Comparison and Application of Markowitz Model and Index Model in Capital Markets

Abstract

The Markowitz Model represents a portfolio’s returns for given risk levels. This research will imply the MM in Excel using the Solver tool. The model focuses on creating a portfolio that maximizes returns for a given level of risk or minimizes risks for a given level of return. Implementing the index model simplifies the calculation of expected returns and the covariance matrix of returns compared to the MM. This study aimed to compare the Markowitz Model and Index Model in constructing optimal portfolios from 10 stocks, the SPX index, and the 1-month federal funds rate, considering 20 years of monthly return data. This paper analyzes the impact of five constraints on these models’ efficient frontiers, using Excel Solver for optimization. The study aims to understand how these models perform under various practical constraints and draw insights relevant to real-life portfolio management scenarios.