Optimal valuation model for cricketers using modern portfolio theory

Abstract

As part of the project course, the aim was to test the hypothesis of efficient portfolio performance for the different franchise teams that have participated in the Indian Premier League (IPL) over the years. Each over was treated as a unit time period over which the portfolio (team) of assets (players) generated returns. These returns were treated as a stochastic process, with an average rate of return and associated risk (variance). For our hypothesis to be true, the team which had recorded the best Sharpe ratio of returns across the two 20-over time periods would have the highest degree of success. The aim of the project is to explore if a risk-return based understanding of team performance can help in designing a winning combination of players. It would enable us to design an efficient portfolio of players based on the optimum portfolio theory and create a valuation mechanism. We would also like to benchmark our model against the auctions in IPL and see if the players were undervalued or overvalued.