Global Journal of Finance and Management

ISSN 0975 - 6477 Volume 2, Number 1 (2010), pp. 35-46

© Research India Publications
http://www.ripublication.com/gjfm.htm

Performance Evaluation of Two Optimal Portfolios

by Sharpe’s Ratio

Asmita Chitnis

Associate Professor, Symbiosis Institute of International Business,

Constituent of Symbiosis International University, SIC,
Rajiv Gandhi Infotech Park, Phase I, Hinjewadi, Pune, Maharashtra, India
E-mai: asmitachitnis@gmail.com

Abstract

A ratio developed by William Sharpe measures risk-adjusted performance. It

tells us whether a portfolio’s return is due to smart investment decisions or a
result of excess risk. This paper attempts to construct two optimal portfolios
from two different samples using Sharpe’s Single Index Model of Capital
Asset Pricing and further to compare the performance of these two portfolios
by Sharpe’s Ratio. For the analysis purpose, NIFTY 50 has been considered as
the market index. Stocks listed on the National Stock Exchange constitute the
population. Two samples each comprising of 26 stocks (most of them being
large caps) have been selected. Monthly indices as well as monthly stock
prices for the period from 1st April, 2004 to 31st March, 2009 are being
considered. Using Sharpe’s Single Index Model a unique cut off point is
defined and the optimal portfolio of stocks having excess of their expected
return over risk-free rate of return greater than this cut-off point is generated
for both the samples separately. Percentage of investment in the respective
portfolios is further decided by the standard procedure outlined by Sharpe’s
Model. Finally, performance of these two optimal portfolios is evaluated by
Sharpe’s Ratio.

Keywords: Sharpe’s ratio, Sharpe’s single index model, optimal portfolio

Introduction
Modern portfolio theory (MPT) or portfolio theory was introduced by Harry
Markowitz with his paper "Portfolio Selection," which appeared in the 1952 Journal
of Finance.
Using diversification, Markowitz proposed that investors focus on selecting
36 Asmita Chitnis

portfolios based on their overall risk-reward characteristics instead of merely

compiling portfolios from securities that each individually has attractive risk-reward
characteristics. In a nutshell, investors should select portfolios and not individual
securities.
Later in 1990, Markowitz shared a Nobel Prize with Merton Miller and William
Sharpe in Economics for introducing and extending the Capital Asset Pricing Model
(CAPM).
This model distinguishes between systematic (market-wide) and specific risk
(asset-specific). William Sharpe's contribution was what is now called the Sharpe
Ratio, a metric that is used for determining the optimum balance of risk and reward
for a portfolio of assets (cash, stocks, funds, etc). To find a risk-efficient portfolio,
fund managers often find the combination of assets that has the highest Sharpe Ratio.
Traders also use the Sharpe Ratio in both back testing trading ideas and evaluating
trading history.

Sharpe’s Single Index Model

Markowitz’s efficient diversification of the Portfolio_1 involves combining securities
with less than positive correlation in order to reduce risk in the portfolio without
sacrificing any of the portfolio return. While carrying out N-security portfolio analysis
using Markowitz model the inputs required are
• expected returns
• variances of return and
• (N2-N)/2 covariances

Thus, Markowitz’s model calculation requires a total of [N (N + 3)]/2 separate

pieces of information for calculation and identification of efficient portfolio. So, this
model is extremely demanding in its data needs and computational requirements.
William Sharpe extended Markowitz’s work and came up with a more simplified
model, where he considered the fact that relationship between securities occur only
through their individual relationships with some index or indices of business activity.
As a result of which the covariance data requirement reduced from (N2-N)/2 under
Markowitz model to only N measures of each security as it relates to the index.
Overall, the Sharpe model requires [3*N + 2] separate pieces of information as
against [N (N + 3)]/2 for Markowitz.

Sharpe’s Model of Portfolio Optimization

Using Sharpe model, the return for each security can be represented by the equation

Ri = αi + βi + ei (1)
Where,
Ri : expected return on security i
αi : intercept giving return on security when index return is zero
βi : slope which measures the change in the security return with respect to change
in the market return
Performance Evaluation of Two Optimal Portfolios by Sharpe’s Ratio 37

ei : error term with mean zero and a standard deviation which is constant.
This paper attempts to construct two optimal portfolios from two different
samples using Sharpe’s Single Index Model of Capital Asset Pricing and further to
compare the performance of these two portfolios by Sharpe’s Ratio.

