Portfolio Optimization based on the Markowitz Model and Index Models: Taking the example of S&P 500

DOI

10.2991/978-94-6463-748-9_36How to use a DOI?

Keywords

Portfolio Optimization; Markowitz Model (MM); Index Model (IM); Constraints

Abstract

The article compared the Markowitz Model with the Index Model in terms of their performance under five different realistic constraints in portfolio optimization. Utilizing 20 years of daily return data for 21 stocks from diverse sectors and the S&P 500 index as a market benchmark, the study estimated the impacts brought about by Regulation T, arbitrary weight caps or box constraints, unrestricted optimization or free problem, prohibition of short selling, and exclusion of the S&P 500. The MM did very well in risk-efficient portfolios since it is based on diversification principles while performing under constraints that bind and especially the constraint of no short positions. In contrast, IM is a factor-based systematic risk model that consistently outperformed for all constraints and proved to be more suitable for a risk-averse investor. It was observed that the efficient frontier of MM was highly sensitive to constraints, whereas IM was much stable due to its simpler framework. Sector diversification also played an important role, wherein sectors like technology provided higher returns and utilities offered stability. This further extended the practical knowledge on how well portfolio optimization models can adapt in a constrained scenario, while informing investors and policymakers of how best they can balance risks against return in a real-world investment context.

Copyright

© 2025 The Author(s)

Open Access

Open Access This chapter is licensed under the terms of the Creative Commons Attribution-NonCommercial 4.0 International License (http://creativecommons.org/licenses/by-nc/4.0/), which permits any noncommercial use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

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TY  - CONF
AU  - Xiaobei Luo
PY  - 2025
DA  - 2025/07/03
TI  - Portfolio Optimization based on the Markowitz Model and Index Models: Taking the example of S&P 500
BT  - Proceedings of the 2025 International Conference on Financial Risk and Investment Management (ICFRIM 2025)
PB  - Atlantis Press
SP  - 316
EP  - 328
SN  - 2352-5428
UR  - https://doi.org/10.2991/978-94-6463-748-9_36
DO  - 10.2991/978-94-6463-748-9_36
ID  - Luo2025
ER  -