Relevance of Sharpe's Single Index Model in Optimal Portfolio Construction with Special Reference to BSE SENSEX

Portfolio management is the crucial decision for any investor. While investors take investment decisions, they expect high returns at minimum risk & they also do not want to block their entire investment in a single security. So they aim at creating optimal portfolios through diversification. The main focus of this research is to construct an optimal portfolio by applying Sharpe's single index model (SIM) for BSE SENSEX in India. In the present study, portfolio is constructed by taking all the 30 companies listed (traded) in BSE Sensex. SENSEX was used as benchmark index. Data is collected from secondary sources i.e. journals, books, online sources for a period of 4 years i.e. from 2011 to 2014. The proposed method formulates a unique cut-off rate and selects those securities to construct an optimal portfolio whose excess return to beta ratio is greater than the cut-off rate. Then proportion of investment in each of the selected securities is computed on the basis of beta value, unsystematic risk and excess return to beta ratio & cut-off rate. The study finds that though 4 company stocks out of 30 constitute the optimal portfolio based on cut-off rate but only 3 stocks should be included in the optimal portfolio i.e. Hindustan Unilever Ltd, ITC Ltd and Tata Consultancy Services Ltd. with ideal proportion of investment of 74.45%, 22.42% and 3.13% respectively and Infosys Tech should not be included because its proportion of investment has come as zero. Sharpe's model suggests investors to invest major portion of their money (74.45%) in Hindustan Unilever Ltd.