Risk Portfolio Management

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CHAPTER I

INTRODUCTION

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INTRODUCTION:

The financial market is the driver of the economic growth and

development of any country. A sound financial market can take the country to

the apex. Financial resources were by allocating the resources through one of

the ways such as portfolios, which are combinations of various securities.

Portfolio analysis includes analyzing the range of possible portfolios that can

be constituted from a given set of securities.

A combination of securities with different risk- return characteristics will

constitute the portfolio of the investor. A portfolio is a combination of various

assets and/or instruments of investments. The portfolio is also built up out of

the wealth or income of the investor over a period of time with a view to suit

his risk and return preferences to that of the portfolio that he holds. The

portfolio analysis is an analysis of the risk-return characteristics of individual

securities in the portfolio and changes that may take place in combination with

other securities due to interactions among themselves and impact of each one

of them on others.

As individuals are becoming more and more responsible for ensuring

their own financial future, portfolio or fund management has taken on an

increasingly important role in banks ranges of offerings to their clients. In

addition, as interest rates have come down and the stock market has gone up

and come down again, clients have a choice of leaving their saving in deposit

accounts, or putting those savings in unit trusts or investment portfolios which

invest in equities and/or bonds. Investing in unit trusts or mutual funds is one

way for individuals and corporations alike to potentially enhance the returns

on their saving

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Objectives of the study:

To study the role of securities in Indian financial markets

To study the investment pattern and its related risks & returns. To find out optimal portfolio, which gave optimal return at a

minimize risk to the investor.

To understand portfolio selection process.

To study the usefulness of efficient frontier technique in portfolio

selection process.

To see whether the portfolio risk is less than individual risk on

whose basis the portfolios are constituted

To see whether the selected portfolios is yielding a satisfactory

and constant return to the investor

To understand, analyze and select the best portfolio.

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Limitations of the study:

This study has been conducted purely to understand Portfolio

Management for investors.

Construction of Portfolio is restricted to two companies based on

Markowitz model.

Very few and randomly selected scrips / companies are analyzed from

BSE listings.

Detailed study of the topic was not possible due to limited size of the

project.

There was a constraint with regard to time allocation for the research

study i.e. for a period of 45 days.

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RESEARCH METHODOLOGY:

Research design or research methodology is the procedure of collecting,

analyzing and interpreting the data to diagnose the problem and react to the

opportunity in such a way where the costs can be minimized and the desired

level of accuracy can be achieved to arrive at a particular conclusion.

The methodology used in the study for the completion of the project and the

fulfillment of the project objectives, is as follows:

Market prices of the companies have been taken for the years of

different dates, there by dividing the companies into 5 sectors.

A final portfolio is made at the end of the year to know the changes

(increase/decrease) in the portfolio at the end of the year.

Sources of the data:

Primary data:

The primary data information is gathered from SMC fin polis by interviewing

SMC executives.

Secondary data:

The secondary data is collected from various financial books, magazines and

from stock lists of various newspapers and SMC as part of the training class

undertaken for project.

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CHAPTER - II

INDUSTRY PROFILE

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INDUSTRY PROFILE

Bombay Stock Exchange Limited is the oldest stock exchange in Asia with a

rich heritage. Popularly known as "BSE", it was established as "The Native

Share & Stock Brokers Association" in 1875. BSE has played a pioneering

role in the Indian Securities Market - one of the oldest in the world. Much

before actual legislations were enacted, BSE had formulated comprehensive

set of Rules and Regulations for the Indian Capital Markets. It also laid down

best practices adopted by the Indian Capital Markets after India gained its

Independence.

Vision:

"Emerge as the premier Indian stock exchange by establishing global

benchmarks"

BSE is the first stock exchange in the country to obtain permanent

recognition in 1956 from the Government of India under the Securities

Contracts (Regulation) Act, 1956.The Exchange's pivotal and pre-eminent role

in the development of the Indian capital market is widely recognized and its

index, SENSEX, is tracked worldwide. SENSEX, first compiled in 1986 was

calculated on a "Market Capitalization-Weighted" methodology of 30

component stocks representing a sample of large, well-established and

financially sound companies. The base year of SENSEX is 1978-79. From

September 2003, the SENSEX is calculated on a free-float market

capitalization methodology. The "free-float Market Capitalization-Weighted"

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methodology is a widely followed index construction methodology on which

majority of global equity benchmarks are based.

The launch of SENSEX in 1986 was later followed up in January 1989 by

introduction of BSE National Index (Base: 1983-84 = 100). It comprised of 100

stocks listed at five major stock exchanges in India at Mumbai, Calcutta,

Delhi, Ahmadabad and Madras. The BSE National Index was renamed as

BSE-100 Index from October 14, 1996 and since then it is calculated taking

into consideration only the prices of stocks listed at BSE. The Exchange

launched dollar-linked version of BSE-100 index i.e. Dollex-100 on May 22,

2006. The Exchange constructed and launched on 27th May, 1994, two new

index series viz., the 'BSE-200' and the 'DOLLEX-200' indices. The launch of

BSE-200 Index in 1994 was followed by the launch of BSE-500 Index and 5

sectored indices in 1999. In 2001, BSE launched the BSE-PSU Index,

DOLLEX-30 and the country's first free-float based index - the BSE TECK

Index. The Exchange shifted all its indices to a free-float methodology (except

BSE PSU index).

The Exchange has a nation-wide reach with a presence in 417 cities and

towns of India. The systems and processes of the Exchange are designed to

safeguard market integrity and enhance transparency in operations. During

the year 2004-2005, the trading volumes on the Exchange showed robust

growth.

The Exchange provides an efficient and transparent market for trading in

equity, debt instruments and derivatives. The BSE's On Line Trading System

(BOLT) is a proprietary system of the Exchange and is BS 7799-2-2002

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certified. The surveillance and clearing & settlement functions of the

Exchange are ISO 9001:2000 certified.

The Exchange is professionally managed under the overall direction of the

Board of Directors. The Board comprises eminent professionals,

representatives of Trading Members and the Managing Director of the

Exchange. The Board is inclusive and is designed to benefit from the

participation of market intermediaries.

BSE as a brand is synonymous with capital markets in India. The BSE

SENSEX is the benchmark equity index that reflects the robustness of the

economy and finance. It was the

First in India to introduce Equity Derivatives

First in India to launch a Free Float Index

First in India to launch US$ version of BSE Sensex

First in India to launch Exchange Enabled Internet Trading Platform

First in India to obtain ISO certification for Surveillance, Clearing &

Settlement

'BSE On-Line Trading System (BOLT) has been awarded the globally

recognized the Information Security Management System standard

BS7799-2:2002.

First to have an exclusive facility for financial training

Moved from Open Outcry to Electronic Trading within just 50 days

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In 2002, the name The Stock Exchange, Mumbai, was changed to BSE.

BSE, which had introduced securities trading in India, replaced its open

outcry system of trading in 1995, when the totally automated trading

through the BSE Online trading (BOLT) system was put into practice. The

BOLT network was expanded, nationwide, in 1997. It was at the BSE's

International Convention Hall that Indias 1st Bell ringing ceremony in the

history Capital Markets was held on February 18th, 2002. It was the listing

ceremony of Bharti Tele ventures Ltd.

BSE with its long history of capital market development is fully geared to

continue its contributions to further the growth of the securities markets

of the country, thus helping India increase its sphere of influence in

international financial markets.

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NATIONAL STOCK EXCHANGE OF INDIA LIMITED

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.

The national stock exchange of India ltd is the largest stock exchange of the

country. NSE is setting the agenda for change in the securities markets in

India. For last 5 years it has played a major role in bringing investors from 347

cities and towns online, ensuring complete transparency, introducing financial

guarantee to settlements, ensuring scientifically designed and professionally

managed indices and by nurturing the dematerialization effort across the

country.

