Wikipedia of Finance - e-learning course on wealth management wikipedia Chapter - Portfolio Optimization Theory

Benefits of Portfolio Optimization Theory and Techniques


Here Is a Quick Intro to the “Portfolio Optimization Theory and Its Benefits”:

The investment process consists of two main tasks are:

  • Security and market analysis, whereby the risk and expected benefit of a range of investment advisory tools.
  • The formation of an optimal portfolio of assets; this task involves determining the risk-benefit opportunity to be found and choosing the best.

And an efficient portfolio optimization turns up to help with the same. The main subject of the portfolio optimization is the determination of an optimal investment strategy on a financial market. Being little more precise: it helps the investor with deciding how many shares of which securities to hold and when, in order to maximize his benefit from the end of the planning horizon.

Here, I am to tell you what the old and modern portfolio optimization is and what its benefits are.

“The old portfolio optimization theory consists the option pricing” and is a years old model of financial mathematics, that is been in practice for decades while “the modern portfolio optimization theory is a model for the creation and optimization of investment portfolios by combining different types of assets”.  The modern portfolio optimization or MPT was designed by Harry Markowitz in 1592, a professor at the University of California San Diego, who won the Nobel Prize in 1990 for his contribution in economics. The development of modern, time-constant portfolio optimization is now much advanced and offers many algorithms for practical application and implementation.

What does Portfolio Optimization Theory says:

The risk of any investment in an individual asset should not be separated from the existence of other assets. For this reason, new investment should be considered in the light of its effects on the risk and performance of a portfolio of assets. The objective of the financial mathematics for investment in any asset consists that whether it maximizes the performance to a certain level of risk, or minimizes the risk for a given level of performance. The statistical concept of correlation underlying the diversification process is used to establish an efficient portfolio of assets.

Advice on Portfolio Optimization of Clients:

A deep analysis of the essence of the business, the market, client portfolio and product offering service, allows detecting the non-profitable businesses and most profitable opportunities. The ultimate goal is to increase the profitability of these portfolios, and hence that of the company.

These analyses should be based on an expert study of the strategies of the company and its competitors, knowledge of the basics of pricing, and the cost structure (SWOT analysis SME). It’s not recommended to give low customer and product base to a simple analysis of profitability, as this may affect the final result of the company in one amount greater than the saved.

Business systems are interrelated with its environment; any changes within the same or the environment have an effect on another part. A comprehensive analysis of the business is therefore recommended to optimize its portfolio of customers or products.

 Now, I am naming the “benefits or Profits of an efficient portfolio optimization techniques” that consist of:

  • Increased profitability.
  • A better understanding of the interrelation between customers and products which facilitates the handling of you company.
  • Improved customer service, increased retention of consumers.
  • A greater focus on profitable businesses, providing free time to generate good business executives.
  • Optimization of the use of resources, lowering the costs and maximizing your results. Cut costs without affecting the sale.
  • Lower expenses in obtaining new customers, Word of mouth promotion (free and highly efficient).

Profitable Customers, if thinking for Long Term:-

Some companies believe in selling as a short-term and timely operation. But hose executives who overcome short-term vision and are looking for consumers in the long run achieve better results and a more harmonious operation.

The company should not only think about how to initiate an operation, but also should analyze and plan how to keep the relationship with that customer in time. The difficulty of this task is that it means to coordinate all areas of the firm and that’s why commercial optimization goes beyond the vending sector.

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