Portfolio Theory and

Optimization of CERN Fin Club Portfolio

Rami Kamalieddin (UNL) 7 Nov 2018

Outline 2

•  Diversification •  Importance of correlations •  Optimization of portfolio with Monte Carlo method •  Optimization by minimizing negative Sharpe •  Proposed set of weight for the CERN Finance

club portfolio

The effect of diversification 3

Correlations 4

Example with two stocks 5

Correlations and two stocks explained 6

When the correlation between the assets is 1, it means that any change in one asset is equally reflected in the change in the other asset. So, if one asset goes down 10%, the other asset will also go down 10%. There is no diversification benefit. In such a case any portfolio derived from a combination of A and B will fall on the straight line, reflecting the risk simply weighted with both assets. However, as the correlation starts reducing, the portfolio starts getting diversification benefit and the efficient frontier starts bending towards the left. The lesser the correlation between the two assets, the more the diversification benefit and more it will bend towards the left. By this logic, when the two assets are perfectly negatively correlated, that is, the correlation between them is -1, the diversification should yield maximum risk reduction. So, there could be a combination of A and B where the risk reduces to 0 when assets are perfectly negatively correlated. For this reason the efficient frontier will usually be a curved line bending towards the left, signifying some levels of diversification.

Diversification 7

Optimization of portfolio with Monte Carlo 8

•  https://github.com/RemKamal/CERN-Finance-Club/blob/master/

Rami_for_CERN_Finance_Club_Portfolio_3Nov2018.ipynb

•  https://youtu.be/uPqu88OhF1E

Optimization by minimizing negative Sharpe 9

•  https://github.com/RemKamal/CERN-Finance-Club/blob/master/

Rami_for_CERN_Finance_Club_Portfolio_3Nov2018.ipynb

•  https://youtu.be/2cb56AuWqXY

Proposed weights for stocks 10

•  ['kop’, 'bay’, 'mdo', 'su1', 'nes', 'r6c', 'srb', 'wmt', '_3v', 'bsb']

•  [0, 0, 0.75, 0.0009, 0, 0, 0, 0.06, 0, 0.18]

•  p.s. PCG was not included in the optimization!

Thank you