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Modelling the Efficient Frontier: An Empirical Study in the Indian Stock Market

Author

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  • Mihir Dash

    (Alliance University, India)

Abstract

The objective of the study was to understand the nature and shape of the efficient frontier for the Indian stock market over time, and to empirically examine Merton’s model for the efficient frontier in the context of the Indian stock market. The study was performed using a sample of fifty stocks that were part of the National Stock Exchange’s Nifty 50 index as of March 31, 2011. The study period was 2000-2011. The main finding of the study is that Merton’s model does not entirely explain the relationship between variance of returns and mean returns on the efficient frontier. Thus, a higher-order polynomial function may be more appropriate for modelling the efficient frontier. Also, the factors affecting the efficient frontier need to be studied in future studies.

Suggested Citation

  • Mihir Dash, 2018. "Modelling the Efficient Frontier: An Empirical Study in the Indian Stock Market," Journal of Applied Management and Investments, Department of Business Administration and Corporate Security, International Humanitarian University, vol. 7(2), pages 83-94, May.
  • Handle: RePEc:ods:journl:v:7:y:2018:i:2:p:83-94
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    References listed on IDEAS

    as
    1. Huberman, Gur & Kandel, Shmuel, 1987. " Mean-Variance Spanning," Journal of Finance, American Finance Association, vol. 42(4), pages 873-888, September.
    2. Anatoliy G. Goncharuk, 2012. "Methodological aspects of investment decision making," Journal of Applied Management and Investments, Department of Business Administration and Corporate Security, International Humanitarian University, vol. 1(3), pages 355-359.
    3. Rambaud, Salvador Cruz & Pérez, José García & Sánchez Granero, Miguel Ángel & Trinidad Segovia, Juan Evangelista, 2009. "Markowitz's model with Euclidean vector spaces," European Journal of Operational Research, Elsevier, vol. 196(3), pages 1245-1248, August.
    4. repec:ods:journl:v:6:y:2017:i:3:p:151-156 is not listed on IDEAS
    5. Gibbons, Michael R & Ross, Stephen A & Shanken, Jay, 1989. "A Test of the Efficiency of a Given Portfolio," Econometrica, Econometric Society, vol. 57(5), pages 1121-1152, September.
    6. David Feldman & Haim Reisman, 2003. "Simple Construction of the Efficient Frontier," European Financial Management, European Financial Management Association, vol. 9(2), pages 251-259.
    7. Voros, J., 1986. "Portfolio analysis--an analytic derivation of the efficient portfolio frontier," European Journal of Operational Research, Elsevier, vol. 23(3), pages 294-300, March.
    8. Bick, Avi, 2004. "The mathematics of the portfolio frontier: a geometry-based approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 44(2), pages 337-361, May.
    9. Cheung, C. Sherman & Kwan, Clarence C.Y. & Mountain, Dean C., 2009. "On the nature of mean-variance spanning," Finance Research Letters, Elsevier, vol. 6(2), pages 106-113, June.
    10. Merton, Robert C., 1972. "An Analytic Derivation of the Efficient Portfolio Frontier," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 7(04), pages 1851-1872, September.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    efficient frontier; Indian stock market; Merton’s model; polynomial function;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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