Building and Optimizing Stock

Portfolio

Financial (Market) Risk Group Assignment

Submitted to

Submitted by:
Anup Kumar
Mayank Salwan
Pooja Goyal
Sudeep Saxena

Group 5– (PGPBABI – Sep’19)

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 Contents
About Stock Market Risk.............................................................................................................
Objective of this assignment........................................................................................................
Data Descriptions and Data Processing......................................................................................
Exploratory Data Analysis............................................................................................................
Comparison of Sensex Price with Company Share Price................................................8
Comparison of Sensex Return with Company Share Return.........................................11
Exploring measures of risks in stock market..................................................................17
Approach for Shortlisting 5 Companies/Assets..........................................................18
Assessing Portfolio........................................................................................................24
Exploring Daily Return...................................................................................................25
Calculating VaR and CVaR for portfolio using ‘Single’ Method......................................29
VaR and CVaR for portfolio: ‘Component’ Method (Equal Weightage)..........................31
Portfolio Optimization.................................................................................................................
Recommendations.....................................................................................................................

Figure 1Asset Price Trends........................................................................................................8

Figure 2 Average Stock Price with Moving Average of 20,50,100......................................9
Figure 3 Maruti Price with MA 20.........................................................................................10
Figure 4 Reliance Price with Moving Average 20...............................................................11
Figure 5 Daily Return...............................................................................................................11
Figure 6 Daily Return...............................................................................................................12
Figure 7 Daily Return...............................................................................................................12
Figure 8 Dispersion and variation in return.........................................................................13
Figure 9 Standard Deviation Test of Return.........................................................................14
Figure 10 Scatter Plots of Asset's Return..............................................................................15
Figure 11 Correlation between Closing and Spread Price.................................................16
Figure 12 Correlation between Spread and Closing Price.................................................16
Figure 13 VaR and CVaR Gamma Distribution....................................................................18
Figure 14 VaR and CVaR for 10 Assets.................................................................................19

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Figure 15 Std Deviation of Big Tickets..................................................................................19
Figure 16 Beta Airtel................................................................................................................20
Figure 17 BETA Measures.......................................................................................................22
Figure 19 Coefficient of Variation................................................................................23
Figure 20 Airtel Price and Daily Return...............................................................................25
Figure 22 Sunpharma Daily Return Rate...............................................................................26
Figure 23 Reliance Daily Return............................................................................................27
Figure 24 Lockdown From Mar 23-2020...............................................................................28
Figure 26 VaR and CVaR at 95%............................................................................................29
Figure 27 Var and CVaR at 99%............................................................................................30
Figure 28 VaR and CVaR at 90%............................................................................................31
Figure 29 VaR and CVaR 'Component' with equal weightage...........................................33
Figure 30 VaR and CVaR at 95% 'Component' using 'Modified'.......................................34
Figure 31 Minimum Variance vs Weight................................................................................35
Figure 32 Fund Allocation With Minimum Variance...........................................................35
Figure 33 Maximum Sharpe Ratio..........................................................................................36
Figure 34 Portfolio with Max Return.....................................................................................36
Figure 35 Optimization Specs..................................................................................................37
Figure 36 Efficient Frontier: Risk vs Return.......................................................................38
Figure 37 Frontier wights Risk vs Return.............................................................................39

Table 1 Heads of 10 Blue Chip Stocks......................................................................................6

Table 2 Data Dictionary.............................................................................................................7
Table 3 Summary of Blue Chip Data........................................................................................7
Table 4 Assets' Correlation Matrix.........................................................................................13
Table 5 Ranking of 10 Blue Chip Stocks................................................................................24
Table 7 VaR and CVaR with equal weightage.......................................................................32

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 About Stock Market Risk
Stock market in a layman’s terms is a collection of markets and exchanges where
continuous activities of selling, buying and issuance of public-held shares are taking
place. Such financial activities are conducted through institutionalized formal
exchanges or over the counter (OTC)market places which operate under defined set of
regulations.
Across the globe there are several stock exchanges markets and New York Stock
Exchange, NASDAQ, Bombay Stock Exchange, London Stock Exchange, National
Stock Exchange are a few popular markets of the world.
Two terms used interchangeable are Equity market and stock market which often
create confusion in new investors.
According to the Basel committee (2013), the definition of market risk is the potential
losses from movements in market variables, e.g., market prices, interest rates and
exchange rates. In other words, it can be explained as the risk that the value of an
investment will decrease due to changes caused by market factors.

