Mean-Variance Portfolio Analysis
This chapter considers statistical characteristics of sets of assets, especially their means, variances, and correlations. A set of assets held by an investor is called the investor's portfolio. A portfolio is a set of assets, such as stocks, held by an investor. Portfolioselection refers to the choice of stocks for the portfolio. Portfolio allocation refers to the choice of weights of those stocks in the portfolio, where the weight of a stock is the proportion of total investment put into that stock. Bi-criterion portfolio analysis, or mean-variance analysis, uses the mean and variance of portfolio rate of return (ROR). The Sharpe ratio of a portfolio is discussed later in this chapter, as is Value-at-Risk. A portfolio should have high expected return, relative to its risk, and small loss probability, where by loss probability is meant the probability that the portfolio ROR will be negative.