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CHAPTER-I
INTRODUCTION
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INTRODUCTION
Portfolio management is the selection and management of all of an organisation’s projects,
Programmes and related business-as-usual activities taking into account resource
constraints. A portfolio is a group of projects and programmes carried out under the
sponsorship of an organisation. Portfolio can be managed at an organizational, programme
or functional level.
The process of managing the assets of a insurance policy or policy holder, including choosing
and monitoring appropriate investments and allocating funds accordingly. It has often been
said that portfolio management is not a science, but an art. Certainly, the human factor
manifesting in a portfolio manager’s ability to create outperformance bears out this truism.
Computer system can pick and run to some extent, portfolio which will provide a return
equal to an index, but the possibilities of higher fund outperformance (and under
performance) are presented by actively managed funds. With the more actively managed
funds, portfolio managers can demonstrate their experience and expertise in picking assets,
countries, sectors, and companies that will generate positive returns
If you own more than one security, you have an investment portfolio. You build the portfolio
by buying additional stocks, bonds, mutual funds, or other investments. Your goal is to
increase the portfolio’s value by selecting investments that you believe will go up in price.
According to modern portfolio theory, you can reduce your investment risk by creating a
diversified portfolio that includes enough different types, or classes, of securities so that at
least level some of them may produce strong returns in any economic climate.
In this study I had calculated risk and return for various portfolios. The portfolios are
constructed with securities from various areas. The analysis has been made based on the
risk and return calculated for portfolios.
The financial market is the driver of the economic growth and development of any
country. A sound financial market can take the country to the apex. Financial resources
were by allocating the resources through one of the ways such as portfolios, which are
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combinations of various securities. Portfolio analysis includes analyzing the range of possible
portfolios that can be constituted from a given set of securities.
A combination of securities with different risk-return characteristics will constitute the
portfolio of the investor. A portfolio is a combination of various assets and/or instruments of
investments. The portfolio is also built up out of the wealth or income of the investor over a
period of time with a view to suit his risk and return preferences to that of the portfolio that
he holds. The portfolio analysis as an analysis of the risk-return characteristics of individual
securities in the portfolio and changes that may take place in combination with securities
due to interactions among themselves and impact of each one of them on others.
As individuals are becoming more and more responsible for ensuring their own financial
future, portfolio or fund management has taken on an increasingly important role in banks
ranges of offerings to their clients. In addition, as interest rates have come down and the
stock market has gone up and come down again, clients have a choice of leaving their saving
in deposit accounts, or putting those savings in unit trusts or investment portfolio which
invest in equities and/or bonds. Investing in unit trusts or mutual funds is one way for
individuals and corporations alike to potentially enhance the returns on their savings.
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NEED FOR THE STUDY
The portfolio management deals with the process of selection securities from the number of
opportunities available with different expected returns and carrying different levels of risk
and the selection of securities is made with a view to provide the investors the maximum
yield for a given level of risk or ensure minimum risk for a level of return.
Portfolio management is a process encompassing many activities of investment in assets
and securities. It is a dynamics and flexible concept and involves regular and systematic
analysis, judgement and actions. The objectives of this service are to help the unknown
investors with the expertise of professionals in investment portfolio management. It
involves construction of a portfolio based upon the investor’s objectives, constraints,
preference for risk and return and liability. The portfolio is reviewed and adjusted from time
to time with the market conditions. The evaluation of portfolio is to be done in terms of
targets set for risk and return. The changes in portfolio are to be effected to meet the
changing conditions.
Portfolio construction refers to the allocation of surplus in hand among a variety of financial
assets open for investment. Portfolio theory concerns itself with the principles governing
such allocation. The modern view of investment is oriented towards the assembly of proper
combinations held together will give beneficial result if they are grouped in a manner to
secure higher return after taking into consideration the risk element.
The modern theory is the view that by diversification, risk can be reduced. The investor can
make diversification either by having a large number of shares of companies in different
regions, in different industries or those producing different types of product lines. Modern
theory believes in the perspectives of combination of securities under constraints of risk and
return.
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OBJECTIVES OF THE STUDY:
To study the role of securities in Indian financial markets
To study the investment pattern and its related risks and returns.
To find out optimal portfolio, which gave optimal return at a minimize risk to the
investor.
To understand portfolio selection process.
To study the usefulness of efficient frontier technique in portfolio selection process.
To see whether the portfolio risk is less than individual risk on whose basis the
portfolio are constituted.
To see whether the selected portfolio is yielding a satisfactory and constant return to
the investor.
To understand, analyze and select the best portfolio
To suggest measures for improvement of Port folio management of India Infoline
Limited, Visakhapatanam.
IMPORTANCE OF THE STUDY:
5
A portfolio is a collection of investments held by an institution or a private
individual. In building up an investment portfolio a financial institution will typically
Conduct its own investment analysis, whilst a private individual may make use of the
services of a financial advisor or a financial institution which offers portfolio management
services. Holding a portfolio is part of an investment and risk-limiting strategy called
diversification. By owning several assets, certain types of risk (in particular specific risk) can
be reduced. The assets in the portfolio could include stocks, bonds, options, warrants, gold
certificates, real estate, futures contracts, production facilities, or any other item that is
expected to retain its value.
Portfolio management involves deciding what assets to include in the portfolio, given the
goals of the portfolio owner and changing economic conditions. Selection involves deciding
what assets to purchase, how many to purchase, when to purchase them, and what assets
to divest. These decisions always involve some sort of performance measurement most
typically expected return on the portfolio, and the risk associated with this return (i.e. the
standard deviation of the return). Typically the expected returns from portfolios, comprised
of different asset bundles are compared.
The unique goals and circumstances of the investor must also be considered. Some
investors are more risk averse than others. Mutual funds have developed particular
techniques to optimize their portfolio holdings.
Thus, portfolio management is all about strengths, weaknesses, opportunities and threats in
the choice of debt vs. Equity, domestic vs. International, growth vs. Safety and numerous
other trade-offs encountered in the attempt to maximize return at a given appetite for risk.
RESEARCH METHODOLOGY:
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Research design or research methodology is the procedure of collecting, analyzing and
interpreting the data to diagnose the problem and react to the opportunity in such a way
where the costs can be minimized and the desired level of accuracy can be achieved to
arrive at a particular conclusion.
The methodology used in the study for the completion of the project and the fulfilment of
the project objectives, is as follows:
Market prices of the companies have been taken for the years of different dates,
there by dividing the companies into 5 sectors.
A final portfolio is made at the end of the year to know the changes
(increase/decrease) in the portfolio at the end of the year.
SOURCES OF THE DATA:
Primary data: The primary data information is gathered from INDIA INFOLINE final
Polis by interviewing INDIA INFOLINE executives.
Secondary data:
The secondary data is collected from various books, magazines and from stock
Lists of various newspapers and INDIA INFOLINE as part of the training class
undertaken for project.
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LIMITATIONS OF THE STUDY:
This study has been conducted purely to understand portfolio management for
investors.
Construction of portfolio is restricted to two companies based on Markowitz
model.
Very few and randomly selected scripts/companies are analyzed from BSE
listings.
Detailed study of the topic was not possible due to limited size of the project.
There was a constraint with regard to time allocation for the research study i.e.
for a period of 45 days.
8
CHAPTER-II
INDUSTRY PROFILE
Industry Overview
The securities market achieves one of the most important functions of
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channelling idle resources or from less productive resources to more productive
resources. Hence in the broader context the people who save and investors who
invest focus more towards the economy’s abilities to invest and save respectively. This
enhances savings and investments in the economy, the two pillars for economic growth. The
Indian Capital Market has come a long way in this process and with a strong regulator it has
been able to usher an era of a modern capital market regime. The past decade in many
ways has been remarkable for securities market in India. It has grown exponentially as
measured in terms of amount raised from the market, the number of listed stocks, market
capitalization, trading volumes and turnover on stock exchanges, and investor population.
The market has witnessed fundamental institutional changes resulting in drastic reduction in
transaction costs and significant improvements in efficiency, transparency and safety.
Capital Market is one of the significant aspects of every financial market. Hence it is
necessary to study its correct meaning. Broadly speaking the capital market is a market for
financial assets which have a long or indefinite maturity. Unlike money market instruments
the capital market instruments become nature for the period above one year. It is an
institutional arrangement to borrow and lend money for a longer period of time. It consists
of financial institutions like IDBI, ICICI, UTI, LIC, etc. These institutions play the role of
lenders in the capital market. Business units and corporate are the borrowers in the capital
market. Capital market involves various instruments which can be used for financial
transactions. Capital market provides long term debt and equity finance for the government
and the corporate sector. Capital market can be classified into primary and secondary
markets. The primary market is a market for new shares were as in the secondary market
the existing securities are traded. Capital market institutions provide rupee loans, foreign
exchange loans, consultancy services and underwriting.
Stock Exchange:
At the end of the June 1989, there were 18 recognized stock exchanges in India.
Among the 18 stock exchanges, the first organized stock exchange set up at
Bombay in 1857 is distinguished not only by its size but also it has been
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Recognized permanently, while the recognition for other markets is renewed every 5 years.
Stock markets are organized either as voluntary, non-profit making associations (Bombay,
Ahmadabad, Indore) or public limited companies (Calcutta, Delhi, Bangalore) or company
limited by guarantee (Madras, Hyderabad).In India, the growth of stock exchanges has been
linked to the growth of corporate Sector. Though a number of stock exchanges were set up
before independence but, there was no All India legislation to regulate they’re working.
Every stock Exchange followed its own methods of working. To rectify this situation, the
SECURITY CONTRACTS (REGULATIONS) ACT was passed in 1956.
A stock exchange, share market or bourse is a corporation or mutual organization
which provides facilities for stock brokers and traders, to trade company stock and other
securities. Stock exchanges also provide facilities for the issue and redemption of securities,
as well as, other financial instruments and capital events including the payment of income
and dividends. The securities trade on a stock exchange include: shares issued by
companies, unit trusts and other pooled investment products and bonds. To be able to
trade a security on a certain stock exchange, it has to be listed there. Usually there is a
central location at least for record keeping, but trade is less and less linked to such a
physical place, as modern markets are electronic networks, which gives those advantages of
speed and cost of transactions. Trade on an exchange is by members only. The initial
offering of stocks and bonds to investors is by definition done in the primary market and
subsequent trading is done in the secondary market. A stock exchange is often the most
important component of a stock market. Supply and demand in stock a market is driven by
various factors which, as in all free markets, affect the price of stocks (see stock valuation).
There is usually no compulsion to issue stock via the stock exchange itself, nor must
stock be subsequently traded on the exchanges. Such trading is said to be off exchange or
over-the-counter. This is the usual way that bonds are trade bonds are traded. Increasingly,
stock exchanges are part of a global market for securities.
The role of Stock Exchanges:
Stock exchanges have multiple roles in the economy, this may include the following:
Raising capital for businesses
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Mobilizing savings for investment
Facilitating company growth
Redistribution of wealth
Corporate governance
Creating investment opportunities for small investors
Government capital-raising for development projects
Barometer of the economy
Functioning of Stock Exchange:
Listing:
Listing of shares, on a stock exchange, means, such shares can be bought and sold, in
stock exchange.
A Company, which intends to issue shares, through prospectus, shall have to apply to one or
more stock exchanges, for getting its shares listed.
The detailed and elaborate procedure of getting the shares listed on a stock exchange is
monitored by SEBI. The SEBI, issues guidelines and notifications, from time to time, with
regard to listing of securities.
Once the shares are listed, they are divided into two categories:
1. GROUP “A” SHARES
2. GROUP “B” SHARES
GROUP “A” SHARES: are referred to as “Cleaned Securities” or “specified shares”. The
facility for carrying forward a transaction from one account period to another is available for
these shares. Group “A” shares represent companies, with huge amount of capital, and
equally a large scope for investment. These shares are frequently traded and command
higher price earnings multiples.
GROUP “B” SHARES: are referred to as, none cleaned securities or non-specified shares. For
these groups facility of carrying forward is not available.
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Whenever a share is moved from Group “B” to Group “An” its market price rises; likewise,
when a share is shifted from Group “A” to Group “B”, its market price declines. There are
some criteria and guide lines, laid down by stock exchange, for shifting stocks from the non-
specified list to the specified list.
Benefits of Stock Exchange:
The benefits of stock Exchanges can be studied under the following headings:
1. Advantages to the companies:
Ready markets for securities
Increase in price.
Increase in goodwill.
Agent between companies and the investors.
2. Advantages to the investors:
Safety of investment
Best use of capital
More collateral value.
Publication of price list of securities
Powerful hedge against inflation.
3. Advantages to the society:
Helpful in industrialization
Increase in rate of capital formation.
Savings are encouraged.
Incentive for efficiency.
Government can raised funds for imports projects. Provides a mirror to
reflect general economic conditions.
PRIMARY MARKET AND SECONDARY MARKET
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Primarily there are two types of stock markets – the primary market and the
secondary market. This is true for the Indian stock markets as well. Basically the primary
market is the place where the shares are issued for the first time. So when a company is
getting listed for the first time at the stock exchange and issuing shares – this process is
undertaken at the primary market. That means the process of initial public offering or IPO
and the debentures are controlled at the primary stock market. On the other hand the
secondary market is the stock market where existing stocks are bought and sold by the retail
investors through the brokers. It is the secondary market that controls the price of the
stocks. Generally when we speak about investing or trading at the stock market we mean
trading at the secondary stock market. It is the secondary market where we can invest and
trade in the stocks to get the profit from our stock market investment.
Now these are the broadcast classification of the stock markets that is true for any
country as well as India. But the Indian stock markets can be divided into further categories
depending on various aspects like the mode of operation and the diversification in services.
First of the two largest stock exchanges in India can be divided on the basis of operation.
While the Bombay stock exchange or BSE is a conventional stock exchange with a trading
floor and operating through mostly offline trades, the National Stock Exchange or NSE is a
completely online stock exchange and the first of its kind in the country. The trading is
carried out at the National Stock Exchange through the electronic limit order book of the
LOB. With the immense popularity of the process and online trading facility other exchanges
started to take up the online route including the BSE where you can trade online as well. But
the BSE is still having the offline trading facility that is carried out at the trading floor of the
exchange at its Dalal Street facility. Apart from these classification there also different types
of stock market in India and the classification is made on the type of instrument that is being
traded at the market. Both the Bombay Stock Exchange and the National Stock Exchange
have these types of stock markets.
MAJOR STOCK EXCHANGES:
The market or place, where securities, viz. Shares are exchange / traded or simply
where buying and selling takes place, is called stock exchange or stock market.