FINANCIAL AND MARKET RISK

Financial risk is the type of specific risk under which a company operates. Financial
risk is a combination of hundreds of factors depending upon the size of the business
and population. As a business listed under stock exchange controls thousands of
factors, controlling them together is close to impossible. Hence it is strongly believed
that statistical tools applied in financial markets do not generate an accuracy more
than 70%.
Stock market is a place where the most experienced and risk-taking investors cannot
predict with more than 70% accuracy.
These risks arise due to
 Customers’ expectations•
 Competition between the financial services providers
 Changes in demography
 Changes in the financial services market
 Structural adjustments in the economy

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 WHAT DO INVESTORS WANT FROM THE STOCK MARKET?
Any investor either new, experienced or proficient in this trade enter the market with one
objective.

Maximum return at minimum risk within minimum possible trading days

As majority of investors do not understand the scientific and statistical approach to

achieve this objective, the role of financial analysts, trading companies and
predictive models are critical to make a sustainable growth in the financial market.
Central tendency (Mean, Median, Mode) and measure of dispersions (Standard
deviation, variance, range, quartiles) of statistics are the prominent terms used in
this trading business.
The confidence level and significance values are the key to success to meet the
objectives of an investor.

Objective of this assignment

This assignment is to build an equity fund portfolio for a client willing to invest INR 1
crore. As an equity fund manager and financial analyst, I have to recommend the client
the investment plan in high-quality blue-chip companies focusing in large cap shares,
which are listed in Sensex.
The client being wealthy and experienced in this field has certain conditions and
recommendations.
He wants to invest in maximum of 5 shares in the universe of Blue-Chip companies
with a cap of maximum exposure of 30% in a single company.
As a fund manager, we will have to build different portfolios under different scenarios
for the client to meet his investment objective.
Since he is an experienced investor, he is assumed to be a risk-neutral and not risk -
averse.

Data Descriptions and Data Processing

Performance of 10 Blue Chip companies have been downloaded from BSE India for 541
days with OHLC variables. While the portfolio is built with closing adjusted price, change
or return percentage, there are several other variables kept into consideration to decide a
good portfolio.
As stock predictability cannot exceed an average accuracy of 70%, multiple factors play
roles in building a good portfolio.

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Major factors are performance of the companies in terms of assets, liabilities, dividends’
payment trend, EBITA, weighted average price, total turnover of daily trading, spread of
high low and spread of open and close price.

Table 1 Heads of 10 Blue Chip Stocks

Table 2 Data Dictionary

Data of Close. Adjusted price has been captured for building the portfolio.
The adjusted closing price amends a stock's closing price to reflect that stock's value
after accounting for any corporate actions. It is often used when examining historical
returns or doing a detailed analysis of past performance. Change percentage was derived

Table 3 Summary of Blue Chip Data 6

from closing price by dividing the current date’s price by previous day’s price and
subtracting by 1 to bring the differencing.

Exploratory Data Analysis

As the task is to shortlist 5 shares out of 10, several factors have to be considered to fetch
the most reliable portfolio value. EDA in this case is more towards the comparison of one
share with another and overall, with the market.

Comparison of Sensex Price with Company Share Price

The objective of comparing Sensex Price (Market Price) with each stock is to identify the
coefficient of correlation and significance of correlation.
The summary of stock prices of 10 Blue-Chip stock listed under BSE India indicates
financial performance of the companies.

