A PROJECT ON

COMPUTATION OF EFFICIENT FRONTIER OF THE 15 STOCK

PORTFOLIO – BENCHMARK S&P BSE SENSEX NEXT 50.

SUBMITTED BY
CHRISELLE D’SOUZA

SUBMITTED TO XAVIER’S INSTITUTE OF MANAGEMENT AND

RESEARCH

IN PARTIAL FULFILMENT OF MASTERS OF MANAGEMENT

STUDIES OF THE UNIVERSITY OF MUMBAI [YEAR ex: 2022-2024]

UNDER THE GUIDANCE OF

Dr. SAMEER LAKHANI
HEAD OF DEPARTMENT OF FINANCE
XIMR
 DECLARATION

I, Chriselle D’souza, student of Xavier’s Institute of Management and Research

affiliated to Mumbai University, hereby declare that this project report titled

“Computation of efficient frontier of the 15-stock portfolio – Benchmark S&P

BSE Sensex Next 50.” carried out under the guidance of “Dr. Sameer Lakhani” at

Xavier’s Institute of Management and Research is the record of authentic work

carried out by me during the period 2022-2024.

_______________________ ________________________
Chriselle D’souza Dr. Sameer Lakhani
 CERTIFICATE OF APPROVAL

The following project titled

Computation of efficient frontier of the 15-stock portfolio – Benchmark S&P

BSE Sensex Next 50

at

Xavier’s Institute of Management and Research

Is hereby approved as a certified study in the management carried out and presented
in the manner satisfactory to warrant its acceptance as a prerequisite for the award of
Masters of Management Studies (MMS) for which it has been submitted. It is
understood that by the approval, the undersigned do not necessarily endorse or
approve any statement made, opinion or conclusion drawn therein but approve the
project report for the purpose it is submitted.

________________________
Dr. KN Vaidyanathan
Director
XIMR
 ACKNOWLEDGEMENT

It is an honor and pleasure to express my gratitude to everyone who has inspired,

supported and assisted me in the making of this dissertation.
First and foremost, I would like to convey my gratitude to Dr. Sameer Lakhani, Head
of the Department of Finance at XIMR, for giving me the privilege to carry out this
dissertation in this prestigious institution under his leadership. I wholeheartedly
express my gratitude to him for his valuable contribution, constant support,
supervision, guidance and valuable advice for my work that made him the backbone
of this project. It was his unflinching encouragement and support that helped me
through this entire project.
I would also like to express my sincere thanks to the Department of
Marketing/Finance/Human Resources and the Administrative Office for taking the
trouble towards ensuring that I had all the necessary requirements to carry out this
project. My gratitude goes out to all members for their valuable inputs and forever-
willing and prompt technical assistance.
I thank my college for their continuous cooperation and support throughout the
project. I express my deepest gratitude to Dr. Vaidyanathan, Director of Xavier
Institute of Management and Research, and Dr. (Fr.) Conrad Pesso, S.J., Chairman of
Xavier Institute of Management and Research who allowed me to carry out this
project at XIMR.
I would also like to thank everyone else who has helped me. I do express my apology
that I cannot mention each one personally.
Last but not the least; I would like to thank my family, for their undying support
towards the completion of my dissertation.
 TABLE OF CONTENTS
SR. NO. TITLE PAGE NO.
1. EXECUTIVE SUMMARY 1
2. INTRODUCTION
2.1. Introduction
2.2. Statement of the Problem 4
2.3. Purpose and Scope of the Study

3. LITERATURE REVIEW
3.1. Mean variance model
3.2. Portfolio risk 6
3.3. Diversification
3.4. Utility matrix importance
4. RESEARCH METHODOLOGY
4.1. Research Design
4.2. Variables
4.3. Hypothesis 16
4.4. Research Method
4.4.1. Instruments
4.4.2. Data collection
5. RESULTS AND DISCUSSIONS
5.1. Analysis of Data 25
5.2. Discussions and Interpretations
6. LIMITATIONS, RECOMMENDATIONS AND 43
DIRECTION FOR FUTURE STUDY
6.1. Limitations
6.2. Recommendations and Future Scope of Research
7. CONCLUSION 50
8. REFERENCES 52
9. ANNEXURE A
Part 1 - Tables 55
 CHAPTER 1

EXECUTIVE SUMMARY

A portfolio is a collection of financial instruments such as stocks, bonds, cash

equivalents, or funds held by an individual, investment company or financial

institution. An investment portfolio can be regarded as a pie which is divided into

various parts, each representing a financial instrument with the objective of

achieving a particular level of risk and return. Investors should construct a

portfolio according to the investment objectives, risk tolerance, and time frame.

Portfolio analysis is one of the areas of investment management that enables

market participants to analyse and assess the performance of a portfolio (equities,

bonds, alternative investments, etc.). Portfolio analysis is intended to measure

performance on a relative and absolute basis along with its associated risks.

The portfolio analysis in this research will be done with a sample of 15 stocks from

the Benchmark S&P BSE Sensex Next 50 & applying the properties of portfolio

optimization, diversification, Utility, Markowitz lending borrowing we will construct

a portfolio can beat the index return.

We are considering the power of these factors to create possible price fluctuations

of these assets and if they actually do affect the prices a lot then we must know

the frequency of these factors. Finding out these important points will help us

with identifying factors that act as a potential threat to the portfolio. This way, we

can be prepared to tackle the risky scenarios in the market with the help of

1
practices such as hedging, investing in options, diversification of assets into low

risk and high risk etc.

The correlation between the risks and the performance of investments (or the

returns) is known as the risk-return trade off. The risk-return trade off states the

higher the risk, the higher the reward and vice versa. Hence, the low levels of

risks are associated with low potential returns and high levels of risks with high

potential returns. According to the risk-return trade off, invested money can

render higher profits only if the investor will accept a higher possibility or

probability of losses.

The most popular risk management techniques and elements to make your trades

successful while evading risks is: Portfolio optimisation - Portfolio optimisation

is the process of constructing portfolios to maximize expected return while

minimizing risk.

Common mistakes made by traders during portfolio analysis are:

 Not investing according to your risk appetite

Your risk appetite plays a huge role when it comes to allocating your capital

across your portfolio. Most beginner investors tend to not factor in their risk

tolerance level when creating a portfolio. This can prove to be a poor decision.

For instance, it doesn’t make sense for a conservative investor to invest in

significantly riskier options like small-cap companies now, does it? So, paying

heed to some solid portfolio management advice, it is a good idea to first do a risk

analysis on yourself to determine your risk tolerance. Once you’ve done that, you

2
can move on to building a portfolio based on your risk appetite. Creating a Utility

table helps identify your risk appetite & most appropriate portfolio to invest in.

 Not diversifying the portfolio

While professional investors may be able to generate alpha (or excess

return over a set benchmark) by investing in a few concentrated positions,

beginners may not be as good at it. Hence, it is wiser to stick to the

principle of diversification.

Markowitz Lending Borrowing - Markowitz created a formula that allows an

investor to mathematically trade off risk tolerance and reward expectations,

resulting in the ideal portfolio.

This theory was based on two main concepts:

1. Every investor’s goal is to maximize return for any level of risk

2. Risk can be reduced by diversifying a portfolio through individual, unrelated

securities.

3
 CHAPTER 2

INTRODUCTION

2.1. INTRODUCTION

Most individuals would choose the least dangerous option to reach their financial

objectives if given the opportunity. Investors can construct portfolios that minimise

risk for a desired level of return or maximise return for a given level of risk by using

contemporary portfolio theory. Modern portfolio theory, which is usually used in

conjunction with a buy-and-hold strategy, has been a vital tool for asset managers and

robo-advisors alike since Henry Markowitz introduced it in 1952.

A graph known as the "efficient frontier" shows the most "efficient" or risk-optimized

portfolio allocation for a range of projected returns. By evaluating the projected

returns from an investment portfolio given a variety of alternative asset allocations,

financial professionals create an efficient frontier. Risk is shown on the X-axis, and

rewards are shown on the Y-axis.

Given a variety of asset allocations, the final form should resemble a parabola with an

upward-sloping line sloping from left to right, representing all conceivable

hypothetical portfolios. The efficient frontier is represented by this line, and any

portfolio that falls on or above it is the ideal portfolio that provides the most return for

a given degree of risk. Conversely, portfolios below the line are not optimised.

In this report I have constructed a portfolio of 15 randomly selected stocks listed in

the Bombay Stock Exchange Sensex Next 50 stocks. I have calculated Sharpe ratio in

order to study the risk-return properties of these investment opportunities. Finally, I

4
have made recommendation to make investment in the best alternative based on the

utility calculation.

2.2. STATEMENT OF THE PROBLEM

1) To find if the 15 stocks portfolio beats the market Benchmark S&P BSE SENSEX

Next 50.

2) To find the weights of this 15 stocks portfolio.

3) To check if Markowitz lending borrowing portfolio works on this 15 stocks

portfolio

4) To check for utility of the optimum mix of this portfolio- with different Risk

aversion coefficient.

