1st International Conference on Business Management

Universitat Politècnica de València, 2015

DOI: http://dx.doi.org/10.4995/ICBM.2015.1247

Application of the theory of Markowitz for structure portfolio investment in

the Colombian stock market
Ph.D. Fernando Garciaª, Jairo Alexander González Buenob and Ph.D. Javier Oliverc
a
Professor Universidad Politécnica de Valencia, fergarga@esp.upv.es, bProfessor Universidad Pontificia Bolivariana,
jairoa.gonzalez@upb.edu.co, and cProfessor Universidad Politécnica de Valencia, jaomun@ade.upv.es.

Abstract
Since its appearance in 1952, Harry Markowitz model has been a major theoretical
reference in structuring investment portfolios, leading to multiple developments and
referrals. The present work is aimed to apply the model of Markowitz in the Colombian
stock market and through an empirical study will verify whether the model is able to
provide investment portfolios to meet the risk and return preferences for a Colombian
investor. To do the daily closing prices for the period January 2005 to December 2014
from a sample of 12 shares of Colombian stock exchange will be used.
Keywords: diversification, efficient frontier, profitability and risk.

Introduction
To venture into the field of finance, investment decision becomes a challenge for those who are willing to
take advantage of the great opportunities and alternatives offered by the stock market. The decision to
invest in a market like Colombia is subject to uncertainty, which leads to consider important variables
from the economic, political and social environment that affect the expected cash flows and change the
course of the results, which defines the presence of risk in investments.
Modern Portfolio Theory is composed of the Theory of Portfolio Selection of Harry Markowitz (1952)
and William Sharpe contributions to the theory of price formation in financial assets (1964) known as the
Capital Asset Pricing Model (CAPM). Basically, the Modern Portfolio Theory is an investment
framework for the selection and construction of investment portfolios based on maximizing the expected
return of the portfolio and the simultaneous minimization of investment risk.
Since its emergence, the theory of Markowitz Portfolio Selection has been a fundamental theoretical
reference in selecting portfolios, leading to multiple developments and referrals.
The remainder of the paper is structured as follows. First, we will present the methodology and the
database. Then the main results of the application will be described. Finally, the last section will
conclude.

Methodology
The aim of this research is to apply the model of Harry Markowitz in the Colombian stock market, to find
the solution to the problem faced by an investor to create an investment portfolio with an optimum
composition of shares that confer the lowest risk for a maximum return.
The model of Markowitz is applied using daily closing prices for the period January 2005 to December
2014 of the following 12 companies: Banco de Bogota SA (Bogota), Bancolombia SA (BCOLOMBIA,
PFBCOLOM), Celsia SA E.S.P. (Celsia), Cementos Argos SA (Cemargos), Corporación Financiera
Colombiana SA (Corficolcf), ETB SA (ETB), Argos Group (Grupoargos), Grupo Aval SA (Grupoaval),
Sura Group Inc. (Gruposura) Interconexión eléctrica SA (ISA) and Nutresa Group (Nutresa). Most of the

This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International

License (CC BY-NC-ND 4.0)
 Application of the theory of Markowitz for structure portfolio investment in the Colombian stock market

selected companies belong to the financial sector (Bogotá, Bclombia, PFBCOLOM, Corficolf, Grupoaval
and Gruposura), two belong to the energy sector (Celcia, ISA), the remaining four are Cemargos, within
the cement industry; ETB, in the telecommunications sector; the food sector is represented by Nutresa,
and Grupoargos is a holding company with investments in cement, energy, urban and real estate
development and ports. These 12 companies are the only ones for which enough information is available
for the requested period.
Historical information from January 2005 to December 2014, daily prices of the 12 actions mentioned
above were used.

Results
Applying the model of Markowitz, the minimum variance portfolio at a desired level of profitability is
calculated (Table 1).
Table 1. Minimum Variance Portfolio
Pesos
Portafolio σp E [Rp]
Bogotá Pfbcolom Corficolcf ETB Grupoaval ISA Nutresa Total
1 32.07% 10.84% 7.10% 8.55% 7.69% 7.74% 26.00% 100.00% 1.204% 0.086%

Source: The authors

In the minimum variance portfolio, Bogotá has the highest weight (32.07%), as it is less risky share
among the 12 stocks selected. Regarding the portfolio of maximum profitability, only Corficolf is
included, because it is share with the highest expected return between 12 stocks selected (Table 2).
Table 2 shows the construction of the Efficient Frontier line, that is, of the combinations of the stocks that
offer the highest return for a given level of risk. Then suitable combinations (wi) of the shares in the
different portfolios according to the desired risk and subject to the restrictions previously indicated are
calculated.
Table 2 shows that from the portfolio 11 only three companies are used to obtain the efficient frontier:
Bogotá, Corficolf and Grupo Aval. This is one of the criticisms stated by Michaud (1989), who suggests
to limit the weight of each companie in the portfolio.

