Benchmarking Techniques

Application of Benchmarking Techniques in Portfolio Optimization in Stock Markets and

its comparison with Modern Portfolio Theory

Group 1

Ankur Gupta (P36013), Mukesh (P36042), Himanshu Gupta (P36116)

Statement of Purpose

The whole idea of our team taking up this project revolve around integrating the learning across
various subject that we had to understand the performance of a firm. The performance will be
manifested in the form of share prices and the risk factor involved for a particular firm. Portfolio
management theory allows us to prepare a portfolio which has inherent checks against risk to
minimize losses but uses stock performance a main measure. On the other hand benchmarking is
a way of discovering what the best performance is being achieved whether in a particular
company, by a competitor or by an entirely different industry. This information can then be used
to identify gaps in an organizations processes in order to achieve a competitive advantage. We
want to make a DEA based investment strategy to prepare stock portfolio. As the model is more
flexible compared to other techniques, it gives us great flexibility in selecting our input and
output. For that matter we will also use financial information of firm while deciding the
performance of firm. We can further integrate this with financial management and macro-
economic aspect of a firm while looking for reasoning for a particular result. Performance would
be a combination of all the factors and we wish to understand various factor involved for that
particular performance once we have calculated the efficiency scores. So, we wish to integrate
our learning that we had in various subjects that we have studied while designing this project to
further deepen our conceptual understanding.

Description of the Project

Selection of efficient portfolio is a very important factor to maximize the returns in stock
markets. To select portfolio many theories have been propounded over the years. One of the most
used and recommended theory is the Modern portfolio theory. It is based on the Markowitz work
of 1952. Modern portfolio theory is based on (i) analyzing risk by focusing on the investors
instead portfolio of individual securities, and (ii) determining and exploiting the E-V efficient
frontier, namely, minimizing risk (commonly measured in terms of variance) for every level of
expected return. This theory was further developed by Sharpe in 1964 and proposed Capital
Asset Pricing Model. The capital asset pricing model (CAPM) helps us to calculate investment
risk and what return on investment we should expect. The model takes into account the asset's
sensitivity to non-diversifiable risk (also known as systematic risk or market risk), often
represented by the quantity beta () in the financial industry, as well as the expected return of the
market and the expected return of a theoretical risk-free asset. CAPM assumes a particular form
of utility functions (in which only first and second moments matter, that is risk is measured by
variance, for example a quadratic utility) or alternatively asset returns whose probability
distributions are completely described by the first two moments (for example, the normal
distribution) and zero transaction costs (necessary for diversification to get rid of all
idiosyncratic risk). Under these conditions, CAPM shows that the cost of equity capital is
determined only by beta. Through our study we aim to use Data Envelopment Approach to find
the most efficient portfolio. A portfolio which offers the maximum returns to an investor,
corresponding to the risk taken by the frontier. Also, we aim to compare the results of both the
approaches and analyze the similarities and differences in the results obtained. Our inputs will be
the financial statements of the organizations, annual reports to understand their future plans. Our
output will be stock prices, returns on the investment and risk (variances) in the investments.

Proces
Financial Health
Political and s
A Firm/Stock Stock Price
Returns
Economic Risk
Environment (Undesirable)
Future
Expectations
Outpu
Inputs
ts

A Visualization of the Process

Sources of Data
1. Prowess
2. Annual reports of the companies for getting their financial health
3. http://www.bseindia.com/
4. http://www.moneycontrol.com/
5. https://in.finance.yahoo.com

References
Markowitz, H., 1952. Portfolio selection. The journal of finance, 7(1), pp.77-91.
Markowitz, H.M., 1991. Foundations of portfolio theory. The journal of finance, 46(2), pp.469-
477.
Chen, H.H., 2008. Stock selection using data envelopment analysis. Industrial Management &
Data Systems, 108(9), pp.1255-1268.
Zamani, L., Beegam, R. and Borzoian, S., 2014. Portfolio selection using data envelopment
analysis (DEA): a case of select Indian investment companies. International Journal of Current
Research and Academic Review, 2(4), pp.50-55.

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