Portfolios Constructed with Cut-Off Points Based on Heteroscadastic Betas and OLS Betas

Authors(2) :-R. Subathra, A. Kachi Mohideen

This paper endeavors to build an optimal portfolio by assuming a single-index model, the justification for which is obtained by analyzing the returns of 37 stocks of the Indian stock market from NIFTY 50 using two approaches: Single index model and APT model. Stock prices in the period from April 2008 to August 2016 is considered in this study. The APT model which proved to be a successful model of stock returns for countries like USA fails to produce significant coefficients, which gives an understanding that the Indian capital market is not yet sufficiently developed to identify all information affecting the stock price movements. The Single Index model leads to the decision that the market index is the most important factor in the Indian capital market. This gives an understanding that the Indian investors respond quickly to the publicly disclosed information. The Treynor's ratio is computed for each asset with the beta of single index model. Two variations of betas are considered in this paper. The betas are estimated with OLS model and with the intervention of GARCH effects. The portfolios are formed by defining a special cut off point and the stocks having overabundance of their normal return over risk free rate of return are chosen. The comparative analysis of OLS betas and GARCH betas identifies the best approach for beta computation and our optimal diversified portfolio comprises of 12 stocks chosen out of 37 stocks.

Authors and Affiliations

R. Subathra
Department of Statistics, Government Arts College (Autonomous), Salem, Tamil Nadu State, India
A. Kachi Mohideen
PG and Research Department of Statistics, Periyar E.V.R. College (Autonomous), Trichy, Tamil Nadu State, India

Factor Models, Risk Premium, Stock Returns, Estimated Sensitivities, Regression Analysis, Treynor’s Index, Portfolio Of Stocks, GARCH, TARCH,EGARCH.

  1. Bodurtha, J.N., Cho, D.C., Senbet, L.W. (1989).Economic Forces and the Stock Market: An international Perspective. The Global Finance Journal, 1(1), 21-46.
  2. Chan, K.C., Chen, N.F., Hsieh, D.A. (1985). An Exploratory Investigation of the Firm Size Effect. Journal of Financial Economics, 14, 451-471.
  3. Chen, N., Roll, R., Ross, S.A. (1986). Economic Forces and the Stock Market. The Journal of Business, 59(3), 383-403.
  4. Edwin J.Elton;Martin J.Gruber;Manfred W.Padberg(1978),”Simple Criteria for Optimal Portfolio Selection:Tracing out the Efficient Frontier”, The journal of Finance,Volume 33, Issue 1,296-302.
  5. Fama, E.F., French, K.R. (1992). The Cross-Section of Expected Stock Returns. The Journal of Finance, 47 (2), 427-465.
  6. Lintner, J. 1965. “The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets”. Review of Economics and Statistics, Vol. 47, No. 2, 13–37.
  7. Markowitz, H. M., 1952, Portfolio Selection, Journal of Finance, March, pp.77-91
  8. McElroy, M.B., Burmeister, E. (1988). Arbitrage Pricing Theory as a Restricted Nonlinear Multivariate Regression Model: Iterated Nonlinear Seemingly Unrelated Regression Estimates. Journal of Business & Economic Statistics, 6(1), 29-42.
  9. Ross, S. (1976). The arbitrage theory of capital asset pricing. Journal of Economic Theory, 13 (3), 341–360.
  10. Sharpe, W. 1964. “Capital Asset Prices: A theory of market equilibrium under conditions of risk”. The Journal of Finance, Vol. 19, No. 6, 425–442.43
  11. Treynor, J.L.1993.“In defense of the CAPM”. Financial Analysts Journal, Vol. 59, No. 3, 11–13. 

Publication Details

Published in : Volume 3 | Issue 3 | March-April 2017
Date of Publication : 2017-04-30
License:  This work is licensed under a Creative Commons Attribution 4.0 International License.
Page(s) : 516-524
Manuscript Number : IJSRST1733172
Publisher : Technoscience Academy

Print ISSN : 2395-6011, Online ISSN : 2395-602X

Cite This Article :

R. Subathra, A. Kachi Mohideen, " Portfolios Constructed with Cut-Off Points Based on Heteroscadastic Betas and OLS Betas", International Journal of Scientific Research in Science and Technology(IJSRST), Print ISSN : 2395-6011, Online ISSN : 2395-602X, Volume 3, Issue 3, pp.516-524, March-April-2017.
Journal URL : http://ijsrst.com/IJSRST1733172

Article Preview

Contact Us