Now we take the same list of stocks as used in the prior blog post, only this time I optimized the portfolio by requesting for a maximum Return/Risk ratio. In the first screenshot readers will see the QPP analysis. In the second slide, note the correlation matrix and in the third I show the constraints placed on the portfolio of stocks.
QPP Analysis: The following asset allocation gives up return, but significantly reduces risk. Reduction in the standard deviation (10.7%) is related to the constraint of requesting a maximum Return/Risk ratio. Note the increase in Diversification Matrix and the reduction in the Portfolio Autocorrelation. This portfolio has a respectable yield of 3.8%.
Correlation Matrix: Pay attention to those stocks that have a weight greater than zero. For example, omit VTI, COP, etc. in your thinking. They do not enter into the calculations even though there is a percentage present. This portfolio ends up with no highly correlated holdings. It is also important to note that the correlations change when the weight or percent allocated to a specific stock varies.
Portfolio Constraints: The following screen shot shows the constraints placed on the portfolio when the Set Objective is to maximize the Return/Risk ratio. Had I requested a maximum Return, Risk would have increased significantly.
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