Harry Markowitz is generally acknowledged as the father of modern portfolio theory after publishing his seminal paper in 1952, for which he (jointly) received a Nobel Prize in 1990. Markowitz (1952) and Tobin (1958) showed that it was possible to identify the composition of an optimal portfolio of risky securities, given forecasts of future returns and an appropriate covariance matrix of share returns. This research endeavours to apply the theory of Markowitz to the Johannesburg Securities Exchange (JSE) to
establish whether an optimal portfolio can be identified and used as an effective trading rule.
Weekly data over 11 years on the top 40 JSE listed companies was analysed to construct Markowitz mean-variance optimised portfolios using ex-ante data. The optimal portfolio was then selected and re-balanced periodically, and the returns compared against the FTSE/JSE ALSI40 index. The study found that the trading strategy significantly outperformed the market in the
period under review.