Korean Management Science Review (경영과학)

The Korean Operations Research and Management Science Society (한국경영과학회)
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Development and Evaluation of an Investment Algorithm Based on Markowitz's Portfolio Selection Model : Case Studies of the U.S. and the Hong Kong Stock Markets

마코위츠 포트폴리오 선정 모형을 기반으로 한 투자 알고리즘 개발 및 성과평가 : 미국 및 홍콩 주식시장을 중심으로

  • 최재호 (연세대학교 경영대학 경영학과) ;
  • 정종빈 (연세대학교 경영대학 경영학과) ;
  • 김성문 (연세대학교 경영대학 경영학과)
  • Received : 2012.10.12
  • Accepted : 2013.01.16
  • Published : 2013.03.31
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Abstract

This paper develops an investment algorithm based on Markowitz's Portfolio Selection Theory, using historical stock return data, and empirically evaluates the performance of the proposed algorithm in the U.S. and the Hong Kong stock markets. The proposed investment algorithm is empirically tested with the 30 constituents of Dow Jones Industrial Average in the U.S. stock market, and the 30 constituents of Hang Seng Index in the Hong Kong stock market. During the 6-year investment period, starting on the first trading day of 2006 and ending on the last trading day of 2011, growth rates of 12.63% and 23.25% were observed for Dow Jones Industrial Average and Hang Seng Index, respectively, while the proposed investment algorithm achieved substantially higher cumulative returns of 35.7% in the U.S. stock market, and 150.62% in the Hong Kong stock market. When compared in terms of Sharpe ratio, Dow Jones Industrial Average and Hang Seng Index achieved 0.075 and 0.155 each, while the proposed investment algorithm showed superior performance, achieving 0.363 and 1.074 in the U.S. and Hong Kong stock markets, respectively. Further, performance in the U.S. stock market is shown to be less sensitive to an investor's risk preference, while aggressive performance goals are shown to achieve relatively higher performance in the Hong Kong stock market. In conclusion, this paper empirically demonstrates that an investment based on a mathematical model using objective historical stock return data for constructing optimal portfolios achieves outstanding performance, in terms of both cumulative returns and Sharpe ratios.

Keywords

References

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