Sharpe Single Index Model: Evidence from Bombay stock Exchange (BSE) in India

Abstract

Risk and return plays a vital role in any investment decision. An investor often needs to make important decisions about whether to invest or not and in which securities or portfolio investment should be made. Sharpe Single index model can be useful in making such decisions. The main purpose of this study is to construct an efficient portfolio by using Sharpe single index model. For this purpose, monthly closing prices of top 20 BSE companies and BSE 100 index for the period from February 2012 to February 2017 have been considered. The proposed method calculates excess return to beta ratio and cut-off point, selects scrips with excess return to beta ratio higher than the cutoff point to form an optimal portfolio. The optimal portfolio consists of four stocks selected out of twenty stocks, giving the return of 2.56 percent. The findings of this study will be useful for individual as well as institutional investors, policymakers, fund managers etc.