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Chapter-1
INTRODUCTION
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1.1 Introduction to the Study
1.1.1 Brokerage Industry
The Indian retail brokerage industry consists of companies that primarily act as agents for the
buying and selling of securities (e.g. stocks, shares, and similar financial instruments) on a
commission or transaction fee basis. It has two main interdependent segments: Primary Market and
the Secondary Market. Now this market is extended to activities like currency, commodity, mutual
fund, insurance etc
The Indian equity brokerage industry thrived on the back of equity markets which sustained a
bull run during 2003-2007. Although high competitive pressure meant continuous compression of
brokerage commissions, low electronic penetration kept operating costs high and the same time,
the industry revenue was also growing. Furthermore, the industry attracted domestic and foreign
investments interest at high valuations of up to 45x P/E multiples. During this time, many of the
key players started expanding their portfolio of services to include wealth management and
advisory services, sale of insurance and mutual fund products, consumer financing and so on.
However, post-2008, the economic downturn factors like muted trading turnover, relentless
competitive pressure and decreasing margins, continued high operating costs and high margining
requirements has put the industry under pressure. During this period, profitability lacking players
were under pressure to build scale. Expansion of scale and investments into technological systems
has the potential to lead the top brokerage firms into paths of higher growth, but the current
economic climate is clearly against heavy investments.
The basic functioning of a brokerage firm is to execute, buy and sell orders for clients.
Traditionally these firms have offered the investigation of the quality and the possibilities of
investing in a variety of investment products. It is still accustomed for brokerage firms to offer
information about possible investments free of charge. This activity of bringing free of chargestock investment report is one of the main tools that are utilized by brokerage houses to compete
against other firms and to investor it continues to be an important service.
1.1.2 The History of Stock Brokerage Firms
Stock brokerage firms have been an established feature in the financial services sector for
nearly thousand years. Dealing in debt securities, brokers employ a variety of systems to aid
investors with the purchase and sales of stocks and bonds in a variety of markets. The firms have
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changed over the years, growing to massive organizations that can affect the entire financial sector
positively or negatively with their performance. Changing with the times, the early twenty-first
century saw a rise of online trading that enabled the average investor to take part in the stock
market for the first time.
History
During the 11th century, the French began regulating and trading agricultural debts on
behalf of the banking community, creating the first brokerage system. In the 1300s, houses began
to set up in major cities like Flanders and Amsterdam in which commodity traders would hold
meetings. Soon, Venetian brokers began to trade in government securities, expanding the
importance of the firms. In 1602, the Dutch East India Company became the first publicity traded
company in which shareholders could own a portion of the business. The stocks improved the size
of companies and became the standard bearer for the modern financial system.
Significance
The earliest brokerage firms were established in London coffee houses, enabling
individuals to purchase stocks from a variety of organizations. They formally founded the London
Stock Exchange in 1801 and created regulations and memberships. The system was copied bybrokerage firms across the world, most notably on Chestnut Street in Philadelphia. Soon, the US
exchange was moved to New York city and various firms like Morgan Stanley and Merrill Lynch
were created to assist in the broking of stocks and securities. The firms limited themselves to
researching and trading stocks for investment groups and individuals.
Considerations
During the 1900s, stock brokerage firms began to move in a direction of market makers.They adopted the policy of quoting both the buying and selling price of a security. This allows a
firm to make a profit from establishing the immediate sale and purchase price to an investor. The
conflict with brokerage firms setting prices creates the concern that insider trading can result from
the sharing of information. Regulators have enforced a system called Chinese Walls to prevent
communication between different departments within the brokerage company. This has resulted in
increased profits and greater interconnection within the financial industry.
Effects
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The creation of high valued brokerage firms like Goldman Sachs and Bear Sterns created a
system of consolidation. Working with hundreds of billions of dollars, the larger firms began to
merge and take over smaller firms in the last half of the 20th century. Firms like Smith Barney were
acquired by Citi group and other investment banks, creating massive financial institutions that
valued, held, sold, insured and invested in securities. This conglomeration of the financial sector
created an environment of volatility that caused a chain reaction when other firms like Bear Sterns
and Lehman Brothers filed for bankruptcy. Trillions of dollars of assets were tied together in
different companies and resulted in a large economic collapse in late 2008.
Features
A large share of the brokerage firms have moved to an online format. Smaller brokers such
as E*Trade, TD Ameritrade and Charles Schwab have taken control of most individual investors
accounts. This added convenience and personal attention paid to the small investor has resulted in a
large influx of activities. In addition, the fact that the online resources offer up-to-the-minute
pricing and immediate trades makes their format appealing to the modern user. Discounted
commissions have lessened the price of trades, giving access to a wider swath of people and adding
liquidity to the market. The role of the stock brokerage firm is ever changing and proves to be a
boon for the future of the financial industry.
1.1.3 Full Service v/s Discounted Brokerage Houses
Full service brokerage firms continue to offer informative stock reports and a level of
service much higher than other brokerage houses. Discounted brokerage houses only dedicate
themselves to execute orders for clients. Full service brokers are sellers looking for purchasing and
selling for clients and offering more customer service than is available from discount brokers. It is
many times possible that a client will not even know who is taking care of the buy or sell order that
they placed.
1.1.4 Market Size and Characteristics
The Indian retail brokerage market is showing phenomenal growth. The total trading
volume of brokerage companies has increased from US $1239.1 billion in 2004 to US $1492.1
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Billion in 2005, and is expected to reach US $6535.7 billion by 2015. Some of the main
characteristics of the brokerage industry include growth in e-brokering; growing derivatives
market, define in brokerage fees etc.
Today, as per NSDL statistics, we have only 2.4 million investors with demat accounts in
the country. Considering various investor combinations that are holding accounts, we can presume
the country has roughly 5 - 7.5 lakh active investors now. This figure is unbelievably small
compared to the potential number of investors, which is anything between 200 million and 250
million. When we take into consideration the way transaction risk and cost in the Indian capital
market is coming down, there will be a massive surge in the number of investors and also in
volumes. The only way to manage this kind of potential growth is to adopt state-of-the-art trading
techniques.The growth of internet-based trading as a mass trading technique in the country is
unstoppable, going by the indicators available and the signals for the future. When it ultimately
gathers momentum, the biggest beneficiary will be the investor, who will be able to trade with
greater momentum; the biggest beneficiary will be the investor, who will be able to trade with
greater speed and transparency, and at lower costs.
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1.2 Theoretical Review
1.2.1 Monetary Policy
The actions of a central bank, currency board or other regulatory committee that determine the size
and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is
maintained through actions such as increasing the interest rate, or changing the amount of money
banks need to keep in the vault (bank reserves).
Monetary policy is the process by which the monetary authority of a country controls the supply
of money, often targeting a rate ofinterest for the purpose of promoting economic growth and
stability. The official goals usually include relatively stable prices and
low unemployment. Monetary theoryprovides insight into how to craft optimal monetary policy.
Monetary policy is referred to as either being Expansionary or Contractionary, where an
expansionary policy increases the total supply of money in the economy more rapidly than usual,
and Contractionary policy expands the money supply more slowly than usual or even shrinks it.
Expansionary policy is traditionally used to try to combat unemployment in a recessionby
lowering interest rates in the hope that easy credit will entice businesses into expanding.
Contractionary policy is intended to slow inflation in hopes of avoiding the resulting distortions
and deterioration of asset values.
