Interplay of Equity Shares: Allocating Investments via Markowitz Model

Abstract

This study aims to design two portfolios, i.e., minimum risk portfolio and optimum portfolio, using Modern Portfolio Theory (MPT). It then compares their performance with the benchmark portfolio, i.e., Nifty. For the creation of portfolios, 50 stocks have been considered which are also used for calculating NSE index, i.e., Nifty. The author has designed two portfolios using adjusted monthly closing prices of 50 stocks for a period of 9 years starting from April 2010 to March 2019. The prime objective of the present study is to first identify those stocks which perform better than risk-free securities, i.e., treasury bills (t-bills). Having shortlisted the securities which perform better than t-bills, the proportion of investment for the “shortlisted securities” is calculated in such a manner that it can create minimum risk and optimum portfolios with the help of MS-Excel add-in ‘Solver’. Just after the creation of minimum risk and optimum portfolios, their performance is further compared with the performance of Nifty. The empirical analysis evidences the significant role of MPT by showing the performance of minimum risk and optimum portfolios is way better than Nifty.