Date on Honors Thesis
Fall 11-22-2021
Major
Finance / Financial Planning
Examining Committee Member
David Durr, PhD, Advisor
Examining Committee Member
David Eaton, PhD, Committee Member
Examining Committee Member
Jessica Dunn, PhD, Committee Member
Abstract/Description
The Standard & Poor’s 500 Index (S&P 500) serves as a proxy for the U.S. equity market and is among the most widely cited financial instruments in the world. Its risk and return can be accepted as the market’s, leading it to be the benchmark for performance in many investment settings. Modern portfolio theory helps to quantify performance by explaining the relationship between risk and return. Every portfolio has its own return and risk level, with the optimal allocations falling on the “Efficient Frontier”, that is the line on a graph that connects the portfolios that have the maximum return for their level of risk. The question can then be asked, is the S&P 500 considered efficient? Or does the S&P 500 have the most efficient allocation of its own assets? This study seeks to establish how the S&P 500 is comprised, break it down, and reallocate its sectors until it falls on the “Efficient Frontier” line.
Thirty-four unique portfolios were created across the study that either maximized return at market risk or minimized risk at market return. These portfolios are comprised only of the assets found in the S&P 500 and follow many of the same constraints as those placed on the index. Approximately 45,000 data points were used in analysis and the results of which were shown in twenty-two tables, seven charts, and three figures. The first portion of this study will elaborate on modern portfolio theory and how it will be used, outline the goal of the research, and break down the S&P 500. The second portion will provide a full research methodology that goes through each step that was taken throughout the research process. The next section will present the quantitative results found using this methodology. The last portion of this study will consist of the analysis of these results and conclusions based on their findings.
Recommended Citation
Rhoads, Dylan, "Using Modern Portfolio Theory To Create Efficient Portfolios From The S&P500" (2021). Honors College Theses. 99.
https://digitalcommons.murraystate.edu/honorstheses/99
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