optimal portfolio jaggu project

OPTIMAL PORTFOLIO PERFORMANCE

Project

Submitted By

Mr. G. JAGADEESH KUMAR

(REGISTER NO : 90349013)

In partial fulfillment of the degree of

MASTER OF BUSINESS ADMINISTRATION

Under the guidance of

Mr. N. RAMAKRISHNA, B.A. , M.B.A.,

Asst. Professor

DR. JYOTHIRMAYI DEGREE COLLEGE (MBA)SRI KRISHNADEVARAYA UNIVERSITY

MBA – 2009-2011

BONAFIDE CERTIFICATE

DEPARTMENT OF MANAGEMENT STUDIES

This is to certify that the project work entitled “OPTIMAL PORTFOLIO

PERFORMANCE” is a bonafide record work done by Mr. G. JAGADEESH KUMAR

(Reg. No.90349013) submitted in the partial fulfillment of the requirement for the

award of the degree of MASTER OF BUSINESS ADMINISTRATION of the SRI

KRISHNADEVARAYA UNIVERSITY.

Faculty guide Head of the Department Principal

Place:

Date:

DECLARATION

Mr. G. JAGADEESH KUMAR (Reg. No.90349013) a bonafide student of the

Department of Management studies, DR. JYOTHIRMAYI DEGREE COLLEGE ( MBA) ,

ADONI. would like to declare that the project titled “OPTIMAL PORTFOLIO

PERFORMANCE” in the partial fulfillment of MASTER OF BUSINESS

ADMINISTRATION course of the SRI KRISHNADEVARAYA UNIVERSITY is

my original work and will not be submitted for the award of an other degree, diploma,

fellowship or other title or prize.

Signature

Date: Name:

Place: Reg.No:

ACKNOWLEDGEMENT

I would like to express my sincere thanks to our Correspondent

Mr. MURALIBABU for encouraging us to do the training well from the college.

I would like to thank our Principal Mr. K. VIJAYA KUMAR and for helping

me to undergo the training well.

Next I owe gratitude to my Head of the Department (HOD) Mr. KIRAN MESA

permitting me to undertake the project in my interested specialization.

Last but not least I would thank my guide Mr. N. RAMAKRISHNA and also

our staff members, DR. JYOTHIRMAYI DEGREE COLLEGE (MBA) for their

support during the course of my project which is worth praising.

I also express my gratitude to my parents for blessing me and encouraging me to

undergo the project effectively.

Signature

TABLE OF CONTENTS

CHAPTER CONTENTS PAGE NO

1 Introduction 7

2 Company Profile 9

3 Study Design

3.1 Importance and Need

3.2 Objectives of the Project

3.3 Scope of the Project

3.4 Limitations of the Project

24

25

26

27

28

4 Review of Literature

4.1 Overview Of Capital Market

4.2 Stock Exchange

4.3 Investment Analysis

4.4 Portfolio Management

4.5 Risk And Return In Portfolio Theory

4.6 William Sharpe’s Single Index Model

29

30

33

44

49

54

60

5 Research Design

5.1 Research Methodology

5.2 Primary data and Secondary data

5.3 Sampling

5.3.1 Sample Size

5.3.2. Sampling Technique

68

69

69

69

69

69

6 Analysis and Interpretation 70

7 Findings, Recommendations, Conclusion

7.1 Findings

7.2 Recommendations

7.3 Conclusion

80

81

81

82

I I .i Bibiliography

I. ii Annexure

83

List of Tables

TABLE NO

CONTENTS PAGE NO

1

2

3

4

8 securities across the sectors.

Values of each securities

Optimal portfolio performance values of each securities

Total risk of the securities

71

72

78

79

Optimal Portfolio Performance Chapter - 1

CHAPTER – 1

Dr. Jyothirmayi Degree College (MBA), Adoni -- 7-- Dept. of Management


1. INTRODUCTION

Economic liberalization and globalization of financial markets have accelerated to the

pace of Indian securities market. The role of securities markets in mobilizing and channeling

the private capital for the economic development of the country has increased over the years.

Introduction of computerized online trading and interconnected market system have lead to

further growth. However, the huge success of IPO’s, public issue of many companies and

disinvestments of PSU’s stake has proved this. FII’s have shown great interest in investing in

Indian securities. Welcome change has been the active participation from retail investors.

In this context, the security analysis and portfolio management has emerged as the

most concerned aspect for rational investment, decision making. A portfolio is combination

of securities held together as in investment. A portfolio tries to trade off the risk return

preferences of an investor by not putting all eggs in single basket.

A portfolio allows for sufficient diversification. Traditionally diversification meant

holding large numbers of securities scattered across industries. Many would feel that holding

fifty such scattered stocks is five times more diversified than holding ten scattered stocks.

However modern portfolio doesn’t believe in holding many stocks. It believes in having

“right kind of diversification”, “the right timing” and “the right reason”. Markowitz was the

first who laid foundation for “Modern portfolio theory”. He attempted to quantity risk. He

provided analytical tools for analysis and selection of optimal portfolio. This portfolio

approach won him Nobel Prize in 1990.

The work done by Markowitz was extended by William Sharpe. He simplified the

amount and type of input data required to perform portfolio analysis. He made the numerous

and complex computations easy which were essential to attain optimal portfolio. This

simplification is achieved through single index model. This model proposed by Sharpe in the



simplest and the most widely used one. The study focuses on finding out an optimal portfolio

using single index model.



CHAPTER – 2



2. COMPANY PROFILE

Brics is one of the top-ranked brokerage houses in India today, with market share

volumes consistently ranked among the best in the industry. A comprehensive financial

advisory solutions provider, Brics offers an array of services comprising equity, debt and

commodity broking, portfolio management, distribution of third-party products and

depository facilities. Boasting a rich pedigree as the financial services arm of the JV Gokal

Group—an international conglomerate with over 50 years of experience in tea and

commodities trading—Brics is ideally placed to inherit the vast reserves of experience

amassed by its parent company.

With a view towards business expansion and diversification, Brics Securities was

created in October 2003 following the acquisition and rechristening of Birla Sun Life

Securities—a joint venture between the Aditya Birla Group and the Sunlife Group of

Canada.With a mandate of servicing the investment needs of clients, Brics Securities set off

by drawing from the vast knowledge pool at Birla Sun Life Securities, and infusing fresh

talent into it, crafting a team of top-notch financial professionals capable of accurately

interpreting and meeting client needs. Headquartered in Mumbai, Brics’ operations are

currently spread over a network of 13 offices in 8 cities across India.

This essentially means greater accessibility for clients—whenever and wherever they

need it. In just over two years, the company has established an enviable standing amongst the

top brokerage houses. Analysts from Brics Securities have been featured among the top 10 in

the country by business magazines and the company has consistently been placed in the top

league of the Thompson First Call rankings.

Brics Securities is also among the top five intermediaries in retail debt, making it a

significant player in this segment. Brics has trading and clearing memberships with leading

stock exchanges in India, thereby offering broking services across market segments at all

national level exchanges including The Stock Exchange, Mumbai (BSE), the National Stock

Exchange of India (NSE), the Multi Commodity Exchange of India (MCX) and the National

Commodity and Derivatives Exchange (NCDEX). And, as a depository participant with the

Central Depository Services (India) (CSDL), clients can also look forward to the smooth



settlement of transactions. Armed with extensive experience in the financial services market,

Brics aims to consolidate its position as a leading player through a staunch philosophy of

client-centric services, underpinned by its core value proposition of intelligent investment

ideas, informed insights and consistent, timely advice.

Parentage

Brics Securities is a 100% owned subsidiary of the JV Gokal Group—an international

tea and commodities trading house with over five decades of experience in tea and

commodities trading, and operations spread over six countries worldwide. Founded in 1952

by the late Mr. Jagjivan Gokal, the group has burgeoned into a US $150 million

conglomerate with diverse business interests in tea, textiles, financial services and software.

Its commodity business spans several emerging economies including Brazil, Russia, India,

China, and South Africa.

A leading international player in the tea trade, it has an extensive reach with offices

in India, Sri Lanka, Russia, Kazakhstan, Hong Kong and Dubai, and a distribution network

spanning 25 countries.The reins of this financially robust group are in the hands of Mr.

Ravindra Gokal, Mr. Nakul Arun Jagjivan, Mr. Nayan Arun Jagjivan and Mr. Bhavesh R

Gokal. The strong financial backbone of the group endows Brics with a strong balance sheet

and reinforces its commitment towards business.

ASSOCIATE COMPANIES:

Brics Commodities Pvt. Ltd.

Brics Commodities draws its experience and expertise in commodities from its parent,

the JV Gokal Group, which has been engaged in commodity trading since 1952. Brics

Commodities is a registered Trading-cum-Clearing Member of the Multi Commodity

Exchange of India (MCX) and the National Commodity and Derivatives Exchange

(NCDEX), and is currently in the process of setting up operations across India.



The company is supported by the twin pillars of superior infrastructure and an

experienced research team. The depth of the research can be gauged from the fact that it

conducts proprietary 4-stage crop surveys and soil condition analyses before taking calls on

agricultural commodities.

Wealth Advisors India Pvt. Ltd.

Wealth Advisors India (WAI) is promoted by a team of professionals with more than

two decades of experience in the financial services industry. The WAI team has a successful

track record in financial advisory services by virtue of its client focus, which ensures

customized, value-added and prompt services. Services offered by WAI include the

distribution of third party products (mutual funds, life and general insurance, postal savings,

government bonds, corporate debt) and in-house products (debt, equity, demat).The target

audience mainly comprises corporate, SMEs, banks, PFs, trusts, HNIs and retail individuals.

