Portfolio Optimization

Question 1

What is risk

Answer 1

standard deviation of historical returns

Question 2

covariance

Answer 2

how much stocks follow each other (do they both go up, down, or out of sequence)

correlation coefficient of stocks daily returns

Question 3

Mean Variance Optimization

Answer 3

Inputs (per stock)
Expected Return
Volatility
Covariance (matrix or variance between stocks)
Target Return (anywhere from return of max asset to min asset)

Question 4

Efficient Frontier

Answer 4

Plotted line of all possible risk / return points that shows the best weighting of each stock to provide maximum return for least amount of risk

Tangent line from origin to EF is the max sharpe ratio portfolio for the assets