Mean-variance investment strategy applied in emerging financial markets: evidence from the Colombian stock market

Copyright 2015, Mykolas Romeris University. Production and hosting by Elsevier B.V. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).In any investment, an analysis of the expected return and the assumed risk constitutes a fundamental step. Investing in financial assets is no exception. Since the portfolio selection theory was proposed by Markowitz in 1952, this methodology has become the benchmark in portfolio management. However, it is not always possible to apply it, especially when investing in emerging financial markets, which are characterised by a scant variety of available stocks and very lowliquidity. In this paper, using the Colombian case, we will examine the challenges found by investors who want to create a portfolio using only stocks listed on a scarcely developed stock market.García García, F.; Gonzalez Bueno, JA.; Oliver Muncharaz, J. (2015). Mean-variance investment strategy applied in emerging financial markets: evidence from the Colombian stock market. Intellectual Economics. 9(1):22-29. doi:10.1016/j.intele.2015.09.003S222991Barak, S., & Modarres, M. (2015). Developing an approach to evaluate stocks by forecasting effective features with data mining methods. Expert Systems with Applications, 42(3), 1325-1339. doi:10.1016/j.eswa.2014.09.026Becker, F., Gürtler, M., & Hibbeln, M. (2013). Markowitz versus Michaud: portfolio optimization strategies reconsidered. The European Journal of Finance, 21(4), 269-291. doi:10.1080/1351847x.2013.830138Belghitar, Y., Clark, E., & Deshmukh, N. (2014). Does it pay to be ethical? Evidence from the FTSE4Good. Journal of Banking & Finance, 47, 54-62. doi:10.1016/j.jbankfin.2014.06.027Chen, C., & Kwon, R. H. (2012). Robust portfolio selection for index tracking. Computers & Operations Research, 39(4), 829-837. doi:10.1016/j.cor.2010.08.019Edirisinghe, N. C. P. (2013). Index-tracking optimal portfolio selection. Quantitative Finance Letters, 1(1), 16-20. doi:10.1080/21649502.2013.803789García, F., Guijarro, F., & Moya, I. (2011). The curvature of the tracking frontier: A new criterion for the partial index tracking problem. Mathematical and Computer Modelling, 54(7-8), 1781-1784. doi:10.1016/j.mcm.2011.02.015García, F., Guijarro, F., & Moya, I. (2013). A MULTIOBJECTIVE MODEL FOR PASSIVE PORTFOLIO MANAGEMENT: AN APPLICATION ON THE S&P 100 INDEX. Journal of Business Economics and Management, 14(4), 758-775. doi:10.3846/16111699.2012.668859Hsu, C.-M. (2014). A hybrid SVR-PSO portfolio optimization procedure for multi-period stock investments. Computational Intelligence and Industrial Engineering. doi:10.2495/ciie140231Jablonskienė, D. (2013). Influence of Pension Funds and Life Insurance on Old-Age Pension. Intellectual Economics, 7(3), 375-388. doi:10.13165/ie-13-7-3-08Jacobs, H., Müller, S., & Weber, M. (2014). How should individual investors diversify? An empirical evaluation of alternative asset allocation policies. Journal of Financial Markets, 19, 62-85. doi:10.1016/j.finmar.2013.07.004Loukeris, N., & Eleftheriadis, I. (2015). Support Vector Machines Networks to Hybrid Neuro-Genetic SVMs in Portfolio Selection. Intelligent Information Management, 07(03), 123-129. doi:10.4236/iim.2015.73011Nazemi, A., Abbasi, B., & Omidi, F. (2014). Solving portfolio selection models with uncertain returns using an artificial neural network scheme. Applied Intelligence, 42(4), 609-621. doi:10.1007/s10489-014-0616-zXia, H., Min, X., & Deng, S. (2015). Effectiveness of earnings forecasts in efficient global portfolio construction. International Journal of Forecasting, 31(2), 568-574. doi:10.1016/j.ijforecast.2014.10.00

Mean-variance investment strategy applied in emerging financial markets: evidence from the Colombian stock market

In any investment, an analysis of the expected return and the assumed risk constitutes a fundamental step. Investing in financial assets is no exception. Since the portfolio selection theory was proposed by Markowitz in 1952, this methodology has become the benchmark in portfolio management. However, it is not always possible to apply it, especially when investing in emerging financial markets, which are characterised by a scant variety of available stocks and very lowliquidity. In this paper, using the Colombian case, we will examine the challenges found by investors who want to create a portfolio using only stocks listed on a scarcely developed stock market