Semi-variance optimization for the components of the Dow Jones Industrial Average index

Resumen

This study contributes to passive portfolio management by comparing four ways for asset allocation. Index investing, mean-variance optimization, equal-weighting and semi-variance optimization are compared as part of the investment strategy aimed at outperforming the Dow Jones Industrial Average (DJIA). The best way to allocate assets was the optimization of portfolios looking for the minimum semi-variance. Yield spreads below the performance of the DJIA and the components of this index are used to the semi-variance. The best strategy has a 65.2% probability of outperforming the DJIA annual return. 5,134 simulations are run between 2000-2020. An abnormal annual return of 0.42% and a beta of 0.95 obtained with the CAPM was achieved.