A COMPARISON OF BASIC AND EXTENDED MARKOWITZ MODEL ON CROATIAN CAPITAL MARKET

• Main Authors: Bruna Škarica, Zrinka Lukač
• Format: Article
• Language: English
• Published: Croatian Operational Research Society 2012-12-01
• Series: Croatian Operational Research Review
• Subjects: portfolio optimization; Markowitz model; expected return and risk; transaction costs
• Online Access: http://hrcak.srce.hr/index.php?show=clanak&id_clanak_jezik=142469

Markowitz' mean - variance model for portfolio selection, first introduced in H.M. Markowitz' 1952 article, is one of the best known models in finance. However, the Markowitz model is based on many assumptions about financial markets and investors, which do not coincide with the real world. One of these assumptions is that there are no taxes or transaction costs, when in reality all financial products are subject to both taxes and transaction costs – such as brokerage fees. In this paper, we consider an extension of the standard portfolio problem which includes transaction costs that arise when constructing an investment portfolio. Finally, we compare both the extension of the Markowitz' model, including transaction costs, and the basic model on the example of the Croatian capital market.