Comparison of the Markowitz Model and Index Model for Portfolio Optimization in the Chinese Stock Market

Abstract

Markowitz Model (MM) and Sharpe’s Single Index Model (SIM) are two classical and practical models in portfolio theory. Currently the Chinese stock market is booming, therefore, it is worth testing whether MM and SIM can effectively spread the risk in Chinese security market. This paper establishes the MM and SIM based on the monthly observations of 10 stocks and CSI300. During the analysis process, there is an additional optimization constraint that selling short is not allowed. Finally, some conclusions are obtained: first, the constraint has a significant impact on the optimal portfolio, while the minimum-variance portfolio is very little affected. What’s more, although both MM and SIM can effectively disperse the specific risk, SIM have better performance in the Chinese stock market by providing higher rewards given the same risk level and bearing lower risk given a certain return. These conclusions are of great significance to investors in the Chinese security market, which can help them obtain the maximum utility through asset diversification.