A Study on Construction of Optimal Portfolio of Selected Stocks using Sharpe s Single Index Model at Anandrathi Financial Services Ltd, Bengaluru

Abstract

Since there are 1000’s of equities, bonds, mutual funds and derivatives traded on major stock exchanges, selecting and creating right portfolio to meet investment objective is a difficult task. Most of the investors choose their investment based on recommendation of the equity brokers, friends, reports of newspapers, magazines, websites etc. To overcome the above problem different techniques such as “Markowitz portfolio model”, “Sharpe’s optimal portfolio model”, “Portfolio construction through security valuation” etc., are available. “Portfolio construction through Sharpe’s single index model” was opted because it was effective to the study. The study conducted, mainly focused on constructing portfolios from 25 stocks (5 stocks from 5 different sectors) for various classes of investors based on Sharpe’s single index model. The main objectives of the study are: To identify stocks and proportion of stocks to be included in the portfolio and to measure constructed portfolio’s performance in terms and comparing it with benchmark Sensex return. With this it is observed that investment can be made in those companies which have excess return to beta as it diversifies risk so good to invest.