Answer to Question #149503 in Finance for Jake Kramer

Question

Briefly explain the process of finding the optimal weight of various asset classes in a portfolio when you use the modern portfolio theory.

Answer 1

Firstly, you start by valuing the securities that are likely to be included in the portfolio. Then you go to calculating the desired asset allocation(or mix of assets) that you want to determine its optimal weight. From there you perform calculations to optimize the portfolio to get maximum amount of return for the minimum amount of risk. Finally, you make use of financial analysis to monitor the portfolio to see if it meets expectations and then making changes to the individual securities or asset mix when market conditions warrant a change.