Kushankur Dey & Debasish Maitra, Fellow Participant, IRMA
TITLE: PORTFOLIO SELECTION REVISITED: EVIDENCE FROM THE INDIAN STOCK MARKET
Authors’ Affiliation
First Author: Shri Kushankur Dey Doctoral Student, 3 rd Year Fellow Programme in Rural Management Institute of Rural Management, Anand (IRMA)
Gujarat388001
Email: f061@irma.ac.in / kushankurm@gmail.com
Second Author: Shri Debasish Maitra Doctoral Student, 2 nd Year Fellow Programme in Rural Management Institute of Rural Management, Anand (IRMA)
Gujarat388001
Draft Paper/IFID Conference/May2010
Kushankur Dey & Debasish Maitra, Fellow Participant, IRMA
ABSTRACT
Investment theory in securities markets preempts the study of the relationship between risk and returns. In this parlance, the behavior of stockprice (movement) has been a recurrent topic in financial jargon. A large number of studies have reported the riskreturn equation of the group of assets or the portfolios. A couple of literature have been carrying the magnitude of the results with respect to the portfolio selection, evaluation and optimisation since a long timeperiod. Several models are also being proposed and reviewed in view of their utilities and validities with renewed interests of the diverse participants. Hence, this paper is an attempt to examine the reliability and usefulness of the exante measures for formulating the portfolio in a congruent manner.
Prima facie the Sharpe singleindex model is incorporated in the study, besides, the Treynorindex, the Jensenindex, and the Sortinoindex, which of course, have yielded relatively a superior and legitimate result as compared to a singleindex model or measure. The study is conducted in Indian context with special reference to S&P CNX NIFTY index. NIFTY is considered as a proxy of the market, that comprises of 50 individual stocks and incorporation of these stocks are subject to three criteria; liquidity, market capitalisation, and floating stocks. Using the Sharpe postulated “algorithm”, cutoff is calculated to select and formulate the portfolio. 26 stocks have qualified to form the portfolio. A comprehensive analysis of each individual stock, portfolio, and the index is carried out with respect to their annualised returns, annualised standard deviations, betas, residual variances or deviations using the mentioned ratios. Meanvariance efficient portfolio is graphically presented in the paper adopting the Markowitz’ riskreturn measures approach.
Therefore, this paper is an amalgamation of both the modern and postmodern portfolio theory with a logical and an elegant approach. Moreover, this study, evidently, provides a basis to a large section of investors, especially retail investors for analysing, selecting, and evaluating the portfolio as a mirror image of the index on a specific reference point of his/her portfolios in order to achieve the optimisation of assets allocation and riskrestructuring in the Indian context.
Keywords : Portfolio theory, postmodern portfolio theory, Sharperatio or index, Treynorratio, Jensenratio, Sortinoratio, Coherent measures of risk
Draft Paper/IFID Conference/May2010
Kushankur Dey & Debasish Maitra, Fellow Participant, IRMA
1.
MOTIVATION
With the advent of information technology, there have been significant changes observed in the landscape of stock markets worldwide. Obviously, Indian stock market
is not an exception to the effect of globalization. Besides the relayrace of a band of
qualified institutional buyers (QIBs) and noninstitutional buyers (NIBs) in the market, evidently, small or retail investors are also taking interest to invest nowadays. Moreover, they understand and play the game by virtue of the “buylow and sellhigh” strategy. Often this type of investor falls into a trap by showing “herd” behaviour or sometimes reaps a quantum of “momentumprofit” by adopting “contrarian” strategy.
A good mix of fundamental and technical analysis helps the investor to formulate the
strategy either for buying or for selling the stocks or securities. This is, in a true sense, called portfolio selection and evaluation. On apriori basis, if investor seems to have a set of fullinformation about the market, he/she can invest proportionately to make a relative gain. Once the investor experiences his/her gain (loss) without knowing or predicting the market, he or she further does investment while taking the lessons from the past. We try to make it clear that individual or personal finance influenced by individual’s mental accounting, representativeness in the market (law of small numbers), disposition effect, conservatism, overconfidence, etc.;which have undoubtedly taken a distinct place in the realms of “behavioural finance”. We depart from this, rather we take our position to explore and explain adopting the philosophy of positive economics behind the occurrence of gain or loss of the investor. It is of course, a branch of financial economics, called security analysis and portfolio management (part
of 
modern portfolio theory). There were many contributions already made enrichment 
of 
this field till late eighties. Hence, an attempt has been made to analyse the use of 
security to improve the portfolio selection adopting the singleindex (algorithmic) model of William Sharpe (1964) in this paper along with a tinge of other approaches of
postmodern portfolio theory, say, Sortino ratio or index.
In first section, introduction is narrated succinctly; sectiontwo looks at literature review
followed by objectives, hypotheses, and methodology in sectionthree. Sectionfour discusses the results and findings. Sectionfive summarises the whole paper and comes
out with implication or leaves few signposts for the future research.
Draft Paper/IFID Conference/May2010
Kushankur Dey & Debasish Maitra, Fellow Participant, IRMA
2.
INTRODUCTION
SECTIONI
Relationship between return and risk has been receiving significant importance in realising the optimal allocation of stocks or optimal investment strategy or even for testing the market anomalies for abnormal stock returns in a horizon of timeperiod (Nath and Dalvi 2004). Hence, portfolio analysis has remained one of the highly pursued areas of research in financial economics for more than three decades. More implicitly, this makes a choice to the investor to take a wise action or prudent inaction which, in turn, compels the investor to cogitate upon the riskreturn embedded relationship of the asset. In real world, we try to measure the standard deviation as a proxy or surrogate to risk and investor attitudes toward portfolios depend exclusively upon expected return and risk (Markowitz 1959). Since diversified portfolios 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, 2 _{i} = β 2 2 _{m} + 2 ε _{i} , where β is systematic factor, 2 _{m} denotes the systematic risk and 2 ε _{i} is unsystematic risk contained portfolio. Thus, it would be relevant to measure the correlation or covariances (r _{x}_{,}_{y} _{o}_{r} Cov _{x}_{,}_{y} ) of the two or more stocks to the ratio of their individual standard deviation (σ _{x} , σ _{y} and σ _{i} ). This raises serious concerns to the investor that how much investment is required in each stock to formulate an optimal portfolio.
At this juncture, we try to bring some classics in the context of modern portfolio theory, which is obviously recounted with few barons of financial economics, namely, Roy, Markowitz, William Sharpe, Treynor, Black, Jensen, and Sortino. Markowitz in his noble winning paper arguably stated that the process of selecting a portfolio may be divided into two stages. The first stage starts with observation, experience, and ends up with beliefs about the future performances of available securities. The second stage starts with the relevant beliefs about future performances and ends with the choice and selection of portfolio (Markowitz 1952). This actually gave a birth to the modern portfolio theory in positive economics. Markowitz is also clear that historical data does not matter rather beliefs about the future as intuitively he posited that historical data is of interest only in so far as it helps form those beliefs about the future. Since different people have different beliefs, Markowitz’s pathbreaking research gives a motivation to investors to formulate a portfolio that can serve a proxy for the market in true sense. More so, he is not bothered about how those choices affect equilibrium process in the market. Sharpe (1964) assumed that investors are homogeneous in nature and are expected to agree on the expected returns, standard deviations and correlations of the
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Kushankur Dey & Debasish Maitra, Fellow Participant, IRMA
securities or stocks in chosen portfolio. Following the legendary works of others, two questions are relevant to pose at this juncture; (i) what would be the security return as a result of the event occurred in the economy or stock market in some point in time, which might be unexpected, or (ii) what would be the market return as a result of that particular event?
SECTIONII
3. LITERATURE REVIEW