The Monetary and Credit Policy is the policy statement, traditionally announced twice a year,
through which the Reserve Bank of India seeks to ensure price stability for the economy. These
factors include - money supply, interest rates and the inflation.
Why it is needed?
What monetary policy at its best can deliver is low and stable inflation, and thereby reduces the
volatility of the business cycle. When inflationary pressures build up, it is monetary policy only
which raises the short-term interest rate (the policy rate), which raises real rates across the
economy and squeezes consumption and investment.
The pain is not concentrated at a few points, as is the case with government interventions in
commodity markets.
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Monetary policy in India underwent significant changes in the 1990s as the Indian Economy
became increasing open and financial sector reforms were put in place. In the 1980s, monetary
policy was geared towards controlling the quantum, cost and directions of credit flow in the
economy. The quantity variables dominated as the transmission Channel of monetary policy.
Reforms during the 1990s enhanced the sensitivity of price signals from the central bank, making
interest rates the increasingly Dominant transmission channel of monetary policy in India.
1.2.2 Objectives of Monetary Policy
The objectives are to maintain price stability and ensure adequate flow of credit to the productive
sectors of the economy. Stability for the national currency (after looking at prevailing economic
conditions), growth in employment and income are also looked into. The monetary policy affects
the real sector through long and variable periods while the financial markets are also impacted
through short-term implications.
There are four main 'channels' which the RBI looks at:
Quantum channel: money supply and credit (affects real output and price level through
changes in reserves money, money supply and credit aggregates). Interest rate channel.
Exchange rate channel (linked to the currency).
Asset price.
Monetary decisions today take into account a wider range of factors, such as:
short term interest rates;
long term interest rates;
velocity of money through the economy;
exchange rate
credit quality
bonds and equities (corporate ownership and debt)
government versus private sector spending/savings
international capital flow of money on large scales
Financial derivatives such as options, swaps and future contracts etc.
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1.2.3 The new Functions of monetary policies that have emerged
To reinforce the emphasis on price stability and well-anchored inflation expectations while
ensuring a monetary and interest rate environment that supports export and investment
demand in the economy so as to enable continuation of the growth momentum.
To re-emphasize credit quality and orderly conditions in financial markets for
securing macroeconomic and, in particular, financial stability while simultaneously
pursuing greater credit penetration and financial inclusion.
To respond swiftly with all possible measures as appropriate to the evolving global and
domestic situation impinging on inflation expectations and the growth momentum
1.2.4 Challenges before monetary policy:
1. Financial markets are unperturbed: with the flattening of yield curves, the compression of
risk spreads and the search for yields continues unabated.2. Second, global imbalances have actually increased with no fears of hard landing, but with
some sense of readying for a bumpy soft landing. Movements in major exchange rates are
not reflecting fundamentals in an environment of generalized elevation in asset prices and
abundant liquidity.
3. Third, strong global economic growth could be accompanied by emerging pressures on
core inflation. the challenge facing us is to judge the compatibility of the current pace of
growth with non-accelerating inflation In the event of a judgment that the current growth
momentum is more cyclical than structural, the stance of monetary policy would need to
reflect a sensitivity to the inevitability of a downturn. On the other hand, the judgment that
structural factors predominate would warrant a different policy stance.
4. An overriding concern faced by the Reserve Bank is the persistently high growth of bank
credit, with attendant worries relating to the quality of bank credit The sharp increase in
credit to sectors such as housing, commercial real estate and retail loans have also been
worrisome on account of the vulnerability of banks to credit concentration risks.
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5. It is difficult to arrive at a clear judgment as to what rate of credit growth is too high in
relation to potential growth.
6. Some of the models integrate policy behavior with the banking system, the demand for a
broad monetary aggregate, and a rich array of goods and financial market variables,
providing a more complete understanding of the monetary transmission mechanism. Weak
economic assumptions and large models combine to reveal difficulties with sorting out
policy effects that other approaches fail to bring out.
1.2.5 Instruments of monetary policy in India
The monetary policy is nothing but controlling the supply of Money. The big Daddy, i.e. The RBI
takes a look at the present levels and also takes a call on what should be the desired level to
promote growth, bring stability of price (low inflation) and foreign exchange.
The various instruments of monetary policy that the RBI has and can use are:
A. Quantitative measures:
1. Open Market operations: Here, the RBI enters into sale and purchase of governmentsecurities and treasury bills. So the RBI can pump money into circulation by buying back
the securities and vice versa. In absence of an independent security market (all Banks are
state owned), this is not really effective in India.
2. Bank rate policy: Popularly known as repo rate and reverse repo rate, it is the rate at which
the RBI and the Banks buy or exchange money. This resuts into the flow of bank credit and
thus effects the money supply.
3. Cash Reserve ratio (CRR): This is the percentage of total deposits that the banks have to
keep with RBI. And this instrument can change the money supply overnight.
4. Statutory Liquidity Requirement (SLR): This is the proportion of deposits which Banks
have to keep liquid in addition to CRR. This also has a bearing on money supply.
B. Qualitative measures:
1. Credit rationing: Imposing limits and charging higher/lower rates of interests in selective
sectors is what you see is being done by RBI.
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2. Moral suasion: We hear of RBI's directive of priority lending in Agriculture sector. Seems
more of a directive rather than persuasion.
3. Change in lending margins :The bank advance money on a certain percentage of the valueof the mortgaged properly like land, building, jewellery, shares, stock of goods etc.The gap
between the value of the mortgaged property and amount advance is called lending margin.
4. Direct controls: Where all other methods prove ineffective, the monetary authorities resort
to direct control measures with clear directive to the banks carry out their lending activity in
a specified manner. There are however rare instances of direct control measure.
1.2.6 Effects of Monetary Policy
Generally the effects of monetary policies are related to current scenario of an economy in
short-run. As monetary policy is the regulation of country money supply i.e. the level of liquidity
in the economy by the central bank of a country. The various tools, which are used in
implementing monetary policies effect, the following determinants of growth are as follows
1. Control Inflation: - The foremost and basic impact of monetary policy is on inflation.
The goal of monetary policy is to control inflation through in monetary policy tools as when
inflation rises central bank generally raises interest rates and vice-versa. The main motto behind
keeping low inflation is to keep stable value of currency.
2. Interest Rate: - Interest rates are directly affected by monetary policy. The central bank
increases or decreases prime rate or interest rate of the loan given by the central bank to other
banks. It helps in credit contraction or expansion.
3. Business cycle- As business is a dynamic entity and always keep on changing, so it
passes through the condition of depression, stagnation and boom. Here monetary policy attempt to
minimize the speed of change in business cycle.
4. Spending and Investment - when a central bank decrease interest rate, the spending
increases and investment. This increase in spending and investment can equate to better overall
health of an economy. Likewise, when interest rates are increased, spending and investment
decreased, which is a tool to control inflation.
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5. Employment -The level of an employment is the showcase of the health of an economy.
When inflation is low and economy is stable or in Expansionary phase, employment level are
higher than when inflation is high and economy is in Contractionary phase. Changes in the
monetary policy that maintain economic stability and minimize inflation tend to keep
unemployment low.
1.2.7 Types of Monetary Policy
1.Inflation Targeting:
Under this policy, the target is to keep inflation under control. The inflation target is
achieved through periodic adjustments to the central bank interest rate target.
2. Price Level Targeting:
Price level targeting is similar to inflation targeting except that CPI growth in one year offset
in subsequent years such that over the time the price level on aggregate does not move.
