Portfolio Investment Strategy Based on Markowitz Model and Single Index Model

Abstract

Investing with the highest return and the lowest risk has always been an ideal situation for every investor in the bond markets. Therefore, financial scholars developed lots of models to estimate the optimal risk portfolios of several bonds. Markowitz Model and Single Index Model are both classical financial models used for this estimation. However, they have different advantages and disadvantages, which makes it difficult to determine which one to use under different circumstances. In this essay, the effectiveness of two regular financial models in establishing the optimal risk portfolio under 5 common constraints is assessed. Based on the data of 7 firms within twenty years, both models are applied to construct their corresponding optimal risk portfolios, and visualized the results through Excel. Then, their results are compared to determine the more suitable model in our case by assessing the expected rate of return, predicted risk, and the accuracy of results.