NSE is a complete capital market prime mover. Its wholly owned subsidiaries,

National securities clearing corporation ltd (NSCCL) provides cleaning and

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settlement of securities, India index services and products ltd (IISL) provides

indices and index services with a consulting and licensing agreement with

Standard & Poors (S&P), and IT ltd forms the technology strength that NSE

works on.

Today, NSE is one of the largest exchanges in the world and still forging

ahead. At NSE, we are constantly working towards creating a more

transparent, vibrant and innovative capital market.

OVER THE COUNTR EXCHANGE OF INDIA

OTCEI was incorporated in 1990 as a section 25 company under the

companies Act 1956 and is recognized as a stock exchange under section 4

of the securities Contracts Regulation Act, 1956. The exchange was set up to

aid enterprising promotes in raising finance for new projects in a cost effective

manner and to provide investors with a transparent and efficient mode of

trading Modeled along the lines of the NASDAQ market of USA, OTCEI

introduced many novel concepts to the Indian capital markets such as screen-

based nationwide trading, sponsorship of companies, market making and

scrip less trading. As a measure of success of these efforts, the Exchange

today has 115 listings and has assisted in providing capital for enterprises that

have gone on to build successful brands for themselves like VIP Advanta,

Sonora Tiles & Brilliant mineral water, etc.

Need for OTCEI:

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Studies by NASSCOM, software technology parks of India, the venture

capitals funds and the governments IT tasks Force, as well as rising interest

in IT, Pharmaceutical, Biotechnology and Media shares have repeatedly

emphasized the need for a national stock market for innovation and high

growth companies.

Innovative companies are critical to developing economics like India, which is

undergoing a major technological revolution. With their abilities to generate

employment opportunities and contribute to the economy, it is essential that

these companies not only expand existing operations but also set up new

units. The key issue for these companies is raising timely, cost effective and

long term capital to sustain their operations and enhance growth. Such

companies, particularly those that have been in operation for a short time, are

unable to raise funds through the traditional financing methods, because they

have not yet been evaluated by the financial world.

Who would find OTCEI helpful?

High-technology enterprises

Companies with high growth potential

Companies focused on new product development

Entrepreneurs seeking finance for specific business projects

The Indian economy is demonstrating signs of recovery and it is essential that

these companies have suitable financing alternative to fund their growth and

maintain competitiveness.

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OTCEI, With its entry guidelines and eligibility requirement tailored for such

innovative and growth oriented companies, is ideally positioned as the

preferred route for raising funds through initial public offer(IPOs) or primary

issues, in this country.

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CHAPTER - III

COMPANY PROFILE

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COMPANY PROFILE

SMC GLOBAL SECURITIES LIMITED

ABOUT SMC GLOBAL SECURITIES

SMC Global is one of the leading integrated financial services groups in the

country today, backed by a blue chip promoter pedigree and a proven track record. Our

businesses are broadly clubbed across three key verticals, the Retail, Institutional and

Wealth spectrums, catering to a diverse and wide base of clients spread across the

length and breadth of the country. Structurally, all businesses are operated through

various subsidiaries held through the holding company, SMC Global, which recently

concluded its resoundingly successful public offer.

The company offers a diverse bouquet of services ranging from equities,

commodities, insurance broking to wealth management, portfolio management services,

personal financial services, investment banking and institutional broking services. SMC

Global retail network spreads across the length and breadth of the country with its

presence through more than 1300 locations across more than 800 cities and towns.

As part of its recent initiatives the group has also started expanding globally.

SMC Global has also successfully partnered with Sanlam, one of the global leaders to

Wealth Management joint venture.

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The vision is to build SMC Global as a globally trusted brand in the financial

services domain and present it as the Investment Gateway of India. All employees of

the group, currently more than 15,000 in number, ceaselessly strive to provide financial

care driven by the core values of diligence and transparency.

GROUP STRUCTURE

SMC Wealth

Management Services Limited and Financial Services Group of the Macquarie Bank

have signed a 50:50 JV now called SMC Wealth Management Limited.

VISION & MISSION

Vision - To build SMC Global as a globally trusted brand in the financial services

domain and present it as the Investment Gateway of India

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Mission - To provide financial care driven by the core values of diligence &

transparency

Brand Essence- Diligent, dynamic & ethical processes for wealth creation.

BRAND IDENTITY

Name

SMC Means company chairmans starting characters S stands for Mr.Subhash

Aggarwal M stands for Mr.Mahesh Gupta. Company both are a fellow member of the

institute of Charted Accounts of India

Symbol

The name is paired with the symbol of a four-leaf clover, a rare mutation of the

common three-leaf clover. Traditionally, it is considered good fortune to find a four leaf

clover as there is only one four-leaf clover for every 10,000 three-leaf clovers found.

Each leaf of the four-leaf clover has a special meaning in the sphere of SMC.

The first leaf of the clover represents Hope. The aspirations to succeed. The

dream of becoming. Of new possibilities. It is the beginning of every step and

the foundations on which a person reaches for the stars.

The third leaf of the clover represents Care. The secret ingredient that is the

cement in every relationship. The truth of feeling that underlines sincerity and

the triumph of diligence in every aspect. From it springs true warmth of service

The second leaf of the clover represents Trust. The ability to place ones own

faith in another. To have a relationship as partners in a team. To accomplish a

given goal with the balance that brings satisfaction to all not in the binding but in

the bond that is built.

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and the ability to adapt to evolving environments with consideration to all.

The fourth and final leaf of the clover represents Good Fortune. Signifying that rare

ability to meld opportunity and planning with circumstance to generate those often

looked for remunerative moments of success.

Hope. Trust. Care. Good fortune. All elements perfectly combine in the emblematic

and rare, four-leaf clover to visually symbolize the values that bind together and form

the core of the SMC vision.

Accent usage

The diacritical tilde mark () over the letter A in the Smc typeface indicates a palatalemphasis sound of the letter A.

MANAGEMENT TEAM

Our Top Management Team

Mr. S C Aggarwal Chairman & Managing Director

Mr. Mahesh C Gupta Vice Chairman & Managing Director

Mr.D K Aggarwal CMD SMC Comtrade Ltd & SMC Capitals Ltd

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Mr. Pradeep Aggarwal Managing Director, SMC Global Securities Ltd

Mr. Anurag Bansal Managing Director, SMC Global Securities Ltd

Mr. Ajay Garg Managing Director, SMC Global Securities Ltd

Mr. Rakesh Gupta - Managing Director, SMC Global Securities Ltd

Mr. Tienie van de CEO, SMC Wealth Management Services Ltd

CLIENT INTERFACE : SERVICES OFFERED

Retail Spectrum- To cater to a large number of retail clients by offering all products

under one roof through the Branch Network and Online mode

Equity, Commodity & Currency Trading

Personal Financial Services

Distribution

Insurance

Loan Against Securities

Equities Derivatives Currency Commodities Clearing Services

Wealth Management

Research

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Online Investment Portal

Institutional Spectrum- To Forge & build strong relationships with Corporate Client

and Institutions

Institutional Equity Broking

Investment Banking

Merchant Banking

Transaction Advisory

Corporate Finance

Wealth Spectrum - To provide customized wealth advisory services to High Net

worth Individuals

Wealth Advisory Services

Portfolio Management Services

International Advisory Fund Management Services

Priority Client Equity Services

Arts Initiative

.

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GROUP COMPANIES

1. SMC Global Securities Ltd

2. SMC Comtrade Ltd

3. SMC Insurance Brokers Pvt Ltd

4. SMC Trade Online

5. Nexgen Capitals Ltd

6. SMC Comex INTL DMCC

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CHAPTER - IV

REVIEW OF LITERATURE

INTRODUCTION:

A portfolio is a collection of investments held by an institution or a

private individual. In building up an investment portfolio a financial institution

will typically conduct its own investment analysis, whilst a private individual

may make use of the services of a financial advisor or a financial institution

which offers portfolio management services. Holding a portfolio is part of an

investment and risk-limiting strategy called diversification. By owning several

assets, certain types of risk (in particular specific risk) can be reduced. The

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assets in the portfolio could include stocks, bonds, options, warrants, gold

certificates, real estate, futures contracts, production facilities, or any other

item that is expected to retain its value.

