Portfolio Creation Using Markowitz's Portfolio Selection Model Involving Equities, Commodities and Bonds in Indian Securities Market

Equities tend to give high returns accompanied with high risk level. Commodities exhibit similar nature but exhibit inverse return movements compared to equities. Although, Equities and Commodities have risk- return parity, the volume traded in commodities is much larger and have longer trading hours as compared to equities. A Portfolio Manager and a small investor on a daily basis is faced with the question whether should he invest in equity or commodity or bonds or a combination of two or all of them while creating a portfolio. Lack of existing literature relating to combination of equities and commodities for Indian Securities market makes this study exploratory in nature. The study has created nine portfolios for selection. These portfolios are created with different combinations of equities, commodities and bonds. Beta values have been used for selecting the equities. Commodities are selected on the basis of variance in their returns. Bonds are selected randomly. The risk and return on the portfolios are computed as per the Markowitz Portfolio Model. An empirical attempt is made as per Markowitz Model to maximize return for a given iso-variance or minimize variance for a given level of iso-mean return while devising portfolios. An attempt is also made to see the effect of diversification on portfolio return and risk. The results of the study show that the combination of equities, commodities and bonds in the portfolio is not only feasible but efficient also. The study highlighted that a combination of equities and commodities promised high return and high risk however the inclusion of bonds in the portfolio promised higher returns with almost similar risk