project
TRANSCRIPT
INTRODUCTION :
Portfolio management and investment decision as a concept
came to be familiar with the conclusion of second world war when thing can be in the
stock market can be liberally ruined the fortune of individual, companies ,even
government ‘s it was then discovered that the investing in various scripts instead of
putting all the money in a single securities yielded weather return with low risk
percentage, it goes to the credit of HARYMERKOWITZ, 1991 noble laurelled to have
pioneered the concept of combining high yielded securities with these low but steady
yielding securities to achieve optimum correlation coefficient of shares.
Portfolio management refers to the management of portfolio’s for others by
professional investment managers it refers to the management of an individual investor’s
portfolio by professionally qualified person ranging from merchant banker to specified
portfolio company.
1.1 NEED FOR THE STUDY:
Portfolio management has emerged as a separate academic discipline in India.
Portfolio theory that deals with the rational investment decision-making process has now
become an integral part of financial literature.Investing in securities such as shares,
debentures & bonds is profitable Well as exciting. It is indeed rewarding but involves a
great deal of risk & need artistic skill. Investing in financial securities is now considered
to be one of the most risky avenues of investment. It is rare to find investors investing
their entire savings in a single security. Instead they tend to invest in a group of
securities. Such group of securities is called as PORTFOLIO. Creation of portfolio helps
to reduce risk without sacrificing returns. Portfolio management deals with the analysis
of individual securities as well as with the theory & practice of optimally combining
securities into portfolios.
1.2 SCOPE OF STUDY
This study covers the Markowitz model. The study covers the calculation of
correlations between the different securities in order to find out at what percentage funds
should be invested among the companies in the portfolio. Also the study includes the
calculation of individual Standard Deviation of securities and ends at the calculation of
weights of individual securities involved in the portfolio. These percentages help in
allocating the funds available for investment based on risky portfolios.
1.3 OBJECTIVES:
1. To study the investment decision process.
2. To analyze the risk return characteristics of sample scripts.
3. Ascertain portfolio weights.
4. To construct an effective portfolio which offers the maximum return for minimum risk
1.4 METHODOLOGY:
Primary source
Information gathered from interacting with Mrs. Swathi in the class room. And the data
collect from the textbooks and other magazines.
Secondary Source
Daily prices of scripts from news papers
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1.5 LIMITATION :
1. Only two samples have been selected for constructing a portfolio.
2. Share prices of scripts of 5 years period was taken.
1.6 CHAPTERIZATION:
1. Chapter-1: It Containt Introduction, Need for the study, Scope and objectives of
the study, the methodology of the study, Limitations and chapterization.
2. Chapter-II: It Containt conceptual framework and policies.
3. Chapter-III: It Containt industry profile and company profile and background of
the company.
4. Chapter-IV: It Containt Data analysis and interpretation.
5. Chapter-V: It Containt findings and suggesting.
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THEORITICAL FRAME WORK OR CONCEPTUAL FRAME WORK
PORTFOLIO:
A portfolio is a collection of securities since it is really desirable to invest
the entire funds of an individual or an institution or a single security, it is essential that
every security be viewed in a portfolio context. Thus it seems logical that the expected
return of the portfolio. Portfolio analysis considers the determine of future risk and return
in holding various blends of individual securities
Portfolio expected return is a weighted average of the expected return of the
individual securities but portfolio variance, in short contrast, can be something reduced
portfolio risk is because risk depends greatly on the co-variance among returns of
individual securities. Portfolios, which are combination of securities, may or may not
take on the aggregate characteristics of their individual parts.
Since portfolios expected return is a weighted average of the expected return of its
securities, the contribution of each security the portfolio’s expected returns depends on its
expected returns and its proportionate share of the initial portfolio’s market value. It
follows that an investor who simply wants the greatest possible expected return should
hold one security; the one which is considered to have a greatest expected return. Very
few investors do this, and very few investment advisors would counsel such and extreme
policy instead, investors should diversify, meaning that their portfolio should include
more than one security.
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OBJECTIVES OF PORTFOLIO MANAGEMENT:
The main objective of investment portfolio management is to maximize
the returns from the investment and to minimize the risk involved in investment.
Moreover, risk in price or inflation erodes the value of money and hence investment must
provide a protection against inflation.
Secondary Objectives:
The following are the other ancillary objectives:
Regular return.
Stable income.
Appreciation of capital.
More liquidity.
Safety of investment.
Tax benefits.
Portfolio management services helps investors to make a wise choice
between alternative investments with pit any post trading hassle’s this service renders
optimum returns to the investors by proper selection of continuous change of one plan to
another plane with in the same scheme, any portfolio management must specify the
objectives like maximum return’s, and risk capital appreciation, safety etc in their offer.
Return From the angle of securities can be fixed income securities such as :
(a) Debentures –partly convertibles and non-convertibles debentures debt with tradable
Warrants.
(b) Preference shares
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(c) Government securities and bonds
(d) Other debt instruments
(2) Variable income securities
(a) Equity shares
(b) Money market securities like treasury bills commercial papers etc.
Portfolio managers has to decide up on the mix of securities on
the basis of contract with the client and objectives of portfolio
NEED FOR 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 regular and
systematic analysis, judgment and action. The objective of this service is to help the
unknown and investors with the expertise of professionals in investment portfolio
management. It involves construction of a portfolio based upon the investor’s objectives,
constraints, preferences for risk and returns and tax liability. The portfolio is reviewed
and adjusted from time to time in tune with the market conditions. The evaluation of
portfolio is to be done in terms of targets set for risk and returns. The changes in the
portfolio are to be effected to meet the changing condition.
Portfolio construction refers to the allocation of surplus funds in hand among a variety
of financial assets open for investment. Portfolio theory concerns itself with the
principles governing such allocation. The modern view of investment is oriented more go
towards the assembly of proper combination of individual securities to form investment
portfolio.
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A combination of securities held together will give a beneficial result if they
grouped in a manner to secure higher returns after taking into consideration the risk
elements.
The modern theory is the view that by diversification risk can be reduced.
Diversification can be made by the investor either by having a large number of shares of
companies in different regions, in different industries or those producing different types
of product lines. Modern theory believes in the perspective of combination of securities
under constraints of risk and returns
PORTFOLIO MANAGEMENT PROCESS:
Investment management is a complex activity which may be broken down into the
following steps:
1) Specification of investment objectives and constraints :
The typical objectives sought by investors are current income, capital
appreciation, and safety of principle. The relative importance of these objectives should
be specified further the constraints arising from liquidity, time horizon, tax and special
circumstances must be identified.
2) choice of the asset mix :
The most important decision in portfolio management is the asset mix decision very
broadly; this is concerned with the proportions of ‘stocks’ (equity shares and units/shares
of equity-oriented mutual funds) and ‘bonds’ in the portfolio.
The appropriate ‘stock-bond’ mix depends mainly on the risk tolerance and
investment horizon of the investor.
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ELEMENTS OF PORTFOLIO MANAGEMENT:
Portfolio management is on-going process involving the following basic tasks:
Identification of the investor’s objectives, constraints and preferences.
Strategies are to be developed and implemented in tune with investment policy
formulated.
Review and monitoring of the performance of the portfolio.
Finally the evaluation of the portfolio
Risk:
Risk is uncertainty of the income /capital appreciation or loss or both. All
investments are risky. The higher the risk taken, the higher is the return. But proper
management of risk involves the right choice of investments whose risks are
compensating. The total risks of two companies may be different and even lower than the
risk of a group of two companies if their companies are offset by each other.
SOURCES OF INVESTMENT RISK:
Business risk:
As a holder of corporate securities (equity shares or debentures), you are
exposed to the risk of poor business performance. This may be caused by a variety of
factors like heightened competition, emergence of new technologies, development of
substitute products, shifts in consumer preferences, inadequate supply of essential inputs,
changes in governmental policies, and so on.
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Interest rate risk:
The changes in interest rate have a bearing on the welfare on investors. As the
interest rate goes up, the market price of existing firmed income securities falls, and vice
versa. This happens because the buyer of a fixed income security would not buy it at its
par value of face value o its fixed interest rate is lower than the prevailing interest rate on
a similar security. For example, a debenture that has a face value of RS. 100 and a fixed
rate of 12% will sell a discount if the interest rate moves up from, say 12% to 14%.while
the chances in interest rate have a direct bearing on the prices of fixed income securities,
they affect equity prices too, albeit some what indirectly.
The two major types of risks are:
Systematic or market related risk.
Unsystematic or company related risks.
Systematic risks affected from the entire market are (the problems, raw material
availability, tax policy or government policy, inflation risk, interest risk and financial
risk). It is managed by the use of Beta of different company shares.
The unsystematic risks are mismanagement, increasing inventory, wrong financial
policy, defective marketing etc. this is diversifiable or avoidable because it is possible to
eliminate or diversify away this component of risk to a considerable extent by investing
in a large portfolio of securities. The unsystematic risk stems from inefficiency
magnitude of those factors different form one company to another.
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RETURNS ON PORTFOLIO:
Each security in a portfolio contributes return in the proportion of its
investments in security. Thus the portfolio expected return is the weighted average of the
expected return, from each of the securities, with weights representing the proportions
share of the security in the total investment. Why does an investor have so many
securities in his portfolio? If the security ABC gives the maximum return why not he
invests in that security all his funds and thus maximize return? The answer to this
questions lie in the investor’s perception of risk attached to investments, his objectives of
income, safety, appreciation, liquidity and hedge against loss of value of money etc. this
pattern of investment in different asset categories, types of investment, etc., would all be
described under the caption of diversification, which aims at the reduction or even
elimination of non-systematic risks and achieve the specific objectives of investors
RISK ON PORTFOLIO :
The expected returns from individual securities carry some degree of risk. Risk
on the portfolio is different from the risk on individual securities. The risk is reflected in
the variability of the returns from zero to infinity. Risk of the individual assets or a
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portfolio is measured by the variance of its return. The expected return depends on the
probability of the returns and their weighted contribution to the risk of the portfolio.
