Journals Information
Universal Journal of Accounting and Finance Vol. 10(2), pp. 609 - 623
DOI: 10.13189/ujaf.2022.100226
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Construction of Optimal Portfolio Using Efficient Portfolio and Zero Opportunity Cost
Daniel Arficho Gaenore 1,*, M Montaz Ali 2, Aduda Jane Akinyi 3
1 Department of Statistics and Actuarial Sciences, Faculty of mathematics, Pan African University for Basic Sciences, Technology and Innovations, Nairobi, Kenya
2 School of Computer Science and Applied Mathematics, University of the Witwatersrand, Johannesburg, South Africa
3 Department of Statistics and Actuarial Sciences, Faculty of mathematics, JKUAT, Nairobi, Kenya
ABSTRACT
In this manuscript, we introduce asset allocation and portfolio selection techniques based on efficiency condition, Sharpe ratio error condition and order three zero opportunity condition. Investors expect the same level of risk and return from alternative investment options unless they want the advantage of diversification for risk. There are two fundamental investment portfolios. The first one is risk free fundamental portfolio, and the second one is risky fundamental portfolio. Investors use zero opportunity cost to select portfolio objective. In this research, mathematical derivation of portfolio construction approach is described in advance. Historical data of this research show that there is a positive linear relationship between natural logarithm of standard deviation of securities’ return and square of co-variance between securities and market return. Furthermore, it shows that there is a positive linear relationship between Treynor ratio of securities’ return and Sharpe ratio of securities’ return. We use global search optimization tool in MatLab and R software to solve empirical portfolio selection and asset allocation problem. Moreover, we apply direct and indirect mathematical proof methods to prove mathematical facts of this study.
KEYWORDS
Asset, Efficient Frontier, Opportunity Cost, Return Neutral, Sharpe Ratio
Cite This Paper in IEEE or APA Citation Styles
(a). IEEE Format:
[1] Daniel Arficho Gaenore , M Montaz Ali , Aduda Jane Akinyi , "Construction of Optimal Portfolio Using Efficient Portfolio and Zero Opportunity Cost," Universal Journal of Accounting and Finance, Vol. 10, No. 2, pp. 609 - 623, 2022. DOI: 10.13189/ujaf.2022.100226.
(b). APA Format:
Daniel Arficho Gaenore , M Montaz Ali , Aduda Jane Akinyi (2022). Construction of Optimal Portfolio Using Efficient Portfolio and Zero Opportunity Cost. Universal Journal of Accounting and Finance, 10(2), 609 - 623. DOI: 10.13189/ujaf.2022.100226.