Portfolio Optimization by Monte Carlo Simulation

Abstract

In this paper, Monte Carlo simulation is used for constructing Efficient Frontier and optimizing the portfolio. Then the performance of the optimized portfolio had been evaluated and compared to the performance of the whole market, Firstly, this study collected the closing prices of five stocks in different industries that was listed in New York stock exchange between 2023/01/01 and 2023/04/12. Secondly, to testify if the construction of the portfolio can possibly mitigate the volatility, the correlation coefficient between these chosen stocks has been calculated. Then, Monte Carlo simulation has been used to construct the Efficient Frontier and find the weights of Maximum Sharpe Ratio portfolio and Minimum Variance portfolio. Lastly, this study put the market price data between 2023/03/12 and 2023/04/12 into the portfolios which had been built in the last step. The returns were compared to the S&P 500 subsequently. As the results shows, the Maximum Sharpe Ratio portfolio is performed better than S&P 500, Minimum Variance portfolio is performed worse than S&P 500. The results of this paper show the performance of these two portfolios compare to the market, which may help investors to decide which strategy to use when it comes to constructing a portfolio.