Performance Evaluation of Equal-Weight Portfolio and Optimum Risk Portfolio on Indian Stocks

ArXiv ID: 2309.13696 “View on arXiv”

Authors: Unknown

Abstract

Designing an optimum portfolio for allocating suitable weights to its constituent assets so that the return and risk associated with the portfolio are optimized is a computationally hard problem. The seminal work of Markowitz that attempted to solve the problem by estimating the future returns of the stocks is found to perform sub-optimally on real-world stock market data. This is because the estimation task becomes extremely challenging due to the stochastic and volatile nature of stock prices. This work illustrates three approaches to portfolio design minimizing the risk, optimizing the risk, and assigning equal weights to the stocks of a portfolio. Thirteen critical sectors listed on the National Stock Exchange (NSE) of India are first chosen. Three portfolios are designed following the above approaches choosing the top ten stocks from each sector based on their free-float market capitalization. The portfolios are designed using the historical prices of the stocks from Jan 1, 2017, to Dec 31, 2022. The portfolios are evaluated on the stock price data from Jan 1, 2022, to Dec 31, 2022. The performances of the portfolios are compared, and the portfolio yielding the higher return for each sector is identified.

Keywords: Markowitz Portfolio Theory, Risk Minimization, Portfolio Optimization, Free-Float Market Capitalization, Sector Analysis, Equities

Complexity vs Empirical Score

• Math Complexity: 3.5/10
• Empirical Rigor: 6.0/10
• Quadrant: Street Traders
• Why: The paper applies standard portfolio optimization models (Markowitz mean-variance, minimum risk) with straightforward volatility and return calculations, representing moderate mathematical complexity. However, it demonstrates high empirical rigor through actual data acquisition from Yahoo Finance, a defined backtest period, and sector-specific performance evaluation on Indian stock market data.

  flowchart TD
    A["Research Goal: Design & Evaluate<br>Portfolio Strategies for Indian Stocks"]
    B["Key Inputs: NSE Data<br>Jan 2017 - Dec 2022"]
    C["Methodology:<br>1. Equal-Weight<br>2. Risk-Minimization<br>3. Optimized Risk"]
    D["Computational Process:<br>Portfolio Construction<br>Testing (Jan-Dec 2022)"]
    E["Key Outcomes:<br>Performance Comparison by Sector<br>Identification of Best-Performing Strategy"]
    
    A --> B
    B --> C
    C --> D
    D --> E