Going by the definition of market efficiency which denotes that a market is efficient with respect to make abnormal returns or profits (other than by an incidence or by chance) by using this set of information to formulate buying and selling decisions (Bharadwaj 2009). We look at two types of popular analyses; one is “fundamental” and the other “technical”. These two have their own significant impact on investor’s decision making (DM) with respect to selffinancing portfolio or zeroinvestment (arbitrage) portfolio. Precisely, fundamental analysis takes into accounts of macroeconomic indicators, industry benchmark ratio and company whereas technical is based on charting and trend analysis, say, breadth analysis (dispersion of pricevolume ratio), relativestrengthindicator, moving average convergencedivergence (MACD) and Elliot’s wave study and band (Bollinger) analysis, etc. There are many tools and techniques already evolved to make the payoff or loss more certain without a mere and naïve investment strategy. On the corollary, it is obvious that market follows its own pattern satisfying the random walk hypothesis (RWH) or Chartists’ theory. Hence, we can say that “the behaviour of stock price has been a recurrent topic in financial jargon. Stock price is time varying and depends upon its past information, market news, and various macroeconomic factors * ” (Pradhan 2009: 1). French and Roll (1986) empirically showed that flow of information affects the magnitude of trading time following the observations and impacts on volatility, which follows trading time hypothesis (French and Rogalski 1980) rather than calendar time hypothesis. Hence, there is a trendreversal observed following the “formation” (say 6 months) and “test” (say, rest 6 months) period in postevent phenomena. This seems to have a formation of “conformity bias” as a difference between winner’ and looser’ portfolio (WL) as pointed out by Jagdish and Titman (1986). On the other side, there is an impact of value of assets and growth
^{*} Adapted from the paper, “Stock Price and Macroeconomic Indicators in India: Evidence from Causality and Cointegration Analysis” by Rudra P. Pradhan, Vinod Gupta School of Management, Indian Institute of Technology Kharagpur. This paper was presented at the conference, “Advanced Data Analysis, Business Analytics and Intelligence”, Indian Institute of ManagementAhmedabad, 2009.
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Kushankur Dey & Debasish Maitra, Fellow Participant, IRMA
on stock return. Cooper (2009) suggested that stocks with higher assets growth usually underperform relative to those with lower assets growth. Hence, it is advisable to take a long (buy or bid) position of stocks with higher return on assets (ROA) and a short (sell or ask) position of stocks with relatively lower ROA or assets growth. Hvidkjaer (2005) discussed the role of (extrapolation bias) small traders in the market showing the trade based analysis of momentum through the crosssectional analysis of stock returns. Factors determining this momentum profit or variances in the stock returns with a sentiment period in trading are namely, one month across return (negative), trading volume/market capitalisation (negative), earningstoprice (positive), return on equity (positive), booktoprice (positive),etc. Here, momentum is the effect that reasons out that winner tends to “win” and losers tend to “loose” for three to sixmonths horizon or reference frame of wealth allocation. This explanation draws argument from the realms of behavioural finance. Nowadays, algorithmic studies are conducting in this branch which is akin to positive financial economics.
Against this backdrop, simplified, logical, and elegant or a singleindex model helps to
measure the capitalasset pricing. Theoretically, we can say that capital market theory is
a major extension of the portfolio theory of Markowitz (Sharpe, 1964). Portfolio theory is really a connotation of how rational investors should build efficient portfolios or frontiers. On the other hand, capital market theory preempts us how assets should be priced in the capital markets if, indeed, everyone behaved in the way portfolio theory suggests. So the capital asset pricing model (CAPM) is a relationship amplifying how
assets should be priced in the capital market (Fama and French 2004). The model simplifies the complexity of real world, tells us that a linear relationship exists between
a security’s (stock) required rate of return and its beta as investment theory suggests
that beta is an approximate measure of risk for portfolios of securities that have been sufficiently diversified (Singh, 2008). Historically calculated beta and risk premium (R _{m}  R _{f} ) used to determine the required rate of return (R _{i} , or expressed as R _{i} =R _{f} +β(R _{m} R _{f} ) or
Ri=+bβ +ε _{i} ) on the investor’s portfolio. The question is on whether we adopt the ex ante or expost measures of beta to arrive at realistic return of the investor. This holds true for a hemophilic group of people containing same belief.
Treynor and Black (1973) showed empirically that adequate usage of security analysis can help to improve portfolio selection and they interpreted CAPM as putting forward that the investor should hold a model or replica of the market portfolio as investors have different expectations from the market consensus because of the absence of insight generating information. This implicitly tells about that the market is “noisy” and the assumption of Efficient Market Hypothesis (EMH) does not hold true in all cases
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Kushankur Dey & Debasish Maitra, Fellow Participant, IRMA
(Grossman and Stiglitz 1980; Fama 1991; Nelson and Schertz 1996; Campbell, Lo and MacKinlay 1997). Very often, semistrong (containing historical and public information) form of the market seems to persist. Following the elegant model of Treynor and Black on “portfolio choice” while investors had out of consensus beliefs, assumptions underlying EMH connotes that individual investor who is attempting to trade profitably on the difference between her expectations and those of a monolithic or gigantic market so large in relation to her own trading activities or strategies that market prices are unaffected by it (Varma 2010). Similar ideas can be traced in the popular BlackLitterman model of “Global Portfolio Optimisation” (1992) which started with some postulations, namely, we ready to accept that there are two distinct sources of information about future excess returns; investor views and market equilibrium; we assume that both sources of information are uncertain and are best expressed as occurrence of probability or distributions; lastly, we choose expected excess returns that are as consistent as possibly with both sources of information.
Even we stick to the market consensus, the CAPM beta itself has to be interpreted with care. The deviation of the CAPM makes it clear that the beta is actually the ratio of covariance of security’s return and market return to a variance of the market return and both of these are parameters of the subjective probability distribution that defines the market consensus…this may be formally correct, but it is misleading because it suggests that the beta is defined in terms of a regression on past data (Varma2010: retrieved from www.iimahd.ernet.in/~jrvarma/blog/index.cg on May 5,
2010).
Beta is considered as regressor (excess return of market portfolio on excess return of individual stock). But the conceptual meaning of beta is somehow different as empirical work of Guy and Rosenberg (1976) established in their paper, “prediction of beta from investment fundamentals” by incorporating few industry estimates, viz., variance in earnings, variance in cash flows, debttoequity ratio (levered or unlevered firm), debt toasset ratio, etc. Hence, there should be subjective beliefs about possible yet uncertain future changes in the beta because of changing business strategy or financial strategy must also be considered. The underpinning of this can serve purposes of an investor, assuming a rational one in positive economics, seems to be agreeable at several occasions that market is random and it has longindefinite memory to reach equilibrium or may show a meanreverting process or simply white noise after removing trend or drift. Therefore, it is quite intuitive that the data generating process does not remain same for too long being coupled with a proper method or fundamental judgment to reduce the sampling error. Being a rational investor wants to optimise the return and risk theoretically that gives a “meanvariance efficient portfolio frontier” underlying some feasible regions.
