Post on 31-Jan-2018
transcript
CHAPTER-I
INTRODUCTION
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The.Risk.Management.to.Business.Success:
Risk management is an important part of planning for businesses. The process of risk
management is designed to reduce or eliminate the risk of certain kinds of events
happening..or..having..an..impact..on..the..business.
Definition.of.Risk.Management:
Risk management is a process for identifying, assessing, and prioritizing risks of
different kinds. Once the risks are identified, the risk manager will create a plan to
minimize or eliminate the impact of negative events. A variety of strategies is
available, depending on the type of risk and the type of business. There are a number
of risk management standards, including those developed by the Project Management
Institute, the International Organization for Standardization (ISO), the National
Institute..of..Science..and..Technology,.and..actuarial..societies.
Types.of.Risk:
There are many different types of risk that risk management plans can mitigate.
Common risks include things like accidents in the workplace or fires, tornadoes,
earthquakes, and other natural disasters. It can also include legal risks like fraud,
theft, and sexual harassment lawsuits. Risks can also relate to business practices,
uncertainty in financial markets, failures in projects, credit risks, or the security and
storage..of..data..and..records.
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Goals.of.Risk.Management:
the idea behind using risk management practices is to protect businesses from being
vulnerable. Many business risk management plans may focus on keeping the company
viable and reducing financial risks. However, risk management is also designed to protect
the employees, customers, and general public from negative events like fires or acts of
terrorism that may affect them. Risk management practices are also about preserving the
physical facilities, data, records, and physical assets a company owns or uses.
Process for Identifying and Managing Risk:
While a variety of different strategies can mitigate or eliminate risk, the process for
identifying and managing the risk is fairly standard and consists of five basic steps. First,
threats or risks are identified. Second, the vulnerability of key assets like information to
the identified threats is assessed. Next, the risk manager must determine the expected
consequences of specific threats to assets. The last two steps in the process are to figure
out ways to reduce risks and then prioritize the risk management procedures based on
their..importance.
Strategies.for.Managing.Risk:
There are as many different types of strategies for managing risk as there are types of
risks. These break down into four main categories. Risk can be managed by accepting the
consequences of a risk and budgeting for it. Another strategy is to transfer the risk to
another party by insuring against a particular, like fire or a slip-and-fall accident. Closing
down a particular high-risk area of a business can avoid risk. Finally, the manager can
reduce the risk’s negative effects, for instance, by installing sprinklers for fires or
instituting..a..back-up..plan..for..data.
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Having a risk management plan is an important part of maintaining a successful and
responsible company. Every company should have one. It will help to protect people as
well as physical and financial assets.
NEED & IMPORTANCE OF STUDY:
Portfolio management or investment helps investors in effective and efficient
management of their investment to achieve this goal. The rapid growth of capital markets
in India has opened up new investment avenues for investors.
The stock markets have become attractive investment options for the common man. But
the need is to be able to effectively and efficiently manage investments in order to keep
maximum returns with minimum risk.
Hence this study on RISK MANAGEMENT” to examine the role process and merits of
effective investment management and decision.
SCOPE OF STUDY:
This study covers the Markowitz model. The study covers the calculation of correlations
between the different securities in order to find out at what percentage funds should be invested
among the companies in the portfolio. Also the study includes the calculation of individual
Standard Deviation of securities and ends at the calculation of weights of individual securities
involved in the portfolio. These percentages help in allocating the funds available for investment
based on risky portfolios.
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OBJECTIVES:More points to be added
To study the investment decision process.
To analysis the risk return characteristics of sample scripts.
Ascertain Risk Management.
To construct an effective portfolio which offers the maximum return for minimum
risk
METHODOLOGY:
Primary source
Information gathered from interacting with employees in the organization. And the data
from the textbooks and other magazines.
Secondary source
Daily prices of scripts from news papers
SCOPE:
Duration Period 2 months
Sample size : 5 years
To ascertain risk, return and weights.
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LIMITATION:More points to be added
Only two samples have been selected for constructing a
portfolio.
Share prices of scripts of 5 years period was taken.
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CHAPTER-II
INDUSTRY PROFILE
&
COMPANY PROFILE
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EVOLUTION:
Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200
years ago. The earliest records of security dealings in India are meager and obscure. The
East India Company was the dominant institution in those days and business in its loan
securities used to be transacted towards the close of the eighteenth century.
By 1830's business on corporate stocks and shares in Bank and Cotton presses took place
in Bombay. Though the trading list was broader in 1839, there were only half a dozen
brokers recognized by banks and merchants during 1840 and 1850.
The 1850's witnessed a rapid development of commercial enterprise and brokerage
business attracted many men into the field and by 1860 the number of brokers increased
into 60.
In 1860-61 the American Civil War broke out and cotton supply from United States of
Europe was stopped; thus, the 'Share Mania' in India begun. The number of brokers
increased to about 200 to 2 50. However, at the end of the American Civil War, in 1865,
a disastrous slump began (for example, Bank of Bombay Share which had touched Rs
2850 could only be sold at Rs. 87).
At the end of the American Civil War, the brokers who thrived out of Civil War in 1874,
found a place in a street (now appropriately called as Dallas Street) where they would
conveniently assemble and transact business. In 1887, they formally established in
Bombay, the "Native Share and Stock Brokers' Association" (which is alternatively
known as “The Stock Exchange "). In 1895, the Stock Exchange acquired a premise in
the same street and it was inaugurated in 1899. Thus, the Stock Exchange at Bombay was
consolidated.
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Other leading cities in stock market operations:
Ahmadabad gained importance next to Bombay with respect to cotton textile industry.
After 1880, many mills originated from Ahmadabad and rapidly forged ahead. As new
mills were floated, the need for a Stock Exchange at Ahmadabad was realized and in
1894 the brokers formed "The Ahmadabad Share and Stock Brokers' Association".
What the cotton textile industry was to Bombay and Ahmadabad, the jute industry was to
Calcutta. Also tea and coal industries were the other major industrial groups in Calcutta.
After the Share Mania in 1861-65, in the 1870's there was a sharp boom in jute shares,
which was followed by a boom in tea shares in the 1880's and 1890's; and a coal boom
between 1904 and 1908. On June 1908, some leading brokers formed "The Calcutta
Stock Exchange Association".
In the beginning of the twentieth century, the industrial revolution was on the way in
India with the Swedes Movement; and with the inauguration of the Tata Iron and Steel
Company Limited in 1907, an important stage in industrial advancement under Indian
enterprise was reached.
Indian cotton and jute textiles, steel, sugar, paper and flour mills and all companies
generally enjoyed phenomenal prosperity, due to the First World War.
In 1920, the then demure city of Madras had the maiden thrill of a stock exchange
functioning in its midst, under the name and style of "The Madras Stock Exchange" with
100 members. However, when boom faded, the number of members stood reduced from
100 to 3, by 1923, and so it went out of existence.
In 1935, the stock market activity improved, especially in South India where there was a
rapid increase in the number of textile mills and many plantation companies were floated.
In 1937, a stock exchange was once again organized in Madras - Madras Stock Exchange
Association (Pvt) Limited. (In 1957 the name was changed to Madras Stock Exchange
Limited).
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Lahore Stock Exchange was formed in 1934 and it had a brief life. It was merged with
the Punjab Stock Exchange Limited, which was incorporated in 1936.
Indian Stock Exchanges - An Umbrella Growth:
The Second World War broke out in 1939. It gave a sharp boom which was followed by a
slump. But, in 1943, the situation changed radically, when India was fully mobilized as a
supply base.
On account of the restrictive controls on cotton, bullion, seeds and other commodities,
those dealing in them found in the stock market as the only outlet for their activities.
They were anxious to join the trade and their number was swelled by numerous others.
Many new associations were constituted for the purpose and Stock Exchanges in all parts
of the country were floated.
The Uttar Pradesh Stock Exchange Limited (1940), Nagpur Stock Exchange Limited
(1940) and Hyderabad Stock Exchange Limited (1944) were incorporated.
In Delhi two stock exchanges - Delhi Stock and Share Brokers' Association Limited and
the Delhi Stocks and Shares Exchange Limited - were floated and later in June 1947,
amalgamated into the Delhi Stock Exchange Association Limited.
Post-independence Scenario:
Most of the exchanges suffered almost a total eclipse during depression. Lahore
Exchange was closed during partition of the country and later migrated to Delhi and
merged with Delhi Stock Exchange.
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Bangalore Stock Exchange Limited was registered in 1957 and recognized in 1963.
Most of the other exchanges languished till 1957 when they applied to the Central
Government for recognition under the Securities Contracts (Regulation) Act, 1956. Only
Bombay, Calcutta, Madras, Ahmadabad, Delhi, Hyderabad and Indore, the well
established exchanges, were recognized under the Act. Some of the members of the other
Associations were required to be admitted by the recognized stock exchanges on a
concessional basis, but acting on the principle of unitary control, all these pseudo stock
exchanges were refused recognition by the Government of India and they thereupon
ceased to function.
Thus, during early sixties there were eight recognized stock exchanges in India
(mentioned above). The number virtually remained unchanged, for nearly two decades.
During eighties, however, many stock exchanges were established: Cochin Stock
Exchange (1980), Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982),
and Pune Stock Exchange Limited (1982), Ludhiana Stock Exchange Association
Limited (1983), Gauhati Stock Exchange Limited (1984), Karana Stock Exchange
Limited (at Mangalore, 1985), Magadha Stock Exchange Association (at Patna, 1986),
Jaipur Stock Exchange Limited (1989), Bhubaneswar Stock Exchange Association
Limited (1989), Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989), Vadodara
Stock Exchange Limited (at Baroda, 1990) and recently established exchanges -
Coimbatore and Meerut. Thus, at present, there are totally twenty one recognized stock
exchanges in India excluding the Over the Counter Exchange of India Limited (OTCEI)
and the National Stock Exchange of India Limited (NSEIL).
The Table given below portrays the overall growth pattern of Indian stock markets since
independence. It is quite evident from the Table that Indian stock markets have not only
grown just in number of exchanges, but also in number of listed companies and in capital
of listed companies. The remarkable growth after 1985 can be clearly seen from the
Table, and this was due to the favoring government policies towards security market
industry.
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Trading Pattern of the Indian Stock Market:
Trading in Indian stock exchanges are limited to listed securities of public limited
companies. They are broadly divided into two categories, namely, specified securities
(forward list) and non-specified securities (cash list). Equity shares of dividend paying,
growth-oriented companies with a paid-up capital of at least Rs.50 million and a market
capitalization of at least Rs.100 million and having more than 20,000 shareholders are,
normally, put in the specified group and the balance in non-specified group.
Two types of transactions can be carried out on the Indian stock exchanges: (a) spot
delivery transactions "for delivery and payment within the time or on the date stipulated
when entering into the contract which shall not be more than 14 days following the date
of the contract" : and (b) forward transactions "delivery and payment can be extended by
further period of 14 days each so that the overall period does not exceed 90 days from the
date of the contract". The latter is permitted only in the case of specified shares. The
brokers who carry over the out standings, pay carry over charges (can tango or
backwardation) which are usually determined by the rates of interest prevailing.