3. MonetaryAggregates:
In the 1980s, several countries used an approach based on constant growth in the money
supply. This approach is also called monetarism. While most monetary policies focuses on price
signal of one term or another, this approach is focused on monetary quantities.
4. Fixed Exchange Rate:
This policy is based on maintaining a fixed exchange rate with a foreign currency. There are
varying degrees of fixed exchange rates, which can be ranked in relation to how rigid the fixed
exchange rate is with the anchor nation.
5. Gold Standard:
The gold standard is a system in which the price of the national currency as measured in
units of gold bars and is kept constant by the daily buying and selling of base currency to other
countries and nationals. The gold standard might be regarded as a special case of the "Fixed
Exchange Rate" policy. And the gold price might be regarded as a special type of "Commodity
Price Index".
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1.2.8 LIMITATIONS OF MONETARY POLICY
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The effectiveness of monetary policy, or any policy for that matter, depends on a number of
factors
1. The time lag: The first and the most important limitation in the effective working of
monetary policy is the time lag, i.e., time taken in chalking out the policy action, its
implementation and working time. The time lag is divided in two parts:
Inside lag or preparatory lag
Outside lag or responses lag
2. Problem in forecasting: Theformulate an appropriate monetary policy one requires to do areliable assessment the magnitude of the problem i.e. recession or inflation , as it helps in
determining the appropriate policy measures. What is more important is to forecast the
effects of monetary actions. Despite advancement in forecasting techniques, reliable
forecasting of macroeconomic variables remains an enigma. In this regard, it is interesting to
quote Stephen Mcnees
How can forecasters go wrong? They may not predict disturbances; they may misread the
current state of the economy and hence base their forecasts on a wrong picture of the present
situation; and they may misjudge the timings and the vigor of the governments monetary
and fiscal responses to booms or recessions. The fact is that forecasting has not reached
perfection, particularly at major turning points in the economy.
3. Non-banking financial intermediaries: The structural change in the financial market has
also reached the scope of effectiveness of monetary policy. The proliferation of non-banking
financial intermediaries including industrial finance corporations, industrial development
banks, mutual saving funds, insurance companies, chits and funds etc. has reduced the share
of the commercial banks in the total credit. Although financial intermediaries cannot create
credit through the process of credit multiplier, their huge share in the financial operations
reduces the effectiveness of monetary policy.
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4. Underdevelopment of money and capital markets: In addition, the effectiveness of
monetary policy in less developed countries is reduced considerably because of the
underdeveloped character of their money and capital markets. Their money and capital
markets are fragmented while effective working of monetary policy requires that money
market and the sub-markets of the capital market work interdependently. For this reason, the
effects of change in money supply and particularly in the interest rate remain confined to the
banking sector.
5. Limitation of discount rate policy:-The discount rate policy has lost its effectiveness as a
variation in the discount rate works effectively only when commercial banks have built their
financial resources. They are not dependent on the central bank for their financial support.Therefore, their discount rate is not affected when the central bank raises the bank rate.
6. Limitation of CRR as an Instrument of Monetary Control:- This method alone is
effective when others measures fail. It proves handier where open market operation and bank
rate policy prove less effective. However, its effectiveness in terms of impact on capital
market depends upon the share of the banking credit in the credit market. It is more effective
in the advanced countries with advanced banking system accounting for a major share in the
capital market.
1.2.9 HIGHLIGHTS OF PAST 3 YEARS RBI'S MONETARY POLICY
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POLICY 2008-09 2009-10 2010-11
Bank Rate 6.00% 6.00% 6.00%
Repo Rate 7.75% 4.75% 5.75%
Reverse Repo 6.00% 3.25% 4.50%
CRR 7.75% 5.00% 6.00%
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1.2.10 TOOLS USED FOR PORTFOLIO EVALUATION
SHARPES PERFORMANCE INDEX
A ratio developed by Nobel laureate William F. Sharpe to measure risk-adjusted
performance. The Sharpe ratio is calculated by subtracting the risk-free rate - such as that
of the 10-year U.S. Treasury bond - from the rate of return for a portfolio and dividing the
result by the standard deviation of the portfolio returns. The Sharpe ratio formula is:
The Sharpe ratio tells us whether a portfolio's returns 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. A negative Sharpe ratio indicates that a
risk-less asset would perform better than the security being analyzed.
A variation of the Sharpe ratio is the Sortino ratio, which removes the effects of upward
price movements on standard deviation to measure only return against downward price
volatility.
TREYNORS PERFORMANCE INDEX
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A ratio developed by Jack Treynor that measures returns earned in excess of that which
could have been earned on a riskless investment per each unit of market risk.
The Treynor ratio is calculated as:
(Average Return of the Portfolio - Average Return of the Risk-Free Rate) / Beta of
the Portfolio
In other words, the Treynor ratio is a risk-adjusted measure of return based on systematic
risk. It is similar to the Sharpe ratio, with the difference being that the Treynor ratio uses
beta as the measurement of volatility.Also known as the "reward-to-volatility ratio".
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1.3 Company Profile
1.3.1 Hedge Equities
Hedge Equities is one of the leading Financial Services Company in India. It offers equity, futures,
options, depository services, commodity broking and mutual funds distribution to its customers.
Hedge Equities is a coming together of over 25 years of cutting edge experience of its founders in
various industries backed with a strong expertise in global financial markets. The board comprises
of veterans from six power houses in their respective fields: Fedex Securities, Baby Marine
Exports, Thakker Developers, Smart Financial, S.M.Hegde (CFO, Videocon Industries), and
Padmashree Mohanlal.
1.3.2 Hedge Portfolio Management Services
With a view to capitalizing on its experience in the share market, the Hedge Equities has launched
portfolio management services in the year 2010. They believe that with the launch of PMS, the
company can set a target of 400 more clients. The number of outlets will be increased to 100 from
the present 75 with coverage in South Indian cities and in Other States in the North by the end of
2011.
1.3.3 Hedge School of Applied Economics
In its efforts to promote financial education in the country, Hedge Equities has launched the School
of Applied Economics in the year 2010 with the objective of creating professionals for the
financial markets. The focus is to groom students in share trading, banking, insurance or wealth
management, by implementing innovative solutions.
1.3.4 Hedge Equities Wealth Management Services
As a part of national wise service development, Hedge Equities launched its Wealth Management
Service (WMS) during December 2010. The services include portfolio management services,
portfolio advisory services and Mutual Fund Advisory services. This service offering will have
tailor-made investment solutions for each client-based on their risk appetite.
The main objective of this WMS is to make a customer into a successful investor. In order to
understand the customers behavior and their risk bearing capacity, Hedge Equities appointed
certain wealth management service teams. They will collect details regarding customers through
questionnaires. After studying consumers expectations and goals they will prepare special
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1.3.8 Corporate Social Responsibility
Being a Responsible Corporate Citizen, Hedge Equities has initiated a Non Profit
movement Hedge Yuva which focuses on educating the masses about Stock Market. Themovement has also formulated various scholarship programs for young and dynamic youth.
1.3.9 PROMISE
To our Customers: We exist to serve and meet your needs. Our focus is to create an
ethical and sustainable financial services platform that places your unique needs over and
above everything else.
To our Employees: We will provide our employees with a meaningful and rewarding
career with emphasis on self development and career progression.
To our Shareholders: We will spare no efforts to achieve a consistent and competitive
growth in earnings and profitability.
