IS KSE-100 INDEX A MEAN-VARIANCE EFFICIENT PORTFOLIO?

Abstract

The purpose of this study was to test the efficiency of the KSE-100 Index based on the underlying principles of efficient portfolios assuming that the allocation of portfolios in the benchmark KSE-100 Index satisfy the underlying conditions of an efficient portfolio since KSE-100 Index is assumed to depict the sentiment of the entire market. In order to do so hundred portfolios were constructed taking randomly generated weights while incorporating return and variance-covariance of all the securities enlisted as KSE-100 companies by KSE. The results indicate that the KSE-100 Index is not mean-variance efficient, in view of the comparison of actual Return-Risk Ratios of randomly developed portfolios. Hence, it is high time for the management of Pakistan Stock Exchange to reconsider the security allocation criteria of KSE-100 Index based on mean-variance efficiency rather than value-based criteria that has little practical significance. It can be further highlighted that portfolio managers who base their calculations on the performance of KSE-100 Index using it as a benchmark may miss better opportunities for portfolio selection and return-risk trade-off on their investments.