Risk Management through Efficient Portfolios

Abstract

Risk Management is the process of identification, analysis and either acceptance or mitigation of uncertainty in investment decision-making. Inadequate risk management can result in severe consequences for companies as well as individuals. Risk management is a two-step process determining what risks exist in an investment and then handling those risks in a way best-suited to investment objectives. It is the process of analyzing risk exposure and attempting to minimize it through various means, including diversification of portfolio. Portfolio is none other than Basket of Stocks. Portfolio Management is the professional management of various securities (shares, bonds and other securities) and assets (e.g., real estate) in order to meet specified investment goals for the benefit of the investors. A portfolio is planned to stabilize the risk of non-performance of various pools of investment. The best way of constructing a portfolio is selecting stocks of different sectors. Sectoral diversification is one of the best strategies to reduce the risk. The present study deals with analysis of risk and return of portfolios constructed for five different sectors. Portfolio constructed in this study includes only stocks and no other investment avenues are included. The sectors selected for the study are the best five sectors for investment at present. Here an attempt is made by the authors to analyze the risk and return of various portfolios by using Markowitz model and William Sharpe model. The purpose of the study is to find out the efficient portfolios which help the investors to maximize their return for a given level of risk.