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Presently, the stock market in India consists of twenty three regional stock
exchanges and two national exchanges, namely, the National Stock Exchange (NSE) and
Over the Counter Exchange of India (OTC).
Twenty Largest Stock Exchanges by Market Capitalization as at 31st October 2012 (in
trillions of US dollars)
o NYSE Euro next
o NASDAQ OMX Group
o Landon Stock Exchange
o Tokyo stock Exchange
o Hong Kong stock Exchange
o Shanghai Stock Exchange
o TMX Group
o Deutsche Burse
o Australian Securities Exchange
o Bombay Stock Exchange
o National Stock Exchange of India
o SIX Swiss Exchange
o BM&F Bove spa
o Korea Exchange
o Shenzhen Stock Exchange
o BME Spanish Exchange
o JSE Limited
o Moscow Exchange
o Singapore Exchange
o Taiwan Stock
The Bombay Stock Exchange (BSE) is the largest Stock Exchange, in the country,
where maximum transactions, in terms of money and shares take place. The
other major stock exchanges are Calcutta, Madras and Delhi Stock Exchanges.
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Other one at Ahmadabad, Bangalore, Kanpur, Rajkot, Hyderabad, Cochin,
Bhubaneswar, Indore, Mangalore, Ludhiana, Patna, Coimbatore and Meerut.
The Bombay Stock Exchange (BSE):-
Is a stock exchange located on Dalal Street, Mumbai and is the oldest stock exchange
in Asia. The equity market capitalization of the companies listed on the BSE was US$1 trillion
as of December 2012, making it the 5th largest stock exchange in Asia and the 10 th largest in
the world. The BSE has the largest number of listed companies in the world.
As of march 2012 there are over 5,133 listed Indian companies and over 8,196 scrip’s
on the stock exchange, the Bombay stock exchange has a significant treading volume. The
BSE SENSEX , Also called “ BSE 30”, is a widely used market index in India & Asia .though
many other exchanges exist , BSE and the National stock exchange of India account for the
majority of equity trading in India while both have similar total market Capitalization (about
USD 1.6 Trillion ) , share volume in NSC is typically 2 times that of BSE.
Vision:
“Emerge as the premier India stock exchange by establishing global benchmarks”
HISTORY:
The Phiroze Jeejeebhoy towers house the Bombay Stock Exchange since 1980.
The Bombay Stock Exchange is the oldest exchange in Asia. It traces its history
to the 1850s, when four Gujarati and one Pars stock broker would gather under banyan
trees in front of Mumbai’s Town Hall. the location of these meetings exchanged many times,
as the number of brokers constantly incensed the group eventually moved Dalal Street in
1874 & in 1875 BSecame an official organization known as ‘the Native Share and Stock
brokers association in the 1956, the BSE became the first stock exchange to be organized by
the Indian government under the securities contract organization act. The Bombay stock
exchange developed the BSE SENSEX in 1986; giving the BSE a means to measure overall
performance of the exchange.
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In 2000 the BSE used this index to open its derivatives market trading SANSEX
futures contracts. The development of SENSEX options along with equity derivatives
followed in 2001 and 2012,expanding the BSE’s treading Platform Historically an open
outcry floor treading exchange , the Bombay stock exchange switched to an electronic
trading system in 1995.it took the exchange only fifty days to make this transition . This
automated screen –based trading platform called BSE on-line trading (BOLT) currently has a
capacity of 8 million orders per day. The BSE has also introduced the world’s first
centralized exchanged-Based internet trading system, BSEWEB.CO.IN in to unable investors
any wear in the world to tread on the BSE platform.
AWARDS
The World Council of Corporate Governance has awarded the Golden Peacock
Global CSR Award for BSE’s initiatives in Corporate Social Responsibility (CSR).
The Annual Reports and Accounts of BSE for the year ended March 31, 2006 and
March 31, 2007 have been awarded the ICAI awards for excellence in financial
reporting.
It has been cited as one of the Worlds’ best performing Stock Market by Reuters.
The Human Resource Management at BSE has won the Asia-pacific HRM awards
for its efforts In employer branding through talent management at work health
management at work and excellence in HR through technology.
National Stock Exchange (NSE):-
National Stock Exchange of India Ltd was started in 1992 with a paid-up equity of Rs.25
crores. The government recognized it in the same year and NSE started its Operations in
wholesale in Nov 1994. NSE is an India’s leading stock exchange covering various cities and
towns across the country. NSE was set up by leading institutions to provide a modern, fully
automated screen based trading system with national research. The exchange had brought
about unparallel transparency, speed and efficiency, safety and market integrity. It has
setup facilities that serve as a model for the securities industry in terms of systems,
17
practices and procedures. NSE has played a catalytic role in reforming the Indian securities
market in terms Of micro structure, market practices and trading volumes.
Vision:
“To become the world’s leading direct selling company by generating more income for
distributors than any other company.”
The National Stock Exchange (NSE) is a stock exchange located at Mumbai, India, it
is the 11th stock exchange in the world by market capitalization and largest in India by daily
turnover and number of trades, for both equities and derivative trading, NSE has a market
capitalization of around US$985 billion and over 1,646 listings of December 2012. Though a
number of other exchanges exist, NSE and the Bombay Stock Exchange are the two most
significant stock exchanges in India and between them are responsible for the vast majority
of share transactions. Thaw NSE’s key index is the S&P CNX Nifty, known as the NSE NIFTY
(National stock Exchange Fifty), an index of fifty major stocks weighted by market
capitalization.
NSE is mutually owned by a set of leading financial institutions, banks, insurance
companies and other financial intermediaries in India but its ownership and management
operate as separate entities. There are at least 2 foreign investors NYSE Euro next and
Goldman Sachs who have taken a stake in the NSE. As of 2006, the NSE VSAT terminals,
2799 in total, cover more than 1500 cities across India. NSE is the third largest Stock
Exchange in the world in terms of the number of trades in equities. It is the second fastest
growing stock exchange in the world with a recorded growth of 16.6%.The National Stock
Exchange of India was set up by Government of India on the recommendation of Pherwani
Committee in 1991. Promoted by leading financial institutions essentially led by IDBI at the
behest of the Government of India, it was incorporated
in November 1992 as a tax-paying company. In April 1993, it was recognized as a stock
exchange under the securities contracts (Regulation) Act, 1956, NSE commenced operations
in the Wholesale Debt Market (WDM) segment in June 1994. The Capital market (Equities)
18
segment of the NSE commenced operations in November 1994, while operations in the
Derivatives segment commenced in June 2000.
The logo of the NSE symbolizes a single nationwide securities trading facility
ensuring equal and fair access to investors, trading members and issuers all over
the country. The initials of the Exchange viz., N, S and E have been etched on the logo and
are distinctly visible. The logo symbolises use of state of the art
information technology and satellite connectivity to bring about the change within the
securities industry. The logo symbolizes vibrancy and unleashing of creative energy to
constantly bring about change through innovation.
19
CHAPTER-III
COMPANY PROFILE
COMPANY HISTORY :-
India Info line Group
20
The India Info line group, comprising the holding company, India Info line
Limited and its wholly-owned subsidiaries, straddle the entire financial services
Space with offerings ranging from Equity Research, Equities and Derivatives
Trading, Commodities Trading, Portfolio Management Services, Mutual
Funds, Life Insurance, Fixed deposits, Wealth Management, Asset Management, Loans,
Investment banking, Gold bonds and other small savings instruments to Loan products and
Investment banking. A multi-channel network in over 2,700 business locations across more
than 500 Cities across India, effectively covering all metros.
India Info line Ltd
India Info line Limited is listed on both the leading stock exchanges in India, viz. The Stock
Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) and is also a member of
both the exchanges. It is engaged in the businesses of Equities Broking services in the Cash
and Derivatives segments of the NSE as well as the Cash segment of the BSE. It is registered
with NSDL as well as CDSL as a Depository participant, providing a one-stop solution for
clients trading in the Equities market. It has recently launched its Investment banking and
Institutional Broking business.
IIFL is near you physically:
We are present in every nook and cranny of the country, with over 3,000 business locations
across 500 cities in India. You can reach us in a variety of ways, online, over the phone and
through our branches. All our offices are connected with the corporate office in Mumbai
with cutting edge networking technology. The group caters to a customer base of about a
million customers.
Our physical presence in key global markets includes subsidiaries in Colombo, Dubai,
New York Mauritius, London, Singapore and Hong Kong.
IIFL has received membership of the Colombo Stock Exchange becoming the first
foreign broker to enter Sri Lanka. IIFL owns and manages the website,
21
www.indiainfoline.com, which is one of India’s leading online destinations for personal
finance, stock markets, economy and business. IIFL has been awarded the ‘Best Broker,
India’ by Finance Asia and the ‘Most improved brokerage, India’ in the Asia Moneypolls.
India Info line was also adjudged as ‘Fastest Growing Equity Broking House-Large firms’ by
Dun & Brad Street. A forerunner in the field of equity research, IIFL’s research is
acknowledged by none other than Forbes as ‘Best of the Web” and ‘… a must read for
investors in Asia’.
Our research is available not just over the Internet but also on international wire
services like Bloomberg, Thomson First Call and Internet Securities besides others where it is
amongst one of the most read Indian brokers.
IIFL is a listed company with a consolidated group net worth of about Rs.2,000
crores. The income and net profit during FY 2011-12 were Rs.14.7 and Rs.2.1 bn
respectively.
The Group has a consistent and uninterrupted track record of profits and dividends
since its listing in 2005. The company is listed on both Exchanges and also trades in the
derivatives segment.
1995
Commenced operations as an Equity Research firm
1997
Launched research products of leading Indian companies, key sectors and the economy
Client included leading Flls, banks and companies.
1999
Launched www.indiainfoline.com
2000
22
Launched online trading through www.5paisa.com started distribution of life insurance
and mutual fund
2003
Launched proprietary trading platform Trader Terminal for retail customers
2004
Acquired commodities broking license
Launched Portfolio Management Service
2005
Maiden IPO and listed on NSE, BSE
2006
Acquired membership of DGCX
Commenced the lending business
2007
Commenced institutional equities business under IIFL
Formed Singapore subsidiary, IIFL (Asia) Pvt. Ltd.,
2008
Launched IIFL Wealth
Transitioned to insurance broking model
2009
Acquired registration for Housing Finance
SEBI in-principle approval for Mutual Fund
Obtained Venture Capital license
2010
23
Received in-principle approval for membership of the Singapore Stock Exchange
Received membership of the Colombo Stock Exchange
2011
Launched IIFL Mutual Fund
Product & Services
We are a one-stop financial service shop, most respected for quality of its advice,
personalized service and cutting-edge technology.
We have a presence in:
Equities
Equities our core offering, gives us a leading market share in both retail and
institutional segments. Over a million retail customers rely on our research, as do leading
Flls and MFs that invest billions.
IIFL is a member of BSE and NSE registered with NSDL and CDSL as a depository
participant and provides broking services in the cash, derivatives and currency segments,
online and offline. IIFL is a dominant player in the retail as well as institutional segments of
the market. It recently became the first Indian broker to get a membership of the Colombo
Stock Exchange and is also the first Indian broker to have received an in-principle approval
for membership of the Singapore Stock Exchange. IIFL’s Trader Terminal, its proprietary
trading platform, is widely acknowledged as one of the best available for retail investors.
Investors opt for IIFL given its unique combination of superior Service, cutting-edge
proprietary Technology, Advice powered by world-acclaimed research and its over 2500
business locations across over 500 cities in India.
IIFL received the BQ1 broker grading (highest grading) from CISIL. The assigned
grading reflects an effective external interface, robust systems frame work and strong risk
24
management. The grading also reflects IIFL’s healthy regulatory compliance track record and
adequate credit risk profile.
IIFL’s analyst team won Zee Business ‘India’s best market analysts awards – 2009’ for
being the best in the Oil and Gas and commodities sectors and a finalist in the Banking and
IT sectors.
IIFL has rapidly emerged as one of the premier institutional equities houses in India
with a team of over 25 research analysts, a full-fledged sales and trading team coupled with
an experienced investment banking team.
The Institutional equities business conducted a very successful ‘Enterprising India’ global
Investors’ conference in Mumbai in March 2010, which was attended by funds with
aggregate AUM over US$5 trillion and CEOs and other executives representing corporate
with a ;combined market capitalization of over US$500 billion. The ‘Discover Sri Lanka’
global investors’ conference, held in Colombo in July 2010, was attended by more than 50
leading global and major local investors and 25 Sri Lankan corporate, along with senior
Government officials.
Commodities
IIFL offers commodities trading to its customers vide its membership of the MCX and the
NCDEX. Our domain knowledge and data based on in depth research of complex paradigms
of commodity kinetics, offers our customers a unique insight into behavioural patterns of
these markets. Our customers are ideally positioned to make informed investment decisions
with a high probability of success.
India Info line Commodities Ltd.,
143, MGR Road, Perungudi,
Chennai, Tamilanadu – 600 096.
Credit and finance
25
Credit & Finance focuses on secured mortgages and consumer loans. Our high
quality loan book of over Rs.6,200 crores ($ 1.2bn) is backed by strong capital adequacy of
approximately 20%.
IIFL offers a wide array of secured loan products. Currently, secured loans (mortgage
loans, margin funding, and loans against shares) comprise 94% of the loan book. The
company has discontinued its unsecured products. It has robust credit processes and
collections mechanism resulting in overall NPAs of less than 1%. The Company has deployed
proprietary loan-processing software to enable stringent credit checks while ensuring fast
application processing. Recently the company has also launched Loans against Gold.
Insurance
Life Insurance, Pension and other Financial Products, an opening architecture
complete our product suite to help customers build a balanced portfolio.
IIFL entered the insurance distribution in 2000 as ICICI Prudential Life Insurance Co.
Ltd., corporate agent. Later, It became an Insurance broker in October 2008 in line with its
strategy to have an open architecture’ model. The company now distributes products of
major insurance companies through its subsidiary India Info line Insurance Brokers Ltd.,
Customers can choose from a wide bouquet of products from several insurance companies
including Max New York Life Insurance, MetLife, Reliance Life Insurance, Bajaj Allianz Life,
Birla Sun life, Life Insurance Corporation, Kotak Life Insurance and others.
Wealth Management Service
Private Wealth Management services cater to over 2500 families who have trusted
us with close to Rs.25,000 crores ($ 5bn) of assets for advice.
IIFL offers private wealth advisory services to high-net-worth individual (HNI) and
corporate clients under the IIFL Private Wealth’ brand. IIFL Private Wealth is managed by a
qualified team of MBAs from IIMs and premier institutes with relevant industry experience.