1.3.10 The HEDGE Advantage
At Hedge Equities, the needs of our Customers stand before everything else.
SEBI Registered Portfolio Manager with a dedicated Wealth Management Services
desk that aims to provide objective guidance tailored to meet each customers individual
needs.
Strong Research Team backed with best of breed data mining and analysis.
Industry leading technology solutions that make portfolio administration simpler and
cost effective.
A Global Outlook blended with a Local Flavor and backed with a growing network of
over 120 service outlets, 450 qualified employees, and over 200 support associates.
The Trust and Goodwill of over 20,000 satisfied customers.
Member of BSE, NSE, MCX, MCXSX,NMC, and Depository Participant in CDSL
Rated as the top brand by the investor community of Asianet channel
Growing overseas presence with operations in Middle East and an expanding presence
in the European region and North America.
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Upcoming Projects
Drawing inspiration from our qualitative performance of last two years, Hedge Equities has
outlined ambitious and profitable plans for the future. We are all set to open 100 new Hi-Tech
service outlets across India and register a pan India presence. The 2010-2011 financial year will
also witness our entry into other global markets with proposed marketing offices in New York,
London and Singapore.
Hedge Credits & Finance Limited, a 100 Crore NBFC will be functional in the early half of
2011. The new financial services firm would provide Margin Funding as well as securitized loans
(e.g., gold loans) to our customer base.
1.3.11 Services Offered
Online Trading
Depository Services
Derivative Trading
Knowledge Centre
Equity Research
Portfolio Management Services
Commodity Trading
Mutual Funds, Bonds, etc
Currency Trading
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1.4 Industry Profile1.4.1 Financial Market
We know that, money always flows from surplus sector to deficit sector. That means personshaving excess of money lend it to those who need money to fulfill their requirement.
Similarly, in business sectors the surplus money flows from the investors or lenders to the
businessmen for the purpose of production or sale of goods and services. There are two different
groups, one who invest money or lend money and the others, who borrow or use the money.
The financial markets act as a link between these two different groups. It facilitates this function by
acting as an intermediary between the borrowers and lenders of money. So, financial market may
be defined as a transmission mechanism between investors (or lenders) and the borrowers (or
users) through which transfer of funds is facilitated. It consists of individual investors, financial
institutions and other intermediaries who are linked by a formal trading rules and communication
network for trading the various financial assets and credit instruments.
1.4.2 Main Functions of Financial Market
It provides facilities for interaction between the investors and the borrowers.
It provides pricing information resulting from the interaction between buyers and sellers in
the market when they trade the financial assets.
It provides security to dealings in financial assets.
It ensures liquidity by providing a mechanism for an investor to sell the financial assets.
It ensures low cost of transactions and information.
1.4.3 Types of Financial Market
A financial market consists of two major segments:
Money Market; and
Capital Market.
While the money market deals in short-term credit, the capital market handles the medium term
and long-term credit.
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The Primary Market consists of arrangements, which facilitate the procurement of long-term funds
by companies by making fresh issue of shares and debentures. Companies make fresh issue of
shares and/or debentures at their formation stage and, if necessary, subsequently for the expansion
of business. It is usually done through private placement to friends, relatives and financial
institutions or by making public issue.
1.4.7 Secondary Market
The secondary market known as stock market or stock exchange plays an equally important role in
mobilizing long-term funds by providing the necessary liquidity to holdings in shares and
debentures. It provides a place where these securities can be encashed without any difficulty and
delay. It is an organized market where shares and debentures are traded regularly with high degree
of transparency and security. In fact, an active secondary market facilitates the growth of primary
market as the investors in the primary market are assured of a continuous market for liquidity of
their holdings. The major players in the primary market are merchant bankers, mutual funds,
financial institutions, and the individual investors; and in the secondary market you have all these
and the stockbrokers who are members of the stock exchange who facilitate the trading.
1.4.8 Stock Exchange
As indicated above, stock exchange is the term commonly used for a secondary market, which
provide a place where different types of existing securities such as shares, debentures and bonds,
government securities can be bought and sold on a regular basis. A stock exchange is generally
organized as an association, a society or a company with a limited number of members. It is open
only to these members who act as brokers for the buyers and sellers. The Securities Contract
(Regulation) Act has defined stock exchange as an association, organization or body of
individuals, whether incorporated or not, established for the purpose of assisting, regulating and
controlling business of buying, selling and dealing in securities.
The main characteristics of a stock exchange are:
1. It is an organized market.
2. It provides a place where existing and approved securities can be bought and sold easily.
3. In a stock exchange, transactions take place between its members or their authorized
agents.
4. All transactions are regulated by rules and by laws of the concerned stock exchange.
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5. It makes complete information available to public in regard to prices and volume of
transactions taking place every day.
1.4.9 Stock Exchange in India
The first organized stock exchange in India was started in Mumbai known as Bombay Stock
Exchange (BSE). It was followed by Ahmadabad Stock Exchange in 1894 and Kolkata Stock
Exchange in 1908. The number of stock exchanges in India went up to 7 by 1939 and it increased
to 21 by 1945 on account of heavy speculation activity during Second World War. A number of
unorganized stock exchanges also functioned in the country without any formal set-up and were
known as kerb market. The Security Contracts (Regulation) Act was passed in 1956 for recognition
and regulation of Stock Exchanges in India. At present we have 23 stock exchanges in the country.
Of these, the most prominent stock exchange that came up is National Stock Exchange (NSE). It is
also based in Mumbai and was promoted by the leading financial institutions in India. It was
incorporated in 1992 and commenced operations in 1994. This stock exchange has a corporate
structure, fully automated screen-based trading and nation-wide coverage.
Another stock exchange that needs special mention is Over The Counter Exchange of India
(OTCEI). It was also promoted by the financial institutions like UTI, ICICI, IDBI, IFCI, LIC etc.
in September 1992 specially to cater to small and medium sized companies with equity capital of
more than Rs.30 lakhs and less than Rs.25 Crore. It helps entrepreneurs in raising finances for their
new projects in a cost effective manner. It provides for nationwide online ring less trading with 20
plus representative offices in all major cities of the country. On this stock exchange, securities of
those companies can be traded which are exclusively listed on OTCEI only. In addition, certain
shares and debentures listed with other stock exchanges in India and the units of UTI and other
mutual funds are also allowed to be traded on OTCEI as permitted securities. It has been noticed
that, of late, the turnover at this stock exchange has considerably reduced and steps have been afootto revitalize it. In fact, as of now, BSE and NSE are the two Stock Exchanges, which enjoy nation-
wide coverage and handle most of the business in securities in the country.
1.4.10 Regulations of Stock Exchange
Stock exchanges suffer from certain limitations and require strict control over their activities in
order to ensure safety in dealings thereon. Hence, as early as 1956, the Securities Contracts
(Regulation) Act was passed which provided for recognition of stock exchanges by the central
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Government. It has also the provision of framing of proper bylaws by every stock exchange for
regulation and control of their functioning subject to the approval by the Government. All stock
exchanges are required submit information relating to its affairs as required by the Government
from time to time. The Government was given wide powers relating to listing of securities, make
or amend bylaws, withdraw recognition to, or supersede the governing bodies of stock exchange in
extraordinary/abnormal situations. Under the Act, the Government promulgated the Securities
Regulations (Rules) 1957, which provided inter alia for the procedures to be followed for
recognition of the stock exchanges, submission of periodical returns and annual returns by
recognized stock exchanges, inquiry into the affairs of recognized stock exchanges and their
members, and requirements for listing of securities.