These are two measures of risk in this context one is the absolute deviation and other
standard deviation.
Most investors invest in a portfolio of assets, because as to spread risk by not
putting all eggs in one basket. Hence, what really matters to them is not the risk and
return of stocks in isolation, but the risk and return of the portfolio as a whole. Risk is
mainly reduced by Diversification.
RISK RETURN ANALYSIS:
All investment has some risk. Investment in shares of companies has its own risk or
uncertainty; these risks arise out of variability of yields and uncertainty of appreciation or
depreciation of share prices, losses of liquidity etc
The risk over time can be represented by the variance of the returns. While the return
over time is capital appreciation plus payout, divided by the purchase price of the share.
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Normally, the higher the risk that the investor takes, the higher is the return.
There is, how ever, a risk less return on capital of about 12% which is the bank, rate
charged by the R.B.I or long term, yielded on government securities at around 13% to
14%. This risk less return refers to lack of variability of return and no uncertainty in the
repayment or capital. But other risks such as loss of liquidity due to parting with money
etc., may however remain, but are rewarded by the total return on the capital. Risk-return
is subject to variation and the objectives of the portfolio manager are to reduce that
variability and thus reduce the risky by choosing an appropriate portfolio.
Traditional approach advocates that one security holds the better, it is according
to the modern approach diversification should not be quantity that should be related to the
quality of scripts which leads to quality of portfolio.
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Experience has shown that beyond the certain securities by adding more securities
expensive.
Simple diversification reduces :
An asset’s total risk can be divided into systematic plus unsystematic risk, as shown
below:
Systematic risk (un diversifiable risk) + unsystematic risk (diversified risk) =Total
risk =Var (r).
Unsystematic risk is that portion of the risk that is unique to the firm (for example, risk
due to strikes and management errors.) Unsystematic risk can be reduced to zero by
simple diversification.
Simple diversification is the random selection of securities that are to be added to a
portfolio. As the number of randomly selected securities added to a portfolio is increased,
the level of unsystematic risk approaches zero. However market related systematic risk
cannot be reduced by simple diversification. This risk is common to all securities.
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Persons involved in portfolio management:
Investor:
Are the people who are interested in investing their funds?
Portfolio managers:
Is a person who is in the wake of a contract agreement with a client, advices or
directs or undertakes on behalf of the clients, the management or distribution or
management of the funds of the client as the case may be.
Discretionary portfolio manager:
Means a manager who exercise under a contract relating to a portfolio
management exercise any degree of discretion as to the investment or management of
portfolio or securities or funds of clients as the case may be
.
The relation ship between an investor and portfolio manager is of a highly
interactive nature
The portfolio manager carries out all the transactions pertaining to the investor
under the power of attorney during the last two decades, and increasing complexity was
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witnessed in the capital market and its trading procedures in this context a key
(uninformed) investor formed ) investor found him self in a tricky situation , to keep track
of market movement ,update his knowledge, yet stay in the capital market and make
money , there fore in looked forward to resuming help from portfolio manager to do the
job for him .The portfolio management seeks to strike a balance between risk’s and
return.
The generally rule in that greater risk more of the profits but S.E.B.I. in its
guidelines prohibits portfolio managers to promise any return to investor.Portfolio
management is not a substitute to the inherent risk’s associated with equity investment.
Who can be a portfolio manager?
Only those who are registered and pay the required license fee are eligible to
operate as portfolio managers. An applicant for this purpose should have necessary
infrastructure with professionally qualified persons and with a minimum of two persons
with experience in this business and a minimum net worth of Rs. 50lakh’s. The certificate
once granted is valid for three years. Fees payable for registration are Rs 2.5lakh’s every
for two years and Rs.1lakh’s for the third year. From the fourth year onwards, renewal
fees per annum are Rs 75000. These are subjected to change by the S.E.B.I.
The S.E.B.I. has imposed a number of obligations and a code of conduct on
them. The portfolio manager should have a high standard of integrity, honesty and should
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not have been convicted of any economic offence or moral turpitude. He should not
resort to rigging up of prices, insider trading or creating false markets, etc. their books of
accounts are subject to inspection to inspection and audit by S.E.B.I... The observance of
the code of conduct and guidelines given by the S.E.B.I. are subject to inspection and
penalties for violation are imposed. The manager has to submit periodical returns and
documents as may be required by the SEBI from time-to- time.
.Functions of portfolio managers:
Advisory role: advice new investments, review the existing ones, identification
of objectives, recommending high yield securities etc.
Conducting market and economic service: this is essential for recommending
good yielding securities they have to study the current fiscal policy, budget
proposal; individual policies etc further portfolio manager should take in to
account the credit policy, industrial growth, foreign exchange possible change in
corporate law’s etc.
Financial analysis: he should evaluate the financial statement of company in
order to understand, their net worth future earnings, prospectus and strength.
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Study of stock market : he should observe the trends at various stock exchange
and analysis scripts so that he is able to identify the right securities for
investment
Study of industry: he should study the industry to know its future prospects,
technical changes etc, required for investment proposal he should also see the
problem’s of the industry.
Decide the type of port folio : keeping in mind the objectives of portfolio a
portfolio manager has to decide weather the portfolio should comprise equity
preference shares, debentures, convertibles, non-convertibles or partly
convertibles, money market, securities etc or a mix of more than one type of
proper mix ensures higher safety, yield and liquidity coupled with balanced risk
techniques of portfolio management.
A portfolio manager in the Indian context has been Brokers (Big
brokers) who on the basis of their experience, market trends, Insider trader, helps the
limited knowledge persons.
Registered merchant bankers can act’s as portfolio manager’s
Investor’s must look forward, for qualification and performance and ability and research
base of the portfolio manager’s.
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Technique’s of portfolio management:
As of now the under noted technique of portfolio management: are in vogue in our
country
1. equity portfolio: is influenced by internal and external factors the internal factors
effect the inner working of the company’s growth plan’s are analyzed with
referenced to Balance sheet, profit & loss a/c (account) of the company.
Among the external factor are changes in the government policies, Trade cycle’s,
Political stability etc.
2. equity stock analysis : under this method the probable future value of a share of a
company is determined it can be done by ratio’s of earning per share of the
company and price earning ratio
EPS == PROFIT AFTER TAX
NO: OF EQUITY SHARES
PRICE EARNING RATIO= MARKET PRICE
E.P.S (earning’s per share)
One can estimate trend of earning by EPS, which reflects trends of earning quality of
company, dividend policy, and quality of management.
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Price earning ratio indicate a confidence of market about the company future, a high
rating is preferable
The following points must be considered by portfolio managers while analyzing the
securities.
1. Nature of the industry and its product: long term trends of industries,
competition with in, and out side the industry, Technical changes, labour relations,
sensitivity, to Trade cycle.
2. Industrial analysis of prospective earnings, cash flows, working capital,
dividends, etc.
3. Ratio analysis: Ratio such as debt equity ratio’s current ratio’s net worth,
profit earning ratio, return on investment, are worked out to decide the portfolio.
The wise principle of portfolio management suggests that “Buy when the market is
low or BEARISH, and sell when the market is rising or BULLISH”.
Stock market operation can be analyzed by:
a) Fundamental approach :- based on intrinsic value of share’s
b) Technical approach:-based on Dowjone’s theory, Random walk theory,
etc.
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Prices are based upon demand and supply of the market.
i. Traditional approach assumes that
ii. Objectives are maximization of wealth and minimization of risk.
iii. Diversification reduces risk and volatility.
iv. Variable returns, high illiquidity; etc.
Capital Assets pricing approach (CAPM) it pay’s more weight age, to risk or portfolio
diversification of portfolio.
Diversification of portfolio reduces risk but it should be based on certain assessment
such as:
Trend analysis of past share prices.
Valuation of intrinsic value of company (trend-marker moves are known for their
Uncertainties they are compared to be high, and low prompts of wave market trends are
constituted by these waves it is a pattern of movement based on past).
The following rules must be studied while cautious portfolio manager before decide to
invest their funds in portfolio’s.
1. Compile the financials of the companies in the immediate past 3 years such as turn
over, gross profit, net profit before tax, compare the profit earning of company with
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that of the industry average nature of product manufacture service render and it future
demand ,know about the promoters and their back ground, dividend track record,
bonus shares in the past 3 to 5 years ,reflects company’s commitment to share holders
the relevant information can be accessed from the RDC(registrant of
companies)published financial results financed quarters, journals and ledgers.
2. Watch out the high’s and lows of the scripts for the past 2 to 3 years and their
timing cyclical scripts have a tendency to repeat their performance ,this hypothesis
can be true of all other financial ,
3. The higher the trading volume higher is liquidity and still higher the chance of
speculation, it is futile to invest in such shares who’s daily movements cannot be kept
track, if you want to reap rich returns keep investment over along horizon and it will
offset the wild intra day trading fluctuation’s, the minor movement of scripts may be
ignored, we must remember that share market moves in phases and the span of each
phase is 6 months to 5 years.
a. Long term of the market should be the guiding factor to enable you to invest
and quit. The market is now bullish and the trend is likely to continue for some
more time.
b .UN tradable shares must find a last place in portfolio apart from return; even
capital invested is eroded with no way of exit with no way of exit with inside.
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How at all one should avoid such scripts in future?
(1) Never invest on the basis of an insider trader tip in a company which is not sound
(insider trader is person who gives tip for trading in securities based on prices sensitive
up price sensitive un published information relating to such security).
(2) Never invest in the so called promoter quota of lesser known company
(3) Never invest in a company about which you do not have appropriate knowledge.
