Optimizing Stock Portfolio using Markowitz Model

Abstract

The stock market is a well-known illustration of an investing option with obvious returns. Its volatility provides a basis for carefully analyzing its prior results in an effort to forecast future market returns. This paper discusses the various models used for selecting investment portfolios and utilizes the Markowitz decision-making model to aid in selecting an optimal investment portfolio based on historical price data and US Treasury 10-year bond rate data. Four stocks were included in the model, with two popular and highly volatile stocks, and two fast-growing stocks. The Markowitz model that maximizes the Sharpe ratio favors the two fast-growing stocks, whereas the same calculations for minimizing risk favor the more volatile stocks, but only lowers risk marginally and reduce returns significantly. The paper further analyzed the accuracy of the Markowitz model in this specific case and provided the Fama French model as a usable alternative that will likely provide alternative suggestions that are more correlated to real-life scenarios.