Construction of Optimal Portfolios: Methodology

The first step towards construction of an optimum portfolio using Sharpe’s Single
Index Model is to select securities on the basis of following criteria:
• The return on the investment is greater than the risk free return and
• The beta value for that security is positive.

For each security selected in the portfolio, expected return is then calculated using
equation (1). After selecting these securities in the portfolio, next step is to construct
an optimal portfolio.
The construction of an optimal Portfolio_1 is simplified if a single number
measures the desirability of including a security in the optimal portfolio. For Sharpe’s
Single Model, such a number exists. In this case, the desirability of any security is
( Ri − R f )
directly related to its excess return-to-beta ratio given by .
βi
Where,
Ri = expected return of stock i
R f = risk-free rate of return
β i = beta of stock i

So, excess return-to-beta ratio is calculated for each security in the portfolio and
securities are ranked in descending order of magnitude according to their excess
return-to-beta ratio. Further, the number of stocks selected in the optimum portfolio
depends on a unique cutoff rate C* such that all stocks with excess return-to-beta
ratios greater than this unique cutoff C*are included and all stocks with lower ratios
excluded.
The value of C* is computed from the characteristics of all securities that belong
in the optimum portfolio. To determine C* it is necessary to calculate its value as if
different numbers of securities were in the optimum portfolio. For a portfolio of i
stocks, Ci is given by:
m (R − R )β
σm∑
2 i f i

i =1 σ ei2
Ci= (2)
i
β i2
1+σ m ∑ 2
2

i =1 σ ei

Where,
σ m2 = variance in the market
38 Asmita Chitnis

σ ei2 = variance of a security’s movement that is not associated with the movement
of the market index; this is the stock’s unsystematic risk.
Definition of all remaining symbols being the same as explained before.
Over establishing the cutoff rate C*, investor knows which securities are qualified
for the optimum portfolio and hence the optimum Portfolio_1 is constructed using
qualified securities.
Once an optimum Portfolio_1 is constructed, next step is to calculate the
percentage invested in each security in the optimum portfolio. The percentage
invested in ith security is denoted by X i and is calculated using the expression

Zi
Χi = N
(3)
∑Z
j =1
j

Where:
β i Ri − R f
Ζi = ( − C*)
σ ei2 βi
Where:
C * = cutoff rate
Ri = expected return of stock i
R f = risk-free rate of return
β i = beta of stock i
σ ei2 =unsystematic risk of stock i

Thus, the above expression determines the relative investment in each security.
Finally, expected return of the optimum portfolio R P and variance σ 2p is
calculated using the following two equations;
N
RP = ∑ X i (α i + β i I )
i =1

N
i.e. RP = ∑ X i Ri (4)
i =1

Where R P is the expected portfolio return and

X i is the proportion of the portfolio devoted to security i, and N is the total
number of securities.
Portfolio variance is calculated using the following equation:
N N
σ P2 = (∑ X i β i ) 2 σ i2 + ∑ ( Χ i2 ei2 ) (5)
i =1 i =1
Definition of all remaining symbols being the same as explained before.
 Performance Evaluation of Two Optimal Portfolios by Sharpe’s Ratio 39

In this study, above procedure of construction of an optimal Portfolio is being

used twice as we had to construct two different optimal portfolios from two different
samples.
Once these two optimal portfolios are being constructed, comparison of these two
portfolios has been made using Sharpe’s ratio which is given by the following
equation:

( Ri − R f )
(6)
σP

Where,
Ri = expected return of stock i
R f = risk-free rate of return and
σ P =Standard Deviation of the portfolio return

Analysis
For constructing two different portfolios, two different samples of size 26 each are
selected from the securities listed on National Security Exchange (refer Appendix).
Thus, securities listed on National Security Exchange constitute the population.
S&P CNXNIFTY is taken as the market index
Monthly closing prices and returns are considered for the selected securities in
each sample from 1st April, 2004 to 31st March 2009. Similar data are collected for
S&P CNXNIFTY for the same period.
This data are collected from www.nseindia.com and also from Prowess Client
Database.
The risk free return is considered to be 6% p.a.
The following Table 1.1 shows data on 26 securities, selected in sample_1.