Botree Software

Incorporated in 1997 Botree Software International (BSIL) is a product development

and Internet solutions company, offering a bouquet of technical, creative, operational and

consultancy services. Its brand ‘Stocky’ has built up a strong presence with a gamut of

products in the areas of distributor automation, C&FA automation, middleware solutions

(web-based), sales force automation (using handheld devices) and integration with ERP

systems.

Today, BSIL (ISO 9001:2000 certified) has established itself as one of the finest

downstream supply chain service providers. It has a noteworthy client list comprising reputed

names in the FMCG, pharmaceutical and mobile verticals such as Johnson & Johnson,

Nestle, Hindustan Lever, Marico Industries, Philips, Procter & Gamble, L'Oreal and Godrej

Industries. Botree also provides solutions in healthcare management and turnkey project

execution for international clients.



BOARD OF DIRECTORS:

Prabhat Awasthi, Head, Equities & Research

An IIT-Kanpur and IIM-Lucknow alumnus, Prabhat has more than a decade of

diverse experience in Equity Research, and was rated India’s Top Analyst by Business

Today (May 2005).

Rahul Rege, Head, Non-Institutional Business

Rahul comes to us with his rich experience in non-institutional broking space at

Sharekhan. Rahul was a key member at Share khan since its inception and has spent seven

years with them.

Smita Das, Head, Institutional Sales

Smita brings with her over nine years of experience in institutional sales, handling

prestigious domestic as well as international clients. She holds an MBA degree in

Marketing & Finance from XIM, Bangalore.

Nirav Sheth, Head, Portfolio Management Services

Nirav has an 11-year track record covering the FMCG, Media and Retail sectors.

Nirav holds an MBA degree in Finance from Symbiosis Institute of Business Management,

Pune.

Bidisha Ganguly, Chief Economist

Bidisha harbours over 10 years of rich experience. In her prior role as Senior CII

Economist, she garnered wide-ranging experience in banking & finance, and overall

monetary & fiscal policy. Bidisha holds an M.A. in Economics, followed by graduate

studies at Columbia University and the University of Maryland, USA.

Distribution Of Products And Services



Wealth Advisors' basket of products is wide enough to address the diverse requirements

of clients and includes distribution of third party products like Mutual funds, Corporate

Debt, Equities, Corporate Deposits, GOI Bonds, Life Insurance, General Insurance and

Small Savings Schemes.WAI has strong in-house and group research capabilities in mutual

funds, debt and equities to analyze products and markets and then recommend them

accordingly.

Mutual Funds: A multiplicity of schemes necessitate an in-depth understanding of

their investment objectives, regular monitoring and analysis of risk adjusted returns of

schemes vis-à-vis benchmark performances. We have to then identify schemes that

deliver superior performance while adhering to their specific investment policy.

Equities: There is often more to a company's story than what numbers alone reveal.

Which is why, we look beyond published reports and rely on in-house research. While

quantitative analysis using the in-house and group research capabilities serves as a

first stage filter, our research team meets with company managements and observes

operations on-site to get meaningful insights into a company's ability to translate

vision into reality.

Debt: The overall objective is to optimize returns while attempting to minimize both

interest rate risk and credit risk. Based on regular monitoring of the economy and

factors which impact interest rate and credit quality, our research team arrives at

broad investment strategies in debt mutual fund schemes or corporate debentures.

Fixed Income Research

Brics Securities’ Fixed Income Group provides secondary market broking services

over a range of debt instruments, including government securities, treasury bills, and public

and private sector bonds. Our experienced dealing team currently services over 200

institutional clients which include Banks, Mutual Funds, Insurance Companies, Financial

Institutions and Primary Dealers (PD’s). Company has a member of the WDM segment of the

NSE and BSE, and the company’s access to the latest movements in the wholesale debt

market allows clients to reap the rich benefits of accurate and timely information. In the retail

debt segment, Brics Securities currently services over 2,000 clients across the country on a

regular basis, comprising Corporate Retirement Trusts, NBFC’s and High Net Worth



Individuals (HNI). The transaction ticket size varies from a few thousand rupees to a few

crores, depending on client requirements. Company offer services to provident fund, gratuity

and superannuation trusts in the Retirement Trusts category. Effective April 1, 2003, non-

government trusts are required follow a statutory investment pattern as laid down by the

finance ministry. In the NBFC client segment, Brics offers broking as well as advisory

services, and helps maintain client SLR’s at the required level (15% of total deposits for

NBFC’s that accept deposits from the public).

Brics Securities also offers broking services to retail investors for government

securities. Individual investors can avail of our services with a minimum investment of Rs

1000, and also conveniently obtain two-way quotes from us by telephone. We deal only in

the de-materialised form of securities.

BRICS SECURITIES ADVANTAGE

Access to the latest market trends:

Armed with the unique advantage of having access to the latest trends in the

wholesale debt market, Brics is able to provide clients with accurate and timely market

information. Our dedicated sales persons pre-empt client needs and provide fitting investment

advice. Apart from this, Brics also acts as a principal party in buying and selling securities,

thus helping clients maintain their statutory investment patterns.

In-depth analysis:

An intimate understanding of the market helps Brics Securities produce cutting-edge

reports. The Fixed Income Group conducts in-depth analysis of key issues influencing the

Indian debt, money and foreign exchange markets. Company’s research team provides

opinions on asset allocation, helps identify significant market trends and publishes global

forecasts on economic activity, policies, interest rates and the Indian rupee, so as to highlight

opportunities for investors and issuers. Additionally, a dedicated team tracks developments

on the Indian economy. Insightful portfolio analysis coupled with extremely efficient post

deal execution ensures complete client satisfaction.



Privacy Policy

At Brics Securities Ltd. they consider the relationship with customer as invaluable

and strive to respect and safeguard the right to privacy. During the relationship customer has

to provide the company with various information for the purpose of availing various facilities

and services, such as online share trading. The personal information company gets from

customer will help to provide with the improved services and products that match customer

needs as closely as possible. Company ensure to protect the personal and financial details

submitted by the customer and the transaction detail done through the company. Customers

account information is protected by placing it in the secure portion of the company Web site,

which is why access to the account is restricted to customer only through your unique login

ID and password. Customer should not reveal the ID and password to any body to maintain

confidentiality of the information. Company shall not disclose customer’s personal details to

any third party. However under certain conditions we would share this information:

(1) The company or its affiliates may use your personal information to keep you updated

about new product or information which is offered from time to time, that may be of

interest to you.

(2) As a part of normal legal/regulatory purposes required by the Securities and Exchange

Board of India, Bombay Stock Exchange Limited, National Stock Exchange of India

Ltd. and other regulatory and government entities, and

(3) Entities, if any, to whom we give contract for processing your application and

transactions and such disclosure would be exclusive to the performance of the specific

service we have assigned.

Please note that this privacy policy does not create any contractual or other legal rights

in or on behalf of any party, nor is it intended to do so.



RULES AND REGULATIONS AFFECTING CLIENT

TRADING MEMBER RELATIONSHIP

Contract Note

Every Trading Member shall issue a contract note to his constituents for trades

executed in such format as may be prescribed by the Exchange from time to time with all

relevant details as required therein to be filled in and issued in such manner and within such

time as prescribed by the Exchange. A contract note shall be signed by a Trading Member or

his Authorised signatory or constituted Attorney.

The Contract Notes shall be numbered with unique running serial number

commencing from one which shall be reset only at the beginning of every financial year. In

case separate series are maintained in respect of different dealing offices of the trading

member, then the dealing office name or code shall be prefixed to the serial number.

A contract note may also be issued by a Trading Member in electronic form in such

format as may be prescribed by the Exchange from time to time duly authenticated by means

of a digital signature as specified in the Information Technology Act, 2000 and the Rules

made there under.

Brokerage

All the orders entered on the Trading System shall be at prices exclusive of

brokerage.Trading Members shall charge brokerage at rates not exceeding such scale as the

Exchange may from time to time prescribe. A Trading Member shall charge brokerage

separately to their constituents and this shall be indicated separately from the price, in the

contract note.



Interest, Dividend, Rights / Bonus And Calls

The buyer shall be entitled to receive all coupons, dividends, bonus, rights and other

privileges which may appertain to securities cum coupon, cum dividend, cum bonus, cum

rights, etc. and the seller shall be entitled to receive all coupons, dividends, bonus issues,

rights and other privileges which may appertain to securities sold ex coupon, ex dividend, ex

bonus, ex rights, etc.

Margin From The Constituents

The Trading Members shall have the right to demand from its constituents the Margin

Deposit which the member has to provide under these Trading Regulations in respect of the

business done by the Members for such constituents. The Trading Members shall buy

securities on behalf of the constituent only on the receipt of margin of minimum such

percentage as the relevant authority may decide from time to time, on the price of the

securities proposed to be purchased, unless the constituent already has an equivalent credit

with the broker. The Trading Member may not, if so desire, collect such a margin from

Financial Institutions, Mutual funds and Foreign Institutional Investors.

The Trading Members shall buy securities on behalf of the constituent only on the

receipt of margin of minimum of such percentage as the relevant authority may decide from

time to time, on the price of the securities proposed to be sold, unless the Trading Member

has received the securities to be sold with valid transfer documents to his satisfaction prior to

such sale. The Trading Member may not, if so desire, collect such a margin from Financial

Institutions, Mutual funds, and Foreign Institutional Investors. The Trading Member shall

obtain a written undertaking from the constituents that the latter shall when called upon to do

so forthwith from time to time provide a Margin Deposit and/or furnish additional Margin as

required under these Rules and Regulations in respect of the business done for the constituent

by and/or as agreed upon by constituent with the Trading Member concerned. The Trading

Member may keep the unutilized margin deposits of his client in bank deposits and pay

interest on the same at such rate as may be mutually agreed in writing between the Trading

Member and his constituent out of the interest accrued on the said deposits.



