In this report, I take a look at a portfolio including SPY and BDN. Both of these stocks are index stocks. After calculating both returns of these ETFs, I calculated the mean of each return for both stocks, which is the average return each month. This came out to .003 for BDN and .00725 for SPY. The standard deviation for BDN was .043 and SPY was .010791, this is a quantity calculated to indicate the extent of deviation for a specific range. I then ran a simulation of 100 portfolios for the best possible outcome for each diversification of the stocks. The best outcome resulted in a 9% allocation to SPY and 91% into BDN.
Assuming we now have access to risk free treasuries resulting in a .1% monthly return, this can change which diversification results in the highest return. I then looked at the Optimal Risky Portfolio's Sharpe ratio which was .254882.
Using only two stocks for a portfolio is hardly diversifying your assets so in order to get a more diverse portfolio, I added EEM to the mix. EEM stands for iShares MSCI Emerging Markets ETF. They are also an index fund that tracks an index of emerging market firms weighted by market cap. EEM has a mean of .003 and standard deviation of .0656. I then applied EEM to the other two stocks to find an efficient allocation to all three. After calculating its Sharpe ratio using a random number generator, it came out to .27983, which is quite higher than the .254882 of just allocating SPY and DNB.
This more diversified portfolio gives you a higher chance at making a higher profit with the same risk. The more diversified the portfolio the better odds you receive for earning the highest rate while maintaining minimal risk. This is why I would recommend diversifying in all three of the stocks to have a greater chance of earning more of a return while keeping risk to a minimum.