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Fortunately, Markowitz’s propositions about the efficient frontier that postulates two relevant parameters of the frequency distributions or two moments which are, namely, mean (first moment) and variance (second). He further stated that formulation of portfolio does not require any further higherorder parameters (Markowitz 1952; Ghosh 2009). Added that the covariance feature is most important that promotes the advantage through diversification of assets in the portfolio. This actually minimises the probability of occurrence of unsystematic risk to a certain limit. This criterion is applicable for more than 2security’s ( N C _{2} ) portfolio. If securities are two, there is no advantage from diversification if rates of return from those securities are positively and perfectly correlated (r _{x}_{,}_{y} =+1) which is unlikely happened with perfectly, negatively correlated security’s portfolio (r _{x}_{,}_{y} =1). In this case, portfolio return would be achieved with certainty. On the other side, the lower the magnitude of correlation, the better it is for diversification, and the negative value, if it is to be ascertained for correlation, is most desirable. Hence, there is a relation of inequality between the correlation coefficient and the ratio of 2security’s standard deviations would score good to delineate cases of advantage from diversification to those which are not. Markowitz’ work was precisely a posthoc work that was mostly concentrated on a small set of securities. Sharpe’s algorithm (1963 and 1964) tried to overcome the actual problem of formulating efficient portfolio in reality (stock market) and he had come out with a predictive, exante model to establish the generalisation of modern portfolio theory covering a large set of securities or the universe in the gamut of financial economics. His singleindex model brought an approach to the covariance of the stock prices that has been to identify the underlying economic forces simultaneously affecting all the stocks in the market. Hence, a shift from microeconomic bias to macroeconomic one was taken place gradually. This singleindex model is nothing but a forecast of the market rate of return and also of its variance during the holding period, in addition the expected rate of return and the variance for each security or stock in the starting selection vector of those stocks.
The distinction between Markowitz’ model and Sharpe’s model was that the former model was based on historical data that underscored the merit to attempt to foresee or forecast a relevant parameters or value in the future, involving the holding period for the fund relation or investment. The latter model specifically brought in the expected future values of the market return and in variance and these are essential elements determining the various parts of the optimisation or optimally calculations. Sharpe ratio or index (excess return from riskfree rate of return to standard deviation of return of portfolio) helps to identify the “rewardtovariability” of the investor’s portfolio. Treynor ratio or index (excess return from riskfree rate of return to beta of portfolio)
Draft Paper/IFID Conference/May2010
Kushankur Dey & Debasish Maitra, Fellow Participant, IRMA
and Jensen performancemeasures (difference between investor’s excess return and market return as a proxy for alpha coefficient) contributed substantially to the modern portfolio theory.
After 1990s, few observations were noticed and documented by financial experts, viz., Sortino (1991) in view of asymmetric distributions of stock values and random cashflow. This situation compelled to incorporate several modelbuilding approaches, namely, meanrisk model, expected utility maximisation, and stochastic dominance to capture the randomness of the stockreturn precisely. These phenomena gave a rebirth or transformation of modern portfolio theory to postmodern portfolio theory (PMPT). Sortino index (excess return from riskfree rate of return to downside risk) came into being for allocating assets or securities to capture the asymmetric distribution of stock return. Sortino and Price (1994), and Pederson and Satchell (2002) proved that the riskreturn frontier while risk is defined by stochastic secondorder dominance (SSDII), exhibits the same expected convexity properties of the traditional meanvariance frontier, thus, is desirable for portfolio analytics. Sortino index is defined as:
As an alternative, the Sortino ratio has been advocated in order to capture the asymmetry of the return distribution. It replaces the standard deviation in the Sharpe ratio by the downside deviation which captures only the downside risk. However, higher moments are incorporated only implicitly (Bacmann and Scholz, see also, Sortino 1998;
Therefore, the Sortino ratio is akin to the Sharpe ratio except that the square root of the semivariance replaces the volatility or it connotes that the risk is only measured with downmoves that is, relative to some target value or minimum acceptable returns (MAR). Lien (2002) argued that excessive kurtosis (fourth moment) has hardly any impact on the monotonic relation between Sortino and Sharpe ratios. Considering portfolio returns are normally distributed (lognormal), it is obvious that both Sortino ratio (SR) and upside potential ratio (UPR) are monotonically increasing functions of the Sharpe ratio. Hence, these three riskmeasures provide an extent for identical ranking of portfolio alternatives. Plantinga and de Groot (2001) stated that for higher levels of loss or riskaversion, the Sortino ratio succumbs to the best results with a correlation of approximately 60% with the preference function. Still, Sortino ratio has attracted few critics from the point of coherent risk measures as this ratio or “value at risk” (VaR) are adhoc attempts to measure the downside risk whereas there is potential ignorance of incorporating upside riskmeasures (Leland 1998). Hence, both are “generally inaccurate as an appropriate risk and/or performance measures” (Leland
1998).
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Kushankur Dey & Debasish Maitra, Fellow Participant, IRMA
4. OBJECTIVES
SECTIONIII
Based on the literature review, we try to formulate a portfolio using the database of Indian capital market, which is the constituent of stock and bond market precisely.
i. Use of Sharpesingle index model and ratioanalysis (Treynor, Jensen and Sortino) to formulate and improve the portfolio selection are to be ascertained through adequate employment of stocks returns and market returnsseries of the S&P CNX NIFTY index.
ii. Performance of portfolio is to be evaluated with respect to index by setting few relevant parameters, namely, beta, market return, stock return, systematic risk, unsystematic risk, and downside risk.
Crosssectional analysis is incorporated to administer the revenant tests in order to arrive at the stated objectives.
5. HYPOTHESES
H _{1} : Meanvariance efficient portfolio is likely to be achieved by incorporating Sharpe singleindex model approach as an exante measure of the modern portfolio theory in Indian context.
H _{2} : Portfolio riskreturn optimisation scores relatively higher than the index or market risk and return equation.
H _{3} : Optimal portfolio selection is possible using the Sharpe singleindex model if and only market is considered a proper vector space.
H _{4} : A good combination of all ratios would define the portfolio relatively superior to a singleratio based approach as a contingency approach and corroborate to the principlesbased coherent risk measures and postmodern portfolio theory.
Negations of the above mentioned alternate hypotheses are nothing but the null ones (hypotheses).
6. METHODOLOGY
Methodological purposiveness and congruence are two most critical issues in financial economics. Concordance about the model selection should be achieved to empirically test the chosen statistical model in order to arrive at precision and to approximate the
Draft Paper/IFID Conference/May2010
Kushankur Dey & Debasish Maitra, Fellow Participant, IRMA
reality (ontology). Model is a representative of the theory which tries to explain any phenomena comprehensively and consistently. In this section, we try to define the model and to delineate the set of procedures for the measurement.
6.1. Model Specifications and Notations
We consider that let there be N risky assets with mean vector μ and covariance matrix Ω assuming that expected return from at least two assets differ and their covariance matrix is of full rank (linearly independent or orthogonal in nature). Define ω _{a} as the (N X 1) vector of portfolio weights for an arbitrary portfolio “a” with weights summing to unity (1). Portfolio “a” has mean return μ _{a} _{=} ω _{a} ’ μ and variance, σ 2 _{a} _{=} ω _{a} ’ Ω ω _{a} . The covariance between any two portfolios “a” and “b” is ω _{a} ’ Ω ω _{b}_{.} Given the population of assets, minimumvariance portfolios are constructed in the absence and presence of riskfree asset (Merton 1972; Roll 1977; Campbell, Lo, and Mackinlay 2007).
Stylized Fact: Portfolio p is the minimumvariance portfolio of all portfolios with mean return
μ _{p} if its portfolio weight vector is the solution to the following constrained optimisation:
subject to
min ω ’ Ω ω
ω
ω ’ μ = μ _{p}
ω ’ τ = 1
(i)
(ii)
(iii)
To solve the optimisation problem, we formulate the Lagrangian function L, differentiate with respect to ω, set the resulting equation to zero, and then solve for ω. To arrive at stable solution, the Lagrangian function we have
L = ω ’ Ω ω + δ _{1} (μ _{p}  ω’ μ) + δ _{2} (1 ω ’ τ)
(iv)
Where τ is a conforming vector of ones and δ _{1} and δ _{2} are Lagrangian multipliers. Differentiating L with respect to ω and setting the result equal to zero, we get
2 Ω ω  δ _{1} μ  δ _{2} τ = 0 
(v) 
Combining (v), (ii), and (iii) equations, we find the solution 

