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Quantitative Finance by Matt Davison

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Chapter 15

Mean Variance Portfolio Optimization

15.1 CHAPTER SUMMARY

In Chapter 2 of this book, and then again in Chapter 6, we saw that diversifying our investments over a portfolio of at least partially uncorrelated assets was a very effective way to reduce the risk of an investment without much negative impact on its return. In this chapter, we explore this idea in much more detail, following the Nobel Prize-winning idea of Harry Markowitz. We will create and use an Excel implementation of his formulas to better understand what his results show.

15.2 Selecting Portfolios

We are able to invest our money in a dizzying array of financial instruments. There are many asset classes—stocks, government bonds, corporate bonds, and even options. There ...

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