Applications in Finance

Abstract

A portfolio is a linear combination of assets. Each asset contributes with a weight cjto the portfolio. The performance of such a portfolio is a function of the various returns of the assets and of the weights $$c = (c_{1},\ldots,c_{p})^{\top }$$. In this chapter we investigate the “optimal choice” of the portfolio weights c. The optimality criterion is the mean-variance efficiency of the portfolio. Usually investors are risk-averse, therefore, we can define a mean-variance efficient portfolio to be a portfolio that has a minimal variance for a given desired mean return.