Sharpe Single Index Model
- 1. SHARPE SINGLE INDEX MODEL with special reference to NSE 50 securities Made By: Fatima Choudhary IV Semester (FA)
- 2. CONTENTS • CONCEPTUAL FRAMEWORK • REVIEW OF LITERATURE • RATIONALE OF STUDY • OBJECTIVES OF STUDY • METHODOLOGY
- 3. CONCEPTUAL FRAMEWORK • Security • Portfolio • Portfolio construction (Traditional and Modern Approach) • Portfolio Management
- 4. SECURITY The term security was originally used to describe financial instruments secured by physical assets. Securities are broadly categorized into: Debt securities (such as banknotes, bonds and debentures Equity securities, e.g., common stocks; and Derivative contracts, such as forwards, futures, options and swaps.
- 5. PORTFOLIO The term portfolio refers to any collection of financial assets such as stocks, bonds, and cash. A portfolio is designed according to the investor's risk tolerance, time frame and investment objectives. A portfolio's asset allocation may be managed by many of the investment approaches and principles.
- 6. PORTFOLIO CONSTRUCTION Portfolio construction is investing in a variety of funds or investment options that work together to meet the requirements of the investor. As the risk element of individual securities as well as portfolios change the invinvestmentestor must periodically review and revise the portfolios. Here the main focus is on Equity portfolio construction. Portfolio constructions are of two types, they are Traditional Approach and Modern Approach
- 7. Traditional Vs. Modern Approach Traditional Approach • is based on Current Income, Capital Appreciation, Tax Considerations, Liquidity and Safety • begins with the analysis of constraints • determining the objectives of investment • type of portfolio is selected • the risk and return of the selected type is assessed • diversification Modern Approach • Markowitz Model of portfolio construction • Sharpe Index Model of portfolio construction . • Capital Asset Pricing Model of portfolio construction
- 8. PORTFOLIO MANAGEMENT • Portfolio management comprises all the processes involved in the creation and maintenance of an investment portfolio. • It deals specifically with the security analysis, portfolio analysis, portfolio selection, portfolio revision & portfolio evaluation. • Portfolio management objectives can be divided into Risk minimization, Safeguarding capital, Capital Appreciation, Choosing optimal mix of securities and Keeping track on performance.
- 9. SHARPE SINGLE INDEX MODEL By William Sharpe in 1963 The return of an individual security is assumed to depend on the return on the market index. The return of an individual security may be expressed as: Ri = αi + βi Rm + ei Where, αi= The component of security’s return that is independent of the market’s performance Rm= The rate of return on the market index Βi= The constant that measures the expected change in stock return(Ri) given a change in market return(Rm). ei= The error term representing the random or residual return, i.e. the unexpected return resulting from influences not identified by the model
- 10. The desirability of any stock is directly related to its excess return-to-beta ratio. If the stocks are ranked from highest to lowest order by excess return to beta that represents the desirability of any stock's inclusion in a portfolio. The number of stocks selected depends on a unique cutoff rate such that all stocks with higher ratios will be included and all stocks with lower ratios excluded
- 11. LITERATURE REVIEW • AJ Du Plessis, M Ward (2009) • G Van der Hoek, AHG Rinnooy Kan, GT Timmer (1983) • Francesc J Ortí , José Sáez, Antonio Terceño (2002) • Alina Lucia Trifan (2009) A Bilbao, M Arenas, M Jiménez, B Perez Gladish and MV Rodriguez (2005) • Varadharajan P (2011) • Rajan Bahadur Paudel and Sujan Koirala (2006)
- 12. RATIONALE OF STUDY Through this research an attempt has been made to construct an optimal portfolio using Sharpe Single Index Model with special reference to NSE 50 securities and to make the investors aware of the functioning of various securities which may help the investors in taking decisions. The report will try justifying that rather keeping all the investment in one security, the investor should compare the risks and expected yield on various instruments while taking investments decisions.
- 13. OBJECTIVE OF STUDY Optimal Portfolio Construction using Sharpe Single Index Model with special reference to NSE 100 securities
- 14. METHODOLOGY THE STUDY This research will be empirical in nature. It will establish relationship with various variables and its impact on the others. The variables under study would be return (dependent variable) and market return (independent variable). These variables will be studied over a period of time to understand relationship between these variables, which would help the investors take timely decisions. THE TOOLS FOR DATA COLLECTION FOR DATA ANALYSIS Mean Standard deviation Beta Sharpe Single Index Model
- 15. CONCLUSION As it is clear that the construction of optimal portfolio investment by using Sharpe’s Single Index Model is an easy mechanism of constructing an optimal portfolio of stocks for a rational investor by analyzing the reason behind the inclusion of securities in the portfolio with their respective weights. This model can show how risky a security is, if the security is held in a well-diversified portfolio. This study is made on the basis of small sample (n<100) i.e. 50 sampled securities. It can be extended to a large sample to get a more accurate result. Hope this study will contribute a little about a lot in the field of investment finance.
- 16. Company Beta of the Portfolio Return of the Portfolio Variance of the Portfolio Tata Motors ltd 0.0744 1.0889 0.0031 Adani 0.2613 3.8192 0.0385 Bharat Petroleum Corp ltd 0.0728 1.0647 0.0030 SBI 0.1275 1.8638 0.0094 Reliance 0.6608 9.6508 0.2878 Shree Cement ltd 0.0762 1.1129 0.0038 Maruti Suzuki India ltd 0.0635 0.9275 0.0027 M & M ltd 0.0701 1.0251 0.0034 ONGS ltd 0.0360 0.5261 0.0009 Bajaj Finance ltd 0.0229 0.3347 0.0004 UltraTech ltd 0.0362 0.5287 0.0010 Grasim Industries ltd 0.0245 0.3575 0.0004 Bharti Airtel ltd 0.0145 0.2118 0.0002 ICICI 0.0175 0.2553 0.0002 Eicher Motors ltd 0.0100 0.1458 0.0001 1.567935168 22.9127 0.3549 The beta, return and risk (in the form of variance) of the portfolio are:
- 17. REFERENCES Sharpe, William (January 1963). "A simplified Model of Portfolio Analysis". Management Science. http://www.primejournal.org/BAM/abstracts/2011/dec/Varadharajan.htm www.wikipedia.org/wiki/Single-index_mode Construction of equity portfolio of large caps companies of selected sectors in India with reference to the Sharpe Index Model, IJPSS Journal, volume 2, issue 8, by P.Varadharajan and Ganesh Application of Markowitz and Sharpe Models in Nepalese Stock Market, The Journal of Nepalese Business Studies Vol. III No. 1 Dec. 2006 by Rajan Bahadur and Paudel Sujan Koirala http://oaithesis.eur.nl www.sage.com www.indianmba.com Security analysis and portfolio management, Punithavarthy Pandian Security analysis and portfolio management, Donald E. Ficher and Ronald J. Jordan