Methods and applications of the mean-variance portfolio selection model

The Mean-Variance portfolio selection model, or Efficient Market model, is examined in terms of the small investor. The performance is first tested on the small sample space of the thirty Dow Jones Industrials. The results show that it is possible to outperform the market by investing in the minimum-variance, or safest, portfolio. The Critical-Line algorithm as developed by Markowitz and modified by Sharpe is used in this analysis. Since the Critical-Line algorithm is very time-consuming and does not always converge to a solution, an alternate algorithm is developed. This algorithm, referred to as the “Simplified Algorithm”, is designed to find specific mean-variance efficient portfolios. It is shown that in the long run there is no significant difference in the performance of the portfolios calculated by the two algorithms. The Simplified Algorithm is applied to the group of Institutional Growth Stocks and it is shown that the highest-expected-return portfolio substantially outperforms the market. This is in contrast to the results shown for the Dow Jones Industrials --Abstract, page iii