(4) Never at all invest in a company which doesn’t have a stringent financial record your
portfolio should not a stagnate
(4) Shuffle the portfolio and replace the slow moving sector with active ones , investors
were shatter when the technology , media, software , stops have taken a down slight.
(5) Never fall to the magic of the scripts don’t confine to the blue chip company‘s, look
out for other portfolio that ensure regular dividends.
(6) In the same way never react to sudden raise or fall in stock market index such
fluctuation is movement minor correction’s in stock market held in consolidation of
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market their by reading out a weak player often taste on wait for the dust and dim to settle
to make your move” .
PORT FOLIO MANAGEMENT AND DIVESIFICATOIN:
Combinations of securities that have high risk and return features make up a
portfolio.
Portfolio’s may or may not take on the aggregate characteristics of individual
part, portfolio analysis takes various components of risk and return for each industry and
consider the effort of combined security.
Portfolio selection involves choosing the best portfolio to suit the risk return
preferences of portfolio investor management of portfolio is a dynamic activity of
evaluating and revising the portfolio in terms of portfolios objectives
It may include in cash also, even if one goes bad the other will provide protection from
the loss even cash is subject to inflation the diversification can be either vertical or
horizontal the vertical diversification portfolio can have script of different company’s
with in the same industry.
In horizontal diversification one can have different scripts chosen from different
industries.
It should be an adequate diversification looking in to the size of portfolio.
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Traditional approach advocates the more security one holds in a portfolio , the better it is
according to modern approach diversification should not be quantified but should be related to
the quality of scripts which leads to the quality and portfolio subsequently experience can show
that beyond a certain number of securities adding more securities become expensive.
Investment in a fixed return securities in the current market scenario which is passing
through a an uncertain phase investors are facing the problem of lack of liquidity combined
with minimum returns the important point to both is that the equity market and debt market
moves in opposite direction .where the stock market is booming, equities perform better where
as in depressed market the assured returns related securities market out perform equities.
It is cyclic and is evident in more global market keeping this in mind an investor can
shift from fixed income securities to equities and vise versa along with the changing market
scenario , if the investment are wisely planned they , fetch good returns even when the market
is depressed most , important the investor must adopt the time bound strategy in differing state
of market to achieve the optimum result when the aim is short term returns it would be wise for
the investor to invest in equities when the market is in boom & it could be reviewed if the same
is done.
Maximum of returns can be achieved by following a composite pattern of investment by
having, suitable investment allocation strategy among the available resources.
Never invest in a single securities your investment can be allocated in the following
areas:
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1. Equities:-primary and secondary market.
2. Mutual Funds
3. Bank deposits
4. Fixed deposits & bonds and the tax saving schemes
The different areas of fixed income are as:-
Fixed deposits in company
Bonds
Mutual funds schemes
with an investment strategy to invest in debt investment in fixed deposit can be made for the
simple reason that assured fixed income of a high of 14-17% per annum can be expected
which is much safer then investing a highly volatile stock market, even in comparison to
banks deposit which gives a maximum return of 12% per annum, fixed deposit s in high
profile esteemed will performing companies definitely gives a higher returns.
BETA:
The concept of Beta as a measure of systematic risk is useful in portfolio management.
The beta measures the movement of one script in relation to the market trend*. Thus BETA
can be positive or negative depending on whether the individual scrip moves in the same
direction as the market or in the opposite direction and the extent of variance of one scrip
vis-à-vis the market is being measured by BETA. The BETA is negative if the share price
moves contrary to the general trend and positive if it moves in the same direction. The
scrip’s with higher BETA of more than one are called aggressive, and those with a low
BETA of less than one are called defensive.
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It is therefore it is necessary, to calculate Betas for all scrip’s and choose those with
high Beta for a portfolio of high returns
INVESTMENT DECISIONS
Definition of investment:
According to F. AMLING “Investment may be defined as the purchase by an
individual or an Institutional investor of a financial or real asset that produces a return
proportional to the risk assumed over some future investment period”. According to D.E.
Fisher and R.J. Jordon, Investment is a commitment of funds made in the expectation of
some positive rate of return. If the investment is properly undertaken, the return will be
commensurate with the risk of the investor assumes”.
Concept of Investment:
Investment will generally be used in its financial sense and as such investment is the
allocation of monetary resources to assets that are expected to yield some gain or positive
return over a given period of time. Investment is a commitment of a person’s funds to derive
future income in the form of interest, dividends, rent, premiums, pension benefits or the
appreciation of the value of his principal capital.
Many types of investment media or channels for making investments are
available. Securities ranging from risk free instruments to highly speculative shares and
debentures are available for alternative investments.
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All investments are risky, as the investor parts with his money. An efficient investor
with proper training can reduce the risk and maximize returns. He can avoid pitfalls and
protect his interest.
There are different methods of classifying the investment avenues. A major
classification is physical Investments and Financial Investments. They are physical, if
savings are used to acquire physical assets, useful for consumption or production.
Some physical assets like ploughs, tractors or harvesters are useful in agricultural production.
A few useful physical assets like cars, jeeps etc., are useful in business.
Many items of physical assets are not useful for further production or goods or create
income as in the case of consumer durables, gold, silver etc. among different types of
investment, some are marketable and transferable and others are not. Examples of marketable
assets are shares and debentures of public limited companies, particularly the listed
companies on Stock Exchange, Bonds of P.S.U., Government securities etc. non-marketable
securities or investments in bank deposits, provident fund and pension funds, insurance
certificates, post office deposits, national savings certificate, company deposits, private
limited companies shares etc.
The investment process may be described in the following stages:
Investment policy:
The first stage determines and involves personal financial affairs and objectives
before making investment. It may also be called the preparation of investment policy stage.
The investor has to see that he should be able to create an emergency fund, an element of
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liquidity and quick convertibility of securities into cash. This stage may, therefore be called
the proper time of identifying investment assets and considering the various features of
investments.
investment analysis:
After arranging a logical order of types of investment preferred, the next step is to
analyze the securities available for investment. The investor must take a comparative analysis
of type of industry, kind of securities etc. the primary concerns at this stage would be to form
beliefs regarding future behavior of prices and stocks, the expected return and associated
risks
Investment valuation:
Investment value, in general is taken to be the present worth to the owners of future
benefits from investments. The investor has to bear in mind the value of these investments.
An appropriate set of weights have to be applied with the use of forecasted benefits to
estimate the value of the investment assets such as stocks, debentures, and bonds and other
assets. Comparison of the value with the current market price of the assets allows a
determination of the relative attractiveness of the asset allows a determination of the relative
attractiveness of the asset. Each asset must be value on its individual merit.
Portfolio construction and feed-back:
Portfolio construction requires knowledge of different aspects of securities in relation to
safety and growth of principal, liquidity of assets etc. In this stage, we study, determination
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of diversification level, consideration of investment timing selection of investment assets,
allocation of invest able wealth to different investments, evaluation of portfolio for feed-
back.
INVESTMENT DECISIONS- GUIDELINES FOR EQUITY INVESTMENT
Equity shares are characterized by price fluctuations, which can produce
substantial gains or inflict severe losses. Given the volatility and dynamism of the stock
market, investor requires greater competence and skill-along with a touch of good luck too-to
invest in equity shares. Here are some general guidelines to play to equity game, irrespective
of weather you aggressive or conservative.
Adopt a suitable formula plan.
Establish value anchors.
Assets market psychology.
Combination of fundamental and technical analyze.
Diversify sensibly.
Periodically review and revise your portfolio.
Requirement of portfolio:
1. Maintain adequate diversification when relative values of various securities in the
portfolio change.
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2. Incorporate new information relevant for return investment.
3. Expand or contrast the size of portfolio to absorb funds or with draw funds.
4. Reflect changes in investor risk disposition.
.
Qualitiles For successful Investing:
Contrary thinking
Patience
Composure
Flexibility
Openness
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INVESTOR’S PORTFOLIO CHOICE:
An investor tends to choose that portfolio, which yields him maximum return by
applying utility theory. Utility Theory is the foundation for the choice under uncertainty.
Cardinal and ordinal theories are the two alternatives, which is used by economist to
determine how people and societies choose to allocate scare resources and to distribute
wealth among one another.
The former theory implies that a consumer is capable of assigning to every
commodity or combination of commodities a number representing the amount of degree
of utility associated with it. Were as the latter theory, implies that a consumer needs not
be liable to assign numbers that represents the degree or amount of utility associated with
commodity or combination of commodity. The consumer can only rank and order the
amount or degree of utility associated with commodity.
In an uncertain environment it becomes necessary to ascertain how different
individual will react to risky situation. The risk is defined as a probability of success or
failure or risk could be described as variability of out comes, payoffs or returns. This
implies that there is a distribution of outcomes associated with each investment decision.
Therefore we can say that there is a relationship between the expected utility and risk.
Expected utility with a particular portfolio return. This numerical value is calculated by
taking a weighted average of the utilities of the various possible returns. The weights are
the probabilities of occurrence associated with each of the possible returns.
31
MARKOWITZ MODEL
THE MEAN-VARIENCE CRITERION
Dr. Harry M.Markowitz is credited with developing the first modern portfolio
analysis in order to arrange for the optimum allocation of assets with in portfolio. To
reach this objective, Markowitz generated portfolios within a reward risk context. In
essence, Markowitz’s model is a theoretical framework for the analysis of risk return
choices. Decisions are based on the concept of efficient portfolios.
A portfolio is efficient when it is expected to yield the highest return for the level
of risk accepted or, alternatively, the smallest portfolio risk for a specified level of
expected return. To build an efficient portfolio an expected return level is chosen, and
assets are substituted until the portfolio combination with the smallest variance at the
return level is found. At this process is repeated for expected returns, set of efficient
portfolio is generated.
ASSUMPTIONS:
1. Investors consider each investment alternative as being represented by a
probability distribution of expected returns over some holding period.
