Optimal Portfolio Construction Using Sharpe's Single-index Model: A Case Study of Amman Stock Exchange

Abstract

The main objective of this study is to construct an optimal portfolio using Sharpe's single-index model (SIM). The study generates a portfolio using daily returns of the Jordanians companies listed in Amman Stock Exchange (ASE) over the period of January 1, 2013 to December 31, 2017. The suggested technique formulates a unique cut-off rate, selects stocks having excess return to beta ratio higher than this cut-off point and defines the percentage of investment in each of the selected stocks. Among the thirty sample companies, only ten were selected for optimal portfolio using SIM. The results show that according to Sharpe’s model, the optimal portfolio achieves a daily rate of return of 0.35% and a daily risk measured by the variance of returns of 0.075%.