Design and Analysis of Optimized Portfolios for Selected Sectors of the Indian Stock Market

TL;DR

This paper develops optimized stock portfolios for six Indian sectors using three risk-adjusted return ratios, evaluating their performance based on historical data and identifying the most effective ratio for maximizing returns.

Contribution

It introduces a sector-specific portfolio optimization approach using Sharpe, Sortino, and Calmar ratios, with empirical evaluation on Indian stock data from 2017 to 2021.

Findings

Sharpe ratio often yields the highest cumulative returns.

Different sectors favor different optimization ratios.

The approach provides actionable insights for Indian stock market investors.

Abstract

Portfolio optimization is a challenging problem that has attracted considerable attention and effort from researchers. The optimization of stock portfolios is a particularly hard problem since the stock prices are volatile and estimation of their future volatilities and values, in most cases, is very difficult, if not impossible. This work uses three ratios, the Sharpe ratio, the Sortino ratio, and the Calmar ratio, for designing the mean-variance optimized portfolios for six important sectors listed in the National Stock Exchange (NSE) of India. Three portfolios are designed for each sector maximizing the ratios based on the historical prices of the ten most important stocks of each sector from Jan 1, 2017, to Dec 31, 2020. The evaluation of the portfolios is done based on their cumulative returns over the test period from Jan 1, 2021, to Dec 31, 2021. The ratio that yields the maximum cumulative returns for both the training and the test periods for the majority of the sectors is identified. The sectors that exhibit the maximum cumulative returns for the same ratio are also identified. The results provide useful insights for investors in the stock market in making their investment decisions based on the current return and risks associated with the six sectors and their stocks.