Optimal portfolio selection and an empirical test of it in İstanbul Stock Exchange

Investors use various investment tools in order to rise the value their savings. Securities are one of these investment tools. Investors always aim to obtain high return from their investments. However, they may not be able to achieve it due to the ambiguity and unpredictability of the future.Investors should be able to select the best composition of securities. In order to realize it, such portfolios that provide both highest return and lowest risk should be formed. That is briefly what the optimal portfolio selection process means.The empirical study aims to find out whether the optimal portfolio selection is achievable in ISE (Istanbul Stock Exchange) The following hypotheses have been tested for this purpose:1) It is possible to create an optimal portfolio in ISE-30 Index, with the method of Quadratic programming.2) The optimal portfolio provides lower risk and higher return compared to the ISE-30 index.The weekly data of 25 equities are compared with the ISE-30 index in terms of return and risk for the period beginning from September 2005 through August 2008.The empirical study consists of two steps: First, the weekly data of stocks within the period from September 2005 to February 2007 are used. Out of these data, the portfolios are formed through the quadratic programming method. Then, using the Sharpe index, the optimal portfolio is selected among these portfolios.In the second part, the weekly data of five stocks that constitute the optimal portfolio is compared with the IMKB 30 index between September 2005 through February 2007 in terms of return and risk.The findings show that the both hyoptheses are accepted. This result proves that the optimal portfolio does provide lower risk and higher return compared to IMKB 30 index. In other words, optimal portfolio isfeasible in IMKB.