IDEAS home Printed from https://ideas.repec.org/a/wun/journl/tjev04y2011i4(16)a05.html
   My bibliography  Save this article

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

Author

Listed:
  • Florentin SERBAN

    (Department of Applied Mathematics, Faculty of Cybernetics, Statistics and Computer Science, Academy of Economic Studies, Bucharest)

  • Mihail BUSU

    (Department of Mathematics, Spiru Haret University, Bucharest, Romania)

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.

Suggested Citation

  • Florentin SERBAN & Mihail BUSU, 2011. "Building an Optimal Portfolio Consisting of two Assets and Its Efficient Frontier," Timisoara Journal of Economics, West University of Timisoara, Romania, Faculty of Economics and Business Administration, vol. 4(4(16)), pages 231-238.
  • Handle: RePEc:wun:journl:tje:v04:y2011:i4(16):a05
    as

    Download full text from publisher

    File URL: http://www.tje.uvt.ro/index.php/tje/article/download/124/pdf
    Download Restriction: no

    More about this item

    Keywords

    risk; selection of assets; principal components analysis; optimization; efficient frontier;

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wun:journl:tje:v04:y2011:i4(16):a05. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Romeo Margea). General contact details of provider: http://edirc.repec.org/data/feuvtro.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.