Portfolio Optimization Using Weighted Historical Return Values: Investors View Approach.

Most of the current portfolio optimization techniques depend only on historical data. However, in a reality, decisions may be changed due to the behavior of investors. Investor’s views may depend on various external factors, such as current market stability, company performances and many factors related to government policies. However, modeling the investor’s behavior pattern is too complex a process due to uncertainty of such patterns. This study is an attempt to discuss how the optimum allocation changes with respect to investor’s views, with a quantitative approach. Therefore, present study focuses to find the optimum asset allocation based on both historical data and investors’ view combined. The raw data set is weighted using an information matrix which represents the investors view, and then the weighted dataset is used to find the optimum asset allocation. The processes are done with the different sets of weights and obtain the corresponding optimum allocations. The optimum allocation is changed with respect to the weightage. For current study, five companies are selected. The historical return of closing price of the chosen companies is weighted using information matrix. Sensitivity of the assets allocation is discussed with respect to varying information. For this purpose, the information matrix is changed and thus different weightages are obtained to get different allocations. [ABSTRACT FROM AUTHOR]