Portfolio Analysis of Asset and Liability Management in Small-, Medium-, and Large-Sized Banks

The paper presents an analysis of the commercial banking firm based on Markowitz portfolio analysis. A bank is treated as a portfolio of five banking assets and three banking liabilities. The average return and risk of each category is estimated empirically for three groups of banks categorized by size - small, medium, and large banks. Bank rates of return on equity are defined as the weighted average of the assets' rates of return less the weighted average of the liabilities rates of return. Quadratic Programming (QP) is used to delineate the set of efficient banking portfolios, which each have the maximum rate of return on equity at each level of equity risk