Comparisons to Investment Portfolios under Markowitz Model and Index Model based on US’s Stock Market

Abstract

In order to construct an investment portfolio, it is crucial to select risky assets and arrange the weights to each asset. This article selects 6 stocks to compose the portfolio and compare their performances under 5 constraints that are always considered in real life by using Markowitz Model and Index Model. These two models would produce different investment portfolios as they take different factors of stock into account. By calculating the maximal return rate determined by Sharpe ratio, and the minimal risk rate determined by standard deviation, comparing the two models and conclude which model is more suitable under each constraint. According to the results, Markowitz model proves that under certain constraints, investors' portfolio selection can be simplified to balance two factors, namely, the expected return and variance of the portfolio. In the case of Index Model, the conclusion is more general and regular. The results would play a significant role in determining the stocks’ future performance and help investors constructing their portfolios under different constraints.