Abstract/Summary

Amidst the challenges in the Malaysian stock market in recent years (2011-2016), this research attempts to test empirically if the risk-return tradeoff can be improved further by applying both the Modern Portfolio Theory (MPT) and value investing strategy. This research applies the MPT framework on the Malaysian stock market using selected value stocks to form an optimal risky portfolio. The portfolio construction process in this study centres on two main questions. The first question is what stocks to select. The second question is what proportion of investment should one allocate to each stock. This paper contributes in terms of a practical application by demonstrating the construction of minimum variance portfolio, optimal risky portfolio and customized portfolios based on targeted returns and risks. From the model, the weight or proportion of investment in each of the selected stock is determined. The results of the out-of-sample test show that optimization produces a higher Sharpe ratio and better risk-adjusted return as compared to an equal-weighted or value-weighted portfolio. Combining value investing and Markowitz Portfolio optimization strategy during a bearish market environment have shielded investors from the macro downtrend which started in mid-2014 in the Malaysian context.