Optimal portfolio using volatility anomaly concept and Sharpe optimisation technique

Pradip Kumar Mitra and Edward Mascarenhas

International Journal of Business Excellence, 2021, vol. 25, issue 4, 474-490

Abstract: Risk aversion is the basic nature of any investor so avoidance of any risky instruments in their investment portfolios becomes inevitable. Equity, the riskiest instrument is normally not preferred by the risk-averse investors. An optimal portfolio with low volatile stocks with a better return than a portfolio with more risky stocks can bring a solution to risk-averse investors. The paper attempts to derive an optimal portfolio using Sharpe's optimisation process with a sample of 30 stocks listed in the BSE low volatility index developed on the theme of volatility anomaly. The paper finds seven such stocks which can be considered for creating a low-risk portfolio out of the 28 stocks with the higher excess return to beta ratio and also derives the allocation of investment. Results suggest that even with lower risk the portfolio could outperform the riskier benchmarking index.

Keywords: risk-averse; risk-aversion; optimal portfolio; volatility anomaly; Sharpe's optimisation model; BSE low volatility index; risk return trade-off; Markowitz model; Sharpe single index model; excess return to beta. (search for similar items in EconPapers)
Date: 2021
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