A member broker in an Indian stock exchange can act as an agent, buy and sell securities
for his clients on a commission basis and also can act as a trader or dealer as a principal,
buy and sell securities on his own account and risk, in contrast with the practice
prevailing on New York and London Stock Exchanges, where a member can act as a
jobber or a broker only.
The nature of trading on Indian Stock Exchanges are that of age old conventional style of
face-to-face trading with bids and offers being made by open outcry. However, there is a
great amount of effort to modernize the Indian stock exchanges in the very recent times.
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Over The Counter Exchange of India (OTCEI):
The traditional trading mechanism prevailed in the Indian stock markets gave way to
many functional inefficiencies, such as, absence of liquidity, lack of transparency, unduly
long settlement periods and benami transactions, which affected the small investors to a
great extent. To provide improved services to investors, the country's first ring less, scrip
less, electronic stock exchange - OTCEI - was created in 1992 by country's premier
financial institutions - Unit Trust of India, Industrial Credit and Investment Corporation
of India, Industrial Development Bank of India, SBI Capital Markets, Industrial Finance
Corporation of India, General Insurance Corporation and its subsidiaries and Can Bank
Financial Services.
Trading at OTCEI is done over the centers spread across the country. Securities traded on
the OTCEI are classified into:
Listed Securities - The shares and debentures of the companies listed on the OTC
can be bought or sold at any OTC counter all over the country and they should not
be listed anywhere else
Permitted Securities - Certain shares and debentures listed on other exchanges and
units of mutual funds are allowed to be traded
Initiated debentures - Any equity holding at least one lakh debentures of particular
scrip can offer them for trading on the OTC.
OTC has a unique feature of trading compared to other traditional exchanges. That is,
certificates of listed securities and initiated debentures are not traded at OTC. The
original certificate will be safely with the custodian. But, a counter receipt is generated
out at the counter which substitutes the share certificate and is used for all transactions.
In the case of permitted securities, the system is similar to a traditional stock exchange.
The difference is that the delivery and payment procedure will be completed within 14
days.
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Compared to the traditional Exchanges, OTC Exchange network has the following
advantages:
OTCEI has widely dispersed trading mechanism across the country which
provides greater liquidity and lesser risk of intermediary charges.
Greater transparency and accuracy of prices is obtained due to the screen-based
scrip less trading.
Since the exact price of the transaction is shown on the computer screen, the
investor gets to know the exact price at which s/he is trading.
Faster settlement and transfer process compared to other exchanges.
In the case of an OTC issue (new issue), the allotment procedure is completed in a
month and trading commences after a month of the issue closure, whereas it takes
a longer period for the same with respect to other exchanges.
Thus, with the superior trading mechanism coupled with information transparency
investors are gradually becoming aware of the manifold advantages of the OTCEI.
National Stock Exchange (NSE):
With the liberalization of the Indian economy, it was found inevitable to lift the Indian
stock market trading system on par with the international standards. On the basis of the
recommendations of high powered Pertain Committee, the National Stock Exchange was
incorporated in 1992 by Industrial Development Bank of India, Industrial Credit and
Investment Corporation of India, Industrial Finance Corporation of India, all Insurance
Corporations, selected commercial banks and others.
Trading at NSE can be classified under two broad categories:
(a) Wholesale debt market and
(b) Capital market.
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Wholesale debt market operations are similar to money market operations - institutions
and corporate bodies enter into high value transactions in financial instruments such as
government securities, treasury bills, public sector unit bonds, commercial paper,
certificate of deposit, etc.
There are two kinds of players in NSE:
(a) Trading members and
(b) Participants.
Recognized members of NSE are called trading members who trade on behalf of
themselves and their clients. Participants include trading members and large players like
banks who take direct settlement responsibility.
Trading at NSE takes place through a fully automated screen-based trading mechanism
which adopts the principle of an order-driven market. Trading members can stay at their
offices and execute the trading, since they are linked through a communication network.
The prices at which the buyer and seller are willing to transact will appear on the screen.
When the prices match the transaction will be completed and a confirmation slip will be
printed at the office of the trading member.
NSE has several advantages over the traditional trading exchanges. They are as follows:
NSE brings an integrated stock market trading network across the nation.
Investors can trade at the same price from anywhere in the country since inter-
market operations are streamlined coupled with the countrywide access to the
securities.
Delays in communication, late payments and the malpractice’s prevailing in the
traditional trading mechanism can be done away with greater operational
efficiency and informational transparency in the stock market operations, with the
support of total computerized network.
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Unless stock markets provide professionalized service, small investors and foreign
investors will not be interested in capital market operations. And capital market being one
of the major sources of long-term finance for industrial projects, India cannot afford to
damage the capital market path. In this regard NSE gains vital importance in the Indian
capital market system.
Preamble:
Often, in the economic literature we find the terms ‘development’ and ‘growth’ are used
interchangeably. However, there is a difference. Economic growth refers to the sustained
increase in per capita or total income, while the term economic development implies
sustained structural change, including all the complex effects of economic growth. In
other words, growth is associated with free enterprise, where as development requires
some sort of control and regulation of the forces affecting development. Thus, economic
development is a process and growth is a phenomenon.
Economic planning is very critical for a nation, especially a developing country like India
to take the country in the path of economic development to attain economic growth.
Why Economic Planning for India?
One of the major objective of planning in India is to increase the rate of economic
development, implying that increasing the rate of capital formation by raising the levels
of income, saving and investment. However, increasing the rate of capital formation in
India is beset with a number of difficulties. People are poverty ridden. Their capacity to
save is extremely low due to low levels of income and high propensity to consume. There
for, the rate of investment is low which leads to capital deficiency and low productivity.
Low productivity means low income and the vicious circle continues. Thus, to break this
vicious economic circle, planning is inevitable for India.
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The market mechanism works imperfectly in developing nations due to the ignorance and
unfamiliarity with it. Therefore, to improve and strengthen market mechanism planning is
very vital. In India, a large portion of the economy is non-monetized; the product, factors
of production, money and capital markets is not organized properly. Thus the prevailing
price mechanism fails to bring about adjustments between aggregate demand and supply
of goods and services. Thus, to improve the economy, market imperfections has to be
removed; available resources has to be mobilized and utilized efficiently; and structural
rigidities has to be overcome. These can be attained only through planning.
In India, capital is scarce; and unemployment and disguised unemployment is prevalent.
Thus, where capital was being scarce and labour being abundant, providing useful
employment opportunities to an increasing labour force is a difficult exercise. Only a
centralized planning model can solve this macro problem of India.
Further, in a country like India where agricultural dependence is very high, one cannot
ignore this segment in the process of economic development. Therefore, an economic
development model has to consider a balanced approach to link both agriculture and
industry and lead for a paralleled growth. Not to mention, both agriculture and industry
cannot develop without adequate infrastructural facilities which only the state can
provide and this is possible only through a well carved out planning strategy. The
government’s role in providing infrastructure is unavoidable due to the fact that the role
of private sector in infrastructural development of India is very minimal since these
infrastructure projects are considered as unprofitable by the private sector.
Further, India is a clear case of income disparity. Thus, it is the duty of the state to reduce
the prevailing income inequalities. This is possible only through planning.
Planning History of India:
The development of planning in India began prior to the first Five Year Plan of
independent India, long before independence even. The idea of central directions of
resources to overcome persistent poverty gradually, because one of the main policies
advocated by nationalists early in the century. The Congress Party worked out a program
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for economic advancement during the 1920’s, and 1930’s and by the 1938 they formed a
National Planning Committee under the chairmanship of future Prime Minister Nehru.
The Committee had little time to do anything but prepare programs and reports before the
Second World War which put an end to it. But it was already more than an academic
exercise remote from administration. Provisional government had been elected in 1938,
and the Congress Party leaders held positions of responsibility. After the war, the Interim
government of the pre-independence years appointed an Advisory Planning Board. The
Board produced a number of somewhat disconnected Plans itself. But, more important in
the long run, it recommended the appointment of a Planning Commission.
The Planning Commission did not start work properly until 1950. During the first three
years of independent India, the state and economy scarcely had a stable structure at all,
while millions of refugees crossed the newly established borders of India and Pakistan,
and while ex-princely states (over 500 of them) were being merged into India or Pakistan.
The Planning Commission as it now exists was not set up until the new India had adopted
its Constitution in January 1950.
Objectives of Indian Planning:
The Planning Commission was set up the following Directive principles:
To make an assessment of the material, capital and human resources of the
country, including technical personnel, and investigate the possibilities of
augmenting such of these resources as are found to be deficient in relation to the
nation’s requirement.
To formulate a plan for the most effective and balanced use of the country’s
resources.
Having determined the priorities, to define the stages in which the plan should be
carried out, and propose the allocation of resources for the completion of each
stage.
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To indicate the factors which are tending to retard economic development, and
determine the conditions which, in view of the current social and political
situation, should be established for the successful execution of the Plan.
To determine the nature of the machinery this will be necessary for securing the
successful implementation of each stage of Plan in all its aspects.
To appraise from time to time the progress achieved in the execution of each stage
of the Plan and recommend the adjustments of policy and measures that such
appraisals may show to be necessary.
To make such interim or auxiliary recommendations as appear to it to be
appropriate either for facilitating the discharge of the duties assigned to it or on a
consideration of the prevailing economic conditions, current policies, measures
and development programs; or on an examination of such specific problems as
may be referred to it for advice by Central or State Governments.
The long-term general objectives of Indian Planning are as follows:
Increasing National Income
Reducing inequalities in the distribution of income and wealth
Elimination of poverty
Providing additional employment; and
Alleviating bottlenecks in the areas of: agricultural production, manufacturing
capacity for producer’s goods and balance of payments.
Economic growth, as the primary objective has remained in focus in all Five Year Plans.
Approximately, economic growth has been targeted at a rate of five per cent per annum.
High priority to economic growth in Indian Plans looks very much justified in view of
long period of stagnation during the British rule
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COMPANY PROFILE
ICICI Prudential Asset Management Company Ltd. is a joint venture between ICICI
Bank, India’s second largest commercial bank & a well-known and trusted name in the
financial services in India, & Prudential Plc, one of the United Kingdom’s largest players
in the financial services sectors.
In a span of over 18 years since inception and just over 13 years of the Joint Venture, the
company has forged a position of preeminence as one of the largest Asset Management
Company’s in the country, contributing significantly towards the growth of the Indian
mutual fund industry.
The company manages significant Mutual Fund Assets under Management (AUM), in
addition to our Portfolio Management Services (PMS) and International Advisory
Mandates for clients across international markets in asset classes like Debt, Equity and
Real Estate with primary focus on risk adjusted returns.
As an Asset Management Company, we have over 18 years of experience and are
currently managing a comprehensive range of schemes of more than 46 Mutual fund
schemes and a wide range of PMS Products for our investors spread across the country.
We service this investor base with our own branch network of around 168 branches and a
distribution reach of over 42,000 channel partners.
ICICI Bank is India's second-largest bank with total assets of Rs. 4,062.34 billion (US$
91 billion) at March 31, 2011 and profit after tax Rs. 51.51 billion (US$ 1,155 million)
for the year ended March 31, 2011. The Bank has a network of 2,556 branches and 7,440
ATMs in India, and has a presence in 19 countries, including India.
