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Portfolio Optimization under Unstable Market Conditions

Student: Mariya Kolotukhina

Supervisor: Andrey M. Silaev

Faculty: Faculty of Economics

Educational Programme: Master

Year of Graduation: 2014

<p style="margin-left:18.0pt;">Current economic development undergoes significant changes of institutional environment and globalization of financial markets. Therefore portfolio management is of utmost importance today.</p><p style="margin-left:18.0pt;">Investors tent to use all possibilities and to adopt economic models and quantitative and qualitative analysis while operating in unsteady markets.</p><p style="margin-left:18.0pt;">Chosen strategy is the most important factor that indicates the effectiveness of investments. Moreover investors should implement modern computing technologies and methods of mathematical modeling.</p><p style="margin-left:18.0pt;">The foundation of &nbsp;portfolio is the paper of Harry Max Markowits. The core idea is to maximize return and to minimize risk of the strategic portfolio. However these methods can&rsquo;t solve the problem of portfolio optimization in a proper way because of the unsteady market conditions.</p><p style="margin-left:18.0pt;">The aim of this work is to analysis of stochastic models of optimal investment management, which is built on the principles of portfolio theory, but also takes into account the presence of stochastic changes in the return on risk-weighted assets and takes into account the nonstationarity of the financial market.</p><p style="margin-left:18.0pt;">In the modern conditions of the market&rsquo;s expansion and crisis the traditional and classical methods of financial mathematics, aimed at optimization of the investment portfolio can&rsquo;t solve the tasks of the optimal portfolio.</p><p style="margin-left:18.0pt;">Therefore in this paper the methods, taking into account the nonstationarity of market condition were analyzed.</p><p style="margin-left:18.0pt;">The first Chapter of the work is devoted to the analysis of the foundations of portfolio analysis under uncertainty over the basic concepts of probabilistic models of the financial market.</p><p style="margin-left:18.0pt;">The second Chapter deals with criteria of efficiency of financial markets and the possibility of their application to modern conditions.<br />The third Chapter includes an overview of the main methods of risk assessment<br />The fourth Chapter deals with the basic criteria of stability of financial instruments.<br />The fifth and sixth Chapter are devoted to the construction of the model of the investment portfolio, applicable in unsteady market condition.</p><p style="margin-left:18.0pt;">The main features of the emerging markets are: low efficiency, low liquidity, increased volatility, strong correlation in the movement of prices of various tools.</p><p style="margin-left:18.0pt;">The analysis of existing methods of evaluation of financial risks, methods of constructing optimal investment portfolios identified main constraints regarding applicability of the classical approaches.</p><p style="margin-left:18.0pt;">Significant volatility of financial instruments in the financial market and the necessity of application of sustainability criteria are important while constructing of investment portfolios.</p><p style="margin-left:18.0pt;">Proposed target function, taking into account the volatility of financial instruments and correlation of profitability of assets;&nbsp;<br />All analysis results in the algorithm that can help to optimize the investment portfolio in the unstable market conditions.</p>

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