Strategic Portfolio Allocation: An Analytical Approach to Balancing Market and Style 23 Investments: A Case Study

Wanhe Li; Yuanzhe Li

doi:10.54097/nczb5584

Authors

Wanhe Li
Yuanzhe Li

DOI:

https://doi.org/10.54097/nczb5584

Keywords:

Portfolio Optimization; Risk-Return Trade-off; Sharpe Ratio; Value at Risk; Asset Allocation; Transaction Costs.

Abstract

This study explores optimal portfolio design by evaluating the risk-return dynamics of the Style 23 and Market portfolios, employing advanced statistical and analytical tools such as Sharpe ratio, regression analysis, cumulative returns, and Value at Risk (VaR). By examining both the entire and half-sample datasets, we developed a robust investment strategy that combines a 0.343 weight for Style 23 and a full weight for the Market Portfolio, demonstrating the benefits of diversification. The findings suggest that this strategy offers superior risk-adjusted returns compared to investing in a single portfolio, as losses in one can be mitigated by gains in the other. However, the analysis also identifies key challenges, including the impact of transaction costs and external factors like economic conditions, which can affect overall performance. These insights underscore the need for continuous strategy evaluation and adjustment. The study concludes that while the combined strategy provides a sound framework for portfolio management, ongoing refinements and adaptability are essential to navigate evolving market landscapes effectively.

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