2. Investors maximize one period-expected utility and posse’s utility curve, which
demonstrates diminishing marginal utility of wealth.
3. Individuals estimate risk on the risk on the basis of the variability of expected
returns.
4. Investors base decisions solely on expected return and variance or returns only.
5. For a given risk level, investors prefer high returns to lower return similarly for a
given level of expected return, Investors prefer risk to more risk.
32
Under these assumptions, a single asset or portfolio of assets is
considered to be “efficient” if no other asset or portfolio of assets offers higher expected
return with the same risk or lower risk with the same expected return
THE SPECIFIC MODEL
In developing his model, Morkowitz first disposed of the investment
behavior rule that the investor should maximize expected return. This rule implies that
the non-diversified single security portfolio with the highest return is the most desirable
portfolio. Only by buying that single security can expected return be maximized. The
single-security portfolio would obviously be preferable if the investor were perfectly
certain that this highest expected return would turn out be the actual return. However,
under real world conditions of uncertainty, most risk adverse investors join with
Markowitz in discarding the role of calling for maximizing expected returns. As an
alternative, Markowitz offers the “expected returns/variance of returns” rule.
Markowitz has shown the effect of diversification by reading the risk of
securities. According to him, the security with covariance which is either negative or low
amongst them is the best manner to reduce risk. Markowitz has been able to show that
securities which have less than positive correlation will reduce risk without, in any way
bringing the return down. According to his research study a low correlation level between
securities in the portfolio will show less risk. According to him, investing in a large
number of securities is not the right method of investment. It is the right kind of security
which brings the maximum result.
33
In order to know how the risk of the stock or script, we use the formula, which is
given below:
------------
Standard deviation = √ variance
n _
Variance = (1/n-1) ∑(R-R) ^2
t =1
Where (R-R) ^2=square of difference between sample and mean.
n=number of sample observed.
After that, we need to compare the stocks or scripts of two companies with each other by
using the formula or correlation co-efficient as given below.
n _ _
Co-variance (COVAB) = 1/n∑ (RA-RA) (RB-RB)
t =1
(COV AB)
Correlation-Coefficient (P AB) = ---------------------
(Std. A) (Std. B)
Where (RA-RA) (RB-RB) = Combined deviations of A&B
(Std. A) (Std B) =standard deviation of A&B
COVAB= covariance between A&B
n =number of observation
34
The next step would be the construction of the optimal portfolio on the basis of
what percentage of investment should be invested when two securities and stocks are
combined i.e. calculation of two assets portfolio weight by using minimum variance
equation which is given below.
FORMULAE (Std. b) ^2 – pab (Std. a) (Std. b)
Xa =------------------- ----------------------------------
(Std. a) ^2 + (std. b) ^2 –2 pab (Std. a) (Std. b)
Where
Std. b= standard deviation of b
Std. a = standard deviation of a
Pab= correlation co-efficient between A&B
The next step is final step to calculate the portfolio risk (combined risk) ,that shows how
much is the risk is reduced by combining two stocks or scripts by using this formula:
___________________________________
σp= √ X1^2σ1^2+X2^2σ2^2+2(X1)(X2)(X12)σ1σ
Where
X1=proportion of investment in security 1.
X2=proportion of investment in security 2.
σ 1= standard deviation of security 1.
σ 2= standard deviation of security 2.
X12=correlation co-efficient between security 1&2.
σ p=portfolio risk
35
INDUSTRYPROFILE
HISTORY OF STOCK EXCHANGES IN INDIA
The origin of the stock exchange in India can be traced back to the later half of19th
century .After the American civil war (1860-61) due to the share mania of the public the
number of broker dealing in shares increased. The broker organized an informal
association in Mumbai named “the native stock and share brokers association” in 1875.
Increased activity in trade and commerce during the first world war and second world
resulted in an increase in stock trading. The growth of stock exchanges suffered asset
back the end of world war. Worldwide depression affected them. Most of stock exchange
in the early stages had a speculative nature of working without technical strength. After
independence, government took keen interest to regulate the speculative nature of stock
exchange working. In that direction, securities and contract government to regulation act
1956. was passed. This gave powers to central government to regulate the stock
exchanges. Further to develop secondary market in the country, stock exchanges were
established in different centers like Chennai, delhi, nagpur, kanpur, Hyderabad, and
banglore. The SER Act recognized the stock exchanges in Mumbai, Chennai, delhi,
Hyderabad, Ahemadabad, and indoor. The banglore stock exchange was recognized in
1963. at present there are 23 stock exchanges.
The setting up of national stock exchange (NSE) and OTCEI (Over the counter exchange
of india) with screen based trading facility resulted in more stock exchanges turning
towards the computer based trading. Bombay stock exchange (BSE) introduced the
screen based trading system in 1995, which is known as BOLT (Bombay on-line trading
system).
Madras stock exchange introduced Automated Network trding System (MANTRA) on
October 7th 1996. apart from Bombay stock exchange , (BSE), Delhi, Pune , Bangalore,
36
DEFINITION OF STOCK EXCHANGE:
“Stock exchange means any body or individual
whether in corporate or not, constituted for the purpose of assisting, regulating or
controlling the business of buying, selling or dealing in securities.”
NEED FOR STOCK EXCHANGE:
As the business and industry expanded and economy
became more complex in nature, a need for permanent finance arose. Entrepreneurs
require money for long-term needs, where as investors demand liquidity. The solution to
this problem gave way for the origin of “Stock Exchange”, which is a ready market for
investment and liquidity.
FUNCTIONS OF STOCK EXCHANGE:
Maintains active trading Shares are traded on the
stock exchanges, enabling the investors to buy and sell securities. The prices may vary
from transaction. A continuous trading increases the liquidity or marketability of the
shares traded on the stock exchanges.
Fixation of prices: prices are determined by the transition that flow from
investors demand and the supplies preference. Usually the trade’s prices are named
known to the public. This helps the investors to make better decisions
ENSURES SAFE AND FAIR DEALINGS:
The rules, regulations and byelaws of the stock exchanges provide a measure
of safety to the investor’s it get a fair deal. Aids in financing the industry. Continuous
market for shares provides a favorable climate for rising capital. The negotiability and
transferability of the securities help the companies to raise long term funds. Investor
willing to subscribe the initial pubic offerings (IOP).This stimulates the capital formation.
37
DISSEMINATION OF INFORMATION:
Stock exchange provide information through their various publics their
publish the share prices traded on their basis along with the volume traded. Directory of
corporate information is useful for the investor’s assessment regarding the corporate.
Handbooks and pamphlets provide information regarding of the stock exchanges.
PERFORMANCE INDUCERS:
The prices of stocks reflects the performance of the traded companies this makes the
corporate more the with its public image tries to maintain good performance.
SELF-REGULATING ORGANIZATION:
The stock exchange monitors the integrity of the member brokers listed companies and
clients continuous internal audit safeguards the investor’s against unfair practices it
settles the disputes between member brokers investors and brokers..
INSTRUMENT TRADEED IN THE STOCK EXCHANGE:
The securities in which individual investors are allowed ti trade in the
exchange are as follows
1. Equity shares
2. Preference shares.
3. Convertible&party convertible debentures
4. Government securities.
38
STOCK EXCHANGE IN INDIA:
S.No NAME OF THE STOCK EXCHANGE YEAR
1 BOMBAY Stock Exchange 1875
2 Hyderabad Stock Exchange 1943
3 Ahmedabad share & Stock Exchange 1957
4 Calcutta Stock Exchange association Limited 1957
5 Delhi Stock Exchange Association Limited 1957
6 Madras Stock Exchange Association Limited 1957
7 Indoor Stock Brokers Association 1958
8 Banglore Stock Exchange 1963
9 Cochin Stock Exchange 1978
10 Pine Stock Exchange Limited 1982
11 U.P Stock Exchange Association Limited 1982
12 Ludhiana Stock Exchange Association Limited 1983
13 Jaipur Stock Exchange Limited 1984
14 Gauhathi Stock Exchange Limited 1984
15 Mangalore Stock Exchange Limited 1985
16 Mabhad Stock Exchange Limited, Patna 1986
17 Bhuvaneswar Stock Exchange Limited 1989
18 Over the counter exchange of India, Bombay 1989
19 Saurashtra Kutch Stock Exchange Limited 1990
20 Vadodara Stock Exchange Limited 1991
21 Coimbatore Stock Exchange Limited 1991
22 Meerut Stock Exchange Limited 1991
23 National Stock Exchange Limited 1992
24 Integrarted Stock Exchange 1999
39
STOCK EXCHANGE IN WORLD:
S.No COUNTRY INDEX
1 Russia Moscow Times
2 Argentina Merval
3 Thailand SET
4 Pakistan Karachi 100
5 Indonesia Jak comp
6 US NASDAQ
7 Czech Republic PX50
8 Mexico IPC
9 Brazil Bovespa
10 Japan Nikkei 225
11 Malaysia KISE COMP
12 China Shanahai comp
13 Singapore Straits Times
14 South Korea Seoul COMP
15 Spain Madrid General
16 US S&P 500
17 India SENSEX
18 US Dow jones
19 Germany Dax
20 Hong Kong Hang seng
21 Canada S & P TSX COMPOSITE
22 India NIFTY
23 UK FISE 100
24 Australia All Ordinates
25 France CAC 40
40
BOMBAY STOCK EXCHANGE
The Bombay stock exchange, existed in Mumbai, popularly known as “BSE” was
established in 1875 as “The Native Share and Stock brokers association” as a voluntary
non-profit making association. It has an evolved over the year into its present status as the
premiere Stock exchange in the country it may be noted that the stock exchange the
oldest one in Asia, even older than the Tokyo Stock Exchange, which was founded in
1878.
