Application of Modern Portfolio Theory in Stock Market

Abstract

When investors face investing problems, the main issue is to make decisions on how to allocate resources among the variety of different assets, especially in the rapidly growing stock market.The paper aims to design an investment strategy for risk-averse investors. We use modern portfolio theory and apply mean-variance analysis, to quantify expected portfolio returns and acceptable levels of portfolio risk and provides methods to select an optimal portfolio. Apple, Netflix, and Google, are used. From the results we can conclude that such mean-variance optimization is applicable. Furthermore, we can obtain minimum variance at level of 23% (with expected return at level of 28%) which illustrates the risky nature of business environment in the country. Additionally, the higher return (at level of 33%) might be achieved if the investor is willing to take a risk (at level of 25%) higher than the of minimum risk. Limitations of the present research are discussed at the end.