Table 1.1: Alpha, Beta, Expected return, Risk and Excess Return to Beta Ratio-
sample_1.

Security Name Beta β Alpha α Expected 2 Syst. Risk Total Unsyst. Excess
Return β Risk Risk Return to
Beta Ratio
ABB 1.12 0.97 24.14 1.25 88.95 179.20 90.25 16.21
ACC 0.83 0.87 18.16 0.70 49.49 137.69 88.20 14.57
Allahabad Bank 0.90 -0.15 18.57 0.82 58.11 174.53 116.42 13.90
Bank of Baroda 1.19 -0.58 24.11 1.42 101.06 198.63 97.57 15.19
HDFC Bank 0.97 1.43 21.46 0.94 66.52 96.27 29.75 15.98
ITC 0.71 1.18 15.81 0.50 35.45 78.48 43.03 13.89
Infosys 0.44 1.42 10.55 0.19 13.82 74.86 61.03 10.32
LNT 1.23 0.96 26.33 1.50 106.66 156.80 50.15 16.59
PNB 1.07 0.20 22.43 1.15 81.88 198.12 116.24 15.31
RIL 1.00 2.06 22.85 1.01 71.63 109.45 37.82 16.79
 40 Asmita Chitnis

Security Name Beta β Alpha α Expected 2 Syst. Risk Total Unsyst. Excess
Return β Risk Risk Return to
Beta Ratio
Satyam 0.55 -1.29 10.08 0.30 21.41 184.98 163.57 7.43
SBI 1.18 0.50 24.92 1.39 98.80 176.21 77.40 16.04
WIPRO 0.74 0.02 15.35 0.55 38.96 83.02 44.06 12.63
Axis Bank 1.07 1.26 23.41 1.14 81.30 172.43 91.13 16.28
Bharti Airtel 0.78 1.62 17.71 0.60 42.89 75.26 32.37 15.07
CMC 0.89 -0.56 17.91 0.80 56.50 263.80 207.30 13.35
IOC 1.05 -0.74 21.02 1.10 78.47 214.69 136.22 14.29
M&M 0.91 0.73 19.51 0.82 58.44 111.61 53.16 14.90
Maruti 0.81 0.57 17.37 0.66 46.80 117.23 70.42 14.01
ONGC 1.08 -0.05 22.41 1.18 83.62 119.62 36.00 15.13
Reliance Infra 1.56 -1.39 30.93 2.44 173.15 293.15 120.00 15.97
Tata Motors 1.25 -2.05 23.93 1.57 111.87 170.00 58.13 14.29
Tata Tea 0.79 0.35 16.73 0.63 44.47 103.12 58.66 13.57
Corpo.Bank 1.14 -1.54 22.06 1.30 92.32 222.52 130.20 14.09
SAIL 1.30 1.41 28.24 1.68 119.29 230.40 111.10 17.17
Tata Steel 1.58 -0.61 32.01 2.48 176.31 270.31 94.00 16.51

It can be seen from Table 1.1 that all the securities selected in sample_1, have
expected return above the risk free return of 6%. So, all the securities are further
considered for constructing the optimal portfolio using Sharpe’s Model.
Further, we use equation (2) to establish unique cutoff C*.
Table 1.2 shows ranking of securities in portfolio_1 based on excess return-to-beta
ratio and calculation of unique cutoff point C*.

Table1.2: Ranking of securities and establishing a cutoff rate C* for portfolio_1 with
σ m2 = 71.06.

Security Name ( Ri − R f ) ( Ri − R f ) β i β i2 j ( Ri − R f ) β i j
β i2 C
βi σ 2
σ ei2
∑
i =1 σ 2 ∑
i =1 σ ei
2
ei ei
SAIL 17.167 0.259 0.015 0.259 0.015 8.889
RIL 16.785 0.447 0.027 0.707 0.042 12.658
LNT 16.591 0.497 0.030 1.203 0.072 14.031
Tata Steel 16.511 0.436 0.026 1.639 0.098 14.614
Axis Bank 16.278 0.204 0.013 1.844 0.111 14.782
ABB 16.214 0.225 0.014 2.068 0.125 14.925
SBI 16.044 0.288 0.018 2.357 0.142 15.054
HDFC Bank 15.982 0.503 0.031 2.860 0.174 15.209
Reliance Infra 15.971 0.324 0.020 3.184 0.194 15.283
PNB 15.307 0.152 0.010 3.336 0.204 C*=15.284
Bank of Baroda 15.186 0.221 0.015 3.557 0.219 15.278
ONGC 15.129 0.494 0.033 4.051 0.251 15.260
Performance Evaluation of Two Optimal Portfolios by Sharpe’s Ratio 41