Portfolio management involves deciding what assets to include in the

portfolio, given the goals of the portfolio owner and changing economic

conditions. Selection involves deciding what assets to purchase, how many to

purchase, when to purchase them, and what assets to divest. These

decisions always involve some sort of performance measurement, most

typically expected return on the portfolio, and the risk associated with this

return (i.e. the standard deviation of the return). Typically the expected returns

from portfolios, comprised of different asset bundles are compared.

The unique goals and circumstances of the investor must also be considered.

Some investors are more risk averse than others. Mutual funds have

developed particular techniques to optimize their portfolio holdings.

Thus, portfolio management is all about strengths, weaknesses,

opportunities and threats in the choice of debt vs. equity, domestic vs.

international, growth vs. safety and numerous other trade-offs encounteredin the attempt to maximize return at a given appetite for risk.

Aspects of Portfolio Management:

Basically portfolio management involves

A proper investment decision making of what to buy & sell

Proper money management in terms of investment in a basket of

assets so as to satisfy the asset preferences of investors.

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http://en.wikipedia.org/wiki/Expected_returnhttp://en.wikipedia.org/wiki/Riskhttp://en.wikipedia.org/wiki/Standard_deviationhttp://en.wikipedia.org/wiki/Expected_returnhttp://en.wikipedia.org/wiki/Riskhttp://en.wikipedia.org/wiki/Standard_deviation


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Reduce the risk and increase returns.

OBJECTIVES OF PORTFOLIO MANAGEMENT:

The basic objective of Portfolio Management is to maximize yield and

minimize risk. The other ancillary objectives are as per needs of investors,

namely:

Regular income or stable return

Appreciation of capital

Marketability and liquidity

Safety of investment

Minimizing of tax liability.

NEED FOR PORTFOLIO MANAGEMENT:

The Portfolio Management deals with the process of selection securities from

the number of opportunities available with different expected returns and

carrying different levels of risk and the selection of securities is made with a

view to provide the investors the maximum yield for a given level of risk or

ensure minimum risk for a level of return.

Portfolio Management is a process encompassing many activities of

investment in assets and securities. It is a dynamics and flexible concept and

involves regular and systematic analysis, judgment and actions. The

objectives of this service are to help the unknown investors with the expertise

of professionals in investment Portfolio Management. It involves construction

of a portfolio based upon the investors objectives, constrains, preferences for

risk and return and liability. The portfolio is reviewed and adjusted from time to

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time with the market conditions. The evaluation of portfolio is to be done in

terms of targets set for risk and return. The changes in portfolio are to be

effected to meet the changing conditions.

Portfolio Construction refers to the allocation of surplus funds in hand among

a variety of financial assets open for investment. Portfolio theory concerns

itself with the principles governing such allocation. The modern view of

investment is oriented towards the assembly of proper combinations held

together will give beneficial result if they are grouped in a manner to secure

higher return after taking into consideration the risk element.

The modern theory is the view that by diversification, risk can be reduced. The

investor can make diversification either by having a large number of shares of

companies in different regions, in different industries or those producing

different types of product lines. Modern theory believes in the perspectives of

combination of securities under constraints of risk and return.

ELEMENTS:

Portfolio Management is an on-going process involving the following basic

tasks.

Identification of the investors objective, constrains and preferences

which help formulated the invest policy.

Strategies are to be developed and implemented in tune with invest

policy formulated. This will help the selection of asset classes and

securities in each class depending upon their risk-return attributes.

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Review and monitoring of the performance of the portfolio by

continuous overview of the market conditions, companys performance

and investors circumstances.

Finally, the evaluation of portfolio for the results to compare with the

targets and needed adjustments have to be made in the portfolio to the

emerging conditions and to make up for any shortfalls in achievements

(targets).

Schematic diagram of stages in portfolio management:

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Process of portfolio management:

The Portfolio Program and Asset Management Program both follow a

disciplined process to establish and monitor an optimal investment mix. This

Specification and

quantification ofinvestorobjectives,constraints, and

preferences

Portfolio policiesand strategies

Capital marketexpectations

Relevanteconomic, social,political sectorand securityconsiderations

Monitoring investorrelated input factors

Portfolio construction

and revision assetallocation, portfoliooptimization, securityselection,implementation andexecution

Monitoring economicand market inputfactors

Attainment ofinvestorobjectives

Performancemeasurement

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six-stage process helps ensure that the investments match investors unique

needs, both now and in the future.

1. IDENTIFY GOALS AND OBJECTIVES:

When will you need the money from your investments? What are you

saving your money for? With the assistance of financial advisor, the

Investment Profile Questionnaire will guide through a series of questions

to help identify the goals and objectives for the investments.

2. DETERMINE OPTIMAL INVESTMENT MIX:

Once the Investment Profile Questionnaire is completed, investors optimal

investment mix or asset allocation will be determined. An asset allocation

represents the mix of investments (cash, fixed income and equities) that

match individual risk and return needs.

This step represents one of the most important decisions in your

portfolio construction, as asset allocation has been found to be the major

determinant of long-term portfolio performance.

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3. CREATE A CUSTOMIZED INVESTMENT POLICY STATEMENT

When the optimal investment mix is determined, the next step is to

formalize our goals and objectives in order to utilize them as a benchmark

to monitor progress and future updates.

4. SELECT INVESTMENTS

The customized portfolio is created using an allocation of select QFM

Funds. Each QFM Fund is designed to satisfy the requirements of a

specific asset class, and is selected in the necessary proportion to match

the optimal investment mix.5 MONITOR PROGRESS

Building an optimal investment mix is only part of the process. It is equally

important to maintain the optimal mix when varying market conditions

cause investment mix to drift away from its target. To ensure that mix of

asset classes stays in line with investors unique needs, the portfolio will

be monitored and rebalanced back to the optimal investment mix

6. REASSESS NEEDS AND GOALS

Just as markets shift, so do the goals and objectives of investors. With the

flexibility of the Portfolio Program andAsset Management Program, when

the investors needs or other life circumstances change, the portfolio has

the flexibility to accommodate such changes.

RISK:

Risk refers to the probability that the return and therefore the value of an

asset or security may have alternative outcomes. Risk is the uncertainty

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(today) surrounding the eventual outcome of an event which will occur in the

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

All investments are risky. The higher the risk taken, the higher is the return.

But proper management of risk involves the right choice of investments whose

risks are compensation.

RETURN:

Return-yield or return differs from the nature of instruments, maturity period

and the creditor or debtor nature of the instrument and a host of other factors.

The most important factor influencing return is risk return is measured by

taking the price income plus the price change.

PORTFOLIO RISK:

Risk on portfolio is different from the risk on individual securities. This risk is

reflected by in the variability of the returns from zero to infinity. The expected

return depends on probability of the returns and their weighted contribution to

the risk of the portfolio.

RETURN ON PORTFOLIO:

Each security in a portfolio contributes returns in the proportion of its

investment in security. Thus the portfolio of expected returns, from each of the

securities with weights representing the proportionate share of security in the

total investments.

RISK RETURN RELATIONSHIP:

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The risk/return relationship is a fundamental concept in not only financial

analysis, but in every aspect of life. If decisions are to lead to benefit

maximization, it is necessary that individuals/institutions consider the

combined influence on expected (future) return or benefit as well as on

risk/cost. The requirement that expected return/benefit be commensurate with

risk/cost is known as the "risk/return trade-off" in finance.

All investments have some risks. An investment in shares of companies has

its own risks or uncertainty. These risks arise out of variability of returns or

yields and uncertainty of appreciation or depreciation of share prices, loss of

liquidity etc. and the overtime can be represented by the variance of the

returns. Normally, higher the risk that the investors take, the higher is the

return.

.

.