ω _{p} = g + hμ _{p} 
(vi) 
Where g and h are (N X 1) vectors, g = 1/D [B (Ω 1 τ) – A (Ω 1 μ)] 
(vii) 
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Kushankur Dey & Debasish Maitra, Fellow Participant, IRMA
h = 1/D [C (Ω 1 μ) – A (Ω 1 τ)]
(viii)
and A = τ ’ Ω 1 μ, B = μ ’ Ω 1 μ, C = τ ’ Ω 1 τ, D = BC A 2
For example, p and r are two minimumvariance portfolios. The covariance of the return of p with the return of r is
Cov (R _{p} , R _{r} ) = C/D (μ _{p} –A/C) (μ _{r} –A/C) +1/C
(ix)
And portfolio g as the global minimumvariance portfolio and for each minimum variance portfolio, say p, except the global one, there exists a unique minimumvariance portfolio that has zero covariance with p. This portfolio is said to be the zerobeta portfolio with respect to p. Hence, we have
ω _{g} = 1/C Ω 1 τ, μ _{g} = A/C, σ 2 _{g} = 1/C 
(x) 
Cov (R _{g} , R _{p} ) = 1/C 
(xi) 
We now introduce a riskfree asset into the analysis and consider portfolios composed of a combination of the N risky assets and the riskfree asset. With a riskfree asset the portfolio weights of the risky assets are not constrained to sum to unity, since (1 ω ’ τ) can be invested in the riskfree asset. Therefore, given a riskfree asset with return R _{f} the minimumvariance portfolio with expected return μ _{p} will be the solution to the constrained optimisation.
subject to
min ω ’ Ω ω
ω
ω ’ μ+ (1 ω ’ τ) = μ _{p}
(xi)
(xii)
Taking the Lagrangian function L, differentiate it with respect to ω, set the resulting equation to zero, and then solve for ω. Hence, we have
L = ω ’ Ω ω+ δ {μ _{p}_{} ω ’ μ(1 ω ’ τ) R _{f} }
(xiii)
Differentiating L with respect to ω and setting the result equal to zero, we get
2 Ω ω+ δ (μR _{f} τ) = 0
(xiv)
Combining (xiv) and (xii) equations, we get the solution,
ω _{p} = (μ _{p} _{} R _{f}_{)} / (μR _{f} τ) ’ Ω 1 (μR _{f} τ)* Ω 1 (μR _{f} τ)
(xv)
We can express ω _{p} as a scalar which depends on the mean of p times a portfolio weight vector which does not depend on p in the given vector space.
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ω _{p} _{=} c _{p} ŵ where c _{p} _{=} (μ _{p} _{} R _{f}_{)} / (μR _{f} τ) ’ Ω 1 (μR _{f} τ) and ŵ = Ω 1 (μR _{f} τ)
(xvi)
Thus with a riskfree asset all minimumvariance portfolios are a combination of a given risky asset portfolio with weights proportional to ŵ and the riskfree asset. This portfolio of risky assets is said to be the tangency portfolio and has a weight vector. Therefore, with the help of portfolio weight vector, tangency portfolio is construed and with a riskfree asset all efficient portfolios lie along the line from the risk free asset through portfolio q. Hence, we get
ω _{q} =1/ τ ’ Ω 1 (μR _{f} τ)* Ω 1 (μR _{f} τ)
(xvii)
The expected excess return per unit risk is useful to provide a basis for economic interpretation of tests of the CAPM. This can be achieved using the Sharpe ratio. For any asset or portfolio “a”, the ratio is defined as the mean excess return (R _{i} –R _{f} or μ _{a} –R _{f} ) divided by the standard deviation of return of assets or portfolio.
Sr _{a} = (μ _{a} –R _{f} )/σ _{a}
(xviii)
Treynor index is slightly different from the Sharpe ratio. It is defined as the mean excess return (R _{i} –R _{f} or μ _{a} –R _{f} ) divided by the beta of assets or portfolio.
Tr _{a} = (μ _{a} –R _{f} )/β _{a}
(xix)
Jensen performancemeasures approach provides a basis for calculating alpha () coefficient or intercept of the portfolio. Hence, we can get from the CAPM (twofactor) model
(μ _{a} –R _{f} ) = +β _{a} (μ _{m} _{} R _{f} ), or Jensen measures, = [(μ _{a} –R _{f} )  β _{a} (μ _{m} _{} R _{f} )]
(xx)
Sortino index is defined as the mean excess return (R _{i} –R _{f} or μ _{a} –R _{f} ) divided by the downside risk or asymmetric distribution of stock or portfolio return.
Sor _{a} = (μ _{a} –R _{f} )/d _{a}
(xxi)
In analysis, we have used the mentioned ratios. SharpeLinter version of the CAPM is drawn from marketmodel building approaches which we have used for calculating beta as regressor and residual variance or unsystematic risk on dailycount basis of the index. Define Z _{t} as an (N X 1) vector of excess returns for N assets or portfolios of assets, for these N assets; the excess returns can be described using the excessreturn market model:
Zt = +βZ _{m}_{t} +Є _{t}_{,} where E[Є _{t} ] = 0, E [Є _{t}_{,} Є _{t} ’ ] = ∑, E [Z _{m}_{t} ] = μ _{m} , E [(Z _{m}_{t}  μ _{m} ) 2 ] = σ 2 _{m}_{,}
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Cov [Z _{m}_{t}_{,} Є _{t} ] = 0
(xxii)
β is the (N X 1) vector of betas, Z _{m}_{t} is the time period t market portfolio excess return _{,} and and Є _{t} are (N X 1) vectors of asset return intercepts and disturbance or noise, respectively. In case of Sharpe singleindex model, the algorithm involves the following equations presented in the table below:
Table 1: William Sharpe Singleindex modelnotation 

