Use of Markowitz and Sharpe models in portfolio optimization: An application on the Istanbul Stock Exchange

The aim of the research is to determine which model will yield more effective results from the optimal portfolio obtained by applying Markowitz's Mean Variance Model, which is the main models of Modern Portfolio Theory, and Sharpe's Single Index Model to stocks on the Istanbul Stock Exchange (ISE). The risk, return and other criteria of the portfolios to be formed by both models will be analyzed and compared. The first and main model, Mean-Variance Model, was put forward by American economist Harry Markowitz, who laid the foundations for Modern Portfolio Theory. This model developed by Markowitz shows that it is not enough to be able to mitigate risk through simple diversification in traditional portfolio theory and the direction and power of the relationship between the stocks to be included in the portfolio is also influential. In spite of the complexity of Markowitz's model and the difficulty of calculating it, William Sharpe has proposed Single Index Model so that optimal portfolios can be created with less data and time lost. The fact that the various stocks in the market share a common link will provide investors with more convenience. In Sharpe's proposed model, stock returns are attributed to the market index. Both models were tested for their applicability on ISE and their results were compared with the help of performance criterias. Keywords: Portfolio Management, Mean-Variance Model, Single Index Model, Istanbul Stock Exchange