Trading Member In Default

For the purpose of Byelaw 8 of Chapter X of the Byelaws of the Exchange, the period

within which a constituent shall close out his contract shall be seven trading days from the

date of pay out of securities due to him; Provided however, if the constituent has not effected

the close out as stated above, he shall be deemed to have closed out at the highest price of the

said security deliverable to him from the date of trading till the 7th trading day from the date

of pay out and loss or damage referred in the said Byelaw shall be ascertained accordingly.

Constituent In Default

If a constituent fails to make payment of consideration to the trading member in

respect of any one or more securities purchased by him before the pay- in date notified by the

Exchange from time to time. The Trading Member shall be at liberty to sell the securities

received in pay-out, in proportion to the amount not received, after taking into account any

amount lying to the credit of the Constituent, by selling equivalent securities at any time on

the Exchange not later than the fifth trading day reckoned from the date of pay- in.

If the trading member has not sold the securities for any reason whatsoever, such

securities shall be deemed to have been closed out at the close out price declared by the

Exchange for the fifth trading day. The loss, if any, on account of the close out shall be to the

account of the Constituent. If a Constituent fails to deliver any one or more securities to the

pool account of the trading member in respect of the securities sold by him before the pay- in

date notified by the Exchange from time to time. Such undercharged obligation in relation to

delivering any one or more securities shall be deemed to have been closed out at the auction

price or close-out price, as may be debited to the Trading Member in respect of the security

for the respective settlement, To the extent traceable to the Constituent who has failed to

deliver; otherwise the close out price on the date of pay-out in respect of the relevant

securities, declared by the Exchange. The loss, if any, on account of the close out shall be to

the account of the Constituent. Subject to what is stated above, no further claims shall lie

between the Constituent and Trading Member.Explanation: If for any reason, schedule of

pay-in and pay-out is modified the above provision shall be made applicable reckoning the

actual date of pay-in and/or pay-out, as the case may be.



CODE OF CONDUCT FOR TRADING MEMBERS

ADHERENCE TO SEBI CODE OF CONDUCT

The Trading Member shall at all times subscribe to the Code of Conduct as prescribed

by the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations,

1992.

General Principles

Professionalism:

A Trading Member in the conduct of his business shall observe high standards of

commercial honour of just and equitable principles of trade.

Adherence to Trading Practices:

Trading Members shall adhere to the Rules, Regulations and Byelaws of the

Exchange and shall comply with such operational parameters, rulings, notices, guidelines and

instructions of the relevant authority as may be applicable from time to time.

Honesty and Fairness:

In conducting his business activities, a Trading Member shall act honestly and fairly,

in the best interests of his constituents.

Capabilities:

A Trading Member shall have and employ effectively the resources and procedures

which are needed for the proper performance of his business activities.



Trading Principles

(a) Trading Members/Participants shall ensure that the fiduciary and other obligations

imposed on them and their staff by the various statutory Acts, Rules and Regulations

are complied with.

(b) Trading Members/Participants shall ensure – (i) that any employee who commits the

Trading Members or Participants to a transaction has the necessary authority to do so.

(ii) that employees are adequately trained in operating in the relevant market segment

in which they deal, are aware of their own, and their organisation's responsibilities as

well as the relevant Statutory Acts governing the Trading Member, the Rules,

Regulations and Bye-laws of the Exchange including any additions or amendments

thereof.

(c) Trading Member shall be responsible for all the actions including trades originating

through or with the use of all following variables - Trading Member Id, User Id, valid

User password at that point of time. However if the Trading Member satisfies the

Exchange that the action(s) and /or trade(s) took place due to fraud or

misrepresentation by any other person other than his authorized person(s) and that the

action(s) and/or trades did not originate from any of his approved workstations, the

Exchange may issue such directions as it considers just and reasonable. The directions

may include referring the matter to arbitration and/or annulment of trade(s) so

effected.

(d) When entering into transactions on behalf of constituents, the Trading Members shall

ensure that they abide by the Code of Conduct and regulations as enumerated in the

current chapter of these regulations.

(e) No Trading Member or person associated with a Trading Member shall make

improper use of constituent's securities or funds.



(f) No Trading Member shall publish and circulate or cause to be published or circulated, any

notice, circular, advertisement, newspaper article, investment service or communication

of any kind which purports to report any transaction as a purchase or sale of any security

unless such Trading Member can establish if called for that such transaction was a

bonafide purchase or sale of such security or which purports to quote the purchase/sale

price for any security unless such Trading Member can establish if called for that such

quotation represents a bonafide order of such security.

(g) When entering into or arranging transactions, Trading Members must ensure that at all

times great care is taken not to misrepresent in any way the nature of transaction.

(h) No Trading Member shall exercise any discretionary power in a client's account unless

such client has given prior written authorization to a stated individual or individuals and

the account has been accepted by the Trading Member, as evidenced in writing by the

Trading Member.

(i) A Trading Member shall not act as a principal or enter into any agreement or

arrangement with a client or client's agents, employees or any other person connected

to the client, employee or agency, whereby special or unusual rates are given with

intent to give special or unusual advantage to such client for the purpose of securing

his business.

(j) The facility of placing orders on ‘Pro-account’ through trading terminals shall be

availed by the Trading Members only at one location of the Trading Members as

specified / required by the Trading Members. Any trading terminal located at a place

other than the above location shall have a facility to place order only for and on behalf

of a Constituent by entering client code details as required by the Exchange / SEBI.

In case any trading member requires the facility of using ‘Pro-account’ through

trading terminals from more than one location, such trading member shall request the

Exchange stating the reason for using the ‘Proaccount’ at multiple locations and the

Exchange may, on a case to case basis after due diligence, consider extending the facility of

allowing use of ‘Pro-account’ from more than one location.



Unfair Trading Practices

4.6.1 No Trading Member shall execute or cause to be executed or participate in an

account for which there are executed purchases of any eligible security at successively higher

prices, or executed sales of any such security at successively lower prices, for the purpose of

creating or inducing a false, misleading or artificial appearance of activity in such security or

for the purpose of unduly or improperly influencing the market price for such security or for

the purpose of establishing a price which does not reflect the true state of the market in such

security.4.6.2 No Trading Member shall, for the purpose of creating or inducing a false or

misleading appearance of activity in an eligible security or creating or inducing a false or

misleading appearance with respect to the market in such security, (a) enter any order or

orders for the purchase of such security with knowledge that an order or orders of

substantially the same size, and at substantially the same price, for the sale of any such

security, has been or will be entered by or for the same or different parties, or (b) enter any

order or orders for the sale of such security with the knowledge that an order or orders of

substantially the same size, and at substantially the same price for the purchase of such

security has been or will be entered by or for the same or different parties.4.7 Every Sub-

broker shall comply with all relevant statutory Acts, including Securities Contracts

(Regulation) Act, 1956 and Rules there under of 1957, and Securities Exchange Board of

India Act, 1992 and Rules, Regulations and guidelines there under, Byelaws, Rules and

Regulations of the Exchange and the requirements of and under any notifications, directives,

guidelines and circulars issued by SEBI and/or the Exchange.

Philosophy of the company

Inspiration, Innovation and Integrity are the three elements that lie at the very core of

the company’s philosophy. Brics philosophy is: To become an inspiration not only for

employees but also for their peers by adopting fair and just practices in their conduct with all

the stakeholders of the company. They continually strive to be innovative in their approach to

the solutions they provide, and also in their processes and services. At Brics, ethics take top

priority.



CHAPTER – 3



3. STUDY DESIGN

3.1 IMPORTANCE AND NEED OF THE STUDY

It helps the investor in identifying the systematic and unsystematic risk

involved in the share prices of the company’s stocks.

It makes careful analysis of the past, planning and diversification of the

investment to moderate the effects of the various risk factors.

Statistical use of standard deviation and expected rate of return help to

quantify the risk.

Analysis of risk and return trade off helps to measure how fast, how often,

how much and so on and give a measurement of the heat and speed of the

market as well as identifying the best and worst constituents at the time.

It helps the investor in making decision on buying and selling the securities

according to the risk involved and the returns associated with the particular

stock.

It helps the investor to analyze and find out the possible yield from his

investments.



3.2 OBJECTIVES OF THE PROJECT

1. To construct an optimal portfolio using Sharpe single index model.

2. To identify stocks and proportion of stocks to be included in portfolio.

3. To find out the stocks to be sold, if existing in current portfolio.

4. To maximize the returns at a given level of risk.

5. To minimize the risk at a given level of returns.



3.3 SCOPE OF THE PROJECT

As the stock market is highly volatile, it is very difficult for the ordinary investor or

speculator to predict the movements of stock prices. The movements of stock prices are

predicted where the investors could minimize the risk and there by maximize their profits.

Once an investor is able to identify the trend, through this he can maximize his profits. In this

scenario many companies are available.

Many people want to invest in shares in order to make huge profits. In this scenario

many companies are available and the investors are in a dilemma to choose a particular

company for investing which gives more returns for them rather than putting their hands in a

company, which is more risky. To assess the potential for an industry group, an investor

would like to consider the overall growth rate, market size and importance to the economy.

While the individual company is still important, its industry group likely to exert just as

much, or more, influence on the stock price. When stocks move, they usually move a group;

there arte very few lone guns out there. Many times it is more important to be in the right

industry than in the right stock.

Once the industry is chosen, an investor would need to narrow the list of companies

before proceeding to a more detailed analysis. Investors are usually interested in finding the

leaders and the innovators within the group. The first task is to identify the current business

and competitive environment with in a group as well as the future trend. How do the

companies rank according to market share, product position and competitive advantage?

Success depends on an edge, be it marketing, technology, market share or innovation.

Comparative analysis will help identify those companies, which are best to invest

with an edge by using methods like expected rate of return, standard deviation and risk free

rate of return calculation.

