Construction of optimum portfolio with special reference to manufacturing companies in India

Portfolio is a combination of securities such as stocks, bonds and money market instruments. The process of blending together the broad asset classes so as to obtain optimum return with minimum risk is called portfolio construction. Diversification of investments helps to spread risk over many assets. The portfolio construction deals with the process of selection of securities from the number of stocks available with different expected returns and carrying different levels of risk. Portfolios that satisfy this requirement are called efficient portfolio. To construct an optimal portfolio, which gives maximum return for a given level of risk, William Sharpe has developed a simple model to analyze the portfolio. This model helps an investor to select the best securities to be included in an optimal portfolio and the weights of investment in each security. The present study deals with construction of an optimal portfolio with stocks of manufacturing companies listed in BSE and for this purpose Sharpe's Single Index Model has been used. The main objective of the study is to construct an optimal portfolio of manufacturing companies listed on Bombay Stock Exchange. The entire study is based on secondary data extracted from websites like Bombay Stock Exchange (BSE), Reserve Bank of India (RBI), books and journals. The sample size is 55 manufacturing companies listed on BSE. The analysis is based on stock returns of 55 companies for five years from 31^st March 2008 to 31^st March 2012.