Python For Finance Portfolio Optimization

Portfolio optimization is the process of selecting the best portfolio (asset distribution),out of the set of all portfolios being considered, according to some objective. The objective typically maximizes factors such as expected return, and minimizes costs like financial risk.
-Wikipedia

In this article I will show you how to create a program to optimize a stock portfolio using the efficient frontier & Python ! In modern portfolio theory, the efficient frontier is an investment portfolio which occupies the ‘efficient’ parts of the risk-return spectrum. Formally, it is the set of portfolios which satisfy the condition that no other portfolio exists with a higher expected return but with the same standard deviation of return.

The Sharpe Ratio goes further: it actually helps you find the best possible proportion of these stocks to use, in a portfolio.
- Moneychimp

The Sharpe ratio was developed by William F. Sharpe in 1966. The ratio describes how much excess return you receive for the extra volatility you endure for holding a riskier asset. It measures the performance of an investment compared to a risk-free asset (bonds, treasury bills, etc.), after adjusting for its risk. It is defined as the difference between the returns of the investment and the risk-free return, divided by the standard deviation of the investment.
-Investopedia

So what is considered a good Sharpe ratio that indicates a high degree of expected return for a relatively low amount of risk?

Usually, any Sharpe ratio greater than 1.0 is considered acceptable to good by investors. A ratio higher than 2.0 is rated as very good. A ratio of 3.0 or higher is considered excellent. A ratio under 1.0 is considered sub-optimal.

If you prefer not to read this article and would like a video representation of it, you can check out the YouTube Video . It goes through everything in this article with a little more detail, and will help make it easy for you to start programming even if you don’t have the programming language Python installed on your computer. Or you can use both as supplementary materials for learning…