Abstract
This research aims at constructing an optimal portfolio that maximizes the overall return and minimizes the risk associated with the individual stocks using the Sharpe Single Index Model. The study includes 25 stocks from five different sectors. Only the secondary data for the past five years (2007-08 to 2011-2012) are used in the study. The final portfolio thus constructed includes stocks from more than one sector. Thus even if some of the sectors do not perform well as expected, it will be compensated by the excess returns from the other sectors that exceed the expectation. This is how risk is diversified .This method of construction of optimal portfolio is very effective and convenient as revision of the optimal portfolio can be an ongoing exercise. The existence of a cut-off rate (Ci) is also extremely useful because most new stocks that have an excess return-to beta ratio above the cut-off rate (Ci) can be included in the optimal portfolio. Thus this study helps the investors to minimize risk and maximize the return on their investment.