Portfolio optimization by applying Markov chains

Abstract

Since one of the main problems in today's economy is 'conquering the market' or, in other words, finding the best way to predict price movements and receive expected rates of return, this paper will deal with the portfolio optimization in the Belgrade stock exchange. The Markov chains method is chosen as a very simple and non-parametric method which has been insufficiently used and studied in our literature so far. The rare research done in this area usually uses the Harry Markowitz model while the Markov chains method has been applied worldwide in the analyses of financial markets regardless of the degree of their development. Therefore, this paper will be unique as it will be the first to employ the Markov chains method in the returns analysis on the Belgrade Stock Exchange.

Keywords

• markov chains
• belgrade stock exchange
• portfolio
• financial markets
• returns