Investigating the Risk-Return Dynamics of Optimal Stock Portfolios in Indian Capital Market

Abstract

Generating the best returns commensurate with the risk appetite is very important for an investor in capital markets. After determining the past returns and risk behavior of a stock and assuming it to be the same in the future, optimal portfolio strategies can be worked out for different investment objectives. While it is known that expected returns and expected risks go hand in hand, there is no existing literature that has examined the exact nature of the relationship between the risks and returns on optimal portfolios in the Indian capital market. Therefore, this study examines the dynamics of risk-return relationship in the case of optimal portfolios designed for different objectives, and also validates the efficient frontier for the Indian capital market. It shows that the improvement in the returns of optimal portfolios happen at a decreasing rate with the increase in the risk appetite of an investor, indicating the nonlinear relationship between risks and returns. The implications for managers and investors have also been discussed