Security Name ( Ri − R f ) ( Ri − R f ) β i β i2 j ( Ri − R f ) β i j
β i2 C
βi σ ei2 σ ei2
∑i =1 σ ei2
∑
i =1 σ ei
2

Bharti Airtel 15.067 0.281 0.019 4.332 0.270 15.247

M&M 14.896 0.230 0.015 4.563 0.286 15.229
ACC 14.566 0.115 0.008 4.678 0.293 15.212
Tata Motors 14.293 0.387 0.027 5.065 0.321 15.138
IOC 14.292 0.116 0.008 5.181 0.329 15.118
Corpo. Bank 14.088 0.141 0.010 5.321 0.339 15.088
Maruti 14.014 0.131 0.009 5.452 0.348 15.061
Allahabad Bank 13.903 0.098 0.007 5.550 0.355 15.039
ITC 13.889 0.161 0.012 5.711 0.367 15.004
Tata Tea 13.566 0.145 0.011 5.856 0.377 14.964
CMC 13.353 0.051 0.004 5.907 0.381 14.949
WIPRO 12.630 0.157 0.012 6.064 0.394 14.878
Infosys 10.316 0.033 0.003 6.097 0.397 14.843
Satyam 7.426 0.014 0.002 6.111 0.399 14.810

It can be observed from Table 1.2 that the unique cutoff has been derived as
15.284. Thus, only 10 securities having excess return to beta ratio above 15.284 are
qualified to the optimum portfolio_1.
After construction of optimal portfolio_1, we find the percentage invested in each
of these 10 securities using the equation (3) given above.
Table 1.3 below, exhibits the optimum portfolio of ten securities and the
percentage invested in each security.

Table 1.3: Optimal Portfolio_1 with percentage invested in each security

Security Name βi ⎛ Ri − Rf ⎞ β ⎛ Ri −Rf * ⎞ Zi X i (%)

⎜⎜ −C* ⎟⎟ Z i = 2i ⎜⎜ −C ⎟⎟ Xi = N
σ ei2 ⎝ βi σ ei ⎝ βi
⎠ ⎠ ∑Z j j =1

SAIL 0.011662 1.882581 0.021954 0.121 12.1373

RIL 0.026548 1.501104 0.039851 0.220 22.0319
LNT 0.02443 1.3065 0.031918 0.176 17.6462
Tata Steel 0.016757 1.226911 0.020559 0.114 11.3663
Axis Bank 0.011738 0.993771 0.011665 0.064 6.4489
ABB 0.012397 0.930158 0.011531 0.064 6.3751
SBI 0.015233 0.760084 0.011578 0.064 6.4012
HDFC Bank 0.032527 0.697395 0.022684 0.125 12.5411
Reliance Infra 0.013007 0.686262 0.008927 0.049 4.9350
PNB 0.009234 0.022975 0.000212 0.001 0.1173
TOTAL 0.18088 1.000 100.000
42 Asmita Chitnis

After finding the percentage invested in each of these 10 securities using the
equation (3), expected return and variance of the optimum portfolio_1 is calculated
using equation (4) and (5).
Table 1.4 below gives calculations for expected return and variance of the
optimum portfolio_1

Table 1.4: Calculations of expected return and variance of the optimum portfolio_1

Zi X i Ri X i βi X i2 X i2 σ ei2
Security Name Xi = N

∑Z j =1
j

SAIL 0.121373 3.427841 0.157256 0.014731 1.63670901

RIL 0.220319 5.034784 0.221196 0.04854 1.83568485
LNT 0.176462 4.645414 0.216182 0.031139 1.56148921
Tata Steel 0.113663 3.638051 0.179034 0.012919 1.21439063
Axis Bank 0.064489 1.509766 0.068978 0.004159 0.37897225
ABB 0.063751 1.53899 0.071324 0.004064 0.36677783
SBI 0.064012 1.595057 0.075477 0.004097 0.31716606
HDFC Bank 0.125411 2.691646 0.121338 0.015728 0.46782479
Reliance Infra 0.04935 1.526363 0.077033 0.002435 0.29226421
PNB 0.001173 0.02631 0.001259 1.38E-06 0.00015992
Total 1.000001 25.63422 1.189078 8.07143876

Similar calculations are performed on the second sample of 26 securities (Refer

Table 2.1 and Table 2.2 in Appendix). Table 2.3 below gives the optimum portfolio of
ten securities (constructed from sample_2) with the percentage invested in each of
them.

