Portfolio Optimization Analysis with Markowitz Quadratic Mean-Variance Model

Abstract

In this study, Markowitz mean-variance approach is tested on Istanbul Stock Exchange (BIST). 252 days of data belonging a year of 2015 are analyzed. First, a hypothetical portfolio is created. It involves ten securities with equal weights. They are chosen from three different industries to minimize risk of portfolio. However, the number of securities is not adequate for a well diversified portfolio alone. Markowitz model takes into account a relation between return on financial assets investing in portfolio. In empiricial analysis, I followed mean-variance model and created many portfolios. The model adjusted them as a minimum variance for a given expected return. Investors choose any of them as their risk preferences. Because they are all efficient. My optimal portfolio is constructed by eight assets with different weights. It provides more return comparing with a portfolio with equal shares of ten stocks.

Keywords: Markowitz, mean-variance approach, modern portfolio theory, efficient frontier