The team advises clients across asset classes like sovereign and quasi-sovereign debt,
26
corporate and collateralized debt, direct equity, ETCs and mutual funds, third party PMS
derivative strategies, real estate and private equity. It has developed innovative products
structured on the fixed
Income side.
It also has tied up with interactive Brokers LLC to strengthen its execution platform
and provide investors with a global investment platform.
Investment Banking
Investment Banking Services are for corporate looking to raise capital. Our forte is
Equity Capital Markets, where we have executed several marquee transactions.
IIFL’s investment banking division was launched in 2006. The business leverages
upon its strength of research and placement capabilities of the institutional and retail sales
teams. Our experienced investment banking team possesses the skill-set to manage all kinds
of investment banking transactions. Our close interaction with investors as well as corporate
helps us understands and offer tailor-made solutions to fulfil requirements. The Company
possesses strong placement capabilities across institutional. HNI and retail investors. This
makes it possible for the team to place large issues with marquee investors.
In Fy10, the team advised and managed more than 10 transactions including
four IPOs and four Qualified Institutions placements.
IIFL Mutual Fund made an impressive beginning in FY12, with lowest charge Nifty
ETF. Other products include Fixed Maturity Plans.
IIFL Vision, Mission & Top Management:
Vision
“To become the Most Respected Company in the financial services space”
Mission
27
“To become a full-fledged financial services company known for its quality of advice,
personalized services, and cutting edge technology”
Top Management Team:-
Mr.Nirmal Jain (Chairman)
Nirmal Jain, MBA (IIM, Ahmadabad) and a Chartered and Cost Accountant,
Founded India’s leading financial services company India Info line Ltd. In 1995, providing
globally acclaimed financial services in equities and commodities broking, life insurance and
mutual funds distribution, among others. Mr. Jain began his career in 1989 with Hindustan
Lever’s commodity export business, contributing tremendously to its growth. He was also
associated with Inquire-Indian Equity Research, which he co-founded in 1994 to set new
standards in equity research in India.
Mr.R.Venkataraman (Managing Director)
R Venkataraman, co-promoter and Executive Director of India Info line Ltd., is a
B.Tech (Electronics and Electrical Communications Engineering, IIT Kharagpur) and an MBA
(IIM Bangalore). He joined the India Info line board in July 1999. He previously held senior
managerial positions in ICICI Limited, including ICICI Securities Limited, their investment
banking joint venture with J P Morgan of USA and with BZW and Taib Capital Corporation
Limited. He was also Assistant Vice President with G E Capital Services India Limited in their
private equity division, possessing a varied experience of more than 16 years in the financial
slices sector.
The Independent Directors:-
Mr.NileshVikamsey
Mr.KrantiSinha
Mr.A.K.Purwar
Mr.SunilKaul
28
CHAPTER-III
REVIEW OF LITERATURE
29
INTRODUCTION:
A portfolio is a collection of investments held by an institution or a private
individual. In building up an investment portfolio a financial institution will typically conduct
its own investment analysis, whilst a private individual may make use of the services of a
financial advisor or a financial institution which offers portfolio management services.
Holding a portfolio is part of an investment and risk-limiting strategy called diversification.
By owning several assets, certain types of risk (in particular specific risk) can be reduced.
The assets in the portfolio could include stocks, bonds, options, warranty, gold certificates,
real estate futures contracts, production facilities, or any other item that is expected to
retain its value.
Portfolio management involves deciding what assets to include in the portfolio, given
the goal of the portfolio owner and charging economic conditions. Selection involves
deciding what assets to purchase, how many to purchase, when to purchase them, and
what assets to divest. These decisions always involve some sort of performance
measurement, most typically expected return on the portfolio, and the risk associated with
this return (i.e the standard deviation of the return). Typically the expected returns from
portfolios, comprised of different asset bundles are compared.
The unique goals and circumstances of the investor must also be considered. Some
investors are some risk averse than others. Mutual funds have developed particular
techniques to optimize their portfolio holdings.
Thus , portfolio management is all about strengths, weakness, opportunities and
threats in the choice of debt vs. Equity, domestic vs. International, growth vs. Safety and
numerous other trade-offs encountered in the attempt to maximize return at a given
appetite for risk.
Aspects of portfolio Management:
Basically portfolio management involves
A proper investment decision making of what to buy and sell
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Proper money management in terms of investment in a basket of assets so as to
satisfy the asset preference on investors.
Reduce the risk and increase returns.
OBJECTIVES OF PORTFOLIO MANAGEMENT:
The basic objective of portfolio management is to maximize yield and minimize risk. The
other ancillary objectives are as per needs of investors, namely:
Regular income or stable return
Appreciation of capital
Marketability and liquidity
Safety of investment
Minimizing of tax liability.
NEED FOR PORTFOLIO MANAGEMENT:
The portfolio Management deals with the process of selection securities from the number of
opportunities available with different expected returns and carrying different levels of risk
and the selection of securities is made with a view to provide the investors the maximum
yield for a given level of risk or ensure minimum risk for a level of return.
Portfolio Management is a process encompassing many activities of investment in assets
and securities. It is a dynamics and flexible concept and involves regular and systematic
analysis, judgement and actions. The objectives of this service are to help the unknown
investors with the expertise of professionals in investment portfolio Management. It
involves construction of a portfolio based upon the investor’s objectives, constrains,
preference for risk and return and liability. The portfolio is reviewed and adjusted from time
31
to time with the market conditions. The evaluation of portfolio is to be done in terms of
targets set for risk and return. The changes in portfolio are to be effected to meet the
changing conditions.
Portfolio Construction refers to the allocation of surplus funds in hand among a variety of
financial assets open for investment. Portfolio theory concerns itself with the principles
governing such allocation. The modern view of investment is oriented towards the assembly
of proper combinations held together will give beneficial result if they are grouped in a
manner to secure higher return after taking into consideration the risk element.
The modern theory is the view that by diversification, risk can be reduced. The investor can
make diversification either by having a large number of shares of companies in different
regions, in different industries or those producing different types of product lines. Modern
theory believes in the perspectives of combination of securities under constraints of risk and
return.
ELEMENTS:
Portfolio Management is an on-going process involving the following basic tasks.
Identification of the investor objective, constrains and preference which help
formulated the invest policy.
Strategies are to be developed and implemented in tune and invest policy
formulated. This will help the selection of asset classes and securities in each
class depending upon their risk-return attributes.
Review and monitoring of the performance of the portfolio by continuous
overview of the market conditions, company’s performance and investor’s
circumstances.
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Finally, the evaluation of portfolio for the results to compare with the targets
and needed adjustments have to be made in the portfolio to the emerging
conditions and to make up for any shortfalls in achievements (targets).
Schematic diagram of stages in portfolio management:
Process of Portfolio Management:
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Specification and quantification of investor objectives, constraints, and
Monitoring investor related input factors
Portfolio policies and strategies
Capital market expectations
Relevant economic, social, political sector and security considerations.
Portfolio construction and revision asset allocation, portfolio optimization, security selection, implementation and execution
Monitoring economic and market input factors
Attainment of investor objectives
Performance
The Portfolio program and asset Management program both follow a disciplined process to
establish and monitor an optimal investment mix. This six-stage process helps ensure that
the investments match investor’s unique needs, both now and in the future.
1: IDENTIFY GOALS AND OBJECTIVES:
When will you need the money from your investments? What are you saving your money
for? With the assistance of financial advisor, the Investment will guide through a series of
questions to help identify the goals and objectives for the investments.
2: DETERMINE OPTIMAL INVESTMENT MIX:
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Once the profile questionnaire is completed, investor’s optimal investment mix or assets
allocation will be determined. An asset allocation represents the mix of investments (cash,
fixed income and equities) that match individual risk and return needs.
This step represents one of the most important decisions in your profile construction, as
asset allocation has been found to be the major determinant of long-term portfolio
performance.
3: CREATE A CUSTOMIZED INVESTMENT POLICY STATEMENT:
When the optimal investment mix is determined, the next step is to formalize our goals and
objectives in order to utilize them as a benchmark to monitor progress and future updates.
4: SELECT INVESTMENTS:
The customized portfolio is created using an allocation of select QFM Fund is designed to
satisfy the requirements of a specific asset class, and is selected in the necessary proportion
to match the optimal mix.
5: MONITOR PROGRESS:
Building an optimal investment mix is only part of the process. It is equally important to
maintain the optimal mix when varying market conditions cause investment mix to drift
away from its target. To ensure that mix of asset classes stays in line with investor’s unique
needs, the portfolio will be monitored and rebalanced back to the optimal investment mix.
6: REASSESS NEEDS AND GOALS:
Just as market shifts, so do the goals and objectives of investors. With the flexibility of the
Portfolio program and Asset management Program, when the investor’s needs or other life
circumstances change, the portfolio has the flexibility to accommodate such changes.
RISK:
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Risk refers to the probability that the return and therefore the value of an asset or security
may have alternative outcomes. Risk is the uncertainty (today) surrounding the eventual
outcome of an event which will occur in the future. Risk is uncertainty of the income/capital
appreciation or loss of both. All investments are risky. The higher the risk taken, the higher
is the return. But proper management of risk involves the right choice of investments whose
risks are compensation.
RETURN:
Return-yield or return differs from the nature of instruments, maturity period and the
creditor or debtor nature of the instrument and a host of other factors. The most important
factor influencing return is risk return is measured by taking the price income plus the price
change.
PORTFOLIO RISK:
Risk on portfolio is different from the risk on individual securities. This risk is reflected by in
the variability of the returns from zero to infinity. The expected return depends on
probability of the return and their weighted contribution to the risk of the portfolio.
RETURN ON PORTFOLIO:
Each security in a portfolio contribution returns in the proportion of its investment in
security. Thus the portfolio of expected returns, from each of the securities with weights
representing the proportionate share of security in the total investments.
RISK-RETURN RELATIONSHIP:
The risk/return relationship is a fundamental concept in not only financial analysis, but in
every aspect of life. If decisions are to lead to benefit maximization, it is necessary that
individuals/institutions consider the combined influence on expected (future) return or
36
benefit as well as on risk/cost. The requirement that expected return/benefit be
commensurate with risk/cost is known as the “risk/return trade-off” in finance.
All investments have some risks. An investment in shares of companies has its own risks or
uncertainty. These risks arise out of variability or returns or yields and uncertainty of
appreciation or depreciation of share prices, loss of liquidity etc. And the overtime can be
represented by the variance of the returns. Normally, higher the risk that the investors take,
the higher is the return.
Y E(r)
R
E
T
U R(f)
R
N X
R I S K
TYPES OF RISKS:
Risk consists of two components. They are
1. Systematic Risk
2. Un-systematic Risk
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1. SYSTEMATIC RISK:
Systematic risk refers to that portion of total variability in return caused by factors affecting
the prices of all securities. Economic, Political and sociological changes are sources of
systematic risk. Their effect is to cause prices of nearly all individual common stocks and/or
all individual bonds to move together in the same manner.
1. Market Risk:
Variability in return on most common stocks that are due to basic sweeping changes in
investor expectations is referred to as market risk. Market risk is caused by investor
reaction to tangible as well as intangible events.
2. Interest rate-Risk:
Interest – rate risk refers to the uncertainty of future market values and of the size of
future income, caused by fluctuations in the general level of interest rates.
3. Purchasing-Power Risk:
Purchasing power risk is the uncertainty of the purchasing power of the amounts to be
received. In more events everyday terms, purchasing power risk to the impact of or
deflation on an investment.
2. UNSYSTEMATIC RISK:
Unsystematic risk is the portion of total risk that is unique to a firm or industry.
Factors such as management capability, consumer preferences, and labour strikes cause
systematic variability of return in a firm. Unsystematic factors are largely independent of
factors affecting securities markets in general. Because these factors affected one firm, they
must be examined for each firm.
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Unsystematic risk that portion of risk that is unique or peculiar to a firm or an industry,
above and beyond that affecting securities market in general. Factors such as management
capability, consumer preferences, and labour strikes can cause unsystematic variability of
return for a company’s stock.
1. Business Risk: Business risk is a function of the operating conditions faced by a firm
and the variability these conditions inject into operating income and expected
dividends.
Business risk can be divided into two broad categories
a. Internal Business Risk
b. External Business Risk
a. Internal business risk is associated with the operational efficiency of the firm. The
operational efficiency differs from company to company. The efficiency of
operation is reflected on the company’s achievement of its pre-set goals and the
fulfilment of the promises to its investors.
b. External business risk is the result of operating conditions imposed on the firm by
circumstances beyond its control. The external environments in which it operates
exert pressure on the firm. The external factors are social and regulatory factors,
monetary and fiscal policies of the government within which a firm or an industry
operates.
2. Financial Risk:
Financial risk is associated with the way in which a company finances its activities.
Financial risk is avoided risk to the extent that management has the freedom to decide to
borrow or not to borrow funds. A firm with no debit financing has no financial risk.
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MARKOWITZ MODEL
THE MEAN VARIANCE CRITERION:
Dr. Harry M. Markowitz is credited with developing the first modern portfolio analysis
model in order to arrange for the optimum allocation of assets with in portfolio. To reach
these objectives, Markowitz generated portfolio with in a reward risk context. In essence,
Markowitz model is a theoretical framework for the analysis of risk return choices.
Decisions are based on the concept of efficient portfolios.
Markowitz model is a theoretical framework for the analysis of risk, return choices
and this approach determines an efficient set of portfolio return through three important
variable that is,
o Return
o Standard Deviation
o Coefficient of correlation
Markowitz model is also called as a “Full Covariance Model”. Through this model the
investor can find out the efficient set of portfolio by finding out the trade off between risk
and return, between the limits of zero and infinity. According to this theory, the effect of
one security purchase over the effects of the other security purchase is taken into
consideration and then the results are evaluated. Markowitz had given up the single stock
portfolio and introduced diversification. The single stock portfolio would be preferable if the
investor is perfectly certain that his expectation of highest return would turn out to be real.
In the world of uncertainty most of the risk adverse investors would like to join Markowitz
rather than keeping a single stock, because diversification reduces the risk.
A portfolio is efficient when it is expected to yield the highest return for the level of risk
accepted or, alternatively the smallest portfolio risk for a specified level of expected return
level chosen, and asset are substituted until the portfolio combination expected returns, set
of efficient portfolio is generated.
Assumptions: The Markowitz model is based on several assumptions regarding investor
behaviour:
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1. Investors consider each investment alternative as being represented by a probability
distribution of expected returns over some holding period.
2. Investors maximize one period-expected utility and possess utility curve, which
demonstrates diminishing marginal utility of wealth.
3. Individuals estimate risk on the basis of variability of expected return.
4. Investors base decisions solely on expected return and variance of returns only.
5. For a given risk level, investors prefer high returns to lower returns.
Similarly for a given level of expected return, investors prefer less risk to more risk.