TYPES OF RISKS: risk consists of two components. They are

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1. Systematic Risk2. Un-systematic Risk

1. SYSTEMATIC RISK:

Systematic risk refers to that portion of total variability in return caused by

factors affecting the prices of all securities. Economic, Political and

sociological changes are sources of systematic risk. Their effect is to cause

prices of nearly all individual common stocks and/or all individual bonds to

move together in the same manner.

i. Market Risk:

Variability in return on most common stocks that are due to basic sweeping

changes in investor expectations is referred to as market risk. Market risk is

caused by investor reaction to tangible as well as intangible events.

ii. Interest rate-Risk:

Interest rate risk refers to the uncertainty of future market values and of the

size of future income, caused by fluctuations in the general level of interest

rates.

iii. Purchasing-Power Risk:

Purchasing power risk is the uncertainty of the purchasing power of the

amounts to be received. In more events everyday terms, purchasing power

risk refers to the impact of or deflation on an investment.

2. UNSYSTEMATIC RISK:

Unsystematic risk is the portion of total risk that is unique to a firm or industry.

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Factors such as management capability, consumer preferences, and labor

strikes Cause systematic variability of return in a firm. Unsystematic factors

are largely independent of factors affecting securities markets in general.

Because these factors affect one firm, they must be examined for each firm.

Unsystematic risk that portion of risk that is unique or peculiar to a firm or

an industry, above and beyond that affecting securities markets in general.

Factors such as management capability, consumer preferences, and labor

strikes can cause unsystematic variability of return for a companys stock.

i. Business Risk:

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

variability these conditions inject into operating income and expected

dividends.

Business risk can be divided into two broad categories

a. Internal Business Risk

b. External Business Risk

a. Internal business risk is associated with the operational efficiency of the

firm. The operational efficiency differs from company to company. The

efficiency of operation is reflected on the companys achievement of its

pre-set goals and the fulfillment of the promises to its investors.

b. External business risk is the result of operating conditions imposed on

the firm by circumstances beyond its control. The external environments in

which it operates exert some pressure on the firm. The external factors are

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social and regulatory factors, monetary and fiscal policies of the

government, business cycle and the general economic environment within

which a firm or an industry operates.

ii. Financial Risk:

Financial risk is associated with the way in which a company finances its

activities. Financial risk is avoided risk to the extent that management has the

freedom to decide to borrow or not to borrow funds. A firm with no debit

financing has no financial risk

MARKOWITZ MODEL

THE MEAN VARIANCE CRITERION:

Dr. Harry M. Markowitz is credited with developing the first modern portfolio

analysis model in order to arrange for the optimum allocation of assets with in

portfolio. To reach these objectives, Markowitz generated portfolio with in a

reward risk context. In essence, Markowitz model is a theoretical framework

for the analysis of risk return choices. Decisions are based on the concept of

efficient portfolios.

Markowitz model is a theoretical framework for the analysis of risk, return

choices and this approach determines an efficient set of portfolio return

through three important variable that is,

Return

Standard Deviation

Coefficient of correlation

Markowitz model is also called as a Full Covariance Model. Through this

model the investor can find out the efficient set of portfolio by finding out the

tradeoff between risk and return, between the limits of zero and infinity.

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According to this theory, the effect of one security purchase over the effects of

the other security purchase is taken into consideration and then the results

are evaluated. Markowitz had given up the single stock portfolio and

introduced diversification. The single stock portfolio would be preferable if the

investor is perfectly certain that his expectation of highest return would turn

out to be real. In the world of uncertainty, most of the risk averse investors

would like to join Markowitz rather than keeping a single stock, because

diversification reduces the risk.

A portfolio is efficient when it is expected to yield the highest return for the

level of risk accepted or, alternatively the smallest portfolio risk for a specified

level of expected return level chosen, and asset are substituted until the

portfolio combination expected returns, set of efficient portfolio is generated.

Assumptions:

The Markowitz model is based on several assumptions regarding investor

behavior:

1. Investors consider each investment alternative as being represented by

a probability distribution of expected returns over some holding period.

2. Investors maximize one period-expected utility and possess utilitycurve, which demonstrates diminishing marginal utility of wealth.

3. Individuals estimate risk on the basis of variability of expected return.

4. Investors base decisions solely on expected return and variance of

return only.

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5. For a given risk level, investors prefer high returns to lower returns.

Similarly for a given level of expected return, investors prefer less risk

to more risk.

Under these assumptions, a single asset or portfolio of assets is considered to

be efficient if no other asset or portfolio of assets higher expected return with

the same expected return.

THE SPECIFIC MODEL:

In developing this model, Markowitz first disposed of the investor behavior

rule that the investor should maximize expected return. This rule implies non-

diversified single security analysis portfolio with the highest expected return is

the most desirable portfolio. Only by buying that single security portfolio would

obviously be preferable if the investor were perfectly certain that this highest

expected return would turn out to be the actual return. However, under real

world conditions of uncertainty, most risk adverse investors join with

Markowitz in discarding the role of calling for maximizing the expected

returns. As an alternative, Markowitz offers the expected returns/variance

rule.

Markowitz has shown the effect of diversification by regarding the risk of

securities. According to him, the security with the covariance, which is either

negative or low amongst them, is the best manner to reduce risk. Markowitz

has been able to show that securities, which have, less than positive

correlation will reduce risk without, in any way, bringing the return down.

According to his research study a low correlation level between securities in

the portfolio will show less risk. According to him, investing in a large number

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of securities is not the right method of investment. It is the right kind of

security that brings the maximum results.

Henry Markowitz has given the following formula for a two-security portfolio

and three security portfolios.

= (x1)2 (1)2 + (X2)2(2)2 + 2(X1)(X2)(r12)(1) (2)

= (x1)2(1)2+(X2)2(2)2 + (X3)2(3)2 +2(X1)(X2)(r12)(1) (2)+ 2(X1)(X3)(r13)(1)

(3)+ 2(X2)(X3)(r23)(2) (3)

p = Standard deviation of the portfolio return

X1= proportion of the portfolio invested in security 1

X2= proportion of the portfolio invested in security 2

X3

= proportion of the portfolio invested in security 31= standard deviation of the return on security 1

2= standard deviation of the return on security 2

3= standard deviation of the return on security 3

r12= coefficient of correlation between the returns on securities 1 and 2



CAPITAL ASSET PRICING MODEL: (CAPM)

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The CAPM is a model for pricing an individual security (asset) or a

portfolio. For individual security perspective, the security market line (SML) is

used and its relation to expected return and systematic risk (beta) to show

how the market must price individual securities in relation to their security risk

class. The SML enables us to calculate the reward-to-risk ratio for any

security in relation to that of the overall market. Therefore, when the expected

rate of return for any security is deflated by its beta coefficient, the reward-to-

risk ratio for any individual security in the market is equal to the market

reward-to-risk ratio, thus:

Individual securitys / beta = Markets securities (portfolio)

Reward-to-risk ratio Reward-to-risk ratio

,

The Security Market Line, seen here in a graph, describes a relation between

the beta and the asset's expected rate of return

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The market reward-to-risk ratio is effectively the market risk premium and by

rearranging the above equation and solving for E (Ri), we obtain the Capital

Asset Pricing Model (CAPM).

Where:

is the expected return on the capital asset

is the risk-free rate of interest

(the beta coefficient) the sensitivity of the asset returns to market

returns, or also ,

is the expected return of the market

is sometimes known as the market premium orrisk premium

(the difference between the expected market rate of return and the risk-free

rate of return).

Beta measures the volatility of the security, relative to the asset class. The

equation is saying that investors require higher levels of expected returns to

compensate them for higher expected risk. We can think of the formula as

predicting a security's behavior as a function of beta:

CAPM says that if we know a security's beta then we know the value

of r that investors expect it to have.

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Assumptions of CAPM:

All investors have rational expectations.

There are no arbitrage opportunities.

Returns are distributed normally.

Fixed quantity ofassets.

Perfectly efficient capital markets.

