Predictive Blend: Fundamental Indexing with Markowitz Mean Variance Portfolio in Indonesia Stock Exchange

Taufik Faturohman and David Christian

A chapter in Comparative Analysis of Trade and Finance in Emerging Economies, 2023, vol. 31, pp 101-111 from Emerald Group Publishing Limited

Abstract: Portfolio selection has been extensively studied in field of business and economics. Many methods have been developed to construct a well-diversified portfolio that is expected to result in higher investment return with minimum risk. One of the most foundational works contributing to modern portfolio selection is the Markowitz mean variance optimization approach. The Markowitz approach heavily relies on past stock price performance, both in term of correlation structure and the return, to predict the future outcome. We constructed both Markowitz portfolio and the Fundamental Indexing portfolio independently, then using Buffet ratio to weight, combined both portfolio into a newly blended portfolio, test out-of-sample the new portfolio in term of return and then compare it to the Indonesian LQ45 benchmark index. The result shows that the new combined portfolio returns annually on average 43.89% higher than the benchmark index.

Keywords: Predictive blend; Markowitz; fundamental indexing; portfolio optimization; capital market; Indonesia; G11; G17; G23 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eme:isetez:s1571-038620230000031013

DOI: 10.1108/S1571-038620230000031013

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