Portfolio Optimization by Asset Allocation

The objective of this paper is to survey the literature from theoretical and the practical perspective of asset allocation and portfolio construction, and the ideal means of performing this mission is through portfolio management process. The efficient financial markets and behavioral finance are two different bases in which investors can evaluate best approach for asset allocation and security selection for a security. The Efficient Markets Hypothesis is believed that market discounts all publicly available information, whereas, behavioral finance and neurosciences disprove because of irrational behavior of retail traders financial market become inefficient. Experts believe that fundamental and technical analysis can help investors to evaluate market price movement of a security. This enables investors to make buy and sell decision that leads to a profitable trade. The portfolio management process decomposed into portfolio planning, portfolio construction, and portfolio evaluation phases. It helps identify what is risk tolerance and ability to take risk of an investors, what is the optimal weight of each security in the portfolio and what is the reasonable expected return based on market conditions.