Operating rules for portfolio construction in the Indian stock market

Abstract

The objective of this study has been to develop some operating rules for the construction of an equity portfolio. A total of 59 scrips from the four metropolitan stock exchanges were selected initially as the likely set of stocks from which the portfolios are to be constructed. These scrips were then a reduced to 21 efficient ones, which were finally used for the portfolio construction. The focus of the study has not been to make projections regarding the future returns of individual scrips but to find how stock prices move relative to each other. The degree of dependence between the stocks was measured by a covariance matrix and using Markowitz model, a few simple operating rules have been suggested for portfolio construction. For easier use of these rules a chart has been prepared that straightaway gives the combination of scrips that should constitute a portfolio once the investor has made a choice regarding his risk-return level. Details of using the chart is provided in chapter VII.