Under these assumptions, a single asset or portfolio of assets is considered to be
“efficient” if no other asset or portfolio of assets higher expected return with the
same expected return.
THE SPECIFIC MODEL:
In developing this model, Markowitz first disposed of the investor behaviour rule
that the investor should maximize expected return. This rule implies non-diversified single
security analysis portfolio with the highest expected return is the most desirable portfolio.
Only by buying that single security portfolio would obviously be preferable if the investor
were perfectly certain that this highest expected return would turn out to be the actual
return. However, under real world conditions of uncertainty, most risk adverse investors
join with Markowitz it in discarding the role of calling for maximizing the expected returns.
As an alternative, Markowitz offer the “expected returns/variance” rule.
Markowitz has shown the effect of diversification by regarding the risk of securities.
According to him, the security with the covariance, which is either negative or low amongst
them, is the best manner to reduce risk. Markowitz has been able to show that securities,
which have, less than positive correlation will reduce risk without, in any way, bringing the
return down. According to his research study a low correlation level between securities in
the portfolio will show less risk. According to him, investing in a large number of securities
is not the right method of investment. It is the right kind of security that brings the
maximum results.
Henry Markowitz has given the following formula for a two-security portfolio and three
security portfolios.
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□□=√(x1)2(□1)2+(x2)2(□2)2+2(x1)(x2)(r12)(□1)(□2)
□□=√(x1)2(□1)2+(x2)2(□2)2+(x3)2(□3)2+2(x1)(x2)(r12)(□1)(□2)+2(x1)(x3)(r13)(□1)(□2)+ 2(x2)(x3)(r23)(□2)
(□3)
p□= Standard deviation of the portfolio return
X1=proportion of the portfolio invested in security 1
X2=proportion of the portfolio invested in security 2
X3=proportion of the portfolio invested in security 3
□1 =standard deviation of the return on security 1
□2= standard deviation of the return on security 2
□3= standard deviation of the return on security 3
r 12= Coefficient of correlation between the returns on securities 1 and 2
r 13= Coefficient of correlation between the returns on securities 1 and 3
r 23= Coefficient of correlation between the returns on securities 2 and 3
CAPITAL ASSET PRICING MODEL: (CAPM)
The CAPM is a model for pricing an individual security (asset) or a portfolio. For
individual security perspective, the security market line (SML) is used and its relation to
expected return and systematic risk (beta) to show how the market must price individual
securities in relation to their security risk class. The SML enables us to calculate the reward-
to-risk ratio for any security in relation to that of the overall market. Therefore, when the
expected rate of return for any security is deflated by its beta coefficient, the reward-to-risk
ratio for any individual security in the market is equal to the market reward-to-risk ratio,
thus:
Individual security’s / beta = Market’s securities (portfolio)
Reward-to-risk ratio Reward –to-risk ratio
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The Security Market Line, seen here in a graph, describes a relation between the beta and
the assets expected rate of return
The market reward-to-risk ratio is effectively the market risk premium and by rearranging
the above equation and solving for E (Ri), we obtain the Capital Asset Pricing Model (CAPM).
Where:
Is the expected return on the capital asset
Is the risk-free rate of interest
(The beta coefficient) the sensitivity of the asset returns to market returns, or also.
Is the expected return of the market
Is sometimes known as the market premium or risk premium (the different between the
expected market rate of return and the risk-free rate of return).
Beta measures the volatility of the security, relative to the asset class. The equation is
saying that investors require higher levels of expected returns to compensate them for
higher expected risk. We can think of the formula as predicting a security’s behaviour as a
function of beta:
CAPM says that if we know a security’s beta then we know the value of r that
investors expect it to have.
Assumptions of CAPM:
All investors have rational expectations.
There are no arbitrage opportunities.
Returns are distributed normally.
Fixed quantity of assets.
Perfectly efficient capital markets.
Investors are solely concerned with level and uncertainty of future wealth
Separation of financial and production sectors. Thus, production plans are fixed.
Risk-free rates exist with limitless borrowing capacity and universal access.
The Risk-free borrowing and lending rates are equal.
No inflation and no change in the level of interest rate exist.
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Perfect information, hence all investors have the same expectations about security
returns for any given time period.
Shortcomings Of CAPM:
The model assumes that asset returns are (jointly) normally distributed random
variables. It is however frequently observed that returns in equity and other markets
are not normally distributed.
The model assumes that the variance of returns is an adequate measurement of risk.
The model does not appear to adequately explain the variation in stock returns.
The model assumes those given a certain expected return investors will prefer lower
risk (lower variance) to higher risk and conversely given a certain level of risk will
prefer higher returns to lower ones.
The model assumes that all investors have access to the same information and agree
about the risk and expected return of all assets. (Homogeneous expectations
assumption)
The model assumes that there are no taxes or transaction costs.
The market portfolio consists of all assets in all markets, where each asset is
weighted by its market capitalization. This assumes no preference between markets
and assets for individual investors, and that investors choose assets solely as a
function of their risk-return profile. It also assumes that all assets are infinitely
divisible as to the amount which may be held or transacted.
The market portfolio should in theory include all types of assets that are held by
anyone as an investment (including works of art, real estate, human capital….)
Unfortunately, it has been shown that this substitution is not innocuous and can lead to
false inferences as to the validity of the CAPM, and it has been said that due to the
observability of the true market portfolio, the CAPM might not be empirically testable.
The efficient frontier:
The CAPM assumes that the risk-return profile of a portfolio can be optimized – an optimal
portfolio displays the lowest possible level of risk for its level of return. Additionally, since
44
each additional asset introduced into a portfolio further diversifies the portfolio, the optimal
portfolio must comprise every asset, with each asset value-weighted to achieve the above.
All such optimal portfolios, i.e., one for each level of return, comprise the efficient frontier.
A line created from the risk-reward graph, comprised of optimal portfolios.
The optimal portfolios plotted along the curve have the highest expected return possible
for the given amount of risk.
Because the unsystematic risk is diversifiable, the total risk of a portfolio can be viewed as
beta.
Note 1: The expected market rate of return is usually measured by looking at the arithmetic
average of historical risk free rates of return and not the current risk free rate of return.
Measuring the Expected Return and Standard Deviation of a Portfolio
The expected return on a portfolio is the weighted average of the returns of individual
assets, where each asset’s weight is determined by its weight in the portfolio.
The formula is:
E (Rp) = [WaXE(Ra)] + [WaXE(Ra)]
Where
E= is stands for expected
Rp= Return on the portfolio
Wa= Weight of asset n where n my stand for asset a, b…..etc
Ra= Return on asset n where n may stand for asset a, b…..etc
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The portfolio standard deviation(σp) measure the risk associated with the expected return of
the portfolio.
The formula is σp=√Wa2σ2+ Wa
2σ2+2WaWbrabσaσb
The term rab represents the correlation between the returns of investments a and b. The
correlation coefficient, r, will always reduce the portfolio standard deviation as long as it is
less than +1.00.
Portfolio diversification:
Diversification occurs when different assets make up a portfolio. The benefit of
diversification is risk reduction; the extent of this benefit depends upon how the returns of
various assets behave over time. The market rewards diversification. We can lower risk
without sacrificing expected return, and/or we can increase expected return without having
to assume more risk. Diversifying among different kinds of assets is called asset allocation.
The diversification can either be vertical or horizontal.
In vertical diversification a portfolio can have scripts of different companies within the same
industry. In horizontal diversification one can have different scripts chosen from different
industries.
An important way to reduce the risk of investing is to diversify your investments.
Diversification is akin to “not putting all your eggs in one basket.”
For example: If portfolio only consisted of stocks of technology companies, it would likely
face a substantial loss in value if a major event adversely affected the technology industry.
There are different ways to diversify a portfolio whose holdings are concentrated in one
industry. We can invest in the stocks of companies belonging to other industry groups. We
can allocate our portfolio among different categories of stocks, such as growth, value, or
income stocks. We can include bonds and cash investments in our asset-allocation
decisions. We can also diversify by investing in foreign stocks and bonds.
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Diversification requires us to invest in securities whose investment returns do not
move together. In other words, the investment returns have a low correlation. The
correlation coefficient is used to measure the degree to which returns of two securities are
related as we increase the number of securities in our portfolio, we reach a point where
likely diversified as much as reasonably possible. Diversification should neither be too
much or too less. It should be adequate according to the size of the portfolio.
The Efficient Frontier and Portfolio Diversification
y
Average Efficient Frontier
Annual
Rate of
return
Standard deviation
The graph on the shows how volatility increases the risk of loss of principal, and how this
risk worsens as the time horizon shrinks. So all other things being equal, volatility is
minimized in the portfolio.
If we graph the return rates and standard deviations for a collection of securities, and for all
portfolios we can get by allocating among them. Markowitz showed that we get a region
bounded by an upward-sloping curve, which he called the efficient frontier.
It’s clear that for any given value of standard deviation, we would like to choose a portfolio
that gives you the greatest possible rate of return; so we always want a portfolio that lies up
along the efficient frontier, rather than lower down, in the interior of the region. This is the
first important property of the efficient frontier: it’s where the best portfolios are.
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50/50 Mix of securities 1 and 2
Security 2
Security 1
The second important property of the efficient frontier is that it’s curved, not straight.
If we take a 50/50 allocation between two securities, assuming that the year-to-year
performance of these two securities is not perfectly in sync – that is, assuming that the great
years and the lousy years for Security I don’t correspond perfectly to the great years and
lousy years for Security 2, but that their cycles are at least a little off – then the standard
deviation of the 50/50 allocation will be less that the average of the standard deviations of
the two securities separately. Graphically, this stretches the possible allocations to the left
of the straight line joining the two securities.
THE FOUR PILLARS OF DIVERSIFICATION:
a. The yield provided by an investment in portfolio of assets will be closer to the
Mean Yield than an investment in a single asset.
b. When the yields are independent – most yields will be concentrated around the
Mean.
c. When all yields react similarly – the portfolio’s variance will equal the variance of
its underlying assets.
d. If the yields are dependent – the portfolio’s variance will be equal to or less than
the lowest.
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Market portfolio:
The efficient frontier is a collection of portfolios, each one optimal for a given amount of
risk. A quantity known as the Sharpe ratio represents a measure of the amount of additional
return (above the risk-free rate) a portfolio provides compared to the risk it carries. The
portfolio on the efficient frontier with the highest Sharpe Ratio is known as the market
portfolio, or sometimes the super-efficient portfolio.
This portfolio has the property that any combination of it and the risk-free asset will
produce a return that is above the efficient frontier – offering a larger return for a given
amount of risk than a portfolio of risky assets on the frontier would.
MARKET PORTFOLIO
EFFICIENT FRONTIER
RISK-FREE ASSET
PORTFOLIO PERFORMANCE EVALUATION:
A portfolio manager evaluates his portfolio performance and identifies the sources of
strengths and weakness. The evaluation of the portfolio provides a feed back about the
performance to evolve better management strategy. Even though evaluation of portfolio
performance is considered to be the last stage of investment process, it is a continuous
process. There are number of situations in which an evaluation becomes necessary and
important.
Evaluation has to take into account:
Rate of returns, or excess return over risk free rate.
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Level of risk both systematic (beta) and unsystematic and residual risks through
proper diversification.
Some of the models used to evaluate portfolio performance are:
o Sharpe’s ratio
o Treynor’s ratio
o Jensen’s alpha
Sharpe’s Ratio:
A ratio developed by Nobel Laureate William F. Sharpe to measure risk-adjusted
performance. It is calculated by subtracting the risk-free rate from the rate of return for a
portfolio and dividing the result by the standard deviation of the portfolio returns.
The Sharpe ratio tells us whether the returns of a portfolio are due to smart investment
decisions or a result of excess risk. This measurement is very useful because although one
portfolio or fund can reap higher returns than its peers, it is only a good investment if those
higher returns do not come with too much additional risk. The greater a portfolio’s Sharpe
ratio, the better its risk-adjusted performance has been.
Treynor’s ratio:
The Treynor ratio is a measurement of the returns earned in excess of that which could
have been earned on a risk less investment.
The Treynor ratio is also called reward-to-volatility ratio. It relates excess return over the
risk-free rate to the additional risk taken; however systematic risk instead of total risk is
used. The higher the Treynor ratio, the better is the performance under analysis.
Treynor’s ratio = (Average Return of the Portfolio – Average Return of the Risk-Free Rate)
/Beta of the Portfolio
Like the Share ratio, the treynor ratio (T) does not quantify the value added, if any, of active
portfolio management. It is a ranking criterion only. A ranking of portfolios based on the
50
Treynor Ratio is only useful if the portfolios under consideration are sub-portfolios of a
broader, fully diversified portfolio. If this is not the case, portfolios with identical systematic
risk, but different total risk, will be rated the same.
Jensen’s alpha:
An alternative method of ranking portfolio management is Jensen’s alpha, which quantifies
the added return as the excess return above the security market line in the capital asset
pricing model. Jensen’s alpha (or Jensen’s Performance Index) is used to determine the
excess return of a stock, other security, or portfolio over the security’s required rate of
return as determined by the Capital Asset Pricing Model.
This model is used to adjust for the level of beta risk, so that riskier securities are expected
to have higher returns. The measure was first used in the evaluation of mutual fund
managers by Michael Jeans in the 1970’s.
To calculate alpha, the following inputs are needed:
The realized return (on the portfolio),
The market return,
The risk-free rate of return, and
The beta of the portfolio.
Rjt-Rft=αj+βj(RMt-Rft)
Where
Rjt = average return on portfolio j for period of‘t’
Rft = risk free rate of return for period of‘t’
αj=intercept that measures the forecasting ability to the manager
βj=systematic risk measure
RMt=average return on the market portfolio ‘t’
51
Portfolio management in India:
In India, portfolio management is still in its infancy. Barring a few Indian banks, and foreign
banks and UTI, no other agency had professional portfolio management until 1987. After the
setting up of public sector Mutual Funds, since 1987, professional portfolio management,
backed by competent research staff became the order of the day. After the success of
mutual funds in portfolio management, a number of brokers and investment consultants
some of whom are also professionally qualified have become portfolio managers. They have
managed the funds of clients on both discretionary and non-discretionary basis.
The recent CBI probe into the operations of many market dealers has revealed the
unscrupulous practices by banks, dealers has revealed the unscrupulous practices by banks,
dealers and brokers in their portfolio operations. The SEBI has then imposed stricter rules,
which included their registration, code of conduct and minimum infrastructure, experience
and expertise etc.
The guidelines of SEBI are in the direction of making portfolio management a responsible
professional service to be rendered by experts in the field.
