Abstract
This study aims to find whether Sharpe's single-index model of portfolio construction offers better investment alternatives to the investors of the Dhaka Stock Exchange (DSE). For this purpose, month-ended closing price data of 178 companies listed on the DSE, the prime bourse of Bangladesh, and the month-ended index value of DSEX have been used for the period starting from January 2013 to February 2018. The stocks selected for this study belong to 16 industrial sectors, and purposive sampling technique has been used to select these sectors. Sharpe's model formulates a unique cut-off rate and selects the stocks having an excess return-to-beta ratio above that rate. In this study, 54 stocks qualified to be a part of the optimal portfolio. Hence, the proportion of investment to be made on each of the stock is calculated according to the model. The study reveals that three industries occupy a hefty chunk (65.78%) of the proposed investment portfolio. The constructed portfolio offers a monthly return of 2.1489% and carries 1.9516% risk as measured by standard deviation. The beta of the optimal portfolio is only 0.124003. The constructed portfolio outperforms every individual stock as well as the market index in terms of offering the optimal risk-return combinations. Therefore, this five-and-a-half-decade-old model offers a great opportunity for Bangladeshi investors to optimize return and diversify risk in an efficient manner.
Highlights
1.1 Research BackgroundThe ground-breaking article published by Markowitz in 1952 marked the beginning of modern portfolio theory
1.3 Research Purpose The primary objective of this study is to find whether Sharpe’s single-index model of portfolio construction offers better investment options to the investors of Dhaka Stock Exchange (DSE)
In the pursuit of constructing an optimal portfolio of equity securities traded on DSE, monthly closing price and benchmark market index (DSEX) data have been used for the period starting from January 2013 to February 2018
Summary
The ground-breaking article published by Markowitz in 1952 marked the beginning of modern portfolio theory. His model is concerned with creating an optimal portfolio of assets by risk-averse investors. According to Markowitz (1952), a risk-averse investor should choose efficient portfolios. Markowitz's pioneering article, named Portfolio Selection, and his subsequent studies have been a source of inspiration for many researchers and scholars. His model was intended to be pragmatic and implementable. The implementation of the model is quite time consuming and expensive Recognition of these problems has motivated researchers to develop and simplify the portfolio construction process. Sharpe came up with a simplified alternative to the Markowitz's model that significantly reduces the data input and computational requirements
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