Index Model with Modern Portfolio Theory and its Application to Find Optimal Portfolio in the American Stock Market

Abstract

A crucial framework in financial science, the Index Model and Modern portfolio theory provide investors with a scientifically sound method of asset allocation. This study applies solver tables for data manipulation and computing to an empirical analysis of the theory in the setting of the American stock market. Based on predetermined criteria, 10 well-known stocks from various industries were chosen, IM will use these optimization inputs to discover the regions of acceptable portfolios for the various five situations of the extra limitations after calculating the necessary optimization inputs for the entire Index Model according to the month and everyday observations. The definition of the efficient frontier and identification of the portfolio with the highest Sharpe ratio and lowest variance under five distinct restrictions were made possible thanks to the help of the Solver table. The results of the empirical investigation support the relevance of the index model and portfolio theory in the American financial market by demonstrating its applicability and usefulness for global investors. According to the results, investors are encouraged to diversify their portfolios in accordance with the efficient frontier's rules in order to maximize profits while minimizing risks.