Investors are solely concerned with level and uncertainty of future

wealth

Separation of financial and production sectors. Thus, production plans

are fixed.

Risk-free rates exist with limitless borrowing capacity and universal

access.

The Risk-free borrowing and lending rates are equal.

No inflation and no change in the level of interest rate exists.

Perfect information, hence all investors have the same expectations

about security returns for any given time period.

S hortcomings Of CAPM:

The model assumes that asset returns are (jointly) normally distributed

random variables. It is however frequently observed that returns in

equity and other markets are not normally distributed.

The model assumes that the variance of returns is an adequate

measurement of risk.

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The model does not appear to adequately explain the variation in stock

returns.

The model assumes those given a certain expected return investors

will prefer lower risk (lower variance) to higher risk and conversely

given a certain level of risk will prefer higher returns to lower ones.

The model assumes that all investors have access to the same

information and agree about the risk and expected return of all assets.

(Homogeneous expectations assumption)

The model assumes that there are no taxes or transaction costs.

The market portfolio consists of all assets in all markets, where each

asset is weighted by its market capitalization. This assumes no

preference between markets and assets for individual investors, and

that investors choose assets solely as a function of their risk-return

profile. It also assumes that all assets are infinitely divisible as to the

amount which may be held or transacted.

The market portfolio should in theory include all types of assets that are

held by anyone as an investment (including works of art, real estate,

human capital...)

Unfortunately, it has been shown that this substitution is not innocuous

and can lead to false inferences as to the validity of the CAPM, and

it has been said that due to the in observability of the true market

portfolio, the CAPM might not be empirically testable.

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The efficient frontier:

The CAPM assumes that the risk-return profile of a portfolio can be optimized

- an optimal portfolio displays the lowest possible level of risk for its level of

return. Additionally, since each additional asset introduced into a portfolio

further diversifies the portfolio, the optimal portfolio must comprise every

asset, with each asset value-weighted to achieve the above. All such optimal

portfolios, i.e., one for each level of return, comprise the efficient frontier.

A line created from the risk-reward graph, comprised of optimal portfolios.

The optimal portfolios plotted along the curve have the highest expected

return possible for the given amount of risk.

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Because the un systemic risk is diversifiable, the total risk of a portfolio can be

viewed as beta.

Note 1: The expected market rate of return is usually measured by

looking at the arithmetic average of the historical returns on a market

portfolio.

Note 2: The risk free rate of return used for determining the risk premium

is usually the arithmetic average of historical risk free rates of return andnot the current risk free rate of return.

Measuring the Expected Return and Standard Deviation of a Portfolio

The expected return on a portfolio is the weighted average of the returns of

individual assets, where each asset's weight is determined by its weight in the

portfolio.

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The formula is:

E (Rp) = [WaX E (Ra)] + [WaX E (Ra)]

Where

E= is stands for expected

Rp= Return on the portfolio

Wa= Weight of asset n where n my stand for asset a, betc.

Ra= Return on asset n where n may stand for asset a, betc

The portfolio standard deviation (p) measure the risk associated with the

expected return of the portfolio.

The formula is p = wa2 2+ wa2 2 + 2wawbrab a b

The term rab represents the correlation between the returns of investments a

and b. The correlation coefficient, r, will always reduce the portfolio standard

deviation as long as it is less than +1.00.

Portfolio diversification:

Diversification occurs when different assets make up a portfolio.

The benefit of diversification is risk reduction; the extent of this benefit

depends upon how the returns of various assets behave over time. The

market rewards diversification. We can lower risk without sacrificing expected

return, and/or we can increase expected return without having to assume

more risk. Diversifying among different kinds of assets is called asset

allocation.

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The diversification can either be vertical or horizontal.

In vertical diversification a portfolio can have scripts of different companies

within the same industry. In horizontal diversification one can have different

scripts chosen from different industries.

An important way to reduce the risk of investing is to diversify your

investments. Diversification is akin to "not putting all your eggs in one

basket."

For example: Ifportfolio only consisted of stocks of technology companies, it

would likely face a substantial loss in value if a major event adversely affected

the technology industry.

There are different ways to diversify a portfolio whose holdings are

concentrated in one industry. We can invest in the stocks of companies

belonging to other industry groups. We can allocate our portfolio among

different categories of stocks, such as growth, value, or income stocks. We

can include bonds and cash investments in our asset-allocation decisions. We

can also diversify by investing in foreign stocks and bonds.

Diversification requires us to invest in securities whose investment returns do

not move together. In other words, the investment returns have a low

correlation. The correlation coefficient is used to measure the degree to which

returns of two securities are related. As we increase the number of securities

in our portfolio, we reach a point where likely diversified as much as

reasonably possible. Diversification should neither be too much or too less. It

should be adequate according to the size of the portfolio.

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The Efficient Frontier and Portfolio Diversification

The graph on the shows how volatility increases the risk of loss of principal,

and how this risk worsens as the time horizon shrinks. So all other things

being equal, volatility is minimized in the portfolio.

If we graph the return rates and standard deviations for a collection of

securities, and for all portfolios we can get by allocating among them.

Markowitz showed that we get a region bounded by an upward-sloping curve,

which he called the efficient frontier.

It's clear that for any given value of standard deviation, we would like to

choose a portfolio that gives you the greatest possible rate of return; so we

always want a portfolio that lies up along the efficient frontier, rather than

lower down, in the interior of the region. This is the first important property of

the efficient frontier: it's where the best portfolios are.

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The second important property of the efficient frontier is that it's curved, not

straight.

If we take a 50/50 allocation between two securities, assuming that the year-

to-year performance of these two securities is not perfectly in sync -- that is,

assuming that the great years and the lousy years for Security 1 don't

correspond perfectly to the great years and lousy years for Security 2, but that

their cycles are at least a little off -- then the standard deviation of the 50/50

allocation will be less than the average of the standard deviations of the two

securities separately. Graphically, this stretches the possible allocations to

the leftof the straight line joining the two securities

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THE FOUR PILLARS OF DIVERSIFICATION:

a. The yield provided by an investment in a portfolio of assets will be

closer to the Mean Yield than an investment in a single asset.

b. When the yields are independent - most yields will be concentrated

around the Mean.

c. When all yields react similarly - the portfolio's variance will equal the

variance of its underlying assets.

d. If the yields are dependent - the portfolio's variance will be equal to or

less than the lowest

Market portfolio:

The efficient frontier is a collection of portfolios, each one optimal for a given

amount of risk. A quantity known as the Sharpe ratio represents a measure of

the amount of additional return (above the risk-free rate) a portfolio provides

compared to the risk it carries. The portfolio on the efficient frontier with the

highest Sharpe Ratio is known as the market portfolio, or sometimes the

super-efficient portfolio.

This portfolio has the property that any combination of it and the risk-free

asset will produce a return that is above the efficient frontier - offering a larger

return for a given amount of risk than a portfolio of risky assets on the frontier

would.

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PORTFOLIO PERFORMANCE EVALUATION:

A Portfolio manager evaluates his portfolio performance and identifies the

sources of strengths and weakness. The evaluation of the portfolio provides a

feed back about the performance to evolve better management strategy. Even

though evaluation of portfolio performance is considered to be the last stage

of investment process, it is a continuous process. There are number of

situations in which an evaluation becomes necessary and important.

Evaluation has to take into account:

Rate of returns, or excess return over risk free rate.

Level of risk both systematic (beta) and unsystematic and residual risks

through proper diversification.

Some of the models used to evaluate portfolio performance are:

Sharpes ratio

Treynors ratio

Jensens alpha

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Sharpes ratio:

A ratio developed by Nobel Laureate William F. Sharpe to measure risk-

adjusted performance. It is calculated by subtracting the risk-free rate from the

rate of return for a portfolio and dividing the result by the standard deviation of

the portfolio returns.