2.3. PURPOSE AND SCOPE OF THE STUDY

The data used in this report is collected from the secondary sources mainly from

Bombay Stock Exchange website. Additional data are collected from various journals,

magazines, online portals, etc. This report includes data for 60 months from January,

2018 to December, 2023. All there turn index (S&P BSE SENSEX Next 50) are

month end values. As a risk-free rate, we have taken Indian Inflation Rate to calculate

risk premium. After collecting data, we selected 15 stocks including variety of sectors

from medical to chemical. I have made a portfolio with the stocks and calculated risk

and return of that. I have used MS Excel & SPSS software to analyze the data. In this

report I have used value weight to calculate portfolio return and risk. Sharpe ratios are

used to measure the volatility of the return of the assets. Utility score is used to make

investment conclusion.

5
 CHAPTER 3

LITERATURE REVIEW

3.1. MEAN VARIANCE MODEL

In Portfolio Selection, The Journal of Finance, written by Markowitz, Harry. (1952)

The core of quantitative trading decisions is the diversification of asset allocation, and

the reallocation of financial resources is and fundamental principle affecting

investment strategies. A series of trading strategy methods originated from the Mean-

Variance Model proposed by Markowitz, which aims to identify an optimal portfolio

by considering a set of selectable asset combinations. It strives to strike a balance

between returns and risks to achieve the most favorable equilibrium.

Some traditional trading methods, such as laid the basic idea of trading strategies in

financial markets. Now recent researchers emphasize the use of machine learning or

deep learning methods to better describe the financial market to obtain more effective

market information.

Trading in financial markets is similar to a game process, some trading strategies

based on deep reinforcement learning have been proposed and proven effective. In

this work, we only use simple and effective Moving Average trading methods, to

prove the effectiveness of our methods.

Mean-variance efficient portfolio selection: an empirical study on the national stock exchange

written by Megha Agarwal, described a balanced portfolio which provides an investor

with capital protections and opportunities for superior gains is required. A flexible

model capable to accommodate for the real-world constraints and objectives of an

6
investor has been formulated using the Quadratic programming approach. The model

is tested on real data drawn for the Nifty securities for a period of twelve financial

years starting from 2000 to 2012. Eight portfolio model formulations namely

diversifier’s portfolio, satisfier’s portfolio, plunger’s portfolio, market trend portfolio,

capital gain bias portfolio, dividend gain bias portfolio, equal priority portfolio and

the ideal portfolio were created for investors with different priorities and risk appetite.

The objective of risk (variance) minimization is achieved by optimizing across other

important portfolio variables such as earnings per share, dividend, free float, impact

cost, institutional holding, market capitalization, net profit, price to book value ratio,

price-earnings ratio, promoter’s shareholding, sales, turnover, beta, unsystematic risk

and volume simultaneously. All the portfolios created were compared with the

Markowitz’s efficient frontier in the risk-return space. Ideal portfolio was found to be

the closest to the Markowitz’s portfolio. 2 Two multiple regression equations have

been estimated with returns and excess returns to standard deviation as the dependent

variables. Regression models explained the relevance of a new variable namely

impact cost having significant explanatory powers for predicting security return and

Sharpe ratio. Granger causality tests were undertaken to find out the relationship of

causation between returns on a security and the variables set as constraints in the

programming problem. The null hypothesis that dividend, impact cost, net profit,

promoter’s holding, sales and volume do not cause returns could not be rejected. The

portfolio utility analysis was undertaken to empirically find the utility derived by an

investor from alternate portfolios for changing levels of risk tolerance. A direct

relationship between the degree of risk tolerance and the value of portfolio utility was

found from the quantitative analysis. The portfolio selection model formulations were

plotted in the risk-return space along with the utility curves to find the optimal

7
portfolio choice for different types of investors. The evaluation of the alternate

portfolio selection model formulations is attempted by using Sharpe ratio (1966) and

Treynor ratio (1965). The Sharpe ratio is the highest for Markowitz portfolio followed

by the ideal portfolio. The ideal portfolio performed the best, even better than the

Markowitz portfolio when evaluated according to Treynor’s ratio. Tests of equality of

mean, variance and portfolio utility for ideal portfolio, Markowitz’s portfolio and

index portfolio were conducted to investigate the proximity of these portfolios. The

mean-variance model formulated and applied in this research work will be of

immense use for the Indian investors both individual and institutional, brokerage

houses, mutual fund managers, banks, high net worth individuals, portfolio

management service providers, financial advisors, regulators, stock exchanges and

research scholars in the area of Portfolio Selection.

3.2. PORTFOLIO RISK

The Efficient Frontier and Portfolio Optimization, chapter written by Maiti, Moinak.

(2021) discusses the (Markowitz, Journal of Finance 7:77–91, 1952) modern portfolio

theory and its implication for the finance studies. Importance of both the systematic

and unsystematic risk with respect to the risk and return relationship is covered. Why

only market risk is important for a reasonably well-diversified portfolio is discussed

in detail. Suitable empirical examples related to the calculation of portfolio returns

and risk are included. Critical discussion made on “why calculating the expected

portfolio return is easy but the harder part is to work out with the calculation of

the risk component of the portfolio”? Two important portfolio risk measuring

parameters, namely variance and covariance are introduced in detail. Thereafter,

8
critical discussions are made using appropriate examples on the importance of

covariances over variances while calculating the portfolio risk.

The general formula for computing the portfolio risk is derived theoretically and

visually. Then efficient frontier and portfolio optimization are introduced and detailed

discussion made using appropriate examples. Further, it is discussed on how

(Markowitz, Journal of Finance 7:77–91, 1952) portfolio selection theory becomes the

basis for developing (Sharpe, The Journal of Finance 19:425–442, 1964)

theory of price formation for financial assets. Critical discussion on the Capital

Market Line & Security Market Line is included. Illustration on plotting the

Mean–Variance efficient frontier and portfolio optimization is made using the R

programming.

According to empirical study in the Indian capital market on building an optimal

equity portfolio by Manish Kumar Ravish Chandra Pathak, the research was carried

out to identify the benefits of diversification opportunities for Indian investor from

Nifty50 from the National index of India. To do so further the study tried to find

whether risk adjusted portfolios using co-integration technique can outperform the

portfolios which is simply based on Single Index Sharpe Model. Total 50 securities

were obtained and calculated to excess return to beta ratio and constructed Sharpe

single index model and tested in a scenario such as portfolio constructed with whole

indexes which has given 8 securities having equal weights and another using the

knowledge of co-integration with exclusion of one security. However, both set of

portfolios are bifurcated under techniques like equal weights portfolio using an Excel

software. After thorough empirical analysis along with comparative studies, it has

been noted that if investor build an optimal portfolio using Sharpe single index model,

one can get a set of securities and weights that provide optimum result. The investor

9
has to be aware about Cointegration approach to build an optimal portfolio because

there is possibility of existence of cointegration among selected stocks. An investor

builds an optimal portfolio using Sharpe single index model Portfolio Return is

12.37% and Total portfolio Risk is 0.7381. An investor used Cointegration approach

(Equal weight) to build an optimal portfolio then Portfolio Return is 14.02% and the

total portfolio Risk using co-integration is also 0.6110. An investor used

Cointegration approach (Market capitalization weight) to build an optimal portfolio

then Portfolio Return is 15.99% and total portfolio Risk using co-integration is also

0.5615. Thus, an investor can build an optimal portfolio using co-integration approach

which helps to increase portfolio return and reduce portfolio Risk. Further can be

concluded that due to co-integrating relationship between Indian market and

securities, domestic portfolio diversification benefits are not available for Indian

investors. However, apart from Indian markets, rest of other countries or say regional

countries are also needs to explore for further researcher to have an international

portfolio diversification. This is a really serious concern for those who are looking for

high return with low risk where diversification opportunity is very low. So further

investor can target those markets where markets are not Co-integrated with each

other.

According to Evaluation of stock market volatility and seasonality effect in Bombay

stock exchange and National stock exchange written by k. Soundararajan

The role of industries in the economic development of a country is very important. It

is said a country is developed country when it has industrial development and its share

in the country’s national output is very significant. without which no country in the

world would become a developed country. The industrial development is necessary to

10
develop the other sectors of an economy since they are mutually interrelated with one

another. As far as developing countries like India is concerned, there is lack of

industrial growth for want of capital resources. In those days the business enterprises

raised their money only by way of financial institutions and on their own. In a course

of time, the role of peoples’ saving started to enter into the industrial finance in the

forms of shares and stocks. Thus, the surplus side of an economy is directed to the

deficit side. There is need for existence of stock exchanges in it to acquire the savings

of the people and lend them to the industrial houses which they need. But, there is

existence of greater degree of risk associated with this investment that there is scope

for big gain or big loss. In order to have gain, the investors carefully watch the

profitability and solvency of the business firms. In this situation the volatility and

seasonality of market return and stock return of the companies occupy an important

place. The Bombay Stock Exchange and National Stock Exchange play crucial roles

in preparing the volatility and seasonality of the returns on shares of companies. The

high volatility leads to uncertainty in the gain and low volatility leads to certainty of

gain. The present study analyzed the volatility and seasonality of market return and

stock return of 217 some selected and important companies in India listed at Bombay

Stock Exchange and National Stock Exchange. From this analysis there have been ups

and downs in the stability of returns on the share and stocks. The present study

concludes that the volatility and seasonality of market return and stock return of

sample companies are not same in all the days of a week, in all the months of the year.

