RISK-RETURN ANALYSIS OF SECTORIAL PORTFOLIOS OF STOCKS
D. TRIPATI RAO, JASDEEP MANDIA, ABHISHEK ANANDABSTRACT. The efficient frontier (risk-return profile) signifies the minimum risk achieved through diversification, i.e., the systematic risk, which has to be taken for any value of the expected returns. Using the Modern Portfolio Theory (MPT) of mean variance optimization, we estimate and compare of different long-only sectorial portfolios. Based on a longitudinal monthly data of average stock returns, efficient frontiers are obtained solving multiple optimizations through quadratic programming in R-statistical computing tool. We find that all the sectorial portfolios of stocks follow MPT in general as the risk associated with it increases on increasing the expected rate of the return but the slope of the efficient frontier decreases. Different sectors behave differently when it comes to the risk-return relationship. On a broad basis, the efficient frontiers of each sector can be classified into three bands: Band 1 always lies on the left side of Band-2, and Band 2 in turn always lies on the left side of Band 3. Since, ideally all the sectors should have exhibited similar behavior, i.e., same expected returns for any given level of risk undertaken, therefore, either there is a persistence of information asymmetry or there exists investor’s bias towards certain sectors. pp. 108–126
JEL Classification: G11
Keywords: risk-return, diversification and portfolio choice