“A STUDY ON OPTIMUM PORTFOLIO CONSTRUCTION USING

WILLIAM SHARPE’S SINGLE INDEX MODEL AT INDIA INFOLINE

LTD (IIFL), BANGALORE.”

DISSERTATION SYNOPSIS

Submitted

To

BANGALORE UNIVERSITY

BY

GOWDA DEEPAK SATISH

REG.NO: 171GCMD046

Under the Guidance of

Ms. PAVITHRA S T

ASSISTANT PROFESSOR

RV INSTITUTE OF MANAGEMENT
CA-17, 36th Cross, 26th Main, 4th‘T’ Block,
Jayanagar, Bangalore-560041
2018-2019
TITLE OF THE STUDY:

“A study on Optimum Portfolio Construction using William Sharpe’s Single Index Model at
India Infoline ltd (IIFL), Bangalore.”

INTRODUCTION:

An Investment is something which a person sacrifices today for the future benefits. There are
many investment avenues available for an individual to increase their wealth, but selection of
a right portfolio is a challenging task. Portfolio is a group of securities that may consist of
stocks, bonds and money market instruments. The process of selecting the best class of
securities to obtain an expected return with a minimum risk is called portfolio construction. A
Portfolio is a mixture of financial assets like stocks, bonds, commodities and money market
instruments. It also includes non-publicly traded securities, like real estates, art and private
investments.
A simple statement to understand the portfolio is that “A wise man never puts all his eggs in
one basket”. Portfolio follows two basic principles i.e., Time value of Money and Safety of
money.
The portfolio should be constructed keeping in mind two things risk tolerance and investment
objectives of the investors. Portfolio works on the two basic assumptions that - investors prefer
high rate of return and they are risk avoiders. Normally portfolio managers invest the funds in
such a way that the risk and return of the securities are balanced.
Portfolio management is an art and science of managing the funds. It is a systematic method of
investing the funds efficiently. The objective of portfolio managers is to help the investors to
maximize the return for a given level of risk appetite.

WILLIAM SHARPE’S SINGLE INDEX MODEL:

There is always confusion in the investors’ mind in selecting the securities which yields higher
return with minimum risk. Besides investors also have to decide how much to invest in each
securities. William Sharpe’s Single Index model helps to come out of this confusion and guides
the investor to select the best portfolio which leads to accomplish the investors’ objectives.
According to this model there is a direct relationship between the market and the price of the
shares. If the market moves up, then prices of the most shares tend to increase and if there is a
decline in the market then there will be decline in the price of shares.
REVIEW OF LITERATURE:
Hetal Tandel study titled “Creating an optimal portfolio on S&P BSE Sensex Single Index
Model” He identified that the Sharpe’s Model has simplified the process of constructing the
portfolio by relating the return in a security to a single market index. He has considered BSE
Sensex top 30 companies to construct the optimal portfolio by considering daily indices along
with the daily prices of 30 securities for the period of April 2008 to March 2013. The securities
are selected on the basis of cut-off rate. He concluded by saying that out of 30 stocks only 9
stocks are suggested for investment.
Mahammadrafique U.Meman study titled “Optimal equity portfolio construction by using
Sharpe Single Index Model with reference to the BSE 30 securities”. He has considered
28 securities from S&P BSE Sensex and were ranked based on excess return to beta ratio. The
historical data of 28 securities for 10 years was considered for the study. He has found that out
of 28 securities only 7 securities are good for portfolio construction.
Mr. Dileep S, Dr. G.V. Kesava Rao and Dr. M D Sai Baba study titled “A study on
portfolio construction by considering fundamental analysis and using Sharpe’s Single
Index Model: Indian context”..They have considered 120 companies (3 companies each in
40 sectors) for the period from January 2009 to December 2014.They have concluded that
Single Index Model always holds good in Indian Capital Market.
Subhodeep Chakraborty & Dr. Ajay Kumar Pate study titled “An Empirical Study on
NIFTY 50” using Sharpe’s Single Index Model byl they used all 50 stocks of NSE NIFTY
50 Index are taken into consideration and daily data of all this stock for the period of September
14, 2016 to September 15, 2017 have been considered for the research.
Laxmi Kanta Giri & Dr. Gayadhar Parhi study titled “Optimum portfolio construction
using single index model” in this paper the daily closing prices of all 50 stocks along with the
Nifty Index were considered for the period of 1 year i.e. from 1st January 2015 to 31st December
2015.

SCOPE OF THE STUDY:

The study will focus on the daily prices of 50 different companies listed in NIFTY 50 index.
The purpose of selecting daily stock prices is to have better estimate of beta coefficient because
the returns are calculated using long time period. Risk free rate of return is considered based
on Government 30 years Bond rate i.e. 6.65%.
NEED FOR THE STUDY:
There are many investment avenues coming up these days. The financial consultant needs to
be aware of all the benefits associated with these new investment avenues so that they can
increase the return of the investors with minimum risk. Today there are many tools and methods
available to the investors to construct an optimal portfolio. One among those is William
Sharpe’s Single Index Model, which provides unique insight to value creation.