This is due to changes in the socio, economic and political factors within the country

and outside the country. The Indian stock market has experienced bitter taste during

the year 2009 on account of global financial meltdown. The prices of shares of

companies both at National Stock Exchange and Bombay Stock Exchange started

11
downwards. But the effect is not like in foreign countries. However, the stock market

in India restored to its original state at present. The existence of the Over-the-Counter

Exchange of India and well-developed sub markets ensuring the effective functions of

Indian stock market. If the above suggestions are fulfilled, the stability in the stock

return and market return can be normalized and it will bring more funds to the

companies and more gains to the investors and ultimately India will flourish in the

economic development

3.3. DIVERSIFICATION

According to Global equity investing An efficient frontier approach written by Niso

Abuaf, Tracyann Ayala & Duncan Sinclair, though international portfolio

diversification has become increasingly important among US institutional and private

investors since the early 1970s, the question remains whether certain markets provide

better diversification alternatives than other markets. This paper empirically addresses

this question by using up to seven global stock market indexes from all regions of the

world and by constructing portfolios that use all combinations of these indexes in

discrete increments. By plotting the mean-variance return outcomes, the results then

identify the indexes that lie on the efficient frontier. Consistent with the literature, this

research finds that US investors can enjoy better diversification by incorporating

particular markets into their portfolios; however, this is not in a time-invariant pattern.

As theoretical reasoning suggests, US investors get better diversification from

countries that are more economically independent from the United States. Intuitively,

we can assume that Latin America would provide better diversification than

12
Europe for a US investor because Latin America and the United States' fiscal

and monetary policies are not consistent. We also find that during certain periods the

Chinese market also provides better diversification for US investors.

A study by Rishi Manrai on impact of diversification strategy on capital structure,

systematic risk and corporate performance in Indian context, brought to light

exhaustive and empirical study examines the “Impact of Diversification Strategy on

Capital Structure, Systematic Risk and Corporate Performance in Indian context”

combined with other variables such as growth, size, AT, profitability. There is no

single study formulated and discussed in India that investigates the impact of

diversification strategy on capital structure, systematic risk and corporate

performance. The study also tries to fill the gap in the field of research by

investigating the combined relationship and effect of corporate performance on capital

structure as well as effect of capital structure on corporate performance. By taking

listed corporates from BSE as well as NSE stock exchanges, similar concept of

investigation also testifies the effect of systematic risk. Nevertheless, this study

employs different measure of diversification strategy, systematic risk and capital

structure. thus, in case of measures of capital structure and corporate performance

such as STDA, LTDA, STDTA, TDTE in order to investigate the effect of debt

structure on corporate performance. Investigating the effect of diversification strategy

on capital structure, systematic risk and corporate performance using market measures

can be valuable as it provides evidence whether the stock market is efficient or not.

125 Number of authors has suggested the utility and analysis of corporate

diversification strategy in light of corporate capital structure, systematic risk and

financial corporate performance. Following this line of research, the relationship

13
between capital structure and corporate diversification strategy was studied for a

sample of 44 Indian corporate during the period 2006-2011. Using multiple linear

regressions as a tool for analysis, it can be concluded that diversification strategy has

a statistically strong and positive relationship with corporate leverage. Similarly

corporate performance and increase in asset tangibility reflects a strong and positive

relationship with corporate capital structure. Growth opportunities on the other hand

have a weak relationship with leverage and it was also found that it tends to decrease

firm leverage. Hence, it can be confirmed from the discussion that companies opting

for product diversification strategies proved to be more profitable and hence also

increase their tangible assets. Systematic risk and diversification strategy also have a

positive relationship but again share a statistically weak or negligible relationship

with corporate growth. Although diversification reduces the corporate operating risk,

the systematic risk is basically unchanged because the corporate increases its financial

leverage to take advantage of larger tax deductions of interest expense. Since there is

minimal effect of systematic risk due to diversification, the corporate cost of capital

remains indifferent. According to the analysis Systematic risk was theoretically

expected to have a positive relationship with capital structure but was reported to have

no relationship. Moreover, a positive but statistically week relationship exists between

systematic risk and other parameters like corporate profitability and corporate size.

On the contrary corporate growth is found to have a negative relationship with

systematic risk. Although diversification reduces the operating risk, the systematic

risk is basically unchanged because the corporate increases its financial leverage to

take advantage of larger tax deductions of interest expense. Since there is minimal

effect of systematic risk due to diversification, the cost of capital remains indifferent.

Similarly, beta is a very close proxy to capture the systematic risk of the corporate,

14
but many researchers believe that there are many anomalies in 126 measuring the

systematic risk of the corporate. Due to this researcher like Hansen (2013) feel that

there are important conceptual challenges that go along with the use of explicit

dynamic economic models for measuring confront risk and uncertainty. The study

found a significant relationship between capital structure and other two variables,

corporate profitability and corporate size. This clearly reflects that by increasing the

debt finance to a certain range there will be a positive impact on the profitability as

well, as the assets of the company will also grow. This will directly impact the

shareholder value and the stock price of that particular corporate. Diversification

strategy as well as leverage is found to have a positive relationship with corporate

performance and that corporate capital structures have a significant impact on

corporate value creation.

3.4. UTILITY MATRIX IMPORTANCE

According to portfolio construction and efficient frontier, written by MD Nurul Kabir,

Assistant Professor, Department of Accounting and Finance at North South

University, a portfolio is desirable only if its certainty equivalent return exceeds that

of the risk-free alternative. So, a risk averse investor prefers higher utility score than

risk free rate. However, for Risk averse investors all the stocks expressed negative

score except for our constructed portfolio. Thus, they will get a better utility.

15
 CHAPTER 4

RESEARCH METHODOLOGY

4.1. RESEARCH DESIGN

1) Selection of the sectors and stocks

First, we choose eight sectors of the Indian economy for the study. The chosen sectors

are identified based on the annual return (in percent) as reported by the BSE (BSE,

2023).as indicated in Table 1.

For each sector, we identify the fifteen ten stocks on random basis, irrespective of

their contributions to the sectoral index in the BSE (BSE, 2023). In the BSE, the index

value of a given sector is computed based on the index of different stocks listed under

the sector. The importance of a stock in a given sector is determined by the

corresponding weight of the stock used in the derivation of the overall index of the

sector. For each of the eight sectors, the stocks are randomly chosen.

2) Data acquisition

For each of the eight sectors I have selected, we extract & arrange date wise the

historical prices of the 15 stocks of the sectors, using the Sort function in the

Microsoft Excel. The ticker names of the stocks are passed as the parameters to the

BSE website with the start _date parameter set to '2018-01-01', the end date parameter

set to '2023-12-31', and the time interval parameter set to 'daily'. In this way, the stock

prices are extracted from the BSE website, from 1 January 2018 to 31 December 31

2023 (BSE Historical Prices, 2023). The stock data have the following attributes:

open, high, low, close, volume, and adjusted close. Since we focus on univariate

16
analysis in the present work, we select close as our variable of interest and don't

consider the other variables. We refer to the univariate close values of the fifteen

stocks for a given sector from 1 January 2018 to 31 December 2023 for training the

portfolio models.

3) Computation of return and volatility

Using the training data for the fifteen stocks in the sectors, we compute the daily

return and log return values of each stock of that sector. The daily return values are

the percentage changes in the daily close values over successive days, while the log

return values are the logarithms of the percentage changes in the daily close values.

For computing the daily return and log return, the Absolute function of Microsoft

Excel is used. Using the daily return values, we compute the daily volatility and the

annual volatility of the fifteen stocks of each sector. The daily volatility is defined as

the standard deviation of the daily return values. The daily volatility, on multiplication

by a factor of the square root of 1484, yields the value of the annual volatility. Here,

there is a standard assumption of 1484 working days in 5 years for a stock market.

The annual volatility value of a stock quantifies the risk associated with stock from

the point of view of an investor, as it indicates the amount of variability in its price.

For computing the volatility of stocks, the std function of Microsoft Excel is used.

The daily return values are also aggregated into annual return values for each stock

for every sector.

4) Computation of covariance and correlation matrices

After computing the volatilities and return of the stocks, we compute the covariance

and the correlation matrices for the fifteen stocks in the sectors using the records in

the training dataset. These matrices help us in understanding the strength of

17
association between a pair of stock prices in a given sector. Any pair exhibiting a high

value of correlation coefficient indicates a strong association between them. We use

the Microsoft Excel functions MMULT to compute the covariance and correlation

matrices. A good portfolio aims to minimize the risk while optimizing the return. Risk

minimization of a portfolio requires identifying stocks that have low correlation

among themselves so that a higher diversity can be achieved. Hence, computation and

analysis of the covariance and correlation matrices of the stocks are of critical

importance.

