Analyzing Financial Data and Implementing Financial Models Using R by Clifford S. Ang

Author:Clifford S. Ang
Language: eng
Format: epub
ISBN: 9783030641559
Publisher: Springer International Publishing

Step 10: Identify the Tangency Portfolio

The tangency portfolio is the portfolio with the highest Sharpe Ratio. Thus, we first calculate the Sharpe Ratio for each combination of portfolio weights. Note that the risk-free rate has to be converted into a monthly rate. We do this by dividing the annual risk-free rate by 12. As the below output shows, the tangency portfolio has a portfolio return of 0.87% with a standard deviation of 2.52%. This is achieved with 61% weight in SPYG and 39% in IGLB with virtually no weight to SPYV and CWI.

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