The study is to construct an optimal portfolio by using an William Sharpe’s Single

Index Model. The stocks chosen to include in portfolio are limited to 8 stocks, which are

constituents of NIFTY.



3.4 LIMITATIONS OF THE PROJECT

1. The project is limited to the extent of information available.

2. Study is restricted to only 8 stocks, which are constituents of market portfolio i.e., NSE-

NIFTY.

3. Dividend incomes are not considered.

4. Stock prices considered are restricted to only the previous 24-month’s closing prices.

5. The study of purely academic interest.

6. Due to time constraint and lack of information, no gilt edged securities, mutual funds,

debentures, etc. could be included in this portfolio.

7. All the calculations could not be brought into the report.



CHAPTER – 4



4. REVIEW OF LITERATURE

4.1 OVERVIEW OF CAPITAL MARKET

Capital Market is a wide term used to comprise all operations in the New Issues and Stock

Market. New Issues made by companies constitute the Primary Market, while trading in the

existing securities relates to the Secondary Market. While we can only buy in the Primary

Market, we can buy and sell securities in the Secondary Market. Capital Market encompasses

all operations of F.I.I., Banks etc., at the long end of spectrum of maturities. It is concerned

with those private savings that are turned into investments through new capital issues and

also new public loans floated by government and semi-government bodies.

Capital Market is a market for borrowing and lending of funds of more than one year.

This market supplies funds for financing the fixed capital requirements of trade and

commerce as well as the long-term requirements of the government. Developing banks and

Insurance companies play a dominant role in the capital market. Transactions in the capital

market have to be conducted only through authorized dealers.

Primary Market:

Primary market is a market for new issues or new financial claims. Hence, it is also

called Initial Public Offering (IPO). Primary market deals with those securities, which are

issued to the public for the first time. In the primary market, the borrower exchange new

financial securities for long-term funds. Thus primary market facilitates capital formation.

There are three ways by which a company may raise capital in the primary market. They are:

Primary issue,

Rights issue, &

Private placement.

The most common method of raising capital by new companies is through sale of

securities to the public. It is called public issue or Initial Public Offering (IPO).



When an existing company wants to raise additional capital, securities are first offered

to the existing shareholders on a pre-emptive basis. It is called rights issue. Private placement

is a way of selling securities privately to a small group of investors.

Secondary Market:

Secondary market is a market for secondary sale of securities. Securities that are

already traded in the new issue market are traded in this market. Generally such securities are

quoted in the Stock Exchanges and it provides a continuous and regular market for buying

and selling of securities. This market consists of all stock exchanges recognized by the

Government of India.

The stock exchanges in India are regulated under the Securities Contracts

(Regulation) Act, 1956. The Bombay Stock Exchange is the principal stock exchange in

India, which sets the tone of the other stock markets.

Structure of the Market:

There are various sub-markets in the Capital Market in India. The structure has undergone

vast changes in recent years. New instruments and new institutions have emerged on the

scene. The sub-markets in the Capital Market are-

1. Market for Corporate securities-for new issues and old securities,

2. Market for Government securities,

3. Market for Debt instruments-debentures and bonds of private corporate sector, bond of

public sector undertakings, public financial institutions, etc.

4. Mutual fund schemes and UTI schemes, etc.

So far as the individual investors are concerned, the market for Corporate securities

and Mutual funds schemes are more relevant. They satisfy requirements of investors namely,

appreciation of capital, safety, liquidity and hedge against inflation.



Importance of Capital Market:

Absence of a capital market acts as a hindrance to the capital formation and economic

growth. Resources would remain idle if finances were not funneled through capital market.

The importance of capital market can be briefly summarized as-

The capital market serves as an important source for the productive use of the economy’s

savings. It mobilizes the savings of the people for further investment and thus avoids

their wastage in unproductive uses.

It provides incentives to savings and facilitates capital formation by offering suitable

rates of interest as per the price of capital.

It provides an avenue for investors, particularly the household sector to invest if financial

assets which are more productive then physical assets.

It facilitates increase in production and productivity in the economy and thus enhances

the economic welfare of the society. Thus, it facilitates “the movement of stream of

command over capital to the point of highest yield” towards those who can apply them

productively and profitably to enhance the national income in the aggregate.

The operations of different institutions in the capital market induce economic growth.

They give qualitative and quantitative directions to the flow of funds and bring about

rational allocation of scarce resources.

A healthy capital market consisting of expert intermediaries promotes stability in values

of securities representing capital funds.

Capital Market Instruments:

The main capital market instruments one can invest in and include in his portfolio are:

1. Equity Shares,

2. Preference Shares,

3. Debentures (convertible and non-convertible),

4. Secured Premium Notes,

5. Zero Coupon Bonds, &

6. Discount Bonds and Deep Discount Bonds.

7. Mutual Funds.



4.2 STOCK EXCHANGE:

A stock exchange or share market is a corporation or mutual organization

which provides facilities for stock brokers and traders, to trade company stocks 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 traded 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

local & central location at least for recordkeeping, but trade is less and less linked to

such a physical place, as modern markets are electronic networks, which gives them

advantages of speed and cost of transactions.

Trade on an exchange is by members only & stock & share holders. 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 markets 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 exchange. Such trading is said to be off

exchange or over-the-counter. This is the usual way that bonds are traded.

Increasingly, stock exchanges are part of a global market for securities.



List of Stock Exchanges In India:

Bombay Stock Exchange

National Stock Exchange

Regional Stock Exchange

Ahmedabad Stock Exchange

Bangalore Stock Exchang

Bhubaneshwar Stock Exchange

Calcutta Stock Exchange

Cochin Stock Exchange

Coimbatore Stock Exchange

Delhi Stock Exchang

Guwahati Stock Exchange

Hyderabad Stock Exchange

Jaipur Stock Exchange

Ludhiana Stock Exchange

Madhya Pradesh Stock Exchange

Madras Stock Exchange

Magadh Stock Exchange

Mangalore Stock Exchange

Meerut Stock Exchange

OTC Exchange Of India

Pune Stock Exchange

Saurashtra Kutch Stock Exchange

Uttar Pradesh Stock Exchange



History of Stock Exchanges In India:

In 1860, the exchange flourished with 60 brokers. In fact the 'Share Mania' in India

began with the American Civil War broke and the cotton supply from the US to Europe

stopped. Further the brokers increased to 250.

At the end of the war in 1874, the market found a place in a street (now called Dalal

Street). In 1887, "Native Share and Stock Brokers' Association" was established. In 1895, the

exchange acquired a premise in the street, which was inaugurated in 1899.

Objectives:

Create a single integrated national level solution with access to multiple markets for

providing high cost-effective service to millions of investors across the country.

Create a liquid and vibrant national level market for all listed companies in general and

small capital companies in particular.

Optimally utilize the existing infrastructure and other resources of Participating Stock

Exchanges, which are under-utilized now.

Provide a level playing field to small Traders and Dealers by offering an opportunity to

participate in a national market having investment-oriented business.

Reduce transaction cost.

Provide clearing and settlement facilities to the Traders and Dealers across the Country

at their doorstep in a decentralized mode. Spread demat trading across the Country.

The Role Of Stock Exchanges



Stock exchanges have multiple roles in the economy, this may include the following:

Raising capital for businesses:

The Stock Exchange provides companies with the facility to raise capital for expansion

through selling shares to the investing public.

Mobilizing savings for investment:

When people draw their savings and invest in shares, it leads to a more rational

allocation of resources because funds, which could have been consumed, or kept in idle

deposits with banks, are mobilized and redirected to promote business activity with benefits

for several economic sectors such as agriculture, commerce and industry, resulting in a

stronger economic growth and higher productivity levels.

Facilitating company growth:

Companies view acquisitions as an opportunity to expand product lines, increase

distribution channels, hedge against volatility, increase its market share, or acquire other

necessary business assets. A takeover bid or a merger agreement through the stock market is

one of the simplest and most common ways for a company to grow by acquisition or fusion.

Redistribution of wealth:

Stocks exchanges do not exist to redistribute wealth although casual and professional

stock investors through stock price increases and dividends get a chance to share in the

wealth of profitable businesses.

Corporate governance:



By having a wide and varied scope of owners, companies generally tend to improve on

their management standards and efficiency in order to satisfy the demands of these

shareholders and the more stringent rules for public corporations imposed by public stock

exchanges and the government.

Consequently, it is alleged that public companies (companies that are owned by

shareholders who are members of the general public and trade shares on public exchanges)

tend to have better management records than privately-held companies (those companies

where shares are not publicly traded, often owned by the company founders and/or their

families and heirs, or otherwise by a small group of investors). However, some well-

documented cases are known where it is alleged that there has been considerable slippage in

corporate governance on the part of some public companies (e.g. Enron Corporation, MCI

WorldCom, Pets.com, Webvan, or Parmalat).

Creating investment opportunities for small investors:

As opposed to other businesses that require huge capital outlay, investing in shares is

open to both the large and small stock investors because a person buys the number of shares

they can afford. Therefore the Stock Exchange provides the opportunity for small investors to

own shares of the same companies as large investors, and to enjoy similar rates of return.

Government capital-raising for development projects:

Governments at various levels may decide to borrow money in order to finance

infrastructure projects such as sewage and water treatment works or housing estates by

selling another category of securities known as bonds. These bonds can be raised through the

Stock Exchange whereby members of the public buy them, thus loaning money to the

government. The result is that the government must tax the citizens or otherwise raise

additional funds to make any regular coupon payments and refund the principal when the

bonds mature.

Barometer of the economy:



At the stock exchange, share prices rise and fall depending, largely, on market forces.

Share prices tend to rise or remain stable when companies and the economy in general show

signs of stability and growth. An economic recession, depression, or financial crisis could

eventually lead to a stock market crash. Therefore the movement of share prices and in

general of the stock indexes can be an indicator of the general trend in the economy.

