Welcome everyone!
To start this blog, I wanted to share with you my Final Project at
the Financial Modeling Program at Wharton University of Pennsylvania.
This assignment proves the
following statement: “Diversification is a risk management strategy that
aggregates a broad selection of investments within a portfolio to maximize its
total expected return and minimize its risk level”.
Therefore, the assignment
goal consists on maximizing several stock/portfolio performances and compare
those results. The performance measure chosen is the Sharpe Ratio and the
standard deviation of returns is the risk level measure. Additionally, the
risk-free asset rate is assumed to be equal to zero to perform a comparison as
clear as possible.
The analysis uses Microsoft
Excel tools to build the Sharpe ratio comparison: Data Analysis for
the Descriptive Statistics tables and Solver function to find the weights that
maximize Sharpe Ratio and thus find the optimal risky portfolio. Please note
diversification strategy can also be used to find asset weights to get to
the minimum variance portfolio whose asset allocation minimizes portfolio
variance and standard deviation instead of maximizing Sharpe ratio.
The portfolio alternatives
were four. First, only Apple stock, which got a 5.08% Sharpe Ratio.
Secondly, the performance rises to 7.08% for a portfolio composed by APPL
and TSLA. Lastly, a Ten-Asset Portfolio case got a 8.42% Sharpe Ratio if
only long positions were taken and 8.8% if short-selling weights were also
possible to include. As a result, the effectiveness of diversification as a
risk management strategy to maximize its total expected return is proved.
You can check the presentation by opening the following link:
https://drive.google.com/file/d/1sbBoVKPhVlmSFOgrmarOGZ6_Z8MjYorp/view?usp=sharing
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