Portfolio Construction

Constructing an efficient portfolio with a desired combination of the selected securities:

Efficient portfolio gives the highest return in a minimum level of risk. The objective of constructing a efficient portfolio is to theta maximization and minimize the risk. The efficient set is determined by finding that portfolio with the greatest ratio of excess return (expected return minus risk free rate) to standard deviation that satisfies the constraint that the proportions invested in assets equal 1.

In equation form we have: maximize the objective function;

Theta = Excess return/standard deviation

When short sell is not allowed:

W (i)>=0

Following objectives are important in constructing as efficient portfolio

• Maximizing theta by not allowing short sell

• Maximizing theta by allowing short sell

• Minimizing risk(Standard deviation) by not allowing short sell

• Minimizing risk(Standard deviation) by allowing short sell

• Minimizing risk(Standard deviation) by not allowing short sell for a given return

• Minimizing risk(Standard deviation) by allowing short sell for a given return

In our portfolio I have considered all the objectives to construct the portfolio. Now I will construct my probable portfolio under the entire above situation.

Initial portfolio construction:

10 securities are included in my portfolio.60 months’ closing stock price of selected securities has been adjusted with dividends in different times by adding with the closing prices. Both the cash and stock dividend have been added with the price.

Risk-free rate:

Risk-free rate is calculated by following procedure:

Year Rate

2005 0.068

2006 0.078

2007 0.079

2008 0.079

2009 0.079

2010 0.078

Annual average 0.076833333

Monthly average 0.006402778

Calculation of Excess return:

Company Mean return Risk free rate Excess return

Apex Foods...