The exchange, upholds the interest of the investors and insurers dressed of their
grievances, whether against the companies or its own member brokers. It also strives to
educate and enlighten the investors by making available necessary informative inputs and
conducing investor education programmers.
A governing board comprising of 9 elected directors, 2 SEBI nominees, 7 public
representatives and an executive director is the apex body, which decides the policies and
regulates the affairs of the exchange.
The executive’s directors as the chief executive officer are responsible for the day to day
administration of the exchange. The average daily turnover of the exchange during the
year 2000-01 (April-March) was Rs.3984.19 cores and average number of Daily trades
5.69 lakes.
However the average daily turnover of the exchange during the year 2001-02 has
declined to Rs.1244.10 cores and number of average daily trades during the period to
5.17 lakes. The average daily turnover of the exchange during the year 2002-03 has
declined and number of average daily trades during the period is also decreased. The Ban
on all deferral products like BLESS AND ALBM in the Indian capital markets by SEBI
with effect from July 2, 2001, abolition of account period settlements, introduction of
compulsory rolling settlements in all scripts traded on the exchange with effect from Dec
31, 2001, etc., have adversely imprecated the liquidity and consequently there is a
considerable decline in the daily turnover of the exchange present scenario is 110363
lakes and number of average daily trades 1075 lakes.
41
BSE INDICES:
In order to enable the market participants, analysts etc., to track the various ups
and downs in the Indian stock market, the exchange has introduced in 1986 an equity
stock index called BSE-SENSEX that subsequently became the barometer of the
movements of the share prices in the Indian stock market. It is a “market capitalization
weighted” index of 30 components stocks representing a sample of large, well-
established and leading companies. The base year sensex is 1978-79. The sensex is
widely reported in both domestic and international markets through print as well as
electronic media.
Sensex is calculated using a market capitalization weighted method. As per this
methodology, the level of the index reflects the total market value of all 30 component
stocks from different industries related to particular base period. The total market value
of a company is determined by multiplying the price of its stocks by the number of shares
outstanding. Statisticians call an all index of a set of combined variables (such as price
and number of shares) a composite index. An indexed number is sued to represent the
results of this calculation in order to market the value easier to work with and track over a
time. It much easier to graph a chart based on indexed values than one based on actual
values world over majority of the well-known indices are constructed using “Market
Capitalization weighted method”. In practice, the daily calculation of SENSEX is done
by dividing the aggregate market value of the 30 companies in the index by a number
called the index Divisor. The Divisor is the only link to the original base period value of
the SENSEX. The Divisor keeps the Index comparable over a period or time and if the
reference point for the entire index maintenance adjustments. SENSEX is widely used to
describe the mood in the Indian stock markets. Base year average is changed as per the
formula new base year average = old base year average * (new market value/old market
value.
42
National Stock Exchange:
The NSE was incorporated in Nov 1992 with an equity capital of Rs.25 cores. The
international securities consultancy (ISC) of Hong Kong has helped in setting up NSE.
ISE has prepared the detailed business plans and installation of hardware and software
systems. The promotions for NSE were financial institutions, insurances companies,
banks and SEBI capital market Ltd, infrastructure leasing and financial services Ltd and
stock holding corporation Ltd.
It has been set up to strengthen the move towards professionalisation of the
capital market as well provided nation wide securities trading facilities to investors.
NSE is not an exchange in the traditional sense where brokers own and manage
the exchange.A two tier administrative set up involving a company board and a
governing abroad of the exchange envisaged. NSE is a national market for shares PSU
bonds, debentures and government securities since infrastructure and trading facilities are
provided.
NSE-NIFTY:
The NSE on April 22, 1996 launched a new equity index. The NSE-50. The new index,
which replaces the existing NSE-100 index, is expected, to serve as an appropriate index
for the new segment of futures and options. “Nifty” means National Index for Fifty
Stocks.
The NSE-50 comprises 50 companies that represent 20 broad industry groups with an
aggregate market capitalization of around Rs.1, 70,000 cores. All companies included in
the index have a market capitalization in excess of Rs.500 cores each and should have
traded for 85% of trading days at an impact cost of less than 1.5%. The base period for
the index is the close of prices on Nov, 1995, which makes one year of completion of
operation of Nose’s capital market segment. The base value of the index has been set at
1000.
43
COMPANY PROFILE
Unicon Investment Solutions
Unicon has been founded with the aim of providing world class investing experience to
hitherto underserved investor community. The technology today has made it possible to
reach out to the last person in the financial market and give him the same level of service
which was available to only the selected few.
We give personalized premium service with reasonable commissions on the NSE, BSE &
Derivative market through our Equity broking arm Unicon Securities Pvt Ltd. and
Commodities on NCDEX and MCX through our Commodity broking arm Unicon
Commodities Pvt. Ltd. With our sophisticated technology you can trade through your
computer and if you want human touch you can also deal through our Relationship
Managers out of our more than 100 branches spread across the nation.
We also give personalized services on Insurance (Life & General) & Investments (Mutual
Funds & IPO's) needs, through our Insurance & Investment distribution arm Unicon
Insurance Advisors Pvt. Ltd. Our tailor-made customized solutions are perfect match to
different financial objectives. Our distribution network is backed by in-house back office
support to serve our customers promptly.
MISSION:
To create long term value by empowering individual investors through superior financial
services supported by culture based on highest level of teamwork, efficiency and
integrity.
VISION:
To provide the most useful and ethical Investment Solutions - guided by values driven
approach to growth, client service and employee development.
44
MANAGEMENT TEAM :
Mr.Gajendra Nagpal (founder and CEO)
Mr. Ram Gupta (Co-founder and president)
Mr .Y P Narang (chairman for fixed assets group)
Mr.sandeep Arora (Chief Operation Manager)
Mr.Vijay chopra(National Head)
OUR PRODUCTS AND SERVICES :
customers have the advantage of trading in all the market segments together in the same
window, as we understand the need of transactions to be executed with high speed and
reduced time. At the same time, they have the advantage of having all Advisory Services
for Life Insurance, General Insurance, Mutual Funds and IPO’s also.
Unicon is a customer focused financial services organization providing a range of
investment solutions to our customers. We work with clients to meet their overall
investment objectives and achieve their financial goals. Our clients have the opportunity
to get personalized services depending on their investment profiles. Our personalized
approach enables clients to achieve their Total INVESTMENT OBJECTIVES.
1. Equity
2. Commodity
3. Depository
4. Distribution
5. NRI Services
6. Back Office
7. Fixed Income
45
EQUITY :
1.UniconPlus
Browser based trading terminal that can be accessed by a unique ID and password. This
facility is available to all our online customers the moment they get registered with us.
FEATURES :
1. Trading at NSE & BSE: Add multiple scrips on the market watch.
2. Greater exposure for trading on the available margin.
3. Common window for display of market watch and order execution.
4. Real time updating of exposure and portfolio while trading.
5. Offline order placement facility.
6. Proxy link to enable trading behind firewalls.
2.UNICON SWIFT :
Application based terminal for active traders. It provides better speed, greater analytical
features & priority access to Relationship Managers.
FEATURES:
Trading at NSE & BSE:
1. Add any number of scripts in the Market Watch.
2. Tick by tick live updation of Intraday chart.
3. Greater exposure for trading on the margin available
4. Common window for market watch and order execution.
5. Key board driven short cuts for punching orders quickly.
6. Facility to customize any number of portfolios & watch lists.
7. Stop-loss feature.
COMMODITY:
46
Unicon offers a unique feature of a single screen trading platform in MCX
andNCDEX.Unicon offers both Offline & Online trading platforms. You can Walk in or
place your orders through telephone at any of our branch locations Online Commodity
Internet trading Platform through UniFlex.
Live Market Watch for commodity market (NCDEX, MCX) in one screen.
Add any number of scrips in the Market Watch.
Tick by tick live updation of Intraday chart.
1. Greater exposure for trading on the margin available Common window for market
watch and order execution.
2. Key board driven short cuts for punching orders quickly.
3. Real time updation of exposure and portfolio.
4. Facility to customize any number of portfolios & watchlists.
5. Market depth, i.e. Best 5 bids and offers, updated live for all scripts.
6. Facility to cancel all pending orders with a single click.
7. Instant trade confirmations.
8. Stop-loss feature.
DISTRIBUTION
Unicon is fast emerging as a leader in the Insurance and Mutual Funds distribution space.
Unicon has over 100 branches and a huge number of “Business Development
Executives” who help to source and service the customers throughout the country.
Unicon is fast becoming the preferred “Vendor Independent” distribution houses because
of providing efficient service like free pick-up of collection of cheques/DD’s, Keeping
track of the premiums etc to its customers.
47
Definition by SEBI:
A portfolio management is the total holdings of securities belonging to any person.
Portfolio is a combination of securities that have returns and risk characteristics of their
own; port folio may not take on the aggregate characteristics of their individual parts.
Thus a portfolio is a combination of various assets and /or instruments of
investments.
Combination may have different features of risk and return separate from those
of the components. The portfolio is also built up of the wealth or income of the investor
over a period of time with a view to suit is return or risk preference to that of the port
folio that he holds. The portfolio analysis is thus an analysis is thus an analysis of risk –
return characteristics of individual securities in the portfolio and changes that may take
place in combination with other securities due interaction among them and impact of
each on others.
Security analysis is only a tool for efficient portfolio management; both of them together
and cannot be dissociated. Portfolios are combination of assets held by the investors.
These combination may be various assets classed like equity and debt or of
different issues like Govt. bonds and corporate debts are of various instruments like
discount bonds, debentures and blue chip equity nor scripts of emerging Blue chip
companies.
48
Portfolio analysis includes portfolio construction, selection of securities revision
of portfolio evaluation and monitoring of the performance of the portfolio. All these are
part of the portfolio management
The traditional portfolio theory aims at the selection of such securities that would fit in
will with the asset preferences, needs and choices of the investors. Thus, retired executive
invests in fixed income securities for a regular and fixed return. A business executive or a
young aggressive investor on the other hand invests in and rowing companies and in risky
ventures.
