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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)

Gujarat-388001

Second Author: Shri Debasish Maitra Doctoral Student, 2 nd Year Fellow Programme in Rural Management Institute of Rural Management, Anand (IRMA)

Gujarat-388001

Draft Paper/IFID Conference/May-2010

Kushankur Dey & Debasish Maitra, Fellow Participant, IRMA

ABSTRACT

Investment theory in securities markets pre-empts the study of the relationship between risk and returns. In this parlance, the behavior of stock-price (movement) has been a recurrent topic in financial jargon. A large number of studies have reported the risk-return 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 time-period. 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 ex-ante measures for formulating the portfolio in a congruent manner.

Prima facie the Sharpe single-index model is incorporated in the study, besides, the Treynor-index, the Jensen-index, and the Sortino-index, which of course, have yielded relatively a superior and legitimate result as compared to a single-index 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”, cut-off 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. Mean-variance efficient portfolio is graphically presented in the paper adopting the Markowitz’ risk-return measures approach.

Therefore, this paper is an amalgamation of both the modern- and post-modern 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 risk-restructuring in the Indian context.

Keywords : Portfolio theory, post-modern portfolio theory, Sharpe-ratio or index, Treynor-ratio, Jensen-ratio, Sortino-ratio, Coherent measures of risk

Draft Paper/IFID Conference/May-2010

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 relay-race of a band of

qualified institutional buyers (QIBs) and non-institutional buyers (NIBs) in the market, evidently, small or retail investors are also taking interest to invest now-a-days. Moreover, they understand and play the game by virtue of the “buy-low and sell-high” strategy. Often this type of investor falls into a trap by showing “herd” behaviour or sometimes reaps a quantum of “momentum-profit” 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 full-information 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 single-index (algorithmic) model of William Sharpe (1964) in this paper along with a tinge of other approaches of

post-modern portfolio theory, say, Sortino ratio or index.

In first section, introduction is narrated succinctly; section-two looks at literature review

followed by objectives, hypotheses, and methodology in section-three. Section-four discusses the results and findings. Section-five summarises the whole paper and comes

out with implication or leaves few signposts for the future research.

Draft Paper/IFID Conference/May-2010

Kushankur Dey & Debasish Maitra, Fellow Participant, IRMA

2.

INTRODUCTION

SECTION-I

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 time-period (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 risk-return 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 or 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

Draft Paper/IFID Conference/May-2010

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?

SECTION-II

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 self-financing portfolio or zero-investment (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 price-volume ratio), relative-strength-indicator, moving average convergence-divergence (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 trend-reversal observed following the “formation” (say 6 months) and “test” (say, rest 6 months) period in post-event phenomena. This seems to have a formation of “conformity bias” as a difference between winner’ and looser’ portfolio (W-L) 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 Management-Ahmedabad, 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 cross-sectional 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), earnings-to-price (positive), return on equity (positive), book-to-price (positive),etc. Here, momentum is the effect that reasons out that winner tends to “win” and losers tend to “loose” for three to six-months horizon or reference frame of wealth allocation. This explanation draws argument from the realms of behavioural finance. Now-a-days, algorithmic studies are conducting in this branch which is akin to positive financial economics.

Against this backdrop, simplified, logical, and elegant or a single-index model helps to

measure the capital-asset 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 pre-empts 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 securitys (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 investors portfolio. The question is on whether we adopt the ex- ante or ex-post 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, semi-strong (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 Black-Litterman 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, debt-to-equity ratio (levered or unlevered firm), debt- to-asset 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 long-indefinite memory to reach equilibrium or may show a mean-reverting 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 mean-variance efficient portfolio frontier” underlying some feasible regions.

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Kushankur Dey & Debasish Maitra, Fellow Participant, IRMA

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 higher-order 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 2-security’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 2-security’s standard deviations would score good to delineate cases of advantage from diversification to those which are not. Markowitz’ work was precisely a post-hoc 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, ex-ante 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 single-index 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 single-index 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 risk-free rate of return to standard deviation of return of portfolio) helps to identify the “reward-to-variability” of the investor’s portfolio. Treynor ratio or index (excess return from risk-free rate of return to beta of portfolio)

