Optimal Portfolio Construction by Using Sharpe Single Index Model

Traditional portfolio theory aims at the selection of securities that would fit in well with the asset preferences, needs and choices of the investor. Modern portfolio theory postulates that maximization of returns and/or minimization of risk will yield optimal returns and choice and attitudes of investors are only a starting point for investment decision and that vigorous risk return analysis is necessary for optimization of returns. Portfolio management presents the best investment plan to the individuals as per their income, budget, age and ability to undertake risks. Portfolio management minimizes the risksin investments and increases returns. Investors expect the higher returns at minimum level of risk. Investors want to spread their investment amount to number of securities to avoid unnecessary blockage of the amount in single investment. Optimal portfolio creation through diversification facilitates to reach their goal. The main objective of this study is to construct an optimal portfolio by applying Sharpe single index model (SIM).