Figure 1Asset Price Trends

Since stock prices are at different scales, visualizing several stock prices
together is a challenge. Hence analysing with return rate is an easier
approach using candle chart

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  LIC seems to be quite consistent but minimum and maximum price
difference has a wide range to decide from.
 It is important to investigate the min and max values to avoid incorrect
assumption. They may be extreme values and can be removed as outliers.
 Since we carry out non-parametric approach in stock portfolio to estimate
risk with historical data, the outliers may not impact.
 Maruti has the highest mean 6606 with median close to mean. This
suggests that Maruti is a reliable stock if judged by data. However other
factors like existing downside of automobile segment may not allow short
term investors.
 Between 2019 and 2020, Maruti touched as high as 8236.
 Infosys with mean of 831 also performed at 1387 as a bench mark in IT
segment.
 Airtel has been performing well but IQR is significantly high.
 In terms of consistency HPCL appears to be best.

Figure 2 Average Stock Price with Moving Average of 20,50,100

Figure 3 Maruti Price with MA 20

Maruti appearing to be most preferred stock when measured using candle chart and
moving average range of 20, 50 and 100, it reflects a downward trend with 100 days MA.
However, moving average with 20 days is most sensitive.
Moving Average of 20 is also showing a dip in price.

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 Looking at the trends and current performance so far, Maruti and Indigo
will be ruled out from portfolio.

Figure 4 Reliance Price with Moving Average 20

Trend of Reliance is more predictable with MA 20 than Maruti.

Comparison of Sensex Return with Company Share Return

Summary

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Figure 5 Daily Return

Figure 6 Daily Return

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Figure 7 Daily Return

Figure 8 Dispersion and variation in return

Table 4 Assets' Correlation Matrix

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It is critical to compare the standard deviation of one stock with the other.

Figure 9 Standard Deviation Test of Return

 Overall standard deviation is significantly different from each other

 Sun pharma and Infosys are significantly different from Indigo and LIC.
 The analysis above clearly suggests to keep Reliance, Airtel, Maruti, HPCL
and ICICI Bank in one group while Sun pharma, LIC, Infosys, Indigo and
HDFC are moving independently.
 Correlation Matrix of Return above suggest selection of companies for
portfolio.
 LIC, ICICI, Reliance and Maruti have a strong and positive correlation with
overall market Sensex.
 It is interesting to observe that Financial sectors; LIC, ICIC and HDFC are
highly correlated indicating multicollinearity.
 Maruti and HPCL which are automobile and Petroleum sectors are mildly
 correlated with financial sectors.

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  Telecom, Aviation, Pharma and IT sectors in stocks selected are
independent but strongly correlated with market.

Can we recommend all financial stocks under one portfolio? Can we

recommend Petroleum and Automobile under one portfolio?

Figure 10 Scatter Plots of Asset's Return

 Correlation matrix explains the objective of this scatter plot matrix.

 ICICI Bank and HDFC have a strong positive correlation
 An interesting observation is that none of the blue-chip stock has a negative
correlation amongst each other or with the market.

Stocks with strong negative correlation with market is a good indictor of

a good portfolio

It is always advisable to investigate the beta to identify the direction and

quantum of shift in stock price with shift in market.

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Figure 11 Correlation between Closing and Spread Price

Closing price of a stock is explained by opening price and spread of open-

close price.
Figure 12 Correlation between Spread and Closing Price

 This further suggests that spread of open-close price is strongly and

positively related to closing stock price.
 This also suggests that investors should wait for a certain average spread
before placing the order.
Importance of Spread price:

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 Closing price of a stock is the price at which it traded at the time of closing.
However, there is an ‘after- hour’ and ‘before-hour’ concept which allows
investors to bid a price after closing hours. Many external and internal factors
affect the opening price of the stock the next trading day. For example, an
announcement of acquiring a company by Infosys may motivate investors to
buy more. As the demand increases during ‘after-trading-hours’, the opening
price is different from the closing price. This is the spread of ‘open-close’ price.
There is no significant correlation between Return and Spread of Close-Open
price.

