Optimal Portfolio Construction (A Case Study of LQ45 Index in Indonesia Stock Exchange)

The purpose of this paper is to test whether single index model or constant correlation model of portfolio selection offers better investment alternatives to investors in IDX. Sample taken for this research is 22 stocks consistently joined in LQ45 index for the time period of February 2010 to January 2015. After obtaining the optimal portfolios, the performance of each portfolio is evaluated and analyzed in terms of their expected return and risk. The measurement of that performance uses the risk adjusted methods Sharpe, Treynor, and Jensen Index. By using the single index model, it is observed that only six out of 22 sample stocks are allowed to be included in the optimal portfolio. Meanwhile the optimal portfolio constructed by using the constant correlation model consists of eight stocks. The final results then show that the optimal portfolio constructed by using the single index model has a better performance. The three indexes Sharpe, Treynor, and Jensen give the same performance ranking for both portfolios, it means that both portfolios have been well-diversified.