Optimum Portfolio Construction Using Sharpe Index Model With Reference to Banking Sector

Abstract

All the investments have two major attributes, namely, return and risk. There is a direct relationship between risk and return of investments. Higher the risk, higher the return investor tends to receive and lower the risk, the investment yields low return. The combination of various avenues of investment is known as portfolio which should have proper mix of high, moderate and low risky investments. Institutional and individual investors can mitigate the risk with adequate return by using various models of portfolio management. The study attempts to build optimal portfolio by using Sharpe Index model which is widely used to maximize the return with minimum risk in banking sector. The data were selected from the secondary source.  Twenty top listed banks of both public and private sector (10 each from public and private banks) were selected based on their market capitalization as on February 25, 2020 for the study. The study found that out of 20 banks under study, five private sector banks such as City Union Bank, Induslnd Bank, Kotak Mahindra Bank, AU Small Finance Bank and HDFC Bank were part of optimal portfolio. Optimal portfolio return was 23.34% which was higher than average Nifty return and portfolio beta was 0.6 which was less than Nifty beta of 1. Portfolio returns was less volatile than market return. The study is useful for institutional and individual investors in building optimal portfolio.