Based on historical data, COVID-19 impact, existing market, GDP of India,

unemployment rate, disinvestment by Indian Government and statistical
inferences so far, we can rule out the following stocks before further
analysis.

Exploring measures of risks in stock market

Value At Risk (VAR): is a measure or threshold to estimate the maximum amount of fund
one can lose at certain confidence level (default is 95%) in certain number of days.
Normally VAR is observed for a day. In other words, minimum amount an investor can
lose at certain probability or alpha value (default is 5%). There is a time period attached to
VAR which can be 1 day, 7 days, 5 days etc. Objective of this measure is to avoid liquidity,
solvency and regulatory problems.
Value at Risk
can be calculated using
a) non-parametric approach with historical data
b) Parametric approach by building models
c) Monte Carlo simulation approach
Inputs required to calculate VAR are
a) Investment or portfolio value
b) Expected volatility
c) Time period
d) Confidence level
Conditional Value at Risk (CVAR):
is an extended measure of VAR which is also called Expected Shortfall. This is becoming
a popular concept in risk management and often applied in businesses with higher
variance. Companies and portfolios with stability in return consider VAR for such risk
analysis.
VAR and CVAR Methods
a) Historical Simulation Method: This is a non-parametric method using the historical
data without any assumption of normality or linearity. In a true sense, this method
depicts the risks of past. However, extreme values and outliers may not always be
present in market for certain portfolio. Hence it has certain drawbacks when it

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 comes to long term prediction. This simulation requires large data for higher
accuracy.

b) Gaussian Simulation Method: This method is used with standardized normal

distribution method keeping a confidence level of 95/99/99.7 percent and
corresponding alpha value as risk. This is a parametric approach unlike historical
method. This is good for a short-term investment or to estimate VAR. Since data
can get skewed at tails, parametric approach may not be able to predict the return
with high accuracy. Hence another method called ‘Modified’ is applied.

c) Modified Simulation Method: This method is applied using parametric tools to

handle the right and left tail skewness and kurtosis. Skewness and kurtosis break
the symmetry of the curve leading to higher/lower bias/variance. In order to trade
off the bias-variance, Modified Method is applied when loner period of data is
considered.

d) Monte Carlo Simulation: is a broad term for computational experiments using

random numbers. The method relies on repeating simulations over and over again
to obtain results sprung from random numbers drawn from a distribution
representing the original setting. These simulations can be viewed together in a
distribution over the potential returns, and therefore give us the data needed for the
risk measures.
Figure 13 VaR and CVaR Gamma Distribution

Approach for Shortlisting 5 Companies/Assets

I. Daily Historical VAR and CVAR at 95% confidence level
for all 10 stocks using ‘Historical, Gaussian and Modified’ methods and ‘Single’
Portfolio Method with equal weight of 10% for all 10 stocks.

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 Interpreting the initial portfolio for shortlisting 5 assets.

 Infosys has the minimum historical VAR with 0.024 followed by Sunpharma
with 0.029
 Bharti, Indigo, LIC, ICICI and Maruti have historical VAR ranging between
0.034 and 0.047.
 Historical VAR indicates true variation of maximum fund at risk on a given
day. This is because of low standard deviation.
 All the assets have a higher VAR with Gaussian method.

Figure 14 VaR and CVaR for 10 Assets

 VAR of LIC with all three methods are at similar level

 Reliance VAR with historical and modified methods are at same level
indicating
 Standard Deviation of Infosys has been least out of four assets with LIC
with maximum variation in daily return.
 Standard Deviation of Infosys has been least out of four assets with LIC
with maximum variation in daily return.

Figure 15 Std Deviation of Big Tickets

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 II. Correlation of Asset Beta with Expected Market return
The beta (β) of an investment security (i.e. a stock) is a measurement of its
volatility of returns relative to the entire market. It is used as a measure of risk and
is an integral part of the Capital Asset Pricing Model (CAPM). A company with a
higher beta has greater risk and also greater expected returns.
The objective of using beta is to predict the change in price/return of asset with
change in one unit of market price.