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ICICI Bank offers a wide range of banking products and financial services to corporate
and retail customers through a variety of delivery channels and through its specialised
subsidiaries in the areas of investment banking, life and non-life insurance, venture
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The Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches
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International Finance Centre and representative offices in United Arab Emirates, China,
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ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the
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Corporate Profile
ICICI Bank is India's second-largest bank with total assets of Rs. 3,562.28 billion (US$
77 billion) as on December 31, 2009.
Board Members
Mr. K. V. Klamath, Chairman
Mr. Sridhar Iyengar
Mr. Homi R. Khusrokhan
Mr. Lakshmi N. Mittal
Mr. Narendra Murkumbi
Dr. Anup K. Pujari
Mr. Anupam Puri
Mr. M.S. Ramachandran
Mr. M.K. Sharma
Mr. V. Sridhar
Prof. Marti G. Subrahmanyam
Mr. V. Perm Watsa
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Ms. Chanda D. Kootchar,
Managing Director & CEO
Mr. Sandeep Bakhshi,
Deputy Managing Director
Mr. N. S. Kennan,
Executive Director & CFO
Mr. K. Ramkumar,
Executive Director
Mr. Son joy Chatterjee,
Executive Director
Mr. K. V. Klamath is a mechanical engineer and did his management studies from the
Indian Institute of Management, Ahmadabad. He joined ICICI in 1971 and worked in the
areas of project finance, leasing, resources and corporate planning. In 1988, he joined the
Asian Development Bank and spent several years in south-east Asia before returning to
ICICI as its Managing Director & CEO in 1996. He became Managing Director & CEO
of ICICI Bank in 2002 following the merger of ICICI with ICICI Bank. Under his
leadership, the ICICI Group transformed itself into a diversified, technology-driven
financial services group that has leadership positions across banking, insurance and asset
management in India, and an international presence. He retired as Managing Director &
CEO in April 2009, and took up the position of non-executive Chairman of ICICI Bank
effective May 1, 2009. He was the President of the Confederation of Indian Industry (CII)
for 2008-09. He was awarded the Padma Bhushan by the President of India in May 2008.
He was conferred the Lifetime Achievement Awards at the Financial Express Best Bank
Awards 2008 and the NDTV Profit Business Leadership Awards 2008; was named
'Businessman of the Year' by Forbes Asia and The Economic Times' 'Business Leader of
the Year' in 2007; Business Standard's "Banker of the Year" and CNBC-TV18's
"Outstanding Business Leader of the Year" in 2006; Business India's "Businessman of
the Year" in 2005; and CNBC's "Asian Business Leader of the Year" in 2001. He has
been conferred with an honorary PhD by the Banaras Hindu University. He is a member
22
of the Board of the Institute of International Finance, a Director on the Board of Infosys
Technologies and a member of the Board of Governors of the Indian Institute of
Management, Ahmadabad.
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their home in a simple manner. UIN - 105N122V01
ICICI Pru Pure Protect is a flexible and affordable term product, with which you can
ensure your life and provide total security for your family in case of an unfortunate event.
UIN - 105N084V01
24
ICICI Pru Lifeguard is a protection plan, which offers life cover at low cost. It is
available in 2 options –level term assurance with return of premium & single premium.
UIN - 105N006V02
Child Plans:
ICICI Pru Smart Kid Regular Premium is an endowment regular premium life
insurance plan which comes with a unique Payer Waiver Benefit (PWB). This benefit
ensures that in case of death of the parent, the company pays all future premiums on
behalf of the parent. This means that the child gets money at important stages of his/her
student life and education never suffers due to lack of funds.UIN No - 105N014V02
ICICI Pru Smart Kid Premier is a ULIP plan which ensures your child’s education
continues even if you are not around. In this Plan you need to invest premiums regularly
over a period of time and the returns that you get will depend on the performance of the
underlying fund performance. UIN - 105L120V01
Retirement Solutions:
ICICI Pru Immediate Annuity is a single premium annuity product that guarantees
income for life at the time of retirement. It offers the benefit of 5 payout options. UIN -
105N009V06
Health Solutions :
ICICI Pru Hospital Care II is a family floater plan covering your spouse and children.
This fixed benefit hospitalisation and surgical plan complements your existing coverage
by offering payouts over and above any health plan you have, thus availing best possible
medical treatment, without having to bother about the cost of the treatment or quality of
care. UIN - 105N108V01
ICICI Pru Crisis Cover is a product that will provide long-term coverage against 35
critical illnesses, total and permanent disability, and death. UIN - 105N072V01
25
ICICI Pru Health Saver is a whole of life comprehensive health insurance policy which
provides a hospitalisation cover for you and your family and reimburses all other medical
expenses not covered in the hospitalisation benefit by building a health fund for you and
your family. UIN - 105L087V01
Group Insurance Solutions:
ICICI Prudential also offers Group Insurance Solutions for companies seeking to enhance
benefits to their employees.
Group Gratuity Plan: ICICI Prudential Life's group gratuity plan helps employers fund
their statutory gratuity obligation in a scientific manner and also avail of tax benefits as
applicable to approved gratuity funds.
Group Leave encashment Plan: ICICI Prudential Life’s Group offers a market linked
and traditional leave encashment plan designed to aid the employer to build a fund to
meet their future leave encashment liability. The contributions made will be invested as
per the chosen investment plans and will be available for payment of the benefit when it
falls due. Additionally, the product also provides for term cover for all the employees
covered under the policy. UIN - 105L079V01
Group Term Insurance Plan: ICICI Prudential Life's flexible group term is a one-year
renewable life insurance policy that enables you to provide every member of your team
with an affordable life cover.
Group Term in lieu of EDLI Scheme: ICICI Prudential's Group Insurance Scheme in
lieu of EDLI has been certified by the Employee Provident Fund Organization (EPFO) as
a superior product that provides greater insurance benefits than the cover offered by
EPFO.
Credit Assure with Credit Assure, we offer an innovative and affordable term life
insurance plan that covers loans against the unfortunate event of death, with complete
26
convenience in application. The scheme is simple and hassle-free. In other words, peace
of mind guaranteed.
Flexible Rider Options:
ICICI Prudential Life offers flexible riders, which can be added to the basic policy at a
marginal cost, depending on the specific needs of the customer.
Accident & disability benefit: If death occurs as the result of an accident during the
term of the policy, the beneficiary receives an additional amount equal to the rider sum
assured under the policy. If an accident results in total and permanent disability, 10% of
rider sum assured will be paid each year, from the end of the 1st year after the disability
date for the remainder of the base policy term or 10 years, whichever is lesser.
Critical illness benefit: Critical Illness Benefit Rider provides protection against 9
critical illnesses to the policyholder when attached to the basic plan.
Income Benefit Rider: In case of death of the life assured during the term of the policy,
10% of the rider sum assured is paid annually to the beneficiary, on each policy
anniversary till maturity of the rider. Income Benefit rider is available with Smart Kid
Child Plans. Premiums paid under this rider are eligible for tax benefits under Section
80C.
Waiver of Premium Rider (WOP): On total and permanent disability due to an
accident, all future premiums for both the base policy and rider(s) will be waived till the
end of the term of the rider or death of the life assured, if earlier.
Waiver of Premium Rider on Critical Illness Rider: This rider waives all your future
premiums of your base policy on occurrence of specified 20 Critical Illnesses. This
ensures that your policy benefits continue as planned.
27
Awards:
ICICI Prudential Life Insurance has been pronounced winner in the 2nd
Excellence Awards and Recognition for Shared Services, 2012. We won the
award in the category - Shared Services in India - Insurance Domain.
These awards have been instituted by All India Management Association (AIMA)
& Delhi Management Association (DMA), in collaboration with R-value
Consulting as knowledge partners, to honour, recognize & promote
transformative strategies for shared services.
Ms. Chanda Kocher, Managing Director & CEO was awarded the "CNBC Asia
India Business Leader of the Year Award". She also received the "CNBC Asia's
CSR Award 2011"
For the third year in a row ICICI Bank has won The Asset Triple A Country
Awards for Best Domestic Bank in India
ICICI Bank won the Most Admired Knowledge Enterprises (MAKE) India 2009
Award. ICICI Bank won the first place in "Maximizing Enterprise Intellectual
Capital" category, October 28, 2009
Ms Chanda Kocher, MD and CEO was awarded with the Indian Business Women
Leadership Award at NDTV Profit Business Leadership Awards, October 26,
2009.
ICICI Bank received two awards in CNBC Ahwaz Consumer Awards; one for the
most preferred auto loan and the other for most preferred credit Card, on
September 30, 2009
Ms. Chanda Kocher, Managing Director & CEO ranked in the top 20 of the
World's 100 Most Powerful Women list compiled by Forbes, August 2009
Financial Express at its FE India's Best Banks Awards, honoured Mr. K.V.
Kamath, Chairman with the Lifetime Achievement Award , July 25, 2009
ICICI Bank won Asset Triple a Investment Awards for the Best Derivative
House, India. In addition ICICI Bank were Highly commended , Local Currency
Structured product, India for 1.5 year ADR GDR linked Range Accrual Note.,
July 2009
28
ICICI bank won in three categories at World finance Banking awards on June 16,
2009
o Best NRI Services bank
o Excellence in Private Banking, APAC Region
o Excellence in Remittance Business, APAC Region
ICICI Bank Mobile Banking was adjudged "Best Bank Award for Initiatives in
Mobile Payments and Banking" by IDRBT, on May 18, 2009 in Hyderabad.
ICICI Bank's b2 branch free banking was adjudged "Best E-Banking Project
Implementation Award 2008" by The Asian Banker, on May 11, 2009 at the
China World Hotel in Beijing.
ICICI Bank bags the "Best bank in SME financing (Private Sector)" at the Dun &
Bradstreet Banking awards 2009.
ICICI Bank NRI services wins the "Excellence in Business Model Innovation
Award" in the eighth Asian Banker Excellence in Retail Financial Services
Awards Programme.
ICICI Bank's Rural Micro Banking and Agri-Business Group win WOW Event &
Experiential Marketing Award in two categories - "Rural Marketing programme
of the year" and "Small Budget on Ground Promotion of the Year". These awards
were given for Cattle Loan 'Kamdhenu Campaign' and "Talkies on the move
campaign' respectively.
ICICI Bank's Germany Branch has been certified by "Sifting Warren test". ICICI
Bank is ranked 2nd amongst 57 savings products across 19 banks
ICICI Bank Germany won the yearly banking test of the investor magazine
€euro in the "call money “category.
The ICICI Bank was awarded the runner's up position in Gartner Business
Intelligence and Excellence Award for Asia Pacific for its Business Intelligence
functions.
ICICI Bank's Organisational Excellence Group was recently awarded ISO
9001:2008 certification by TUV Nord. The scope of certification comprised
processes around consulting and capability building on methods of quality &
improvements.
29
ICICI Bank has been awarded the following titles under The Asset Triple A
Country Awards for 2009:
o Best Transaction Bank in India
o Best Trade Finance Bank in India
o Best Cash Management Bank in India
o Best Domestic Custodian in India
ICICI Bank has bagged the Best Cash Management Bank in India award for the
second year in a row. The other awards have been bagged for the third year in a
row.