1.4.11 Role of SEBI
As part of economic reforms programme started in June 1991, the Government of India initiated
several capital market reforms, which included the abolition of the office of the Controller of
Capital Issues (CCI) and granting statutory recognition to Securities Exchange Board of India
(SEBI) in 1992 for:
Protecting the interest of investors in securities;
Promoting the development of securities market;
Regulating the securities market; and
Matters connected there with or incidental thereto.
SEBI has been vested with necessary powers concerning various aspects of capital market such as:
Regulating the business in stock exchanges and any other securities market;
Registering and regulating the working of various intermediaries and mutual funds;
Promoting and regulating self regulatory organizations;
Promoting investors education and training of intermediaries;
Prohibiting insider trading and unfair trade practices;
Regulating substantial acquisition of shares and takeover of companies;
Calling for information, undertaking inspection, conducting inquiries and audit of stock
exchanges, and intermediaries and self regulation organizations in the stock market; and
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Performing such functions and exercising such powers under the provisions of the Capital
Issues (Control) Act, 1947 and the Securities Contracts (Regulation) Act, 1956 as may be
delegated to it by the Central Government.
1.4.12 BOMBAY STOCKEXCHANGE (BSE)
Bombay Stock Exchange is the oldest stock exchange in Asia What is now popularly known as the
BSE was established as "The Native Share & Stock Brokers' Association" in 1875. Over the past
135 years, BSE has facilitated the growth of the Indian corporate sector by providing it with an
efficient capital raising platform.
Today, BSE is the world's number 1 exchange in the world in terms of the number of listed
companies (over 4900). It is the world's 5th most active in terms of number of transactions handled
through its electronic trading system. And it is in the top ten of global exchanges in terms of the
market capitalization of its listed companies (as of December 31, 2009). The companies listed on
BSE command a total market capitalization of USD Trillion 1.28 as of Feb, 2010.
BSE is the first exchange in India and the second in the world to obtain an ISO 9001:2000
certifications. It is also the first Exchange in the country and second in the world to receive
Information Security Management System Standard BS 7799-2-2002 certification for its BSE On-
Line trading System (BOLT). Presently, we are ISO 27001:2005 certified, which is a ISO version
of BS 7799 for Information Security.
The BSE Index, SENSEX, is India's first and most popular Stock Market benchmark index.
Exchange traded funds (ETF) on SENSEX, are listed on BSE and in Hong Kong. Futures and
options on the index are also traded at BSE.
BSE continues to innovate:
Became the first national exchange to launch its website in Gujarati and Hindi and now
Marathi
Purchased of Marketplace Technologies in 2009 to enhance the in-house technology
development capabilities of the BSE and allow faster time-to-market for new products
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Launched a reporting platform for corporate bonds christened the ICDM or Indian
Corporate Debt Market
Acquired a 15% stake in United Stock Exchange (USE) to drive the development and
growth of the currency and interest rate derivatives markets
Launched 'BSE StAR MF' Mutual fund trading platform, which enables exchange members
to use its existing infrastructure for transaction in MF schemes.
BSE now offers AMFI Certification for Mutual Fund Advisors through BSE Training
Institute (BTI)
Co-location facilities for Algorithmic trading
BSE also successfully launched the BSE IPO index and PSU website
BSE revamped its website with wide range of new features like 'Live streaming quotes for
SENSEX companies', 'Advanced Stock Reach', 'SENSEX View', 'Market Galaxy', and
'Members'
Launched 'BSE SENSEX MOBILE STREAMER'
With its tradition of serving the community, BSE has been undertaking Corporate Social
Responsibility (CSR) initiatives with a focus on Education, Health and Environment. BSE has
been awarded by the World Council of Corporate Governance the Golden Peacock Global CSRAward for its initiatives in Corporate Social Responsibility (CSR).
Other Awards:
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.
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
Drawing from its rich past and its equally robust performance in the recent times, BSE will
continue to remain an icon in the Indian capital market.
1.4.13 Vision
"Emerge as the premier Indian stock exchange by establishing global benchmarks"
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1.4.14 NATIONAL STOCKEXCHANGE (NSE)
The National Stock Exchange of India Limited has genesis in the report of the High Powered Study
Group on Establishment of New Stock Exchanges. It recommended promotion of a National StockExchange by financial institutions (FIs) to provide access to investors from all across the country
on an equal footing. Based on the recommendations, NSE was promoted by leading Financial
Institutions at the behest of the Government of India and was incorporated in November 1992 as a
tax-paying company unlike other stock exchanges in the country.
The National Stock Exchange (NSE) operates a nation-wide, electronic market, offering trading in
Capital Market, Derivatives Market and Currency Derivatives segments including equities, equities
based derivatives, Currency futures and options, equity based ETFs, Gold ETF and Retail
Government Securities. Today NSE network stretches to more than 1,500 locations in the country
and supports more than 2, 30,000 terminals.
With more than 10 asset classes in offering, NSE has taken many initiatives to strengthen the
securities industry and provides several new products like Mini Nifty, Long Dated Options and
Mutual Fund Service System. Responding to market needs, NSE has introduced services like
DMA, FIX capabilities, co-location facility and mobile trading to cater to the evolving need of the
market and various categories of market participants.
NSE has made its global presence felt with cross-listing arrangements, including license
agreements covering benchmark indexes for U.S. and Indian equities with CME Group and has
also signed a Memorandum of Understanding (MOU) with Singapore Exchange (SGX) to
cooperate in the development of a market for India-linked products and services to be listed on
SGX. The two exchanges also will look into a bilateral securities trading link to enable investors in
one country to seamlessly trade on the other countrys exchange.
NSE is committed to operate a market ecosystem which is transparent and at the same time offers
high levels of safety, integrity and corporate governance, providing ever growing trading &
investment opportunities for investors.
1.4.15 Mission
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NSE's mission is setting the agenda for change in the securities markets in India. The NSE was set-
up with the main objectives of:
Establishing a nation-wide trading facility for equities, debt instruments and hybrids, Ensuring equal access to investors all over the country through an appropriate
communication network,
Providing a fair, efficient and transparent securities market to investors using electronic
trading systems,
Enabling shorter settlement cycles and book entry settlements systems, and
Meeting the current international standards of securities markets.
The standards set by NSE in terms of market practices and technologies have become industry
benchmarks and are being emulated by other market participants. NSE is more than a mere market
facilitator. It's that force which is guiding the industry towards new horizons and greater
opportunities.
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1.5 Need for the study
Monetary policy, at its best can deliver is low and stable inflation, and thereby reduces the
volatility of the business cycle. When inflationary pressures build up, it is monetary policy only
which raises the short-term interest rate (the policy rate), which raises real rates across the
economy and squeezes consumption and investment. So there is a direct relationship between
monetary policy and stock performances.
So it is very important to study and understand the impacts of monetary policy in the performance
of financial market
1.6 Objectives of the Study
1.6.1 Primary Objective:
o To study the impact of monetary policy in the performance of the financial market
1.6.2 Secondary Objectives:
o To assess the level of share performance of selected companies through Sharpes,
and Treynors ratios
o To compare the impact of Bank Rate on the performance of selected companies
shareso To compare the impact ofRepo Rate on the performance of selected companies
shares
o To compare the impact of Reverse Repo Rate on the performance of selected
companies shares
o To compare the impact of Cash Reserve Ratio on the performance of selected
companies shares
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Chapter-2
REVIEW OF LITERATURE
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REVIEW OF LITERATURE
For any research endeavor, a review of literature is paramount important. Such an effort will
highlight the past attempts made and provide a clear comprehension of similar studies.