PORTFOLIO ANALYSIS:
Portfolio analysis includes portfolio construction, selection of securities, revision of portfolio
evaluation and monitoring the performance of the portfolio. All these are part of subject of
portfolio management which is a dynamic concept. Individual securities have risk-return
characteristics of their own. Portfolios, which are combinations of securities may or may
not take on the aggregate characteristics of their individual’s parts.
Portfolio analysis considers the determination of future risk and return in holding
various blends of individual securities. As we know that expected return from individual
securities carries some degree of risk. Various groups of securities when held together
behave in a different manner and give interest payments and dividends also, which are
different to the analysis of individual securities. A combination of securities held together
52
will give a beneficial result if they are grouped in manner to secure higher return after taking
into consideration the risk element.
There are two approaches in construction of the portfolio of securities. They are
Traditional approach
Modern approach
TRADITIONAL APPROACH:
Traditional approach was based on the fact that risk could be measured on each individual
security through the process of finding out the standard deviation and that security should
be chosen where the deviation was the lowest. Traditional approach believes that the
market is inefficient and the fundamental analyst can take advantage for the situation.
Traditional approach is a comprehensive financial plan for the individual. It takes into
account the individual needs such as housing, life insurance and pension plans.
Traditional approach basically deals with two major decisions. They are
a. Determining the objectives of the portfolio
b. Selection of securities to be included in the portfolio
MODERN APPROACH:
Modern approach theory was brought out by Markowitz and Sharpe. It is the
combination of securities to get the most efficient portfolio. Combination of securities can
be made in many ways. Markowitz developed the theory of diversification through scientific
reasoning and method. Modern portfolio theory believes in the maximization of return
through a combination of securities. The modern approach discusses the relationship
between different securities and then draws inter-relationships of risks between them.
Markowitz gives more attention to the process of selecting the portfolio. It does not deal
with the individual needs.
53
CHAPTER-V
DATA ANALYSIS AND INTERPRETATION
54
CONSTRUCTION OF THE STUDY
The purpose of the study is to find out at what percentage of investment
should be invested between two companies on the basis of risk and return of each security
in comparison. These percentages help in allocating the funds available for investment in
risky portfolios.
IMPLEMENTATION OF STUDY
For implementing the study, TEN securities or stocks constituting the NIFTY
Market are selected of one month closing share movement prices data from NSE Market
Tracker dated from 12 May-June 02-2013 to .Those are
BHARATHI AIRTEL
BHEL
INFOSYS
ITC Limited
NTPC
ONGC
RANBAXY
SAIL
SBI
TATA MOTORS
In order to know the risk & return of the stock or security, we use the different formulae
which are given below.
METHODOLOGY OF STUDY
For implementing the study, of securities or stocks consisting the nifty market are selected
of one month opening and closing share movement price date from NSE on date.
55
R = ClosingPrice−PreviousClosing Price
PreviousClosingPrice ×100
To know the average (R) the following formula has been used
Average (R’) = ∑ Rn
The next step is to know the risk of the stock or security; the following formula is given
below.
Std.dev = √Variancen
Variance = 1n−1∑ (R−R' )2
t=1
Where
(R-R’) = squares of different between sample and mean.
n = number of sample observations.
After that, the correlation of the securities is calculated by using the following formula;
Corrélation Coefficient (rAB) = CovABσ Aσ B
Co-variance (COVAB) = 1n∑ (RA−R 'A )(RB¿−R 'B)
t=1¿
Where,
(RA-R’A) (RB-R’B) = combined deviations of A&B.
(σ A) (σ B) = Standard Deviations of A&B
COVAB = Covariance between A&B
n= no of observations.
56
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
ie, calculations of assets portfolio weights by using minimum equation, which is given below
W A = σB(σ B−r AB σ A)
σ A2 +σB
2 −2 r AB σBσ B
W B=1−W A
Where W A = proportion of investment in A
W B= proportion of investment in B
The next and final step is to calculate the portfolio risk (combined risk) that shows how
much is reduced by combining two stocks or securities by using this formula.
FORMULA:
σ P = √σ A2 W A2 +σ B
2W B2 +2 rABσ A σBW AW B
Where,
σ P = Portfolio Risk
σ A = Standard Deviation of security A
WA = Proportion of investment in security B
σ B = Standard Deviation of security of B
WB = proportion of investment in security B
r AB = Co-relation Coefficient between securities A&B.
57
4.1 MOVEMENT OF PRICES OF BHARATHI AIRTEL
Symbol
Date
SHARE
Prev
Close
Close
Price Return Avg. Diff D2
BHARTIARTL 16/05/13 345.6 345.35 -0.07234 0.208515 -0.28086 0.078882
BHARTIARTL 17/05/13 345.35 348.85 1.013465 0.208515 0.80495 0.647945
BHARTIARTL 18/05/13 348.85 347.65 -0.34399 0.208515 -0.55251 0.305267
BHARTIARTL 19/05/13 347.65 338.45 -2.64634 0.208515 -2.85486 8.150226
BHARTIARTL 20/05/13 338.45 331 -2.20121 0.208515 -2.40973 5.806799
BHARTIARTL 23/05/13 331 332.05 0.317221 0.208515 0.108706 0.011817
BHARTIARTL 24/05/13 332.05 335.15 0.933594 0.208515 0.725079 0.52574
BHARTIARTL 25/05/13 335.15 339.70 1.357601 0.208515 1.149086 1.320399
BHARTIARTL 27/05/13 339.70 344.30 1.354136 0.208515 1.145621 1.312447
BHARTIARTL 30/05/13 344.30 335.00 -2.70113 0.208515 -2.90965 8.466063
BHARTIARTL 01/06/13 335.00 332.85 -0.64179 0.208515 -0.85031 0.723027
BHARTIARTL 02/06/13 332.85 343.25 3.124531 0.208515 2.916016 8.503149
BHARTIARTL 03/06/13 343.25 343.30 0.014567 0.208515 -0.19395 0.037617
BHARTIARTL 06/06/13 343.30 348.60 1.543839 0.208515 1.335324 1.78309
BHARTIARTL 07/06/13 348.60 341.90 -1.92197 0.208515 -2.13049 4.538988
BHARTIARTL 09/06/13 341.90 342.35 0.131617 0.208515 -0.0769 0.005914
BHARTIARTL 11/06/13 342.35 354.00 3.40295 0.208515 3.194435 10.20441
BHARTIARTL 13/06/13 354.00 357.45 0.974576 0.208515 0.766061 0.586849
58
BHARTIARTL 14/06/13 357.45 358.80 0.377675 0.208515 0.16916 0.028615
BHARTIARTL 15/06/13 358.80 359.35 0.153289 0.208515 -0.05523 0.00305
0.208515 53.0402
Calculation of Risk:
Risk = √∑ D2
n−1 = √∑ 53.0402
20−1
=1.6708
4.1. Graphical Representation of Bharathi Airtel
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
-4
-3
-2
-1
0
1
2
3
4
Return
Interpretation:
The above table shows the daily returns of BHARATHI AIRTEL for the month of
DEC2010.
The average Return is 0.208515 and Risk is 1.6708.
The Highest price for the month was on 15-06-2013 i.e., 359.35 and the lowest price
was on 20-05-2013 i.e., 331.
59
4.2. MOVEMENT OF SHARE PRICES OF BHEL
Symbol Date
Prev
Close
Close
Price Return Avg Diff D2
BHEL 16/05/13 2212.55 2238.65 1.179634 0.2931 0.886534 0.785943
BHEL 17/05/13 2238.65 2239.85 0.053604 0.2931 -0.2395 0.057358
BHEL 18/05/13 2239.85 2239.75 -0.00446 0.2931 -0.29756 0.088545
BHEL 19/05/13 2239.75 2226.80 -0.57819 0.2931 -0.87129 0.759145
BHEL 20/05/13 2226.80 2287.80 2.739357 0.2931 2.446257 5.984173
BHEL 23/05/13 2287.80 2340.30 2.294781 0.2931 2.001681 4.006727
BHEL 24/05/13 2340.30 2333.85 -0.27561 0.2931 -0.56871 0.323426
BHEL 25/05/13 2333.85 2318.00 -0.67914 0.2931 -0.97224 0.945242
BHEL 27/05/13 2318.00 2308.90 -0.39258 0.2931 -0.68568 0.470157
BHEL 30/05/13 2308.90 2314.00 0.220884 0.2931 -0.07222 0.005215
BHEL 01/06/13 2314.00 2322.85 0.382455 0.2931 0.089355 0.007984
BHEL 02/06/13 2322.85 2323.90 0.045203 0.2931 -0.2479 0.061453
BHEL 03/06/13 2323.90 2303.55 -0.87568 0.2931 -1.16878 1.366054
BHEL 06/06/13 2303.55 2285.95 -0.76404 0.2931 -1.05714 1.117541
BHEL 07/06/13 2285.95 2291.40 0.238413 0.2931 -0.05469 0.002991
BHEL 09/06/13 2291.40 2296.95 0.24221 0.2931 -0.05089 0.00259
BHEL 11/06/13 2296.95 2304.550.330874
0.29310.037774 0.001427
BHEL 13/06/13 2304.55 2337.60 1.434119 0.2931 1.141019 1.301925
60
BHEL 14/06/13 2337.60 2323.70 -0.59463 0.2931 -0.88773 0.788059
BHEL 15/06/13 2323.70 2343.80 0.865 0.2931 0.5719 0.327069
0.2931 18.4030
Calculation of Risk:
Risk =√∑ D2
n−1 =√ 18.4030
20−1
=0.9842
4.2. Graphical Representation of BHEL
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
3
Return
61
Interpretation:
The above table shows the daily returns of BHARATH HEAVY ELECTRONICS LIMITED
for the month of DEC2010.
The average Return is 0.2931 and Risk is 0.9842.
The Highest price for the month was on 15/06/13 i.e., 2343.80 and the lowest price
was on 19/05/13 i.e., 2226.80.
62
4.3.Statement showing covariance of BHARATIARTL and BHEL
Date
Retur
n R1 D1 D12 Date
Retu
rn R2 D2 D22 D1D2
16/05/13
-0.07
0.2
0 -0.28 0.07
6/12/12
1.17
0.29
0.88 0.78 -0.25
17/05/13
1.013
0.2
0 0.80 0.64
7/12/12
0.05
0.29 -
0.23 0.05 -0.19
18/05/13
-0.34
0.2
0 -0.55 0.30
8/12/12
-0.04
0.29 -
0.29 0.08 0.16
19/05/13
-2.64
0.2
0 -2.85 8.15
9/12/12
-0.57
0.29 -
0.87 0.75 2.49
20/05/13
-2.20
0.2
0 -2.40 5.80
10/12/12
2.73
0.29
2.44 5.98 -5.89
23/05/13
0.31
0.2
0 0.10 0.01
13/12/12
2.29
0.29
2 4 0.22
24/05/13
0.93
0.2
0 0.72 0.52
14/12/12
-0.27
0.29 -
0.56 0.32 -0.41
25/05/13
1.35
0.2
0 1.14 1.32
15/12/12
-0.67
0.29 -
0.97 0.94 -1.12
27/05/13
1.35
0.2
0 1.14 1.31
16/12/12
-0.39
0.29 -
0.68 0.47 -0.78
30/05/13
-2.70
0.2
0 -2.90 8.46
20/12/12
0.22
0.29 -
0.07
0.00
5 0.21
01/06/13
-0.64
0.2
0 -0.85 0.72
21/12/12
0.38
0.29
0.08
0.00
7 -0.07
02/06/13
3.12
0.2
0 2.91 8.50
22/12/12
0.04
0.29 -
0.24 0.06 -0.72
03/06/13
0.01
0.2
0 -0.19 0.03
23/12/12
-0.87
0.29 -
1.16 1.36 0.22
06/06/13
1.54
0.2
0 1.33 1.78
24/12/12
-0.76
0.29 -
1.05 1.11 -1.41
63
07/06/13
-1.92
0.2
0 -2.13 4.53
27/12/12
0.23
0.29 -
0.05
0.00
2 0.11
09/06/13
0.13
0.2
0 -0.07
0.00
5
28/12/12
0.24
0.29 -
0.05
0.00
2 0.003
11/06/13
3.40
0.2
0 3.19 10.2
29/12/12
0.33
0.29
0.03
0.00
1 0.12
13/06/13
0.97
0.2
0 0.76 0.58
30/12/12
1.4
0.29
1.14 1.30 0.87
14/06/13
0.37
0.2
0 0.16
0.02
8
31/12/12
-0.59
0.29
-0.8 0.78 -0.15
15/06/13
0.15
0.2
0 -0.05
0.00
3
3/1/13 0.86
5
0.29
0.57 0.32 -0.03
53.4 18.4
030
-6.61
Calculation of Correlation Coefficient:
Correlation Coefficient of BHARATHI AIRTEL and BHEL = r1, 2
= ∑ D1D2
D22
=−6.61718.4030
= - 0.35
Construction of Portfolio:
Average return of AIRTEL= R1 = 0.2085
Average return of BHEL = R2 = 0.2931
Risk of AIRTEL= σ1 =1.67
64
Risk of BHEL = σ2 =0.98
Weight of AIRTEL = W1 = 0.5
Weight of BHEL= W2 = 0.5
PORTFOLIO RETURN = W1 R1+ W2 R2
= (0.5) (0.2085) + (0.5) (0.2931)
=0.10425+0.14655
=0.2508
PORTFOLIO RISK = √W 12σ1
2+W 22σ2
2+2W 1W 2σ 1σ 2r1,2
√(0.52)(1.672)+(0.52)(0.982)+2(0.5)(0.5)(1.67)(0.98)(−0.35)
=√0.70+0.24−0.28
=1.898
65
4.4. MOVEMENT OF SHARE PRICES OF INFOSYS
Symbol Date
Prev
Close
Close
Price Return Avg Diff D2
INFOSYSTCH 16/05/13 3125 3143.4 0.5888 0.5119 0.0769 0.005914
INFOSYSTCH 17/05/13 3143.4 3178.6 1.119807 0.5119 0.607907 0.36955
INFOSYSTCH 18/05/13 3178.6 3131.75 -1.47392 0.5119 -1.98582 3.943478
INFOSYSTCH 19/05/13 3131.75 3,151.45 0.629041 0.5119 0.117141 0.013722
INFOSYSTCH 20/05/13 3,151.45 3144.25 -0.22847 0.5119 -0.74037 0.548142
INFOSYSTCH 23/05/13 3144.25 3145.30 0.033394 0.5119 -0.47851 0.228968
INFOSYSTCH 24/05/13 3145.30 3158.65 0.424443 0.5119 -0.08746 0.007649
INFOSYSTCH 25/05/13 3158.65 3203.45 1.418327 0.5119 0.906427 0.821611
INFOSYSTCH 27/05/13 3203.45 3293.30 2.804789 0.5119 2.292889 5.257338
INFOSYSTCH 30/05/13 3293.30 3349.95 1.720159 0.5119 1.208259 1.45989
INFOSYSTCH 01/06/13 3349.95 3329.25 -0.61792 0.5119 -1.12982 1.276492
INFOSYSTCH 02/06/13 3329.25 3332.50 0.09762 0.5119 -0.41428 0.171628
INFOSYSTCH 03/06/13 3332.50 3367.9 1.062266 0.5119 0.550366 0.302902
INFOSYSTCH 06/06/13 3367.9 3370.15 0.066807 0.5119 -0.44509 0.198108
INFOSYSTCH 07/06/13 3370.15 3376.90 0.200288 0.5119 -0.31161 0.097102
INFOSYSTCH 09/06/13 3376.90 3382.65 0.170275 0.5119 -0.34163 0.116708
INFOSYSTCH 11/06/13 3382.65 3404.90 0.657768 0.5119 0.145868 0.021278
INFOSYSTCH 13/06/13 3404.90 3446.95 1.234985 0.5119 0.723085 0.522852
66
INFOSYSTCH 14/06/13 3446.95 3442.75 -0.12185 0.5119 -0.63375 0.401635
INFOSYSTCH 15/06/13 3442.75 3458.35 0.453126 0.5119 -0.05877 0.003454
0.5119 15.7684
Calculation of Risk:
Risk =√∑ D2
n−1 =√ 15.7684
20−1
=0.9109
4.3. Graphical Representation Infosys
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
-2
-1
0
1
2
3
4
Return
Interpretation:
67
The above table shows the daily returns of INFOSYS for the month of DEC2010.
