The Application of Monte Carlo Simulation and Mean-variance in Portfolio Selection

Abstract

This paper manages to construct an efficient portfolio that has a better return than the market index. This portfolio is unique because its five assets have been carefully picked from different industries to diversify risk, which is rarely seen in other research. First, this article uses Monte Carlo simulation to generate a possible portfolio and calculate the weight of each asset in different scenarios. Second, it uses the mean-variance model to measure the risk and return of the portfolio. Based on the accessed data, this study finds that the daily return of the minimum volatility portfolio outruns the market index, and it also determines the weight of each stock in the minimum volatility portfolio. The paper provides feasible ways of constructing an efficient portfolio, such as how to select stocks and allocate assets. The results in this paper may benefit the related investors in financial markets and help them find efficient portfolio that outruns the market index.