Markowitz portfolio theory
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Modern Portfolio Theory (MPT), a hypothesis put forth by Harry Markowitz in his paper "Portfolio Selection," is an investment theory based on the idea that risk-averse investors can construct portfolios to optimize or maximize expected return based on a given level of market risk, emphasizing that risk is an inherent part of higher reward. It is one of the most important and influential economic theories dealing with finance and investment.
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Markowitz portfolio theory
- 1. The Indotraders An Investment fund Submitted by Debiprasad Dash-16202161
- 2. Sectors wise contribution to GDP 2%7% 9% 15% 2% 6% 8% 51% Sectors contribution to India GDP Pharma Sector Auto mobile sector Real Estate Oil & Gas FMCG Banking IT Others 3%5% 19% 27%5% 41% Sectors contribution to USA GDP Aerospace&Defence.xlsx Electronics FMCG Pharma Telecome Others
- 3. 23.3% 39.8% 20.0% 34.1% 43.9% 18.4% 44.58% 17.08% 136% 112% 2.4% 5.6% 23.4% 30.3% 9.3% 21.3% 10.0% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0% 140.0% 160.0% Auto mobile sector Eicher Motors Ashok Leyland Real Estate industry Siemens Adani Ports Oil & Gas industry ONGC FMCG industry HUL Banking sector PNB IT sector Infosys Pharma Sector Lupin Cadila Health INDUSTRY vs. COMPANY PERFORMANCE IND(ROE)
- 4. 33.8% 35.6% 7.4% 41.4% 35.1% 59.9% 41.2% 56.3% 33.9% 34.2% 35.1% 28.3% 7.9% 3.6% 7.4% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% INDUSTRY vs. COMPANY PERFORMANCE US(ROE)
- 5. Security market line 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% -1 -0.5 0 0.5 1 1.5 2 ExpectedReturn Beta SML(India) SML Stocks 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% -1 -0.5 0 0.5 1 1.5 2ExpectedReturn Beta SML (US)
- 6. Efficient frontier(2003-17) 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% Return Risk both market India market US market tangent PortfolioReturnPortfolioRisk Both 2.79% 4.11% India 3.22% 6.11% US 2.08% 6.61%
- 7. Before crisis (2003-07) 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 2003-07 both India US Tangent PortfolioReturnPortfolioRisk Both 3.22% 2.80% India 5.91% 7.27% Us 3.22% 7.89%
- 8. After Crisis(2007-17) 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 5.00% 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 2007-17 Both India US Tangent Portfolio Return Portfolio Risk Both 2.57% 3.84% India 3.27% 5.75% Us 1.80% 6.34%
- 9. Explanation for the results From the efficient frontier it can be seen that diversification of portfolio in both Indian and US market is to be adopted. Indian economy is an emerging and growing economy and hence since these industries contribute the most to the GDP, investing in those industries with the stocks of those companies who have an average better than industry average is a good idea. After 2008 crisis the US economy has suffered a lot and investing in the US industries alone is not sufficient to earn greater returns with lower risks although capital is not a huge problem, Also the US economy has saturated and the growth is slow in comparison to the Indian economy where in most sectors 100% FDI is involved. Hence portfolio diversification in both the economies would generate better returns with optimum risk.
- 10. Implications of this research From the efficient frontier it is seen that since the investment in both markets provide a much higher return than the individual Indian and US market returns for a particular risk, the efficient frontier for both the markets is chosen implying to invest in both markets
- 11. How can Industry Practitioners utilize the project work The efficient frontier gives an idea about various risks and returns for those risks and helps the investor in deciding to invest and diversify the portfolio in which all markets to minimize risks and generate an optimum return. The tangent joining the risk free rate and efficient frontier shows that below the tangent point the investor could invest money of the people and above the tangent point shows the investor invests by burrowing money from the government. The risk free rate point in the efficient frontier means the minimum return that the investor is bound to get under no risks.
- 12. Conclusion Diversified Portfolio with unrelated stocks in combined market reduces correlation and the risk of the investment. Expected return is maximized for a given level of risk We will be investing in both the market after the crisis scenario In the following stocks with different levels of weights. Lupin Cadila EicherMotorsLarsen&Toubro:L&TIndiaONGC HUL PNB Apple Pepsi AmgenInc.(A Return 2.43% 3.14% 4.78% 2.10% 1.18% 1.91% 3.74% 2.33% 0.55% 1.04% Weights 4% 25% 16% 5% 1% 16% 1% 18% 1% 14%