Portfolio Optimization

At this point of the book, all of the focus has been on the estimating values of financial instruments and their risks individually. We never considered those as a group. In this chapter, we will study the real-world implications of instruments. In practice, most of the time, financial instruments are treated as a collection of items rather than being single. A collection may consist of different types of instruments: derivative, bond, stocks, etc. We name this collection as portfolio. From the discussions of Chapter 2 , you should already know the concept of returns. The basis of any kind of investment is the desire to have more returns. We should, therefore, be able to quantify the returns and risks at the portfolio level and optimize the investment. Formally, the whole process of quantification is known as portfolio optimization which is the topic of discussion for this chapter.