Reviewing of all literature on the area of research is a preliminary step before attending to plan the
study. It is essential to review all the relevant materials connected with the problem chosen. It is
necessary to show how the problem under the study relates to the previous research studies. It is
also equally important to show how this work is differed from existing literature.
The review of previous literature is an existing task calling for deep insight and clear prospective
of the entire field. No experienced researcher can think of undertaking study without acquainting
himself with the contribution of previous investigators.
1. Mr.Ankur Sharma a student of Institute of Integrated Learning in Management, in his
Research study about economic environment and policy, he critically analyzed the
monetary policy and measured the effectiveness of monetary policy in India. He concluded
that the specter of inflation has led the RBI to repeatedly raise interest rates and increase
banks reserve requirements in classic monetary policy responses and also stated that RBI
also faces the challenge of simultaneously managing the exchange rate in the face of porous
controls on international capital flows
2. Ms.Aakriti Agarwal, student of Jaipuria Institute of Management, Lucknow, in her report
on Indian brokerage industry, stated that RBIs monetary policy have a greater impact in
stock performances. She concluded that expected changes in RBIs policy create positive
changes in the stock performances.
3. Mr.Yoon Je Cho, Professor of Graduate School of International Studies, Sogang, Korea
In his article about Indian Capital Market, Recent Developments and policy issues he
explained about influence of RBIs policies in performance of stocks and in regulating
overall money supply in Indian Economy. He further stated that RBIs role in the capital
market decisions regarding foreign exchange control liquidity support to market
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participants and debt management primary dealers. He also stated that securities
transactions that involve a foreign exchange transaction need the permission of RBI.
4. Mr.Payel Jain, Vinod Kothari and Company, in their article Indian financial market; Aquick Introduction they speak out about the role of RBIs policies in the overall
performance of financial market
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Chapter-3
RESEARCH METHODOLOGY
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Research Methodology is a way to systematically solve the research problem..The source
of data for the study is collected from the Annual Report, NSE Indices and Historical documents.
The nature of data collected is secondary data .The period of the study covered 3 years from 2008-
2009 to 2010-2011. Techniques used for the analysis are Sharpe Ratio and Treynor Ratio.
3.1 Research Design
The study carried out here is an Analytical Research
3.2 Data Collection
The nature of data collected is secondary and it is mainly from Annual Reports of the
companies, NSE Indices and Historical documents from NSE website
3.3 Sampling
Samples are selected purely based on Market Capitalization of the companies listed in NSE
3.4 Market Capitalization
Market cap or market capitalization is simply the worth of a company in terms of its shares.
3.5 Data Analysis
Financial tools used for data analysis are:
Sharpes Performance Index
Treynors Performance Index
3.6 Period of Study
Period of this study is 3 years, ranging from 2008 to 2009
3.7 Limitations of the study
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This study is conducted on the basis of performance of 10 companies from 5 sectors, which
may not represent a true picture of all the listed companies
This analysis is conducted for 3 years performance only
This study is purely based in historical data, which may not exactly represent the future
performance
The limitations of the tools used, blindly apply to this study also
All the limitations of secondary data analysis also hold for this project
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Chapter-4
DATA ANALYSIS
AND
INTERPRETATION
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SHARPE PERFORMANCE INDEX
Sharpes performance index gives a single value to be used for the performance ranking of variousfunds or portfolios. Sharpe index measures the risk premium of the portfolio relative to the total
amount of risk in the portfolio. The risk premium is the difference between the portfolios average
rate of return and the riskless rate of return. The standard deviation of the portfolio indicates the
risk.
S= (Average Return-Risk Free Return)/Standard Deviation
TREYNORS PERFORMANCE INDEX
Treynors performance index is based on the concept of Characteristic line. The relationship
between a given market return and the funds return is given by the characteristic line. The funds
performance is measured in relation to the market performance. The ideal funds return rises at a
faster rate than the general market performance when the market is moving upwards and its rate of
return declines slowly than the market return, in the decline. The ideal fund may place its fund in
the treasury bills or short sell the stock during the decline and earn positive return.
T= (Average Return of the Portfolio - Average Return of the Risk-Free Rate) / Beta of the
Portfolio
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TABLE 1
TABLE SHOWING STANDARD DEVIATION FOR 3 YEARS
DIAGRAM - 1
DIAGRAM SHOWING STANDARD DEVIATION FOR 3 YEARS
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SL. No Company Name
Standard Deviation
2008-2009 2009-2010 2010-2011
1 ACC 94.93 87.58 93.99
2 Ambuja Cements 17.15 9.72 15.15
3 HDFC Bank 215.49 218.2 196.13
4 SBI 222.34 319.13 403.29
5 TCS 104.83 176.38 171.73
6 Infosys 271.75 402.61 235.23
7 Tata Motors 77.71 211.39 157.81
8 Hero Honda 199.47 188.46 209.87
9Dr.ReddysLaboratories 103.08 245.83 172.87
10 Cipla 17.01 17.01 18.69
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TABLE - 2
TABLE SHOWING BETA VALUE FOR 3 YEARS
DIAGRAM 2
DIAGRAM SHOWING BETA VALUE FOR 3 YEARS
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SL. No Company NameBeta of the Portfolio
2008-2009 2009-2010 2010-2011
1 ACC 0.79 0.81 0.83
2 Ambuja Cements 0.84 0.76 1.07
3 HDFC Bank 0.83 0.78 1.46
4 SBI 1.16 1.16 1.88
5 TCS 0.82 0.83 0.36
6 Infosys 0.67 0.68 0.41
7 Tata Motors 0.54 0.78 0.31
8 Hero Honda 1.26 1.23 1.12
9Dr.ReddysLaboratories 0.46 0.53 0.21
10 Cipla 0.45 0.57 1.35
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TABLE - 3
DIAGRAM - 3
Diagram Showing Sharpes Performance Index in 2008-2009
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Company Name
Average
Return (in %)
Risk free
Return (in %)
Standard
Deviation Sharpe ratio
ACC 100 8.1606 94.93 0.00972
Ambuja Cements 55 8.1606 17.15 0.02731