STATEMENT OF THE PROBLEM:

Every investor today wants to maximize profits with least risk. They want their capital to grow
with minimum risk, in a short period of time. Construction of optimum Portfolio is the toughest
work for any investor.

The main objectives of this project are to check risk and returns relations, construction of
portfolio and verifying Single Index Model in Indian context. Descriptive research
methodology used for the study and considered 50 companies from NSE NIFTY50. The data
are going to be collected from NSE website listed in the stock market. The daily price of
selected variables of Nifty50 Index are to be selected from June 2008 to June 2018.

OBJECTIVES OF THE STUDY:

1. To understand the volatility of the stocks in respect to changing market conditions in stock
market.
2. To understand how effective this model helps in constructing an optimal portfolio which
brings out the better return to an investor.
3. To calculate risk and return of selected stocks and to compare with NIFTY 50 Index.

RESEARCH METHODOLOGY:
Type of Research:
The type of research will be used for the study is descriptive research, with the
characteristics of daily prices of selected stocks.
Method of sampling:
For the purpose of the study Convenience Sampling will be used, Sample units will be
selected based on 50 companies which are listed under NIFTY 50 index.
 Sample Size:
The study covers 50 companies and for a period of 10 years i.e., from June 2008 to June
2018.
Analysis:
The tools will be used for construction portfolio are; Returns, Risks, Beta, Systematic
Risks and Unsystematic Risks.

SOURCES OF DATA:

 Secondary Data:
For the study secondary data are going to be collected from NSE website about the different
stocks which are listed under NIFTY50, journals and articles on William Sharpe’s Single
Index Model.

PLAN OF ANALYSIS:

The data will be collected from NSE website of 50 different companies which are listed
in NIFTY 50 during the period of June 2008 to June 2018. Further with the help of
mathematical formulas we can calculate the return, Standard deviation, Beta, Systematic Risk
and Unsystematic Risk of each stock compared with NIFTY movements in the market.

𝑃1 − 𝑃0
𝐑𝐞𝐭𝐮𝐫𝐧 = ∗ 100
𝑃0

Σ(𝑋 − 𝑋̅)2
𝝈=√
𝑛−1
𝑛Σ𝑋𝑌 − (Σ𝑋)(Σ𝑌)
𝑩𝒆𝒕𝒂(𝜷) =
𝑛Σ𝑋 2 − (Σ𝑋)2
𝑺𝒚𝒔𝒕𝒆𝒎𝒂𝒕𝒊𝒄 𝑹𝒊𝒔𝒌 = 𝛽 2 ∗ 𝜎𝑚
2

2
𝜎𝑚 = 𝑀𝑎𝑟𝑘𝑒𝑡 (𝑆𝐸𝑁𝑆𝐸𝑋) 𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒

𝑼𝒏𝒔𝒚𝒔𝒕𝒎𝒂𝒕𝒊𝒄 𝑹𝒊𝒔𝒌 = 𝜎 2 − 𝑆𝑦𝑠𝑡𝑒𝑚𝑎𝑡𝑖𝑐 𝑅𝑖𝑠𝑘

LIMITATION FOR THE STUDY:
1. Considering only secondary data with respect to selected stocks of NIFTY50.
2. Using only William Sharpe’s Single Index Model for this project.
3. This project is only related to Indian selected stocks.

CHAPTER SCHEME:

Chapter 1: Introduction

The introduction of this project will cover about the NIFTY 50 companies which are
listed as well as the risk and return associated with those stocks with respect to the
changing pattern in stock market from June 2008 to June 2018

Chapter 2: Literature review and Research design

Review of literature and gaps, statement of the problem, objectives of the study,
sampling, tools and techniques for data collection, plan of analysis and limitation of the
study.

Chapter 3: Profile of the Organisation and Respondents

Origin, history, organisation structure, future plans, brief about respondents.

Chapter 4: Data analysis and Interpretation

The data collected from the company will be tabulated and depicted in tabular form

Chapter 5: Summary of findings, Conclusion and Suggestions

REFERENCES:

Journals

 International journal of research in commerce, economics and management

 Investment analysis and Portfolio Management book by Prasanna Chandra
Articles

 “Optimal equity portfolio construction by using Sharpe Single Index Model with
reference to the BSE 30 securities” research paper by Mahammadrafique U.Meman
 “Creating an optimal portfolio on S&P BSE Sensex Single Index Model” research
paper by Hetal D Tandel
 “A study on portfolio construction by considering fundamental analysis and using
Sharpe’s Single Index Model: Indian context” research paper by Mr. Dileep S, Dr. G.V.
Kesava Rao and Dr. M D Sai Baba

Website
 https://www.investopedia.com
 https://www.nseindia.com

GOWDA DEEPAK SATISH Ms. PAVITHRA S T

171GCMD046 Assistant Professor