Optimal Portfolio Construction Based on Markowitz Model

Abstract

The appearance of Markowitz Model significantly improves the way investors optimize their financial portfolio, allowing them to reduce the collective risks of different assets and further maximize the profitability of their portfolio. This article aims to discuss and analyze the feasibility of Markowitz Model in practical cases as the definition of this mean variance model leans to the theoretical aspect of the finance like efficient market and rational investors. The data that applied to this study will be ten stocks from different types of companies and a market-capitalization index S&P 500. By utilizing the expected return and standard deviation formula, the efficient frontiers, minimum variance frontiers and max Sharpe portfolio are calculated respectively. Then simulating the practical limitations through applying five distinct constraints on the original results to take a glance at the performance of Markowitz Model in real cases. At last, discussing the restrictions of this theoretical model based on the data from this study and evidence that claimed by predecessor is necessary for demonstrating the preciseness. By comparing and contrasting the data under ideal situation and real cases, it reaches to the conclusion that the investors do gain higher returns and more optimized portfolio by means of the Markowitz Model.