Portfolio Construction using R

Create a portfolio of stocks using stock price histories downloaded from Yahoo. We create an efficient frontier for a long-only portfolio and show how to graphically display the risk-return tradeoff and the allocations. We next show how to compare frontiers created with other constraints and compare them to the original long-only frontier
the R code is available on http://wp.me/pTp8L-3j

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in this video we'll look at portfolio
construction using our well first
reading prices and will create efficient
frontiers and show how to display the
returns the allocation and then we'll do
a comparison of two different portfolios
with two different sets of constraints
we first start by copying the code and
pasting it into our what this will do is
this will download stock price history
for five different technology stocks
once you download the data will then
calculate the efficient frontier so we
copy and paste the commands and then
what after it's calculated the efficient
frontier it will plot the risk-return
space which is their next thing we want
to do is you want to look at some key
points within the efficient frontier
so for instance we want to look at
the Sharpe ratio the tangent line
we can also do this interactively and
first of all we plotted the efficient
frontier with selection number one this
is the minimum variance portfolio and
then lastly we plotted out three stocks
in terms of their where they sit on the
risk-return space and then we can use 0
to exit out next we want to take a look
at what the inputs were to the process
so what we're going to do is we're going
to print out what the main returns were
for the five stocks and what the
covariance matrix was one of the things
you want to do is one also convert from
daily returns and risk to analyze
numbers and so the following code they
were cutting and pasting will do this
next we want to look at what the Sharpe
ratios were for each one of the points
on the efficient frontier remember
previously one of the points in the
upper-right was the maximum sharp point
where the tangency line was the first we
create a new page so we don't overwrite
the previous plot we plotted up and one
of the higher points in the upper right
of the efficient frontier is also the
highest point with the Sharpe ratio and
then finally we want to do is you want
to count you want to graphically display
with the allocation reach the 50 points
so we started the lower . and go to the
the upper right . and it shows you what
the various applications are and we can
also print these print out what the
allocation was free to the 50 points and
we can also print out what the what the
risk and return was then we can scroll
through this one other thing that we
that also is useful is for us to be able
to write these data out so in this case
I've taken the allocation and I wanted
to write that out to a CSV file up
getting important to excel so do right
csb give it the name of the variable and
the filename and then I want to make
want to know where the file is actually
stored so i use to get WD command to
tell me what directory is the one where
I've stored the csv file so that
completes doing the creating the
efficient frontier
next we want to do is you want to do a
comparison of the efficient frontier for
the currency current portfolio which is
a long-only so zero to a hundred percent
versus some alternatives so we have a
line custody constraints which says
that we now can allocate have
allocations down to minus a hundred
percent for each one of the stocks we
copy this code which calculates the new
efficient frontier with the constraint 0
minus $OPERAND minus 1 to plus 1 versus
the original which appears in the blue
or the red is the beacons the one that
laws long and short positions the blue
is longing we can also try other types
of constraints so the one example here
says that every stock much doesn't have
at least ten percent of the portfolio
what kind of a maximum 60-percent we
copy that constraint paste it in and we
copy the same code we had before except
for that first line which has the
constraint and then we paste and the
blue is the original long-only portfolio
the red shows the portfolio is
restricted to ten percent the sixty
percent the show this graphically we go
back and copy our code to print out
graphically what the allocation look
like and this is what it looks like you
notice that everything
each one of the five stocks at least ten
percent allocation and also we we can
also print out the matrix showing what
the allocation was for each of the
points on the efficient frontier and
that's the original efficient frontier
that's the new allocated new allocation
across the frontier to do a comparison
of how the 10-percent of sixty percent
location compares to the long only
allocation we first of all recreate the
long only portfolio by talking the code
pasting it in
now we created the original long-only
portfolio and now we copy the the code
that produces the bar chart chart
showing what the allocation was we print
that out what first of all we use devenu
to create a new window and then we plot
the long lonely allocation in a new
window and then we can move the windows
apart to see how the allocation of
different the original long only on the
left the ten percent on the right