Application of portfolio optimization

Abstract

Portfolio optimization, as the basis for quantitative investment finance, has become a fundamental topic in modern finance. Consequently, the portfolio constructing, and optimization is always a hotspot in the modern finance area. This paper concentrates on the application and analysis of portfolio optimization. Asset diversification plays a crucial role in examining how to improve the performance of a portfolio. To achieve portfolio diversification, this paper calculate the correlation coefficient matrix of the seven selected assets and look for smaller correlation coefficients. By referring to the Interpretation of Pearson's Correlation Coefficient and the process of constructing portfolios with assets from multiple industries, this paper constructs portfolio within the framework of mean-variance analysis and using the Capital Asset Pricing Model (CAPM) to initially demonstrate portfolio performance. Finally, this paper adopts the Fama-French three-factor model in terms of expected return, Sharpe ratio and variance analysis to evaluate the financial performance of the portfolio.