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Creating a Superior Portfolio Using Markowitz Modern Portfolio Theory: Indexing LQ45 Components as Benchmark

Karisha Elizandra Azdan, Subiakto Soekarno Soekarno


Abstract. Investing, one among the sources of financial gain is currently becoming crucial publicly eyes. The right decision of investment could possibly lead to a significantly higher income than keeping money aside. However, this type of income is uncertain and requires more volatility to gain good returns. As there are many risk-averse investors who tend to be more cautious and most of the time does not satisfy with the results, a modern portfolio theory has emerged and become the bridge between safer investment and good returns. The theory is called Optimal Modern Portfolio found by Harry Markowitz, which combines the assets with possible low correlations to reduce the similarity across the components which then also decrease the amount of standard deviations. Constructing a portfolio sometimes can be done by indexing an existing market to be used as the benchmark, but somehow the cost of investing in market index is incredibly expensive. In this study, a portfolio will be constructed by indexing the LQ45 market with less number of stocks and possibly smaller amount of costs. The result is expected to become the alternative for investors to make an investment in a portfolio consisting part of components in LQ45 with a lower cost than the market.

Keywords: Index, Portfolio, LQ45, Markowitz, Capital Market


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