Comparative Analysis of Mean Variance Efficient Frontier and Resampled Efficient Frontier For Optimal Stock Portfolio Formation

Abstract

Abstract One way to form an optimal stock portfolio is to use the mean-variance efficient frontier (MVEF) method. However, the MVEF method is susceptible to changes in input. An optimal stock portfolio formation method has been developed to overcome this problem, known as the Resampled Efficient Frontier (REF) method. The REF method is a refinement of the MVEF method. REF is done by generating data repeatedly using the Montecarlo simulation. The parameters needed to form a stock portfolio using REF are the average input return μ and the covariance variance matrix Σ. The calculation results show that the weight of the REF portfolio is not negative (there is no short selling strategy). The Sharpe ratio of the REF portfolio is also higher than the MVEF. A larger Sharpe ratio indicates that the REF portfolio has a better performance compared to MVEF. However, empirically based on a case study simulation, the MVEF method experienced a smaller loss compared to the REF method.