Portfolio Optimization under Real Constraints

Abstract

How to balance risk and return is a question that every investor cares about. Since there is little research on portfolio management in specific industries under special constraints, this paper aims to conduct asset allocation analysis on consumer defensive, technology, financial service and healthcare industries. This paper selects ten representative companies from these industries and combine them with generalized indices and use Markowitz model and index model for analysis. Portfolio optimization is based on investor preferences and five constraints of financial market regulations. The results show that, first, disallowing shorting has the strongest binding power. Second, the S&P 500, as the best single measure of U.S. large-cap stocks, is a good choice for balancing risk and reward. These findings may be of great significance to the research on the optimal allocation of financial assets in the industry and to investors with similar requirements to make their own investment decisions.