The Performance of an Efficient Portfolio Index During Extreme Market Conditions In South Africa

Abstract

Modern portfolio theory dates back to the work of Markowitz (1952), when he first introduced the concept of efficient portfolio selection, suggesting that there is only one combination of shares that would maximise an investors returns for a given level of risk. Since this introduction, portfolio selection has evolved producing concepts and tools such as the Capital Asset Pricing Model or CAPM (Tobin 1958; Sharpe 1963), the Arbitrage Pricing Theory (Ross 1976) and the 3 Factor Model (Fama and French 1996a, 1996b). This research seeks to develop an Index based on the efficient portfolio concepts of Markowitz (1952) for the JSE and evaluates the performance of this index relative to the J203 or All share index which was used as the benchmark index. Over the period January 2002 till December 2009, when accumulating the abnormal returns or excess returns of the efficient portfolio index over the market index, for the full duration of the analysis period, the efficient portfolio index returned a 3.8% year on year premium return over the market benchmark. The research however, did not yield a statistically significant difference between the returns of the efficient portfolio index and the returns of the market index. The research goes on to search for any conditional influences on the performance of the efficient portfolio, specifically during bull and bear market conditions. Using a t-test there was no difference found in the performance of the index between the two conditional states of the market