 
 Application of the theory of Markowitz for structure portfolio investment in the Colombian stock market

Table 2. Efficient Portfolio Composition

Pesos
Portafolio σp E [Rp]
Bogotá Bcolombia Pfbcolom Celsia Cemargos Corficolcf ETB Grupoargos Grupoaval Gruposura ISA Nutresa Total
1 32.05% 0.00% 10.81% 0.00% 0.00% 7.13% 8.58% 0.00% 7.66% 0.00% 7.81% 25.96% 100.00% 1.204% 0.086%
2 30.29% 0.00% 10.20% 0.00% 0.00% 26.42% 3.88% 0.00% 9.20% 0.00% 4.15% 15.86% 100.00% 1.246% 0.108%
3 29.47% 0.00% 9.84% 0.14% 0.00% 34.59% 1.69% 0.00% 9.78% 0.00% 2.92% 11.56% 100.00% 1.289% 0.117%
4 28.79% 0.00% 9.30% 1.47% 0.00% 40.81% 0.62% 0.00% 10.22% 0.00% 2.19% 6.60% 100.00% 1.331% 0.124%
5 28.05% 0.00% 9.24% 0.66% 0.00% 46.96% 0.00% 0.00% 10.74% 0.00% 0.00% 4.35% 100.00% 1.374% 0.131%
6 26.59% 0.00% 8.42% 0.58% 0.00% 52.51% 0.00% 0.00% 10.79% 0.00% 0.00% 1.10% 100.00% 1.417% 0.136%
7 24.65% 0.00% 6.64% 0.00% 0.00% 58.14% 0.00% 0.00% 10.57% 0.00% 0.00% 0.00% 100.00% 1.459% 0.141%
8 21.82% 0.00% 4.92% 0.00% 0.00% 63.45% 0.00% 0.00% 9.81% 0.00% 0.00% 0.00% 100.00% 1.502% 0.146%
9 19.30% 0.00% 3.12% 0.00% 0.00% 68.32% 0.00% 0.00% 9.26% 0.00% 0.00% 0.00% 100.00% 1.544% 0.150%
10 16.90% 0.00% 1.52% 0.00% 0.00% 72.88% 0.00% 0.00% 8.71% 0.00% 0.00% 0.00% 100.00% 1.587% 0.154%
11 14.68% 0.00% 0.00% 0.00% 0.00% 77.20% 0.00% 0.00% 8.11% 0.00% 0.00% 0.00% 100.00% 1.629% 0.157%
12 11.50% 0.00% 0.00% 0.00% 0.00% 81.30% 0.00% 0.00% 7.20% 0.00% 0.00% 0.00% 100.00% 1.672% 0.161%
13 8.50% 0.00% 0.00% 0.00% 0.00% 85.21% 0.00% 0.00% 6.28% 0.00% 0.00% 0.00% 100.00% 1.715% 0.164%

14 5.59% 0.00% 0.00% 0.00% 0.00% 88.96% 0.00% 0.00% 5.45% 0.00% 0.00% 0.00% 100.00% 1.757% 0.167%
15 2.75% 0.00% 0.00% 0.00% 0.00% 92.58% 0.00% 0.00% 4.66% 0.00% 0.00% 0.00% 100.00% 1.800% 0.170%
16 0.12% 0.00% 0.00% 0.00% 0.00% 96.12% 0.00% 0.00% 3.77% 0.00% 0.00% 0.00% 100.00% 1.842% 0.173%
17 0.00% 0.00% 0.00% 0.00% 0.00% 100.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 100.00% 1.885% 0.176%
Portafolios Eficientes = 17
Amplitud Desviación Estandar = 0.043%

Source: own data

For a conservative investor, the minimum variance portfolio is a good choice. However, according to
Markowitz, rational selection of the investor and risk aversion lead him to seek different possibilities of
portfolio geared for generating good returns at a given level of risk, and create the so-called indifference
curves on the efficient frontier line.
It is worth highlighting that an investor who wants to invest in shares comprising the Colombian stock
market can maximize profitability by investing in any of the portfolios located on the efficient frontier
line, depending on the level of risk he/she wants to assume.

Conclusions
In this paper the application of the Markowitz model in the Colombian stock market in the period January
2005 to December 2014.
The main conclusion to be drawn form this research is the difficulty faced by Colombian investors in
order to implement the model of Markowitz. In fact, only 12 companies present complete information
regarding share prices for a time period which is not very long. This lack on information and on
companies available to build the portfolio has a very important impact on the portfolios that can be
created by the model. Many of the efficient portfolios are composed just by two companies. For this
reason, invertors seeking a higher and more reasonable degree of diversification cannot construct their
portfolios only using Colombian shares. Therefore future research should be directed to find other
investment alternatives, for example, investing in other stock markets in the region and creating a pan-
american portfolio applying the model of Markowitz.

References
Markowitz, H. (1952). Portfolio Selection. The Journal of Finance, 7, 77-91.

Michaud, R. (1989). The Markowitz optimization enigma: is optimized optimal?. Financial Analysis Journal. 45(1),
31-42.

 
 Application of the theory of Markowitz for structure portfolio investment in the Colombian stock market

Ross, S., Westerfield, R. & Jaffe, J. (2012). Finanzas corporativas. Novena Edición. McGraw-Hill. México

Sharpe, W. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. Journal of Finance,
19, 425-442.