ICICI Bank Canada received the prestigious Canadian Helen Keller Award at the
Canadian Helen Keller Centre's Fifth Annual Luncheon in Toronto. The award
was given to ICICI Bank its long-standing support to this unique training centre
for people who are deaf-blind.
ICICI Foundation for Inclusive Growth (ICICI Foundation) was founded by the ICICI
Group in early 2008 to give focus to its efforts to promote inclusive growth amongst low-
income Indian households.
We believe our fundamental challenge is to create a “just” society – one where everyone
has equal opportunity to develop and grow. Towards this end, ICICI Foundation is
committed to making India’s economic growth more inclusive, allowing every individual
to participate in and benefit from the growth process.
We hold a set of core beliefs and values that defines our pathway towards inclusive
growth and guides our five strategic partnerships.
Vision:
our vision is a world free of poverty in which every individual has the freedom and power
to create and sustain a just society in which to live.
30
Mission:
Our mission is to create and support strong independent organisations which work
towards empowering the poor to participate in and benefit from the Indian growth
process.
As a key partner in India's economic growth for more than five decades, the ICICI Group
endeavours to promote growth in all sectors of the nation’s economy. To give focus to its
efforts to promote inclusive growth amongst low-income Indian households, the ICICI
Group founded ICICI Foundation for Inclusive Growth in January 2010.
The foundations of ICICI Group’s approach towards human and social development were
established with the Social Initiatives Group (SIG), a non-profit resource group within
ICICI Bank, in 2000.
ICICI Foundation for Inclusive Growth (ICICI Foundation) has been set up as public
charitable trusts registered at Chennai vide registration of the Trust Deed with the Sub-
Registrar’s Office at Chennai on January 04, 2010.
The application for registration of the Foundation under section 12AA of the Income tax
Act, 1961 (“the Act”) was filed on February 7, 2008 and the application under section
80G of the Act was filed on February 14, 2008. Subsequently, ICICI Foundation was
registered as a “PUBLIC CHARITABLE TRUST” under Section 12AA of the Act with
effect from February 7, 2008. Further, ICICI Foundation received approval under Section
80G (5) (VI) of the Act on March 19, 2008. This approval is valid in respect of donation
received by ICICI Foundation from February 14, 2008 to March 31, 2009. Accordingly,
ICICI Bank and Group Companies will be eligible to get a deduction under section 80G
on donations made during this period.
ICICI Foundation has also obtained its Permanent Account Number (PAN) and Tax
deduction Account Number (TAN).
31
Funds Flow 2010-2011:
ICICI Foundation received Rs.617.80 million from the following sources as grants:
(January 4, 2008 to March 31, 2011) (spanning two financial years)
Source (January 4, 2008 – March 31, 2011)Amount
(Rs.millions)
ICICI Bank 500.00
ICICI Prudential Life Insurance 67.72
ICICI Lombard General Insurance 17.12
ICICI Securities 14.98
ICICI Securities PD 6.99
ICICI Home Finance 1.99
ICICI Venture 9.00
Total 617.80
ICICI Foundation also incurred total expenses of Rs.1.25 million during this period and
had a fund balance of Rs.61.55 million as on March 31, 2011.
Disbursements (January 4, 2008 to March 31, 2011)
Grant Beneficiaries (January 4, 2010 – March 31, 2011)Amount
(Rs.millions)
ICICI Foundation Programmes
ICICI Centre for Child Health and Nutrition 150.00
IFMR Finance Foundation 200.00
32
Environmentally Sustainable Finance 20.00
CSO Partners 50.00
CARE (Policy Unit) 5.00
Strategy and Advisory Group 20.00
ICICI Group Corporate Social Responsibility Programmes
Read to Lead 25.00
MITRA (ICICI Fellows Programme) 55.00
CARE (Disaster Management Unit) 5.00
Rang De 25.00
Total 555.00
Grant Beneficiaries for 2010-2011:
ICICI Foundation Programmers
ICICI Centre for Child Health and Nutrition (ICCHN)
The grant of Rs.150.00 million was provided to ICCHN by way of corpus support and for
pursuing various projects consistent with its mission.
IFMR Finance Foundation (IFF)
The grant of Rs.200.00 million was provided to IFMR Finance Foundation by way of
corpus support and for pursuing various projects consistent with its mission.
Environmentally Sustainable Finance (ESF)
The grant of Rs.20.00 million was provided to ESF for their collaboration work with
Rural Energy Network Enterprise (RENE) on sustainable energy and environment
projects benefiting remote rural end users. The proposed projects will promote
33
developing tools and driving innovation to scale rural energy access for remote rural
users.
CSO Partners:
the grant of Rs.50.00 million was provided to CSO Partners by way of corpus support
and for pursuing various projects consistent with its mission.
CARE (Policy Unit):
A grant of Rs.5.00 million was provided to CARE, an Indian NGO that is closely
affiliated with CARE (USA), to create a policy unit in Delhi. Learning from CARE’s
work in India and world-wide as well as from the work of ICICI Foundation and its
partners, the unit will serve as a platform to engage the government and policymakers in
an effort to bring about required policy changes in areas such as maternal and child
health.
Strategy and Advisory Group (SAG):
Charitable foundations in India and world-wide struggle to fully develop the strategy
formulation, knowledge management and impact assessment dimensions of their work. A
grant of Rs.20.00 million was provided to Strategy and Advisory Group (SAG), a team at
Centre for Development Finance that provides strategic advisory services to clients in the
development sector, to develop these functions and to offer their expertise to foundations
in general, including ICICI Foundation.
ICICI Group Corporate Social Responsibility Programmers:
Read to lead is an initiative of ICICI Bank to facilitate elementary education for
disadvantaged children in the age group of 6-13 years. An amount of Rs.25.00 million
has thus far been disbursed to 100,000 children through 30 NGOs. The balance amount of
Rs.75.00 million is planned to be disbursed during the period 2009-2010.
MITRA (ICICI Fellows Programme)
MITRA is an affiliate of CSO Partners that is focused on addressing the challenge of
human resources for civil society organisations (CSOs). In partnership with CSO Partners
and MITRA, ICICI Foundation proposes to launch an ICICI Fellows Programme. An
34
amount of Rs.55.00 million has been disbursed to MITRA for developing and launching
the programme over the period 2009-2010.
CARE (Disaster Management Unit)
a grant of Rs.5.00 million has been given to CARE in India to enable it to prepare for any
future disasters that may strike and respond immediately with the required relief efforts.
Rang De (Micro Enterprise Development)
Rang De, an affiliate of CSO Partners, has partnered with ICICI Venture to roll out funds
for micro enterprise development in rural and semi-urban locations. The amount of
Rs.25.00 million that has been disbursed to them will support micro enterprises to the
extent of Rs.15.00 million and the balance amount of Rs.10.00 million will go towards
meeting their expenses to build the platform.
35
CHAPTER-III
LITERATURE REVIEW
36
Review of literature is not up to the mark.
Changes are required. More related information
should to be included.
A security is a fungible, negotiable instrument representing financial value. Securities
are broadly categorized into debt securities (such as banknotes, bonds and debentures)
and equity securities, e.g., common stocks; and derivative contracts, such as forwards,
futures, options and swaps. The company or other entity issuing the security is called the
issuer. A country's regulatory structure determines what qualifies as a security. For
example, private investment pools may have some features of securities, but they may not
be registered or regulated as such if they meet various restrictions.
Securities may be represented by a certificate or, more typically, "non-certificated", that
is in electronic or "book entry" only form. Certificates may be bearer, meaning they
entitle the holder to rights under the security merely by holding the security, or
registered, meaning they entitle the holder to rights only if he or she appears on a security
register maintained by the issuer or an intermediary. They include shares of corporate
stock or mutual funds, bonds issued by corporations or governmental agencies, stock
options or other options, limited partnership units, and various other formal investment
instruments that are negotiable and fungible. Corporations or governmental agencies,
stock options or other options, limited partnership units, and various other formal
investment instruments those are negotiable and fungible
RISK RETURN ANALYSIS:
All investment has some risk. Investment in shares of companies has its own risk or
uncertainty; these risks arise out of variability of yields and uncertainty of appreciation or
depreciation of share prices, losses of liquidity etc
37
The risk over time can be represented by the variance of the returns. While the return
over time is capital appreciation plus payout, divided by the purchase price of the share.
Normally, the higher the risk that the investor takes, the higher is the return.
There is, however, a risk less return on capital of about 12% which is the bank, rate
charged by the R.B.I or long term, yielded on government securities at around 13% to
14%. This risk less return refers to lack of variability of return and no uncertainty in the
repayment or capital. But other risks such as loss of liquidity due to parting with money
etc., may however remain, but are rewarded by the total return on the capital. Risk-return
is subject to variation and the objectives of the portfolio manager are to reduce that
variability and thus reduce the risk by choosing an appropriate portfolio.
Traditional approach advocates that one security holds the better, it is according
to the modern approach diversification should not be quantity that should be related to the
quality of scripts which leads to quality of portfolio.
Experience has shown that beyond the certain securities by adding more securities
expensive.
38
RISK MANAGEMENT DEFINITIONS TO BE INCLUDED
Risk management is the identification, assessment, and prioritization of risks (defined in
ISO 31000 as the effect of uncertainty on objectives, whether positive or negative)
followed by coordinated and economical application of resources to minimize, monitor,
and control the probability and/or impact of unfortunate events or to maximize the
realization of opportunities. Risks can come from uncertainty in financial markets,
project failures (at any phase in design, development, production, or sustainment life-
cycles), legal liabilities, credit risk, accidents, natural causes and disasters as well as
deliberate attack from an adversary, or events of uncertain or unpredictable root-cause.
Several risk management standards have been developed including the Project
Management Institute, the National Institute of Science and Technology, actuarial
societies, and ISO standards. Methods, definitions and goals vary widely according to
whether the risk management method is in the context of project management, security,
engineering, industrial processes, financial portfolios, actuarial assessments, or public
health and safety.
The strategies to manage risk typically include transferring the risk to another party,
avoiding the risk, reducing the negative effect or probability of the risk, or even accepting
some or all of the potential or actual consequences of a particular risk.
Certain aspects of many of the risk management standards have come under criticism for
having no measurable improvement on risk, whether the confidence in estimates and
decisions seem to increase.
Introduction:
39
This section provides an introduction to the principles of risk management. The
vocabulary of risk management is defined in ISO Guide 73, "Risk management.
Vocabulary."
In ideal risk management, a prioritization process is followed whereby the risks with the
greatest loss (or impact) and the greatest probability of occurring are handled first, and
risks with lower probability of occurrence and lower loss are handled in descending
order. In practice the process of assessing overall risk can be difficult, and balancing
resources used to mitigate between risks with a high probability of occurrence but lower
loss versus a risk with high loss but lower probability of occurrence can often be
mishandled.
Intangible risk management identifies a new type of a risk that has a 100% probability of
occurring but is ignored by the organization due to a lack of identification ability. For
example, when deficient knowledge is applied to a situation, a knowledge risk
materializes. Relationship risk appears when ineffective collaboration occurs. Process-
engagement risk may be an issue when ineffective operational procedures are applied.
These risks directly reduce the productivity of knowledge workers, decrease cost
effectiveness, profitability, service, quality, reputation, brand value, and earnings quality.
Intangible risk management allows risk management to create immediate value from the
identification and reduction of risks that reduce productivity.
