Minimum variance portfolio

Minimum variance portfolio is a portfolio of individually risky assets which when combined result in the lowest possible risk level for an expected return.

Enter your Email below to Download Free Historical Data for Nikkei 225 and Economic Data for 120,000+ Macroeconomic Indicators and Market Data covering Stocks, Bonds, Commodities, Currencies & Financial Indices of 150 countries in Excel or via Quantitative Python API.

Minimum variance algorithm finds the average covariance of each asset versus all other assets including its own variance an then converts the average value for each asset to a cross-sectional distribution using normalization. This is used to proportionally weight each asset to find an initial set of weights. The final weights are derived by multiplying each initial asset weight by its inverse variance and then releveraging to sum up the weights to a total of 100%.

Minimum variance portfolio achieves a high sharpe ratio and a superior returns relative to an equal weight portfolio with less than 50% of the volatility.

Minimum Variance Portfolio Example

Minimum Variance Portfolio

The performance of an optimized portfolio based on minimum variance algorithm is compared to bonds and stocks portfolio. It’s superior performance is clearly visible.

Minimum variance portfolio reduces downside relative to an equal weight portfolio, and also loses some upsdie performance. MVP captures 75% of upside in bull markets relative to an equal weight index, and only 50% of the downside in bear markets.