The Sharpe ratio tells us whether the returns of a portfolio are due to smart

investment decisions or a result of excess risk. This measurement is very

useful because although one portfolio or fund can reap higher returns than its

peers, it is only a good investment if those higher returns do not come with too

much additional risk. The greater a portfolio's Sharpe ratio, the better its risk-

adjusted performance has been.

Treynors ratio:

The Treynor ratio is a measurement of the returns earned in excess of that

which could have been earned on a risk less investment.

The Treynor ratio is also called reward-to-volatility ratio. It relates excess

return over the risk-free rate to the additional risk taken; however systematic

risk instead of total risk is used. The higher the Treynor ratio, the better is the

performance under analysis.

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Treynors ratio = (Average Return of the Portfolio - Average Return of

the Risk-Free Rate) / Beta of the Portfolio

Like the Sharpe ratio, the Treynor ratio (T) does not quantify the value added,

if any, of active portfolio management. It is a ranking criterion only. A ranking

of portfolios based on the Treynor Ratio is only useful if the portfolios under

consideration are sub-portfolios of a broader, fully diversified portfolio. If this is

not the case, portfolios with identical systematic risk, but different total risk,

will be rated the same.

Jensens alpha:

An alternative method of ranking portfolio management is Jensen's alpha,

which quantifies the added return as the excess return above the security

market line in the capital asset pricing model. Jensen's alpha (or Jensen's

Performance Index) is used to determine the excess return of a stock, other

security, orportfolio over the security's required rate of return as determined

by the Capital Asset Pricing Model.

This model is used to adjust for the level of beta risk, so that riskier securities

are expected to have higher returns. The measure was first used in the

evaluation ofmutual fund managers by Michael Jensen in the 1970's.

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To calculate alpha, the following inputs are needed:

The realized return (on the portfolio),

The market return,

The risk-free rate of return, and

The beta of the portfolio.

Rjt - Rft = j + j (RMt - Rft)

Where

Rjt= average return on portfolio j for period oft

Rft = risk free rate of return for period oft

j = intercept that measures the forecasting ability to the manager

j = systematic risk measure

RMt= average return on the market portfolio for periodt

Portfolio management in India:

In India, portfolio management is still in its infancy. Barring a few Indian

banks, and foreign banks and UTI, no other agency had professional portfolio

managementuntil1987. After the setting up of public sector Mutual Funds,

since 1987, professional portfolio management, backed by competent

research staff became the order of the day. After the success of mutual funds

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in portfolio management, a number of brokers and investment consultants

some of whom are also professionally qualified have become portfolio

managers. They have managed the funds of clients on both discretionary and

non-discretionary basis.

The recent CBI probe into the operations of many market dealers has

revealed the unscrupulous practices by banks, dealers and brokers in their

portfolio operations. The SEBI has then imposed stricter rules, which included

their registration, a code of conduct and minimum infrastructure, experience

and expertise etc.

The guidelines of SEBI are in the direction of making portfolio management a

responsible professional service to be rendered by experts in the field.

PORTFOLIO ANALYSIS:

Portfolio analysis includes portfolio construction, selection of securities,

revision of portfolio evaluation and monitoring the performance of the portfolio.

All these are part of subject of portfolio management which is a dynamic

concept. Individual securities have risk-return characteristics of their own.

Portfolios, which are combinations of securities may or may not take on the

aggregate characteristics of their individuals parts.

Portfolio analysis considers the determination of future risk and return

in holding various blends of individual securities. As we know that expected

return from individual securities carries some degree of risk. Various groups of

securities when held together behave in a different manner and give interest

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payments and dividends also, which are different to the analysis of individual

securities. A combination of securities held together will give a beneficial

result if they are grouped in a manner to secure higher return after taking into

consideration the risk element.

There are two approaches in construction of the portfolio of securities. They

are

Traditional approach

Modern approach

TRADITIONAL APPROACH:

Traditional approach was based on the fact that risk could be measured on

each individual security through the process of finding out the standard

deviation and that security should be chosen where the deviation was the

lowest. Traditional approach believes that the market is inefficient and the

fundamental analyst can take advantage for the situation. Traditional

approach is a comprehensive financial plan for the individual. It takes into

account the individual needs such as housing, life insurance and pension

plans.

Traditional approach basically deals with two major decisions. They are

a) Determining the objectives of the portfolio

b) Selection of securities to be included in the portfolio

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MODERN APPROACH:

Modern approach theory was brought out by Markowitz and Sharpe. It is

the combination of securities to get the most efficient portfolio. Combination of

securities can be made in many ways. Markowitz developed the theory of

diversification through scientific reasoning and method. Modern portfolio

theory believes in the maximization of return through a combination of

securities. The modern approach discusses the relationship between different

securities and then draws inter-relationships of risks between them. Markowitz

gives more attention to the process of selecting the portfolio. It does not deal

with the individual needs.

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CHAPTER -VDATA ANALYSIS AND

INTERPRETATION

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CALCULATED EXPECTED RETURNS AND STANDARD DEVIATIONS

Company name Expected return (%) Standard deviation(%)

CEMENT

GACLLNT

19.0363.69

56.9165.12

PHARMACEUTICAL

RANBAXYCIPLA

9.02-8.25

54.8252.43

TELECOM

MTNLBHARTI ARTL

13.71125.18

17.97126.51

BANKING

ING VYSYAICICI

12.4649.43

68.2538.83

I.T.

WIPROSATYAM

-13.6816.82

34.7640.41

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Portfolio Returns and Risks of Companies

Company name Returns (%) Risks (%)

CEMENT

GACLLNT

38.2338 44.23

PHARMACEUTICAL

RANBAXYCIPLA

-0.6512 48.63

TELECOM

MTNLBHARTI ARTL

253.99 252.45

BANKING

ING VYSYAICICI

48.3209 38.81

I.T.

WIPROSATYAM

-1.175 28.47

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CORRELATION COEFFICIENT BETWEEN THE COMPANIES

Company name Correlation coefficient (r)

CEMENT

GACLLNT

0.66

PHARMACEUTICAL

RANBAXYCIPLA

0.65

TELECOM

MTNLBHARTI ARTL

0.95

BANKING

ING VYSYAICICI

0.54

I.T.

WIPROSATYAM

0.17

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CALCULATION OF AVERAGE RETURN OF COMPANIES:

Average return = R/N

GUJARAT AMBUJA CEMENT LTD (GACL):

Year

Openingshare price

(P0)

Closingshare price

(P1) (P1-P0)(P1-P0)/P0*100

2005-2006 164.00 303.85 139.85 85.27

2006-2007 306.10 401.55 95.45 31.18

2007-2008 405.00 79.60 -325.40 -80.35

2008-2009 80.00 141.30 61.30 76.63

2009-2010 144.80 119.35 -25.45 -17.58

TOTAL RETURN95.15

Average return = 95.15/5 = 19.03

LARSEN AND TOUBRO (LNT):

Year

Openingshare price

(P0)

Closingshare price

(P1) (P1-P0)(P1-P0)/P0*100

2005-2006 213.70 527.35 313.65 146.77

2006-2007 530.00 982.00 452.00 85.28

2007-2008 988.70 1844.20 855.50 86.53

2008-2009 1845.00 1442.95 -402.05 -21.79

2009-2010 1400.00 1703.20 303.20 21.66

TOTAL RETURN318.45

Average return = 318.45/5 = 63.69

RANBAXY LABORATORIES:

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Year Openingshare price

(P0)

Closingshare price

(P1)

(P1-P0)(P1-P0)/P0*100

2005-2006 597.80 1098.20 500.40 83.71

2006-2007 1100.10 1251.40 151.30 13.75

2007-2008 1252.00 362.35 -889.65 -71.06

2008-2009 364.40 391.85 27.45 7.53

2009-2010 393.00 349.15 -43.85 11.16

TOTAL RETURN45.09

Average return = 45.09/5 =9.02

CIPLA:

Year

Openingshare price

(P0)

