Asian Journal of Research in Business Economics and Management
Year : 2012, Volume : 2, Issue : 7
First page : ( 220) Last page : ( 234)
Online ISSN : 2249-7307.

Optimal portfolio selection with or without the procedure of short sales

Rani Meenakshi*, Research Scholar, Dr. Bahl Sarita**, Associate Professor

*Department of Commerce, Kurukshetra University, Kurukshetra, Haryana

**Department of Commerce and Business Management, Arya College, Ludhiana, Punjab

Online published on 4 July, 2012.

Abstract

The main purpose of this paper is to construct an optimal portfolio with the procedure of short sales and without the procedure of short sales by applying Sharpe's single-index model. The present study is based on the secondary data. For the purpose of constructing an optimal portfolio, a sample of thirty stocks listed on Bombay Stock Exchange (BSE) was selected in this study. BSE Sensitive Index (Sensex) has been used as market index. Daily closing prices of selected stocks as well as market index for the period of April 2006 to March 2011 were used in this study. A unique cut off point was computed. The results of the study constructed an optimal portfolio and also represented the optimal portfolio with the percentage invested in each stock. The present study found that the eleven out of thirty stocks have expected return greater than risk free rate of return and these eleven stocks have been used for optimal portfolio construction. All the selected stocks have represented positive return. In the study the expected return of optimal portfolio is 15.96 and the risk of optimal portfolio is 3.048 when the short sales are not allowed and when the short sales are allowed, the expected return of optimal portfolio is14.17 and the risk of optimal portfolio is 2.98. The study concluded that the Sharpe's single index model is of great importance and the framework of Sharpe's single index model for optimal portfolio construction is very simple and useful. The findings of the study will be useful for investors and practically related for the purpose of investing.

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Keywords

Stock Market, Sharpe's Single Index Model, Optimal Portfolio, Beta.

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