Risk management also faces difficulties in allocating resources. This is the idea of
opportunity cost. Resources spent on risk management could have been spent on more
profitable activities. Again, ideal risk management minimizes spending (or manpower or
other resources) and also minimizes the negative effects of risks.
Method:
For the most part, these methods consist of the following elements, performed, more or
less, in the following order.
1. identify, characterize, and assess threats
40
2. assess the vulnerability of critical assets to specific threats
3. determine the risk (i.e. the expected consequences of specific types of attacks on
specific assets)
4. identify ways to reduce those risks
5. prioritize risk reduction measures based on a strategy
Principles of risk management:
The International Organization for Standardization (ISO) identifies the following
principles of risk management:
Risk management should:
create value - resources expended to mitigate risk should generally exceed the
consequence of inaction, or (as in value engineering), the gain should exceed the
pain
be an integral part of organizational processes
be part of decision making
explicitly address uncertainty and assumptions
be systematic and structured
be based on the best available information
be tailor able
take into account human factors
be transparent and inclusive
be dynamic, iterative and responsive to change
be capable of continual improvement and enhancement
be continually or periodically re-assessed
Process:
41
According to the standard ISO 31000 "Risk management -- Principles and guidelines on
implementation," the process of risk management consists of several steps as follows:
Establishing the context:
Establishing the context involves:
1. Identification of risk in a selected domain of interest
2. Planning the remainder of the process.
3. Mapping out the following:
o the social scope of risk management
o the identity and objectives of stakeholders
o The basis upon which risks will be evaluated, constraints.
4. Defining a framework for the activity and an agenda for identification.
5. Developing an analysis of risks involved in the process.
6. Mitigation or Solution of risks using available technological, human and
organizational resources.
Identification:
After establishing the context, the next step in the process of managing risk is to identify
potential risks. Risks are about events that, when triggered, cause problems. Hence, risk
identification can start with the source of problems, or with the problem itself.
Source analysis Risk sources may be internal or external to the system that is the
target of risk management.
Examples of risk sources are: stakeholders of a project, employees of a company or the
weather over an airport.
Problem analysis Risks are related to identified threats. For example: the threat of
losing money, the threat of abuse of confidential information or the threat of
accidents and casualties. The threats may exist with various entities, most
42
important with shareholders, customers and legislative bodies such as the
government.
When either source or problem is known, the events that a source may trigger or the
events that can lead to a problem can be investigated. For example: stakeholders
withdrawing during a project may endanger funding of the project; confidential
information may be stolen by employees even within a closed network; lightning striking
an aircraft during takeoff may make all people on board immediate casualties.
The chosen method of identifying risks may depend on culture, industry practice and
compliance. The identification methods are formed by templates or the development of
templates for identifying source, problem or event. Common risk identification methods
are:
Objectives-based risk identification Organizations and project teams have
objectives. Any event that may endanger achieving an objective partly or
completely is identified as risk.
Scenario-based risk identification in scenario analysis different scenarios are
created. The scenarios may be the alternative ways to achieve an objective, or an
analysis of the interaction of forces in, for example, a market or battle. Any event
that triggers an undesired scenario alternative is identified as risk - see Futures
Studies for methodology used by Futurists.
Taxonomy-based risk identification the taxonomy in taxonomy-based risk
identification is a breakdown of possible risk sources. Based on the taxonomy and
knowledge of best practices, a questionnaire is compiled. The answers to the
questions reveal risks.
Common-risk checking in several industries, lists with known risks is available.
Each risk in the list can be checked for application to a particular situation.
Risk charting this method combines the above approaches by listing resources at
risk, threats to those resources, modifying factors which may increase or decrease
the risk and consequences it is wished to avoid. Creating a matrix under these
headings enables a variety of approaches. One can begin with resources and
43
consider the threats they are exposed to and the consequences of each.
Alternatively one can start with the threats and examine which resources they
would affect, or one can begin with the consequences and determine which
combination of threats and resources would be involved to bring them about.
Assessment:
Once risks have been identified, they must then be assessed as to their potential severity
of impact (generally a negative impact, such as damage or loss) and to the probability of
occurrence. These quantities can be either simple to measure, in the case of the value of a
lost building, or impossible to know for sure in the case of the probability of an unlikely
event occurring. Therefore, in the assessment process it is critical to make the best
educated decisions in order to properly prioritize the implementation of the risk
management plan.
Even a short-term positive improvement can have long-term negative impacts. Take the
"turnpike" example. A highway is widened to allow more traffic. More traffic capacity
leads to greater development in the areas surrounding the improved traffic capacity. Over
time, traffic thereby increases to fill available capacity. Turnpikes thereby need to be
expanded in a seemingly endless cycles. There are many other engineering examples
where expanded capacity (to do any function) is soon filled by increased demand. Since
expansion comes at a cost, the resulting growth could become unsustainable without
forecasting and management.
The fundamental difficulty in risk assessment is determining the rate of occurrence since
statistical information is not available on all kinds of past incidents. Furthermore,
evaluating the severity of the consequences (impact) is often quite difficult for intangible
assets. Asset valuation is another question that needs to be addressed. Thus, best educated
opinions and available statistics are the primary sources of information. Nevertheless,
44
risk assessment should produce such information for the management of the organization
that the primary risks are easy to understand and that the risk management decisions may
be prioritized. Thus, there have been several theories and attempts to quantify risks.
Numerous different risk formulae exist, but perhaps the most widely accepted formula for
risk quantification is:
Rate (or probability) of occurrence multiplied by the impact of the event equals
risk magnitude
Composite Risk Index:
The above formula can also be re-written in terms of a Composite Risk Index, as follows:
Composite Risk Index = Impact of Risk event x Probability of Occurrence
The impact of the risk event is commonly assessed on a scale of 1 to 5, where 1 and 5
represent the minimum and maximum possible impact of an occurrence of a risk (usually
in terms of financial losses). However, the 1 to 5 scale can be arbitrary and need not be
on a linear scale.
The probability of occurrence is likewise commonly assessed on a scale from 1 to 5,
where 1 represents a very low probability of the risk event actually occurring while 5
represents a very high probability of occurrence. This axis may be expressed in either
mathematical terms (event occurs once a year, once in ten years, once in 100 years etc.)
or may be expressed in "plain English" - event has occurred here very often; event has
been known to occur here; event has been known to occur in the industry etc.). Again, the
1 to 5 scale can be arbitrary or non-linear depending on decisions by subject-matter
experts.
The Composite Index thus can take values ranging (typically) from 1 through 25, and this
range is usually arbitrarily divided into three sub-ranges. The overall risk assessment is
45
then Low, Medium or high, depending on the sub-range containing the calculated value
of the Composite Index. For instance, the three sub-ranges could be defined as 1 to 8, 9 to
16 and 17 to 25.
Note that the probability of risk occurrence is difficult to estimate, since the past data on
frequencies are not readily available, as mentioned above. After all, probability does not
imply certainty.
Likewise, the impact of the risk is not easy to estimate since it is often difficult to
estimate the potential loss in the event of risk occurrence.
Further, both the above factors can change in magnitude depending on the adequacy of
risk avoidance and prevention measures taken and due to changes in the external business
environment. Hence it is absolutely necessary to periodically re-assess risks and
intensify/relax mitigation measures, or as necessary. Changes in procedures, technology,
schedules, budgets, market conditions, political environment, or other factors typically
require re-assessment of risks.
Risk Options:
Risk mitigation measures are usually formulated according to one or more of the
following major risk options, which are:
1. Design a new business process with adequate built-in risk control and
containment measures from the start.
2. Periodically re-assess risks that are accepted in ongoing processes as a normal
feature of business operations and modify mitigation measures.
3. Transfer risks to an external agency (e.g. an insurance company)
4. Avoid risks altogether (e.g. by closing down a particular high-risk business area)
Later research has shown that the financial benefits of risk management are less
dependent on the formula used but are more dependent on the frequency and how risk
assessment is performed.
46
In business it is imperative to be able to present the findings of risk assessments in
financial, market, or schedule terms. Robert Courtney Jr. (IBM, 1970) proposed a
formula for presenting risks in financial terms. The Courtney formula was accepted as the
official risk analysis method for the US governmental agencies. The formula proposes
calculation of ALE (annualized loss expectancy) and compares the expected loss value to
the security control implementation costs (cost-benefit analysis).
Potential risk treatments:
Once risks have been identified and assessed, all techniques to manage the risk fall into
one or more of these four major categories:
Avoidance (eliminate, withdraw from or not become involved)
Reduction (optimize - mitigate)
Sharing (transfer - outsource or insure)
Retention (accept and budget)
Ideal use of these strategies may not be possible. Some of them may involve trade-offs
that are not acceptable to the organization or person making the risk management
decisions. Another source, from the US Department of Defense (see link), Defense
Acquisition University, calls these categories ACAT, for Avoid, Control, Accept, or
Transfer. This use of the ACAT acronym is reminiscent of another ACAT (for
Acquisition Category) used in US Defense industry procurements, in which Risk
Management figures prominently in decision making and planning.
Risk avoidance:
This includes not performing an activity that could carry risk. An example would be not
buying a property or business in order to not take on the legal liability that comes with it.
Another would be not flying in order not to take the risk that the airplane were to be
hijacked. Avoidance may seem the answer to all risks, but avoiding risks also means
losing out on the potential gain that accepting (retaining) the risk may have allowed. Not
entering a business to avoid the risk of loss also avoids the possibility of earning profits.
47
Hazard Prevention:
Hazard prevention refers to the prevention of risks in an emergency. The first and most
effective stage of hazard prevention is the elimination of hazards. If this takes too long, is
too costly, or is otherwise impractical, the second stage is mitigation.
Risk reduction:
Risk reduction or "optimization" involves reducing the severity of the loss or the
likelihood of the loss from occurring. For example, sprinklers are designed to put out a
fire to reduce the risk of loss by fire. This method may cause a greater loss by water
damage and therefore may not be suitable. Hal on fire suppression systems may mitigate
that risk, but the cost may be prohibitive as a strategy.
Acknowledging that risks can be positive or negative, optimizing risks means finding a
balance between negative risk and the benefit of the operation or activity; and between
risk reduction and effort applied. By an offshore drilling contractor effectively applying
HSE Management in its organization, it can optimize risk to achieve levels of residual
risk that are tolerable.
Modern software development methodologies reduce risk by developing and delivering
software incrementally. Early methodologies suffered from the fact that they only
delivered software in the final phase of development; any problems encountered in earlier
phases meant costly rework and often jeopardized the whole project. By developing in
iterations, software projects can limit effort wasted to a single iteration.
48
Outsourcing could be an example of risk reduction if the outsourcer can demonstrate
higher capability at managing or reducing risks. For example, a company may outsource
only its software development, the manufacturing of hard goods, or customer support
needs to another company, while handling the business management itself. This way, the
company can concentrate more on business development without having to worry as
much about the manufacturing process, managing the development team, or finding a
physical location for a call center.
Risk sharing:
Briefly defined as "sharing with another party the burden of loss or the benefit of gain,
from a risk, and the measures to reduce a risk."