5) Computation of the expected return and risk of portfolios

At this step, we proceed towards a deeper analysis of the historical prices of the

fifteen stocks in each of the eight sectors. First, for each sector, we construct a

portfolio using the fifteen stocks, with each stock carrying equal weight. Since there

are fifteen stocks in a sector (i.e., in a portfolio), each stock is assigned a weight of

0.067. As shown in Table 2. Based on the training dataset and using an equal-weight

portfolio, we compute the yearly return and risk (i.e., volatility) of each portfolio. The

computation of the expected return of a portfolio is done using (1). In (1), E(R)

denotes the expected return of a portfolio consisting of n stocks, which are denoted as

S1, S2, …Sn. The weights associated with the stocks are represented by wi's.

𝐸(𝑅) = 𝑤1𝐸 (𝑅𝑆1) + 𝑤2𝐸(𝑅𝑆2 ) + ⋯ + 𝑤𝑛𝐸(𝑅𝑆𝑛 ) (1)

The yearly return and the yearly volatility of the equal-weight portfolio of each sector

are computed using the training dataset. For this purpose, the mean of the 5 yearly

return values is derived using the AVERAGE function in Microsoft Excel with a

parameter 'Y'. Yearly volatility values of the stocks in the equal-weight portfolio are

derived by multiplying the daily volatility values by the square root of 1484, assuming

that there are, on average, 1484 working days in 5 years for a stock exchange. The

18
equal-weight portfolio of a sector gives us an idea about the overall profitability and

risk associated with each sector over the training period. However, for future

investments, their usefulness is very limited. Every stock in a portfolio does not

contribute equally to its return and the risk. Hence, we proceed with computations of

minimum risk and optimal risk portfolios in the next steps.

6) Building the minimum risk portfolio

We build the minimum risk portfolio for each sector using the records in its training

dataset. The minimum risk portfolio is characterized by its minimum variance. The

variance of a portfolio is a metric computed using the variances of each stock in the

portfolio as well as the covariances between each pair of stocks in the portfolio. The

variance of a portfolio is computed using (2).

𝑉𝑎𝑟(𝑃) = ∑𝑤𝑖 𝑛 𝑖=1 𝜎𝑖 2 + 2 ∗ ∑𝑤𝑖 𝑖, 𝑗 ∗ 𝑤𝑗 ∗ 𝐶𝑜𝑣 (𝑖, 𝑗) (2)

In (2), wi and σi represent the weight associated with stock i and the standard

deviation of the historical prices of the stock i. The covariance among the historical

prices of stock i and stock j is denoted as Cov(i, j). In the present work, there are

fifteen stocks in a portfolio. Hence, 15 terms are involved in the computation of

variance of each portfolio, 15 terms for the weighted variances, and 225 terms for the

weighted covariances. For building the minimum risk portfolios, we need to find the

combination of wi's that minimizes the variance of the portfolio.

For finding the minimum risk portfolio, we first plot the efficient frontier for each

portfolio. For a given portfolio of stocks, the efficient frontier is the contour with

returns plotted along the y-axis and the volatility (i.e., risk) on the x-axis. The points

of an efficient frontier denote the points with the maximum return for a given value of

volatility or the minimum value of volatility for a given value of the return. Since, for

an efficient frontier, the volatility is plotted along the x-axis, the minimum risk

19
portfolio is identified by the leftmost point lying on the efficient frontier. For plotting

the contour of the efficient frontier, we randomly assign the weights to the fifteen

stocks in a portfolio in a loop and iterate the loop 15 times in Microsoft Excel

SOLVER function. The iteration produces 15 points, each point representing a

portfolio. The minimum risk portfolio is identified by detecting the leftmost point on

the efficient frontier.

7) Computing the optimum risk portfolio

The investors in the stock markets are usually not interested in the minimum risk

portfolios as the return values are usually low. In most cases, the investors are ready

to incur some amount of risk if the associated return values are high. To compute the

optimum risk portfolio, we use the metric Sharpe Ratio of a portfolio. The Sharpe

Ratio of a portfolio is given by (3).

𝑆ℎ𝑎𝑟𝑝𝑒 𝑅𝑎𝑡𝑖𝑜 = 𝑅𝑐 − 𝑅𝑓 /𝜎𝑐 (3)

In (3), Rc, Rf, and σc denote the return of the current portfolio, the risk-free portfolio,

and the standard deviation of the current portfolio, respectively. Here, the risk-free

portfolio is a portfolio with a volatility value of 1%. The optimum-risk portfolio is the

one that maximizes the Sharpe Ratio for a set of stocks. This portfolio makes an

optimization between the return and the risk of a portfolio. It yields a substantially

higher return than the minimum risk portfolio, with a very nominal increase in the

risk, and hence, maximizing the value of the Sharpe ratio. We identify the optimal

portfolio using the SUBTRACT function in Microsoft Excel over the set of the

Sharpe Ratio values computed for all the points of an efficient frontier.

20
8) Plotting the portfolios & comparing them to benchmark & other stocks

SPSS tool was used to create the Efficient frontier chart to compare it with benchmark

& a few other stocks.

9) Building the Utility matrix

To analyze and evaluate their invest opportunity we have calculated their utility based

on their risk averse coefficients by using following formula:

U = E(rp) – 1 /2*A*σp 2

Here, U = Utility that can investors get from their portfolio.

E (rp) = Expected return from the portfolio

A = Risk averse coefficient

σp 2 = Variance of the portfolio

After plug in the above data into this formula we get the following results: Table 3.

4.2. VARIABLES
The sectors are identified based on the annual return (in percent) as reported by the

BSE (BSE, 2023), whether highest to the lowest are chosen. Fifteen stocks are chosen

from the eight sectors along with Benchmark S&P BSE SENSEX Next 50. Close

Prices are chosen from the given set of prices, i.e. open, high, low & close.

Average daily return, Average daily variance, Effective annual yield, Annual

variance, Annual Standard Deviation is then computed for further analysis.

4.3. HYPOTHESIS
H0: The portfolio beats the market Benchmark S&P BSE SENSEX Next 50.

H1: The portfolio doesn’t out beat the market Benchmark S&P BSE SENSEX

Next 50.

21
H0: The portfolio is well diversified.

H1: The portfolio is not well diversified.

H0: The portfolio can create a utility matrix for different risk averse persons.

H1: The portfolio can’t create a utility matrix for different risk averse persons.

4.4. RESEARCH METHOD

4.4.1. INSTRUMENTS

1) Microsoft Excel Functions:

AVERAGE: Calculates the average (arithmetic mean) of a range of values.

STD.S.: Calculates the standard deviation of a sample data set.

MMULT: Performs matrix multiplication, which is useful for various mathematical

operations involving matrices.

Sharpe Ratio: A ratio developed by Nobel laureate William F. Sharpe to measure the

risk-adjusted return of an investment portfolio. It compares the return of the

investment to the risk-free rate of return and the volatility of the investment.

SOLVER: An Excel add-in tool used for optimization and solving complex

mathematical problems, such as linear programming, nonlinear optimization, and

others.

SPSS (Statistical Package for the Social Sciences): SPSS is a software package used

for statistical analysis in social science research and beyond. It provides a wide range

of statistical functions and tools for data manipulation, visualization, and analysis.

SPSS is commonly used for tasks such as data cleaning, descriptive statistics,

hypothesis testing, regression analysis, and more.

22
2) Efficient Frontier Chart:

The Efficient Frontier is a concept in modern portfolio theory that represents a set of

optimal portfolios that offer the highest expected return for a given level of risk or the

lowest risk for a given level of return.

Creating an Efficient Frontier chart involves analyzing different combinations of

assets to find the optimal portfolio allocation that maximizes return while minimizing

risk.

SPSS can be used to analyze historical financial data, calculate portfolio returns and

volatility, and generate an Efficient Frontier chart to visualize the trade-off between

risk and return.

3) Benchmark Comparison:

Comparing portfolio performance to a benchmark index or other stocks helps

investors evaluate the effectiveness of their investment strategy. SPSS can be used to

analyze portfolio returns relative to a benchmark, conduct statistical tests, and

visualize the results to assess whether the portfolio outperforms or underperforms the

benchmark.

Overall, these instruments and tools are valuable for conducting sophisticated

financial analysis, optimizing investment portfolios, and making informed investment

decisions based on statistical analysis and mathematical modeling.

4.4.2. DATA COLLECTION

This report includes data for 60 months from January, 2018 to December, 2023. All

there turn index (S&P BSE SENSEX Next 50) are month end values.

23
 1) Data Cleaning and Preparation:

Ensure that your data is clean, complete, and formatted correctly for analysis. Check

for any missing values or inconsistencies and handle them appropriately. Organize the

data into a format suitable for analysis, such as a spreadsheet or database.

