The Optimal Allocation of Securities for Portfolios

Abstract

Portfolio optimization assists in the selection of the optimum portfolio to meet certain goals. The most often usedportfolio optimization model is the Markowitz Model (MM). The approach highlights the need to select assetscomplementing one another to reduce risk for investors. It compares the risks and returns of multiple equities to discoverwhich asset offers the best returns while posing the fewest hazards. To simplify the Markowitz Model, the Index Model(IM) employs a single element, the market index, which impacts all investment returns. Using the MM and IM, thisstudy analyzes permitted portfolio areas for ten stocks and one broad equity index. The ten businesses were chosenfrom various industry areas. SPX, NVDA (Technology), CSCO (Technology), INTC (Technology), The Goldman SachsGroup (Financial Services), US Bancorp (Financial Services), TD CN (Financial Services), Allstate (Financial Services),Procter & Gamble Company (Personal Care Products), Johnson & Johnson (Pharmacy), Colgate-Palmolive (PersonalCare Products).The firms from several industrial sectors are chosento guarantee the risk-diversified final portfolio. As aconsequence, the efficient portfolio employs the weightsthat yield the highest returns for a given risk level orthe lowest risk for a given projected return level whendetermined using the MM or IM. We concluded from thedata that the IM optimization model well approximatesthe MM optimization model by minimizing the number ofestimations necessary for model estimation.