Examination of Efficient Frontier Under Constraints in Indian Equity Market

This paper takes into account a set of risky stocks from the Indian equity market with a view to constructing efficient frontiers and examining the optimal portfolio behavior under various constraints. The paper uses Sensex 30 stocks daily prices along with daily BSE Sensex index price data as market benchmark for 10 years starting from 2006 in constructing and optimizing portfolio with the minimum variance and maximum return under different constraints. The paper makes an attempt to identify the efficient frontiers by estimating the average return of the portfolio and iteratively minimizing the standard deviation or risk of the portfolio to the minimum possible level. It is observed that the efficient frontiers shift towards left as constraints are relaxed in its formation. So, according to the study, the most constrained efficient frontier is the one with value-at-risk at 95% and short sales not allowed. The most relaxed efficient frontier is the one with short sales allowed, as it is to the leftmost position in the combined graph created, as shifting of the efficient frontier to the left in the return-risk graph means same returns for lower levels of risk