© 2018 JETIR August 2018, Volume 5, Issue 8 www.jetir.org (ISSN-2349-5162) JETIRA006093 Journal of Emerging Technologies and Innovative Research (JETIR) www.jetir.org 512 OPTIMAL PORTFOLIO CONSTRUCTION: A CASE STUDY OF NSE Dr. Simranjeet Kaur Sandhar*, Dr. Neetika Jain**, Ruchi Kushwah*** *Assistant Professor, Symbiosis University of Applied Sciences, Indore, (M.P.) **Assistant Professor, Symbiosis University of Applied Sciences, Indore, (M.P.) ***Academic Associate, Indian Institute of Management, Indore,(M.P.) Abstract-Portfolio construction is a widely-used theory on how investors can construct investment portfolios to maximise expected returns and minimise risk. The practice of portfolio construction includes implementing an asset allocation strategy, which involves balancing investment risk and return by adjusting the percentage of a portfolio allocated to each asset class. Asset allocation is devised based on an investor’s risk tolerance, investment goals and investment timeframe. An attempt is made here to get an insight into the idea embedded inSharpe’s single index model and to construct an optimal portfolio empirically using thismodel. The study aimed to construct an optimal portfolio by using Sharpe’s single index model. For this purpose the monthly closing prices of companies listed in NSE and NSE index (Nifty) for the period of Jan 2010 – Dec 2016 has been considered. Ultimately it is recommended that among the sample companies all the stocks are undervalued except three stocks (Maruti, Tata Steel and HDFC) thus the investors can pick these stocks to revise their portfolio. Keywords: Sharpe’s Single Index Model, Return and Risk Analysis, Risk Characteristic Line, Portfolio Analysis, Optimal Portfolio Construction 1. Introduction 1.1 Investment Investment is the commitment of money or capital to purchase financial instruments or other assets in order to gain profitable returns in the form of interest, income, or appreciation of the value of the instrument. No doubt, investing one’s hard-earned money is a risky business. Sure, there are investments that look like they don't carry huge risk of failure, but these won't get huge amounts of dough. The basic rule of Investing applies everywhere-“Huge risk comes with Huge returns” and being aware of the objectives and avenues of investment leads to financial security. If one wants to safe guard one's money against inflation and aim it to grow, one need to select the right financial product for oneself. Investment is an art and a science, key to successful investment is focused and effective investment planning. There are various options in which one can invest. There are many investment options available in the market as Mutual Funds, Fixed Deposit, National Saving Certificate, Public Provident Fund, stock Market, Gold, Silver, & Real estate. 1.2Portfolio The term portfolio refers to any collection of financial assets such as stocks, bonds, and cash. Portfolios may be held by individual investors and/or managed by financial professionals, hedge funds, banks and other financial institutions. It is a generally accepted principle that a portfolio is designed according to the investor's risk tolerance, time frame and investment objectives. The monetary value of each asset may influence the risk/reward ratio of the portfolio and is referred to as the asset allocation of the portfolio. To successfully build a portfolio of impact investments, investors will need to assign an individual or a team to source, commit to and manage this set of investments. As we will see in the examples below, institutional investors utilize different organizational structures to establish these teams. 1.3 Portfolio Construction Portfolio is the combination of securities such as a stock bonds and money market instrument. The process of blending together the broad asset classes so as to obtain optimum return with minimum risk is called portfolio construction. Diversification of investment helps to spread risk over many assets. A drive as mentioned, this study focuses only on the construction part of an investment process and thus understands the theory behind portfolio construction is a prerequisite. In particular, the portfolio constructed in this thesis build on the portfolio, the theory introduced in the seminal and heavily cited study by Markowitz (1952). Portfolio construction is an important aspect of building the right type of investment portfolio based on your long- terminvestment objectives.A disciplined portfolio constructionprocess can help you meet your goals whilestriking a balance between risk and return.Sound portfolio construction shouldmaintain and enhance your strategic assetallocation strategy and help you avoid thepitfalls that often preventinvestors from reaching their goals. When building an optimal investment portfolio (portfolio construction), your financial adviser will often recommend investing in more than one asset class to diversify your portfolio and reduce risk. The percentage that you allocate to each asset class is based on your risk tolerance, investment timeframe and objectives. This is known as asset allocation. The aim is to balance risk and return by dividing assets between asset classes. An investor with a high tolerance for risk and a longer time horizon will typically invest in a more aggressive portfolio - one that includes a higher component of equities, as illustrated below. Investors