Portfolio Optimization Using Short Look Back Period Volatility: An Application of Modern Portfolio Theory

Abstract

One of the major advances in the investment field during the past few decades has been the recognition that the creation of an optimum investment portfolio is not simply a matter of combining a lot of unique individual securities that have desirable risk-return characteristics. Specifically, it has been shown that the relationship among the investments must be considered to build an optimum portfolio to further meet the investment objectives of an investor. This paper attempts to solve the allocation problem while creating an equity portfolio. Markowitz reward risk ratio optimization technique has been used to find out optimal weights and construct a portfolio from the stocks of NIFTY 50. The research has been done on the data from 2020-2022. It is very much evident from the results that the optimal portfolio has outperformed the NIFTY 50 on the basis of reward to risk ratio. The results suggest that efficient selection of securities and weight allocation on the basis of optimized Sharpe Ratio can enhance the returns for individual investors and for the fund manager’s portfolios as well.