The modern portfolio theory postulates that maximization of returns and minimization of
risk will yield optional returns and the choice and attitudes of investors are only a starting
point for investment decisions and that vigorous risk returns analysis is necessary for
optimization of returns
Portfolio analysis includes portfolio construction, selection of securities, and revision of
portfolio evaluation and monitoring of the performance of the portfolio. All these are part
of the portfolio management.
49
Calculation of return of ICICI
Year Beginning price(Rs)
Ending price(Rs)
Dividend(Rs)
2006 141.45 295.45 7.502007 297.90 371.35 7.50
2008 375.00 585.05 8.502009 587.70 891.5 8.50
2010 892.00 1238.7 10.00
Return=Dividend+(Ending Price-Beginning price) Beginning Price Return(2006)= 7.50+(295.45-141.45) * 100 = 114.17% 141.45Return(2007) = 7.50+(371.35-297.90) * 100 = 27.17% 297.90
Return(2008) = 8.50+(585.05-375) * 100 =58.28% 375
Return(2009) = 8.50+(891.5-587.70) * 100 =53.13% 587.70
Return(2010) = 10.00+(1238.7-892) * 100 =39.98% 892
50
CALCULATION OF RETURN OF HDFC
Return=Dividend+(Ending Price-Beginning price) Beginning Price Return(2006) = 3+(645.55-358.5) *100 =80.9% 358.5
Return(2007) = 3.50+(769.05-645.9) * 100 =19.60% 645.9
Return(2008) = 4.50+(1207-771) * 100 =57.13% 771
Return(2009) = 5.00+(1626.9-1195) * 100 =36.6% 1195.9
Return(2010) = 7.00+(2877.75-1630) * 100 =76.97% 1630
Year BeginningPrice
Ending price Dividend
2006 358.5 645.55 3
2007 645.9 769.05 3.50
2008 771 1207 4.50
2009 1195 1626.9 5.50
2010 1630 2877.75 7.00
51
Calculation of return of WIPRO
Year Beginning price(Rs)
Ending price(Rs)
Dividend(Rs)
2006 1630.60 1736.05 1.002007 1752.00 748.8 29.00
2008 755.00 463.35 5.002009 462.00 605.9 5.00
2010 603.00 525.65 8.00
Return=Dividend+(Ending Price-Beginning price) Beginning Price Return(2006) = 1.00+(1736.05-1630.60) * 100 = 8.184% 1630.60
Return(2007) = 29.00+(748.8-1752.00) * 100 = -55.60% 1752.00
Return(2008) = 5.00+(463.35-755.00) * 100 = -37.96% 755.00
Return(2009) = 5.00+(605.9-462.00) * 100 = 32.23% 462.00 Return(2010) = 8.00+(525.65-603.00) * 100 = -11.5% 603.00
52
Calculation of return of ITC
Year Beginning price(Rs)
Ending price(Rs)
Dividend(Rs)
2006 667 983.5 152007 990 1310.75 20
2008 1318.95 142.1 31.802009 142 176.1 2.65
2010 176.5 209.45 3.10
Return=Dividend+(Ending Price-Beginning p Beginning Price
Return(2006)=15+(983.5-667) * 100 = 49.7% 667
Return(2007)=20+(1310.75-990) * 100 = 34.4% 990
Return(2008)= 31+(142.1-1318.95) * 100 = 86.87% 1318.95
Return(2009) = 2.65+(176.1-142) * 100 = 25.8% 142
Return(2010)=3.10+(209.45-176.5) * 100 = 20.45 176.5
53
Calculation of return of COLGATE&PALMOLIVE
Year Beginning price(Rs)
Ending price(Rs)
Dividend(Rs)
2006 133.65 159.7 6.752007 161.5 179.1 6.75
2008 179.2 269.15 7.252009 270.5 388.45 6.00
2010 390.9 382.1 11.25
Return=Dividend+(Ending Price-Beginning p Beginning Price
Return(2006)=6.75+(159.7-133.65) * 100 = 24.5% 133.65
Return(2007)=6.75+(179.1-161.5) * 100 = 13.58 161.5
Return(2008)= 7.25+(269.15-179.2) * 100 = 54.2 179.2
Return(2009)=6.00+(388.45-270.5) * 100 = 45.8 270.5
Return(2010)=11.25+(382.1-390.9) * 100 = 0.62 390.9
54
Calculation of return of CIPLA
Year Beginning price(Rs)
Ending price(Rs)
Dividend(Rs)
2006 898.00 1371.05 10.002007 1334.00 317.8 3.00
2008 320.00 448 3.502009 447.95 251.35 2.00
2010 251.5 212.65 2.00
Return=Dividend+(Ending Price-Beginning price) Beginning Price Return(2006)=10.00+(1375.05-898.00) * 100 = 54.23% 898.00
Return(2007) = 3.00+(317.8-1334.00) * 100 = -75.95% 1334
Return(2008) = 3.50+(448-320.00) * 100 = 41.09% 320
Return(2009) = 2.00+(251.35-447.95) * 100 = -43.44% 447.95
Return(2010) = 2.00+(212.65-251.5) * 100 = -14.65% 251.5
55
Calculation of return of RANBAXY
Year Beginning price(Rs)
Ending price(Rs)
Dividend(Rs)
2006 598.45 1095.25 15.002007 1109.00 1251.15 17.00
2008 1268 362.75 14.502009 363 391.8 8.50
2010 391 425.5 8.50
Return=Dividend+(Ending Price-Beginning price) Beginning Price Return(2006) = 15.00+(1095.25-598.45) * 100 = 85.52% 598..45
Return(2007) = 17.00+(1251.15-1109.00) * 100 = 14.35% 1109
Return(2008) = 14.50+(362.75-1268.00) * 100 = -70.24% 1268.00
Return(2009) = 8.50+(391.8-363) * 100 = 10.27% 363
Return(2010) = 8.50+(425.5-391.00) * 100 = 10.99% 391.00
56
Calculation of return of MAHENDRA&MAHENDRA
Year Beginning price(Rs)
Ending price(Rs)
Dividend(Rs)
2006 113.45 388.8 5.502007 392.55 545.45 9.00
2008 547.10 511.6 13.002009 514.80 908.45 10.00
2010 913.00 861.95 11.50
Return=Dividend+(Ending Price-Beginning p Beginning Price
Return(2006)=5.50+(388.8-113.45) * 100 = 247.55% 113.45
Return(2007)=9.00+(545.45-392.55) * 100 = 41.24% 392.55
Return(2008)= 13.00+(511.6-547.10) * 100 = _-4.11% 547.10
Return(2009)=10.00+(908.45-514.80) * 100 = 78.41% 514.50Return(2010)=11.50+(861.95-913.00) * 100 = -4.3% 913.00
57
Calculation of return of BAJAJ AUTO
Year Beginning price(Rs)
Ending price(Rs)
Dividend(Rs)
2006 502 1136.3 14.002007 1125.05 1131.2 25.00
2008 1149.00 2001.1 25.002009 2016.00 2619.15 40.00
2010 2648.65 2627.9 40.00
Return=Dividend+(Ending Price-Beginning p Beginning Price
Return(2006)=14.00+(1136.3 -502) * 100 = 129.14% 502
Return(2007)=25.00+(1131.2-1125.05) * 100 = 2.77% 1125.05
Return(2008)= 25.00+(2001.1-1149.00) * 100 = _76.34% 1149.00
Return(2009)=40.00+(2619.15-2016.00) * 100 = 31.9% 2016.00Return(2010)=40.00+(2627.9-2648.65) * 100 = 0.726% 2648.65
58
Calculation of standard deviation of ICICI
Year Return (R) _ R
_ R-R
_( R-R )2
2006 114.7 58.652 56.048 3486.6
2007 27.17 58.652 -31.482 991.11
2008 58.28 58.652 -0.372 0.138384
2009 53.13 58.652 -5.522 30.492
2010 39.98 58.652 -18.672 348.64
293.26 4856.98 _ Average (R) = R = 293.26 = 58.652 N 5 _ Variance = 1 (R-R) 2 n-1
Standard Deviation = Variance
= 1 (11905.379) 5-1
= 34.846
Calculation of standard deviation of HDFC
59
_
Average (R) = R = 271.2 = 54.24 N 5 _ Variance = 1 (R-R) 2 n-1
Standard Deviation = Variance
= 1 (2476.8) 5-1 = 24.88
Year Return (R) _ R
_ R-R
_( R-R )2
2006 80.9 54.24 26.66 710.75
2007 19.60 54.24 -34.64 1199.92
2008 57.13 54.24 2.89 8.3521
2009 36.6 54.24 -17.64 311.16
2010 76.97 54.24 22.73 516.65
271.2 2476.8
60
Calculation of standard deviation of WIPRO
_ Average (R) = R = -64.646 = -12.93 N 5 _
Variance = 1/n-1 (R-R)2
Standard Deviation = Variance
= 1 (4934.5)
4
= 35.12
Calculation of standard deviation of ITC
Year Return (R) _ R
_ R-R
_( R-R )2
2006 8.184 -12.93 21.114 445.81
2007 -55.60 -12.93 -42.67 1820.73
2008 -37.96 -12.93 -25.03 626.5
2009 32.23 -12.93 45.16 2039.4
2010 -11.5 -12.93 1.43 2.0449
-64.646 4934.5
61
Year Return (R)
_ R
_ R-R
_( R-R )2
2006 49.7 8.686 41.04 1682.14
2007 34.4 8.686 25.714 661.209
2008 -86.87 8.686 -95.556 9130.94
2009 25.8 8.686 17.114 293.88
2010 20.4 8.686 11.714 137.21
43.43 11905.379 _ Average (R) = R = 43.43 = 8.686 N 5 __
Variance = 1 (R-R) 2 N- 1
Standard Deviation = Variance
= 1 (11905.379) 5-1
S.D = 54.55
Calculation of standard deviation of COLGATE&PALMOLIVE
Year Return (R)
_ R
_ R-R
_( R-R )2
62
2006 24.5 27.74 -3.24 10.5
2007 13.58 27.74 -14.16 200.5
2008 54.2 27.74 26.46 700.13
2009 45.8 27.74 18.06 326.16
2010 0.62 27.74 -27.12 735.5
138.7 27.74 1972.79
