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Predictive Blend: Fundamental Indexing with Markowitz Mean Variance Portfolio in Indonesia Stock Exchange

In: Comparative Analysis of Trade and Finance in Emerging Economies

Author

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  • Taufik Faturohman
  • David Christian

Abstract

Portfolio selection has been extensively studied in field of business and economics. Many methods have been developed to construct a well-diversified portfolio that is expected to result in higher investment return with minimum risk. One of the most foundational works contributing to modern portfolio selection is the Markowitz mean variance optimization approach. The Markowitz approach heavily relies on past stock price performance, both in term of correlation structure and the return, to predict the future outcome. We constructed both Markowitz portfolio and the Fundamental Indexing portfolio independently, then using Buffet ratio to weight, combined both portfolio into a newly blended portfolio, test out-of-sample the new portfolio in term of return and then compare it to the Indonesian LQ45 benchmark index. The result shows that the new combined portfolio returns annually on average 43.89% higher than the benchmark index.

Suggested Citation

  • Taufik Faturohman & David Christian, 2023. "Predictive Blend: Fundamental Indexing with Markowitz Mean Variance Portfolio in Indonesia Stock Exchange," International Symposia in Economic Theory and Econometrics, in: Comparative Analysis of Trade and Finance in Emerging Economies, volume 31, pages 101-111, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:isetez:s1571-038620230000031013
    DOI: 10.1108/S1571-038620230000031013
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    Keywords

    Predictive blend; Markowitz; fundamental indexing; portfolio optimization; capital market; Indonesia; G11; G17; G23;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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