Portfolios under Constraints in Real Practice

Abstract

Portfolio optimization now has a decisive status in the financial researching. However, few research focus on several specific industries and the commonly used constraints in the realistic financial world. This paper aims to do the asset allocation for three industries, i.e., technology industry, financial service industry and industrial industry. The SPX500 and ten firms from the above industries are chosen to obtain their correlation coefficient matrix. Then Mean-Variance Model is used to calculate the maximum Sharpe Ratio, the minimum variance, the capital allocation line. Finally, solver table is applied to calculate the minimum variance frontier under each constraint. The result shows that, first, the SPX500 has a high correlation coefficient with the listed firms, and it’s a good choice in a portfolio that balances risk and return; second, the minimum variance frontier and capital allocation line behave worse when adding constraints. These findings may help the investors with specific risk appetite to make their own investment decisions. Besides, investors will be aware of the price of adding constraints when making a investment decision.