Rank 
Security 
Excess 
Excess 
Excess 
Beta to 
Cum. 
Cum. 
Cutoff 
Zvalue 

order 
No. 
mean 
mean 
return 
Residual 
or 

(1) 
(2) 
return 
return to beta 
times beta to residual 
variance 
(5) 
(6) 
or C * 
Optimal portfolio 

(3) 
(4) 
variance 
(6) 
(7) 
selection 

(5) 
(8) 

1, 2, 
a _{1} , a _{2} , a _{3} … 
(μ _{a} –R _{f} ) 
(μ _{a} –R _{f} )/β _{a} 
(μ _{a} –R _{f} ) 
β 
_{a} /σ _{a} 2 
∑(μ _{a} 
∑ 
[σ 2 _{m} ∑(μ _{a} 
_{a} /σ _{a} ^{2} ((μ _{a} –R _{f} )/β _{a}  β C ^{*} ) 

3… 
β 
_{a} /σ _{a} ^{2} 
–R _{f} ) 
β 
_{a} /σ _{a} 2 
–R _{f} ) 

β 
_{a} /σ _{a} 2 
β _{a} /σ 
_{a} 2 ]/ 

[1+ 

σ ^{2} m( ∑ 

β _{a} /σ _{a} 2 ] 

Note: Security’s selection to formulate portfolio is based on benchmark ratio or cutoff score. Securities which have higher excess mean return to beta to calculated cutoff score, those would be eligible to enter into the portfolio. Z value would decide the proportion or weights of stocks or securities in the portfolio and based on this, ranking of security is done or optimisation is achieved (Fischer and Jordan 2008: 610614). 
6.2. Sampling Frame and Data
The study is based on 50 S&P CNX NIFTY companies that were part of the index since November 3, 1995 to till date. S&P CNX NIFTY is recognised as a benchmark stock index based on the selected stocks traded at the National Stock Exchange (NSE). It is primarily owned and overseen by India Index Services and Products Ltd. (IISL), which is joint venture (JV) between the NSE (1992), India’s most advanced and leading Stock Exchange (3 rd ranked worldwide) and Credit Rating and Information Services of India Limited (CRISIL, 1987), India’s leading Credit Rating Company (198889) promoted by the S&P. IISL is the first specialised company in the country focused upon developing the stock indices as a core product by encompassing more than 20 sectors (24) in the
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Kushankur Dey & Debasish Maitra, Fellow Participant, IRMA
designed index, that is, NIFTY. In fact, this index was developed by Shah and Thomas during nineties. It has a consulting and licensing agreement with the Standard & Poor’s (S&P), who are world leaders in these services. It is noteworthy to mention that the average traded value of all NIFTY stocks is more than 80% of the traded value of all stocks available for trading on the NSE. The stocks are subject to inclusion in NIFTY based on their (listed companies) average market capitalization, that is, more than or equal to 500 crores; liquidity which is calculated on impact cost (ratio of actual buy/sell size to ideal buy/sell size) which should be 0.75% or even less than that either for buying or for selling the stocks and tradefrequencies of those stocks should be more than 90% of total trades over six months period; lastly, floating stocks should be at least of 12% which should not be held by promoters and associates or it is possible that 88% of the total stocks can be held by them (for more details, see, Patwari and Bhargava
2009).
However, for the purpose of study the data are used from April, 2009 to March, 2010 (244days closedtradeprice and since then, same 50 companies are the parts of this index. NIFTY capital market segment’s market capitalization is around 37% (36.674), while SENSEX excluding BSE100, BSE500, BSEIPO, MIDCAP, SMLCAP and other sectoral indices is reporting 63.326% as reported on December, 2009. In case of freefloat market capitalistion index, NIFTY (54.17%) is ahead of SENSEX (45.82%) other than or excluding BSE100. S&P CNX NIFTY is taken as market proxy and the average yields of Government of India (GOI) securities are used as riskfree rate of returns of the respective years. The data are collected from Centre of Monitoring Indian Economy (CMIE Prowess database), BSE, NSE, RBI, SEBI websites.
SECTIONIV
7. RESULTS AND DISCUSSIONS
Index data with respect to index return and stock return are retrieved from CMIE for 244trading dayscounts. Regressing index or market return on individual stock return (taking naturallog of both returnseries), beta is calculated for each 50stock. Calculated betas have achieved the precision of about 95% with the beta of the NSEprovided database. 50 independent regressions are run to estimate the predictor or regressor, that is, beta and unsystematic risk or residual variance (error component). Besides, descriptive statistics are also ascertained for both the index and stockreturn series of all 50stocks cumulatively. The positive skewness coefficients indicate that frequency distribution of index and stockreturns series are positively skewed or have longer thinner tail to the right. The unconditional distribution of both index and stock returns
Draft Paper/IFID Conference/May2010
Kushankur Dey & Debasish Maitra, Fellow Participant, IRMA
exhibit thin tails (leptokurtic) and excessive peak at the mean than the corresponding normal distributions. Both series follow an empirical distribution, say, lognormal, normality is not achieved as reported by JB (JarqueBera) statistic (4790.317 with significant pvalue for index return and 3838.90 with significant pvalue for stockreturn series on dailycounts) besides the unitroot check, which is shown in the following histogram and graph (Fig1, Fig2, and Fig3). Here the JB statistic is highly statistically significant for both index and stockreturns series, and hence we fail to accept the null hypothesis of normality.
Table2 represents the results of Augmented DickeyFuller (ADF) (Dickey and Fuller 1979) unitroot tests applied on the logfirst differences of daily stock and index returns series to test the existence of unit roots and identify the order of integration [I(1), in this case] of each variable. PhillipsPerron (PP) (Phillips and Perron, 1988) unit root test was not conducted to test the same as the samplesize is relatively large enough to follow the asymptoticy. Results show that the first differences of logarithm of the both index and stockprices yielded larger ADF statistics that rejected the null hypothesis with three critical values at three levels of significance, 1%, 5%, and 10%. Hence, we can safely infer that both series are stationary at their first differences but nonstationary processes are observed at their individual logseries. Therefore, evidently, movements of stockreturn series follow a meanreverting process, which is known as white noise (mean zero, variance, and covariance constant) conforming non linearity returnsseries. Beta, Fstatistic, R _{j} 2 , residual variance (σ _{ε} 2 ) of each stock are presented in Exhibit1.
FIG1: Descriptive statistics of Index return (S&P CNX NIFTY)
Draft Paper/IFID Conference/May2010
Kushankur Dey & Debasish Maitra, Fellow Participant, IRMA
FIG2: Descriptive statistics of Stock return (50 stocks)
FIG3: Pictorial presentation of NIFTYstock return
S to c k R e tu rn
Table 2: Results of Unit Root Tests 

