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Mean-Variance Optimization

Asset allocation is a multiple objective problem: sophisticated investors seek to maximize return while minimizing risk. Given the complex interactions among the assets under consideration, how can an investor select the portfolio that achieves their goals? One answer is Mean-Variance Optimization, a mathematical technique pioneered by Harry Markowitz in the 1950's. Since its introduction, Mean-Variance Optimization, or MVO, has been one of the most successful applications of mathematics in finance. While the technique has been widely used in major investment institutions, the power of MVO has only recently been of interest to individual investors and financial services professionals due in large part to the growth in market access afforded by the internet.

Diversification is the key concept. This is the process of selecting assets that complement one another in order to mitigate risk. MVO accomplishes this by characterizing each asset by its expected return and volatility (i.e., standard deviation in asset return). The interaction between two assets is characterized by the correlation between their respective returns. Under these assumptions, a mathematically optimal answer to the asset allocation problem can be generated.

Wagner's M-V Optimizer product for personal or larger scale portfolio optimization problems brought the power of MVO to hundreds of homes and businesses. This entry-level product is no longer available for purchase, as its maintenance costs now exceed projected sales.

If you need to embed extensive portfolio optimization capability into your own software application or website, then you should consider our industrial strength MVO Library product. For more information on any of our mean-variance optimization products, please contact MVOSupport@pa.wagner.com.

Wagner Math Finance has been providing Mean-Variance Optimization solutions for close to a decade, serving a broad spectrum of clients with products ranging from Excel based spreadsheet solutions for individual investors to industrial strength software libraries for some of the world's largest money managers. Our products are robust, tested over many years, and can handle large problems with thousands of assets and constraints. In addition, we have the expertise on hand to customize these solutions to meet our clients evolving needs.