Table 2.3: Optimal Portfolio_2 with percentage invested in each security

Security Name βi ⎛Ri −Rf *⎞ β ⎛Ri −Rf *⎞ Zi X i (%)

⎜⎜ −C ⎟⎟ Z i = 2i ⎜⎜ −C ⎟⎟ X i =
σ ei2 ⎝ βi σ ei β
N
⎠ ⎝ i ⎠ ∑Z
j =1
j

Sesa Goa 0.00907 3.58452 0.03253 0.19322 19.32167

Titan Ind 0.00712 2.39451 0.01705 0.10130 10.13017
Balarampur Chini 0.00600 2.22550 0.01335 0.07930 7.92957
BHEL 0.01730 2.13698 0.03698 0.21964 21.96384
Siemens 0.01351 1.81194 0.02448 0.14543 14.54293
Bata India 0.00787 1.61332 0.01269 0.07538 7.53771
HDFC 0.01999 0.78226 0.01564 0.09290 9.29033
ICICI Bank 0.01968 0.72828 0.01433 0.08512 8.51197
Dena Bank 0.00979 0.09267 0.00091 0.00539 0.53913
Grasim 0.01377 0.02842 0.00039 0.00233 0.23251
TOTAL 0.16835 1.00000 100.000
Performance Evaluation of Two Optimal Portfolios by Sharpe’s Ratio 43

Table 2.4 gives the calculations for expected return and variance of the optimum
portfolio_2.

Table 2.4: Calculations of expected return and variance of the optimum portfolio_2

Zi X i Ri X i βi X i2 X i2 σ ei2
Security Name Xi = N

∑Z
j =1
j

Sesa Goa 0.19322 6.40195 0.27855 0.03733 5.9309

Titan Ind 0.10130 2.35786 0.09926 0.01026 1.4118
Balarampur Chini 0.07930 2.53687 0.11803 0.00629 1.5603
BHEL 0.21964 5.57934 0.24529 0.04824 3.1136
Siemens 0.14543 4.57688 0.21728 0.02115 2.3385
Bata India 0.07538 2.19368 0.10335 0.00568 0.9904
HDFC 0.09290 2.06938 0.09439 0.00863 0.4386
ICICI Bank 0.08512 2.24499 0.10863 0.00725 0.4699
Dena Bank 0.00539 0.12520 0.00606 0.00003 0.0033
Grasim 0.00233 0.05528 0.00271 0.00001 0.0005
1.00000 28.14145 1.27355 16.25782

Further, portfolio return and risk are calculated using the expressions (4) and (5).
And lastly, Sharpe’s ratio is used to compare the performance of the two optimal
portfolios given by expression (6).

Portfolio_1 Portfolio_2 Sharpe’s Ratio

Portfolio Return ( %) 25.63422 28.14145 1.884527
Portfolio Risk 10.41865 11.46813 1.930694

Findings
• Both the optimum portfolios thus constructed are largely diversified as
securities in the individual portfolio represent different sectors of the
economy-Cement, Banking, Financial Institutions, Capital Goods, Commodity
etc.
• From Table 1.2, and Table 2.2 it is observed that the cutoff rate C* for the first
Portfolio_1 is 15.284 as against 15.236 of portfolio_2 which is almost the
same.
• The optimum portfolio variances have been observed to be quite high,
signaling the fact that during the period of the study, the markets were in a
major uptrend with high amount of volatility. But, the variability for both the
optimal portfolios is substantially less than the variability of any of the
individual stocks in the portfolio.
• Expected return on portfolio_1 is 25.63 % and that on portfolio_2 is 28.14 %.
44 Asmita Chitnis

The variability in the return is 108.5483 for Portfolio_1 and 131.518 for the
Portfolio_2. That is, return as well as risk (variability) is less for Portfolio_1 as
compared to Portfolio_2.
• Sharpe’s ratio as a measure of performance evaluation for the Portfolio_1 and
Portfolio_2 work out to be 1.884527 and 1.930694 respectively.

