ABSTRACT
The selection of an appropriate portfolio of assets is an essential component of fund management. Although a part of portfolio selection decisions is still taken on a qualitative basis, quantitative approaches to decisions under uncertainty are becoming more widely adopted. Portfolio optimization aims at choosing the weights of a given set of assets, so that the selected portfolio is the best one according to specific criteria. In this chapter, the authors start dealing with prices and returns of assets, and cover risk-gain analysis. Starting from the seminal model of Markowitz, who is regarded as the father of Modern Portfolio Theory, the authors consider other popular portfolio selection models, which aim at overcoming computational and (alleged) theoretical drawbacks of the former. Finally, the chapter is dedicated to immunization. Portfolio optimization is applied to equities, while immunization is applied to bonds.
