Empirical study in the Indian Capital Market on Building an optimal equity portfolio

Abstract

This thesis strives to contribute to the research on BUILDING AN OPTIMAL EQUITY PORTFOLIO IN THE INDIAN CAPITAL MARKET. Portfolio is a combination of securities such as stocks, bonds and money market instruments. The process of blending together the broad asset classes so as to obtain optimal return with minimum risk is called portfolio construction. Diversification of investment helps to spread risk over many assets. In a diversified portfolio, some securities may not perform as expected, but others may exceed the expectation and making newlinethe actual return of the portfolio reasonably close to the anticipated one. newlineIn volatile and complex markets, it is increasingly challenging to design an optimal investment portfolio for organization, clients, or for one s own self. In an emerging market like India one is faced with various investment opportunities like stocks, debt instruments, real estate, bullion, derivatives, etc., and as the various avenues of investment increase shaping, managing and monitoring of the portfolio becomes more complex and complicated The Diversified portfolio (Markowitz and Sharpe) reduce the occurrence of unsystematic risk, avoidance of systematic one is of huge challenge to the investor. As noted that the variance of returns on an asset is a measure of its total risk and variance can be split into systematic and unsystematic risk, that is, s2i = ß2s2m + s2ei, where ß is systematic factor, s2m denotes the newlinesystematic risk and s2ei is unsystematic risk contained portfolio. Thus, it would be relevant to measure the correlation or covariances (rxy or Covxy) of the two or more stocks to the ratio of their individual standard deviation (sx, sy and si). This raises serious concerns to the investor that how much investment is required in each stock to formulate an optimal portfolio. newline newline