Listing requirements:

Listing requirements are the set of conditions imposed by a given stock exchange

upon companies that want to be listed on that exchange. Such conditions sometimes include

minimum number of shares outstanding, minimum market capitalization, and minimum

annual income.

REQUIREMENTS BY STOCK EXCHANGE:

Companies have to meet the requirements of the exchange in order to have their stocks

and shares listed and traded there, but requirements vary by stock exchange:

London Stock Exchange: The main market of the London Stock Exchange has

requirements for a minimum market capitalization (£700,000), three years of audited

financial statements, minimum public float (25 per cent) and sufficient working

capital for at least 12 months from the date of listing.

NASDAQ Stock Exchange: To be listed on the NASDAQ a company must have

issued at least 1.25 million shares of stock worth at least $70 million and must have

earned more than $11 million over the last three years.

New York Stock Exchange: To be listed on the New York Stock Exchange (NYSE),

for example, a company must have issued at least a million shares of stock worth

$100 million and must have earned more than $10 million over the last three years.

Stock Market:



Indian stock market marks to be one of the oldest stock market in Asia. Stock Market,

which is a market where the trading of company stock, both listed company securities and

unlisted takes place. It is different from stock exchange because it also put all stock indices

and stock index movements on the same platform. For example, we use the term, "the stock

market was up today" or "the stock market bubble."

The National Stock Exchange:

The National Stock Exchange of India Limited has genesis in the report of the High

Powered Study Group on Establishment of New Stock Exchanges, which recommended

promotion of a National Stock Exchange 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. On its recognition as a stock exchange under the Securities

Contracts (Regulation) Act, 1956 in April 1993, NSE commenced operations in the

Wholesale Debt Market (WDM) segment in June 1994. The Capital Market (Equities)

segment commenced operations in November 1994 and operations in Derivatives segment

commenced in June 2000.

Mission of NSE :

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.

Promoters :



NSE has been promoted by leading financial institutions, banks, insurance companies and

other financial intermediaries:

Industrial Development Bank of India Limited

Industrial Finance Corporation of India Limited

Life Insurance Corporation of India

State Bank of India

ICICI Bank Limited

IL & FS Trust Company Limited

Stock Holding Corporation of India Limited

SBI Capital Markets Limited

Bank of Baroda

Canara Bank

General Insurance Corporation of India

National Insurance Company Limited

The New India Assurance Company Limited

The Oriental Insurance Company Limited

United India Insurance Company Limited

Punjab National Bank

Oriental Bank of Commerce

Corporation Bank

Indian Bank

Union Bank of India

Infrastructure Development Finance Company Ltd.

Corporate Structure :

NSE is one of the first de-mutualized stock exchanges in the country, where the

ownership and management of the Exchange is completely divorced from the right to trade on

it. Though the impetus for its establishment came from policy makers in the country, it has

been set up as a public limited company, owned by the leading institutional investors in the

country.



From day one, NSE has adopted the form of a demutualised exchange - the

ownership, management and trading is in the hands of three different sets of people. NSE is

owned by a set of leading financial institutions, banks, insurance companies and other

financial intermediaries and is managed by professionals, who do not directly or indirectly

trade on the Exchange. This has completely eliminated any conflict of interest and helped

NSE in aggressively pursuing policies and practices within a public interest framework.

The NSE model however, does not preclude, but in fact accommodates involvement,

support and contribution of trading members in a variety of ways. Its Board comprises of

senior executives from promoter institutions, eminent professionals in the fields of law,

economics, accountancy, finance, taxation, etc, public representatives, nominees of SEBI and

one full time executive of the Exchange. While the Board deals with broad policy issues,

decisions relating to market operations are delegated by the Board to various committees

constituted by it. Such committees include representatives from trading members,

professionals, the public and the management. The day-to-day management of the Exchange

is delegated to the Managing.

Logo of NSE:

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 symbolizes 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.



Securities and Exchange Board of India (SEBI):

SEBI is a board (autonomous body) created by the Government of India in 1988 and

given statutory form in 1992 with the SEBI Act 1992 with its head office at Mumbai. It is

chaired by Mr. M. Damodaran a respected turnaround civil servant credited with turning

around large public sector companies from near death scenarios including the famous Unit

Trust of India. Below the Board, headed by the Chairman, the staff/officers of the

organization are led by Executive Directors.

SEBI has three functions rolled into one body: legislative, judicial and executive. It

drafts rules in its legislative capacity, it conducts enquiries and enforcement action in its

executive function and it passes rulings and orders in its judicial capacity. Though this makes

it exceedingly powerful, there is an appeals process to create accountability.

SEBI has had a mixed history in terms of its success as a regulator. Though it has

pushed systemic reforms aggressively and successively (e.g. the quick movement towards

making the markets electronic and paperless), it seems to lack the legal expertise needed to

sustain prosecutions/enforcement actions. It has often received flak from the appellate body

known as the Securities Appellate Tribunal (SAT). From the SAT, an appeal lies straight to

the Supreme Court of India

Functions of SEBI:

Its main functions are:

1. Registering and regulating the working of stock brokers, sub-brokers, share transfer

agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers,

underwriters, portfolio managers, investment advisers and such other intermediaries who

may be associated with securities markets in any manner.



2. Registering and regulating the working of the depositories, participants, custodians of

securities, foreign institutional investors, credit rating agencies and such other

intermediaries as the board may, by notification, specify in this behalf.

3. Registering and regulating the working of venture capital funds and collective investment

schemes including mutual funds;

4. Prohibiting fraudulent and unfair trade practices relating to securities markets;

5. Promoting investors' education and training of intermediaries of securities markets;

6. Prohibiting insider trading in securities;

7. Regulating substantial acquisition of shares and takeover of companies;

8. Calling for information from undertaking inspection, conducting inquiries and audits of

the stock exchanges, mutual funds and other persons associated with the securities market

and intermediaries and self- regulatory organisations in the securities market;

9. Calling for information and record from any bank or any other authority or board or

corporation established or constituted by or under any central, state or provincial act in

respect of any transaction in securities which is under investigation or inquiry by the

board;19

10. Performing such functions and exercising such powers under the provisions of 20

securities contracts (regulation) act, 1956, as may be delegated to it by the central

government;

11. Levying fees or other charges for carrying out the purpose of this section;

12. Conducting research for the above purposes;

13. Calling from or furnishing to any such agencies, as may be specified by the board, such

information as may be considered necessary by it for the efficient discharge of its

functions ,performing such other functions as may be prescribed.



4.3 INVESTMENT ANALYSIS

INVESTMENT :

“Investment is the sacrifice of certain present values for the uncertain future reward”

Meaning:

‘Investment’ of ‘Investing’ is a word of many interpretations. There are

basically two concepts of investments.

1. Economic Investment

In the Economic sense, investment means net additions to the economy’s capital stock

which consists of goods and services that are used in the production of other goods and

services. Investment in this sense implies the formation of new and productive capital in the

form of new constructions, plant used machinery etc. Such investment generates physical

assets.

2. Financial Investment

In the financial sense, investment is the commitment of a person’s fund to derive

future income in the turn of interest, dividend, premiums, pension benefits or appreciation in

the value of their capital. Purchasing of shares, debentures, post office saving certificates,

insurance policies are all investments in the financial sense. Such investment generates

financial assets.



INVESTMENT ALTERNATIVES:

For an investor, he has got a wide array of investment avenues to choose sacrificing

some rig our, these may be classified as shown in exhibit.


InvestmentAvenues

Non-marketable Financial Assets

Equity Shares

Money MarketsInstruments

Life InsurancePolicies

Precious Objects

Bonds

Mutual found Schemes

Real Estate

Financial Derivatives


Non – marketable Financial Assets:

A good portion of financial assets is represented by non-marketable financial assets.

These can be classified in to the following broad categories.

Bank deposits

Post office deposits

Company deposits

Provident fund deposits

Equity Shares:

Equity shares represent ownership capital. As an equity shareholder, he has an

ownership stake in the company. This essentially means that he has residual interest in

income and wealth. Perhaps, the most romantic among various investment avenues, equity

shares are classified into the following broad categories by stock market analysts :

Blue chip shares

Growth shares

Income shares

Cyclical shares

Speculative shares

Bonds:

Bonds or debentures represent long-term debt instruments. The issuer of a bond

promises to pay a stipulated stream of cash flows. Bonds may be classified into the following

categories:

Government securities

Government of India relief bonds

Government agency securities

PSU bonds

Debentures of private sector companies



Money Market Instruments:

Debt instruments which have a maturity of less than one year at the time of issue are

called money market instruments. The important money market instruments are :

Treasury bills

Commercial paper

Certificates of deposit

Mutual Funds:

Instead of directly buying equity shares and/or fixed income instruments, If can

participate in various schemes floated by mutual funds which, in turn, invest in equity shares

and fixed income securities. There are three broad types of mutual fund schemes.

Equity schemes

Debt schemes

Balanced schemes

The insurance:

The insurance in a broad sense, life insurance may be viewed as an investment.

Insurance premiums represented for the sacrifice and the assured sum the benefit. The

important types of insurance policies in India are :

Endowment assurance policy

Money back policy

Whole life policy

Term assurance policy



Real Estate:

For the bulk of the investors the most important asset in their portfolio is a residual

house. In addition to a residential house, the more affluent investors are likely to be interested

in the following types of real estate:

Agricultural land

Semi-urban land

Time-share in a holiday resort.

