Hi, I'm trying to construct an optimized portfolio with 5 assets, one of which being a risk free us interbank rate.
I have already constructed a portfolio of the risky assets using frontcon. I have minimum allocations set for each of the 4 risky assets. I took the average of portfolio weights that produce a portfolio risk under 3.3%.
How to I incorporate the risky portfolio into a final portfolio that includes the risk-free asset? I feel like I have not correctly accounted for the other port optimization features in Matlab, but am also not sure how to build in the allocation constraints for the risky assets, especially since I have only forecasted the variance covariance matrix for the risky assets.
Thanks!
–Edit: Attached is the code that I'm using
%Set CONSTRAINT CONDITITONS for 2005-2010 and defaults for Efficient
%Portfolio Estimation (frontcon)
AB1=[0.10375083 0.006820083 0.171937234 0.003411251]AB2=[0.09746352 0.006573773 0.157316298 0.003219355]AB3=[0.099026445 0.005835995 0.144081934 0.003175635]AB4=[0.094700297 0.005734776 0.117213615 0.003325538]AB5=[0.090528613 0.005708664 0.117541015 0.003486458]AB6=[0.090044181 0.005225695 0.112304033 0.004449439]AssetMax=[1 1 1 1]NumPorts=1000%For Each Year
%1) Run DCC MV GARCH Process for each year to get the Variance-Covariance Matrix
%2) Set Asset Bounds According to Constraint Conditions
%3) Estimate the Efficient Portfolio for Risky Assets Using Frontcon
%2005
[parameters, loglikelihood, Ht, Qt, stdresid, likelihoods, stderrors, A,B, jointscores]=dcc_mvgarch(R1,1,1,1,1);VCM1=Ht(:,:,966)PortReturn=[]AssetBounds=AB1AssetBounds(2,:)=AssetMaxExpCovariance=VCM1ExpReturn=D1(966,:)[PortRisk, PortReturn, PortWts] = frontcon(ExpReturn, ExpCovariance, NumPorts, PortReturn, AssetBounds)Port2005=PortRiskPort2005(:,2:5)=PortWtsif mean(Port2005(:,1))<.033 W2005 = mean(Port2005(:,2:5));end
Where VCM is the variance covariance matrix AB1-6 are asset bounds specific to each year that I'm estimating a portfolio for. W is the average portfolio weights that produce a standard deviation less than .033.
Unfortunately I only have access to 7.0.
—Thanks again
Best Answer