HDFC Bank 85 8.1606 215.49 0.00357
SBI 215 8.1606 222.34 0.009303
TCS 366.67 8.1606 104.83 0.034199
Infosys 372.5 8.1606 271.75 0.13407
Hero Honda 950 8.1606 77.71 0.1212
Tata Motors 150 8.1606 199.47 0.00711
Dr.Reddys Lab 75 8.1606 103.08 0.006484
Cipla 100 8.1606 17.01 0.053991
Table Showing Sharpes Performance Index for 2008-2009
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TABLE - 4
Table Showing Sharpes Performance Index for 2009-2010
DIAGRAM 4
Diagram Showing Sharpes Performance Index in 2009-2010
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CompanyName
AverageReturn (in %)
Risk freeReturn (in %)
StandardDeviation Sharpe ratio
ACC 115 8.1606 87.58 0.0122
AmbujaCements 60 8.1606 9.72 0.5333
HDFC Bank 100 8.1606 218.2 0.00421
SBI 195 8.1606 319.13 0.005855
TCS 275 8.1606 176.38 0.01513
Infosys 235 8.1606 402.61 0.005634
Hero Honda 2500 8.1606 211.39 0.11788
Tata Motors 60 8.1606 188.46 0.002751Dr.Reddys Lab 125 8.1606 245.83 0.004753
Cipla 100 8.1606 17.01 0.053991
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TABLE 5
Table Showing Sharpes Performance Index for 2010-2011
Company
Name
Average
Return (in %)
Risk free
Return (in %)
Standard
Deviation Sharpe ratio
ACC 152.5 8.1606 93.99 0.01536
AmbujaCements 65 8.1606 15.15 0.3752
HDFC Bank 120 8.1606 196.13 0.005702
SBI 200 8.1606 403.29 0.004757
TCS 500 8.1606 171.73 0.02864
Infosys 550 8.1606 235.23 0.023034
Hero Honda 1500 8.1606 157.81 0.094534
Tata Motors 150 8.1606 209.87 0.606758
Dr.Reddys Lab 225 8.1606 172.87 0.012543
Cipla 75 8.1606 18.69 0.035762
DIAGRAM - 5
Diagram Showing Sharpes Performance Index in 2009-2010
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TABLE 6
Table Showing Treynors Performance Index for 2008-2009
Company
Name
Average
Return (in %)
Risk free
Return (in %)
Beta of the
Portfolio
Treynor
Ratio
ACC 100 8.1606 0.79 1.163
AmbujaCements 55 8.1606 0.84 0.558
HDFC Bank 85 8.1606 0.83 0.926
SBI 215 8.1606 1.16 1.783
TCS 366.67 8.1606 0.82 4.372
Infosys 372.5 8.1606 0.67 5.438
Hero Honda 950 8.1606 0.54 17.44Tata Motors 150 8.1606 1.26 1.126
Dr.Reddys Lab 75 8.1606 0.46 1.453
Cipla 100 8.1606 0.45 2.041
DIAGRAM - 6
Diagram Showing Treynors Performance Index for 2008-2009
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TABLE 7
Table Showing Treynors Performance Index for 2009-2010
DIAGRAM - 7
Diagram Showing Treynors Performance Index for 2009-2010
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Company
Name
Average
Return (in %)
Risk free
Return (in %)
Beta of the
Portfolio
Treynor
Ratio
ACC 115 8.1606 0.81 1.319
AmbujaCements 60 8.1606 0.76 0.682
HDFC Bank 100 8.1606 0.78 1.177
SBI 195 8.1606 1.16 1.611
TCS 275 8.1606 0.83 3.215
Infosys 235 8.1606 0.68 3.336
Hero Honda 2500 8.1606 0.78 31.947
Tata Motors 60 8.1606 1.23 0.422
Dr.Reddys Lab 125 8.1606 0.53 2.205Cipla 100 8.1606 0.57 1.611
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TABLE 8
Table Showing Treynors Performance Index for 2010-2011
Company
Name
Average
Return (in %)
Risk free
Return (in %)
Beta of the
Portfolio
Treynor
Ratio
ACC 152.5 8.1606 0.83 1.739
AmbujaCements 65 8.1606 1.07 0.531
HDFC Bank 120 8.1606 1.46 0.766
SBI 200 8.1606 1.88 1.021
TCS 500 8.1606 0.36 13.662Infosys 550 8.1606 0.41 13.216
Hero Honda 1500 8.1606 0.31 48.124
Tata Motors 150 8.1606 1.12 1.266
Dr.Reddys Lab 225 8.1606 0.21 10.326
Cipla 75 8.1606 1.35 0.495
DIAGRAM - 8
Diagram Showing Treynors Performance Index for 2010-2011
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TABLE - 9
Highlights of past three years Monetary Policy
DIAGRAM - 9
Diagram Showing Highlights of Monetary Policy
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
0.09
2008-2009 2009-2010 2010-2011
Bank Rate
Repo Rate
Reverse Repo Rate
Cash Reserve Ratio
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POLICY 2008-09 2009-10 2010-11
Bank Rate 6.00% 6.00% 6.00%
Repo Rate 7.75% 4.75% 5.75%
Reverse Repo 6.00% 3.25% 4.50%
CRR
7.75% 5.00% 6.00%
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TABLE - 10
Consolidated Analysis of Sharpe's and Treynor's Performance Index of Selected Companies
Page | 51
Company
Name
2008-2009 2009-2010 2010-2011
Sharpe ratio
Treynor
Ratio
Sharpe
ratio
Treynor
Ratio
Sharpe
ratio
Treynor
Ratio
ACC 0.00972 1.163 0.0122 1.319 0.01536 1.739
AmbujaCements 0.02731 0.558 0.5333 0.682 0.3752 0.531
HDFC Bank 0.00357 0.926 0.00421 1.177 0.005702 0.766
SBI 0.009303 1.783 0.005855 1.611 0.004757 1.021
TCS 0.034199 4.372 0.01513 3.215 0.02864 13.662
Infosys 0.13407 5.438 0.005634 3.336 0.023034 13.216
Hero Honda 0.1212 17.44 0.11788 31.947 0.094534 48.124
Tata Motors 0.00711 1.126 0.002751 0.422 0.606758 1.266
Dr.Reddys Lab 0.006484 1.453 0.004753 2.205 0.012543 10.326
Cipla 0.053991 2.041 0.053991 1.611 0.035762 0.495
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DIAGRAM 10
Diagram Showing Consolidated Analysis of Sharpe's and Treynor's Performance Index of
Selected Companies
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Interpretations
There is no change in Bank Rate for the past 3 years, so it does not have any influence in the
Performance of selected companys shares in the Financial Market
ACC: In 2008-09, the Sharpe Ratio is 0.00972, Treynor Ratio is 1.163 and the various
Policy Rates are 7.75%, 6.00%, and 7.75% Repo Rate, Reverse Repo Rate and Cash
Reserve Ratio respectively. In 2009-10, Sharpe Ratio and Treynor Ratio have increased.
Sharpe Ratio increased to 0.0122 and Treynor Ratio increased to 1.319, it may be due to
the decrease in various policies, i.e. Repo rate decreased to 4.75%, Reverse Repo to 3.25%
and CRR to 5%. It indicates high risk and high return situation. In 2010-11, the various
Policy Rates are increased but Sharpe Ratio decreased to 0.01536, it means risk in
investment is reduced and Treynor Ratio is increased to 1.739, it means the chance of
return is high. It indicates a low risk and high return situation.
Ambuja Cements: In 2008-09, the Sharpe Ratio and Treynor Ratio is 0.02731 and 0.558
respectively. It is moderately low risk and low return situation. In 2009-10, the Sharpe
Ratio is increased to 0.5333 and Treynor Ratio is slightly increased to 0.682, it may be
because of the change in Monetary Policy. So the risk and return of investment isincreased. In 2010-11, Sharpe Ratio is decreased to 0.3752 and Treynor Ratio is decreased
to 0.531. It indicates the slight changes in the risk and return.
HDFC Bank: In 2008-09, Sharpe Ratio and Treynor Ratio is 0.00357 and 0.926, which
indicates low risk and high return situation. In 2009-10, the Sharpe Ratio is slightly
increased to 0.00421 and Treynor Ratio is increased to 1.177, it shows that, the return on
investment is high at a moderately less risk and in 2010-11; the Sharpe Ratio has again
increased slightly to 0.005702 and Treynor ratio has decreased to 0.766. Here the risk andreturn is positive.
