Proceedings of the 4th International Conference on Economic Management and Model Engineering, ICEMME 2022, November 18-20, 2022, Nanjing, China

Research Article

Optimal Portfolio Assessment Based on the Modern Portfolio Model

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  • @INPROCEEDINGS{10.4108/eai.18-11-2022.2326868,
        author={Xiang  Guo and Zixin  Xu},
        title={Optimal Portfolio Assessment Based on the Modern Portfolio Model},
        proceedings={Proceedings of the 4th International Conference on Economic Management and Model Engineering, ICEMME 2022, November 18-20, 2022, Nanjing, China},
        publisher={EAI},
        proceedings_a={ICEMME},
        year={2023},
        month={2},
        keywords={portfolio management; diversification effect; leveraging; sharpe ratio},
        doi={10.4108/eai.18-11-2022.2326868}
    }
    
  • Xiang Guo
    Zixin Xu
    Year: 2023
    Optimal Portfolio Assessment Based on the Modern Portfolio Model
    ICEMME
    EAI
    DOI: 10.4108/eai.18-11-2022.2326868
Xiang Guo1,*, Zixin Xu2
  • 1: School of Mathematical Sciences South China Normal University Guangzhou, China
  • 2: School of Finance Sciences Shanghai Lixin University of Accounting and Finance Shanghai, China
*Contact email: 20182233038@m.scnu.edu.cn

Abstract

Investment in financial assets has two basic parameters, which are return and risk. These parameters have a positive relationship, and all investors face a trade-off between risk and return. Portfolio investment, a combination of financial assets, is widely used by investors because it can diversify risks while obtaining higher returns. Different investors have different preferences. Some investors prefer low risk, some prefer the high return, while others prefer high return per unit of risk. This paper used the modern investment portfolio model to construct the optimal portfolios based on three different principles: minimum risk, maximum return, utility, and maximum Sharpe ratio, and compare them. We proposed the portfolios with and without a risk-free rate. Based on our asset set, we found that the assets that make up the portfolios under the three principles above are different. The principle of risk diversification and the principle of maximum utility focus only on decreasing the risk and increasing the return, respectively. However, the principle of maximizing the Sharpe ratio better balances the relationship between risk and return, and the portfolio constructed under this principle pays the lowest per unit of risk. Furthermore, adding a risk-free asset to our portfolio did not raise the risk while increasing the return, and the unit return went up as well.