Financing method for real estate and infrastructure development using Markowitz’s portfolio selection model and the Monte Carlo simulation

Abstract

Purpose Special purpose companies issue stocks to raise money to finance development of real estate and infrastructure. The advantage of a stock issue is that it does not entail financial cost such as interest on a loan. However, financing obtained in this way has been insufficient due to low interest by investors because of the large variability of the stocks’ earnings rates. The purpose of this paper is to propose methods to improve investment earnings rate for financing. Design/methodology/approach The proposed methods are Markowitz’s model and a combination of Markowitz’s model and Monte Carlo simulation. The proposed methods were verified by comparison with actual earnings rate. Findings The earnings rate was increased by as much as 23 percent over the actual value. Then, earnings rate compared with risk was analyzed using the Sharpe ratio which is a method to measure investment performance. The performance was also increased by as much as 23 percent over the actual value. The proposed method can help activate investment by increasing investors’ interest in the stock issue. Originality/value This study verified that Markowitz’s portfolio model, which is used for econometrics, could be applied for financing of construction project. It is valuable because the previous studies did not propose the method for financing.