Optimal Portfolio Selection Using the Sharpe Ratio and the Tangency Portfolio Approach: A Long-Term Case Study on the Istanbul Stock Exchange (BIST)

Abstract

This paper investigates the practical application of the mean-variance optimization framework and the Sharpe ratio in the Istanbul Stock Exchange (BIST) over a twenty-five-year period from July 2000 to June 2025. An initial portfolio was constructed with ten equally weighted stocks drawn from diverse sectors to achieve effective diversification. Using the Markowitz model, a set of portfolios was generated that minimized variance for specified expected returns, collectively forming the efficient frontier, which illustrates combinations of return and risk that dominate all other alternatives. Among these, the optimal portfolio—identified through the tangency portfolio approach and the Sharpe ratio—yielded returns approximately thirty-five percent higher than those of an equally weighted portfolio of the same ten stocks.

Keywords: Sharpe ratio, Capital Market Line, mean-variance approach, optimal portfolio, tangency portfolio, efficient frontier

DOI: 10.7176/RJFA/16-7-04

Publication date:August 31^st 2025