Problem Based On Markowitz Mean, Variance Analysis
Problem Based On Markowitz Mean, Variance Analysis
Volume 7, Issue 4, April – 2022 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165
Problem based on Markowitz Mean,
Variance Analysis
Tejaswini Pradhan (Student), Sai Jagnyaseni Rana (Research scholar), Indira Routaray (Associate professor)
Abstract:- The aim of this paper is to analysis on Expected return given by:
Markowitz Mean Variance Portfolio Theory and test
how problems can be solved by this. The related data 1 2 k k
l
will be taken from National Stock Exchange (NSE). This E ( c )
research has been applied Markowitz Model on two (k 1) l 1 (k 1)
Listed companies of National Stock Exchange by taking
the data of February 2017. Here, 1 , 2 ,, k be the returns of company
base on daily stock data , l be the lth number of data,
Keywords:- MPT, NSE, expected return, risk, diversification.
E ( c ) be the expected return from company which is also
I. INTRODUCTION
written as c , k be the number of corresponding days.
Mean-Variance Portfolio Theory, also known as the
Modern Portfolio Theory (MPT), which is founded by Harry Variance given by:
Markowitz in 1952. He received Nobel Prize for this
invention. According to him any investors who invest in k 2
stock market or anywhere else, always want to minimize the
risk and maximize the return. It is nothing but an
( l c )
2 l 1
(k 1)
optimization of Risk Return ratio to Stock Investors(SI). c
Modern Portfolio Theory specifies that it is not enough to
look at individual security for its market risk and company be the variance of company, l be the lth
Here,
2
c
number of data, c be the expected return from company, k
specific risk.
The National Stock Exchange is the largest Stock be the number of corresponding days.
Exchange in world and head quarter of NSE is in Mumbai,
India. It was established in a year 1992. By number of Standard deviation given by:
contracts traded based on the statistics, it is the world’s
largest future exchange in 2021 By the World Federation of k
Exchanges (WFE), NSE is considered as world’s 4th cash
equities by statistics in 2021. A modern, fully self-operating,
( l c )
screen-based electronic trading system that offered easy c l 1
trading facilities to investors spread across the length and
(k 1)
breadth of the country is only provided by NSE. Here, c be the standard deviation of return from company.
II. MARKOWITZ MEAN VARIANCE ANALYSIS
According to Markowitz the portfolio return of
Father of Modern Portfolio Theory, Harry Markowitz investment is given by:
said that, two properties of an asset: risk and return which
are concerned by the investors, but by diversification of E (rinv ) winv1 rinv1 winv2 rinv2
portfolio it is possible to trade-off between them. The where,
important of his theory is that risk of an individual asset
hardly matters to an investor. It is possible to calculate E (rinv ) = expected return after investment,
which investment have the greats variance and expected winv1 = weight of first investment,
return. Assume the following investments are an investors
portfolio. For calculation of risk and return, here we taken rinv1 = return for first investment,
mathematical expression which is given by Markowitz.
winv2 = weight of second investment,
Mathematical Expression rinv2 = return for second investment.
Before calculate portfolio return and risk, first calculate
indivisual company’s expected return(mean), variance
The risk or portfolio risk of investment is given by:
and standard deviation.
inv ((winv1 ) 2 (rinv1 ) 2 ) ((winv2 ) 2 (rinv2 ) 2 ) 2winv1winv2 rinv1rinv2 inv1inv2
IJISRT22APR702 www.ijisrt.com 644
Volume 7, Issue 4, April – 2022 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165
where, Assuming two investors Inv1 and Inv2 which have
inv = risk after investment, investment amount ₹ 150000, ₹350000 respectively.
inv1inv2 = correlation between two investment. So total portfolio value is 500000, the weight of each
asset is:
Example
150000
Weight of Inv1 30%
Expected return and risk will be calculated in following 500000
and the corresponding data are taken from two companies
like BATA INDIA and PC JEWELLERS of February 2017. 350000
Weight of Inv 2 70%
By calculation we getting the expected return of 500000
BATAINDIA is 0.23%, risk is 1.41% PC JEWELLERS is
If Inv1 invest in PC Jeweller and Inv2 invest
0.04% and risk is 1.89%.
inBATAINDIA. Then the total expected return of the
Assuming two investors Inv1 and Inv2 which have portfolio is the weight of the asset in the portfolio multiplied
investment amount ₹ 150000, ₹350000 respectively. by the expected return.
So total portfolio value is 500000, the weight of each Portfolio expected return = (30% × 0.04%) + (70% ×
asset is: 0.23%) = 0.173%
Portfolio variance is more complicated to calculate
150000
Weight of Inv1 30% because it is not a simple weighted average of the
500000 investments’ variances. The correlation between the two
investments is 0.50. The standard deviation, or square root
350000 of variance, for Inv1 is 1.89%, and the standard deviation
Weight of Inv 2 70% for Inv2 is 1.41%.
500000
The portfolio variance is:
If Inv1 invest in BATAINDIA and Inv2 invest in PC
Jeweller. Then the total expected return of the portfolio is ((30%) 2 × (0.04%) 2 ) + ((70%) 2 × (0.23%) 2 )
the weight of the asset in the portfolio multiplied by the
+ (2 × 30% × 70% × 0.04% × 0.23% × 0.50)
expected return.
0.00028%
Portfolio expected return = (30% × 0.23%) + (70% ×
0.04%) = 0.097%
The portfolio standard deviation is the square root of
Portfolio variance is more complicated to calculate
the answer : 0.167%.
because it is not a simple weighted average of the
investments’ variances. The correlation between the two III. CONCLUSION
investments is 0.50. The standard deviation, or square root
of variance, for Inv1 is 1.41%, and the standard deviation From Markowitz mean variance analysis we noticed
for Inv2 is 1.89%. that any asset or company or investment have risk as well
return. In conclusion, most of the assumptions prevailed in
The portfolio variance is: the Markowitz’s Mean Variance Portfolio Theory. Therefore,
we need to ensure the model has a considerably minimum
((30%) 2 × (0.23%) 2 ) + ((70%) 2 × (0.04%) 2 ) error in making analysis.
+ (2 × 30% × 70% × 0.23% × 0.04% × 0.50) REFERENCES
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IJISRT22APR702 www.ijisrt.com 645
Volume 7, Issue 4, April – 2022 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165
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