Mammoney - Your Ultimate Guide to Personal Finance & Investing

Introduction to Portfolio Optimization In the world of finance, portfolio optimization is a critical process that aims to balance risk and return by carefully selecting and managing a mix of investment assets. Advanced portfolio optimization techniques go beyond traditional methods, incorporating sophisticated strategies and tools to achieve higher efficiency and performance. This article will explore these advanced techniques, offering insights on how to construct a well-optimized portfolio that aligns with specific financial goals and risk tolerance. Mean-Variance Optimization Mean-variance optimization, introduced by Harry Markowitz, is a foundational concept in modern portfolio theory. It involves creating a portfolio that maximizes expected return for a given level of risk, or alternatively, minimizes risk for a given level of expected return. This technique is based on the following key principles: Expected Returns : Estimating the future returns of individual assets. Variances a...