State Bank of India: In 2008-09, Sharpe and Treynor Ratios are 0.009303 and 1.783
respectively; its a low risk and high return situation. In 2009-10, Sharpe Ratio decreased to
0.005855, it means the risk on investment is reduced and Treynor Ratio decreased to 1.611,
it shows that the return from investment has reduced slightly. In 2010-11, the Sharpe Ratio
is reduced to 0.004757, it means the level of risk is reduced, and Treynor Ratio is reduced
to 1.021, it means the chance of getting high return is reduced
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Tata Consultancy Services: In 2008-09, the Sharpe Ratio is 0.034199 and Treynor Ratio
is 4.372. It indicates a High return and moderately low risk situation. In 2009-10, Sharpe
Ratio is reduced to 0.01513, i.e., risk on investment is reduced slightly and Treynor ratio is
reduced to 3.215, it means Chance of return also reduced compared to 2008-09. In 2010-11,
Sharpe and Treynor ratios are 0.02864 and 13.662 respectively. That means there is a high
increase in return; it may be because of the changes in monetary policy.
Infosys: In 2008-09, Sharpe and Treynor Ratios are 0.13407 and 5.438 respectively. It is
moderately low risk and high return situation. In 2009-10, both these ratios are reduced to
0.005634 and 3.336 respectively, i.e. risk and return level is slightly decreased. In 2010-11,
Sharpe Ratio slightly increased to 0.023034 and Treynor Ratio showed a sudden increase to
13.216. It may be due to the changes in the monetary policy.
Hero Honda: In 2008-09, Sharpe Ratio is 0.1212 and Treynor Ratio is 17.44. It indicates
that a low risk and high return situation. In 2009-10, Sharpe ratio slightly varied to 0.11788
and there is a huge change in Treynor Ratio to 31.947. This change may be due to the
change in monetary policy. In 2010-11, Sharpe Ratio is decreased to 0.094534, i.e. the risk
situation is slightly reduced and Treynor Ratio is increased to 48.124.
Tata Motors: In 2008-09, Sharpe Ratio is 0.00711 and Treynor Ratio is 1.126. Here the
risk is comparatively low and moderately high return. In 2009-10, the Sharpe Ratio isslightly decreased to 0.002751 and Treynor Ratio is decreased to 0.422. It means the
chance of risk and return is slightly reduced. In 2010-11, the Sharpe Ratio increased to
0.606758 and Treynor Ratio is increased to 1.266. It is comparatively risky and profitable
situation.
Dr.Reddys Laboratories: In 2008-09, Sharpe Ratio is 0.006484 and Treynor Ratio is
1.453. It is reasonably good situation for investment. In 2009-10, Sharpe Ratio slightly
varied to 0.004753 and Treynor Ratio is slightly increased to 2.205. And in 2010-11,Sharpe Ratio is 0.012543 and Treynor Ratio is 10.326. It indicates moderately low risk and
high return situation
Cipla: In 2008-09, Sharpe and Treynor Ratios are 0.053991 and 2.041 respectively. It is
reasonably good situation for investment. In 2009-10, the Sharpe Ratio remains constant
and Treynor Ratio slightly decreased to 1.611. Here there is no change in risk level and
return level is slightly reduced. In 2010-11, Sharpe Ratio is slightly varied to 0.035762 and
Treynor Ratio reduced to 0.495. It shows a low risk and low return situation. This may be
because of the changes in monetary policy.
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Chapter-5
FINDINGS, SUGGESTIONS
ANDCONCLUSION
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5.1 FINDINGS
Bank Rate remains the same for the 3 years. So it doesnt have any influence in
the performance of the selected companys shares in the financial market.
Sharpe Ratio and Treynors Ratio for ACC Ltd is 0.00972 and 1.163 in 2008-09
and it showed an increasing trend in 2009-10 and then Sharpe Ratio decreased in
2010-11. It may be because of the changes in Repo, Reverse Repo or CRR.
In the case of Ambuja Cements, the Sharpe and Treynor Ratios are 0.02731 and
0.558 respectively, and it slightly increased in 2009-10 then it went down in 2010-
11.
The performance of Cement sector in the Financial Market have a influence of
Repo, Reverse Repo and CRR
Sharpe Ratio and Treynors Ratio for HDFC Bank are 0.00357 and 0.926 in 2008-
09 and in 2009-10 both these ratios are increased then in 2010-11, Treynor Ratio
Comes down and Sharpe Ratio goes up.
Sharpe and Treynor Ratios of SBI is 0.009303 and 1.783 in 2008-09 and in 2009-
10, both these ratios are decreased. And in 2010-11 also it shows a decreasing
trend. Overall it shows a decreasing trend.
The performance of Bank Sector is highly influenced by these policy rates.
Because Bank Sector is directly linked with RBIs decisions
In the case of Tata Consultancy Services, these policy rates dont have much
influence. Because Sharpe Ratio and Treynor Ratio shows an increasing trend in
these 3 years, and in 2010-11 the Treynor Ratio goes very higher rate, i.e., to
13.662
Sharpe Ratio and Treynor Ratio of Infosys also show moderately an increasing
trend. And in 2010-11 the Treynor Ratio is 13.216.
The performance of IT sector doesnt have a greater influence of Repo, Reverse
Repo and CRR
Sharpe Ratio and Treynor Ratio of Hero Honda is 0.1212 and 17.44 respectively.
Here the Treynor ratio is very high and it again increased to 31.947 in 2009-10 and
to 48.124 in 2010-11. So it shows an increasing trend in these 3 years. So it shows
a positive trend
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In the case of Tata Motors, the Sharpe and Treynor Ratios are 0.00711 and 1.126
in 2008-09 and then both these ratios are decreased in 2009-10 and then it
increased. It may due to the changes in RBIs policy regarding Repo Rate, Reverse
Repo Rate and Cash Reserve Ratio.
The performance of Automobile Sector have an influence of these Major RBI
Rates
Sharpe and Treynor Ratios of Dr.Reddys Laboratories, is 0.006484 and 1.453
respectively. And in 2009-10 and 2010-11, both these ratio shows a positive trend.
In the case of Cipla, Sharpe and Treynor Ratios are 0.053991 and 2.041
respectively. Then it shows a downward trend in 2009-10 and 2010-11.
The performance of Pharmaceutical Sector doesnt have much influence of Repo
Rate, Reverse Repo Rate and Cash Reserve Ratio.
The major finding is that, the expected change in Policy rates impacts the
Financial Market with a positive change in the performance of shares.
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5.2 SUGGESTIONS
Companies should be ready to face the inflation situation in the economy.
Companies should increase their dividend percentage at the time of changes in
monetary policy.
Make the investor aware about the changes in the policy rates.
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5.3 Conclusion
In the present scenario, one of the major problem faces by the Indian Economy is
Inflation. RBI always tries to control this inflation and try to stabilize the market. The
major tools used by RBI for this purpose is Bank Rate, Repo Rate, Reverse Repo Rate
and Cash Reserve Ratio. By amending these policy rates, RBI is able to keep the market
stable for some extent. So for this purpose RBI keep changing these rates and it influence
the performance of Shares in Financial market.
Expected Changes in these rates create a positive impact in the financial market. And
more than or less than the expected changes may lead to negative or positive change in
the market. It may lead to increase or decrease in the risk for the investment and return
from the investment.