Harry Markowitz Model Portfolio Theory

CHAPTER ONE

INTRODUCTION

Introduction Objectives of the Study Importance of the Study Limitations of the Study Hypothesis of the study Structure of the Study

Introduction: The Modern Portfolio Theory (MPT) was introduced by harry Markowitz(1952), It was the beginning in portfolio-selection technique, and revolutionize portfolio development in order to emphasis the relationship between risk and return , Mean-Variance Optimization is at the core of Markowitz’s Modern Portfolio Theory . It is heavily based on the concept of the efficient frontier (EF), and process of finding the optimal portfolio and how to create a frontier of investment portfolios. The set of all portfolios which had the greatest possible expected

Importance of the Study: As mentioned earlier Markowitz Model is a find the efficient frontier (i.e. to find a composition of portfolio which produce the highest return given the level of risk). Testing the application and such model which has a great importance to portfolio manager and investors, it helps minimize risk and probable loss if is found to be available it also are important. The test will importance to scholars in the field of portfolio management, on other hand and up to the researcher knowledge. This model has not have tested in most of emerging market and for such test in ASE or other regional market. Limitations of the Study:

The environment of research has different limitations and problems face the researchers, such as that appeared in this study : Short period and small sample size of stocks that used in this study, while other studies investigated for a long period and hundreds of

Appling short look back period (maximum 6 months) to estimate Mean-Variance Optimization parameters in order to best harvest the momentum factor and to find the efficient frontier.

2. Long only portfolio weights to stabilize the optimization (short selling not allow).

The sample of the study is 80 stocks have been randomly divided into four different portfolios. Each of them contain different number of stocks as follow:

Portfolios of the sample size(80 stocks) Number of stocks

1 12.5% 10

2 32.5% 26

3 55% 44

4 100% 80

the long-only weights MVO model Classical Asset Allocation (CAA) has been formulation. And for find the weights that determined the Minimum Variance portfolio on efficient frontier. In addition constructs portfolios with equal weight approach 1/N. Finally, compare the portfolios performance under two approaches CAA and 1/N.

Using Solver in Excel Program the optimal weights of stocks in portfolios have been estimated as follow :

1. For find the maximum return given the risk target of 10% .

2. For find the minimum risk given the return target of 10%.

Hypothesis of the Study:

To achieve the objective of the study, the following main hypothesis is investigated:

H_a: Markowitz model for portfolio selection help the investors to make the best decision where they investing and how in