Evaluation of investment strategies on BSE stocks using portfolio theory

Abstract

The project applies the Markowitz Portfolio Theory to the top 10 stocks of the BSE (in terms of market capitalization, as on 30th June 2011), and constructs the tangent portfolio on the efficient frontier using historical risks and returns of these 10 stocks. A randomly weighted portfolio and a market weighted portfolio are also constructed to compare the performance of the Markowitz portfolio with these two portfolios. A multi-period approach to investing is looked at with monthly, fortnightly and weekly rebalancing. The analysis is carried out using two historical periods (Dec 04 – Nov 07 & Jul 08 – Jun 11). It is observed that the Markowitz portfolio outperforms both the randomly weighted and market weighted portfolios in both the historical periods, and that monthly rebalancing is more efficient than fortnightly or weekly rebalancing. Moreover, it is concluded that Sharpe ratio is a better measure of performance than using return alone.