Closingshare price

(P1) (P1-P0)(P1-P0)/P0*100

2005-2006 904.00 1317.25 413.25 45.71

2006-2007 1339.00 317.25 -1021.75 -76.31

2007-2008 320.00 443.40 123.40 38.56

2008-2009 445.00 250.70 -194.30 -43.66

2009-2010 253.40 239.30 -14.10 -5.56

TOTAL RETURN-41.26

Average return = -41.26/5 = -8.25

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MTNL:

Year

Openingshare price

(P0)

Closingshare price

(P1) (P1-P0)

(P1-P0)/

P0*1002005-2006 95.15 137.70 42.55 44.72

2006-2007 139.10 154.90 15.80 11.36

2007-2008 156.00 144.20 11.80 7.56

2008-2009 145.20 142.85 -2.35 -1.62

2009-2010 143.00 152.35 9.35 6.54

TOTAL RETURN68.56


BHARTI ARTL:

Year

Openingshare price

(P0)

Closingshare price

(P1) (P1-P0)(P1-P0)/P0*100

2005-2006 23.50 105.10 81.60 347.23

2006-2007 106.25 215.60 109.35 102.92

2007-2008 218.90 345.70 126.80 57.93

2008-2009 348.90 628.85 279.95 80.24

2009-2010 635.00 862.80 227.80 35.87

TOTAL RETURN624.19

Average return = 624.19/5 = 125.18

ING VYSYA:

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Year Openingshare price

(P0)

Closingshare price

(P1)

(P1-P0)(P1-P0)/P0*100

2005-2006 252.05 549.00 296.95 117.81

2006-2007 560.00 585.75 25.75 4.60

2007-2008 585.00 162.25 -422.75 -72.26

2008-2009 164.50 157.45 -7.05 -4.29

2009-2010 159.00 185.15 26.15 16.45

TOTAL RETURN62.31


ICICI:

Year

Openingshare price

(P0)

Closingshare price

(P1) (P1-P0)(P1-P0)/P0*100

2005-2006 141.70 295.70 154.00 108.68

2006-2007 299.70 370.75 71.05 23.71

2007-2008 374.85 584.70 209.85 55.98

2008-2009 586.25 890.40 304.15 51.88

2009-2010 889.00 950.25 61.25 6.89

TOTAL RETURN247.14

Average return = 247.14/5 = 49.43

WIPRO:

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Year

Openingshare price

(P0)

Closingshare price

(P1) (P1-P0)

(P1-P0)/

P0*1002005-2006 1644.40 1737.60 93.2 5.67

2006-2007 1744.40 748.00 -996.40 -57.12

2007-2008 753.00 463.45 -289.55 -38.45

2008-2009 464.00 604.55 140.55 30.29

2009-2010 607.90 554.35 -53.55 -8.81

TOTAL RETURN-68.42

Average return = -68.42/5 = -13.68

SATYAM COMP:

Year

Openingshare price

(P0)

Closingshare price

(P1) (P1-P0)(P1-P0)/P0*100

2005-2006 280.10 367.35 87.25 31.15

2006-2007 370.00 409.90 39.90 10.78

2007-2008 412.00 737.80 325.80 79.08

2008-2009 740.70 483.95 -256.75 -34.66

2009-2010 486.00 474.95 -11.05 -2.27

TOTAL RETURN84.08


CALCULATION OF STANDARD DEVIATION:

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Standard Deviation = Variance

Variance = 1/n-1 (d2)

GUJARAT AMBUJA CEMENT LTD:

Year Return (R)Avg. Return

(R )d=

(R-R)d2

2005-2006 85.27 19.03 66.24 4387.74

2006-2007 31.18 19.03 12.15 147.62

2007-2008 -80.35 19.03 -61.32 3760.14

2008-2009 76.63 19.03 57.60 3317.76

2009-2010 -17.58 19.03 -36.66 1343.96

TOTAL

d2=12957.22

Variance = 1/n-1 (d2) = 1/5-1 (12957.22) = 56.91

Standard Deviation = Variance = 3239.305 = 56.91

LARSEN & TOUBRO:

Year Return (R)

Avg. Return

(R )

d=

(R-R) D2

2005-2006 146.77 63.69 83.08 6902.29

2006-2007 85.28 63.69 21.59 466.13

2007-2008 86.53 63.69 22.84 521.67

2008-2009 -21.79 63.69 -85.48 7306.83

2009-2010 21.66 63.69 -42.03 1766.52

TOTAL

d2=16963.44

Variance = 1/n-1 (d2) = 1/5-1 (16963.44) = 4240.86


RANBAXY LABORATORIES:

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(R )d=

(R-R)D2

2005-2006 83.71 9.02 74.69 5578.60

2006-2007 13.75 9.02 4.73 22.37

2007-2008 -71.06 9.02 80.08 6412.81

2008-2009 7.53 9.02 -1.49 2.22

2009-2010 11.16 9.02 2.14 4.58

TOTAL

d2=12020.58

Variance = 1/n-1 (d2) = 1/5-1 (12020.58) = 3005.145


CIPLA:


(R )d=

(R-R)D2

2005-2006 45.17 -8.25 53.96 2911.68

2006-2007 -76.31 -8.25 -68.06 4632.16

2007-2008 38.56 -8.25 46.81 2191.182008-2009 -43.66 -8.25 -35.41 1253.87

2009-2010 -5.56 -8.25 -2.69 7.24

TOTAL

d2=10996.13

Variance = 1/n-1 (d2) = 1/5-1 (10996.13) = 2749.0325


MTNL:

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(R )d=

(R-R)d2

2005-2006 44.72 13.72 31 961

2006-2007 11.36 13.72 -2.36 5.57

2007-2008 7.56 13.72 -6.16 37.95

2008-2009 -1.62 13.72 -15.34 235.32

2009-2010 6.54 13.72 -7.18 51.55

TOTAL

d2=1291.39

Variance = 1/n-1 (d2) = 1/5-1 (1291.39) = 322.8475


BHARTI ARTL:


(R )d=

(R-R)D2

2005-2006 347.23 125.18 222.05 49306.20

2006-2007 102.92 125.18 -22.26 495.512007-2008 57.93 125.18 -67.25 4522.56

2008-2009 80.24 125.18 -44.94 2019.60

2009-2010 37.59 125.18 -87.59 7672.01

TOTAL

d2=64015.88

Variance = 1/n-1 (d2) = 1/5-1 (64015.88) = 16003.97


ING VYSYA:

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(R )d=

(R-R)D2

2005-2006 117.81 12.46 105.35 11098.62

2006-2007 4.60 12.46 -7.86 61.78

2007-2008 -72.26 12.46 -84.72 7177.48

2008-2009 -4.29 12.46 -16.75 280.56

2009-2010 16.45 12.46 3.99 15.92

TOTAL

d2=18634.36

Variance = 1/n-1 (d2) = 1/5-1 (18634.36) = 4658.59


ICICI:


(R )d=

(R-R)d2

2005-2006 108.68 49.43 59.25 3410.56

2006-2007 23.71 49.43 -25.72 661.52

2007-2008 55.98 49.43 6.55 42.90

2008-2009 51.88 49.43 2.45 6.00

2009-2010 6.89 49.43 -42.54 1809.65

TOTAL

d2=6030.63

Variance = 1/n-1 (d2) = 1/5-1 (6030.63) = 1507.6575


WIPRO:

Year Return (R) Avg. Return d= d2

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(R ) (R-R)

2005-2006 5.67 -13.68 19.35 374.42

2006-2007 -57.12 -13.68 -43.44 1887.03

2007-2008 -38.45 -13.68 -24.77 613.55

2008-2009 30.29 -13.68 43.97 1933.36

2009-2010 -8.81 -13.68 -4.87 23.72

TOTAL

d2=4832.08

Variance = 1/n-1 (d2) = 1/5-1 (4832.08) = 1208.02


SATYAM:


(R )d=

(R-R)d2

2005-2006 31.15 16.82 14.33 205.55

2006-2007 10.78 16.82 -6.04 36.48

2007-2008 79.08 16.82 62.26 3876.31

2008-2009 -34.66 16.82 51.48 2050.19

2009-2010 -2.27 16.82 19.09 364.43

TOTAL

d2=6532.76

Variance = 1/n-1 (d2) = 1/5-1 (6532.76) = 1633.19


CALCULATION OF CORRELATION BETWEEN TWO

COMPANIES:

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Covariance (COVab) = 1/(n-1) (dx.dy)

Correlation of coefficient = COVab / a* b

GACL& LNT:

YEARDev. OfGACL(dx)

Dev. Of LNT(dy)

Product of dev.(dx)(dy)

2005-2006 66.24 83.08 5503.2192

2006-2007 12.15 21.59 262.3185

2007-2008 -61.32 22.84 -1400.54882008-2009 57.6 -85.48 -4923.648

2009-2010 -36.66 -42.03 1540.8198

TOTAL

dx. dy =982.1607

COVab =1/(5-1)(982.1607)=245.54Correlation of coefficient = 245.54/(56.91)(65.12) = 0.066

RANBAXY&CIPLA:

YEAR Dev. Of Dev. Of LNT Product of dev.

