Construction Of Optimal Portfolio Using Sharpe’s Single Index Model: An Empirical Study on Nifty 50 Stocks

Abstract

The construction of an optimal portfolio has become increasingly challenging in recent years, as investors expect to maximize returns and minimize risks from their respective investments. An investor needs to have proper knowledge of security analysis and portfolio theory for making correct investment decisions. In this study 50 companies of nifty50 listed Stocks have been considered. The daily closing share prices of the stocks from 1 February 2013 to 1 February 2023 have been used in the study. The characteristics such as returns in association with the systematic and unsystematic risk of selected stocks were analyzed. The proportion of investment of each stock included in the optimal portfolio was also computed. The analyses concluded with suggesting proportion of investment that can be beneficiary for an individual investor, financial planner or financial advisor are preferable in the construction of an optimal portfolio and thereby to spread the availability of funds. In early 1950, Harry Markowitz developed a comprehensive model which stated that investors can reduce their risk through diversification in the present study Sharpe’s Single Index Model (SIM) is used to construct an optimal portfolio. The reason for choosing SIM over the Markowitz Model is that it requires fewer inputs and is easier to calculate. It is named as Single Index Model as it uses only a single index for portfolio construction.