Optimal Portfolio Risk Analysis Using the Monte Carlo Method

Abstract

Investment is an activity carried out with the expectation of gaining profits in the future through the management of investment assets. Investment assets can include buildings, gold, and stocks. Investment activities are inseparable from the concepts of return and risk. The relationship between the expected rate of return and the level of risk is linear. However, risk can be avoided or reduced through portfolio diversification. Evaluating investment risk is crucial for investors to determine which risky assets to choose. One popular method for assessing the risk of a portfolio is using Value at Risk (VaR). In VaR calculations, Monte Carlo is considered the most effective method. In this paper, a risk analysis of the optimal portfolio is conducted using the Monte Carlo method. The analyzed optimal portfolio consists of shares in BBCA, TLKM, BBRI, BBNI, BMRI, ADRO, GGRM, and UNTR. The results indicate that the potential loss for the investor is no more than IDR 705.634,- with an initial fund of 1 billion.Â