Mean-Variance and Single-Index Model Portfolio Optimisation:Case in the Indonesian Stock Market

Abstract

Manuscript type: Research paper
Research aims: This study aims to compare the performance of meanvariance
and single-index models in creating the optimal portfolio.
Design/Methodology/Approach: This study creates optimal portfolios
using the mean-variance and single-index models with daily stock return
data of 38 companies listed on the LQ45 index, IDX Composite index
and Bank Indonesia’s 7-Day (Reverse) Repo Rate from January 1, 2012 to
December 31, 2019. The two models are compared using the Sharpe ratio.
Research findings: The result shows that the single-index model
dominates the Indonesian Stock Exchange (IDX), more so than the meanvariance
model. BBCA has the highest proportion for both mean-variance
and single-index portfolios.
Theoretical contribution/Originality: This study compares two popular
portfolio models in the Indonesian stock market.
Practitioner/Policy implication: This study helps investors to create
optimal portfolios using a model that is more suited to the IDX.
Research limitation/Implication: This study creates the optimal portfolio
without differentiating risk preferences (i.e., risk averse, risk moderate
and risk taker). In addition, this research only uses daily return data and
does not compare it with weekly and monthly data.