2) Calculation of Returns:

Calculate the monthly returns for the S&P BSE SENSEX Next 50 index using the

month-end values. Returns can be calculated using the formula:

Return=(End Value−Start ValueStart Value)×100%Return=(Start ValueEnd Value−St

art Value)×100%

3) Analysis and Interpretation:

Analyze the trends and patterns in the index returns over the 60-month period.

Calculate summary statistics such as mean return, standard deviation, minimum, and

maximum returns. Visualize the data using charts or graphs to gain insights into the

performance of the index.

4) Comparison and Benchmarking:

Compare the performance of the S&P BSE SENSEX Next 50 index with other

relevant benchmarks or indices. Assess the relative performance and volatility of the

index compared to its peers or market benchmarks.

5) Interpretation and Reporting:

Interpret the findings of your analysis and draw conclusions based on the data.

Prepare a report summarizing the key insights, trends, and conclusions from the

analysis. Present your findings in a clear and concise manner, using visualizations and

tables as necessary.

24
 CHAPTER 5

RESULTS AND DISCUSSIONS

5.1. ANALYSIS OF DATA

Equal Portfolio return –

The equal portfolio utilizes equal weights for all stocks and has a beta of 0.879, it

implies that this portfolio is less volatile than the market as a whole. A beta of less

than 1 indicates that the portfolio is expected to have lower volatility compared to the

overall market.

The fact that the equal portfolio has a much higher return (277.6%) compared to the

market return suggests that it has performed exceptionally well. However, this high

return comes with high risk, as indicated by the 44.9% risk (standard deviation).

In practical terms, investors would need to consider their risk tolerance and

investment objectives. The equal portfolio may be suitable for investors seeking

potentially high returns but are willing to accept higher levels of risk, while the

optimal combination portfolio might be more appropriate for those prioritizing lower

risk and a more stable performance, even if it means potentially lower returns

compared to the market.

25
Table 2 - Equal Portfolio return

Securities Weights Return Risk beta

Apollo hospital 0.067 5.848835153 0.862154369 0.81624
Avenue supermarts ltd. 0.067 3.707661869 0.777456498 0.802537556
BHEL 0.067 2.903924116 1.148643457 1.429177388
Colgate 0.067 1.651309993 0.534565247 0.489406959
Exide Industries 0.067 0.837338783 0.692100825 0.905235395
Info edge 0.067 5.016422313 0.98416542 0.946950169
Interglobal aviation 0.067 2.82551501 0.93771486 0.876293673
Marico 0.067 1.03090754 0.588893543 0.558743324
MRF 0.067 1.175072031 0.62221186 0.795266774
Petronet lng ltd. 0.067 0.088131006 0.668316431 0.700740116
Pidilight industries 0.067 2.643354307 0.613792288 0.719555029
SIEMENS LTD 0.067 3.174180836 0.708393897 0.929788843
Tata consumers 0.067 3.582847646 0.74708057 0.941419242
Tata power 0.067 4.277271625 0.935818258 1.26439146
TVS motors 0.067 2.662993419 0.810769302 0.940025678
SUM 1

portfolio return 2.776

var 0.201
risk 0.449
Beta 0.879

Chart 2 & Table 3- Chart 2 and Table 3 illustrate the return and risk characteristics of

the portfolio compared to a benchmark, likely the S&P Sensex Next50 index.

Additionally, some specific stocks are mentioned, such as Marico, Colgate, and TVS

Motors, along with their respective risk and return metrics.

Here's a breakdown of the analysis:

1. Return and Risk Line of the Portfolio and Benchmark:

 The return and risk line of the portfolio indicates the relationship

between the portfolio's return and its risk (standard deviation or

volatility). This line is likely compared to a similar line for the

benchmark (S&P Sensex Next50 index), allowing investors to

26
 visualize how the portfolio's risk-return profile compares to the market

index.

2. Performance of the 15-Stock Portfolio:

 The 15-stock portfolio is able to beat the market index. This suggests

that the portfolio has generated higher returns than the benchmark

index, indicating successful performance.

3. Specific Stock Performances:

 Marico, Colgate, and TVS Motors are singled out for their

performance relative to the 15-stock portfolio and the market index.

 Marico and Colgate are described as almost on par with the 15-

stock portfolio. This implies that these stocks have generated

returns and exhibited risks similar to those of the broader

portfolio.

 TVS Motors is noted to have performed better than the 15-

stock portfolio. This suggests that TVS Motors has delivered

higher returns relative to its risk compared to both the portfolio

and the market index.

Overall, this analysis highlights the outperformance of the 15-stock portfolio

compared to the market index, as well as the notable performances of individual

stocks like Marico, Colgate, and TVS Motors. Investors may find this information

useful for assessing the relative performance of their investments and making

informed decisions about portfolio composition and stock selection.

Chart 1 - Plotting of efficient frontier line with other stocks

27
 Efficient Frontier
290.0%
TVS motors 270.0%
270.0% 260.0%
250.0%
250.0% 240.0%
230.0%
230.0% 184.6% 220.0%

210.0% 200.0%
180.0%
190.0%
Colgate 210.0%
170.0% 175.0% 190.0%
150.0% 170.0%
160.0% 165.0%
130.0%
Marico
110.0% BSE next50
90.0%
39.0% 38.9% 38.9% 38.8% 38.8% 38.8% 38.8% 38.9% 39.0% 39.1% 39.2% 39.4% 39.7% 39.9% 40.2%

Efficient Frontier BSE next50 Marico

TVS motors Colgate

Table 3 – Risk & Return matrix

On X & Y axes BSE Marico TVS motors Colgate

next50
Effective Annual 98.2% 103.09 266.30% 165.13%
Yield %
Annual SD 47.0% 58.89% 81.08% 53.46%

Minimum risk portfolio -

 The minimum risk portfolio has achieved a return of 200%, which is quite

high, especially considering its risk level of 38.9%. This suggests that the

portfolio has delivered strong returns relative to its risk profile.

 The optimal combination portfolio, excluding stocks such as BHEL, Tata

Consumers, and Tata Power, has a beta of 0.679. This beta indicates that the

portfolio's returns are less volatile than the overall market. However, it's

mentioned that this portfolio performs under the market return, although the

specific return percentage is not provided.

It's important to note that the minimum risk portfolio's return of 200% is impressive,

especially given its relatively low risk.

28
Investors may interpret this information in several ways:

1. Risk-Return Trade-off: The minimum risk portfolio demonstrates that it's

possible to achieve high returns with relatively low risk. This could be

appealing to investors who prioritize capital preservation and stability.

2. Diversification Benefits: The Minimum risk portfolio, by excluding certain

stocks, may be focusing on diversification to mitigate risk. This could appeal

to investors seeking a balanced approach to portfolio management.

3. Performance Relative to the Market: While the optimal combination

portfolio performs under the market return, its lower beta suggests that it may

provide more stability during market downturns. However, investors should

assess whether the potential reduction in returns is acceptable given the lower

risk.

In summary, investors should consider their risk tolerance, investment objectives, and

preferences for returns and volatility when evaluating these portfolios. Both the

minimum risk portfolio and the optimal combination portfolio offer different risk-

return profiles, and the choice between them would depend on individual investor

preferences and circumstances.

29
Table 4 - Minimum risk portfolio

Min risk
Securities Weights Return Risk beta
Apollo hospital 0.068 5.848835153 0.862154369 0.81624

Avenue supermarts ltd. 0.072 3.707661869 0.777456498 0.802537556

BHEL 0.000 2.903924116 1.148643457 1.429177388
Colgate 0.256 1.651309993 0.534565247 0.489406959
Exide Industries 0.025 0.837338783 0.692100825 0.905235395
Info edge 0.017 5.016422313 0.98416542 0.946950169

Interglobal aviation 0.032 2.82551501 0.93771486 0.876293673

Marico 0.160 1.03090754 0.588893543 0.558743324
MRF 0.099 1.175072031 0.62221186 0.795266774

Petronet lng ltd. 0.116 0.088131006 0.668316431 0.700740116

Pidilight industries 0.096 2.643354307 0.613792288 0.719555029

siemens ltd. 0.026 3.174180836 0.708393897 0.929788843
Tata consumers 0.000 3.582847646 0.74708057 0.941419242
Tata power 0.000 4.277271625 0.935818258 1.26439146
TVS motors 0.032 2.662993419 0.810769302 0.940025678

Sum of weights 1.0

portfolio return 2.000
var 0.151
risk 0.389
Beta 0.679

30
Market risk Portfolio (Beta=1):

The market risk portfolio has achieved a substantial return of 280.5%, which is quite

high. However, this return comes with a relatively high risk of 52.7%. This suggests

that while the portfolio has delivered impressive returns, it has also been subject to

significant volatility. The optimal combination portfolio, excluding stocks such as

Apollo Hospital and Avenue Supermarts Ltd., has a beta of 1. This indicates that the

portfolio's returns are directly in line with the overall market. In other words, it

performs at par with the market return. It's notable that the market risk portfolio has

delivered substantial returns, which could be attractive to investors seeking high

growth opportunities. However, the higher risk associated with this portfolio may

make it less suitable for investors with lower risk tolerance.

