Reaching for a Better Understanding of the Portfolio Optimization Process

Fund managers must select a portfolio of assets from a group of securities so as to balance the conflicting goals of maximizing portfolio return and minimizing portfolio risk. There are many elegant approaches to this problem. All suffer from the same flaw – they all require estimates of the expected future risk and return of the constituent securities as well as of the correlations between the returns of pairs of these securities. Such estimates are difficult to obtain for two reasons: First, both companies and market conditions change over time making past history no indication of future performance. Second, the daily fluctuations in security prices tend to be much larger than any daily trend, making estimation of securities returns correlations very difficult. In this project, with Mapleridge Capital Corp, an alternative investment management company, the intern will investigate the impact of uncertainties in the parameters on the optimization process and develop robust methodologies for portfolio selection, using mathematical, statistical and computational techniques.

Lifeng Cheng
Faculty Supervisor: 
Dr. Huaxiong Huang