Building an Efficient Portfolio Using Sharpe’s Single Index Model(An Empirical Study with Reference to Nifty 50)

Abstract

In recent years, construction of an optimal portfolio has become progressively more challenge, since investors expect maximum return with minimum risk from their respective investment. To achieve this, the investor needs to have appropriate knowledge about the security analysis and portfolio theory for making accurate investment decisions. Even though Harry Markowitz developed a comprehensive model which stated that investors can reduce their risk through diversification, this research paper uses Sharpe ‘s Single Index Model (SIM) to construct an optimal portfolio. Reason being SIM requires very few inputs and is easier to calculate. The results showed that, forty-two stocks were bullish during the study period and benefitted investor with positive returns consistently and eight stocks showed negative trend/returns. As per the results obtained from the model, Optimal Portfolio is built by selecting twelve stocks which are above the cut off rate. This paper throws light not only on the method of constructing the portfolio and its application, but also calculates intrinsic value for the above selected stocks. As the result only 10 stocks show progressive intrinsic value. This research paper found that though nifty 50 was down by 7500 points by last of march, Pharmaceutical field securities strived due to covid 19 crisis.