The Application of Markowitz Model and Index Model in the Real Financial Market

Abstract

This essay aims to analyze the optimal capital allocation in a ten-stock portfolio. The research paper will delve into two big aspects: the introduction of the Markowitz Model (“MM”) and Index Model (“IM”) and the implementation of MM and IM. A recent 20 years of historical daily total return data for ten different stocks, which belong to groups of three to four different sectors (according to Yahoo Finance), one (S&P 500) equity index (a total of eleven risky assets) and a proxy for risk-free rate (one-month Fed Funds rate) will be used. Utilizing these optimization inputs for the Markowitz Model and Index Model, I will find the regions of permissible portfolios (efficient frontier, minimal risk portfolio, optimal portfolio, and minimal return portfolios frontier) for the five cases of the additional constraints.