Study on the Application of Markowitz’s Portfolio Selection Theory in Upstream Oil and Gas Investment Decision

Irvan Novikri; Noer Azam Achsani; Roy H.M. Sembel; Tony Irawan; Tubagus Haryono

doi:10.59261/inkubis.v8i2.276

Authors

Irvan Novikri IPB University
Noer Azam Achsani IPB University
Roy H.M. Sembel Institute Pengembangan Manajemen Indonesia
Tony Irawan IPB University
Tubagus Haryono Garuda Multi Energi

DOI:

https://doi.org/10.59261/inkubis.v8i2.276

Keywords:

Markowitz’s portfolio selection theory, Efficient frontier, Optimal portfolio, Risk definition

Abstract

Background: …

Objective: Modern portfolio theory aims to maximize investment returns while managing the amount of risk taken, represented by variance, across different investment options. By regularly monitoring and adjusting their portfolio, investors can better align their investments with their specific financial goals and objectives. This theory emphasizes the importance of both selecting diverse investments and understanding the risks involved to achieve the best possible financial outcomes.

Methods: The basic idea of portfolio theory is that the overall risk of a group of investments (or portfolio) depends on not just the risk of each individual investment but also how those investments interact with each other, known as their covariance or correlation. Having a mix of different risky assets can help manage risk because while some investments may increase in value, others might decrease, balancing out the overall effect. This process of combining different assets is called diversification, and it helps reduce the chance of significant losses in the portfolio.

Results: Understanding the relationships between different investment projects can create additional benefits in managing risk. For example, if two projects are negatively correlated, meaning that when one succeeds, the other tends to fail, this can help reduce the chance of losing money on both projects at the same time. If projects are independent, diversifying investments can spread risk effectively, but if they are negatively correlated, it provides an even better safety net, potentially lowering the risk of total loss to almost nothing.

Conclusion: To estimate how much the returns of assets in a portfolio might vary, portfolio managers look at the past performance of those assets since future performance is uncertain and cannot be predicted. The goal of diversifying a portfolio is to manage risk and build wealth over time, so understanding how assets behaved in different conditions helps in making informed investment decisions. This historical data serves as a useful guide to assess potential future variability and manage the risks associated with investments.

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