Optimal Portfolio Investment and Consumption Strategies in Indian Equity Market

Abstract

A number of investment strategies map out to maximize portfolio growth are tested on a long run Indian equity market. The application of the optimal portfolio techniques produces magnificent rate of growth, In spite of the fact that the assumptions of normality. Optimal portfolios are constructed by rebalancing the portfolio weights of four indices and ten sectors of National stock exchange indices. The purpose of this paper is to examine the Optimality of the Portfolio in the NSE and examine hypothesis the application of efficient market. The sample of stocks is not large in spite of its comprehensiveness from the local stock market . This paper also analyzes optimal portfolio and consumption strategies with unobservable states and predictability of risky asset returns. We develop approximate analytical solutions to the unconstrained dynamic problem. The approximation is shown to be fast and accurate. The computation time of the approximate solution is shown to be practically independent of the number of assets when no predictors are present and only marginally affected by the number of predictors. While the portfolio policy strongly depends on the current state of the economy, the consumption-to-wealth ratio is violently state-independent. Hedging demands are negligible with regimes and no predictability, but are important with predictability. On the other hand, the consumption to wealth ratio is not very impacted by the predictor. We provide an out of sample statistical assessment of the returns provided by a multi-regime strategy with respect to a single-regime and to a 1/N strategy.