The term of 'risk transfer' is often used in place of risk sharing in the mistaken belief that
you can transfer a risk to a third party through insurance or outsourcing. In practice if the
insurance company or contractor go bankrupt or end up in court, the original risk is likely
to still revert to the first party. As such in the terminology of practitioners and scholars
alike, the purchase of an insurance contract is often described as a "transfer of risk."
However, technically speaking, the buyer of the contract generally retains legal
responsibility for the losses "transferred", meaning that insurance may be described more
accurately as a post-event compensatory mechanism. For example, a personal injuries
insurance policy does not transfer the risk of a car accident to the insurance company.
The risk still lays with the policy holder namely the person who has been in the accident.
The insurance policy simply provides that if an accident (the event) occurs involving the
policy holder then some compensation may be payable to the policy holder that is
commensurate to the suffering/damage.
Some ways of managing risk fall into multiple categories. Risk retention pools are
technically retaining the risk for the group, but spreading it over the whole group
involves transfer among individual members of the group. This is different from
traditional insurance, in that no premium is exchanged between members of the group up
front, but instead losses are assessed to all members of the group.
49
Risk retention:
Involves accepting the loss, or benefit of gain, from a risk when it occurs. True self
insurance falls in this category. Risk retention is a viable strategy for small risks where
the cost of insuring against the risk would be greater over time than the total losses
sustained. All risks that are not avoided or transferred are retained by default. This
includes risks that are so large or catastrophic that they either cannot be insured against or
the premiums would be infeasible. War is an example since most property and risks are
not insured against war, so the loss attributed by war is retained by the insured. Also any
amount of potential loss (risk) over the amount insured is retained risk. This may also be
acceptable if the chance of a very large loss is small or if the cost to insure for greater
coverage amounts is so great it would hinder the goals of the organization too much.
Create a Risk Management Plan:
Select appropriate controls or countermeasures to measure each risk. Risk mitigation
needs to be approved by the appropriate level of management. For instance, a risk
concerning the image of the organization should have top management decision behind it
whereas IT management would have the authority to decide on computer virus risks.
The risk management plan should propose applicable and effective security controls for
managing the risks. For example, an observed high risk of computer viruses could be
mitigated by acquiring and implementing antivirus software. A good risk management
plan should contain a schedule for control implementation and responsible persons for
those actions.
According to ISO/IEC 27001, the stage immediately after completion of the risk
assessment phase consists of preparing a Risk Treatment Plan, which should document
the decisions about how each of the identified risks should be handled. Mitigation of risks
often means selection of security controls, which should be documented in a Statement of
Applicability, which identifies which particular control objectives and controls from the
standard have been selected, and why.
50
Implementation:
Implementation follows all of the planned methods for mitigating the effect of the risks.
Purchase insurance policies for the risks that have been decided to be transferred to an
insurer, avoid all risks that can be avoided without sacrificing the entity's goals, reduce
others, and retain the rest.
Review and evaluation of the plan:
Initial risk management plans will never be perfect. Practice, experience, and actual loss
results will necessitate changes in the plan and contribute information to allow possible
different decisions to be made in dealing with the risks being faced.
Risk analysis results and management plans should be updated periodically. There are
two primary reasons for this:
1. to evaluate whether the previously selected security controls are still applicable
and effective, and
2. To evaluate the possible risk level changes in the business environment. For
example, information risks are a good example of rapidly changing business
environment.
Limitations:
If risks are improperly assessed and prioritized, time can be wasted in dealing with risk of
losses that are not likely to occur. Spending too much time assessing and managing
unlikely risks can divert resources that could be used more profitably. Unlikely events do
occur but if the risk is unlikely enough to occur it may be better to simply retain the risk
and deal with the result if the loss does in fact occur. Qualitative risk assessment is
subjective and lacks consistency. The primary justification for a formal risk assessment
process is legal and bureaucratic.
51
Prioritizing the risk management processes too highly could keep an organization from
ever completing a project or even getting started. This is especially true if other work is
suspended until the risk management process is considered complete.
It is also important to keep in mind the distinction between risk and uncertainty. Risk can
be measured by impacts x probability.
Areas of risk management:
As applied to corporate finance, risk management is the technique for measuring,
monitoring and controlling the financial or operational risk on a firm's balance sheet. See
value at risk.
The Basel II framework breaks risks into market risk (price risk), credit risk and
operational risk and also specifies methods for calculating capital requirements for each
of these components.
Enterprise risk management:
In enterprise risk management, a risk is defined as a possible event or circumstance that
can have negative influences on the enterprise in question. Its impact can be on the very
existence, the resources (human and capital), the products and services, or the customers
of the enterprise, as well as external impacts on society, markets, or the environment. In a
financial institution, enterprise risk management is normally thought of as the
combination of credit risk, interest rate risk or asset liability management, market risk,
and operational risk.
In the more general case, every probable risk can have a pre-formulated plan to deal with
its possible consequences (to ensure contingency if the risk becomes a liability).
52
From the information above and the average cost per employee over time, or cost accrual
ratio, a project manager can estimate:
The cost associated with the risk if it arises, estimated by multiplying employee
costs per unit time by the estimated time lost (cost impact, C where C = cost
accrual ratio * S).
the probable increase in time associated with a risk (schedule variance due to risk,
Rs where Rs = P * S):
o Sorting on this value puts the highest risks to the schedule first. This is
intended to cause the greatest risks to the project to be attempted first so
that risk is minimized as quickly as possible.
o These are slightly misleading as schedule variances with a large P and
small S and vice versa are not equivalent. (The risk of the RMS Titanic
sinking vs. the passengers' meals being served at slightly the wrong time).
the probable increase in cost associated with a risk (cost variance due to risk, Rc
where Rc = P*C = P*CAR*S = P*S*CAR)
o Sorting on this value puts the highest risks to the budget first.
o See concerns about schedule variance as this is a function of it, as
illustrated in the equation above.
Risk in a project or process can be due either to Special Cause Variation or Common
Cause Variation and requires appropriate treatment. That is to re-iterate the concern about
external cases not being equivalent in the list immediately above.
Risk management activities as applied to project management:
In project management, risk management includes the following activities:
Planning how risk will be managed in the particular project. Plans should include
risk management tasks, responsibilities, activities and budget.
Assigning a risk officer - a team member other than a project manager who is
responsible for foreseeing potential project problems. Typical characteristic of
risk officer is a healthy skepticism.
53
Maintaining live project risk database. Each risk should have the following
attributes: opening date, title, short description, probability and importance.
Optionally a risk may have an assigned person responsible for its resolution and a
date by which the risk must be resolved.
Creating anonymous risk reporting channel. Each team member should have the
possibility to report risks that he/she foresees in the project.
Preparing mitigation plans for risks that are chosen to be mitigated. The purpose
of the mitigation plan is to describe how this particular risk will be handled –
what, when, by who and how will it be done to avoid it or minimize consequences
if it becomes a liability.
Summarizing planned and faced risks, effectiveness of mitigation activities, and
effort spent for the risk management.
Risk management for mega projects:
Megaprojects (sometimes also called "major programs") are extremely large-scale
investment projects, typically costing more than US$1 billion per project. Megaprojects
include bridges, tunnels, highways, railways, airports, seaports, power plants, dams,
wastewater projects, coastal flood protection schemes, oil and natural gas extraction
projects, public buildings, information technology systems, aerospace projects, and
defense systems. Megaprojects have been shown to be particularly risky in terms of
finance, safety, and social and environmental impacts. Risk management is therefore
particularly pertinent for megaprojects and special methods and special education have
been developed for such risk management.
Risk management of Information Technology:
Information technology is increasingly pervasive in modern life in every sector.
IT risk is a risk related to information technology. This is a relatively new term due to an
increasing awareness that information security is simply one facet of a multitude of risks
that are relevant to IT and the real world processes it supports.
54
A number of methodologies have been developed to deal with this kind of risk.
ISACA's Risk IT framework ties IT risk to Enterprise risk management.
Risk management techniques in petroleum and natural gas:
For the offshore oil and gas industry, operational risk management is regulated by the
safety case regime in many countries. Hazard identification and risk assessment tools and
techniques are described in the international standard ISO 17776:2000, and organizations
such as the IADC (International Association of Drilling Contractors) publish guidelines
for HSE Case development which are based on the ISO standard. Further, diagrammatic
representations of hazardous events are often expected by governmental regulators as part
of risk management in safety case submissions; these are known as bow-tie diagrams.
The technique is also used by organizations and regulators in mining, aviation, health,
defense, industrial and finance.
Risk management and business continuity:
Risk management is simply a practice of systematically selecting cost effective
approaches for minimizing the effect of threat realization to the organization. All risks
can never be fully avoided or mitigated simply because of financial and practical
limitations. Therefore all organizations have to accept some level of residual risks.
Whereas risk management tends to be preemptive, business continuity planning (BCP)
was invented to deal with the consequences of realized residual risks. The necessity to
have BCP in place arises because even very unlikely events will occur if given enough
time. Risk management and BCP are often mistakenly seen as rivals or overlapping
practices. In fact these processes are so tightly tied together that such separation seems
artificial. For example, the risk management process creates important inputs for the BCP
55
(assets, impact assessments, cost estimates etc.). Risk management also proposes
applicable controls for the observed risks. Therefore, risk management covers several
areas that are vital for the BCP process. However, the BCP process goes beyond risk
management's preemptive approach and assumes that the disaster will happen at some
point.
Risk communication:
Risk communication is a complex cross-disciplinary academic field. Problems for risk
communicators involve how to reach the intended audience, to make the risk
comprehensible and relatable to other risks, how to pay appropriate respect to the
audience's values related to the risk, how to predict the audience's response to the
communication, etc. A main goal of risk communication is to improve collective and
individual decision making. Risk communication is somewhat related to crisis
communication.
Seven cardinal rules for the practice of risk communication:
Accept and involve the public/other consumers as legitimate partners (e.g.
stakeholders).
Plan carefully and evaluate your efforts with a focus on your strengths,
weaknesses, opportunities, and threats (SWOT).
Listen to the stakeholder’s specific concerns.
Be honest, frank, and open.
Coordinate and collaborate with other credible sources.
Meet the needs of the media.
Speak clearly and with compassion.
Financial risk management is the practice of creating economic value in a firm by using
financial instruments to manage exposure to risk, particularly credit risk and market risk.
Other types include Foreign exchange, Shape, Volatility, Sector, Liquidity, Inflation
56
risks, etc. Similar to general risk management, financial risk management requires
identifying its sources, measuring it, and plans to address them.
Financial risk management can be qualitative and quantitative. As a specialization of risk
management, financial risk management focuses on when and how to hedge using
financial instruments to manage costly exposures to risk.
In the banking sector worldwide, the Basel Accords are generally adopted by
internationally active banks for tracking, reporting and exposing operational, credit and
market risks.
When to use financial risk management:
Finance theory (i.e., financial economics) prescribes that a firm should take on a project
when it increases shareholder value. Finance theory also shows that firm managers
cannot create value for shareholders, also called its investors, by taking on projects that
shareholders could do for themselves at the same cost.
When applied to financial risk management, this implies that firm managers should not
hedge risks that investors can hedge for themselves at the same cost. This notion was
captured by the hedging irrelevance proposition: In a perfect market, the firm cannot
create value by hedging a risk when the price of bearing that risk within the firm is the
same as the price of bearing it outside of the firm. In practice, financial markets are not
likely to be perfect markets.