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GACL(dx)

(dy)(dx)(dy)

2005-2006 74.69 53.96 4030.2724

2006-2007 4.73 -68.06 -321.9238

2007-2008 80.08 46.81 3748.5448

2008-2009 -1.49 -35.41 52.7609

2009-2010 2.14 2.69 -5.7566

TOTAL

dx. dy =7503.8977

COVab =1/(5-1)(7503.8977) = 1875.97

Correlation of coefficient = 1875.97/(54.82)(52.43) = 0.65

MTNL&BHARTI ARTL:

YEARDev. OfGACL(dx)

Dev. Of LNT(dy)


2005-2006 31 222.05 6883.55

2006-2007 -2.36 -22.06 52.0616

2007-2008 -6016 -67.25 414.26

2008-2009 -15.34 -44.94 689.3796

2009-2010 -7.18 -87.59 628.8962

TOTAL

dx. dy =8668.1474

COVab =1/(5-1)(8668.1474) = 2167.04

Correlation of coefficient = 2167.04/(17.97)(126.51)

ING VYSYA&ICICI:

YEAR Dev. OfGACL

Dev. Of LNT(dy)


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(dx)

2005-2006 105.35 59.25 6241.9875

2006-2007 -7.86 -25.72 202.1592

2007-2008 -84.72 6.55 -554.9162008-2009 -16.75 2.45 -41.0375

2009-2010 3.99 -42.54 -169.7346

TOTAL

dx. dy =5678.4586

COVab =1/(5-1)(5678.4586) =1419.61

Correlation of coefficient = 1419.61/(68.25)(38.83) = 0.54

WIPRO&SATYAM:

YEARDev. OfGACL(dx)

Dev. Of LNT(dy)


2005-2006 19.35 14.33 277.2855

2006-2007 -43.44 -6.04 262.33762007-2008 -24.77 62.26 -1542.1802

2008-2009 43.97 51.48 2263.5756

2009-2010 -4.87 19.09 -92.9683

TOTAL

dx. dy =1168.0802

COVab =1/(5-1)(1168.0802) = 233.62Correlation of coefficient = 233.62/(34.76)(40.41) = 0.17

CALCULATION OF PORTFOLIO WEIGHTS:

Deriving the minimum risk portfolio, the following formula is used:

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Wa = (b)2 - rab (a) (b)

(a)2 + (b)2 2rab (a) (b)Where,

Xa is the proportion of security A

Xb is the proportion of security B

a = standard deviation of security A

b = standard deviation of security B

rab = correlation co-efficient between A&B

GACL& LNT:

(65.12)2- 0.066(56.91) (65.12)Xa =

(56.91)2 + (65.12)2-2 (0.066) (56.91) (65.12)

= 0.57

Xb = 1- Xa

=1- 0.57

= 0.43

RANBAXY& CIPLA:

(52.43)2-0.65(54.82) (52.43)

Xa =

(54.82)2 + (52.43)2 -2 (0.65) (54.82) (52.43)

= 0.44

Xb = 1-Xa

= 1-0.44

= 0.56

MTNL& BHARTI ARTL:

(126.51)2 0.95 (17.97) (126.51)

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Xa =

(17.97)2 + (126.51)2 2(0.95) (17.97) (126.51)

= -1.15

Xb = 1 Xa

= 1- (-1.15)

= 2.15

ING VYSYA& ICICI:

(38.83)2 0.54(68.25) (38.83)

Xa =

(68.25)2 + (38.83)2 2 (0.54) (68.25) (38.83)

= 0.03

Xb = 1 Xa

= 1 0.03

= 0.97

WIPRO& SATYAM:

(40.41)2 0.17(34.76) (40.41)

Xa =

(34.76)2 + (40.41)2 2 (0.17) (34.76) (40.41)

= 0.59

Xb = 1 Xb

= 1 0.59

= 0.41

CALCULATION OF PORTFOLIO RISK:

For two securities:

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P = a2*(Xa) 2 + b2*(Xb) 2 + 2rab*a*b*Xa*Xb

Where,

P = portfolio risk

Xa = proportion of investment in security A

Xb = proportion of investment in security B

R12 = correlation co-efficient between security 1 & 2

a = standard deviation of security 1

b = standard deviation of security 2

For three securities:

p =(a)2(Xa)2+(b)2(Xb)2+ (c)2(Xc)2+ 2(Xa)(Xb)(rab)(a)(b) +

2(Xa)(Xc)(rac)(a)(c) + 2(Xb)(Xc)(rbc)(b)(c)

GACL& LNT:

p = (0.57)2 *(56.91)2 +(0.43)2*(65.12)2 +2(0.57)(0.43)(0.066)(56.91)(65.12)

= 1956.259145

= 44.23

RANBAXY& CIPLA:

p = (0.44)2 *(54.82)2 +(0.56)2*(52.43)2 +2(0.44)(0.56)(0.65)(54.82)(52.43)

= 2364.537348

= 48.63

MTNL& BHARTI ARTL:

p =(-1.15)2 *(17.97)2+(2.15)2*(126.51)2+2(-1.15)(2.15)(0.95)(17.97)(126.51)

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= 63729.36593

= 252.45

ING VYSYA& ICICI:

p = (0.03)2 *(68.25)2 + (0.97)2*(38.83)2 +2(0.03)(0.97)(0.54)(68.25)(38.83)

= 1506.140849

= 38.81

WIPRO& SATYAM:

p = (0.59)2 *(34.76)2 + (0.41)2*(40.41)2 +2(0.59)(0.41)(0.17)(34.76)(40.41)

= 810.6233835

= 28.47

CALCULATION OF PORTFOLIO RETURN:

Rp = W1R1 + W2R2 (for two securities)

Rp = W1R1+ W2R2 + W3R3 (for three securities)

Where,

W1, W2, W3 are the weights of the securities

R1, R2, R3 are the Expected returns

GACL& LNT:

Rp = (0.57)(19.03) + (0.43)(63.69)

= 38.2338

RANBAXY& CIPLA:

Rp = (0.44)(9.02) + (0.56)(-8.25)

= -0.6512

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MTNL& BHARTI ARTL:

Rp = (-1.15)(13.17) + (2.15)(125.18)

= 253.99

ING VYSYA& ICICI:

Rp = (0.03)(12.46) + (0.97)(49.43)

= 48.3209

WIPRO& SATYAM:

Rp = (0.59)(-13.68) + (0.41)(16.82)

= - 1.175

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CHAPTER VICONCLUSION &

SUGGESTIONS

Conclusions for Portfolio Risk, Return & Investments

When we form the optimum of two securities by using minimum variance

equation, then the return of the portfolio may decrease in order to reduce the

portfolio risk.

GACL & LNT

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The prime objective of this combination is to reduce risk of portfolio. Least

preference is given to the

Documents

Risk Portfolio Management