Investors should consider their investment goals, risk tolerance, and preferences when

choosing between these portfolios. While the market risk portfolio may offer higher

returns, it also comes with higher volatility, whereas the optimal combination

portfolio may provide more stability but with potentially lower returns. It's crucial for

investors to align their investment decisions with their individual financial objectives

and risk appetite.

31
Table 5 - Market risk Portfolio

Beta =1
Securities Weights Return Risk beta
Apollo hospital 0.000 5.84884 0.8622 0.8162

Avenue supermarts ltd. 0.000 3.70766 0.7775 0.8025

BHEL 0.162 2.90392 1.1486 1.4292
Colgate 0.020 1.65131 0.5346 0.4894
Exide Industries 0.079 0.83734 0.6921 0.9052
Info edge 0.085 5.01642 0.9842 0.947

Interglobal aviation 0.075 2.82552 0.9377 0.8763

Marico 0.030 1.03091 0.5889 0.5587
MRF 0.064 1.17507 0.6222 0.7953

Petronet lng ltd. 0.050 0.08813 0.6683 0.7007

Pidilight industries 0.053 2.64335 0.6138 0.7196

siemens ltd. 0.083 3.17418 0.7084 0.9298
Tata consumers 0.084 3.58285 0.7471 0.9414
Tata power 0.130 4.27727 0.9358 1.2644
TVS motors 0.084 2.66299 0.8108 0.94

Sum of weights 1.0

portfolio return 2.805
var 0.277
risk 0.527
Beta 1.000

32
Maximum risk Portfolio:

 The maximum risk portfolio has achieved an exceptionally high return of

504.5%, indicating significant gains. However, this return comes with a

relatively high risk of 60%. This suggests that while the portfolio has

delivered impressive returns, it has also been exposed to substantial volatility.

 The optimal combination portfolio, consisting of stocks such as Apollo

Hospital, Avenue Supermarts Ltd., Info Edge, Tata Consumers, and Tata

Power, has a beta of 0.897. This beta indicates that the portfolio's returns are

less volatile than the overall market. Additionally, it's mentioned that this

portfolio performs under the market return, although the specific return

percentage is not provided.

It's notable that the maximum risk portfolio has delivered substantial returns, which

could be attractive to investors seeking high growth opportunities. However, the

higher risk associated with this portfolio may make it less suitable for investors with

lower risk tolerance.

Investors should consider their investment goals, risk tolerance, and preferences when

choosing between these portfolios. While the maximum risk portfolio may offer

higher returns, it also comes with higher volatility, whereas the optimal combination

portfolio may provide more stability but with potentially lower returns. It's crucial for

investors to align their investment decisions with their individual financial objectives

and risk appetite.

33
Table 6 – Maximum Risk Portfolio

Max return
Securities Weights Return Risk beta
Apollo hospital 0.466 5.8488 0.8622 0.8162
Avenue
supermarts ltd. 0.162 3.7077 0.7775 0.8025
BHEL 0.000 2.9039 1.1486 1.4292
Colgate 0.000 1.6513 0.5346 0.4894
Exide Industries 0.000 0.8373 0.6921 0.9052
Info edge 0.216 5.0164 0.9842 0.947
Interglobal
aviation 0.000 2.8255 0.9377 0.8763
Marico 0.000 1.0309 0.5889 0.5587
MRF 0.000 1.1751 0.6222 0.7953

Petronet lng ltd. 0.000 0.0881 0.6683 0.7007

Pidilight industries 0.000 2.6434 0.6138 0.7196

siemens ltd. 0.000 3.1742 0.7084 0.9298
Tata consumers 0.046 3.5828 0.7471 0.9414
Tata power 0.110 4.2773 0.9358 1.2644
TVS motors 0.000 2.663 0.8108 0.94

Sum of weights 1.0

portfolio return 5.045
var 0.360
risk 0.600
Beta 0.897

Finding the efficient frontier line through a number of portfolio mix

 Using Solver to Optimize Portfolios:

 By adjusting the portfolio mix, you were able to increase the returns by 1%

while keeping the risk stable at 38.9%. Solver likely iteratively adjusted the

weights of different assets within the portfolio to achieve this optimization.

Refer table 12 - This table likely lists the various portfolio mixes achieved through

the optimization process. Each row represents a different portfolio mix, specifying

the weights of assets and their corresponding returns and risks.

34
 Efficient Frontier Graph:

 The efficient frontier is plotted on a graph, where the x-axis represents the risk

(standard deviation) and the y-axis represents the return. Each point on the

graph corresponds to a specific portfolio mix, with varying levels of risk and

return.

 The arc formed by connecting the points on the efficient frontier represents the

set of optimal portfolios.

 The leftmost point on the efficient frontier represents the portfolio mix with

the highest return for a given level of risk (in this case, 38.9%). This portfolio

mix is considered the efficient portfolio mix.

Efficient Portfolio Mix:

 The efficient portfolio mix is identified as the leftmost point on the efficient

frontier.

 This mix offers a return of 190% and a risk of 39%. It represents the optimal

balance between risk and return, maximizing returns for the given level of

risk.

 Any portfolio below this point on the graph is considered underperforming in

terms of risk-adjusted return, while any portfolio above this point represents a

desired level of return with higher risk.

Overall, the efficient frontier and the efficient portfolio mix identified through Solver

provide valuable insights for investors seeking to construct portfolios that offer the

best possible risk-return trade-off. By visualizing the efficient frontier, investors can

make informed decisions about portfolio allocation based on their risk preferences

and return objectives.

35
Chart 2 – Efficient frontier line

Efficient Frontier
3.00
2.70
2.60
2.50
2.10 2.40
2.50 2.30
2.20
2.00
2.00
1.60
1.50 1.90
1.65
1.00

0.50

0.00
0.38 0.40 0.42

Efficient Frontier

Building the utility matrix

The utility matrix was used to determine the best decision for each possible outcome,

for an investor to invest in a particular stock/portfolio.

Risk Aversion Coefficients:

 Low-risk investor: Risk aversion coefficient of 2

 Medium-risk investor: Risk aversion coefficient of 4

 High-risk investor: Risk aversion coefficient of 6

Portfolio Choices:

 Low-risk Investor (Risk Aversion Coefficient = 2): This investor prefers lower

levels of risk relative to expected returns. As such, they opt for Portfolio 4,

which offers a return of 200%.

36
  Medium-risk Investor (Risk Aversion Coefficient = 4): This investor is willing

to take on more risk compared to the low-risk investor but still seeks a

balanced risk-return trade-off. They choose Portfolio 5, which offers a slightly

higher return of 210%.

 High-risk Investor (Risk Aversion Coefficient = 6): This investor is more

tolerant of risk and seeks higher returns even if it means accepting higher

levels of risk. They select Portfolio 7, which provides the highest return of

230%.

These portfolio choices align with each investor's risk preferences based on their

respective risk aversion coefficients. The low-risk investor prioritizes minimizing

risk, while the high-risk investor prioritizes maximizing returns, with the medium-risk

investor falling somewhere in between.

By understanding their risk aversion coefficients, investors can tailor their portfolio

choices to align with their risk tolerance and return objectives, ensuring a suitable

risk-return balance in their investment strategy.

Table 7 - The utility matrix

Risk Aversion
Riskyness Investors 1 2 3 4 5 6 7 8 9 10 11
Coefficient (A)
High Mr. X 6 1.1448 1.1959 1.4475 1.2467 1.6446 1.7418 1.8381 1.9335 2.0280 2.1216 2.2142
Medium Mr. Y 4 1.2965 1.3472 1.5984 1.3978 1.7964 1.8945 1.9921 2.0890 2.1853 2.2811 2.3761
Low Mr. Z 2 1.4483 1.4986 1.7492 1.8489 1.9482 2.0473 2.1460 2.2445 2.3427 2.4405 2.5381

37
Table 8 - Markowitz Efficient Frontier – Lending & Borrowing
Security Returm Risk
15 stock portfolio 2.775526 0.4488
BSE next50 0.767296 0.428883

COV 0.019998
RF 0.0683

The lending & borrowing portfolio can be made through these 2 stocks – 15 Stocks
portfolio & BSE Next50, with help of their risk & returns.
Table 9 – Lending portfolio
Lending Portfolio
A
Rf

Wntpc Wrf Port ReturnPort var Port risk

0 1 0.0683 0 0
0.05 0.95 0.203661 0.000504 0.02244
0.1 0.9 0.339023 0.002014 0.04488
0.15 0.85 0.474384 0.004532 0.06732
0.2 0.8 0.609745 0.008057 0.08976
0.25 0.75 0.745107 0.012589 0.1122
0.3 0.7 0.880468 0.018128 0.13464
0.35 0.65 1.015829 0.024674 0.15708
0.4 0.6 1.151191 0.032227 0.17952
0.45 0.55 1.286552 0.040788 0.20196
0.5 0.5 1.421913 0.050355 0.2244
0.55 0.45 1.557274 0.06093 0.24684
0.6 0.4 1.692636 0.072512 0.26928
0.65 0.35 1.827997 0.0851 0.29172
0.7 0.3 1.963358 0.098696 0.31416
0.75 0.25 2.09872 0.113299 0.3366
0.8 0.2 2.234081 0.12891 0.35904
0.85 0.15 2.369442 0.145527 0.38148
0.9 0.1 2.504804 0.163151 0.40392
0.95 0.05 2.640165 0.181783 0.42636
1 0 2.775526 0.201421 0.4488

