Portfolio Investment Optimization based on Markowitz Model and Index Model Under 4 Constraints, a comparative approach

Abstract

Since early 2020, global economy and financial markets have faced enormous turbulence due to the spread of COVID-19. Against this backdrop, this paper is drafted to help investors better understand portfolio management by finding how various constraints affect asset allocation under two dynamic modeling: Markowitz and Index. Raw data of ten stocks from four popular sectors and the SPX500 are collected as the source of this paper. By processing raw data and using the processed data, this paper reaches the conclusion that the stock market stays resilient to external shocks. As mentioned, there are two models that would be the focus of this paper: Markowitz Model and Index Model. Both of which would be analyzed under one non-constrain and four simulated constraints to examine portfolio performance. Comparing the results, Index Model generates higher numerical results with respect to associated risk than these produced based on the Markowitz Model. On the other hand, the portfolios constructed based on the results of the Index Model performs better under most of the constraints than the ones based on the Markowitz Model in terms of Sharpe ratio. Based on the concluded results, this paper meets by demonstrating stock investors a potential approach to mitigate risks during unexpected shocks with broad impacts.