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Kushankur Dey & Debasish Maitra, Fellow Participant, IRMA

and Jensen performance-measures (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 model-building approaches, namely, mean-risk model, expected utility maximisation, and stochastic dominance to capture the randomness of the stock-return precisely. These phenomena gave a rebirth or transformation of modern portfolio theory to post-modern portfolio theory (PMPT). Sortino index (excess return from risk-free rate of return to down-side 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 risk-return frontier while risk is defined by stochastic second-order dominance (SSD-II), exhibits the same expected convexity properties of the traditional mean-variance 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 semi-variance replaces the volatility or it connotes that the risk is only measured with down-moves 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 (log-normal), it is obvious that both Sortino ratio (SR) and upside potential ratio (UPR) are monotonically increasing functions of the Sharpe ratio. Hence, these three risk-measures provide an extent for identical ranking of portfolio alternatives. Plantinga and de Groot (2001) stated that for higher levels of loss or risk-aversion, 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 ad-hoc attempts to measure the downside risk whereas there is potential ignorance of incorporating upside risk-measures (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

SECTION-III

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 Sharpe-single index model and ratio-analysis (Treynor, Jensen and Sortino) to formulate and improve the portfolio selection are to be ascertained through adequate employment of stocks returns- and market returns-series 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.

Cross-sectional analysis is incorporated to administer the revenant tests in order to arrive at the stated objectives.

5. HYPOTHESES

H 1 : Mean-variance efficient portfolio is likely to be achieved by incorporating Sharpe single-index model approach as an ex-ante measure of the modern portfolio theory in Indian context.

H 2 : Portfolio risk-return optimisation scores relatively higher than the index or market risk and return equation.

H 3 : Optimal portfolio selection is possible using the Sharpe single-index 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 single-ratio based approach as a contingency approach and corroborate to the principles-based coherent risk measures and post-modern 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

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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 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 “awith weights summing to unity (1). Portfolio “ahas 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, minimum-variance portfolios are constructed in the absence and presence of risk-free asset (Merton 1972; Roll 1977; Campbell, Lo, and Mackinlay 2007).

Stylized Fact: Portfolio p is the minimum-variance 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 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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h = 1/D [C (Ω -1 μ) – A (Ω -1 τ)]

(viii)

and A = τ -1 μ, B = μ -1 μ, C = τ -1 τ, D = BC- A 2

For example, p and r are two minimum-variance 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 minimum-variance portfolio and for each minimum- variance portfolio, say p, except the global one, there exists a unique minimum-variance portfolio that has zero covariance with p. This portfolio is said to be the zero-beta 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 risk-free asset into the analysis and consider portfolios composed of a combination of the N risky assets and the risk-free asset. With a risk-free asset the portfolio weights of the risky assets are not constrained to sum to unity, since (1- ω τ) can be invested in the risk-free asset. Therefore, given a risk-free asset with return R f the minimum-variance 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 (μ-R f τ) = 0

(xiv)

Combining (xiv) and (xii) equations, we get the solution,

ω p = (μ p - R f) / (μ-R f τ) -1 (μ-R f τ)* -1 (μ-R 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 = p - R f) / (μ-R f τ) -1 -R f τ) and ŵ = -1 (μ-R f τ)

(xvi)

Thus with a risk-free asset all minimum-variance portfolios are a combination of a given risky asset portfolio with weights proportional to ŵ and the risk-free 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 risk-free asset all efficient portfolios lie along the line from the risk free asset through portfolio q. Hence, we get

ω q =1/ τ -1 -R f τ)* -1 -R 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 )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 performance-measures approach provides a basis for calculating alpha () coefficient or intercept of the portfolio. Hence, we can get from the CAPM (two-factor) 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. Sharpe-Linter version of the CAPM is drawn from market-model building approaches which we have used for calculating beta as regressor and residual variance or unsystematic risk on daily-count 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 excess-return market model:

Zt =  +βZ mt +Є t, where E[Є t ] = 0, E [Є t, Є t ] = ∑, E [Z mt ] = μ m , E [(Z mt - μ m ) 2 ] = σ 2 m,

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Cov [Z mt, Є t ] = 0

(xxii)

β is the (N X 1) vector of betas, Z mt 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 single-index model, the algorithm involves the following equations presented in the table below:

 

Table 1: William Sharpe Single-index model-notation

 

Rank-

Security

Excess

Excess

Excess

Beta to

Cum.

Cum.

Cut-off

Z-value

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 )

a R f )/β a

a R f )

β

a a 2

∑(μ a

 

2 m ∑(μ a

a a 2 ((μ a R f )/β a -

β

C

* )

3…

β

a a 2

 

R f )

β

a a 2

R f )

   

β

a a 2

 

β

a

a 2 ]/

 
 

[1+

σ

2 m(

β

a a 2 ]

Note: Security’s selection to formulate portfolio is based on benchmark ratio or cut-off score. Securities which have higher excess mean return to beta to calculated cut-off 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: 610-614).

