Challenge: Constrained Optimization
Evaluate yourself on the concepts learned in this chapter via a coding exercise.
Problem statement
Suppose you have $10000 to invest in the stock market and you want to diversify your portfolio among three different stocks: Stock 1 (STK1), Stock 2 (STK2), and Stock 3 (STK3). You have the following information on the expected return of these three stocks based on their five-year compound annual growth rate (CAGR):
Stock (xi) | Expected Return in % (μi) |
STK1 | 15 |
STK2 | 12 |
STK3 | 25 |
Mathematical formulation
Assuming that
subject to the following constraints:
: Ensuring an average portfolio return of % per year ...
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