This paper is an attempt to examine the reliability and usefulness of ex ante measures of portfolio formulation by selecting securities from a well-defined sampling frame. Four indices are employed to achieve the objectives of the study, namely, Sharpe index, Treynor index, Jensen index and Sortino index. Incorporation of the four indices helps in understanding theoretical underpinnings of both modern and post-modern portfolio theories. The study is conducted in the Indian context with special reference to S&P500 CNX NIFTY index, wherein the selection of the security for constructing the index is subject to three criteria: liquidity, market capitalization, and floating stocks. Using the Sharpe’s algorithm, cut-off is calculated to formulate the portfolio of 26 stocks out of 50 stocks. A comprehensive analysis of each individual stock, portfolio, and index is presented with respect to their annualized returns, annualized standard deviations, betas, residual variances or deviations. This study provides a basis for a large section of investors, especially retail investors, for analyzing, selecting, and evaluating their portfolios as an index tracker onto some specific reference point.

Exploring the relationship between return and risk is always in the investor’s interest. Nath and Dalvi (2004) opined that achieving optimal investment strategy and examining market anomalies for abnormal stock return in a defined time period are some topical areas of research in the field of investment management. Siegel and Waring (2009) have put forward that active portfolio management leaves the investor with two choices. One is wise action and another is prudent inaction. As a result, investor often cogitates upon the regret rather than the reward, as she or he feels something has gone wrong in constructing the portfolio. Portfolio construction is primarily based on individual security’s return and proportion or weightage of that security in the portfolio. Precisely, portfolio comprises more than one asset. Asset could be cash or security or even other funds. Multiplication of returns and proportions of respective assets gives rise to portfolio return. Some principles like positive homogeneity, sub-additivity, and monotonicity are considered for determining portfolio risk-return optimisation. However, risk is an integral part of portfolio formulation. We often consider standard deviation as a proxy of risk. Markowitz (1959) stated that investor’s attitude towards constructed portfolio depends exclusively on the expected return and risk. Since the diversified portfolio containing 15-20 stocks (optimum) seems to reduce the occurrence of unsystematic risk, avoidance of systematic one is a huge challenge. As mentioned in various literature, the variance of return on an asset is a measure of its total risk, wherein variance can be split into both systematic and unsystematic parts.

Applied Finance Journal, Portfolio Selection Revisited, Indian Stock Market, Capital Asset Pricing Model, Sharpe index, Treynor index, Jensen index, Sortino index, Post-Modern Portfolio Theory, Stochastic Second-Order Dominance.