Precious Objects:

Precious objects are items that are generally small in size but highly valuable in

monetary terms. Some important precious objects are :

Gold and silver

Precious stones

Art objects

Financial Derivatives:

A financial derivative is an instrument whose value is derived form the value of an

underlying asset. It may be viewed as a side on the asset. The most important financial

derivatives from the point of investors are :

Options

Futures

4.4 PORTFOLIO MANAGEMENT



A portfolio consists of any combination of assets, the outcome of which cannot be

defined with certainty. A portfolio goes with a saying that “A wise man never puts all his

eggs in one basket”. A portfolio is a collection of securities. Since it is rarely desirable to

invest the entire funds of an individual or an institution in a single security, it is essential that

every security be viewed in a portfolio context.

Two basic principles of finance form the basis for portfolio theory. Namely, Time

value of money and the Safety of money. A rupee today is worth more tan a rupee tomorrow

or a year later, and as parting with money involves the loss of present consumption, it has to

be rewarded by a return commensurate with time of waiting. Secondly a safe rupee is

preferred to an unsafe rupee at any point of time. Due to risk aversion of investors, they feel

risk is inconvenient and has to be rewarded by a return. The larger the risk, the higher should

be the return.

Objectives of a Portfolio:

The objective of a portfolio theory is two folded-

1. To optimize risk for a given level of yield or

2. To optimize return for a given level or risk.

This objective of portfolio management is termed as a search for “Efficient Portfolio”. It is

useful here to clarify what an efficient portfolio. A portfolio is efficient if and only if there is

no alternative with-

1. The same return at a lower risk or

2. The same risk at a lower return or

3. A higher return and a lower risk.

A portfolio theory is based on two assumptions, other things remaining the same-

1. Investors prefer higher rate of return to a lower rate of return.

2. Investors are risk averse, i.e., not willing to take risk.

The traditional portfolio managers diversified their funds over a large number of

securities to strike a balance between risk and return. However this was done on intuition



without really understanding the magnitude of risk reduction. The 1950’s saw a body of

knowledge being developed, which measures the expected rate of return and risk associated

with combining assets. This study came to be known as Portfolio Theory.

The important portfolio theories have been developed by-

1. Harry M. Markowitz

2. William Sharpe

Portfolio Management:

Portfolio Management is a process encompassing many activities of investment in

assets and securities. It is a dynamic and flexible concept and involves continuous and

systematic analysis, judgment and operations. The objective of portfolio management is to

help the investors with the expertise of professionals. Portfolio Management is the

management of large investible funds with a view to maximizing return and minimizing risk.

Portfolio Management is an art and requires high degree of expertise. It is essentially a

systematic method of managing one’s investment efficiently.

Basically Portfolio Management involves;

1. A proper investment decision-making of what to buy and sell;

2. Proper money management in terms of investment in a basket of assets so as to satisfy

the asset preferences of investors;

3. Reduce the risk and increase returns.

Objective of Portfolio Management:

The objective of portfolio management is to maximize the return and minimize the

risk. A portfolio is a basket of investments or assets held by an individual or a corporate

body.

Phases of Portfolio Management:



Portfolio Management is a process encompassing many activities aimed at optimizing the

investment of one’s funds. Five phases can be identified in the portfolio management

process-

1. Security Analysis,

2. Portfolio Analysis,

3. Portfolio Selection,

4. Portfolio Revision

5. And Portfolio Evaluation.

Each phase is an integral part of the whole process and the success of portfolio

management depends upon the efficiency in carrying out each of these phases.

1. Security Analysis:

Security analysis is the initial phase of the portfolio management process. This step

consists of examining the risk-return characteristics of individual securities. A basic strategy

in securities investment is to buy under priced securities and sell overpriced securities. But

the problem is how to identify these under priced and overpriced securities. This is what

security analysis is all about.

There are two alternative approaches to security analysis, namely, Fundamental

Analysis and Technical Analysis.

Fundamental Analysis provides and analytical framework for rational investment

decision-making. It concentrates Fundamental analysis studies not only the fundamental

factors affecting the company but also the fundamental factors affecting the industry to which

the company belongs and also the economy fundamentals. Fundamental analysis works out

intrinsic value of a security based on its fundamentals; then compares this intrinsic value with

the current market price. Fundamental Analysis helps to identify fundamentally strong

companies whose shares is worth to be included in the investor’s portfolio.

Technical Analysis believes that share price movements are systematic and exhibit

certain consistent patterns. It studies the past movements in the prices of shares to identify

trends and patterns and then tries to predict the future price movements. Technical analysis

ignores the fundamental of shares.



2. Portfolio Analysis:

A portfolio is a group of securities held together as investment. Investors invest their

funds in a portfolio of securities rather than in a single security to spread risk by not putting

all their eggs in one basket. The return and risk of each portfolio has to be calculated

mathematically and expressed quantitatively. Portfolio analysis phase of portfolio

management consists of identifying the range of possible portfolios that can be constituted

from a given set of securities and calculating their return and risk for further analysis.

3. Portfolio Selection:

Portfolio selection is the process of finding the optimal portfolio. The main goal of

portfolio selection is to generate a portfolio that provides the highest return and the lowest

risk. The portfolio having this characteristic is known as efficient portfolio. The portfolio

selection problem is the process of delineating the efficient portfolios and then selection the

best portfolio from the set. The selection of the optimal portfolio depends upon the investors

risk aversion or conversely on his risk tolerance.

4. Portfolio Revision:

Having constructed the optimal portfolio, the investor has to monitor it constantly to

ensure that it continues to be optimal. The investor has to revise his portfolio in the light of

the developments in the market. This revision leads to purchase of some new securities and

sale of some of the existing securities from the portfolio. The mix of securities and their

proportion changes as a result of the revision. Portfolio revision may also be necessitated by

some investor related changes such as availability of additional funds, change in risk attitude,

need of cash for other alternative use, etc.

Portfolio revision has to be done scientifically and objectively so as to ensure the

optimality of the revised portfolio. Portfolio revision is as important as portfolio analysis and

selection and hence the revision process has to be carried out with much care.



5. Portfolio Evaluation:

Portfolio evaluation is the process, which is concerned with assessing the performance

of the portfolio over a selected period of time in terms of return and risk. This involves

quantitative measurement of actual return realized and the risk borne by the portfolio over the

period of investment. Alternative measures of performance evaluation have been developed

for use by investors and portfolio managers. Portfolio evaluation provides a mechanism for

identifying weaknesses in the investment process and for improving these deficit areas. It

provides a feedback mechanism for improving the entire portfolio management process.

Role of Portfolio Management:

Portfolio management is now a familiar term and is widely practiced in India. The

theories and concepts relating to portfolio management now find their way in the front pages

of financial newspapers and the cover pages of investment journals in India. In the beginning

of the nineties India embarked on a program of economic liberalization and globalization.

This reform process has made the Indian capital markets active.

The Indian stock markets are steadily moving towards higher efficiency, with rapid

computerization, increasing market transparency, better infrastructure, better customer

service, closer integration and higher volumes. Large institutional investors with their

diversified portfolios dominate the markets. A large number of mutual funds have been set up

in the country since 1987. With this development, investment in securities has gained

considerable momentum.

Along with the spread of securities investment among ordinary investors, the

acceptance of quantitative techniques by the investment community changed the investment

scenario in India. Professional portfolio management, backed by competent research, began

to be practiced by mutual funds, investment consultants and big brokers.

4.5 RISK AND RETURN IN PORTFOLIO THEORY



Risk is the uncertainty of the income and capital appreciation or loss of both. Risk is

inherent in any investment. This risk may relate to loss or delay in repayment of the principal

capital or loss on non-payment of interest or variability of returns. While some securities are

almost risk less like Government securities others are more risky.

The degree of risk however varies on the basis of the features of the assets, investment

instrument, the mode of investment, the issuer of security, etc. The uncertainty associated

with the returns from an investment introduces risk into an investment. The possibility of

variation of the actual return from the expected return is termed as risk.

An investment whose returns are fairly stable is considered as low-risk investment,

whereas an investment whose returns fluctuate significantly is considered to be a high-risk

instrument.

Risk depends on the following factors:

1. Wrong decision of what to invest in,

2. Wrong timings of investments,

3. Nature of the instruments invested in,

4. Creditworthiness of the issuer,

5. Maturity period or the length of investment, &

6. Amount of investment.

Calculation of Risk:



The most popular measure of risk is the variance or standard deviation of profitability

distribution of possible returns. Variance is usually denoted by σ² and is calculated by the

following formula:

σ² =

Where,

σ² = Variance or total risk of security I

= Variability of possible returns from expected return of security;

P(xi) = Related probability of occurrence.

Elements of Risk:

The essence of risk in an investment is the variation in its returns. This variation in

returns of a security is caused by a number of factors that constitute the elements of risk. The

total variability in returns of a security represents the total risk of that security. Systematic

risk and Unsystematic risk are two components of total risk. Thus Total Risk = Systematic

Risk + Unsystematic Risk

Systematic Risk:

Systematic risk is the variability in the security returns caused by changes in the

economy or market. All securities are affected by such risks to some extent. The systematic

risk of a security can be measured by relating that security’s variability with the variability in

the stock market index. Systematic risks are the market problems, tax policy or any

Government policy, inflation risk, interest rate risk and financial risk. Systematic risk is

further sub-divided into interest rate risk, market risk and purchasing power risk.

i. Interest rate risk: The variation in bond prices caused due to the variations in the

interest rates is known as interest rate risk. Interest rate risk affects bonds directly and

shares indirectly.

ii. Market risk: Market risk is the increased variability of the investor returns due to the

alternating movements of the share market. In other words, the variation in returns

caused by the volatility of the stock market is referred to as market risk.



iii. Purchasing power risk: Purchasing power risk refers to the variation in investor

returns caused by inflation.

Unsystematic Risk:

Unsystematic risk is the risk that is specific or unique to a company. This is associated

with the security of a particular company and can be reduced by combining it with another

security having opposite characteristics. The investor does not seek to measure the

unsystematic risk of a security as it can be reduced through diversification.

