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

Xiaobei Luo ()
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Xiaobei Luo: San Diego State University

A chapter in Proceedings of the 2025 International Conference on Financial Risk and Investment Management (ICFRIM 2025), 2025, pp 316-328 from Springer

Abstract: 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.

Keywords: Portfolio Optimization; Markowitz Model (MM); Index Model (IM); Constraints (search for similar items in EconPapers)
Date: 2025
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DOI: 10.2991/978-94-6463-748-9_36

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