Portfolio Optimization: Application and Comparison of Markowitz Model and Single Index Model on LQ45 Stocks in Indonesia Stock Exchange

Abstract

This paper examines the optimization of an Indonesian stock portfolio using two models: the Markowitz Model (Mean-Variance Model) and the Single Index Model. The data comprises historical returns of LQ 45 stocks from January 2016 to December 2021. The focus is on selecting stocks for the portfolio and determining their weights based on the two models. The study compares the performance of both optimized portfolios with the LQ45 Index benchmark, IHSG market, and each other using Sharpe and Treynor measurements. The paper tests whether the stock composition of the optimized portfolio from both models successfully and consistently generates a better performance in the future (1 January 2022 – 31 December 2022) and (1 January 2023 – 31 December 2023) compared to both LQ45 and IHSG. The results reveal a notable contrast in portfolio performance between 2022 and 2023. In 2022, both the Markowitz and Single Index portfolios exhibited remarkable returns, surpassing LQ 45 and IHSG. However, in 2023, both portfolios experienced substantial underperformance, with negative returns and unfavorable risk-adjusted metrics. These findings underscore the dynamic nature of financial markets and the need for continuous portfolio monitoring and adaptation. Investors are encouraged to reevaluate their portfolio strategies in response to changing market conditions. The study contributes valuable insights into the temporal variability of optimized portfolios and their sensitivity to evolving market dynamics.