How to build a potential stock portfolio during ordinary and crisis period? Example of COVID-19 pandemic period.

Abstract

One of the important and simple ideas of investment is the Mean-Variance Portfolio theory by Markowitz (1952). According to some researchers, MVO is an unstable and error-maximizing procedure, and it is always beaten by simple 1/N portfolios. However, the theory is true it is difficult to achieve because the economy runs not the same as in previous years. The optimal mean-variance portfolio is a complex combination of means, volatilities, and correlations of asset returns. According to history “The best assets in the past often become worst assets in the future” (Wouter J. Keller, Adam Butler, and Ilya Kipnis, 2015).

According to the other research papers for long term investment, there was no difference between daily and monthly data. So in this paper, we decided to apply long periods (10 years weekly data) and also short periods (6 months daily data) during COVID19. To find out the best strategy for investing in stocks we built several portfolios and then checked them during the following years. In our study, MVO worked well with big company stocks, but when financial crisis happens in the economy the calculation becomes not that effective, however, our portfolio has the lowest loss we cannot gain a return. In other words, we can say that using MVO we can create a portfolio with less risk. The theory may not work with small companies because young companies might fall quickly during a crisis period, it may not survive. So choosing big company stocks will be the first step to reduce your risk. Although we invest in big companies we still face several risks. What should we do when the economy faces the financial crisis? As we said before MVO cannot give positive returns it means you still take some loss so during the crisis period we need to run different approaches to get profit from our investment. During the crisis period none of the methods may not work so we decided to find BUY and SELL point and 2 points will help to recover loss and take profit from our investment.

Shortly our project conducted an analysis based on the prices of 30 best performed US company stocks for the period 2010-2020, which was tested using the Markowitz minimum variance portfolio theory by building a new stock portfolio with the lowest risk and optimal return each year, then comparing the results. According to our study, the methodology was not useful during the financial crisis period. In order to correct this, we tried to analyze the actual example of COVID-19 and determine the point of buy and sell. First, we found that diversification helps to reduce risk to a certain level. Second, how individual investors should react during the crisis period.