This suggests that firm managers likely have many opportunities to create value for
shareholders using financial risk management. The trick is to determine which risks are
cheaper for the firm to manage than the shareholders. A general rule of thumb, however,
is that market risks that result in unique risks for the firm are the best candidates for
financial risk management.
The concepts of financial risk management change dramatically in the international
realm. Multinational Corporations are faced with many different obstacles in overcoming
these challenges. There has been some research on the risks firms must consider when
operating in many countries, such as the three kinds of foreign exchange exposure for
57
various future time horizons: transactions exposure, accounting exposure, and economic
exposure.
Megaprojects (sometimes also called "major programs") have been shown to be
particularly risky in terms of finance. Financial risk management is therefore particularly
pertinent for megaprojects and special methods have been developed for such risk
management.
Implementation of study:
For implementing the study,8 security’s or scripts constituting the Sensex market
are selected of one month closing share movement price data from Economic Times and
financial express on Jan 2012.
In order to know how the risk of the stock or script, we use the formula, which is
given below:
------------
Standard deviation = √ variance
N _
Variance = (1/n-1) ∑(R-R) ^2
t =1
Where (R-R) ^2=square of difference between sample and mean.
n=number of sample observed.
After that, we need to compare the stocks or scripts of two companies with each other by
using the formula or correlation co-efficient as given below.
N _ _Co-variance (COVAB) = 1/n∑ (RA-RA) (RB-RB)
58
t =1
(COV AB)
Correlation-Coefficient (P AB) = ---------------------
(Std. A) (Std. B)
Where (RA-RA) (RB-RB) = Combined deviations of A&B
(Std. A) (Std B) =standard deviation of A&B
COVAB= covariance between A&B
n =number of observation
The next step would be the construction of the optimal portfolio on the basis of
what percentage of investment should be invested when two securities and stocks are
combined i.e. calculation of two assets portfolio weight by using minimum variance
equation which is given below.
FORMULA (Std. b) ^2 – pab (Std. a) (Std. b)
Xa =------------------- ----------------------------------
(Std. a) ^2 + (std. b) ^2 –2 pab (Std. a) (Std. b)
Where
Std. b= standard deviation of b
Std. a = standard deviation of a
Pab= correlation co-efficient between A&B
The next step is final step to calculate the portfolio risk (combined risk), that shows how
much is the risk is reduced by combining two stocks or scripts by using this formula:
___________________________________
σp= √ X1^2σ1^2+X2^2σ2^2+2(X1)(X2)(X12)σ1σ
Where
X1=proportion of investment in security 1.
X2=proportion of investment in security 2.
Σ 1= standard deviation of security 1.
Σ 2= standard deviation of security 2.
X12=correlation co-efficient between security 1&2.
Σ p=portfolio risk
59
CHAPTER-IV
DATA ANALYSES AND
INTERPRETATION
60
Analysis of which company is undertaken?
From where the data was collected.
CALCULATION OF AVERAGE RETURN OF COMPANIES:
_ Average Return (R) = (R)/N
(P0) = Opening price of the share (P1) = Closing price of the share D = DividendWIPRO:
Year (P0) (P1) D (P1-P0)D+(P1-P0)/
P0*1002007-2008 1,233.45 1361.20 29 127.75 12.712008-2009 1,361.20 2,012 5 650.8 48.162009-2010 2012 1900.75 5 -111.25 -15.842010-2011 1900.75 1900.45 8 -0.3 1.382011-2012 1900.45 425.30 - -1475.15 -0.776
TOTAL RETURN 45.634
Average Return = 45.63/5 = 9.12
DR REDDY’S LABORATORIES LTD:
Year (P0) (P1) D (P1-P0)D+(P1-P0)/
P0*100
61
2007-2008 916.30 974.35 5 58.2 6.892008-2009 974.35 739.15 5 23.52 -23.632009-2010 739.15 1,421.40 5 682.25 92.982010-2011 1,421.40 1456.55 3.75 35.15 2.742011-2012 1456.55 591.25 .75 -865.3 -59.4
TOTAL RETURN 19.58
Average Return = 19.58/5 = 3.916
ACC:
Year (P0) (P1) D (P1-P0)D+(P1-P0)/
P0*1002007-2008 138.50 254.65 4 116.15 86.712008-2009 254.65 360.55 7 105.9 44.342009-2010 360.55 782.20 8 421.61 119.192010-2011 782.20 735.25 25 -46.95 -2.82011-2012 735.23 826.10 2 90.85 12.63
TOTAL RETURN 258.07
Average Return = 258.07/5 =51.614
HERO AUTOMOBILES LIMITED:
Year (P0) (P1) D (P1-P0)D+(P1-P0)/
P0*1002007-2008 188.20 490.60 20 302.40 171.32008-2009 490.60 548.00 20 57.40 15.772009-2010 548.00 890.45 20 342.45 66.142010-2011 890.45 688.75 17 -20.17 -20.74
62
2011-2012 688.75 9.5 1.45 1.45 1.958
TOTAL RETURN 234.428
Average Return = 234.428/5 = 46.885
DIAGRAMATIC PRESENTATION
RETURN
63
COMPANY RETURN
WIPRO 9.12DR.REDDY 3.916
ACC 51.614HERO 46.885
WIPRO DR.REDDY ACC HERO0
10
20
30
40
50
60
RETURN
RETURN
Interpretation is needed for all graphs and figures
CALCULATION OF STANDARD DEVIATION:
Standard Deviation = Variance __Variance = 1/n (R-R)2
WIPRO:
YearReturn
(R)Avg.
Return (R) (R-R) (R-R)2
2007-2008 12.71 9.12 3.59 12.88812008-2009 48.16 9.12 39.04 1524.1222009-2010 -15.84 9.12 -24.96 623.00162010-2011 1.38 9.12 -7.74 59.90762011-2012 -0.776 9.12 -9.896 97.93082
TOTAL 2317.85 _
Variance = 1/n (R-R)2 = 1/5 (2317.85) = 463.57
64
Standard Deviation = Variance = 463.57 =21.53 DR. REDDY’S:
YearReturn
(R)Avg.
Return (R) (R-R) (R-R)2
2007-2008 6.89 46.88 2.98 8.88042008-2009 -23.63 46.88 -27.54 758.45162009-2010 92.98 46.88 89.07 7933.4652010-2011 2.74 46.88 -1.17 1.36892011-2012 -59.4 46.88 -63.31 4008.156
TOTAL 12710.32
Variance = 1/n-1 (R-R)2 = 1/5 (12710.32) = 2542.06
Standard Deviation = Variance = 2542.06= 50.14
ACC:
YearReturn
(R)Avg.
Return (R) (R-R) (R-R)2
2007-2008 86.71 51.61 35.1 1232.012008-2009 44.34 51.61 -7.27 52.85292009-2010 119.19 51.61 67.58 4567.0562010-2011 -2.8 51.61 -54.41 2960.4482011-2012 12.63 51.61 -38.98 1519.44
TOTAL 10331.81
Variance = 1/n-1 (R-R)2 = 1/5 (10331.81) = 2066.36
Standard Deviation = Variance = 2066.36 = 45.45 HERO:
65
YearReturn
(R)Avg.
Return (R) (R-R) (R-R)2
2007-2008 171.3 32.59 138.71 19,240.52008-2009 15.77 32.59 -16.82 284.12009-2010 66.14 32.59 33.57 1,126.2732010-2011 -20.74 32.59 -53.33 2,844.12011-2012 1.958 32.59 -31 -960.8
TOTAL 29,592.4
Variance = 1/n-1 (R-R)2 = 1/5 (29,592.4) = 4,232.1
Standard Deviation = Variance = 4,232.1 = 70.23
DIAGRAMATIC PRESENTATION
COMPANY RISKWIPRO 22.86
DR.REDDY 46.66ACC 47.963
HERO 70.23
RISK
66
0
10
20
30
40
50
60
70
80
WIPRODR.REDDYACCHERO
CALCULATION OF CORRELATION: Covariance (COV ab) = 1/n (RA-RA)(RB-RB) Correlation Coefficient = COV ab/a*b
WIPRO WITH OTHER COMPANIES
ii) WIPRO (RA)&DR.REDDY (RB)
YEAR (RA-RA) (RB-RB) (RA-RA) (RB-RB)2007-2008 8.11 6.22 50.442008-2009 43.56 -24.3 -1,058.52009-2010 -10.44 92.31 -963.72010-2011 -4.195 2.07 -8.692011-2012 -4.678 -60.07 281.01
TOTAL -1,180.3
67
Covariance (COV ab) = 1/5 (-1,180.3) = -196.72 Correlation Coefficient = COV ab/a*b
a = 22.86; b = 46.66 = -196.72/(22.86)(46.66) = -0.184
iii. WIPRO (RA) & ACC (RB)
YEAR (RA-RA) (RB-RB) (RA-RA) (RB-RB)2007-2008 -32.01 -50.7 1,622.912008-2009 8.11 44.67 362.32009-2010 43.56 2.32 101.182010-2011 -10.44 77.17 -805.72011-2012 -4.195 -44.82 188.02
TOTAL 1,606.11
Covariance (COV ab) = 1/5(1,606.11) = 267.69Correlation Coefficient = COV ab/a*b
a = 22.86; b = 47.27 = 267.69/(22.86)(47.27) = .0247
v. WIPRO (RA) & HERO (RB)
YEAR (RA-RA) (RB-RB) (RA-RA) (RB-RB)2007-2008 8.11 138.71 1,124.92008-2009 43.56 -16.82 -732.682009-2010 -10.44 33.57 -358.482010-2011 -2.42 -59.44 143.82011-2012 -4.68 -31 145.1
TOTAL 2,697
Covariance (COV ab) = 1/6 (2,697) = 449.7
Correlation Coefficient = COV ab/a*ba = 22.86; b = 70.23
68
= 2,697/(22.86)(70.23) = 0.28
3. Correlation between DR REDDY & Other Companies:
i. DR REDDY(RA) &ACC(RB)
YEAR (RA-RA) (RB-RB) (RA-RA) (RB-RB)2007-2008 6.22 44.67 277.852008-2009 -24.31 2.32 -56.3992009-2010 92.31 77.17 7,123.562010-2011 2.07 -44.82 -92.782011-2012 -60.07 -29.37 1,764.26
TOTAL 9,838.84
Covariance (COV ab) = 1/6 (9,838.84) =1,639.81
Correlation Coefficient = COV ab/a*ba = 46.66; b = 47.27= 1,639.81/(46.66)(47.27) = 0.743
iii. DR REDDY (RA) &HERO (RB)
YEAR (RA-RA) (RB-RB) (RA-RA) (RB-RB)2007-2008 6.22 138.71 862.722008-2009 -24.3 -16.82 408.732009-2010 92.31 33.57 3,098.852010-2011 2.07 -53.33 -110.3932011-2012 -60.07 -31 1,862.2
TOTAL 7,284.66
Covariance (COV ab) = 1/6 (7,284.66) = 1,214.109Correlation Coefficient = COV ab/a*b
a = 46.66; b = 70.23= 1,214.109/(46.66)(70.23) = 0.370
69
4. Correlation With ACC & Other Companies
ACC(RA) & HERO (RB)
How the calculation is done
Covariance (COV ab) = 1/6 (15,682.15) = 2,613.7Correlation Coefficient = COV ab/a*b
a = 47.27; b =70.23=2,613.7/(47.27)(70.23) = 0.787
