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Portfolio Construction Techniques Using Hedging and Diversification


Affiliations
1 St. Francis Institute of Management & Research, Mumbai, India
2 PGDM Alumni, St. Francis Institute of Management & Research, Mumbai, India
     

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An intelligent investor is always advised to diversify portfolio to reduce risks. This could be done in the cash market as well as using derivatives. Typically, derivative is used by hedge fund to make the use of leverage. Nifty 50 (Nifty) index is fifty stock diversified index. Nifty has historically added the stock that has done well and deleted that hasn't done well based on percentage return as a criterion. In this process however, there're some companies which have remained common over the years. This study was based on common 29 Nifty Stocks from 2006 to 2016 and their monthly stock price data. The focus of this study was to construct different portfolios' using various methods of hedging and diversification and analysing them for returns. These 29 companies almost cover all the sectors such as Information Technology, Fast-Moving Consumer Goods (FMCG), Capital Goods, Steel, Banking, Pharma, Automobile and Energy Sector. 2006 to 2011 data was used as a base data to select the weights o f various scripts in the portfolio and 2012 to 2016 data was used to test the data for study of performance of the portfolio. These portfolios were based on following criteria.

• Equal Weight                                                                                                               

• Risk Return Optim um Portfolio using Markowitz Mean-Variance approach

• Market Capitalisation                                                                                                   

• Optimum Portfolio with use of futures for short selling (Derivatives)


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  • Harry .M. Markowitz, Portfolio selection: Efficient diversification of investments (New York: John Wiley, 1959).

  • Prasanna Chandra (2008), Third Edition - Investment Analysis and

  • Portfolio Management p.215 to p.244:Tata McGraw Hill Education Private Limited.

  • Benjamin Graham (1949) -"The Intelligent Investor" : Harper & Brothers.

  • Bodie, Kane and Marcus (2002) Investment, International Edition, 2002, McGraw-Hill.

  • Levin Richard and Rubin David (2007), "Statistics for Management".

  • http://www.nseindia.com/

  • http://www.moneycontrol.com/

  • http://www.capitalline.com

  • http:/www. rbi.org. in/


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  • Portfolio Construction Techniques Using Hedging and Diversification

Abstract Views: 181  |  PDF Views: 0

Authors

Pushkar D. Parulekar
St. Francis Institute of Management & Research, Mumbai, India
Anand K. Mishra
PGDM Alumni, St. Francis Institute of Management & Research, Mumbai, India

Abstract


An intelligent investor is always advised to diversify portfolio to reduce risks. This could be done in the cash market as well as using derivatives. Typically, derivative is used by hedge fund to make the use of leverage. Nifty 50 (Nifty) index is fifty stock diversified index. Nifty has historically added the stock that has done well and deleted that hasn't done well based on percentage return as a criterion. In this process however, there're some companies which have remained common over the years. This study was based on common 29 Nifty Stocks from 2006 to 2016 and their monthly stock price data. The focus of this study was to construct different portfolios' using various methods of hedging and diversification and analysing them for returns. These 29 companies almost cover all the sectors such as Information Technology, Fast-Moving Consumer Goods (FMCG), Capital Goods, Steel, Banking, Pharma, Automobile and Energy Sector. 2006 to 2011 data was used as a base data to select the weights o f various scripts in the portfolio and 2012 to 2016 data was used to test the data for study of performance of the portfolio. These portfolios were based on following criteria.

• Equal Weight                                                                                                               

• Risk Return Optim um Portfolio using Markowitz Mean-Variance approach

• Market Capitalisation                                                                                                   

• Optimum Portfolio with use of futures for short selling (Derivatives)


References