__ Average R = R N
= 138.7 = 27.74 5 __ variance = 1 (R-R )2
n-1 Standard Deviation = Variance
1 (1972.79) 4
= 22.2
Calculation of standard deviation of CIPLA
Year Return (R) _ R
_ R-R
_( R-R )2
63
2006 54.23 -7.744 61.974 3840
2007 -75.95 -7.744 -68.206 4652
2008 41.09 -7.744 48.834 2384
2009 -43.44 -7.744 -35.696 1274
2010 -14.65 -7.744 -6.906 47.692
-38.72 12197.692 _ Average (R) = R = -38.72 = -7.744 N 5 _ Variance = 1/n-1 (R-R)2 Standard Deviation = Variance _ = 1 (12197.692) 4
=55.22
Calculation of standard deviation of RANBAXY
64
_ Average (R) = R = 50.89 = 10.18 N 5 Variance = 1 (R-R) 2 n-1
Standard Deviation = Variance
= 1 (12161)
4
= 55.13
Calculation of standard deviation of MAHENDRA&MAHENDRA
Year Return (R) _ R
_ R-R
_( R-R )2
2006 85.52 10.18 75.34 5676
2007 14.35 10.18 4.17 17.39
2008 -70.24 10.18 -80.42 6467
2009 10.27 10.18 0.09 0.0081
2010 10.99 10.18 0.81 0.6561
50.89 12161
65
Year Return (R)
_ R
_ R-R
_( R-R )2
2006 247.45 71.758 175.79 30902.8
2007 41.24 71.758 -30.52 931.47
2008 -4.11 71.758 -75.868 5755.95
2009 78.41 71.758 6.652 44.25
2010 -4.3 71.758 -76.058 5784.82
358.79 43419.3
__ Average R = R n = 358.79 =71.758 5 __ Variance = 1 (R-R )2
n-1
Standard Deviation = Variance
= 1 (43419.3) = 104.186 4
Calculation of standard deviation of BAJAJ AUTO
66
Year Return (R)
_ R
_ R-R
_( R-R )2
2006 129.14 48.175 80.965 6555.3
2007 2.77 48.175 -45.405 2061.6
2008 76.34 48.175 28.165 793.3
2009 31.9 48.175 -16.275 264.9
2010 0.726 48.175 -47.449 2251.4
240.876 11926.5
__ Average R = R N
= 240.876 = 48.175 5 __ Variance = 1 (R-R) 2 N-1
Standard Deviation = Variance
= 1 (11926.5) 4 = 54.6
Correlation between HDFC & ICICI
YearDEVIATIONOFHDFC ___
DEVIATION OF ICICI __
COMBINED DEVIATION
67
RA-RA RB-RB ___ ___ (RA-RA ) (RB-RB)
2006 26.66 56.048 1494.24
2007 -34.64 -31.482 1090.5
2008 2.89 -0.372 -1.075
2009 -17.64 -5.522 97.41
2010 22.73 -18.672 -424.4
2256.675
nCo-variance (COVAB
) =1/n (RA-RA) (RB-RB) t=1
Co-variance (COVAB )=1/5 (2256.675)
=451.335
Correlation – Coefficient (PAB) = COV AB
(Std. A) (Std. B)
= 451.335 (24.88) (34.846) = 0.5206
Correlation between ITC&COLGATE -PALMOLIVE
68
YearDEVIATIONOF ITC ___RA-RA
DEVIATION OF COLGATE- PALMOLIVE __RB-RB
COMBINED DEVIATION ___ ___ (RA-RA ) (RB-RB)
2006 41.04 -3.24 -132.97
2007 25.714 -14.16 -364.1
2008 -95.556 26.46 -2528.4
2009 17.114 18.06 309.07
2010 11.714 -27.12 -317.68
-3034.08
nCo-variance (COVAB
)=1/n (RA-RA) (RB-RB) t=1
Co-variance (COVAB )=1/5 (-3034.08)
=-606.816 Correlation – Coefficient (PAB) = COV AB
(Std. A) (Std. B)
= - 606.816 (54.55) (22.21) = - 0.5008
Correlation between CIPLA & RANBAXY
69
YearDEVIATION 0FCIPLA ___RA-RA
DEVIATION OF RANBAXI __RB-RB
COMBINED DEVIATION ___ ___ (RA-RA ) (RB-RB)
2006 61.974 75.34 4669.12
2007 -68.206 4.17 -284.42
2008 48.834 -80.42 -3927.23
2009 -35.696 0.09 -3.213
2010 -6.906 0.81 -5.59
448.667
nCo-variance (COVAB
)=1/n (RA-RA) (RB-RB) t=1
Co-variance (COVAB )=1/5 448.667
= 89.7334Correlation – Coefficient (PAB) = COV AB
(Std. A) (Std. B)
= 89.7334
(55.22)(55.13)
=0.0295
Correlation between BAJAJ AUTO &MAHENDRA-
DEVIATIONOF DEVIATION OF M&M COMBINED DEVIATION
70
Year BAJAJ ___RA-RA
___RB-RB
___ ___ (RA-RA ) (RB-RB)
2006 80.965 175.79 14232.84
2007 -45.405 -30.52 1385.76
2008 28.165 -75.868 -1909.22
2009 -16.275 6.652 -108.26
2010 -47.449 -76.058 3608.87
17210
nCo-variance (COVAB
)=1/n (RA-RA) (RB-RB) t=1
Co-variance (COVAB )=1/5 (17210)
=3442 Correlation – Coefficient (PAB) = COV AB
(Std. A) (Std. B)
= 3442 (54.60) (104.586) = 0.605
Correlation between HDFC&WIPRO
71
YearDEVIATION OFHDFC ___RA-RA
DEVIATION OF WIPRO __RB-RB
COMBINED DEVIATION ___ ___ (RA-RA ) (RB-RB)
2006 26.06 21.114 550.23
2007 -34.64 -42.67 1478.1
2008 2.89 -25.03 -72.34
2009 -17.64 45.16 -796.6
2010 22.73 1.43 32.50
1191.89
nCo-variance(COVAB
)=1/n (RA-RA) (RB-RB)
t=1
Co-variance(COVAB )=1/5 (1191.89)
=238.38
Correlation – Coefficient (PAB) = COV AB
(Std. A) (Std. B)
= 238.38 (24.88) (35.123)
=0.273
Correlation between BAJAJ& ITC
72
YearDEVIATION OFBAJAJ ___RA-RA
DEVIATION OF ITC
__RB-RB
COMBINED DEVIATION ___ ___ (RA-RA ) (RB-RB)
2006 80.965 41.04 3322.80
2007 -45.405 25.714 -1167.54
2008 28.165 -95.556 -2691.33
2009 -16.275 17.114 -278.53
2010 -47.449 11.714 -555.82
-1370.42
nCo-variance(COVAB
)=1/n (RA-RA) (RB-RB) t=1
Co-variance(COVAB )=1/5 (-1370.42)
=-274.08
Correlation – Coefficient (PAB) = COV AB
(Std. A) (Std. B)
= - 274.08 (54.60) (54.55) =-0.092
73
STANDARD DEVIATION
COMPANY STANDARED DEVIATION
ITC 54.55COL-PAL 22.21BAJAJ 54.60M&M 104.186HDFC 24.88ICICI 34.846RANBAXY 55.13WIPRO 35.123CIPLA 55.22
AVERAGE
74
COMPANY AVERAGE
ITC 8.686
COLGATE&PALMOLIVE 27.74
BAJAJ 48.175
M&M 71.758
HDFC 54.24
ICICI 58.652RANBAXY 10.18WIPRO -12.93
CIPLA -7.744
Interpretation:
Standard deviation is the indication at risk associated with a security it shows
uncertainty of return from a security from above analysis M&M have high Standard
deviation and it has practical to get good return ITC is low risky
CORRELATION OF COEFFICIENT
75
COMPANY R
HDFC&ICICI 0.5206ITC&COLGATE 0.5008
BAJAJAUTO&MAHINDRA 0.605
CIPLA&RANBAXY 0.0295
HDFC&WIPRO 0.0273
BAJAJ&ITC -0.09
CIPLA&BAJAJ 0.690
PORTFOLIO WEIGHTS
HDFC&ICICI
76
Formula:
X a = ( Std.b) 2 – p ab (std.a )(std.b)
(std.a) 2 + (std.b) 2 -2 pab (std.a) (std.b)
X b = 1 – X a
Where X a = HDFC
X b = ICICI
Std.a = 24.88 Std.b = 34.85
p ab = 0.5206
X a = (34.85 ) 2 – (0.5206) (24.88 )(34.85)
(24.88) 2 + (34.85) 2 - 2 (0.5206) (24.88) (34.85)
X b = 1 – X a
X a = 0.8199
X b = 0.1801
PORTFOLIO WEIGHTS
77
Formula:
X a = ( Std.b) 2 – p ab (std.a )(std.b)
(std.a) 2 + (std.b) 2 -2 pab (std.a) (std.b)
X b = 1 – X a
Where X a = WIPRO
X a = (34.846) 2 – (0.586) (35.123 )(34.846)
(35.123) 2 + (34.846) 2 - 2 (0.586) (35.123) (34.846)
X b = 1 – X a
X a = 0.4905
X b = 0.5095
PORTFOLIO WEIGHTS
ITC&COLGATE:
78
Formula:
X a = ( Std.b) 2 – p ab (std.a )(std.b)
(std.a) 2 + (std.b) 2 -2 pab (std.a) (std.b)
X b = 1 – X a
Where X a = ITC
X b = COLGATE Std.a = 54.55
Std.b = 22.21
p ab = 0.5008
X a = (22.21) 2 – (0.5008) (54.55 )(22.21)
(54.55) 2 + (22.21) 2 - 2 (0.5008) (54.55) (22.21)
X b = 1 – X a
X a = 0.0503
X b = 0.9497
PORTFOLIO WEIGHTS
CIPLA&RANBAXY:
79
Formula:
X a = ( Std.b) 2 – p ab (std.a )(std.b)
(std.a) 2 + (std.b) 2 -2 pab (std.a) (std.b)
X b = 1 – X a
Where X a = CIPLA
X b = RANBAXY Std.a = 55.22
Std.b = 55.13
p ab = 0.0295
X a = (55.13) 2 – 0.0295 (55.22) (55.13) (55.22) 2 + (55.13) 2
- 2 (0.0295) (55.22) (55.13)
X b = 1 – X a
X a = 0.49916
X b = 0.50084
PORTFOLIO WEIGHTS
BAJAJ AUTO&MAHENDRA:
80
Formula:
X a = ( Std.b) 2 – p ab (std.a )(std.b)
(std.a) 2 + (std.b) 2 -2 pab (std.a) (std.b)
X b = 1 – X a
Where X a = BAJAJ AUTO
X b = MAHENDRA Std.a = 54.60
Std.b = 104.186
p ab = 0.605
X a = (104.19) 2 – o.605 (54.60) (104.19) (54.60) 2 + (104.19) 2
- 2 (0.605) (54.60) (104.19)
X b = 1 – X a
X a = 1.6206
X b = -0.6206
Two Portfolios Correlation COMPANY COMPANY Xb PORTFOLI PORTFOLO
81
Coefficient Xa O RETURN Rp
RISK
σp
ICICI&HDFC 0.5206 0.8199 ..0.1801 114.24 31.14
ITC&COLGATE 0.5008 0.0563 0.9497 26.835 22.77
CIPLA&RANBAXI 0.605 0.49916 0.50084 1.2335 49.43
M&M &BAJAJ 0.0295 1.6206 -0.620 122.61 171.22
__ __
PORTFOLIO RETURN ( Rp)=(Ra)(Xa) + (Rb) (Xb)
