This repository contains the code for the Portfolio optimization techniques for financial assets using Markowitz and Sharpe's theories from the domain Modern Portfolio Theory. This Project is done as a part of the coursework for the course "Introduction to Financial Engineering" under the supervision of Dr. Vivek Vijay.
Modern portfolio theory (MPT) is an investment theory that aims to maximize returns for a given level of risk by constructing a well-diversified portfolio of assets. The theory was developed by Harry Markowitz in the 1950s and expanded by William Sharpe's Capital Asset Pricing Model (CAPM) in the 1960s.
MPT assumes that investors are rational and risk-averse, seeking to maximize their returns while minimizing their risk. It also assumes that the risk of an individual asset is not important, but rather the risk of the entire portfolio.
Markowitz's contribution to MPT was the development of the concept of efficient portfolios, which are portfolios that offer the highest possible return for a given level of risk, or the lowest possible risk for a given level of return. Markowitz showed that by diversifying investments across different assets with different risk and return characteristics, investors can reduce their overall risk without sacrificing returns.
Sharpe's contribution was the development of CAPM, which provides a framework for determining the expected return of an asset based on its risk relative to the overall market. CAPM takes into account the risk-free rate of return, the market risk premium, and the asset's beta, which measures the asset's volatility compared to the overall market.
Together, Markowitz's efficient portfolio theory and Sharpe's CAPM provide a powerful framework for constructing and evaluating investment portfolios. By combining assets with different risk and return characteristics, investors can build portfolios that offer the highest possible return for a given level of risk or the lowest possible risk for a given level of return.
