Critical Assessment of Markowitz and Index Models for Portfolio Optimization

This paper conducts a comparative analysis of the Markowitz Model (MM) and the Index Model (IM) for portfolio optimization, taking into account the realistic constraints of financial regulations and investor preferences. The analysis is grounded in 20 years of historical data from ten stocks across various sectors, coupled with the S&P 500 index and a proxy for the risk-free rate. By aggregating daily returns into monthly observations, we calculate inputs for both models, aiming to discern their effectiveness in navigating the complexities of market behavior and investment strategy formulation. This approach not only highlights the theoretical underpinnings of each model but also examines their practical applicability and performance in real-world settings, thereby offering insights into their respective strengths and limitations in achieving optimized investment outcomes.