Track: High School STEM Project Presentation

Abstract

Investors have made efforts for the constructive strategy establishment to invest the stock that has high rates of return and minimal risks. These efforts are originated from Markowitz's Mean-variance portfolio model. In addition, this is connected to the research of optimal portfolio model. These days, various portfolio models exist in the world and it is perplexing to judge what the most appropriate portfolio model is. Accordingly, this study evaluated the upper hand by comparison and analysis that selected the typical portfolio models. This study used the Mean-Variance portfolio model, TASD (Target Absolute Semi-Deviation) model and equally weighted portfolio (1/N strategy) model. This research carried out the mock stock trading of portfolio models from June 25 to July 7 and used the result index to compare these portfolio models. This research selected investment category of the top 20 KOSPI total market value of 5 years. This research used four performance measurements to evaluate the portfolio by using return, risk, Sharpe ratio, Treynor ratio and Jensen’s Alpha.

As a result of performance measurement, TASD model showed the highest result not only in return but also in portfolio risk. On the other hand, equally weighted model indicated relatively lowest both return and portfolio risk. The average profit was apparently less than others in comparison, but standard deviation was not significantly different. Second, in case of considering standard deviation of portfolio as risk, TASD model showed the highest Modified Sharpe ratio that suggest TASD model has highest excess return per portfolio risk. Whereas the Modified Sharpe ratio of equally weighted model recorded the lowest that suggest equally weighted model has lowest excess return per portfolio risk. Third, all portfolio model showed great sensitivity about the stock market that recorded minus return. Above all, TASD model relatively indicated the lowest sensitivity about the stock market than another portfolio models. On the contrary the equally weighted model recorded the highest sensitivity. Also, in case of considering standard deviation of stock market as risk, TASD model ranked the highest excess return per stock market risk. On the other hand, the equally weighted model ranked the lowest excess return per stock market risk. Fourth, the return of TASD model and Mean-Variance model was higher than the expected return considering the risk. In particular, TASD model showed the highest return than expected return considering the risk. Whereas, equally weighted model indicated the lowest return.

Therefore TASD model showed the superior performance in every performance measurement expect the risk than other comparable portfolio models. Mean-Variance model ranked second and equally weighted model recorded the lowest. This research analyzed the reason of the result which came from the condition of stock market. The price of KOSPI rapidly decreased during this research period and all portfolio models occurred minus return. In this condition, this research realized that TASD model coped with the stock market’s fluctuation most flexibly. However, the equally weighted model is debased in every performance measure except the risk. We found out that the equally weighted portfolio has no theoretical basis or estimation so that it is hard to handle the risk when the stock market changes rapidly. Therefore, this research makes sure that the TASD portfolio model is the best portfolio model when we assume the stability as the most important principle. It minimizes the rate of minus return when the people do not know the future in the stock market. Therefore, this research proved that TASD model is most suitable model to investors who wants the stable investment.