Portfolio Optimizer - Markowitz

🎯 Purpose

The Markowitz Model (Nobel Prize 1990) finds the optimal portfolio allocation that maximizes return for a given level of risk, or minimizes risk for a given return.

📊 Core Concepts

1️⃣ Risk vs. Return Trade-off

Higher returns usually come with higher risk. The model finds the best balance for your preferences.

2️⃣ Diversification Power

Combining assets with low correlation reduces portfolio risk without sacrificing return. This is the "free lunch" of investing!

📊 Definition

The Risk-Free Rate is the theoretical return on an investment with zero risk. It's your baseline: any risky investment should offer a return above this rate to be worth it.

📈 Common Proxies

• US 10-Year Treasury Bond: ~4.0-4.5% (as of 2024)
• German Bund (10Y): ~2.5-3.0%
• French OAT (10Y): ~3.0-3.5%
• ECB Deposit Rate: ~3.5-4.0%

📊 Definition

The Sharpe Ratio measures how much excess return you receive for each unit of risk you take. It's the gold standard for comparing investments.

📊 What Is It?

The Efficient Frontier is the curved line on the chart representing optimal portfolios—those offering the highest return for each level of risk.

📈 Understanding the Output

1️⃣ Max Sharpe Portfolio

This is your recommended portfolio for long-term growth with optimal risk-adjusted returns.

2️⃣ Asset Allocation (Pie Charts)

Shows how much to invest in each asset. These percentages tell you exactly how to split your capital.