The average Return is 0.5119 and Risk is 0.9109.
The Highest price for the month was on 15/06/13i.e., 3458.35and the lowest price
was on 18/05/13 i.e., 3131.75.
4.5. MOVEMENT OF SHARE PRICES OF ITC Limited
68
Symbol Date Prev Close
Close
Price Return Avg Diff D2
ITC 16/05/13 171.3 169.05 -1.31349 0.105867 -1.41935 2.014561
ITC 17/05/13 169.05 168.2 -0.50281 0.105867 -0.60868 0.370488
ITC 18/05/13 168.2 166.75 -0.86207 0.105867 -0.96794 0.9369
ITC 19/05/13 166.75 167.30 0.329835 0.105867 0.223968 0.050162
ITC 20/05/13 167.30 170.30 1.793186 0.105867 1.687319 2.847044
ITC 23/05/13 170.30 167.15 -1.84968 0.105867 -1.95554 3.824153
ITC 24/05/13 167.15 168.40 0.747831 0.105867 0.641964 0.412118
ITC 25/05/13 168.40 167.00 -0.83135 0.105867 -0.93722 0.878383
ITC 27/05/13 167.00 168.05 0.628743 0.105867 0.522875 0.273399
ITC 30/05/13 168.05 166.95 -0.65457 0.105867 -0.76043 0.57826
ITC 01/06/13 166.95 167.15 0.119796 0.105867 0.013929 0.000194
ITC 02/06/13 167.15 167.40 0.149566 0.105867 0.043699 0.00191
ITC 03/06/13 167.40 166.90 -0.29869 0.105867 -0.40455 0.163663
ITC 06/06/13 166.90 169.90 1.797484 0.105867 1.691616 2.861566
ITC 07/06/13 169.90 169.75 -0.08829 0.105867 -0.19415 0.037696
ITC 09/06/13 169.75 171.20 0.854197 0.105867 0.74833 0.559998
ITC 11/06/13 171.20 174.20 1.752336 0.105867 1.646469 2.710866
ITC 13/06/13 174.20 174.55 0.200918 0.105867 0.095051 0.009035
ITC 14/06/13 174.55 174.65 0.05729 0.105867 -0.04858 0.00236
ITC 15/06/13 174.65 174.80 0.085886 0.105867 -0.01998 0.000399
69
0.105867 18.5331
Calculation of Risk:
Risk = √∑ D2
n−1 = √ 18.5331
20−1
=0.9876
4.4. Graphical Representation of ITC limited
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
Return
Interpretation:
The above table shows the daily returns of ITC LIMITED for the month of DEC2010.
The average Return is 0.105867 and Risk is 0.9876.
The Highest price for the month was on 15/06/13i.e., 174.80 and the lowest price
was on 18/05/13 i.e., 166.75.
4.6. Statement showing covariance of INFOSYS and ITC
Date Return R1 D1 D12 Date Return R2 D2 D2
2 D1D2
70
16/05/13 0.59 0.51 0.08 0.005 6/12/12 -1.31 0.10 -1.42 2.01 -0.10915
17/05/13 1.12 0.51 0.60 0.37 7/12/12 -0.50 0.10 -0.61 0.37 -0.37002
18/05/13 -1.47 0.51 -1.98 3.94 8/12/12 -0.86 0.10 -0.97 0.93 1.922155
19/05/13 0.63 0.51 0.12 0.013 9/12/12 0.33 0.10 0.22 0.05 0.026236
20/05/13 -0.23 0.51 -0.74 0.55 10/12/12 1.79 0.10 1.69 2.88 -1.24924
23/05/130.033
0.51-0.48 0.23
13/12/12-1.85
0.10-1.96 3.82 0.935745
24/05/13 0.42 0.51 -0.08 0.007 14/12/12 0.75 0.10 0.64 0.41 -0.05615
25/05/13 1.42 0.51 0.91 0.82 15/12/12 -0.83 0.10 -0.94 0.88 -0.84952
27/05/13 2.80 0.51 2.29 5.26 16/12/12 0.63 0.10 0.52 0.27 1.198894
30/05/13 1.72 0.51 1.21 1.46 20/12/12 -0.65 0.10 -0.76 0.58 -0.9188
01/06/13 -0.62 0.51 -1.13 1.28 21/12/12 0.12 0.10 0.013 0.000194 -0.01574
02/06/13 0.098 0.51 -0.41 0.17 22/12/12 0.15 0.10 0.043 0.00191 -0.0181
03/06/13 1.06 0.51 0.55 0.30 23/12/12 -0.30 0.10 -0.404 0.16 -0.22265
06/06/13 0.07 0.51 -0.45 0.2 24/12/12 1.79 0.10 1.69 2.86 -0.75292
07/06/13 0.20 0.51 -0.31 0.1 27/12/12 -0.089 0.10 -0.19 0.037 0.060499
09/06/13 0.17 0.51 -0.34 0.12 28/12/12 0.85 0.10 0.75 0.56 -0.25565
11/06/13 0.66 0.51 0.14 0.02 29/12/12 1.75 0.10 1.64 2.71 0.240167
13/06/13 1.23 0.51 0.72 0.52 30/12/12 0.20 0.10 0.095 0.009 0.06873
14/06/13 -0.12 0.51 -0.63 0.40 31/12/12 0.056 0.10 -0.048 0.002 0.030788
15/06/13 0.45 0.51 -0.06 0.003 03/01/13 0.08 0.10 -0.019 0.0003 0.001174
71
18.5404 -0.3595
Calculation of Correlation Coefficient:
Correlation Coefficient of INFOSYS and ITC = r1,2
= ∑ D1D2
D22
= - 0.3595
18.5404
= - 0.02
Construction of Portfolio:
Average return of INFOSYS = R1 = 0.5119
Average return of ITC =R2 = 0.105867
Risk of INFOSYS = σ1 =0.9109
Risk of ITC = σ2 =0.9876
Weight of INFOSYS = W1 = 0.5
Weight of ITC = W2 = 0.5
PORTFOLIO RETURN = W1 R1+ W2 R2
= (0.5)(0.5119) + (0.5)(0..105867)
= 0.25595+0.0529335
=0.3088835
PORTFOLIO RISK = √W 12σ1
2+W 22σ2
2+2W 1W 2σ 1σ 2r1,2
72
√(0.52)(0.922)+(0.52)(0.992)+2(0.5)(0.5)(0.92)(0.99)(0.02)
= √0.21+0.25+0.0091
= 0.47
4.7. MOVEMENT OF SHARE PRICES OF NTPC
Symbol Date Prev Close
Close
Price Return Avg Diff D2
NTPC
16/05/1
3
185.15 187.05
1.026195 0.3574
0.66879
5
0.44728
7
NTPC
17/05/1
3
187.05 191.60
2.432505
0.3574 2.07510
5
4.30605
9
NTPC
18/05/1
3
191.60 190.95
-0.33925
0.3574
-0.69665
0.48531
9
NTPC
19/05/1
3
190.95 187.90
-1.59728
0.3574
-1.95468
3.82076
1
NTPC
20/05/1
3
187.90 192.40
2.394891
0.3574 2.03749
1
4.15136
9
NTPC
23/05/1
3
192.40 196.45
2.10499
0.3574
1.74759
3.05406
9
NTPC
24/05/1
3
196.45 199.50
1.552558
0.3574 1.19515
8
1.42840
2
NTPC
25/05/1
3
199.50 196.95
-1.2782
0.3574
-1.6356
2.67517
3
NTPC
27/05/1
3
196.95 197.95
0.507743
0.3574 0.15034
3
0.02260
3
73
NTPC
30/05/1
3
197.95 192.90
-2.55115
0.3574
-2.90855
8.45965
9
NTPC
01/06/1
3
192.90 191.85
-0.54432
0.3574
-0.90172
0.81310
5
NTPC
02/06/1
3
191.85 192.80
0.495179
0.3574 0.13777
9
0.01898
3
NTPC
03/06/1
3
192.80 195.75
1.530083
0.3574 1.17268
3
1.37518
5
NTPC
06/06/1
3
195.75 198.25
1.277139
0.3574 0.91973
9 0.84592
NTPC
07/06/1
3
198.25 197.00
-0.63052
0.3574
-0.98792 0.97598
NTPC
09/06/1
3
197.00 196.50
-0.25381
0.3574
-0.61121
0.37357
4
NTPC
11/06/1
3
196.50 197.90
0.712468
0.3574 0.35506
8
0.12607
3
NTPC
13/06/1
3
197.90 202.25
2.19808
0.3574
1.84068
3.38810
2
NTPC
14/06/1
3
202.25 200.65
-0.7911
0.3574
-1.1485
1.31905
3
NTPC
15/06/1
3 200.65
198.45
-1.09644
0.3574
-1.45384
2.11364
1
0.3574 40.20
Calculation of Risk:
74
Risk = √∑ D2
n−1 =√ 40.20
20−1
= 1.4545
4.5. Graphical Representation of NTPC
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
-3
-2
-1
0
1
2
3
Return
Interpretation:
The above table shows the daily returns of NTPC for the month of DEC2010.
The average Return is 0.3574 and Risk is 1.4545.
The Highest price for the month was on 13/06/13i.e., 202.25 and the lowest price
was on 16/05/13i.e., 187.05.
75
4.8. MOVEMENT OF SHARE PRICES OF ONGC
Symbol Date
Prev
Close
Close
Price Return Avg Diff D2
ONGC
16/05/13 1319.6 1320.5 0.06820
2 -0.09979
0.16799
2
0.02822
1
ONGC 17/05/13 1320.5 1337.95 1.32146
9 -0.09979
1.42125
9
2.01997
8
ONGC 18/05/13 1337.95 1345.3 0.54934
8 -0.09979
0.64913
8 0.42138
ONGC 19/05/13 1345.3 1321.60
-1.76169 -0.09979 -1.6619
2.76190
8
76
ONGC 20/05/13 1321.60 1322.00 0.03026
6 -0.09979
0.13005
6
0.01691
5
ONGC 23/05/13 1322.00 1328.10 0.46142
2 -0.09979
0.56121
2
0.31495
9
ONGC 24/05/13 1328.10 1331.90 0.28612
3 -0.09979
0.38591
3
0.14892
9
ONGC 25/05/13 1331.90 1323.75
-0.61191 -0.09979 -0.51212
0.26226
5
ONGC 27/05/13 1323.75 1304.00
-1.49197 -0.09979 -1.39218
1.93817
5
ONGC 30/05/13 1304.00 1304.45 0.03450
9 -0.09979
0.13429
9
0.01803
6
ONGC 01/06/13 1304.45 1301.00
-0.26448 -0.09979 -0.16469
0.02712
3
ONGC 02/06/13 1301.00 1305.20 0.32282
9 -0.09979
0.42261
9
0.17860
6
ONGC 03/06/13 1305.20 1300.25
-0.37925 -0.09979 -0.27946
0.07809
9
ONGC 06/06/13 1300.25 1294.75
-0.423 -0.09979 -0.32321
0.10446
2
ONGC 07/06/13 1294.75 1299.55 0.37072
8 -0.09979
0.47051
8
0.22138
7
ONGC 09/06/13 1299.55 1289.90
-0.74256 -0.09979 -0.64277
0.41315
9
ONGC 11/06/13 1289.90 1303.35 1.04271
6 -0.09979
1.14250
6
1.30532
1
77
ONGC 13/06/13 1303.35 1294.60
-0.67135 -0.09979 -0.57156
0.32667
7
ONGC 14/06/13 1294.60 1288.20
-0.49436 -0.09979 -0.39457
0.15568
6
ONGC 15/06/13 1288.20 1292.80 0.35708
7 -0.09979
0.45687
7
0.20873
7
-0.09979 10.95
Calculation of Risk:
Risk = √∑ D2
n−1 =√ 10.95
20−1
=0.759
4.6. Graphical Representation of ONGC
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
-2
-1.5
-1
-0.5
0
0.5
1
1.5
Return
Interpretation:
78
The above table shows the daily returns of ONGC for the month of DEC2010.
The average Return is -0.09979 and Risk is 0.759.
The Highest price for the month was on 18/05/13 i.e., 1345.3 and the lowest price
was on 14/06/13 i.e., 1288.2.
