Asset Allocation Optimization Using Sharpe Ratio and Excel Solver
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Solution Overview
Problem
Current asset allocation methods, such as the Markowitz model, are complex and require mathematical expertise, making them inaccessible to ordinary investors. Additionally, existing optimization methods often fail to consider volatility and risk-free returns, leading to increased market volatility and damage to value investors.
Innovation Solution
An optimization method and system for asset allocation based on the Sharpe ratio, which calculates the annual return rate and volatility of each asset, constructs an efficient frontier, and determines the optimal asset allocation by maximizing the Sharpe ratio and Sharpe return rate.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Productivity
If the Markowitz model is used for asset allocation, then quantitative allocation is achieved, but the complexity of calculation and mathematical knowledge requirements increase
Solution Approach 1:
The patent replaces complex professional software with simple Excel templates that can be easily created and discarded. The optimization model uses basic Excel functions rather than complex mathematical libraries, making the tool accessible to ordinary investors without requiring deep mathematical knowledge or expensive software licenses.
Solution Approach 2:
The patent substitutes complex mathematical optimization algorithms with Excel's built-in solver and basic financial formulas. Instead of requiring users to implement sophisticated portfolio optimization algorithms from scratch, the solution leverages Excel's existing computational capabilities to automatically calculate optimal asset allocations.
2Measurement precision
If professional software is designed based on complex software design language, then accurate asset allocation optimization is achieved, but the development cost and usage fee increase
Solution Approach 1:
The patent creates simplified copies of professional portfolio optimization functionality using Excel templates. Instead of developing new complex software, it replicates the essential optimization capabilities using accessible spreadsheet tools that ordinary investors already have, thereby reducing both development and usage costs while maintaining core functionality.
Solution Approach 2:
The patent makes the optimization tool universally accessible by using Excel, a platform that is already widely installed and familiar to most investors. This multi-functional approach allows the same tool to serve both beginners and more advanced investors without requiring separate specialized software for different user levels.
3Ease of operation
If optimization methods consider only historical data without volatility and risk-free return, then calculation simplicity is maintained, but market volatility increases and value investors are damaged
Solution Approach 1:
The patent modifies the optimization parameters to include risk-free rate adjustments and volatility considerations within the Excel framework. By changing the input parameters to account for risk-free returns and incorporating volatility metrics into the Sharpe ratio calculation, the model maintains simplicity while improving investment safety and reliability.
Solution Approach 2:
The patent incorporates feedback mechanisms by using the Sharpe ratio as an optimization criterion that inherently balances return and risk. The model provides feedback on portfolio performance metrics and adjusts allocations to maximize risk-adjusted returns, preventing extreme volatility while maintaining calculation accessibility for ordinary investors.
Data Source
AI summary
The present invention discloses an asset allocation method and system. The method comprises acquiring the returns of each asset and determining the annual return rate and the annual volatility of each asset; determining expected returns according to the annual return rate, determining expected volatility according to the annual volatility, and constructing an efficient frontier by taking the expected returns as a horizontal coordinate and the expected volatility as a vertical coordinate; acquiring the Sharpe ratio and the Sharpe return rate of each point within the efficient frontier, and determining the optimal asset allocation according to the weight of each required asset corresponding to the Sharpe ratio and the Sharpe return rate.