38
Table 10 – Borrowing portfolio
Borrowing Portfolio
A
Rf

Wntpc Wrf Port ReturnPort var Port risk

1 0 2.775526 0.201421 0.4488
1.05 -0.05 2.910888 0.222067 0.47124
1.1 -0.1 3.046249 0.24372 0.49368
1.15 -0.15 3.18161 0.266379 0.51612
1.2 -0.2 3.316972 0.290046 0.53856
1.25 -0.25 3.452333 0.31472 0.561
1.3 -0.3 3.587694 0.340402 0.58344
1.35 -0.35 3.723056 0.36709 0.60588
1.4 -0.4 3.858417 0.394785 0.628319
1.45 -0.45 3.993778 0.423488 0.650759
1.5 -0.5 4.129139 0.453198 0.673199
1.55 -0.55 4.264501 0.483914 0.695639
1.6 -0.6 4.399862 0.515638 0.718079
1.65 -0.65 4.535223 0.548369 0.740519
1.7 -0.7 4.670585 0.582107 0.762959
1.75 -0.75 4.805946 0.616852 0.785399
1.8 -0.8 4.941307 0.652604 0.807839
1.85 -0.85 5.076669 0.689364 0.830279
1.9 -0.9 5.21203 0.72713 0.852719
1.95 -0.95 5.347391 0.765904 0.875159
2 -1 5.482753 0.805684 0.897599

39
Table 11 – In this table the Combination portfolio, of 15 stock portfolio & BSE

Sensex Next50, The, optimum portfolio is calculated through the highest Sharpe ratio,

i.e. 6.11. Weights of 15 stock portfolio is 0.85 & that of BSE Sensex Next50 is 0.15,

which makes a total of 1.

Portfolio risk is .3934 with portfolio return of 2.4742.

Combination
A
B

Wa Wb Port ReturnPort var Port risk Sharpes Ratio

0 1 0.767296 0.183941 0.428883 1.629806
0.05 0.95 0.867708 0.16841 0.410378 1.94798
0.1 0.9 0.968119 0.154606 0.3932 2.288454
0.15 0.85 1.068531 0.142529 0.37753 2.649409
0.2 0.8 1.168942 0.132178 0.363564 3.027373
0.25 0.75 1.269354 0.123555 0.351504 3.416902
0.3 0.7 1.369765 0.116658 0.341553 3.810438
0.35 0.65 1.470177 0.111488 0.333899 4.19851
0.4 0.6 1.570588 0.108045 0.328702 4.57036
0.45 0.55 1.671 0.106329 0.326081 4.91503
0.5 0.5 1.771411 0.10634 0.326098 5.222704
0.55 0.45 1.871823 0.108077 0.328751 5.485988
0.6 0.4 1.972234 0.111541 0.333978 5.700777
0.65 0.35 2.072646 0.116732 0.341661 5.866471
0.7 0.3 2.173057 0.12365 0.351639 5.985555
0.75 0.25 2.273469 0.132295 0.363724 6.062755
0.8 0.2 2.37388 0.142667 0.377712 6.104064
0.85 0.15 2.474292 0.154765 0.393402 6.115863
0.9 0.1 2.574703 0.16859 0.410597 6.104285
0.95 0.05 2.675115 0.184142 0.429118 6.074821
1 0 2.775526 0.201421 0.4488 6.032149

40
Chart 3 – The same is indicated in this chart, the blue line indicates lending portfolio

& red line indicates Borrowing portfolio, the green arc is the possible number of

portfolios in the given mix, the left most point indicates the Optimal mix of portfolio,

at a portfolio return of 247%

Markowitz Efficient Frontier line - Lending &

Borrowing
6

2.47429181445494

0
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1

41
5.2. DISCUSSIONS AND INTERPRETATIONS

It's important to understand that beta alone doesn't dictate whether a portfolio

outperforms or underperforms the market. It merely indicates the sensitivity of the

portfolio's returns to movements in the market.

It's important to note that the minimum risk portfolio's return of 200% is impressive,

especially given its relatively low risk. On the other hand, the optimal combination

portfolio, while having a lower beta and potentially offering reduced volatility, may

not have achieved as high returns as the market.

Thus, we accept the H0 hypothesis, in the following manner

H0: The portfolio beats the market Benchmark S&P BSE SENSEX Next 50.

Since, the portfolio has outperformed the benchmark in the Chart 2, & we have

checked the performance with other stocks as well.

H0: The portfolio is well diversified.

The various sectors from medical, automobile, FMCG, chemical & aviation is used to

build the portfolio we draw inference from Table 1.

H0: The portfolio can create a utility matrix for different risk averse persons.

The utility matrix is created for X, Y & Z investor, taking into account their risk

aversion coefficient. we draw inference from table 7.

Thus, it is interpreted that 15-stock portfolio can outperform the benchmark & create

value for its investors.

42
 CHAPTER 6

LIMITATIONS, RECOMMENDATIONS AND DIRECTION FOR

FUTURE STUDY

6.1. LIMITATIONS
Even your careful and sincere endeavour there are some limitations –

1. Data Quality and Accuracy: The accuracy and reliability of the data

used for stock prices, historical returns, and other relevant financial

metrics may affect the precision of the efficient frontier calculation.

Errors or inconsistencies in the data could lead to inaccurate portfolio

optimization results.

2. Assumptions and Model Complexity: The efficient frontier calculation

relies on certain assumptions regarding expected returns, volatility, and

correlations between assets. These assumptions may not hold true in

real-world conditions, especially during periods of market turbulence

or structural changes. Moreover, the complexity of the mathematical

models used for portfolio optimization introduces additional risk of

model misspecification.

3. Limited Historical Data: The availability of historical data for the

selected stocks and the benchmark index may be limited, particularly

for smaller or less-established companies. This limitation could impact

the robustness of the efficient frontier analysis, especially when

estimating future returns and risk parameters.

43
4. Transaction Costs and Liquidity Constraints: The efficient frontier

analysis typically assumes frictionless markets with no transaction

costs. In reality, buying and selling securities incurs transaction costs,

which can significantly impact portfolio performance, especially for

smaller portfolios. Additionally, liquidity constraints may limit the

ability to implement optimal portfolio weights, particularly for illiquid

or thinly traded stocks.

5. Market Dynamics and Structural Changes: Market dynamics, such as

changes in investor sentiment, economic conditions, regulatory

environment, or technological disruptions, can affect the relationships

between asset returns and correlations over time. Structural changes in

the market may render historical data less relevant for predicting future

asset behaviour, potentially leading to suboptimal portfolio allocation.

6. Benchmark Selection: The choice of the S&P BSE Sensex Next 50 as

the benchmark index may not adequately represent the risk and return

characteristics of the 15-stock portfolio. Differences in sectoral

composition, market capitalization, and other factors between the

portfolio and the benchmark index could influence the interpretation of

portfolio performance relative to the benchmark.

7. Risk Management and Diversification: While the efficient frontier

analysis aims to optimize portfolio returns for a given level of risk, it

44
 may not fully capture all sources of risk, including systemic risks and

tail events. Moreover, diversification benefits may be limited if the

selected stocks exhibit high correlations during market downturns,

undermining the effectiveness of portfolio risk management strategies.

8. Sensitivity to Input Parameters: The efficient frontier analysis is

sensitive to input parameters, such as expected returns, volatility

estimates, and correlation coefficients. Small changes in these

parameters can lead to significant variations in the optimal portfolio

weights and frontier shape, highlighting the importance of robust

sensitivity analysis and scenario testing.

6.2. RECOMMENDATIONS AND FUTURE SCOPE OF RESEARCH

1. For future studies building upon the project of computing the

efficient frontier of a 15-stock portfolio benchmarked against the

S&P BSE Sensex Next 50, several directions could be explored to

further enhance understanding and practical application:

2. Advanced Portfolio Optimization Techniques: Investigate

advanced portfolio optimization techniques beyond traditional

mean-variance optimization, such as multi-objective optimization,

Bayesian methods, or machine learning algorithms. Explore how

these methods can incorporate additional objectives, constraints,

and information to generate more robust and adaptive portfolio

allocations.

45
3. Integration of Alternative Assets: Expand the scope of the portfolio

analysis to include alternative assets classes, such as commodities,

real estate, or alternative investments like hedge funds and private

equity. Assess the diversification benefits and risk-return

characteristics of incorporating these assets into the portfolio

construction process.

