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An Application of Portfolio Mean-Variance and Semi-Variance Optimization Techniques: A Case of Fiji

Author

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  • Ronald Ravinesh Kumar

    (School of Accounting, Finance and Economics, Laucala Campus, Private Mail Bag, The University of the South Pacific, Suva, Fiji)

  • Peter Josef Stauvermann

    (Department of Global Business & Economics, Changwon National University, Changwon 51-140, Korea)

  • Aristeidis Samitas

    (Department of Finance, College of Business, Zayed University, Abu Dhabi MF2-2-006, United Arab Emirates)

Abstract

In this paper, we apply the Markowitz portfolio optimization technique based on mean-variance and semi-variance as measures of risk on stocks listed on the South Pacific Stock Exchange, Fiji. We document key market characteristics and consider monthly returns data from SEP-2019 to FEB-2022 (T = 30) of 17/19 listed companies on the stock exchange to construct various portfolios like 1/N (naïve), maximum return, and market and minimum-variance with and without short-selling constraints. Additionally, we compute each stock’s beta using the market capitalization-weighted stock price index data. We note that well-diversified portfolios (market portfolio and minimum-variance portfolio) with short-selling constraints have relatively higher expected returns with lower risk. Moreover, well-diversified portfolios perform better than the naïve and maximum portfolios in terms of risk. Moreover, we find that both the mean-variance and the semi-variance measures of risk yields a unique market portfolio in terms of expected returns, although the latter has a lower standard deviation and a higher Sharpe ratio. However, for the minimum-variance portfolios and market portfolios without short selling, we find relatively higher returns and risks using the mean-variance than the semi-variance approach. The low beta of individual stock indicates the low sensitivity of its price to the movement of the market index. The study is an initial attempt to provide potential investors with some practical strategies and tools in developing a diversified portfolio. Since not all the portfolios based on mean-variance and the semi-variance analyses are unique, additional methods of investment analysis and portfolio construction are recommended. Subsequently, for investment decisions, our analysis can be complemented with additional measures of risk and an in-depth financial statement/company performance analysis.

Suggested Citation

  • Ronald Ravinesh Kumar & Peter Josef Stauvermann & Aristeidis Samitas, 2022. "An Application of Portfolio Mean-Variance and Semi-Variance Optimization Techniques: A Case of Fiji," JRFM, MDPI, vol. 15(5), pages 1-25, April.
    • Handle: RePEc:gam:jjrfmx:v:15:y:2022:i:5:p:190-:d:797211
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    References listed on IDEAS

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    1. Chavalle, Luc & Chavez-Bedoya, Luis, 2019. "The impact of transaction costs in portfolio optimization: A comparative analysis between the cost of trading in Peru and the United States," Journal of Economics, Finance and Administrative Science, Universidad ESAN, vol. 24(48), pages 288-311.
    2. Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, vol. 60(2), pages 151-151.
    3. Markowitz, Harry M., 1990. "Normative portfolio analysis: Past, present, and future," Journal of Economics and Business, Elsevier, vol. 42(2), pages 99-103, May.
    4. Philipp Baumann & Norbert Trautmann, 2013. "Portfolio-optimization models for small investors," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 77(3), pages 345-356, June.
    5. Markowitz, Harry M, 1991. "Foundations of Portfolio Theory," Journal of Finance, American Finance Association, vol. 46(2), pages 469-477, June.
    6. Sharpe, William F., 1971. "A Linear Programming Approximation for the General Portfolio Analysis Problem," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 6(5), pages 1263-1275, December.
    7. Hiroshi Konno & Hiroaki Yamazaki, 1991. "Mean-Absolute Deviation Portfolio Optimization Model and Its Applications to Tokyo Stock Market," Management Science, INFORMS, vol. 37(5), pages 519-531, May.
    8. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
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    1. Ronald Ravinesh Kumar & Peter Josef Stauvermann, 2022. "Portfolios under Different Methods and Scenarios: A Case of Fiji’s South Pacific Stock Exchange," JRFM, MDPI, vol. 15(12), pages 1-27, November.

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