Effectiveness and Limitation of Markowitz Mean-variance Model: Evidence from Hang Seng Index

Abstract

As China's economy has expanded rapidly, its financial system has gradually improved, new financial businesses have evolved, and new theories and technologies have also been developed. The Markowitz mean-variance model, the cornerstone of asset pricing theory, is utilized as an example in this paper to demonstrate how the Markowitz portfolio theory may be applied to assess a portfolio of five stocks in the Hang Seng data, a significant indicator of the Hong Kong stock market. Empirically, the optimal portfolios with the highest Sharpe ratios and lowest variances are identified. Their expected returns, standard deviations, and Sharpe ratios are then evaluated by comparing them to equal-weight portfolios and giving the effective frontier. The author further demonstrates the guiding significance of Markowitz's portfolio theory in the Chinese investment market through the assessment of the findings. Finally, in the context of the Chinese securities market, identify and analyze the model's constraints and offer suggestions.