Ex post simulation

Ex post simulations are run with historical data in order to determine the optimal portfolio. This allows us to review which portfolio structure would have been optimal with the given data from an ex post perspective. Due to the less developed corporate bond market in the... 

As a point of reference for the proportions of corporate and government bonds in the portfolio, historical data are analyzed. An ex post simulation examines how the risk/return relation of a mixed portfolio would have developed in the past. The (expected) return of a mixed portfolio is made up as follows ... 

In order to answer the question what share should be taken up by corporate bonds in a portfolio, ex post simulations were run. The Markowitz approach of portfolio optimization is based on using expected returns. Since the question of determining the optimal fixed income portfolio is to be answered against the background of historical data, the return and variance/covariance estimators are replaced by their historical return means and variances/covariances respectively. These historical data are computed congruently to the relevant investment horizon. For a 3-year investment horizon, the return means and variances/covariances of assets are computed on the basis of 36 monthly returns. The same is, in analogy, done for a 5-year investment horizon on the basis of 60 monthly returns. Investment horizons of three, five, and 10 years are analyzed here. For the investment horizon of, for example, five years, the monthly data in the time window from February 1980 to January 1985 are used. 

In this chapter we addressed the question of what proportions corporate and government bonds of different credit quality and maturity segments an investor should hold in a fixed-income portfolio. Maximizing the risk/ return relation according to the Markowitz approach is the core issue here. Optimal portfolio weights were established in ex post simulations. 

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See also in sourсe #XX -- [ ]

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