Variables 
ADF (tstatistic) 
Levels 

First Differences 

dln Index_return (R _{m} ) 
10.15786* 
dln Stock_return (R _{i} ) 
11.73572* 
Note: The Mackinnon (1996) critical values for ADF test is 3.457, 2.873, 2.573 for both stockreturns series and indexreturns series with onesided pvalues and laglength is 5 (maximum 14) and laglength 8 (maximum is 14) at 1%, 5%, and 10% significance levels, respectively. Information criterion chosen is SIC. * indicates the significantpvalue rejecting the nullhypothesis. 
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Kushankur Dey & Debasish Maitra, Fellow Participant, IRMA
We have taken (regressed) predictor or beta to estimate the Sharpesingle index model for the portfolio optimisation. Individual stock return (R _{i} ), riskfree return (R _{f} ) or Tbills rate, that is, 4.7% annualised yield (0.035525% on daily count), beta (β _{j} ), market risk (σ _{m} 2 , calculated from the dailyvariance of the indexreturn), residual variance (σ _{ε} 2 );these indicators are taken into consideration to calculate cutoff (C * ) score to choose and select the stock from the given index, NIFTY to formulate the portfolio. In fact, systematic risk or β _{j}_{} multiple of indexreturnvariance (β 2 σ _{m} 2 ) to total risk (β 2 σ _{m} 2 + σ _{ε} 2 ) is called “Sharpe appraisal ratio” (Bodie et al., 2002). Finally, Zvalue for qualified individual stock is calculated which is nothing but to assign certain weights to the selected stocks in the portfolio or to arrive at the proportion of the stocks in the formulated portfolio or “Sharpestyle analysis”, say, “N” stocks comprise of singleindex portfolio following the covariance terms, [{(N 2  N)}/2]. In this case, 26 stocks are finally scored above C* or 0.253 to form a portfolio. Hence, total covarianceterms are 325 or N C _{2}_{6} out of 1225 (for the index). Following the Markowitz’ approaches, number of covarianceterms are 377 out of 1325. Enumeration satisfies the equation, that is, [{N× (N+3)}/2].
We have considered the market model approach other than constant return approach (μ _{i} ) to calculate the beta which is not exactly similar with CAPM. In market model, we have incorporated market return (R _{m} ) and individual stock return (R _{i} ) where as _{i} and β _{j} are chosen as coefficients of the OLSregression model. CAPM takes into account of R _{f} as replacement of and R _{m} as (R _{m} R _{f} ) the difference as excess market return or equity risk premium. Error component is considered as unsystematic risk that corroborates residual variance or noise in the returnseries of individual stock. This represents the unexplained variance or residual sum square (RSS) in the stock’s or security’s return. The following table provides an outlook of portfolio that is constructed after selecting 26individual security from the given index, with respect to portfolio beta, R 2 , F statistic, and tstatistics with pvalues at 5% level of significance, respectively. We try to estimate the predictive ability of NIFTY as explanatory or exogenous variable on the chosen portfolio as dependent or endogenous variable. β of the portfolio is 0.951 (standardized) and intercept is not significantly different from zero, that is, 0.168. Explained variance of the model is almost 90% with moderate to good DurbinWatson statistic (2.009). Hence, we can say that the first differences of logarithm of the both index and portfolio are free from serial correlation or autocorrelation problem and fail to reject the robustness of the model as the model is devoid of “spurious regression trap”. Residuals statistics are also mentioned in the table.
Draft Paper/IFID Conference/May2010
Kushankur Dey & Debasish Maitra, Fellow Participant, IRMA
Table 3: Results of Regression 

Dependent 
Portfolio 

Variable 

Independent 
Index (NIFTY) 

Variable 

R 
2 
0.904 (0.573**) 
DW 
2.009 

Fstat (Goodness of fit index) 
2261.296** 

Coefficients 

Intercept (α) 
tstatistic 
4.542 (0.037**) 

Beta (β) 
tstatistic 
47.553 (0.020**) 

Residuals 
Minimum 
Maximum 
Mean 
Std. deviation 

statistics (N 

=243) 

Predicted value 
5.43 
15.35 
0.37 
1.752 

Residual 
2.118 
2.633 
0.000 
0.572 

Std. Predicted 
0.312 
8.546 
0.000 
1.000 

value 

Std. Residual 
3.696 
4.593 
0.000 
0.998 

Note: **indicates significant pvalues of the mentioned tests’ statistics at 5% level of significance, respectively. In parentheses standard errors of the respective testsstatistics are mentioned. 
Fig4, 5, and 6 imply the pictorial presentation of portfolio’s actual, predicted and residuals movement, frequency distributions or histogram (descriptive statistic), and stationarity of regression standardised residuals, respectively.
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Kushankur Dey & Debasish Maitra, Fellow Participant, IRMA
FIG 5 &6: Histogram of the Portfolio and Normal PP plot of Regression Resiudals
Draft Paper/IFID Conference/May2010
Kushankur Dey & Debasish Maitra, Fellow Participant, IRMA
Based on the C * and ratio analysis (Sharpe, Treynor, Jensen, and Sortino) we have calculated the security’s rank in the chosen portfolio and downside risk considering calculation parameter, that is, minimum acceptable return (MAR) 0.05%. The following tables 4 & 5 in view of postmodern portfolio theory provide the details of portfolio’s average rank, security’s beta, annualised return, annualised standard deviation, etc. Meanvariance efficient frontier using Markowitz’ two parameters approach is shown in the following Fig7.
FIG7: MeanVarianceEfficient Return of the Portfolio
Table4: PostModern Portfolio Theory 
S&P CNX NIFTY 
Portfolio 

RiskReturn Analysis 

Sharpe Ratio 
1.88 
4.64 

Downside Deviation (MAR) % 
1.060 
1.017 

Downside Deviation (RFR) % 
4.827 
4.694 

Downside Deviation (0%) 
1.035 
0.993 

Sortino Ratio (MAR) 
0.135 
0.301 

Sortino Ratio (RFR) 
0.942 
0.934 

Sortino Ratio (0%) 
0.186 
0.359 

Mean Day Return (%) 
0.22 
0.37 

Standard Deviation (%) 
1.88 
1.84 

Compounding Daily Return (%) 
0.19 
0.36 

Annualized Return (%) 
60.04 
138.24 

Annualised SD (%) 
29.44 
28.79 
Draft Paper/IFID Conference/May2010
Kushankur Dey & Debasish Maitra, Fellow Participant, IRMA
Jens 

Sr 
Proportion 
en 

N 
Rank 
Z  
/Weightag 
Annual 
Annualis 
Sharpe 
Treynor 
Ran 
Inde 
Ran 
Averag 

o. 
Portfolio 
Order 
Value 
e(%) 
ised Ri 
ed SD 
Beta 
Ratio 
Rank 
Index 
k 
x 
k 
e Rank 