Conclusion
• Individual securities, as we have seen, have risk-return characteristics of their
own. Portfolios, which are combinations of securities, tend to spread risk over
many securities and thus help to reduce the overall risk involved.
• If we try to conclude about the risk involved, then Portfolio_1 outperforms
Portfolio_2 as its variability in return is less as compared to that of
Portfolio_2. Investor with less risk appetite will definitely prefer Portfolio_1
with less risk- less return. If the decision is taken solely on the basis of
expected return on the portfolio, then Portfolio_2 becomes the preferred
choice.
• But, a more comprehensive measure of performance evaluation of the
Portfolio_1 is given by Sharpe’s ratio. The greater the portfolio’s Sharpe’s
ratio, the better is its performance. From the above analysis, it can be
concluded that in spite of having greater variability, Portfolio_2 is the
preferred portfolio between the two portfolios under study as Sharpe’s ratio
for Portfolio_2 is greater than that for Portfolio_1.
• This method of construction of optimal portfolio and further evaluation of its
performance is very effective and convenient as revision of the optimal
portfolio can be an on going exercise. The existence of a cutoff rate is also
extremely useful because most new securities that have an excess return-to-
beta ratio above the cutoff rate can be included in the optimal portfolio.

References
[1] Sharpe, William F. 1963. A Simplified Model for Portfolio Analysis,
Management Science 9: 227-293.
[2] Markowitz, Harry M. 1952. Portfolio Selection, Journal of Finance 7: 77-91.
[3] Jorion (2007), Value at Risk, McGraw Hill, U.S.A.
[4] Fischer, Donald E., and Ronald J. Jordan (2000), Security Analysis and
Portfolio Management, Prentice Hall, India
[5] Elton, Gruber (1991), Modern Portfolio Theory and Investment Analysis, John
Wiley Series in Finance, Singapore
[6] Prasanna Chandra (2008), Investment Analysis and Portfolio Management,
Tata McGraw Hill, India
Performance Evaluation of Two Optimal Portfolios by Sharpe’s Ratio 45

Appendix

Portfolio_1 Portfolio_2
Security Name Security Name
ABB Grasim
ACC BHEL
Allahabad Bank BASF India
Bank of Baroda Bata India
HDFC Bank Hindalco
ITC ICICI Bank
Infosys Indian Overseas Bank
Larsen and Toubro Siemens
PNB Tata Chemicals
RIL Ambuja Cement
Satyam Balarampur Chini
SBI Bharat Electronics
WIPRO Bharar Forge
Axis Bank Bharat Pertoleum
Bharti Airtel Cipla
CMC Zee Entertainment
IOC Bharat Gears
M&M Britannia
Maruti Colgate
ONGC Cummins
Reliance Infra Dena Bank
Tata Motors Federal Bank
Tata Tea Indian Hotels
Corporation Bank Sesa Goa
SAIL Titan Ind
Tata Steel HDFC

Table 2.1: Alpha, Beta, Expected return, Risk and Excess Return to Beta Ratio-
sample_2
Security Name Beta Alpha Expected 2 Syst. Total Unsyst. Excess Ret to
β α Return β Risk Risk Risk Beta Ratio
Grasim -0.34 1.16 23.78 1.36 96.38 180.93 84.55 15.26
BHEL 2.28 1.12 25.40 1.25 88.63 153.17 64.54 17.37
BASF India 0.47 0.55 11.91 0.31 21.71 103.85 82.14 10.70
Bata India 0.71 1.37 29.10 1.88 133.59 307.91 174.31 16.85
Hindalco -1.79 1.37 26.54 1.87 133.05 195.94 62.89 15.01
ICICI Bank -0.05 1.28 26.37 1.63 115.74 180.60 64.86 15.96
Indian Overseas Bank -0.85 1.06 21.20 1.13 80.57 197.74 117.18 14.27
Siemens 0.53 1.49 31.47 2.23 158.63 269.20 110.57 17.05
Tata Chemicals -0.40 1.17 23.78 1.36 96.92 166.33 69.41 15.23
Ambuja Cement 0.15 0.90 18.77 0.81 57.43 128.92 71.49 14.20
Balarampur Chini 1.17 1.49 31.99 2.22 157.45 405.60 248.15 17.46
Bharat Electronics 0.24 1.03 21.53 1.06 75.12 161.77 86.65 15.10
Bharar Forge -1.30 1.12 21.85 1.25 88.84 170.46 81.61 14.18
Bharat Pertoleum -1.03 1.03 20.37 1.07 75.86 238.17 162.31 13.90
46 Asmita Chitnis

