Constructing optimal portfolio in developing

countries
Thesis (Phase 1)
Presented to
The Department of Finance at
K. J. Somaiya Institute of Management Studies and
Research, Mumbai

In Partial Fulfillment
Of the Requirements for the MMS Finance

By
Vatsal Mehta
MMS Finance
Roll no. 059

Under the Supervision of

Prof. Sunil Parmar

Professor, K.J. SIMSR

Introduction:
A Portfolio is a collection of investments, real and/or financial. A portfolio can comprise of
bonds, equity, mutual funds, commodities, real estate etc. An efficient portfolio is either a
portfolio that offers the highest expected return for a given level of risk, or one with the lowest
level of risk for a given expected return. The line that connects all these efficient portfolios is the
efficient frontier. An efficient portfolio is most preferred by an investor because its risk/reward
characteristics approximate the investor's utility function. A portfolio that maximizes an
investor's preferences with respect to return and risk. There could be various portfolios for
different risks and returns.

Objective:
The primary objective of the thesis is to find out the optimal portfolio in developing countries.
The objective of the thesis is to find out optimal portfolio using minimum variance and
maximum returns.
To find out the maximum returns an investor can achieve using efficient frontier.
Find out the weights to be assigned to each asset class.

Literature Review:
Traditional portfolio management is a nonquantitative approach to balancing a portfolio with
different assets, such as stocks and bonds, from different companies and different sectors as a
way of reducing the overall risk of the portfolio. The main objective is to select assets that have
little or negative correlation with each other, so that the overall diversifiable risk is reduced.
Modern portfolio theory (MPT) reduces portfolio risk by selecting and balancing assets based on
statistical techniques that quantify the amount of diversification by calculating expected returns,
standard deviations of individual securities to assess their risk, and by calculating the actual
coefficients of correlation between assets, or by using a good proxy, such as the single-index
model, allowing a better choice of assets that have negative or no correlation with other assets in
the portfolio. Modern portfolio management differs from the traditional approach by the use of
quantitative methods to reduce risk. The main objective of modern portfolio theory is to have an
efficient portfolio, which is a portfolio that yields the highest return for a specific risk, or, stated
in another way, the lowest risk for a given return. Profits can be maximized by selecting an
efficient portfolio that is also an optimal portfolio, which is one that provides the most
satisfaction the greatest return for an investor based on his tolerance for risk.

Optimal Portfolio construction:

Step 1: Using available risky securities to construct efficient frontier.
Step 2: Find the optimal risky portfolio using risk free securities.
Step 3: Choose most favorable asset allocation using risk return trade-off.

References:

http://www.nasdaq.com/investing/glossary/o/http%3a%2f
%2fwww.nasdaq.com%2finvesting%2fglossary%2fo%2foptimalportfolio#ixzz4LluD2lZq
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http://www.bestinvest.co.uk/media/modelfactsheets/defensive.pdf