The Application of the Markowitz’s Model in Efficient Portfolio Forming on the Capital Market in the Republic of Serbia

Abstract

The characteristics of the developing market to which the Serbian market belongs are: illiquidity, low turnover and nontransparency. The aim of this paper is to examine the possibility of application of the Markowitz's model for forming the set of efficient portfolios on the capital market in Serbia. The research is based on previous theoretical and empirical research in the world. Statistical methods of determining return and risk, matrix of variances and covariances for liquid shares have been applied. Portfolio optimization has been conducted by add-in programme Solver included in the Microsoft Excel package, respecting the limitations according to Markowitz's model. The results of the analysis have shown that the set of efficient portfolios, which meets the criterion that they give minimal risk for the given return, can be formed on the capital market in Serbia. The results show that Markowitz's model allows the investors to select the efficient portfolio, but only for liquid shares, depending on the risk they are ready to accept. The findings of this paper indicate that expressive illiquidity on the Serbian market and insufficient number of shares for diversification by sectors make the practical application of the research results difficult.

Balkan Stock Exchanges – Consideration of the Length of the Estimation Window in Similar Markets

“…The author assessed that the CROBEX market index does not perform as the reference, in contrast to the index on developed markets, such as the S&P index for NJSE. Marovitz's theory was also used by Radović, Radukić, and Njegomir (2016) for the Serbian capital market. They proved that this model allows investors to choose an effective portfolio, but only for liquid assets, and the efficiency of the portfolio depends on the risk they are willing to accept.…”

The application of the Full Markowitz Model in generating optimal investment portfolio

“…Similarly, Mokta Rani Sarker [2] "construct an optimal portfolio by using Markowitz model" and "the optimum portfolio consists of twenty stocks selected out of 164 stocks, giving the return of 6.48%". However, Milica Radović, Snežana Radukić, and Vladimir Njegomir [3] "estimate the possibilities of the application of modern Markowitz's portfolio theory", and "identify the limiting factors for application on developing markets". For example, the limiting factors can be "illiquidity of the capital market in Serbia, which is the consequence of ownership concentration in the companies during privatization."…”

The Efficiency between Markowitz Model and Single Index Model

“…Dr. Harry Markowitz creates this model, and he presents the methodology of portfolio selections. Radović et al, [5] found that this could be set in three stages: first, it is the forming of possible portfolios, then determining the set of efficient portfolios, and lastly, depending on investment preferences which will use the utility function. Therefore, portfolio optimization is reached.…”

“…Using the Markowitz model, researchers can find the set of efficient portfolios, which can reduce a firm's unsystematic risk by diversification and find its minimal risk. At the same time, the researchers found that the correlation between return and portfolio's beta coefficient appears to be positive [5]. From 2013 to 2016, there is another practical study of Markowitz portfolio optimization which focuses on the Bulgarian stock market.…”