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Optimal Portfolios on (In)Efficient Markets
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| Organization: | Charles University of Prague |
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Wolfram Technology Conference 2011
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Champaign, Illinois, USA
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We study the performance of portfolios of assets from the point of view of an extended efficient market hypothesis. We assume that the investors make their decisions exclusively on the information based on the expected returns and the covariance structure of returns, and that this information is available to all investors. Further, we suppose that the investors' behavior is rational in the following sense: (1) the investors choose portfolios with the highest expected return among those with the same risk; and (2) the investors choose portfolios with the smallest risk among those with the same expected return (risk aversion). Under these assumptions, the whole market should be in an equilibrium.
In practice, even if data comes from the set of highly rated companies, it exhibits severe violations from what might be considered as a rational behavior of the market. In this contribution, we analyze the impact of this inconsistency on the optimal portfolio selection and the influence upon the re-balancing portfolio. The data from the Mathematica FinancialData Integrated Data Source was used for numerical illustrations as well for encouragement for this presentation.
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http://www.wolfram.com/events/technology-conference-2011
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| OptimalPortfoliosOn(In)EfficientMarkets.cdf (4.2 MB) - CDF Document | | OptimalPortfoliosOn(In)EfficientMarkets.nb (4.2 MB) - Mathematica Notebook |
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