Unsystematic risks are mismanagement, increasing inventory, wrong financial policy,

defective marketing, etc. The unsystematic or unique risk affecting specific securities arises

from two sources:

i. The operating environment of the company, and

ii. The financing pattern adopted by the company.

These two types of risks are referred to as business risk and financial risk.

i. Business risk:

Business risk is a function of operating conditions faced by a company and is the

variability in operating income caused by the operating conditions of the company like sales,

income, profits, market conditions for product mix, input supplies, strength of competitors,

etc. Business risk may be sometimes external to the company or sometimes due to internal

factors.

ii. Financial risk:

Financial risk relates to the method of financing adopted by the company, delayed

receivables, fall in current assets or rise in current liabilities and such other factors. Financial

risk is avoidable and these risks could no doubt be solved but they may lead to fluctuations in

earnings, profits and dividends to the shareholders. Proper financial planning and other

adjustments can used to correct financial risks.

Minimization of risk:



The company specific risk (unsystematic risk) can be reduced by diversifying into a

few companies belonging to various industry groups (tea, sugar, paper, cement, steel, etc.) or

asset groups (bank deposits, gold bonds, land, real estate, shares, etc.). Each of them has

different risk – return characteristics and investments are to be made based on individuals risk

preferences. The second category of risk (systematic risk) can be managed by the use of Beta

() of different company shares.

Diversification of risk:

It is clear that systematic risk is unavailable and it is common to all the securities. But

unsystematic risk is stock specific. Unsystematic risk associated with the security of a

particular company can be reduced by combining it with another security having opposite

characteristics. This process is known as diversification. Diversifications can serve

unsystematic risk to zero as shown in figure below:

Thus, a well-diversified portfolio suffers only systematic risk and provides a better

tradeoff between risk and return.

Unsystematic risk

Total risk Systematic risk

No. Of securities held

What is Return?


Ris

k(s

tan

dar

d d

evia

tion

)


Return is the income plus capital appreciation. The difference between purchase price

and sale price is capital appreciation. The return on a security depends upon the amount of

risk taken. Higher the risk taken, the higher will be the risk. We can distinguish between

expected return and realized return from an investment. The expected return is the uncertain

future return that an investor expects to get from his investment. The realized return, on the

contrary, is the certain return that an investor has actually obtained from his investment at the

end of the holding period. Return on a typical investment consists of two components:

Income or current yield – capital gain/capital losses yield.

Income or current yield is in the form of interest or dividends. Capital gain/loss is the

charge in the price of asset-the difference between purchase price and the price at which the

asset can be or is sold. In symbols:

Returns =

Current yield Capital gain/capital loss

Calculation of Expected Return:

The expected return of the investment is the probability weighted average of all

possible returns. In symbols. =

Where,

= Expected return on security i

xi = possible return on security i

= related probability of occurrence

It is sum of the products of possible returns with their respective probability.

What is Beta ( )?



In simple language, Beta is percentage change in the individual scrip returns divided

by the percentage change in market returns. In other words Beta describes the relationship

between a stock’s return and the market index return. Here, the appreciation in the individual

scrip price relative to the market index is considered. Beta is the index of the systematic risk

of an asset. The Beta of an asset is the measure of variability of that asset relative to the

variability of the market as a whole. A Beta measures the volatility of a security’s returns

relative to the market. The larger the Beta the more volatile is the security. If Beta is 1, it

indicates that the scrip risk is the same as the market risk. If Beta is greater than 1, the scrip

risk is more than the market risk and if the Beta is less than 1, then the scrip risk is less than

the market risk. A defensive or risk averse investor should invest in scrip’s with Beta less

than 1 and an aggressive investor should invest in scrip’s with a Beta of more than1. Beta can

also be negative, implying that the stock returns move in the direction opposite to that of the

market returns. If Beta is zero, prices are said to be unrelated to the market index.

Calculation of Beta:

1) Calculate Market index return = Today’s index – Yesterdays index

Yesterday’s index

2) Calculate security return = Today’s Price – Yesterdays Price

Yesterday’s Price

3) Calculate Beta: a) --------------- (A)

b) --------------- (B)

c) β =

Risk Return Analysis: \

All investments are risky. Higher the risk taken, greater will be the return. But proper

management of risk involves the right choice of investments whose risks are compensating.

The total risks of two companies may be different and even lower than the risk of a group of

companies if each other offset their risks.

4.6 WILLIAM SHARPE’s SINGLE INDEX MODEL



“There are two elements of security returns-independent and dependent”. The basic notion

underlying the single index model is that the movements in stock market affect all stocks.

Casual observation of share prices reveals that when the market moves up, prices of most

shares tend to increase when the market drops, the prices of most shares tend to decline.

William Sharpe assumed that, for the sake of simplicity, the return on security could be

regarded as being linearly adapted to a single index like the market index.

Theoretically, the market index should consist of all the securities trading in the

market. However a popular average can be treated as a surrogate for the market index.

Acceptance of idea of a market index, Sharpe argued, would obviate the need for calculating

thousands of covariance’s between individual securities in the single underlying factor being

measured by the market index. Hence, this model has come to be known as “The market

model” or “single index model”.

The return of an individual security is assumed to depend on the return on the market

index. The return of an individual security may be expressed as:

Ri = αi + βi Rm + ei

Where,

αi = The component of security is return that is independent of the

market’s performance.

Rm = The rate of return on the market index

Βi = The constant that measures the expected change in Ri given a change in Rm.

ei = The error term representing the random or residual return.

This equation breaks the return on a stock into two components, one part due to the

market and the other part independent of the market. The beta in the equation, indicates how

extensively the return of a security will vary would suggest greater responsiveness on the part

of the stock in relation to the market and vice-versa. The alpha parameter αi indicates what

the return of the security would be when the market return is zero.

The positive alpha represents a sort of bonus return and would be a highly desirable

aspect of a security, whereas a negative alpha represents a penalty to the investor and is an

undesirable aspect of a security. The final term in the equation, ei, is the unexpected return

resulting from influences not identified by the model. It is referred to as the random or



residual return. It may take on any value, but over a large number of observations it will

average out to zero.

William Sharpe, who tried to simplify the data tabulation required for the Markowitz

model of portfolio analysis suggested that a satisfactory simplification would be achieved by

abandoning covariance of each security with each other security and substituting in its place

the relationship of each security with a market index as measured by the single index model

suggested by him that is well know as Sharpe’s index model. In the place of [N (N-1)/2]

covariance required for the Markowitz model, Sharpe model requires only N measures of

Beta co-efficient

Security Characteristic Line:

An analyst’s view of relationship between return on individual securities and return

on market portfolio can be expressed by using a characteristic line. A characteristic line is a

proxy for the relationship between excess returns for shock and excess returns for market.

The following figure shows an example of characteristic line.

Y

L

βim

α

C O Excess return on market portfolio X

The vertical axis plots excess return on security. This is the difference between the holding

period return security and risk less rate of return.

Excess return on security i =


Exc

ess

retu

rn o

n se

curi

ty


Where, Ri = Holding period return on security-I

Rf = Risk less rate of return

The horizontal axis plots excess return on the market. This is the difference between holding

period return on market and the risk less rate of return.

Excess return on market portfolio m =

Where,

= Holding period return on market portfolio.

Rf = Risk less rate of return.

The characteristic like summarizing the relationship between two excess returns can be

written as

The value of alpha (α i) is indicated by intercept of characterization line on the vertical

axis. The value of α is an excess return on security when the excess return on market is zero.

The beta (βim) is the measure of systematic risk. It is the scope of the characteristic

line. It depicts the sensitivity of the securities excess return to that of market portfolio.

Securities with beta values greater than one are termed aggressive: in up markets their price

tends to rise at faster rate than the market. On the other hand, they tend to full sharper than

the market in down markets. Securities with beta less than one is termed defensive: in up

market their prices tend to rise at slower rate than the market. On the other hand, they tend of

full at slower rate than markets. Securities with beta equal to 1, it means that return for

security vary proportionally with market. These securities move in tune with the market-

upward or downward. The error term (ei) represents the uncertain portion of the non-market

of the excess return as security.

This can be demonstrated by referring the characteristic line into two parts as follows:



By convention, αi represents the expected non-market excess return while e i represents

deviation from this expectation. It may take any value but over a large number of observation

it will average out to be zero.

Computation of Beta and Alpha of a security:

Given the market returns and security returns the beta is calculated by using the

formula.

βim = Cov

Where,

Cov = Covariance between excess return in security i and excess return on market.

Var = Variance of excess return on market.

Once the beta is calculated, the equation reduces to as below and αi is easily computed.

Where,

Exp = Expected excess return on security i.

Exp = Expected return on market.

Market and Non-market risk and return on security:

The characteristic line procedure dichotomizes a securities return into two components, one.

Market related

Non-market related. In symbols,



In symbols: Exp =

Similarly the risk of a security is the sum of variety of two components i.e.,

Market related and

Non-market related

In symbols: Vari =

Total risk = Market related risk Non market related risk

Selection of securities to be included in an optimal portfolio:

The constriction of an optimal portfolio gets simplified if a single number measures

the desirability of including a stock in the optimal portfolio. Under William Sharpe Model the

desirability of a stock being selected is directly related to the ratio of excess returns of a

security of its Beta. Ratio of excess returns to Beta (Ri-Rf) / βi

The stocks are ranked by excess return to Beta in descending order. The number of

stocks selected depends on a unique cut off rate known as C and is determined in such a way

that all stocks with higher ratio of excess returns of Beta will be included and stocks with

lower Beta will be excluded. C is the highest Value of Cj when j securities are assumed to

belong to the optimal portfolio.

Ci =

To determine which stocks are included in the optimal portfolio, the following steps are to be

carried out-



1. Calculate the excess return to Beta ratio for each stock under review and rank them in

highest to lowest order.

