A Study on Portfolio Construction- The Diversification Method of Investments

Investment is the employment of funds on assets with the aim of earns income or capital appreciation. All investment involves a return and risk. To make wise decisions in investment, there is a need for information / knowledge on security analysis and portfolio management. Any rational investor, before investing his or her investible wealth in the stocks, analyses the risk related with the particular stock. The actual / real return he receives from a stock may vary from his expected return and the risk is expressed in terms of variability of return. A portfolio is a collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents, including closed-end funds and exchange-traded funds. Portfolio construction refers to a process of selecting the optimum mix of securities for the purpose of achieving maximum returns by taking minimum risk. A portfolio construction process allows for a holistic approach to investing, which can improve the possibility for better investment outcomes. If an investor plans for the portfolio investment, he/she is required to take an in-depth look at all current assets, investments, and debts if any. An investor has to decide on the extent of risk and volatility he/she willing to take, and what returns he/she wants to generate for establishing a risk-return profile. Portfolio construction helps the investors constructing investment portfolios to maximise expected returns and minimise risk. This study focuses on optimal portfolio construction using Sharpe’s single index model by selecting fifteen companies from NSE (National Stock Exchange). To conclude, out of fifteen securities twelve securities were selected through calculating cut-off rate. At the end the cut off-rate was used to find out the proportion of money to be invested in those of twelve securities.