When one goes about constructing their stock portfolio, there are two questions to ask. The first is what assets to buy? The second is what should be the weightage allocation of each asset? This article shows you a practical example of how you can optimize your stock portfolio through asset allocation strategies. Suppose I have already answered the first question. I want to buy Amazon, Microsoft, Alibaba, Facebook, Tesla, Apple, Google, Disney. There are 8 assets to add to my portfolio. But which one should I buy more or less so that my portfolio is optimized? And what do we mean my optimized? That’s what this article is all about.

1. How does Portfolio Optimization Works?

Based on the Modern Portfolio Theory, Markowitz argues that all investors are risk-averse. We want to achieve the highest long-term returns without taking extreme short-term volatility. But how do we measure that? Though there are many ways to optimize your stock portfolio,...