Finance Capstone: Optimal Portfolio Performance and Diversification

This finance project evaluates the performance of an optimal portfolio, comparing it to Apple Inc. (AAPL) to demonstrate the benefits of diversification. The analysis includes the creation of both minimum variance and optimal portfolios using assets like Vanguard Total Bond Market Index Fund and Vanguard 500 Index. The project calculates monthly returns, compares portfolio stability with AAPL's volatility, and highlights how diversification reduces risk and enhances returns. The conclusion emphasizes the importance of strategic asset allocation in generating income and mitigating risk. The project also involves creating a presentation for potential clients, illustrating portfolio diversification through graphs and comparisons, based on the capstone project steps. This assignment is designed to showcase the ability to analyze portfolio characteristics and communicate its performance effectively.

FINANCE
Evaluating the Optimal Portfolio

INTRODUCTION
• The detection of optimal portfolio is mainly conducted in the assessment
• The efficient frontier is drawn for detecting the optimal and minimum variance portfolio
comprises of assets Vanguard Total Bond Market Index Fund and Vanguard 500 Index.
• Further evaluation has been conducted on detecting the performance the created portfolio
with Apple Inc performance.

ANALYZING THE MINIMUM VARIANCE
PORTFOLIO
0.50% 1.00% 1.50% 2.00% 2.50% 3.00%
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
, [X VALUE], [Y VALUE]
Minimum variance portfolio Portfolio Return
Risk
Return

ANALYZING THE OPTIMAL RISKY PORTFOLIO
0.50% 1.00% 1.50% 2.00% 2.50% 3.00%
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
Optimal portfolio, [X
VALUE], [Y VALUE]
Optimal portfolio Portfolio Return Optimal portfolio
Risk
Return
( 𝐸 ( 𝑟 𝐵 ) − 𝑟 𝑓 ) × 𝜎 𝑆
2 − ( 𝐸 ( 𝑟 𝑆 ) −𝑟 𝑓 ) × 𝜎 𝑆 𝜎 𝐵 𝜌 S ,B
( 𝐸 ( 𝑟 𝐵 ) − 𝑟 𝑓 ) × 𝜎 𝑆
2 + ( 𝐸 ( 𝑟 𝑆 ) −𝑟 𝑓 ) × 𝜎 𝐵
2 − ( 𝐸 ( 𝑟 𝐵 ) −𝑟 𝑓 + 𝐸 ( 𝑟 𝑆 ) −𝑟 𝑓 ) ×𝜎 𝑆 𝜎 𝐵 𝜌 S, B
( ( 0.26 % ) ) × 0.82 %❑
❑ − ( ( 1.22 % ) ) × 0.82 % × 3.07 % × −0.0000243
( 0.26 % ) × 0.82 %+ 1.22 % ×3.07 % − ( 0.26 %+ 1.22 % ) ×0.82 % ×3.07 % ×− 0.0000243

DETECTING THE PERFORMANCE OF THE
PORTFOLIO
• Minimum variance portfolio is only used by investors, who aim to reduce the total risk involved
in investment regardless of the returns that can be generated from the portfolio. The minimum
variance portfolio allows conservative investors to minimize the risk level while, while
improving their investment scope.
• However, the optimal portfolio variance aims in detecting the investment weights in the stock,
which can deliver the maximum level of returns with limited risk. The aim of the portfolio is to
generate high level of returns from an investment regardless of risk that needs to be taken into
consideration for generating high returns.

CALCULATING THE PORTFOLIO MONTHLY
RETURNS
Portfolio returns Returns Amount
Jan-16 -0.17% 4,991,250.16
Feb-16 0.47% 5,014,505.44
Mar-16 2.42% 5,135,799.60
Apr-16 0.39% 5,155,829.22
May-16 0.47% 5,179,852.85
Jun-16 1.52% 5,258,416.96
Jul-16 1.41% 5,332,739.80
• The performance of the portfolio has been improving
since February, as detected in the table. In addition,
the performance of the portfolio has mainly increased
from the levels of 5,000,000 to 5,332,739.80. The
portfolio has generated high level returns from
investment.

COMPARING THE PERFORMANCE OF THE
PORTFOLIO WITH AAPL
• The performance of the portfolio has more stable than the
returns provided by Apple Inc. in comparison to the
created optimal portfolio.
• Moreover, the performance of Apple Inc. has been volatile,
which has relatively reduced in case of the portfolio
created.
• The returns of Apple Inc. has been ranging in both positive
and negative values, which is raising risk involved in
investment.
• On the other hand, the diversification present in the
portfolio has reduced the risk and maintained adequate
returns from investment.
Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16
-20.00%
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
Comparing returns of AAPL and
Portfolio returns
Portfolio returns APPL

CONCLUSION
• From the analysis of the created portfolio, it can be detected that investments conducted in stock
with relevant weights can eventually help in generating high level of income from investment.
• Both minimum variance portfolio and optimal portfolio provide adequate investment opportunity
to the investor.
• Lastly, the comparison between Apple Inc. returns and the optimal portfolio has mainly stated
about the efficiency of the portfolio in minimizing the risk and improving the return generation
capability of the investment in the selected securities.

BIBLIOGRAPHY
• Padma, A. and Rambabu, G., 2017. Optimal Portfolio Construction by Using Sharpe
Single Index Model. Sumedha Journal of Management, 6(4), pp.57-65.
• Markov, M. and Bauman, E., Markov Processes International LLC, 2017. Systems and
methods for financial optimization using portfolio calibration. U.S. Patent 9,721,300.

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