CALCULATION OF PORTFOLIO WEIGHTS:
FORMULA :
Wa = b [b-(nab*a)]
70
YEAR(RA-RA) (RB-
RB)(RA-RA) (RB-RB)
2007-2008 44.67 138.71 6,196.182008-2009 2032 -16.82 -39.0222009-2010 77.17 33.57 2,590.592010-2011 -44.82 -53.33 2,390.2512011-2012 -29.37 -31 910.5
TOTAL 15,682.15
a2 + b2 - 2nab*a*b
Wb = 1 – Wa WEIGHTS OF WIPRO & OTHER COMPANIES:
i. WIPRO & DR. REDDY
a = 22.86b = 46.66Nab = -0.184
WA = 46.66 [46.66-(-0.184*)] 2 + 2 – 2(-0.184)**
WA = 2,373.42 3,092.2615
WA = 0.77Wb = 1 – Wa Wb = 1- 0.77 = 0.23
ii. WIPRO (a) & ACC (b)
a = 22.86b = 47.27Nab = 0.247
WA = 47.27 [- (0.25*)] 2 + 2 – 2(0.5)**
WA = 1,964.82 1,767.66
WA =1.11
Wb = 1 – Wa
Wb = 1- 1.11 = -0.11
iii. WIPRO(a) & HERO(b)
a = 22.86
71
b = 70.23Nab = 0.28
WA = 70.23 [70.23-(0.28*22.86)] 2 + 2 – 2(0.28)**
WA = 4,482.88 4,555.77
WA = 0.98
Wb = 1 – Wa
Wb = 1-0.98 = 0.02
WEIGHTS OF DRREDDY & OTHER COMPANIES:
DRREDDY (a) & ACC (b) a = 46.7b = 47.7Nab = 0.74
WA = 47.7 [47.7- (0.74*46.7)] 2 + 2 – 2(0.74)**
WA = 602.6 1,149.01
WA = 0.52Wb = 1 – Wa Wb = 1- 0.52 = 0.48
i. DRREDDY (a) & HERO(b)
a = 46.67b = 70.23
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Nab = 0.37
WA = 70.23 [70.23-(0.37*46.67)] 2 + 2 – 2(0.37)**
WA = 3,722.2 2,506.9
WA = 1.48Wb = 1 – Wa Wb = 1-1.48 = -0.48
WEIGHTS OF ACC & OTHER COMPANIES
ACC (a) & HERO(b)
a = 47.3b = 70.23Nab = 0.79
WA = 70.23 [70.23- (0.79*47.3)] 2 + 2 – 2(0.79)**
WA = 2,308.5 1,921.43
WA = 1.20
Wb = 1 – Wa
Wb = 1- 1.20 = -0.20
CALCULATION OF PORTFOLIO RISK:
RP = (a*Wa)2 + (b*Wb)2 + 2*a*b*Wa*Wb*nab
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CALCULATION OF PORTFOLIO RISK OF WIPRO & OTHER COMPANIES:
WIPRO (a) & DR.REDDY (b):
a = 22.86b = 46.66Wa = 0.78Wb = 0.23Nab = -0184
RP = (22.86*0.78.)2+(46.66*0.23) 2(22.86)(46.66)(0.78(0.23)(-0.184)
355.6 18.86%
WIPRO (a) &ACC (b):
a = 22.86b = 47.27Wa = 1.11Wb = -0.11Nab = 0.25
RP = (22.86*1.11) 2+(47.27*-0.11) 2+2(22.86)(47.27)(1.11)(-0.11)(0.25)
551.2 23.5%
WIPRO (a) & HERO (b):a = 22.86b = 70.23Wa= 0.98Wb=0.02Nab = 028
RP = (22.86*0.98)2(70.23*0.02)2+2(22.86)(70.23)(0.98)(0.02)(0.28)
525 = 22.85%
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CALCULATION OF PORTFOLIO RISK OF DR REDDY & OTHER COMPANIES
DRREDDY (a) & ACC (b):
a = 46.7b = 47.3Wa=0.52Wb= 0.48Nab = 0.74
RP = (46.7*0.52)2+(47.3*0.48)2+2(46.7)**(0.48)*(0.74)
1,922.80 = 43.85%
DRREDDY (a) & HERO HONDA (b):
a = 46.67b = 70.23Wa = 1.48Wb= -0.48Nab = 0.37
RP = (46.67*1.48)2+(70.23*-0.48)2+2(46.67)**(-048)*(0.37)
234.89 = 15.33%
CALCULATION OF PORTFOLIO RISK OF ACC & OTHER COMPANIES
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ACC (a) &HERO (b):a = 47.3b = 70.23Wa= 1.20Wb = -0.20Nab = 0.79
RP = (47.3*1.20)2+ (70.23*-0.20)2+2(47.3)**(-0.20)*(0.79)
1,764.84 = 42%
CALCULATION OF PORTFOLIO RETURN:
Rp= (RA*WA) + (RB*WB)
Where Rp = portfolio return RA= return of A WA= weight of A RB= return of B WB= weight of B
CALCULATION OF PORTFOLIO RETURN OF WIPRO & OTHER COMPANIES:
WIPRO (a) & DR.REDDY (b):
RA= 4.6 WA=0.77
RB=0.67 WB=0.23
Rp = (4.6*0.77) + (0.67*0.23)
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Rp = (3.542 + 0.1541)Rp = 3.6961%
WIPRO (a) &ACC (b):
RA= 4.6 WA=1.11
RB= 42.02 WB=-0.11
Rp = (4.6*1.11) + (42.02*-0.11)Rp = (5.106+4.622)Rp = 0.484
WIPRO (a) & HERO (b):
RA= 4.6 WA=0.98
RB= 32.498 WB=0.02
Rp = (4.6*0.9) + (32.498*0.02)
Rp = (4.508 + 0.6499)
Rp = 5.16%
CALCULATION OF PORTFOLIO RETURN OF DR REDDY & OTHER COMPANIES
DRREDDY (a) & ACC (b): RA= 0.67 WA=0.52
RB=42.02 WB=0.48
Rp = (0.67*0.52) + (42.02*0.48)
Rp = (.3487+20.139)Rp = 20.5%
DRREDDY (a) & HERO (b):
RA= 0.67 WA=1.48
RB=32.498 WB=-0.48
Rp (0.67*1.48) + (32.498*-0.48)
Rp (0.9916-15.599)
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Rp -14.60%
CALCULATION OF PORTFOLIO RETURN OF ACC & OTHER COMPANIES
ACC(a) &HERO (b): RA= 42.02 WA=1.20
RB=32.498 WB=-0.20
Rp = (42.02*1.20) + (32.498*-0.20)
Rp = (50.424-6.499)Rp = 43.92%
DISPLAY OF ALL CALCULATED VALUES
COMBINATION CORRELATION COVARIANCEPORTFOLIO RETURN
PORTFOLIO RISK
WIPRO & DR.REDDY -0.184 -196.72 3.7 18.9WIPRO & ACC 0.247 267.69 0.49 23.5WIPRO &HERO 0.28 449.7 5.0 22.9DR.REDDY & ACC .7434 1639.8 20.5 43.9DR.REDDY & BHEL 0.7969 3047.7 -21.7 22.9DR REDDY&HERO 0.705 1,124.1095 -14.6 15.3ACC&BHEL 0.917 3,558.65 21.07 63.8ACC & HERO 0.7873 2,613.7 43.9 42
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I nterpretations The analytical part of the study for the 6 years period reveals the following
interpretations,
Wipro with acc:Portfolio weights for wipro and ACC are (1.11) and (-0.11) respectively. This indicates
that the investors who are interested to take more risk they can invest in this combination, and
also can get high returns.
Dr reddy & hero:In this combination as per the calculation & the study of portfolio weights of dr reddy and
hero are (1.48) and (-0.48) respectively. Here the standard deviation of Dr reddy &hero are
(46.66) and (70.23) respectively. Returns are (0.67) is for Dr reddy (32.43) is for hero. In this,
position invest in hero is high risk as well as high returns also up to (32.43) when compared to
DR reddy.
Dr reddy&acc:
The portfolio of weights of the both (0.52) is Dr reddy (.048) is for acc. The standard
deviation of Dr reddy is (46.66) and (47.27) for acc. The returns of DR reddy is (0.67) and
(42.02) is acc. According to this combination investor can invest acc; this is more risk as well as
more returns can get up to (42.02). If investor wants less risk he has to invest in acc.Dr reddy is
a low risk as well as low returns also.
Acc&hero:
According to this combination of the portfolio weights are (1.20) in acc and (-0.20) is
hero. The standard deviation of acc is less than hero 47.27>70.23. If the investor wants to take
low risk, acc is the better option. And the return point of view hero is providing more returns
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that of acc. According to this combination if the investor wants to get returns then he has to take
the more risk. This is the good combination for investors for investing in the acc & hero. For
more profits. “Greater Portfolio Return with less Risk is always is an attractive combination” for
the Investors.
SUMMARY & CONCLUSIONSUMMARY:
The investors who are risk averse can invest their funds in the portfolio combination
of,ACC,HERO AND WIPRO proportion. The investors who are slightly risk averse are
suggested to invest in WIPRO, DR. REDDY, ACC as the combination is slightly low risk when
compared with other companies.
The analysis regarding the compaines ACC, HERO has howed a wise investment in
public and in private sector with an increasing trend where as corporate sector has recorded a
decreasing trends income which denotes an increasing trend throught out the study period.
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CHAPTER-V
FINDINGS
SUGGESSIONS
CONCLUSIONS
BIBLIOGRAPHY
CONCLUSIONS:
More information should be provided
The analytical part of study for the 5 years reveals the following as for as:
As far as the average return of the company is concerned ACC, , HERO is high
with an average return of 48.41%. WIPRO, DR.REDDY is getting low returns.
HERO securities are performing at medium returns.
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As far as the correlation is concerned the securities DR.REDDY are high
correlated with minimum portfolio risk. The investor who is risk averse will have
to invest in this combination which gives good return with low risk.
RECOMMENDATIONS:
Numbering to be given
As the average return of securities, ACC, HERO and are HIGH, it is suggested that investors who show interest in these securities taking risk into consideration.
As the risk of the securities ACC, HERO and BHEL are risky securities it suggested that the investors should be careful while investing in these securities.
The investors who require minimum return with low risk should invest in WIPRO & DR.REDDY.
It is recommended that the investors who require high risk with high return should invest in ITC and HERO.
The investors are benefited by investing in selected scripts of Industries.
BIBILOGRAPHY:
1. SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT-donald.E.Fisher, Ronald.J.Jordan
2. INVESTMENTS -William .F.Sharpe, gordon,J Alexander and
Jeffery.V.Baily
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3. PORTFOLIOMANAGEMENT -Strong R.A
WEB REFERENCES:
http;//www.nseindia.com
http;//www.bseindia.comhttp;//www.economictimes.comhttp;//www.answers.comhttp://www.iciciprulife.com
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