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

• Author Details:   
• Tanuj Nandan
• Nivedita Srivastava

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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 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. Further, the proportion of investment of each stock included in the optimal portfolio was also computed.

Keywords: Sharpe’s Single Index Model, Optimal Portfolio, Cut off Rate, Systematic Risk, Unsystematic Risk, Diversification, Beta, Risk, Return and Variance