Security Name Beta Alpha Expected 2 Syst. Total Unsyst. Excess Ret to
β α Return β Risk Risk Risk Beta Ratio
Cipla 1.41 0.61 14.09 0.38 26.65 98.42 71.76 13.21
Zee Entertainment 0.68 0.72 15.59 0.52 36.84 140.70 103.86 13.31
Bharat Gears 0.18 0.89 18.53 0.79 55.82 422.78 366.96 14.14
Britannia 1.18 0.38 8.95 0.14 10.02 61.05 51.03 7.87
Colgate 2.40 0.45 11.63 0.20 14.13 68.06 53.92 12.63
Cummins 0.16 0.89 18.56 0.79 56.08 132.45 76.38 14.14
Dena Bank -0.04 1.12 23.22 1.26 89.71 204.43 114.71 15.33
Federal Bank -0.59 0.62 12.24 0.38 27.30 167.69 140.39 10.07
Indian Hotels -0.92 1.02 20.15 1.03 73.52 130.10 56.58 13.91
Sesa Goa 3.28 1.44 33.13 2.08 147.70 306.56 158.87 18.82
Titan Ind 2.98 0.98 23.28 0.96 68.23 205.80 137.57 17.63
HDFC 1.24 1.02 22.27 1.03 73.35 124.17 50.81 16.02

Table 2.2 Ranking of securities and establishing a cutoff rate C* for portfolio_2 with
σ m2 = 71.06
Security Name ( Ri − R f ) ( Ri − R f ) β i β i2 j ( Ri − R f ) β i j
β i2 C
βi σ ei2 σ ei2
∑i =1 σ ei2
∑
i =1 σ ei
2

Sesa Goa 18.821 0.246 0.013 0.246 0.013 9.068

Titan Ind 17.631 0.123 0.007 0.369 0.020 10.818
Balarampur Chini 17.462 0.156 0.009 0.525 0.029 12.196
BHEL 17.373 0.336 0.019 0.861 0.048 13.800
Siemens 17.048 0.344 0.020 1.205 0.069 14.594
Bata India 16.850 0.182 0.011 1.387 0.079 14.855
HDFC 16.019 0.325 0.020 1.712 0.100 15.063
ICICI Bank 15.965 0.401 0.025 2.113 0.125 15.226
Dena Bank 15.329 0.169 0.011 2.282 0.136 15.233
Grasim 15.265 0.245 0.016 2.527 0.152 C*=15.236
Tata Chemicals 15.226 0.299 0.020 2.826 0.171 15.235
Bharat Electronics 15.103 0.184 0.012 3.010 0.184 15.227
Hindalco 15.014 0.447 0.030 3.457 0.213 15.199
Indian Overseas Bank 14.272 0.138 0.010 3.595 0.223 15.161
Ambuja Cement 14.202 0.161 0.011 3.756 0.234 15.118
Bharar Forge 14.176 0.217 0.015 3.973 0.250 15.063
Bharat Gears 14.138 0.030 0.002 4.003 0.252 15.056
Cummins 14.138 0.146 0.010 4.149 0.262 15.021
Indian Hotels 13.908 0.254 0.018 4.403 0.280 14.952
Bharat Pertoleum 13.905 0.091 0.007 4.495 0.287 14.929
Zee Entertainment 13.312 0.066 0.005 4.561 0.292 14.903
Cipla 13.214 0.069 0.005 4.630 0.297 14.875
Colgate 12.632 0.047 0.004 4.677 0.301 14.848
BASF India 10.698 0.040 0.004 4.717 0.305 14.800
Federal Bank 10.071 0.028 0.003 4.744 0.307 14.760
Britannia 7.865 0.022 0.003 4.766 0.310 14.701