Optimal portfolio determination for developing country’s vulnerable stock market data

Abstract

The aim of the paper is to provide a clear guideline to the investors to follow a systematic strategy to make a profit with low risk from their investments in developing country’s stocks where the market is more vulnerable. Bangladesh stock exchange is one of the vulnerable stock markets among the developing countries where short-sales are not allowed and hence investors are reluctant to invest even for short term. We used stock market data for 81 stock companies from Dhaka stock exchange and implemented single index model to it for analyzing the benchmark market index DSEX to obtain the optimal portfolio. We have shown how the optimal portfolio can be formulated with an allocation strategy to get profit with minimum portfolio risk and how to diversify the risk of the optimal portfolio. This analysis demonstrates how optimal portfolio can be done for a vulnerable but emerging stock market and how sustainable they are. More specifically, we demonstrate statistical finance theories and their applications with a simple user-friendly stock investment portfolio.

Keywords:

• Optimal portfolio
• Single index model
• Stock
• Dhaka Stock Exchange
• Return
• Risk

2010 AMS subject classifications 90B50:

• Management decision making
• including multiple objectives