PORTFOLIO RISK= ___________________________________
σp= √ X1^2σ1^2+X2^2σ2^2+2(X1)(X2)(X12)σ1σ2
Portfolio return Rp
ICICI&HDFC 114.24
ITC&COLGATE 26.835
82
CIPLA&RANBAXI 1.234
M&M &BAJAJ 122.61
Interpretation:
It is proved fact that portfolio is lower than individual risks at assets of portfolio we
absurd from the calculations in that risk of portfolio.
Portfolio risk
ICICI&HDFC 31.14
ITC&COLGATE 22.77
CIPLA&RANBAXI 49.43
M&M &BAJAJ 171.22
83
Interpretation:
It is proved fact that portfolio is lower than individual risks at assets of portfolio we
absurd from the calculations in that risk of portfolio.
FINDINGS:
1. As far as the average returns of the selected companies are concerned, M&M
BAJAJ is performing well in isolation where as CIPLA &RANBAXY is performing very
poor.
84
2. As far as the standard Deviation of the selected companies are concerned,
M&M&ICICI is very high, where as ITC&COLGATE, is giving less risk than other
companies. This means that the higher the risk the higher the return.
3. As far as the correlation co-efficient is concerned the study selects only negatively
correlated scripts as suggested by Markowitz.The combination of securities with ITC is
negatively correlated.
4. As far as Portfolio Risk & Return are concerned the combination of securities of
ITC & Bajaj Auto is giving more return and meanwhile the risk involved in that security
is also more.
SUGGESTIONS
85
1. As the average return of securities BAJAJ,ICICI, HDFC and ITC are HIGH, it is
suggested that investors who show interest in these securities taking risk into
consideration.
2. As the risk of the securities ITC, BAJAJ, M&M and CIPLA are risky securities it
suggested that the investors should be careful while investing in these securities.
3. The investors who require minimum return with low risk should invest in WIPRO
& CIPLA&COLGATE.
4. It is recommended that the investors who require high risk with high return should
invest in ICIC and BAJAJ and M&M .
5. The investors are benefited by investing in selected scripts of Industries.
CONCLUSIONS
ICICI&HDFC
86
The combination of ICICI and HDFC gives the proportion of investment is 1.1801 and
0.8199 for ICICI and HDFC, based on the standard deviations The standard deviation for
ICICI is 34.846 and for HDFC is 24.88.
Hence the investor should invest their funds more in HDFC when compared to
ICICI as the risk involved in HDFC is less than ICICI as the standard deviation of HDFC
is less than that of ICICI.
ITC & COLGATE PALMOLIVE
The combination of ITC and COLGATE gives the proportion of investment is 0.0563 and
0.50084 for ITC and COLGATE, based on the standard deviations The standard
deviation for ITC is 54.55 and for COLGATE is 22.2.
Hence the investor should invest their funds more in COLGATE when compared
to ITC as the risk involved in COLGATE is less than ITC as the standard deviation of
COLGATE is less than that of ITC.
CIPLA&RANBAXY
The combination of CIPLA and RANBAXY gives the proportion of investment is
0.49916 and 0.50084 for CIPLA and RANBAXY, based on the standard deviations The
standard deviation for CIPLA is 55.22 and for RANBAXY is 55.13. When compared to
both the risk is almost same, hence the risk is same when invested in either of the
security.
MAHENDRA & BAJAJ AUTO
87
The combination of M&M and BAJAJ AUTO gives the proportion of investment is
1.6206 and 0.6206 for M&M and BAJAJ AUTO, based on the standard deviations The
standard deviation for M&M is 104.186 and for BAJAJ AUTO is 54.6.
Hence the investor should invest their funds more in BAJAJ AUTO when
compared to M&M as the risk involved in BAJAJ AUTO is less than M&M as the
standard deviation of BAJAJ AUTO is less than that of M&M.
CONCLUSIONS FOR CORRELATION
In case of perfectly correlated securities or stocks, the risk can be reduced to a minimum
point.In case of negatively correlative securities the risk can be reduced to a zero.(which
is company’s risk) but the market risk prevails the same for the security or stock in the
portfolio.
As the study shows the following findings for portfolio construction;
Investor would be able to achieve when the returns of shares and debentures
Resultant portfolio would be known as diversified portfolio. Thus portfolio construction
would address itself to three major via., selectivity, timing and diversification
In case of portfolio management, negatively correlated assets are most
profitable .Correlation between the BAJAJ & ITC are negatively correlated which means
both the combinations of portfolios are at good position to gain in future .
Investors may invest their money for long run, as both the combinations are most
suitable portfolios. A rational investor would constantly examine his chosen portfolio
both for average return and risk.
88
BIBLIOGRAPHY
89
TEXT BOOKS
AUTHORNAME BOOKNAME PUBLICATION EDITION
1.DONALDE, FISHER SECURITIES ANYLISIS 6THEDITION &PORTFOLIOMANAGEMENT
2.RONALD J.JODON INVESTMENTS MANAGEMENT S.CHAND 3.V.A.AVADHANI INVESTMENT MANAGEMENT
Website
4. WWW. Investopedia.com
5. www.nseindia.com
6. www.bseindia.com.
7. www.unicon investmentsolutions.com
Newspapers& magazine
8. DAILY NEWS PAPERS.
ECONOMIC TIME, FINANCIAL EXPRES.ETC
ANNEXURE
90
Implementation of study:
For implementing the study,8 securitie’s or scripts constituting the sensex market are
selected of one month closing share movement price data From Economic Times and
financial express from jan 3rd to 31st jan 2009.
In order to know how the risk of the stock or script, we use the formula, which is given below..
_________ Standard deviation= √ variance n _ Variance= (1/n-1) ∑ (R-R)2 t=1 _ Where (R-R)2 = square of difference between sample and mean
n = number of sample observed
After that we need to compare the stocks or scripts of two companies with each other by
using the formula or correlation coefficient as given below.
n __ __ Covariance [COVAB] =1/n ∑ (RA-RA) (RB-RB)
t=1 correlation-Coefficient (PAB ) = (COVAB )
(std.A) (std.B)
Where (RA-RA)(RB-RB) = Combined deviation of A&B
(std.A) (std.B)deviation of A&B
COVAB = Covariance between A&B n= number of observations.
The next step would be the construction of the optimal portfolio on the basis of
what percentage of investment should be invested when two securities and stocks are
91
combined i.e. calculation of two assets portfolio weight by using minimum variance
equation which is given below.
FORMULA (Std. b) ^2 – pab (Std. a) (Std. b)
Xa =------------------- ---------------------------------- (Std. a) ^2 + (std. b) ^2 –2pab (Std. a) (Std. b) Where
Std. b= standard deviation of b
Std. a = standard deviation of a
Pab= correlation co-efficient between A&B The next step is final step to calculate the portfolio risk (combined risk),that shows how
much is the risk is reduced by combining two stocks or scripts by using this formula:
_________________________________-
σp= √ X1^2σ1^2+X2^2σ2^2+2(X1)(X2)(X12)σ1σ2 Where X1=proportion of investment in security 1.
X2=proportion of investment in security 2.
σ 1= standard deviation of security 1.
σ 2= standard deviation of security 2.
X12=correlation co-efficient between securities
σ p=portfolio risk.
92