Mean-Variance Portfolio Optimization is a foundational concept in modern portfolio theory, introduced by Harry Markowitz in the 1950s. The primary goal of this approach is to construct a portfolio that maximizes expected return for a given level of risk, or alternatively, minimizes risk for a specified expected return. This is achieved by analyzing the mean (expected return) and variance (risk) of asset returns, allowing investors to make informed decisions about asset allocation.
The optimization process involves the following key steps:
Mathematically, the optimization problem can be expressed as follows:
subject to
where is the vector of asset weights, $ \mathbf{\
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