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 world-wide) and Credit Rating and Information Services of India Limited (CRISIL, 1987), India’s leading Credit Rating Company (1988-89) 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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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 trade-frequencies 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 (244-days closed-trade-price 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 BSE-100, BSE-500, BSE-IPO, MIDCAP, SMLCAP and other sectoral indices is reporting 63.326% as reported on December, 2009. In case of free-float market capitalistion index, NIFTY (54.17%) is ahead of SENSEX (45.82%) other than or excluding BSE-100. S&P CNX NIFTY is taken as market proxy and the average yields of Government of India (GOI) securities are used as risk-free 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.

SECTION-IV

7. RESULTS AND DISCUSSIONS

Index data with respect to index return and stock return are retrieved from CMIE for 244-trading days-counts. Regressing index or market return on individual stock return (taking natural-log of both return-series), beta is calculated for each 50-stock. Calculated betas have achieved the precision of about 95% with the beta of the NSE-provided 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 stock-return series of all 50-stocks cumulatively. The positive skewness coefficients indicate that frequency distribution of index- and stock-returns series are positively skewed or have longer thinner tail to the right. The unconditional distribution of both index and stock returns

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exhibit thin tails (leptokurtic) and excessive peak at the mean than the corresponding normal distributions. Both series follow an empirical distribution, say, log-normal, normality is not achieved as reported by J-B (Jarque-Bera) statistic (4790.317 with significant p-value for index return and 3838.90 with significant p-value for stock-return series on daily-counts) besides the unit-root check, which is shown in the following histogram and graph (Fig-1, Fig-2, and Fig-3). Here the J-B statistic is highly statistically significant for both index and stock-returns series, and hence we fail to accept the null hypothesis of normality.

Table-2 represents the results of Augmented Dickey-Fuller (ADF) (Dickey and Fuller 1979) unit-root tests applied on the log-first 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. Phillips-Perron (PP) (Phillips and Perron, 1988) unit- root test was not conducted to test the same as the sample-size is relatively large enough to follow the asymptoticy. Results show that the first differences of logarithm of the both index and stock-prices 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 non-stationary processes are observed at their individual log-series. Therefore, evidently, movements of stock-return series follow a mean-reverting process, which is known as white noise (mean zero, variance, and covariance constant) conforming non- linearity returns-series. Beta, F-statistic, R j 2 , residual variance (σ ε 2 ) of each stock are presented in Exhibit-1.

FIG-1: Descriptive statistics of Index return (S&P CNX NIFTY)

80 D es criptive Statis tics _Index R etrun Series: IN D EX _ R
80
D es criptive Statis tics _Index R etrun
Series: IN D EX _ R ETU R N
70
Sa m ple 1 2 4 3
O bserva tion s 2 4 3
60
Mean
0.002220
50
Median
0.001662
40
Maximum
0.163343
Minimum
-0.060216
30
Std. Dev.
0.018848
Skewness
2.450687
20
Kurtosis
24.19185
10
Jarque-Bera
4790.317
0
Probability
0.000000
-0.05
0.00
0.05
0.10
0.15

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FIG-2: Descriptive statistics of Stock return (50 stocks)

70 Series: STO C K_RETU RN Sam ple 1 243 60 O bservations 243 50
70
Series: STO C K_RETU RN
Sam ple 1 243
60
O bservations 243
50
Mean
0.001987
40
Median
3.26e-05
Maximum
0.195857
30
Minimum
-0.059181
Std. Dev.
0.023446
20
Skewness
2.519550
Kurtosis
21.80846
10
Jarque-Bera
3838.899
0
Probability
0.000000
-0.05
0.00
0.05
0.10
0.15
0.20

FIG-3: Pictorial presentation of NIFTY-stock return

S to c k R e tu rn

.20 .15 .10 .05 .00 -.05 -.10 25 50 75 100 125 150 175 200
.20
.15
.10
.05
.00
-.05
-.10
25
50
75
100
125
150
175
200
225

Table 2: Results of Unit Root Tests

Variables

ADF (t-statistic)

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 stock-returns series and index-returns series with one-sided p-values and lag-length is 5 (maximum 14) and lag-length 8 (maximum is 14) at 1%, 5%, and 10% significance levels, respectively. Information criterion chosen is SIC. * -indicates the significant-p-value rejecting the null-hypothesis.

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We have taken (regressed) predictor or beta to estimate the Sharpe-single index model for the portfolio optimisation. Individual stock return (R i ), risk-free return (R f ) or T-bills rate, that is, 4.7% annualised yield (0.035525% on daily count), beta (β j ), market risk (σ m 2 , calculated from the daily-variance of the index-return), residual variance (σ ε 2 );-these indicators are taken into consideration to calculate cut-off (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 index-return-variance (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, Z-value 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 “Sharpe-style analysis, say, “N” stocks comprise of single-index 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 covariance-terms are 325 or N C 26 out of 1225 (for the index). Following the Markowitz’ approaches, number of covariance-terms 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 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 OLS-regression 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 return-series 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 26-individual security from the given index, with respect to portfolio beta, R 2 , F- statistic, and t-statistics with p-values 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 Durbin-Watson 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 auto-correlation 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.