4.9. Statement showing covariance of NTPC and ONGC
Date
Retu
rn R1 D1 D12 Date Return R2 D2 D2
2 D1D2
16/05/13
1.02
0.35
0.66 0.44
6/12/12
0.07
-
0.09 0.16 0.02 0.11
17/05/13
2.43
0.35
2.07 4.30
7/12/12
1.32
-
0.09 1.42 2.01 2.94
18/05/13
-0.33
0.35 -
0.69 0.48
8/12/12
0.55
-
0.09 0.64 0.42
-
0.45
19/05/13
-1.59
0.35 -
1.95 3.82
9/12/12
-1.77
-
0.09
-
1.66 2.76 3.24
20/05/13
2.39
0.35
2.03 4.15
10/12/12
0.03
-
0.09 0.13 0.016 0.26
23/05/13
2.10
0.35
1.74 3.05
13/12/12
0.46
-
0.09 0.56 0.31 0.98
24/05/13
1.55
0.35
1.19 1.42
14/12/12
0.29
-
0.09 0.38 0.15 0.46
25/05/13
-1.27
0.35 -
1.63 2.67
15/12/12
-0.61
-
0.09
-
0.51 0.26 0.83
27/05/13
0.50
0.35
0.15 0.02
16/12/12
-1.49
-
0.09
-
1.39 1.94 -0.2
30/05/13
-2.55
0.35 -
2.90 8.45
20/12/12
0.03
-
0.09 0.13 0.02
-
0.39
01/06/13
-0.54
0.35
-0.0 0.81
21/12/12
-0.26
-
0.09
-
0.16 0.03 0.14
02/06/13
0.49
0.35
0.13 0.01
22/12/12
0.32
-
0.09 0.42 0.18 0.05
79
03/06/13
1.53
0.35
1.17 1.37
23/12/12
-0.37
-
0.09
-
0.28 0.07
-
0.32
06/06/13
1.27
0.35
0.91 0.84
24/12/12
-0.42
-
0.09
-
0.32 0.10
-
0.29
07/06/13
-0.63
0.35 -
0.98 0.97
27/12/12
0.37
-
0.09 0.47 0.22
-
0.46
09/06/13
-0.25
0.35 -
0.61 0.37
28/12/12
-0.74
-
0.09
-
0.64 0.41 0.39
11/06/13
0.71
0.35
0.35 0.12
29/12/12
1.04
-
0.09 1.14 1.30 0.40
13/06/13
2.19
0.35
1.84 3.38
30/12/12
-0.67
-
0.09
-
0.57 0.32
-
1.05
14/06/13
-0.79
0.35 -
1.14 1.31
31/12/12
-0.49
-
0.09
-
0.39 0.15 0.45
15/06/13
-1.09
0.35 -
1.45 2.11
03/01/13
0.35
-
0.09 0.45 0.20
-
0.66
0.35 40.20 -1.995 10.95 6.4
Calculation of Correlation Coefficient:
Correlation Coefficient of NTPC and ONGC = r1, 2
= ∑ D1D2
D22
=6.454810.95
= 0.5894
Construction of Portfolio:
80
Average return of NTPC = R1 = 0.3574
Average return of ONGC = R2 = -0.09979
Risk of NTPC = σ1 = 1.4545
Risk of ONGC = σ2 = 0.759
Weight of NTPC = W1 = 0.5
Weight of ONGC = W2 = 0.5
PORTFOLIO RETURN = W 1 R1 + W 2 R2
= (0.5) (0.3574) + (0.5) (-0.09979)
= 0.1787-0.049895
= 1.10675
PORTFOLIO RISK = √W 12σ1
2+W 22σ2
2+2W 1W 2σ 1σ 2r1,2
√(0.52)(1.45452)+(0.52)(0.7592)+2(0.5)(0.5)(1.4545)(0.759)(0.5894)
=√0.53+0.14+0.33
= 0.99
81
4.10. MOVEMENT OF SHARE PRICES OF RANBAXY
Symbol Date
Prev
Close
Close
Price Return Avg Diff D2
RANBAXY
16/05/1
3
574.15 568.1
5 -1.045 0.247 -1.29241 1.670336
RANBAXY 17/05/1
3
568.15 560.1
5 -1.408 0.247 -1.65547 2.740583
RANBAXY 18/05/1
3
560.15 567.7
1.347 0.247 1.100461 1.211015
RANBAXY 19/05/1
3
567.7 546.9
5 -3.65 0.247 -3.90249 15.22944
RANBAXY 20/05/1
3
546.95 553.7
0 1.234 0.247 0.986725 0.973626
RANBAXY 23/05/1
3
553.70 545.7
0 -1.444 0.247 -1.69222 2.8636
RANBAXY 24/05/1
3
545.70 561.5
5 2.904 0.247 2.657134 7.060364
RANBAXY 25/05/1
3
561.55 550.9
0 -1.89 0.247 -2.14393 4.596428
RANBAXY 27/05/1
3
550.90 547.0
0 -0.707 0.247 -0.95532 0.912644
RANBAXY 30/05/1
3
547.00 539.8
5 -1.307 0.247 -1.55452 2.416537
82
RANBAXY 01/06/1
3
539.85 559.1
0 3.565 0.247 3.318414 11.01187
RANBAXY 02/06/1
3
559.10 570.5
5 2.047 0.247 1.800542 3.241953
RANBAXY 03/06/1
3
570.55 570.7
0 0.026 0.247 -0.2211 0.048886
RANBAXY 06/06/1
3
570.70 573.2
5 0.44 0.247 0.199428 0.039771
RANBAXY 07/06/1
3
573.25 574.8
5 0.27 0.247 0.031719 0.001006
RANBAXY 09/06/1
3
574.85 589.9
5 2.62 0.247 2.37938 5.661451
RANBAXY 11/06/1
3
589.95 589.2
5 -0.11 0.247 -0.36605 0.13399
RANBAXY 13/06/1
3
589.25 590.4
0 0.19 0.247 -0.05223 0.002728
RANBAXY 14/06/1
3
590.40 598.6
5 1.397 0.247 1.149966 1.322422
RANBAXY 15/06/1
3
598.65 601.4
0 0.459 0.247 0.211975 0.044933
0.247 61.18
Calculation of Risk:
Risk =√∑ D2
n−1 =√ 61.18
20−1
= 1.79
83
4.7. Graphical Representation of RANBXY
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
-5
-4
-3
-2
-1
0
1
2
3
4
Return
Interpretation:
The above table shows the daily returns of RANBAXY for the month of DEC2010.
The average Return is 0.247 and Risk is 1.79.
The Highest price for the month was on 15/06/13 i.e., 601.40 and the lowest price
was on 30/05/13 i.e., 538.95.
4.11. MOVEMENT OF SHARE PRICES OF SAIL
Symbol Date Prev Close
Close
Price Return Avg Diff D2
SAIL 16/05/13 182.80 184.05 0.683807 0.17 0.513807 0.263998
SAIL 17/05/13 184.05 183.4 -0.35316 0.17 -0.52316 0.273702
SAIL 18/05/13 183.4 178.05 -2.91712 0.17 -3.08712 9.530316
SAIL 19/05/13 178.05 174.20 -2.16231 0.17 -2.33231 5.439688
SAIL 20/05/13 174.20 176.50 1.320321 0.17 1.150321 1.323239
84
SAIL 23/05/13 176.50 180.65 2.351275 0.17 2.181275 4.75796
SAIL 24/05/13 180.65 182.25 0.885691 0.17 0.715691 0.512213
SAIL 25/05/13 182.25 178.50 -2.05761 0.17 -2.22761 4.96226
SAIL 27/05/13 178.50 188.25 5.462185 0.17 5.292185 28.00722
SAIL 30/05/13 188.25 192.10 2.045153 0.17 1.875153 3.516198
SAIL 01/06/13 192.10 194.85 1.431546 0.17 1.261546 1.591498
SAIL 02/06/13 194.85 195.30 0.230947 0.17 0.060947 0.003715
SAIL 03/06/13 195.30 186.20 -4.6595 0.17 -4.8295 23.32405
SAIL 06/06/13 186.20 184.80 -0.75188 0.17 -0.92188 0.849862
SAIL 07/06/13 184.80 177.35 -4.03139 0.17 -4.20139 17.65164
SAIL 09/06/13 177.35 176.70 -0.36651 0.17 -0.53651 0.28784
SAIL 11/06/13 176.70 180.15 1.952462 0.17 1.782462 3.17717
SAIL 13/06/13 180.15 181.25 0.610602 0.17 0.440602 0.19413
SAIL 14/06/13 181.25 182.50 0.689655 0.17 0.519655 0.270041
SAIL 15/06/13 182.50 187.95 2.986301 0.17 2.816301 7.931553
0.17 113.86
Calculation of Risk:
Risk =√∑ D2
n−1 =√ 113.86
20−1
= 2.45
4.8. Graphical Representation of SAIL
85
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
-6
-4
-2
0
2
4
6
8
Return
Return
Interpretation:
The above table shows the daily returns of SAIL for the month of DEC2010.
The average Return is 0.17 and Risk is 2.45.
The Highest price for the month was on 02/06/13 i.e., 195.3 and the lowest price
was on 19/05/13 i.e., 174.2.
4.12. Statement showing covariance of Ranbaxy and SAIL
Date return R1 D1 D12 Date Return R2 D2 D2
2 D1D2
16/05/13 -1.04 0.24
7
-1.29 1.67 6/12/12 0.68 0.17 0.513 0.26 -0.6
17/05/13 -1.40 0.24
7
-1.65 2.74 7/12/12 -0.35 0.17 -0.52 0.27 0.8
18/05/13 1.34 0.24
7
1.100 1.21 8/12/12 -2.92 0.17 -3.08 9.53 -3.3
19/05/13 -3.65 0.24
7
-3.90 15.22 9/12/12 -2.16 0.17 -2.33 5.43 9.1
20/05/13 1.23 0.24 0.98 0.97 10/1/2/12 1.32 0.17 1.15 1.32 1.1
86
7
23/05/13 -1.44 0.24
7
-1.69 2.86 13/12/12 2.35 0.17 2.18 4.75 -3.6
24/05/13 2.90 0.24
7
2.65 7.06 14/12/12 0.88 0.17 0.71 0.51 1.9
25/05/13 -1.89 0.24
7
-2.14 4.59 15/12/12 -2.05 0.17 -2.22 4.96 4.7
27/05/13 -0.70 0.24
7
-0.95 0.91 16/12/12 5.46 0.17 5.29 28.00 -5.0
30/05/13 -1.30 0.24
7
-1.55 2.41 20/12/12 2.04 0.17 1.87 3.51 -2.9
01/06/13 3.56 0.24
7
3.31 11.01 21/12/12 1.43 0.17 1.26 1.591 4.1
02/06/13 2.047 0.24
7
1.80 3.24 22/12/12 0.23 0.17 0.06 0.003 0.1
03/06/13 0.02 0.24
7
-0.22 0.048 23/12/12 -4.65 0.17 -4.82 23.32 1
06/06/13 0.44 0.24
7
0.19 0.039 24/12/12 -0.75 0.17 -0.92 0.849 -0.1
07/06/13 0.27 0.24
7
0.032 0.001 27/12/12 -4.03 0.17 -4.20 17.65 -0.1
09/06/13 2.62 0.24
7
2.38 5.66 28/12/12 -0.36 0.17 -0.53 0.28 -1.2
11/06/13 -0.11 0.24
7
-0.36 0.13 29/12/12 1.95 0.17 1.78 3.17 -0.6
13/06/13 0.19 0.24
7
-0.05 0.0027 30/12/12 0.6 0.17 0.44 0.19 -0.02
14/06/13 1.39 0.24
7
1.14 1.32 31/12/12 0.68 0.17 0.51 0.27 0.5
15/06/13 0.45 0.24
7
0.21 0.044 03/01/13 2.98 0.17 2.81 7.93 0.5
87
Calculation of Correlation Coefficient:
Correlation Coefficient of RANBAXY and SAIL = r1, 2
= ∑ D1D 2
D22
=6.35
113.79
= 0.0558
Construction of Portfolio:
Average return of RANBAXY = R1 = 0.247
Average return of SAIL = R2 = 0.17
Risk of SAIL = σ1 = 2.45
Risk of RANBAXY = σ2 = 1.79
Weight of RANBAXY= W1 = 0.5
Weight of SAIL = W2 = 0.5
PORTFOLIO RETURN = W1 R1+ W2 R2
= (0.5) (O.247) + (0.5) (0.17)
= (0.1235) + (0.085)
=0.2085
PORTFOLIO RISK = √W 12σ1
2+W 22σ2
2+2W 1W 2σ 1σ 2r1,2
√(0.52)(2.452)+(0.52)(1.792)+2(0.5)(0.5)(2.45)(1.79)(0.0558)
= √1.5+0.80+0.122
88
= 2.422
4.13. MOVEMENT OF SHARE PRICES OF SBI
Symbol Date
Prev
Close
Close
Price Return Avg Diff D2
SBI 16/05/13 3070.75 2952.35 -3.85574 -0.40 -3.45574 11.94214
SBI 17/05/13 2952.35 2864.50 -2.9756 -0.40 -2.5756 6.633715
SBI 18/05/13 2864.50 2805 -2.07715 -0.40 -1.67715 2.812832
SBI 19/05/13 2805 2,686.90 -4.21034 -0.40 -3.81034 14.51869
SBI 20/05/13 2,686.90 2732.45 1.695262 -0.40 2.095262 4.390123
SBI 23/05/13 2732.45 2744.85 0.453805 -0.40 0.853805 0.728983
SBI 24/05/13 2744.85 2792.70 1.743265 -0.40 2.143265 4.593585
SBI 25/05/13 2792.70 2698.05 -3.38919 -0.40 -2.98919 8.935257
SBI 27/05/13 2698.05 2762.95 2.405441 -0.40 2.805441 7.870499
SBI 30/05/13 2762.95 2700.45 -2.26207 -0.40 -1.86207 3.467305
SBI 01/06/13 2700.45 2743.75 1.603436 -0.40 2.003436 4.013756
SBI 02/06/13 2743.75 2744.95 0.043736 -0.40 0.443736 0.196902
SBI 03/06/13 2744.95 2746.25 0.04736 -0.40 0.44736 0.200131
SBI 06/06/13 2746.25 2755.35 0.331361 -0.40 0.731361 0.534889
89
SBI 07/06/13 2755.35 2751.20 -0.15062 -0.40 0.24938 0.06219
SBI 09/06/13 2751.20 2728.50 -0.82509 -0.40 -0.42509 0.180702
SBI 11/06/13 2728.50 2755.2 0.97856 -0.40 1.37856 1.900428
SBI 13/06/13 2755.2 2749.65 -0.20144 -0.40 0.19856 0.039426
SBI 14/06/13 2749.65 2811.9 2.26392 -0.40 2.66392 7.09649
SBI 15/06/13 2811.90 2822.1 0.362744 -0.40 0.762744 0.581778
-0.40 80.69
Calculation of Risk:
Risk = √∑ D2
n−1 =√ 80.69
20−1
=7.85
4.9. Graphical Representation of SBI
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
-5
-4
-3
-2
-1
0
1
2
3
Return
Return
Interpretation:
90
The above table shows the daily returns of SBI for the month of DEC2010.
The average Return is -0.40 and Risk is 7.85.
