A Comparative Study of Portfolio Optimization Methods for the Indian Stock Market

TL;DR

This study compares three portfolio optimization methods—MVP, HRP, and HERC—applied to Indian stocks across 15 sectors, evaluating their performance based on returns, volatility, and Sharpe ratios over a three-year period.

Contribution

It provides a comparative analysis of MVP, HRP, and HERC methods specifically for the Indian stock market, highlighting their relative effectiveness.

Findings

HERC outperforms in maximizing returns in several sectors.

HRP achieves the lowest volatility across multiple sectors.

MVP often yields the highest Sharpe ratios.

Abstract

This chapter presents a comparative study of the three portfolio optimization methods, MVP, HRP, and HERC, on the Indian stock market, particularly focusing on the stocks chosen from 15 sectors listed on the National Stock Exchange of India. The top stocks of each cluster are identified based on their free-float market capitalization from the report of the NSE published on July 1, 2022 (NSE Website). For each sector, three portfolios are designed on stock prices from July 1, 2019, to June 30, 2022, following three portfolio optimization approaches. The portfolios are tested over the period from July 1, 2022, to June 30, 2023. For the evaluation of the performances of the portfolios, three metrics are used. These three metrics are cumulative returns, annual volatilities, and Sharpe ratios. For each sector, the portfolios that yield the highest cumulative return, the lowest volatility, and the maximum Sharpe Ratio over the training and the test periods are identified.