Portfolio optimization of the mean-absolute deviation model of some stocks using the singular covariance matrix

Abstract

Investing in the stock sector, investors often face risk problems. Usually, forming an investment portfolio is done to minimize risk. In this research, investment portfolio optimization is discussed. The data analyzed are 8 shares traded on the capital market in Indonesia through the Indonesia Stock Exchange (IDX). Optimization is performed using the Mean-Absolute Deviation model with the singular covariance matrix to determine the optimal weights. The results of portfolio optimization Mean-Absolute Deviation model with singular covariance matrix method, was obtained optimal portfolio weights that is of 17.22% for BBCA shares; 26.64% for TKIM shares; 9.96% for BBRI shares; 9.96% for BBNI shares; 8.70% for BMRI shares; 3.75% for ADRO shares; 6.52% for GGRM shares; and 17.25% for UNTR shares. Where the optimal portfolio composition is obtained the expected rate of return (expected return) of 0.18% with a portfolio risk level (standard deviation) of 0.07%.