Achieving Optimal Investment Portfolio Using Dynamic Programming

Abstract

Any time an investor makes an investment he must decide on the optimal investment strategy. Two very important strategies are Active portfolio management and Long term investing. The main objective of this study was to determine the optimal investment returns among six investments and the corresponding investments to be made. Data on six investments were collected – Government of Ghana’s Treasury Bills, Barclays Bank Ghana Ltd, Ghana Commercial Bank, Data Bank, Guinness Ghana Limited and Fan Milk Limited. Sample period ranges from 2000 to 2008 and the price series were normalize such that each commodity’s price changes have annualized volatility of 10%. Dynamic programming was used for data analysis. The results revealed that with ¢900 available for investment and given the corresponding returns from the various financial institutions we should not invest in Government of Ghana’s Treasury Bills and Ghana Commercial Bank. However, we should invest ¢100 in Barclays Bank Ghana to get ¢15, ¢200 in Data Bank, Accra to get ¢40, ¢500 in Ghana Guinness Limited, Accra for a return of ¢75 and ¢100 in Fan Milk Limited, Accra for a return of ¢19. This gives the optimal returns of ¢149.

Keywords: Dynamic Programming, Optimal Investment