Application of different portfolio optimization methodologies under sudden market movements: Sri Lankan context

Since its origin in 1952, the Modern portfolio theory by Harry Markowitz has been renowned and widely used by market practitioners. The Black-Litterman model of portfolio optimization has been introduced as an alternative method of portfolio optimization, and also is widely used since 1991. This paper tries to examine which portfolio optimization methodology of the above is ideal under sudden market movements in Sri Lankan context. The study is conducted using 15 stocks across 9 industries traded in the Colombo Stock Exchange, in the period of 2010-2019, to test for the year 2020. The study recognized that under sudden market movements, the Black-Litterman model proved to be optimal than the Markowitz model in Sri Lankan context.