The Impact of Special Constraints on Portfolios in Two Conditions

ABSTRACT

This paper proposes to find how some specific constraints affect portfolio choice under two dynamic situations which are only considering risk and considering both risk and return respectively. Ten individual stocks from different industries and SPX 500 from 2001 to 2021 have been selected as the data. For example, the COVID-19 has brought a great negative impact on the aviation industry. By analyzing the data, I have found that the stock market has a strong resilience and ability to deal with external shocks. I have also chosen two models, namely Markowitz Model and Index Model under five constraints to examine the portfolio performance. These results indicate that some constraints have a negative impact on portfolio choice. For example, the portfolio under the benchmark has meant having no constraints being ones with the minimum risk. In other words, too many constraints make the risk higher. Additionally, the portfolio has its maximum return and risk if the broad index isn't in the portfolio. This means broad index can control the risk of the portfolio. From the results of the paper and the research direction, this paper has applications for stock investors during shocks and events which had broad impacts. © 2022 Owner/Author.