TITLE:
Portfolio Optimization Modelling with R for Enhancing Decision Making and Prediction in Case of Uganda Securities Exchange
AUTHORS:
Ronald Baganzi, Byung-Gyoo Kim, Geon-Cheol Shin
KEYWORDS:
Portfolio Optimization, R Language, Efficient Frontier, Uganda Securities Exchange, Uganda
JOURNAL NAME:
Journal of Financial Risk Management,
Vol.6 No.4,
November
2,
2017
ABSTRACT: Portfolio
Optimization involves choosing proportions of assets to be held in a portfolio,
so as to make the portfolio better than any other. In this research, we use a
software for statistical computing R to analyse the performance of portfolio optimization
models which include; Markowitz’s Mean-Variance (MV) model, the VaR model, and
Konno and Yamazaki’s Mean-Absolute Deviation (MAD) model. We start by analysing
multi-asset data for the major indexes in the world followed by historical data
of 16 constituent shares listed on the Uganda Securities Exchange (USE)
covering 6.5 years. The paper then tests the stock performance of the models
using R. We found that GREXP bonds dominated the world market as they accounted
for more than 60% of the Maximum Diversified Portfolio (MDP). For the USE, we
generated more risk measures like volatility, Sharpe Ratio (SR), Risk Parity
(RP), Expected Shortfall (ES) or CVaR which we used to assess stock
performance. UMEME, NVL, BATU, JHL, DFCU, EBL, EABL, KCB, SBU and CENT were the
best-performing stocks. By understanding the performance of portfolio
optimization models in R, Ugandan investors will develop a better view of the
latest performance of the stocks listed on the USE. This will help them to
decide on which stocks to include in their investment portfolios, thus prevent
wrong investment decisions.