The beta coefficient can be interpreted as follows:

 β =1 exactly as volatile as the market

 β >1 more volatile than the market
 β <1>0 less volatile than the market
 β =0 uncorrelated to the market
 β <0 negatively correlated to the market
 HDFC has the highest slope which indicates high return with high
volatility
 Indigo has the least slope suggesting low return with low risk
 Infosys appears to be best bet with 40% Beta.
Figure 16 Beta Airtel

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Figure 17 BETA Measures

 Reliance has the highest time ratio (Beta positive/Beta Negative)

 Time ratio indicates the ration of market when it was going up against the
period the market started falling.
 HDFC has the highest negative beta indicating frequent fall of prices
against market. Sunpharma has the lowest negative beta again showing a

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 good sign. This has also suggested to allocate maximum fund if investor
wants to go with sharpe ratio.

III. Sharpe Ratio

Sharpe Ratio is the measure of estimating the return expected from an
investment in contrast to risk free investment like fixed deposit or keeping
fund in bank’s saving accounts. Generally, a risk-free return is declared by
the treasure of the country. In India is ranges between 4-6%. It is calculated
by subtracting the risk-free return from average return and divided by
standard deviation of the return. Since it is more of a comparison with risk
free return, investors with fund like 1 crore would not be interested in
looking at this measure. This measure is more relevant for new investors or
investors who are risk averse.

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IV. Coefficient of Variation
As an investor looks at maximum return with minimum risk, Coefficient of
Variation is a strong tool to optimize a portfolio. Standard Deviation/Mean of
return means lower the CV, better the opportunity to earn. The graph
below depicts the CV of all 10 assets with Infosys being the best option
followed by Reliance Even though Indigo has the top 5 ranking in this
measure, certain factors will not yield high confidence in investors.

Figure 18 Coefficient of Variation

Initial shortlisting with equal weightage

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Table 5 Ranking of 10 Blue Chip Stocks

Keeping in mind a client with INR 1 Crore, primary focus of selection of

portfolio has been Historical VAR followed by parametric weightages to
CVAR, Beta and Sharpe Ratio.

Assessing Portfolio
Airtel, Infosys, Reliance, HDFC and Sunpharma is the new portfolio which will be built to
optimize the return with minimum risk. Sectors have been selected in line with the current
market situation with certain understanding of policies of government.

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Exploring Daily Return

Figure 19 Airtel Price and Daily Return

Airtel stock price shows a rising trend except for 2020 (COVID-19) impact but 2021
appears to be positive.
The daily return has maximum variation in 2020 followed by controlled risk in 2021.
Only 23.6% of variance of change in daily return of Airtel is explained by change in 1 unit
of market return. It has certain advantage if the market dips. Coefficient of 0.774 * market
return
Mar-23-2020 (COVID-19) which can be modified using Gaussian and Modified method.
Infosys has been consistent but one extreme negative return of -15% can be seen in 2019.

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With slight increase in variance in 2020, Infosys appears to be a good bet. 30% of

variance in change of mean return of Infosys is explained by 1% change in market return.

Slope of 0.762 indicates good return but high volatility. COVID-19 can be seen as reason
for this high volatility. Since COVID-19 was unexpected and companies have considered
this as
an outlier, this turbulence can be ignored.
COVID-19 came as a blessing in disguise for Sunpharma. Volatility centred between -0.05
and 0.05 against the high volatility of 2019. A slope of 0.60 suggests a good stock as it is
neither very high returning stock nor volatile. Appears to be a good trade-off between
return and risk. is not risky for the investor. Airtel’s return appeared to be volatile in 2020
and 3 extreme observations are seen above 10%. Only one extreme value below -10 (-12)
can be seen

Figure 20 Sunpharma Daily Return Rate

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 Figure 21 Reliance Daily Return