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Table 3: Results of Regression

 

Dependent

Portfolio

Variable

Independent

Index (NIFTY)

Variable

R

2

0.904 (0.573**)

D-W

2.009

F-stat (Goodness of fit index)

2261.296**

Coefficients

 

Intercept (α)

t-statistic

4.542 (0.037**)

Beta (β)

t-statistic

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 p-values of the mentioned tests’ statistics at 5% level of significance, respectively. In parentheses standard errors of the respective tests-statistics are mentioned.

Fig-4, 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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FIG-4: Actual-Predicted-Residual movement of the Portfolios 16 12 8 4 0 -4 -8 25 50
FIG-4: Actual-Predicted-Residual movement of the Portfolios
16
12
8
4
0
-4
-8
25
50
75
100
125
150
175
200
225
A C T U A L
P R E D IC T E D
R E S ID U A L

FIG- 5 &6: Histogram of the Portfolio and Normal P-P plot of Regression Resiudals

5 &6: Histogram of the Portfolio and Normal P-P plot of Regression Resiudals Draft Paper/IFID Conference/May-2010
5 &6: Histogram of the Portfolio and Normal P-P plot of Regression Resiudals Draft Paper/IFID Conference/May-2010

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Based on the C * and ratio analysis (Sharpe, Treynor, Jensen, and Sortino) we have calculated the security’s rank in the chosen portfolio and down-side risk considering calculation parameter, that is, minimum acceptable return (MAR) 0.05%. The following tables 4 & 5 in view of post-modern portfolio theory provide the details of portfolio’s average rank, security’s beta, annualised return, annualised standard deviation, etc. Mean-variance efficient frontier using Markowitz’ two parameters approach is shown in the following Fig-7.

FIG-7: Mean-Variance-Efficient Return of the Portfolio

FIG-7 : Mean-Variance-Efficient Return of the Portfolio Table-4: Post-Modern Portfolio Theory S&P CNX NIFTY

Table-4: Post-Modern Portfolio Theory

S&P CNX NIFTY

Portfolio

Risk-Return 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

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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

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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

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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 Fig-7, it can be inferred that feasible region would be any point on the mean-variance efficient frontier where tangency of potential portfolio would be a particular point intersecting the concave shaped curve. Sharpe-Linter 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 26 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 Sharpe-index (4.637 vs. 1.878), the Treynor-index (143.548 vs. 55.290), and the Sortino-index (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, sub-additivity, 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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SECTION-V

8. SUMMARY AND CONCLUSION

The present study has touched upon the area of portfolio selection and evaluation in the lights of both modern- and post-modern portfolio theories. Ratio-analysis 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 mean-shortfall or tail conditional expectancy (TCE) or conditional value-at- risk (VaR), etc. are not violated while formulating hypotheses and methodology. Sharpe’s single-index 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 mean-variance efficient frontier is considered during the determination of the portfolio’s risk- and return-equations.

We have chosen the NIFTY index as it serves a better proxy of the market than any other indices, viz., BSE-SENSEX, BSE-midcap, BSE-100 etc., in Indian context. 50-stocks are considered and Sharpe-algorithm is incorporated for calculating the cut-off score, which comes about 0.253% on average-daily 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 single-index model and then, other ratios are also determined to look at the top-26 stocks in regards to their annualised returns, annualised standard deviations, betas, Sharpe-index scores, Treynor-index scores, Jensen-index 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 Sharpe-ratio or index, Treynor-ratio, Sortino-ratio, 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 mean-variance efficient portfolio can be achieved by incorporating the Sharpe single-index measure as an ex-ante 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 post-modern portfolio theory.

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EXHIBIT-1

Table-6: Results of regression (on average daily counts basis using high-frequency data)

Dependent

Individual security (50 stocks)

 

variable

 

Independent

Index or NIFTY

variable

Security’s name

Model-R 2 (%)

Beta (t-Stat)

F-Stat (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

 

Draft Paper/IFID Conference/May-2010

Kushankur Dey & Debasish Maitra, Fellow Participant, IRMA

Security’s name

Model-R 2 (%)

Beta (t-Stat)

F-Stat (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

Draft Paper/IFID Conference/May-2010

Kushankur Dey & Debasish Maitra, Fellow Participant, IRMA

Security’s name

Model-R 2 (%)

Beta (t-Stat)

F-Stat (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