Stochastic Portfolio Optimization

Abstract: The main purpose for an aggressive investor is to maximize the return in theinvestments. But in order to do so the risk should be taken into consideration.In this thesis, we utilize Markowitz portfolio theory, one of the standard modelsfor maximizing return while considering risk. The model allows the investorto balance risk tolerance and expected return on the stock market based onhistorical data. Simply put, the goal is to allocate capital to stocks in a mannerthat maximizes expected return while considering risk. The tested cases involvedmodels utilizing historical data from five and ten years ago, respectively. Theresulting allocation distribution of these portfolios depended on the varianceconstraint and, to a large extent, on how many years of historical data were used.These results emphasize the significance of data in portfolio optimization.