1 
A 
B B Ltd. 
14 
1.426 
2.716 
81.791 
39.298 
0.82 
1.961 
18 
93.965 
17 
3.171 
19 
12.654 
Ambuja 

Cements 

2 
Ltd. 
25 
0.348 
0.663 
54.790 
38.873 
0.72 
1.288 
24 
69.514 
25 
1.024 
25 
17.096 

Axis Bank 

3 
Ltd. 
11 
2.419 
4.609 
149.533 
48.139 
1.23 
3.008 
7 
117.718 
10 
7.679 
8 
7.003 

Bharat 

Petroleum 

4 
Corpn. Ltd. 
23 
0.464 
0.883 
32.112 
37.571 
0.42 
0.729 
26 
65.172 
26 
0.415 
26 
17.576 

5 
Cipla Ltd. 
20 
0.947 
1.805 
45.382 
34.051 
0.51 
1.194 
25 
79.691 
21 
1.244 
24 
15.398 

G 
A I L 

6 
(India) Ltd. 
21 
0.606 
1.155 
55.041 
35.452 
0.68 
1.419 
23 
73.972 
24 
1.270 
23 
16.140 

H 
C L 

Technologi 
14.69 

7 
es 
Ltd. 
5 
3.277 
6.244 
209.214 
52.571 
1.04 
3.889 
3 
196.610 
1 
7 
2 
2.296 
H 
D F C 

8 
Bank Ltd. 
3 
3.714 
7.076 
85.028 
30.712 
0.76 
2.614 
10 
105.642 
12 
3.827 
15 
9.871 

Hero 

Honda 

9 
Motors Ltd. 
9 
2.683 
5.112 
76.293 
33.869 
0.61 
2.113 
17 
117.300 
11 
3.783 
16 
9.704 

Hindalco 

Industries 
11.60 

10 
Ltd. 
12 
2.378 
4.531 
194.353 
56.453 
1.33 
3.359 
6 
142.566 
7 
8 
3 
4.453 

I C I C I 

11 
Bank Ltd. 
18 
1.240 
2.363 
139.935 
51.022 
1.4 
2.650 
9 
96.568 
16 
5.779 
11 
9.883 
Draft Paper/IFID Conference/May2010
Kushankur Dey & Debasish Maitra, Fellow Participant, IRMA
Jens 

Sr 
Proportion 
en 

N 
Rank 
Z  
/Weightag 
Annual 
Annualis 
Sharpe 
Treynor 
Ran 
Inde 
Ran 
Averag 

o. 
Portfolio 
Order 
Value 
e(%) 
ised Ri 
ed SD 
Beta 
Ratio 
Rank 
Index 
k 
x 
k 
e Rank 
Infrastructu 

re 

Developme 

nt Finance 

13 
Co. Ltd. 
15 
1.363 
2.598 
141.309 
55.135 
1.35 
2.477 
14 
101.162 
15 
6.193 
10 
9.159 
Kotak 

Mahindra 

14 
Bank Ltd. 
24 
0.360 
0.687 
117.347 
53.243 
1.37 
2.115 
16 
82.195 
20 
3.686 
17 
13.038 
Larsen & 

15 
Toubro Ltd. 
16 
1.255 
2.392 
119.481 
44.643 
1.26 
2.570 
12 
91.064 
18 
4.508 
13 
11.190 
Maruti 

Suzuki 

16 
India Ltd. 
17 
1.244 
2.370 
66.667 
37.007 
0.7 
1.673 
21 
88.467 
19 
2.322 
21 
13.891 
Punjab 

National 

17 
Bank 
2 
5.088 
9.695 
133.840 
36.591 
0.83 
3.528 
4 
155.542 
5 
8.321 
7 
5.176 
Ranbaxy 

Laboratorie 

18 
s Ltd. 
7 
2.788 
5.312 
138.664 
47.057 
0.79 
2.846 
8 
169.524 
4 
9.024 
5 
3.949 
Siemens 

19 
Ltd. 
4 
3.499 
6.668 
158.183 
45.384 
1.18 
3.381 
5 
130.036 
8 
8.820 
6 
5.794 
Steel 

Authority 

Of India 

20 
Ltd. 
13 
1.577 
3.005 
130.244 
48.391 
1.24 
2.594 
11 
101.213 
14 
5.694 
12 
9.531 
Draft Paper/IFID Conference/May2010
Kushankur Dey & Debasish Maitra, Fellow Participant, IRMA
Jens 

Sr 
Proportion 
en 

N 
Rank 
Z  
/Weightag 
Annual 
Annualis 
Sharpe 
Treynor 
Ran 
Inde 
Ran 
Averag 

o. 
Portfolio 
Order 
Value 
e(%) 
ised Ri 
ed SD 
Beta 
Ratio 
Rank 
Index 
k 
x 
k 
e Rank 
Sun 

Pharmaceut 

ical Inds. 

22 
Ltd. 
10 
2.602 
4.958 
58.605 
33.690 
0.36 
1.599 
22 
149.624 
6 
3.396 
18 
8.533 
Tata Motors 
17.57 

23 
Ltd. 
8 
2.778 
5.293 
250.168 
60.566 
1.26 
4.052 
1 
194.784 
2 
6 
1 
2.351 
Tata Power 

24 
Co. Ltd. 
22 
0.543 
1.035 
62.875 
34.594 
0.78 
1.680 
20 
74.532 
23 
1.501 
22 
15.560 
Tata Steel 

25 
Ltd. 
19 
1.181 
2.250 
153.758 
58.757 
1.42 
2.536 
13 
104.942 
13 
7.051 
9 
8.179 
11.12 

26 
Wipro Ltd. 
1 
5.278 
10.057 
160.261 
39.008 
0.8 
3.987 
2 
194.401 
3 
9 
4 
3.662 
Portfolio 
138.240 
28.790 
0.93 
4.637 
143.548 
8.208 