Figure 22 Lockdown From Mar 23-2020

Return rate of Reliance has been consistent before 2020 but high variation has been
observed towards the upper side of control line. 2020 also has huge variation but return
increased during COVID-19 and this was due to merger and acquisition of certain
companies by Reliance (Facebook was a major tie up). The minimum return Reliance has
yielded is approx. -13 on Mar 23-2020. Market has crashed on Mar-23-2020 due to
COVID-19 lockdown

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HDFC has been no exception in 2020. Stability in 2019 has been appreciated by the
investors. 2021 is visibly inconsistent but within control.
A slope of 0.622 with a return of 1.2 with change in 1% in market is good bet for risk-
neutral investors.
https://www.business-standard.com/podcast/markets/market-wrap-march-23-
here-s-all-that-happened-in-the-markets-today-120032301143_1.html

Calculating VaR and CVaR for portfolio using ‘Single’ Method

Figure 23 VaR and CVaR at 95%

 Historical VaR appears to be best for 5 Blue-Chip assets with Infosys at

lowest VAR.
 Modified VaR has increased slightly for all assets except Airtel and this is
because of skewness in data of 2020.

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  Infosys lost its top position to Reliance with modified method and so did
Sunpharma.
 Gaussian does not suggest a good option to get adopted for this data.
 Reliance has the lowest risk when VaR breaches its 5% probability. CVaR
of Reliance and Bharti Airtel are lowest with Modification as a method.
 This indicates appropriate weightage which can be allocated to the assets.
 As shown in figure Table 5 Ranking of 10 Blue Chip Stocks Coefficient of
Variation of Reliance and Airtel are 2 and 3 respectively.

Figure 24 Var and CVaR at 99%

As alpha (risk) decreased from 5 to 1%, the VaR and CVaR significantly increased due to
lower rejection area. The confidence level increased with decrease in alpha value.
This is a very risky approach if the investor is not high-risk taker.


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Figure 25 VaR and CVaR at 90%

On the contrary, the VaR reduced with an increase in Alpha value from 5% to 10%. This is
a good approach for risk-averse or new investors.

VaR and CVaR for portfolio: ‘Component’ Method (Equal Weightage)

When the contribution of each asset has to be calculated for the portfolio, the portfolio
method applied is ‘Component’. This clearly suggests the weightage an asset should be
allocated. In a normal condition, the contribution of any asset should not exceed the
weightage it has been allocated.

Table 6 VaR and CVaR with equal weightage

 Airtel has the least CVaR with Historical non parametric method but
increased to 0.11 with modified method due to high volatility. Figure 19 Airtel
Price and Daily Return.

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  VaR of Airtel did not change significantly with Modified method and this is
due to historical data while modified CVaR takes skewness and kurtosis
into consideration.

Figure 26 VaR and CVaR 'Component' with equal weightage

 Considering CVaR HDFC has the best performance followed by Reliance

with modified method.
 Airtel has the minimum risk under Historical method. All the assets are
close to each under Gaussian method.
 The overall VaR for the portfolio at 95% with historical data stands at
0.6300
 Weight allocated 0.15, 0.20, 0.30, 0.20, 0.15 in order to tickers in figure
above. Infosys while Airtel has the minimum VaR
 Highest VaR contribution is by Infosys with 0.427 followed by Reliance.
 Weightage of Reliance and Infosys are 30 and 20 percent respectively.
Reliance has a VaR below its contribution of 30% but Infosys has
exceeded.
 HDFC has exceeded their 30% and 15% for CVaR or expected shortfall
and but Infosys has come to its contribution of 20%.
 Airtel has the minimum risk at 15% contribution.
 This model suggests to change the contribution for all the assets.
 Unlike Historical, Gaussian is depicting a different story with Reliance and
Infosys below their contribution.
 Airtel, HDFC and Sunpharma have exceeded their contribution showing a
major risk if invested with this contribution.

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 Figure 27 VaR and CVaR at 95% 'Component' using 'Modified'

 CVaR as expected to increase but contribution has not changed

significantly.
 Sunpharma has shown a significant change with modified method and this
apparent from Figure 6 Daily Return high volatility
 With modified method, HDFC away from its weightage with 54%
contribution to portfolio.

