• ISSN: 2301-3567 (Print), 2972-3981 (Online)
    • Abbreviated Title: J. Econ. Bus. Manag.
    • Frequency: Quarterly
    • DOI: 10.18178/JOEBM
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HOME > Archive > 2022 > Volume 10 Number 2 (Apr. 2022) >
JOEBM 2022 Vol.10(2): 128-132 ISSN: 2301-3567
DOI: 10.18178/joebm.2022.10.2.686

Modern Portfolio Theory and Application in Australia

Yanjie Cui and Chulong Cheng

Abstract—International financial markets are facing unprecedented challenges due to the impact of COVID-19. This paper aims to test whether the modern portfolio theory (MPT) is still applicable as an efficient tool for evaluating stock returns and excess returns under volatile markets. It includes an evaluation of prior works that first started out the MPT and those who furthered Markowitz’s innovative algorithms. Basically, this theorem aims at helping investors make investment decisions by lowering investment risk to the minimum and at the same time reaching a maximum payoff. The methodology of testing is implying a trading algorithm based on the MPT in a set of R scripts. The algorithm generates an optimized portfolio from the six biggest stocks traded on the Australian Securities Exchange and the 30-day bank bill swap rate from the Reserve Bank of Australia. It uses the training data to calculate the returns and standard deviations of the portfolio and uses the held back data to examine. Evaluation of the algorithm is carried out using a portfolio that has an initial value of $10,000,000. The result shows that a simulated 99th percentile of the portfolio value distribution at the 10 days’ time-horizon is $531,805,142, indicating that the portfolio will not incur a huge gain or loss. Therefore, the trading algorithm performs relatively well in a volatile international financial situation, and the modern portfolio theory still has reference value and guidance for the future development of financial markets.

Index Terms—Modern portfolio theory, stock returns, algorithm efficiency, COVID-19.

Yanjie Cui is with School of Economics, The University of Sydney, NSW 2006 Australia (e-mail: ycui8936@uni.sydney.edu.au). Chulong Cheng is with Department of Economics, University of Illinois at Urbana-Champaign, IL 61820 USA (e-mail: chulong2@illinois.edu).

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Cite:Yanjie Cui and Chulong Cheng, "Modern Portfolio Theory and Application in Australia," Journal of Economics, Business and Management vol. 10, no. 2, pp. 128-132, 2022.

Copyright © 2022 by the authors. This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited (CC BY 4.0).

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