Building an Optimal Portfolio Consisting of two Assets and Its Efficient Frontier

Florentin Serban and Mihail Busu ()
Additional contact information
Florentin Serban: Department of Applied Mathematics, Faculty of Cybernetics, Statistics and Computer Science, Academy of Economic Studies, Bucharest

Timisoara Journal of Economics, 2011, vol. 4, issue 4(16), 231-238

Abstract: In modern portfolio theory, it is common practice to first compute the risk-reward efficient frontier and then to support an individual investor in selecting a portfolio that meets his/her preferences for profitability and risk. Potential flaws include (a) the assumption that past data provide sufficient evidence for predicting the future performances of the securities under consideration and (b) the necessity to mathematically determine or approximate the investor’s utility function. This paper presents the description of the efficient frontier for a portfolio made of two assets. We use data analysis to obtain two clusters, then, we estimate the risk of each asset corresponding to each class we obtained. Thus, we get the best two assets among the ones we analyzed and for which we will construct the efficient frontier. The originality of our paper consists in the combination of classification theory and risk estimation theory to determine the best assets. To illustrate the efficiency of the method we used, we present a case study which makes reference to the stocks listed at Bucharest Stock Exchange. We consider two stocks with the best features from Bucharest Stock Exchange based on the existent correlation that we obtained by data analyses (for classification), and by the evaluation of the loss repartition (for risk estimation), then we construct the efficient frontier for this portfolio.

Keywords: risk; selection of assets; principal components analysis; optimization; efficient frontier (search for similar items in EconPapers)
JEL-codes: C02 C61 G11 (search for similar items in EconPapers)
Date: 2011
References: Add references at CitEc
Citations:

Downloads: (external link)
https://tje.uvt.ro/index.php/tje/article/download/124/pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wun:journl:tje:v04:y2011:i4(16):a05

Ordering information: This journal article can be ordered from
16 J. H. Pestalozzi Street, 300115, Timisoara, Romania
https://tje.uvt.ro

Access Statistics for this article

Timisoara Journal of Economics is currently edited by Camelia Margea

More articles in Timisoara Journal of Economics from West University of Timisoara, Romania, Faculty of Economics and Business Administration Contact information at EDIRC.
Bibliographic data for series maintained by Romeo Margea ().