4. Factor-Based Investing: Explore factor-based investing strategies,

such as value, momentum, quality, and low volatility factors, and

examine their impact on portfolio construction and performance.

Investigate how factor-based approaches can be integrated into the

efficient frontier analysis to enhance risk-adjusted returns and

mitigate portfolio risk exposures.

5. Dynamic Asset Allocation Models: Develop dynamic asset

allocation models that dynamically adjust portfolio weights based

on changing market conditions, economic indicators, and risk

factors. Explore tactical asset allocation, dynamic risk parity, or

adaptive asset allocation strategies to exploit market inefficiencies

and enhance portfolio performance over time.

6. Risk Management and Tail Risk Protection: Investigate innovative

risk management techniques to protect against tail risk events and

extreme market downturns. Evaluate the effectiveness of strategies

46
 such as tail risk hedging, option-based strategies, or alternative risk

premia strategies in mitigating downside risk while preserving

upside potential.

7. Environmental, Social, and Governance (ESG) Integration:

Incorporate environmental, social, and governance (ESG)

considerations into the portfolio construction process to align

investments with sustainability goals and ethical principles. Assess

how ESG factors can be integrated into the efficient frontier

analysis to enhance long-term risk-adjusted returns and promote

responsible investing practices.

8. Scenario Analysis and Stress Testing: Conduct scenario analysis

and stress testing to assess the resilience of the portfolio under

different market scenarios, economic scenarios, and geopolitical

events. Explore how alternative scenarios and stress tests can

inform portfolio decision-making and enhance risk management

practices.

9. Behavioral Finance and Investor Preferences: Explore the

implications of behavioral biases and investor preferences on

portfolio construction and decision-making. Investigate how

incorporating insights from behavioral finance can improve the

design of investment strategies, asset allocation frameworks, and

risk management approaches.

47
10. Utilizing reinforcement learning algorithms such as Q-learning and

Deep Q-learning to enhance portfolio robustness.

11. Expanding the analysis framework to include additional sectors for

designing more comprehensive portfolios.

12. Implementing Python for financial analysis and algorithmic

trading, utilizing interactive visualizations using Bokeh on various

portfolio indexes.

13. Assessing portfolio performance based on return, risk, Sharpe ratio,

and Value at Risk (VaR) at different confidence levels.

14. Further exploring the integration of big data analytics into financial

market estimation techniques.

15. Extending the research to incorporate GARCH framework for

analysing variance and correlation structures across assets.

16. Investigating the impact of commodity investments on portfolio

diversification and risk management.

17. Analysing the effectiveness of different portfolio optimization

models and risk measures beyond Mean-Variance theory.

18. Investigating the implications of heteroskedasticity and

autoregressive conditional heteroskedasticity (ARCH) in financial

data.

19. Exploring active strategies for commodity futures trading and

incorporating leveraged commodity futures into portfolio

optimization.

20. Considering alternative risk measurements such as semi-variance,

Modified Value at Risk, and downside risk for portfolio analysis

48
 CHAPTER 7

CONCLUSION

The study of portfolio is a complex and difficult task as it is totally based on future

prediction and anticipation. But the investors need to do portfolio analysis and

construct portfolio accordingly in order to secure their funds. Portfolio construction

involve wise selection of stocks based on various factors. Efficient frontier is a tool

that serves the best help to the investors.

Efficient frontier shows all the possible combination of stocks in order to choose the

best portfolio according to the risk tolerance attitude of any investor. In this report

we took stocks from different industry to get the best benefit of diversification.

Here, we use various factors like industry stability, return percentage and

performance of the stock to select stocks for our portfolio. From our min-variance

analysis, we derived an efficient frontier and made our investment decision. By

revising our capital and risk-aversion coefficient we can make many other choices

for investment.

Many mathematical methods for portfolio optimization problems use a particular

initial composition of the portfolio without specifying how assets have been chosen.

The approach proposed by this research has an important advantage, as guaranteed

by the diversity of the portfolio and has the ability to improve portfolio performance

because it starts with an initial portfolio comprising a wide range of low-risk assets.

Designing a portfolio for optimizing the return and risk is a very challenging task. In

this paper, I have presented three different approaches to portfolio design, e.g., the

49
minimum risk portfolio, the optimum risk portfolio, and the maximum portfolio. I

have chosen eight sectors in the Indian stock market, and identified the fifteen

stocks from the sector based on their listing in the BSE of India. Using the historical

stock prices for each stock from 1 January 2018 to 31 December 2023, three

portfolios are designed for sectors. Based on the training data, several important

metrics of each portfolio are computed such as, annual return, annual risk, weight

assigned to the constituent stocks in a portfolio, the correlation heatmaps among the

stocks, and the principal components of the portfolios. After evaluating the

portfolios on their training data, I deployed the optimum risk portfolios over a

period of sixty months and computed their return values. It is observed that the

return value of the optimum risk portfolio is 190% higher than those of the market

beta & minimum risk portfolio. On the other hand, the optimum portfolio has higher

stocks in its portfolio like auto, aviation, medical and the FMCG sectors.

While the performances of the portfolio design approaches are found to be similar, it

is observed the return values of the Maximum risk portfolio is marginally higher

than its optimum risk counterparts.

The Utility matrix can help an investor take his investment decision based on the

riskiness of the portfolio. In this research the Low-risk Investor could opt for

portfolio 4 – portfolio return 200%, Medium-risk Investor could opt for portfolio 5 –

portfolio return 210%, High-risk Investor could opt for portfolio 7 – portfolio return

230%.

Finally, the Markowitz lending borrowing portfolio, indicates the optimal mix of the

15-stock portfolio & BSE Sensex Next50, help create trade off within the portfolio,

by having weights of 0.85 & 0.15, respectively.

50
51
 CHAPTER 8

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54
 CHAPTER 9

ANNEXURE A

PART 1 – TABLES

Table 1.

Industry Stocks Names

Medical 1 Apollo hospital
Internet services 1 Info edge
Avenue, tata consumers,
FMCG 4 Colgate, Marico
Energy industry and
infrastructure sector,
refineries, city gas
distributors, oil and gas,
fertilizer and power BHEL, Tata power,
companies 3 PETRONET LNG LTD
Technology 1 Siemens
Automobile & Its Ancillaries 3 TVS motors, Exide, MRF
Aviation 1 Interglobal aviation
Chemicals 1 Pidilight

Table 12

Avenue Tata
Apollo supermart Exide Intergloba consumer Tata TVS
No. P. ReturnP. Risk hospital s ltd. BHEL Colgate Industries Info edge l aviation Marico MRF Petronet lng ltd. Pidilight industries siemens ltd. s power motors Sum
1 1.60 0.39 0.0320 0.0523 0.0000 0.2632 0.0509 0.0000 0.0258 0.1861 0.1246 0.1466 0.0881 0.0071 0.0000 0.0000 0.0234 1.0000
2 1.65 0.39 0.0373 0.0550 0.0000 0.2621 0.0472 0.0000 0.0266 0.1830 0.1216 0.1424 0.0897 0.0103 0.0000 0.0000 0.0246 0.9997
3 1.90 0.39 0.0594 0.0668 0.0000 0.2574 0.0313 0.0127 0.0305 0.1663 0.1059 0.1240 0.0940 0.0215 0.0000 0.0000 0.0302 1.0000
4 2.00 0.39 0.0683 0.0722 0.0000 0.2553 0.0250 0.0173 0.0319 0.1601 0.1001 0.1163 0.0954 0.0261 0.0000 0.0000 0.0320 1.0000
5 2.10 0.39 0.0772 0.0767 0.0000 0.2538 0.0188 0.0223 0.0332 0.1536 0.0938 0.1086 0.0974 0.0308 0.0000 0.0000 0.0339 1.0000
6 2.20 0.39 0.0850 0.0809 0.0000 0.2516 0.0120 0.0269 0.0343 0.1467 0.0872 0.1016 0.0987 0.0350 0.0046 0.0000 0.0356 1.0000
7 2.30 0.39 0.0927 0.0850 0.0000 0.2494 0.0054 0.0313 0.0356 0.1401 0.0805 0.0943 0.0999 0.0389 0.0099 0.0000 0.0372 1.0000
8 2.40 0.39 0.1005 0.0891 0.0000 0.2470 0.0000 0.0357 0.0367 0.1332 0.0735 0.0868 0.1011 0.0428 0.0151 0.0000 0.0386 1.0000
9 2.50 0.40 0.1090 0.0935 0.0000 0.2438 0.0000 0.0402 0.0376 0.1257 0.0650 0.0778 0.1020 0.0462 0.0200 0.0000 0.0393 1.0000
10 2.60 0.40 0.1166 0.0976 0.0000 0.2409 0.0000 0.0445 0.0382 0.1183 0.0560 0.0692 0.1029 0.0488 0.0243 0.0034 0.0392 1.0000
11 2.70 0.40 0.1242 0.1016 0.0000 0.2380 0.0000 0.0487 0.0387 0.1110 0.0472 0.0604 0.1039 0.0514 0.0285 0.0071 0.0393 1.0000

55