Abstract:
The purpose of this study is to choose an efficient portfolio and rebalance it
with transaction costs to enable account holders who desire to invest in the
financial markets to achieve their goals in the most convenient way.
Rebalancing is the process of restoring the asset allocation values of a portfolio
back to the levels specified by an investment strategy. These levels are meant
to correspond to an investor's risk tolerance and rewards. The Modern
Portfolio Theory (MPT) reduces portfolio risk by choosing and balancing
assets based on statistical methods that measure the level of diversity by
computing expected returns and standard deviations of individual securities to
assess their risk. When a portfolio is expected to produce the maximum return
at the lowest risk, or at a specific level of risk, it is said to be efficient. Here,
we contrast the results of the three major efficient portfolios by considering a
portfolio of 10 stocks randomly selected from the FTSE100 index (Financial
Times Stock Exchange) and closing stock prices of the stocks over the
preceding five years. By using MATLAB software the parametric efficient
portfolio is found to be more appropriate and the investment was more
diversified than with the variance efficient and expected return efficient
portfolios. Using optimized weights and the traded quantities of each
investment, the quadratic programming model was developed to rebalance the
portfolio while accounting for transaction costs. Risk and returns are
investigated using the developed model while accounting for transaction costs
and rebalancing the parametric efficient portfolio.