The Highest price for the month was on 16/05/13 i.e., 2952.35. and the lowest price
was on 19/05/13 i.e., 2686.9.
4.14. MOVEMENT OF SHARE PRICES OF TATA MOTORS
Symbol Date
Prev
Close
Close
Price Return Avg Diff D2
TATAMOTORS
16/05/1
3
1314.7 1357.8 3.27831
4 -0.005
3.28331
4 10.78015
TATAMOTORS
17/05/1
3
1357.85 1335.4
-1.65335 -0.005 -1.64835 2.717055
TATAMOTORS
18/05/1
3
1335.4 1336.1 0.05241
9 -0.005
0.05741
9 0.003297
TATAMOTORS
19/05/1
3
1336.1 1273.8
-4.66282 -0.005 -4.65782 21.69533
TATAMOTORS
20/05/1
3
1273.85 1247.6
-2.06068 -0.005 -2.05568 4.225829
TATAMOTORS
23/05/1
3
1247.60 1277.2 2.37255
5 -0.005
2.37755
5 5.652769
TATAMOTORS
24/05/1
3
1277.20 1305.9 2.24710
3 -0.005
2.25210
3 5.071968
TATAMOTORS
25/05/1
3
1305.95 1322.9 1.29790
6 -0.005
1.30290
6 1.697563
TATAMOTORS
27/05/1
3
1322.90 1347 1.82175
5 -0.005
1.82675
5 3.337035
91
TATAMOTORS
30/05/1
3
1347.00 1351 0.29695
6 -0.005
0.30195
6 0.091178
TATAMOTORS
01/06/1
3
1351.00 1350
-0.07402 -0.005 -0.06902 0.004764
TATAMOTORS
02/06/1
3
1350.00 1365.1 1.11851
9 -0.005
1.12351
9 1.262294
TATAMOTORS
03/06/1
3
1365.15 1352.7
-0.91199 -0.005 -0.90699 0.822627
TATAMOTORS
06/06/1
3
1352.75 1306.1
-3.44853 -0.005 -3.44353 11.8579
TATAMOTORS
07/06/1
3
1306.15 1301.1
-0.38663 -0.005 -0.38163 0.145643
TATAMOTORS
09/06/1
3
1301.10 1268.9
-2.47483 -0.005 -2.46983 6.100055
TATAMOTORS
11/06/1
3
1268.90 1273.8 0.38616
1 -0.005
0.39116
1 0.153007
TATAMOTORS
13/06/1
3
1273.85 1300.1 2.06068
2 -0.005
2.06568
2 4.267043
TATAMOTORS
14/06/1
3
1300.15 1308.3 0.62685
1 -0.005
0.63185
1 0.399235
TATAMOTORS
15/06/1
3
1308.35 1308.4 0.00382
2 -0.005
0.00882
2 0.000078
-0.005 80.28482
Calculation of Risk.
92
Risk = √∑ D2
n−1 =√ 80.28
20−1
=2.055
4.10. Graphical Representation of TATA MOTORS
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
-6
-5
-4
-3
-2
-1
0
1
2
3
4
Return
Return
Interpretation:
The above table shows the daily returns of TATA MOTORS for the month of
DEC2010.
The average Return is -0.005 and Risk is 2.055.
The Highest price for the month was on 02/06/13 i.e., 1365.1 and the lowest price
was on 20/05/13 i.e., 1247.6.
4.15. Statement showing covariance of SBI and TATAMOTORS
Date Return R1 D1 D12 Date return R2 D2 D2
2 D1D2
16/05/13
-3.85 -0.40 -3.45 11.94
6/12/12
3.27
-
0.005 3.28 10.78 -11.3
17/05/13 -2.97 -0.40 -2.58 6.63 7/12/12 -1.65 - -1.65 2.72 4.2
93
0.005
18/05/13
-2.07
-0.4
0 -1.68 2.81
8/12/12
0.05
-
0.005 0.057 0.003 -0.09
19/05/13
-4.21 -0.40 -3.81 14.52
9/12/12
-4.66
-
0.005 -4.65 21.69 17.7
20/05/13
1.69 -0.40 2.09 4.39
10/12/12
-2.06
-
0.005 -2.05 4.22 -4.3
23/05/13
0.45 -0.40 0.85 0.73
13/12/12
2.37
-
0.005 2.37 5.65 2.02
24/05/13
1.74 -0.40 2.14 4.59
14/12/12
2.24
-
0.005 2.25 5.07 4.8
25/05/13
-3.39 -0.40 -2.99 8.94
15/12/12
1.29
-
0.005 1.30 1.69 -3.8
27/05/13
2.4 -0.40 2.80 7.87
16/12/12
1.82
-
0.005 1.82 3.34 5.1
30/05/13
-2.26 -0.40 -1.86 3.47
20/12/12
0.29
-
0.005 0.30 0.09 -0.5
01/06/13
1.6 -0.40
2.00
3 4.01
21/12/12
-0.07
-
0.005 -0.06 0.004 -0.1
02/06/13
0.04 -0.40 0.44 0.19
22/12/12
1.11
-
0.005 1.12 1.26 0.4
03/06/13
0.04 -0.40 0.44 0.2
23/12/12
-0.91
-
0.005 -0.9 0.82 -0.4
06/06/13 0.33 -0.40 0.73 0.53 24/12/12 -3.44 - -3.4 11.86 -2.5
94
0.005
07/06/13
-0.15 -0.40 0.24 0.06
27/12/12
-0.38
-
0.005 -0.38 0.15 -0.09
09/06/13
-0.82 -0.40 -0.42 0.18
28/12/12
-2.47
-
0.005 -2.46 6.1
1.04
9
11/06/13
0.98 -0.40 1.37 1.9
29/12/12
0.38
-
0.005 0.39 0.15 0.53
13/06/13
-0.20 -0.40 0.19 0.04
30/12/12
2.06
-
0.005 2.06 4.27 0.41
14/06/13
2.26 -0.40 2.66 7.09
31/12/12
0.62
-
0.005 0.63 0.39 1.68
15/06/13
0.362 -0.40 0.76 0.58
03/01/12
0.003
-
0.005 0.008 0.007
0.00
6
-0.40 80.69 -0.005 80.25
14.7
9
Calculation of Correlation Coefficient:
Correlation Coefficient of SBI and TATA MOTORS = r1, 2
= ∑ D1D 2
D22
=14.7980.25
=0.18
Construction of Portfolio:
95
Average return of SBI = R1 = -0.4
Average return of TATA MOTORS = R2 = -0.005
Risk of SBI = σ1 = 7.85
Risk of TATA MOTORS = σ2 = 2.055
Weight of SBI= W1 = 0.5
Weight of TATA MOTORS = W2 = 0.5
PORTFOLIO RETURN = W1 R1+ W2 R2
= (0.5)(-0.4)+(0.5)(-0.005)
= (-0.2) + (-0.0025)
= -0.2025
PORTFOLIO RISK = √W 12σ1
2+W 22σ2
2+2W 1W 2σ 1σ 2r1,2
√(0.52)(7.852)+(0.52)(2.0552)+2(0.5)(0.5)(7.85)(2.055)(0.18)
=√15.4+1.05+1.45
= 4.27
4.16. Statement showing Portfolios Return and Risk
S.No. Portfolio's Return Risk
1 BHARATHI AIRTEL and BHEL 0.2508 1.898
2 INFOSYS and ITC 0.3088 0.47
3 NTPC and ONGC 1.10675 0.99
96
4 RANBAXY and SAIL 0.2085 2.422
5 SBI and TATA MOTORS -0.2025 4.27
4.17. Graphical Representation of Return
1 2 3 4 5-0.4-0.2
00.20.40.60.8
11.2
Return
4.18. Graphical Representation of Risk
1 2 3 4 50
1
2
3
4
Risk
CHAPTER-VI97
FINDINGS,SUMMARY AND SUGGESTIONS
SUMMARY:
The present study titled “PORTFOLIO MANAGEMENT “ consists of 6 chapters which
includes Introduction, Industry profile, company profile, review of literature, data analysis
and interpretation, findings ,suggestion and summary.
The first chapter consists of Introduction talks about Portfolio management meaning,
significance, need, objectives, importance, research methodology and limitations.
The second chapter consists of industry profile talks industry overview, stock exchange,
history of stock exchange, role of stock exchange, major stock exchanges,fuctions of stock
exchange
98
The third chapter consists of company profile talks about the vision, the management,
privacy policy.
The fourth chapter consists of Theoretical Framework talks about process of portfolio
management, risk-return relationship, markowitzs model, CAPM, portfolio diversification,
portfolio performance evaluation, portfolio analysis.
The fifth chapter consists of Data analysis and interpretation talks about the purpose of the
study is to find out at what percentage of investment should be invested between two
companies on the basis of risk and return of each security in comparison. These percentages
help in allocating the funds available for investment in risky portfolios.
The sixth chapter consists of findings, summary and suggestions .
FINDINGS:
The present project has been under taken to study the process of portfolio
construction and how to manage it. During the study the following facts have been
identified.
PORTFOLIO 1: This consists of BHARATHI AIRTEL and BHEL
99
The Average Return of BHARATHI AIRTEL is 0.208515
The Risk of BHARATHI AIRTEL is 1.6708
The Average Return of BHEL is 0.2931
The Risk of BHEL is 0.9842
The Coefficient of Correlation between BHARATHI AIRTEL and BHEL is 0.35
By Constructing a Portfolio with equal weights the Return is 0.2508 and the Risk is 1.898
PORTFOLIO 2: This consists of INFOSYS and ITC.
The Average Return of INFOSYS is 0.5119
The Risk of INFOSYS is 0.9109
The Average Return of ITC is 0.105867
The Risk of ITC is 0.9876
The Coefficient of Correlation between INFOSYS and ITC is 0.02
By Constructing a Portfolio with equal weights the Return is 0.94925 and the Risk is 0.47
PORTFOLIO 3: This consists of NTPC and ONGC
The Average Return of NTPC is 0.3574
The Risk of NTPC is 1.4545
The Average Return of ONGC is -0.09979
The Risk of ONGC is 0.759
The Coefficient of Correlation between NTPC and ONGC is 0.5894
By Constructing a Portfolio with equal weights the Return is 1.10675 and the Risk is 0.99
PORTFOLIO 4: This consists of RANBAXY and SAIL.
100
The Average Return of RANBAXY is 0.247
The Risk of RANBAXY is 1.79
The Average Return of SAIL is 0.17
The Risk of SAIL is 2.45
The Coefficient of Correlation between RANBAXY and SAIL is 0.0558
By Constructing a Portfolio with equal weights the Return is 0.2085 and the Risk is
2.422
PORTFOLIO 5: This consists of SBI and TATA MOTORS.
The Average Return of SBI is -0.40
The Risk of SBI is 7.85
The Average Return of TATA MOTORS is -0.005
The Risk of TATA MOTORS is 2.055
The Coefficient of Correlation between SBI and TATA MOTORS is 2.5596
By Constructing a Portfolio with equal weights the Return is -0.82 and Risk is 3.56
SUGGESTIONS:
Correlation is an important element while constructing the portfolio.
If the correlation is high, we can’t reduce the risk level for getting optimum return
level.
Before going to portfolio construction one should check the constraint i.e. the
correlation coefficient is less than the ratio of smaller Standard Deviation to largest
Standard Deviation, then the combination of two securities provides a lesser
Standard Deviation of return than when either of the security is taken alone.
Investor should go for effective investment rather than random investment by using
portfolio weight formula to gain maximum return among these combinations.
101
Return is based on the scripts average return and its weights. So select the scripts
which will give higher average return with lower risk level among different scripts.
The risk level is one of important factor in determination of portfolio. The risk
affected by co-variance, standard deviation, correlation of two securities.
Choosing the securities, which are having negative correlation or lower correlation,
will give maximum return with the optimal risk level.
It is suggested to the investor that before going to investment, he should conduct
the fundamental analysis i.e. economic analysis, industry and company analysis.
It is suggested that a portfolio should be constructed to meet the investor’s goals
and objectives. The objective of every investor is to select portfolio that gives
optimal return with low risk.
It is suggested that the investor with low risk profile should choose low level risk
portfolio and the risk neutral investor should choose medium level risk portfolio.
It is suggested that the investor should have the knowledge about economy,
industry, and company and market structure. Efficient market theory states that the
share price fluctuations are random and do not follow any regular pattern.
It is suggested that each portfolio should be designed to achieve a predefined
business objectives.
It is suggested that each portfolio project need to be assessed in terms of business
value and adherence to portfolio selection strategy.
It is suggested that the investor can use the project evaluation process available ion
portfolio management systems to evaluate the project at various stages of the
project life cycle.
It is suggested that the investor should go for an appropriate diversification towards
reducing the risk. Diversification of investments helps to spread risk in many
securities.
It is suggested to the investor that he should keep in his mind that the market
psychology may be affected by tangible events or fictions.
It is suggested to the investor that management of portfolio is a dynamic activity of
evaluating and the revising the portfolio in terms of its objectives.
It is suggested to the investor that portfolio helps in spreading the risk in many
securities. Thus the risk is reduced. The basic principle is that if a portfolio holds
102
several assets or securities that may include cash and bank, Even if one goes bad the
other will provide protection from loss.
It is suggested that the diversification should neither be to large or to low. It should
be an adequate diversification according to the size of the portfolio.
After the Analysis and Findings we can suggest the investors to invest in
portfolios by using Markowitz method. This can be as follows.
Take the Securities whose returns are more but risk is less.
Study the correlation coefficient of those securities selected with more returns and
less risks.
If the correlation coefficient is negative, they are best for constructing portfolios.
Now after the Analysis and Findings we have the best portfolios as follows.
INFOSYS and ITC Return is 0.94925and Risk is 0.47
NTPC and ONGC Return is 1.10675 and Risk is 0.99.
BHARATHI AIRTEL and BHEL Return is 0.2508 and Risk is 1.898.
103
BIBLIOGRAPHY
BIBLIOGRAPHY
Books Referred:
Donald E. Fischer, Ronald J. Jordan, SAPM, 1999, Sixth Edition, Portfolio Analysis,
page no: 559-588 & CAPM, page no: 636-648
Punithavathy Pandian, Security Analysis & Portfolio Management, 2007, Portfolio
Markowitz Model, page no: 329-349 & CAPM, page no: 379-387.
Prasanna Chandra, Investment Analysis & Portfolio Management, 2006, Second
edition, Efficient Frontier, page no: 251-259
Websites:
104
www.investopedia.com
www.capitalmarket.com
www.bse.com
www.nse.com
www.utvi.com
Business Magazines:
Business world-2012
Outlook Money-2012
105