Comparison of Risk Minimizing and Return Maximizing Portfolio Models

Abstract

The fundamental purpose of investing in stocks is to make a profit. But in the stock investment, the income always accompanies the risk. In order to reduce the risk of greater returns, the investor will be two or more of the stock portfolio together to invest. This study examines the return and risk of a stock portfolio using a minimal variance and maximum Sharpe ratio model, based on the Markowitz mean-variance theory, in order to identify the best stock portfolio for a given risk preference. The mean-variance model is best for risk-averse investors and just considers risk instead of return. While the introduction of Sharpe ratio enables investors to consider both return and risk simultaneously in the objective functions of the optimization problems. The empirical study based on the stock and fund data of five United Kingdom stocks and one America stock demonstrates the model based on maximum Sharpe ratio criterion is more suitable for risk-seeking investors and can produce more active replacing strategies than minimum Mean-variance model.