Portfolio Optimization
Optimization of a stock portfolio comprising of several assets is the final objective of an
investor. Every investor or a trader wants maximum return at minimum risk.
The stock market or share market being huge are flooded with thousands of software
using multiple techniques to attract prospective clients. However, the truth remains bitter ‘it
is extremely difficult to predict a stock market’
Risk vs Return is the what every financial institute describes in different words using
different techniques.
As every trade has it, Type 1 and Type 2 errors are statistical terms while trade-off
between risk and return is the skill of an analyst.
Higher return with higher risk and vice versa.
Steps:
I. Calculate portfolio returns for all the days you have captured and weights
II. Calculate portfolio risk by calculating covariance and weights
III. Calculate sharpe ratio keeping risk free at 0% rate. (portfolio return/ portfolio risk)

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IV. Decide number of combinations of weightages
Portfolio return calculate =2.294, Portfolio Risk= 0.3745, Sharper Ratio= 6.12 6
** Sharpe ratio will change with every iteration due to creation of 5000 loops.
 With 5000 different combinations of stock allocation weightages the figure
below suggests maximum allocation to Infosys followed by HDFC.
Figure 28 Minimum Variance vs Weight

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Figure 29 Fund Allocation With Minimum Variance

We as financial analyst can suggest the first option in case he is willing to look at long
term. He can diversify with minimum risk and maximum return. Shown below in INR

Figure 30 Maximum Sharpe Ratio

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  Surprisingly assets with maximum sharpe ratio has minimum allocation of
shares.
 Sunpharma Figure 28 Minimum Variance vs Weight has an allocation of
only 13.9% of shares while HDFC has 26.11%.
 This also demands reshuffling of allocation for a trade off.
 We can change the number of simulations to find the optimum level of
sharp ratio at minimum variance.

Figure 31 Portfolio with Max Return

Sunpharma has the maximum allocation of 76% followed by Infosys with

17%. As Sharpe Ratio is derived from expected return the figure above is
resonating with Figure 30 Maximum Sharpe Ratio

Efficient Frontier (Risk vs Return)

Optimization playing a critical role suggests best level of fund allocation.
Risk vs Return plot indicates the line of demarcation.
Optimization specs used:

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Figure 32 Optimization Specs

HDFC and Reliance have been given 100% weightage in 2 simulations to optimize
minimum risk.

Figure 33 Efficient Frontier: Risk vs Return

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  As risk increase the return increases but from 1.3 as the risk decreases the
return also decreases. This area is called inefficient frontier beyond
investing is futile.
 Certain decisions will change depending upon types of investors.
 Sharpe Ratio, Risk and Return are curvilinear meaning their rate change at
certain stage and move in opposite direction.
 The points of change of direction hold importance to decide the measures
for the investors.

Risk averse investors should go with sharpe ratio if he cannot take a risk
of high return with high risk.

Figure 34 Frontier wights Risk vs Return

Recommendations
As share market is subject to risk and predictive models have not exceeded
an average of 70% accuracy, recommendation to invest in stock market
cannot be a word of commitment or receiving estimated return cannot be a
contract or legal.

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As per the data picked for 5 Blue-chip assets, we would recommend
1) Infosys and HDFC with close to 52% of INR 1 crore and rest 50% can
be divided amongst Reliance, Sunpharma and Airtel. We can
recommend 17% towards Airtel. This is recommended based on
minimum risk the investor can take.
2) As CVaR of Airtel and Sunpharma have been volatile, risk factor is
high. As a safe ground, investor can go with majority of stake with
Sunpharma and Infosys with Sharpe Ratio in mind. However, he can
further divide the investment into 30% each for safer journey.
3) As Risk vs return is maximum at 0.8 against a risk of 1.5,
recommendation is to trade-off the two until the investor is a strong risk
taker.

THANK YOU

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