Portfolio Asset Allocation Based on Maximum Sharpe Ratio

Abstract

With the digital transformation of society, the diversity of portfolios is increasingly improving. As a result, the methods of achieving optimum portfolio asset allocation attract more and more investors. Therefore, research on portfolio asset allocation is imperative. This research is aimed at a portfolio construction strategy based on the maximum Sharpe ratio. Eight A-share market stocks and three Exchange-Traded Fund (ETF) are selected as research objects. Sharpe ratio is regarded as a key indicator that balances the performance between portfolio returns and volatility. As the research showcases, a diversified portfolio among different asset categories is capable of reducing unsystematic risk and improving the stability of an asset allocation, thus increasing the Sharpe ratio. The result of the research proves the effectiveness of the asset diversification theory, whose potential for reducing unsystematic risk and improving portfolio returns is indicated. This research provides practical strategic recommendations with their practical significance and application value. However, the assumption of a normal distribution in portfolio returns, as implied by the Sharpe ratio, may not always hold, which can be further addressed by a copula-based approach.