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Optimal portfolio creation
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School of Business |
Bachelor's thesis
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en
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31+2
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This thesis explored the possibility of creating mathematically optimal stock portfolios for investors. Employing a quantitative approach, this thesis examined how optimal portfolio weightages could be calculated by maximizing the Sharpe ratio of a given portfolio of stocks. Quantitative data was gathered by obtaining historical stock price data for a total of 28 stocks across 7 different industries from the Nasdaq Helsinki as well as price data for 28 stocks across 7 different industries from a combination of the Nasdaq Stockholm, Nasdaq Copenhagen, and Oslo Stock Exchange.
The main findings of the study were that by optimizing the Sharpe ratio of a given portfolio, greater expected returns could be generated in both the Finnish market and the Nordic market as a whole. Sharpe ratio optimization was significantly more effective in the Finnish market than in the Nordic market which suggests better average performance of stocks in the other Nordic countries compared to Finland. Neither of the optimized portfolios was able to generate greater returns than an S&P 500 ETF over the same period of time meaning that although optimization generated better returns compared to the regular portfolio, it is unable to consistently beat the market return. The thesis concludes with recommendations for further research in the field by examining the average stock returns within the individual Nordic stock markets as well as the correlations of returns in the US stock market to the returns in the markets of Sweden, Norway, and Denmark.