Mean-Variance Efficient Frontier

Business Finance

As a financial risk manager (FRM) working for an asset management firm, you are facing the task

of constructing a set of optimal portfolios, which eventually will be proposed to the clients. Ideally,

you should deliver a summary of different strategies stating the risk and return of each. In doing

so, you wanna make sure that each strategy is delivering the best risk-return trade-off.

In technical terms, you are asked to construct a Mean-Variance Efficient Frontier (MVEF) given

the universe of the 12 stocks. To do so, you need to solve the following optimization problem for a given m

Your final goal is to provide a list of (m, ?p(m)) for a set of m values. After deriving this list, you need to:

  • plot each m against its corresponding ?p(m) – the plot should deliver a concave function representing what is known as the MVEF.
  • highlight the point on the MVEF with the maximum Sharpe-ratio (SR) – in fact, this point refers to the SR portfolio (recall Portfolio 2)
  • split the data into two periods, one covering the years 2015 and 2016 (Period 1) an done covering the more recent years 2017 and 2018. Repeat the above and compare between the two periods MVEF. Provide a number of insights.
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