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Beta, Cut-Off Rate, Diversification, Excess Return to Beta Ratio, Systematic Risk, Unsystematic Risk, Portfolio Optimization, Sharpe's Single Index Model G02, G11, G150Paper Submission Date : December 17, 2013 ; Paper sent back for Revision : February 4, 2014 ; Paper Acceptance Date : April 2, 2014.
He therefore concluded that the desirability of a security for its inclusion is directly related to its excess return to beta ratio, R (i) – R (f)/ β (i)Where R (i) = expected return on security i R (f) = return on a riskless securityΒ (i) = beta of security This ranking order gives the best securities that are to be selected for the portfolio.
The study aimed at applying Sharpe's single index model for constructing an optimal portfolio and understanding the effect of diversification of investments.
The study is empirical in nature and is based on secondary data.
It was found that even companies with high rates of return were not included in the portfolio as the risk involved in such companies was high.