Portfolio Creation, Optimization & Performance Measurement Using Dynamic Passive & Active Strategies

This study starts off by picking up top stocks (from the NIFTY100 market), which have shown good fundamentals like the Capital Structure assessed by Debt-Equity ratio, quick ratio & current ratio, profitability ratio, retention ratio and most importantly the Price to Earnings to Growth (PEG) Ratio. A ranking system was devised to get an overall rank for each stock based on these financial ratios, to get an idea of potentially good performing businesses for the test period of our Portfolio. Markowitz Portfolio Optimization theory was adopted, which uses mean-variance and covariance matrix calculations to obtain the weights or the desired asset allocation and to create the efficient Portfolio, optimized for the maximum Sharpe?s Ratio which was possible, given the historical Stock Returns and Volatility and compared with the equal weighted portfolio having na?ve asset allocation. The performance of a dynamic passive strategy, which is the Buy & Hold was compared to that of the active- Constant Mix Strategy in the holding period of 5 years with monthly rebalancing, with an objective to outperform the benchmark market index, NIFTY100. The optimal weighted portfolio performed better than both the equal weighted portfolio and the benchmark index under both the Buy-and-Hold and the Constant Mix Strategy. Further, the Constant Mix Strategy exhibited better performance than Buy-and-Hold as was also suggested by the oscillating market in the given time period.