𝑏 ⋅ 2 , 𝑏 =benchmark portfolio.

Sectors 𝒙
Communications 9%
Consumer Disc 13%
 Consumer Staples 8%
Energy 2%
Financials 14%
HealthCare 13%
Industrials 10%
IT 24%
Materials 3%
Real Estate 3%
Utilities 2%
Carbon Intensity 88.948
Carbon Momentum -0.059

Table 2.2.2 Structure results for Carbon Momentum Constraints

Sectors 𝑪𝑴 ≤ −𝟓% 𝑪𝑴 ≤ −𝟔% 𝑪𝑴 ≤ −𝟕% 𝑪𝑴 ≤ −𝟖%

Communications 2.2% 2.2% 2.2% 2.2%
Consumer Disc 16.2% 16.2% 16.2% 16.2%
Consumer Staples -5.3% -5.3% -5.3% -5.3%
Energy -5.8% -5.8% -5.8% -5.8%
Financials 25.5% 25.5% 25.5% 25.5%
HealthCare 21.9% 21.9% 21.9% 21.9%
Industrials 19.7% 19.7% 19.7% 19.7%
IT 20.9% 20.9% 20.9% 20.9%
Materials 5.3% 5.3% 5.3% 5.3%
Real Estate -3.2% -3.2% -3.2% -3.2%
Utilities 2.8% 2.8% 2.8% 2.8%

Table 2.2.3 Structure Results for Green Intensities constraint 𝐺(𝑥) ≥ 𝐺(𝑏) ⋅ (1 + 𝐺)

Sector G=0 G = 0.5 G = 1 G=2

Communications 8.1% 6.9% 5.8% 3.5%
Consumer Disc 13.9% 17.1% 20.3% 26.7%
Consumer
Staples 6.1% 3.0% -0.1% -6.4%
Energy 1.4% -2.4% -6.2% -13.7%
Financials 13.1% 12.1% 11.0% 8.8%
HealthCare 12.4% 11.2% 9.9% 7.3%
Industrials 13.8% 21.6% 29.5% 45.2%
IT 23.3% 23.3% 23.3% 23.4%
Materials 1.4% -5.2% -11.8% -25.0%
Real Estate 4.5% 7.9% 11.2% 17.9%
Utilities 2.1% 4.6% 7.2% 12.3%
Table 2.2.4 Structure of portfolios where:

(𝐶𝑀∗ , 𝐺) ∈ {(−0.06,0.25), (−0.06,0.5), (−0.07,0), (−0.07,0.25)} = {𝐶1 , … , 𝐶4 }

Sector 𝑪𝟏 𝑪𝟐 𝑪𝟑 𝑪𝟒
Communications 4.1% 4.1% 4.1% 4.1%
Consumer Disc 22.3% 22.3% 22.3% 22.3%
Consumer Staples 3.4% 3.4% 3.4% 3.4%
Energy 1.5% 1.5% 1.5% 1.5%
Financials 24.3% 24.3% 24.3% 24.3%
HealthCare 6.3% 6.3% 6.3% 6.3%
Industrials 21.3% 21.3% 21.3% 21.3%
IT 11.5% 11.5% 11.5% 11.5%
Materials 2.2% 2.2% 2.2% 2.2%
Real Estate 1.4% 1.4% 1.4% 1.4%
Utilities 1.6% 1.6% 1.6% 1.6%