Portfolio Optimization of S&P 500 assets and Forecast of Efficiency in turbulence

Portfolio Optimization of S&P 500 assets and Forecast of Efficiency in turbulence

Thuy Nguyen, Tai Tran, Huy Truong

October 2009

Abstract

Optimization is one key activity to portfolio management practice. This document draws portfolio selection and optimization guidelines from Harry Markowitz, William Sharpe, Treynor & Black and Modigliani & Modigliani works to optimize portfolios constructed from the S&P 500 and fixed income assets. We build efficient portfolios using their adjusted daily historical data through an observation of 15 years. We find that, under short-selling liquidity constraint, Wal-Mart outperforms the market and its peers, and prevails through macro-economic fluctuations. Short-cuts to portfolio construction and rebalancing using Black method reduces input management efforts, while comes at a slight trade-off of accuracy. We also forecast portfolio returns for subsequent years and adjust our models to cope with possible turbulence. The efficient portfolios still produces better results than bogey portfolios do.

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