S&P CNX 

NIFTY 
60.030 
29.440 
1 
1.878 
55.290 
From the above Fig7, it can be inferred that feasible region would be any point on the meanvariance efficient frontier where tangency of potential portfolio would be a particular point intersecting the concave shaped curve. SharpeLinter version postulates that with a decrease in tangency of potential portfolio or assets, grouping of assets are likely to be increased. From the index, we have drawn 26 stocks that can form N C _{2}_{6} portfolios subject to the efficient frontier of the minimum variance. Portfolio performs relatively better than index with respect to its annualised return (138.240% vs. 60.030%), annualised standard deviation (28.790% vs. 29.440%), the Sharpeindex (4.637 vs. 1.878), the Treynorindex (143.548 vs. 55.290), and the Sortinoindex (0.301 vs. 0.135), respectively. Jensen index of the portfolio is 8.208. Hence, all four formulated hypotheses cannot be rejected or we fail to accept the null hypotheses. Coherent measures of risk (positive homogeneity, subadditivity, translation invariance, monotonicity) are considered while accomplishing the selection, evaluation of the portfolio (for more details, see, Acerbi and Scandolo 2007; Hull 2007).
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Kushankur Dey & Debasish Maitra, Fellow Participant, IRMA
SECTIONV
8. SUMMARY AND CONCLUSION
The present study has touched upon the area of portfolio selection and evaluation in the lights of both modern and postmodern portfolio theories. Ratioanalysis is succinctly interpreted and presented in order to improve the portfolio selection. Minimum variance portfolio is desired outcome if and only certain assumptions, namely, market as proper vector space, no randomness or stochastic nature of the measured variables, expected meanshortfall or tail conditional expectancy (TCE) or conditional valueat risk (VaR), etc. are not violated while formulating hypotheses and methodology. Sharpe’s singleindex approach has taken care of portfolio selection and optimisation well in this context. Although Sharpe’s postulations have possessed distinctiveness and parsimony, that is, containment of minimum assumptions and minimum complexity, incorporation of other ratios or indices have helped to improve or modify the portfolio selection. Markowitz’s meanvariance efficient frontier is considered during the determination of the portfolio’s risk and returnequations.
We have chosen the NIFTY index as it serves a better proxy of the market than any other indices, viz., BSESENSEX, BSEmidcap, BSE100 etc., in Indian context. 50stocks are considered and Sharpealgorithm is incorporated for calculating the cutoff score, which comes about 0.253% on averagedaily count basis. We have calculated beta, residual variance by regressing index return on individual stock return considering average yield of both index and stock on daily basis. Excess mean return and cumulative beta to residual variance are calculated using the Sharpe singleindex model and then, other ratios are also determined to look at the top26 stocks in regards to their annualised returns, annualised standard deviations, betas, Sharpeindex scores, Treynorindex scores, Jensenindex scores, and finally, we have arrived at average rank of individual stock, the portfolio, and the index. Evidently, portfolio’s performance is relatively superior to the index with respect to the Sharperatio or index, Treynorratio, Sortinoratio, annualised return. Coefficient of determination (CD) shows that the portfolio is a good mirror of the index and the standard deviation of the portfolio or the systematic risk component is on lower side compared to the index. Hence, we conclude that meanvariance efficient portfolio can be achieved by incorporating the Sharpe singleindex measure as an exante approach, which would take care of portfolio risk return optimisation (with the given constraints). Therefore, a good combination of all ratios incorporated in the paper provides a better ground to achieve the conformity of both the modern and postmodern portfolio theory.
Draft Paper/IFID Conference/May2010
Kushankur Dey & Debasish Maitra, Fellow Participant, IRMA
EXHIBIT1
Table6: Results of regression (on average daily counts basis using highfrequency data) 

Dependent 
Individual security (50 stocks) 

variable 

Independent 
Index or NIFTY 

variable 

Security’s name 
ModelR 2 (%) 
Beta (tStat) 
FStat (GFI) 
Residual 

variance (%) 

ABB 
38.078 
0.823 
(12.173**) 
148.20** 
0.000391 
ACC 
34.472 
0.767 
(12.259**) 
126.78** 
0.000397 
Ambuja 
29.814 
0.720 
(10.118**) 
102.374** 
0.000435 
Axis Bank 
56.775 
1.232 
(17.791**) 
316.554** 
0.000411 
Bharat Heavy 
59.966 
0.963 
(18.999**) 
360.991** 
0.00022 
Electricals 

Bharat 
10.835 
0.420 
(5.411**) 
29.286** 
0.000516 
Petroleum 

Bharti 
7.000 
0.720 
(4.260**) 
18.151** 
0.002451 
Cairn Energy 
47.415 
0.946 
(14.741**) 
217.306** 
0.000353 
Cipla 
19.639 
0.512 
(7.674**) 
58.898** 
0.000382 
DLF 
56.003 
1.639 
(17.514**) 
306.764** 
0.00075 
GAIL 
31.997 
0.681 
(10.648**) 
113.399** 
0.00035 
HCL 
33.390 
1.039 
(11.119**) 
123.651** 
0.000749 
HDFC 
53.310 
0.761 
(16.588**) 
275.176** 
0.00018 
Hero Honda 
28.706 
0.616 
(9.850**) 
97.038** 
0.000335 
Hindalco 
48.145 
1.330 
(14.958**) 
223.760** 
0.000677 
Hindustan 
13.739 
0.369 
(6.195**) 
38.387** 
0.000305 
Unilever 
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Kushankur Dey & Debasish Maitra, Fellow Participant, IRMA
Security’s name 
ModelR 2 (%) 
Beta (tStat) 
FStat (GFI) 
Residual 

variance (%) 

HDFC Ltd. 
58.357 
1.102 
(18.377**) 
337.737** 
0.000308 
ICICI Bank 
64.951 
1.396 
(21.133**) 
446.621** 
0.000374 
ITC 
24.560 
0.561 
(8.857**) 
78.459** 
0.000345 
Idea 
45.122 
1.097 
(14.076**) 
198.161** 
0.000521 
Infosys 
33.494 
0.645 
(11.017**) 
121.375** 
0.000293 
IDFC 
52.260 
1.353 
(16.242**) 
263.825** 
0.000595 
JAIPRAKASH 
45.688 
1.623 
(14.239**) 
202.74** 
0.001113 
JINDAL Steel 
3.533 
1.172 
(2.970**) 
8.826** 
0.013343 
Kotak Mahindra 
57.159 
1.367 
(17.931**) 
321.549** 
0.000498 
L&T 
69.053 
1.260 
(23.189**) 
537.772** 
0.000253 
M&M 
13.684 
1.038 
(6.181**) 
38.207** 
0.002418 
Maruti Suzuki 
30.971 
0.699 
(10.398**) 
108.130** 
0.000387 
NTPC 
45.948 
0.659 
(14.313**) 
204.870** 
0.000182 
ONGC 
42.853 
0.803 
(13.443**) 
180.723** 
0.000306 
Power Grid 
55.804 
0.859 
(17.444**) 
304.300** 
0.000208 
PNB 
44.717 
0.831 
(13.962**) 
194.941** 
0.000303 
RANBAXY 
24.723 
0.794 
(8.896**) 
79.153** 
0.000683 
Reliance Capital 
61.682 
1.577 
(19.696**) 
387.951** 
0.000549 
Reliance Comm 
52.388 
1.344 
(16.284**) 
265.18** 
0.000548 
RIL 
20.634 
1.271 
(7.915**) 
62.658** 
0.00221 
Reliance Infra 
59.460 
1.405 
(18.801**) 
353.487** 
0.000478 
Reliance Power 
52.365 
1.057 
(16.276**) 
264.931** 
0.000361 
Siemens 
59.058 
1.184 
(18.645**) 
347.640** 
0.000346 
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Kushankur Dey & Debasish Maitra, Fellow Participant, IRMA
Security’s name 
ModelR 2 (%) 
Beta (tStat) 
FStat (GFI) 
Residual 

variance (%) 

SBI 
62.835 
1.153 
(20.185**) 
407.471** 
0.00028 
SAIL 
57.198 
1.243 
(17.946**) 
322.062** 
0.000411 
Sterlite 
49.915 
1.311 
(15.497**) 
240.184** 
0.000613 
Sun Pharma 
9.897 
0.359 
(5.145**) 
26.473** 
0.000419 
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