Comparison of Markowitz Model and Index Model in Optimization of Portfolio

Abstract

 To compare the differences between Markowitz Model and the Single Index Model, we have used historical return data for ten stock which belong in groups to three different equity sectors to practically implement the Markowitz Model and the Single Index Model. We find the stocks in the same equity sector being noticeably positively correlated even after eliminating systemic risks, which violates the formal condition of the IM. Also, as a result of very detailed comparison, we can conclude that the IM serves as an accurate approximation of the MM in practical applications for large enough number of risky assets. And adding a broad index such as S&P 500 to an existing individual equities portfolio is improving its properties.