Comparison of Markowitz Model and Single Index Model with ESG Factors Involved

Abstract

ESG considerations have become increasingly prominent within the realms of investor and corporate decision-making, underscoring the importance of employing robust methodologies for incorporating ESG factors into portfolio construction. This study aims to leverage the Markowitz Model and Single Index Model to construct portfolios utilizing a selection of 10 stocks, evaluating their applicability across various conditions, particularly investors' risk tolerance levels. Utilizing the solver function within Microsoft Excel, graphical representations will be generated under four distinct constraints, facilitating comparisons based on both graphical depictions and accompanying data analysis. The findings reveal that, under specified conditions, the two models exhibit negligible differences, while highlighting the significant role of ESG constraints in portfolio construction. Nonetheless, given the distinct assumptions and conditions underlying each model's calculations, investors retain the flexibility to choose either approach for portfolio analysis. This research underscores the impact of ESG factors on asset allocation outcomes within both models, offering valuable insights into ESG investing practices and the comparative performances of the Markowitz Model and the Single Index Model.