An empirical investigation into understanding whether the portfolio perform better in bubble period in Indian stock market

This paper tries to understand the effect of the steady bubble and bubble bust scenario by constructing optimal portfolio through application of Sharpe's Single Index Model. The study uses data from National stock exchange of India has been taken through a period of March 2008 to March 2012. The end of 2008 saw a rise in price bubble in Indian stock markets. BSE went up by 12000 and NSE gained 300 points in a period of ten days. Post October 2009, the bubble had bust which lead to a dip in the stock indices. Thus two period that is data from March 2005 to 2008 has been taken for the rise in price bubble and the subsequent period of March 2009 to October 2012 has been taken as the post price Bubble bust period. This period also saw a dip in the international economy with the subprime crisis in September 2008. Using NSE as the market index and daily indices from the period mentioned above, the study formulates a cut-off point and selects stocks having excess return of their expected return over the risk free rate of return surpassing this cut-off point. The study uses the average repo rate of 7.25 during the period of the study as the risk free return. Percentage of an investment in each of the selected stock is decided on the weights assigned to each stock depending on the respective beta value. The stock movement variable represent unsystematic risk, return on stocks and risk free return vis-à-vis the cut –off rate of return. Pre bubble and post bubble single index model for the same stocks that entered the optimum portfolio were judged. It was found that the stocks failed to pass the single index criteria during the post bubble period.