This is the portfolio optimization project referenced in the syllabus. It is designed to be as simple and as straightforward as possible. Given its nature, this project will be an individual project and not entail groups.
Watch this video on a two asset-optimization. Unlike in prior years, this video does not require matrix algebra or an advanced mathematics. It does require, however, the use of Bloomberg and Excel Solver.
Pick two ETFs to use in this exercise – any two ETFs. Because of the vast number of ETFs available, this is a very low probability that you will pick the same two ETFs as another in the class (Should two of you pick the same ETFs, I will deduct 1 point; should three of you pick the same ETFs, I will deduct 2 points; etc.).
After picking your two ETFs – any two ETFs – you will complete the assignment.
The assignment is as follows (and will be provided to be in hard copy on one page):
- 1)With your two ETFs, run the same two-asset solver optimization as that in the video (use five years of monthly data). Provide, in hard copy, the output box (ETF mean, standard deviation, etc. and portfolio mean, etc.)
- 2)Provide in a short paragraph, the advantage of your output with respect to diversification, discussing the minimum variance and Sharpe ratios.
- 3)Provide, finally, in a short paragraph, explain why – or why not – you would recommend this two-asset portfolio mix for you or your client over the next five years.