2. The optimal portfolio consists of investing in all stocks for which the ratio of excess

returns to Beta is greater than C.

Arriving at the optimal portfolio with percentage of investment to be made

in each selected securities:

Once we have decided as to which securities are to be included in the optimal

portfolio, we must calculate the proportion or the percentage of investment to be invested in

each security. This percentage to be invested in each security is calculated as follows:

X =

Where,

Zi =

Where,

= Unsystematic risk

Ri = Mean return of stock

Rf = Risk free rate of return

C* = Cutoff rate

X = Proportion of investment to be invested in that stock.

Rj = Return of individual security

Zj = Total of Zi’s

Portfolio characteristic line:



A characteristic line of a portfolio can be constricted the manner used for a single

security. It can be expressed as follows:

Where,

Rp = Excess expected return on portfolio P

αp = Expected value of non-market component of portfolio p’s excess return.

ep = Deviation of actual non-market component of portfolio

p’s excess return from expected value.

Βpm = Beta of the portfolio i.e., sensitivity of portfolio to market.

The value of αp (alpha of portfolio) is the weighted average of alpha vales for its

component securities, using relative market values as weights.

Where,

αp = Value of alpha of the portfolio.

xi = Proportion of security i in portfolio P.

αi = Value of alpha for security i

N = Number of securities in the portfolio.

The Beta of the portfolio is the weighted average of the beta value of its component

securities using relative market values as weights.

βpm = Value of beta for portfolio P

xi = Proportion of market security i invested in portfolio P.

βim = Value of beta of security i

N = Number of securities in the portfolio.

Portfolio return and risk:



Portfolio analysis and selection requires, as inputs are expected portfolio return and

risk for all possible portfolios that can be constructed with a given set of securities. The

return and risk of portfolios can be calculated using the single index model. The excepted

return of a portfolio may be taken as portfolio Alpha plus portfolio Beta times expected

market return.

In symbols:

Where,

= Expected return on portfolio

= Alpha of portfolio

= Beta of portfolio

= Expected return on market.

The risk of a portfolio is measured as variance of portfolio returns.

In symbols:

Where,

= Total risk of the portfolio

= Variance of the market portfolio

= Square of the portfolio Beta

= Square of the proportion of security

= Variance of residual return (unsystematic component) of security

n = Number of securities in the portfolio.



CHAPTER – 5



5. RESEARCH DESIGN

5.1 RESEARCH METHODOLOGY:

The research design constitutes the blue print for the collection, measurement

and analysis of data. A research design is the plan, structure and strategy of

investigation conceived so as to obtain answer to research questions and to control

variances. A research design specifies the methods and procedures for conducting a

particular study. It may be emphasized that the main criteria of good research design

is that it must answer the question posed earlier.

To constitute NSE-Nifty, are taken for construction of an optimal portfolio.

5.2 PRIMARY DATA AND SECONDARY DATA:

The research method is descriptive in nature. The whole study is based on both

primary and secondary data. They are:

1. Information collected from the company and Internet.

2. Data collected from newspaper, books and journals.

3. Data collected from National Stock Exchange websites.

5.3 SAMPLING :

To constitute NSE-Nifty, are taken for construction of an optimal portfolio. Since the

data is based on secondary data.

5.3.1 SAMPLE SIZE:

The stocks chosen to include in portfolio are limited to 8 stocks, which are

constituents of NIFTY.

5.3.2 SAMPLING TECHNIQUE:

The expected rate of return, risk free rate of return and standard deviation

values of each securities.



CHAPTER – 6



6. ANALYSIS AND INTERPRETATION

The following 8 stocks, which constitute of NSE-Nifty, are taken for construction of an

optimal portfolio.

Table 1 : 8 securities across the sectors.

AUTOMOBILE SECTOR

MARUTHI SUZUKI TATA MOTORS

PHARMACEUTICAL SECTOR

RANBAXY LAB CIPLA LTD

INFORMATION TECHNOLOGY SECTOR

TATA COMMUNICATIONS WIPRO LTD

FMCG SECTOR

DABUR INDIA ITC LTD



The expected rate of return, standard deviation, and risk free rate of return values of each

securities are given below.

Table 2 : values of each securities

Sl.No COMPANY Rp p Rf

1 MARUTI SUZUKI 26% 18% 7%

2 TATA MOTORS 19% 16% 7%

3 RANBAXY LAB 15% 17% 7%

4 CIPLA LTD 12% 16% 7%

5TATA

COMMUNICATIONS12% 14% 7%

6 WIPRO LTD 14% 11% 7%

7 DABUR INDIA 11% 10% 7%

8 ITC LTD 10% 8% 7%



Construction of optimal portfolio performance by using an william

sharpe’s single index model

The following is the formula used to calculate the optimal portfolio performance as per

sharpe model.

Optimal Portfolio Performance = Rp - Rf

p

Where;

Rp = Rate Of Return

Rf = Risk Free Rate Of Return

p = Standard Deviation

1 . Showing the calculations of the expected rate of return, standard deviation, and risk free

rate of return values of each securities are given below.

Sl.NO Company Rp p Rf

1 MARUTI SUZUKI 26% 18% 7%


p

= 26-7/18

= 19/18

= 1.0555.





Sl.NO Company Rp p Rf

2 TATA MOTORS 19% 16% 7%


p

= 19-7/16

= 12/16

= 0.75.

3 . showing the calculations of the expected rate of return, standard deviation, and risk free


Sl.NO Company Rp ( p) Rf

3 RANBAXY LAB 15% 17% 7%


p

= 15-7/17

= 8/17

= 0.4705.






4 CIPLA LTD 12% 16% 7%


p

` = 12-7/16

= 5/16

= 0.3125.




5 TATA COMMUICATIONS 12% 14% 7%


p

= 12-7/14

= 5/14

= 0.3571.






6 WIPRO LTD 14% 11% 7%


p

= 14-7/11

= 7/11

= 0.6363.




7 DABUR INDIA 11% 10% 7%


p

= 11-7/10

= 4/10

= 0.4.






8 ITC 10% 8% 7%


p

= 10-7/8

= 3/8

= 0.375.



Table 3 : Optimal Portfolio Performance Values Of Each Securities

Sl . No. Company ( Rp-Rf )/ p

1 MARUTHI SUZUKI 1.0555

2 TATA MOTORS 0.75

3 RANBAXY LAB 0.4705

4 CIPLA LTD 0.3125

5 TATA COMMUNICATIONS 0.3571

6 WIPRO LTD 0.6363

7 DABUR INDIA 0.4

8 ITC LTD 0.375

INTERPRETATION:



From the above analysis it is clear that from among the eight companies listed

above Maruthi suzuki has highest value i.e., 1.0555.

Table 4 : Total risk of the securities

Sl No Company Total Risk Systematic

Risk

Unsystematic

Risk

1 MARUTHI SUZUKI 127.9290 42.8240 85.1050

2 TATA MOTORS 151.1205 46.2748 104.8457

3 RANBAXY LAB 311.3644 37.2734 274.0909

4 CIPLA LTD 283.3046 28.7584 254.5462

5 TATA

COMMUNICATIONS

210.5443 42.5967 167.9475

6 WIPRO LTD 218.7218 37.0577 181.6640

7 DABUR INDIA 203.1629 17.0167 186.1461

8

ITC LTD 461.6539 10.0187 451.6352


Optimal Portfolio Performance . Chapter - 7

CHAPTER – 7



7.1. FINDINGS

The study was to construct an optimal portfolio using Sharpe single index model. The

securities considered for study were eight stocks, which constitutes NSE-Nifty.

From the data’s considered for study are the closing prices of each security for 24

months (from Jan 2009-Dec 2010). The risk free rate of return arrived at was 7%.

The expected rate of return, standard deviation and risk free rate of return values of

each securities was calculated. Then the systematic risk and unsystematic were

computed. As the MARUTHI SUZUKI highest value got was 1.0555.

7.2. RECOMMENDATIONS

The investor should read news papers, business journals, websites, etc. to get the

awareness about the stock market situations and factors this will affect the stock

market. He should give key attention on the activities of the major players in the

market.

For creating optimal portfolio selection securities from different sectors.

Before entering to risk reduction strategy the investor should determine the level to

this has to reduce his risk. He should determine the cost and benefit of the strategy

with the existing market conditions.

The investor should not stick to one strategy in the whole time he should change his

strategies according to their market situations.

The investor should take advantage from the option premium movements by selling or

buying options, where the investor feels it comfortable. He should not wait for the

expiry of the contract.



7.3. CONCLUSIONS

The share market is more challenging, fulfilling and rewarding to resourceful

investors willing to learn the trade for having effective returns with minimum risk

involved. The optimal portfolio analysis and risk, return trade off are determined by

the challenging attitudes of investors towards a variety of economic, monetary,

political and psychological forces prevailing in the stock market.

By studying the nature of previous market turning points it is possible to

develop some characteristics that can help to identify major markets tops and bottoms

(i.e., highs and lows). From this analysis the investor gets a correct view of the

volatility of the shares prices and hence can make decisions or selling the securities.

.


Optimal Portfolio Performance Chapter -

i. BIBLIOGRAPHY

REFERENCE BOOKS:

1. Donald E.Fischer, Ronald J. Jordan, “Security Analysis and Portfolio Management”

2. ICFAI University Press, “ Introduction to Security Analysis”

3. Punithavathy Pandian, “Security Analysis and Portfolio Management”.

NEWSPAPERS:

1. Economic Times

2. Business Line

WEBSITES:

1. www.moneycontrol.com

2. www.nseindia.com

3. www.standardcharteredwealthmanagers.com


http://www.standardcharteredwealthmanagers.com/

http://www.nseindia.com/

http://www.moneycontrol.com/

optimal portfolio jaggu project

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