A Portfolio Rebalancing Approach for the Indian Stock Market

ArXiv ID: 2310.09770 “View on arXiv”

Authors: Unknown

Abstract

This chapter presents a calendar rebalancing approach to portfolios of stocks in the Indian stock market. Ten important sectors of the Indian economy are first selected. For each of these sectors, the top ten stocks are identified based on their free-float market capitalization values. Using the ten stocks in each sector, a sector-specific portfolio is designed. In this study, the historical stock prices are used from January 4, 2021, to September 20, 2023 (NSE Website). The portfolios are designed based on the training data from January 4, 2021 to June 30, 2022. The performances of the portfolios are tested over the period from July 1, 2022, to September 20, 2023. The calendar rebalancing approach presented in the chapter is based on a yearly rebalancing method. However, the method presented is perfectly flexible and can be adapted for weekly or monthly rebalancing. The rebalanced portfolios for the ten sectors are analyzed in detail for their performances. The performance results are not only indicative of the relative performances of the sectors over the training (i.e., in-sample) data and test (out-of-sample) data, but they also reflect the overall effectiveness of the proposed portfolio rebalancing approach.

Keywords: portfolio rebalancing, sector analysis, Indian stock market, calendar strategy, free-float market capitalization

Complexity vs Empirical Score

• Math Complexity: 2.0/10
• Empirical Rigor: 6.5/10
• Quadrant: Street Traders
• Why: The paper employs basic portfolio theory and descriptive statistics rather than advanced mathematical derivations, but it demonstrates high empirical rigor by using real historical market data, defining clear training/test splits, and backtesting with specific performance metrics (cumulative returns, volatility, Sharpe ratio).

  flowchart TD
    A["Research Goal:<br>Calendar Rebalancing Strategy<br>for Indian Stock Market"] --> B["Data Collection:<br>Historical Stock Prices NSE<br>Jan 2021 - Sep 2023"]
    
    B --> C{"Methodology"}
    
    subgraph C [" "]
        direction TB
        C1["Select 10 Key Sectors"] --> C2["Identify Top 10 Stocks<br>by Free-Float Market Cap"] --> C3["Form Sector-Specific Portfolios"]
    end
    
    C --> D{"Data Split"}
    
    subgraph D [" "]
        direction TB
        D1["Training/In-Sample<br>Jan 2021 - Jun 2022"] --> D2["Testing/Out-of-Sample<br>Jul 2022 - Sep 2023"]
    end
    
    D --> E["Simulation & Analysis:<br>Yearly Calendar Rebalancing<br>on 10 Sector Portfolios"]
    
    E --> F["Key Findings"]
    
    subgraph F [" "]
        direction TB
        F1["Sector Performance<br>In-Sample vs Out-of-Sample"] --> F2["Approach Effectiveness<br>Validated via Yearly Rebalancing"]
    end
    
    style A fill:#e1f5e1
    style F fill:#fff0f0