mirzarafath.files.wordpress.com · Web viewIndia bulls entered the Indian Real Estate market and became the first company to bring FDI in Indian Real Estate. India bulls won bids

CHAPTER-I

INTRODUCTION

1

INTRODUCTION

Investment may be defined as an activity that commits funds in any financial form in the present

with an expectation of receiving additional return in the future. The expectations bring with it a

probability that the quantum of return may vary from a minimum to a maximum. This possibility of

variation in the actual return is known as investment risk. Thus every investment involves a return and

risk.

Investment is an activity that is undertaken by those who have savings. Savings can be defined as

the excess of income over expenditure. An investor earns/expects to earn additional monetary value

from the mode of investment that could be in the form of financial assets.

The three important characteristics of any financial asset are:

Return-the potential return possible from an asset.

Risk-the variability in returns of the asset form the chances of its value going down/up.

Liquidity-the ease with which an asset can be converted into cash.

Investors tend to look at these three characteristics while deciding on their individual preference

pattern of investments. Each financial asset will have a certain level of each of these characteristics.

Investment avenues:

There are a large number of investment avenues for savers in India. Some of them are

marketable and liquid, while others are non-marketable. Some of them are highly risky while some

others are almost risk less.

Investment avenues can be broadly categorized under the following head.

1. Corporate securities

2. Equity shares.

3. Preference shares.

4. Debentures/Bonds.

5. Derivatives.

6. Others.

2

Corporate Securities:

Joint stock companies in the private sector issue corporate securities. These include equity shares,

preference shares, and debentures. Equity shares have variable dividend and hence belong to the high

risk-high return category; preference shares and debentures have fixed returns with lower risk. The

classification of corporate securities that can be chosen as investment avenues can be depicted as shown

below:

3

Equity Shares

Preference shares

Bonds Warrants Derivatives

OBJECTIVE OF THE STUDY :

To study the investment pattern and it’s related risks & returns.

To help the investors to choose wisely between alternative investment.

To understand analyze and select the best portfolio.

To strike balance between costs of funds, risks and returns.

To find out optimal portfolio, which gave optimal return at a minimize risk to the investor.

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

portfolios are constituted

4

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.

.

5

LIMITATION OF THE STUDY:

This study has been conducted purely to understand portfolio management for

investor and is done for requirement of Certificate of MBA.

For study purpose 5 companies have been taken for calculations.

Study is limited to portfolio consisting of only 2 companies.

Data collection was strictly confined to secondary source. No Primary data is

associated with the project.

There was a constraint with regard to time allocated for the research study, period

of one and half month i.e., from Feb 11th to March 27th 2010.

Study is limited to only first 3 steps of pharses of portfolio management.

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

The availability of information in the form of annual reports and price fluctuations

of the companies was a big constraint to the study.

6

RESEARCH METHODOLOG Y:

Sources of Data Collection

The Methodology adopted or employed in this study was mostly on secondary data

collection i.e.,

Companies Annual Reports.

Information Form Internet

Publication

Information provided Stock Exchanges.

Period of Study

For different companies, financial data has been collected from the year 2005- 2010

Selection Companies Companies selected for analysis are:-

o WIPRO

o Indian Tobacco Corporation(ITC LTD)

o DR REDDY LABORATORIES LTD

o ACC

o BHARAT HEAVY ELECTRICALS LTD

7

CHAPTER -II

INDUSTRY PROFILE INDUSTRY PROFILE

ORGANIZATION ON INDIAN STOCK EXCHANGES

8

The recognized stock exchanges in India vary from voluntary non-profit making

organizations(Bombay, Ahmedabad,Indore) to Joint stock Companies Limited by shares

(Calcutta, Delhi, Bangalore) and companies limited by guarantee (Madras & Hyderabad).

There is a broad uniformity in the organization of stock exchanges, since the Article of

Association defining the constitution of the recognized stock exchanges is approved by the

central government. BSE was the first Stock Exchange to get permanent recognisation followed

by Calcutta, Delhi, Madras, Ahmedabad, Hyderabad, Indore and Bangalore. The other exchanges

were official recognisation will renew for another term. As per the present guidelines, the

proposed region in which the stock exchange is to be set up must be industrially developed with

a sizeable number of industrial units and should be able to attract at least 50 companies

independently.

FACTORS AFFECTING THE PRICES IN THE STOCK MARKET.

Important Factors Affecting to the Prices in the Stock Market are

1. Monetary Policy

2. Inflation

3. FII (Foreign institutional investors)

4. Political Influence

5. Company Announcements

6. SEBI Regulation

7. Annual Budget

9

1.Monetary policy is the process by which the government, central bank, or monetary authority

manages the supply of money, or trading in foreign exchange markets.[1] Monetary theory

provides insight into how to craft optimal monetary policy.

Monetary policy is generally referred to as either being an expansionary policy, or a

contractionary policy, where an expansionary policy increases the total supply of money in the

economy, and a contractionary policy decreases the total money supply. Expansionary policy is

traditionally used to combat unemployment in a recession by lowering interest rates, while

contractionary policy has the goal of raising interest rates to combat inflation (or cool an

otherwise overheated economy). Monetary policy should be contrasted with fiscal policy, which

refers to government borrowing, spending and taxation.

Overview:

Monetary policy rests on the relationship between the rates of interest in an economy, that is the

price at which money can be borrowed, and the total supply of money. Monetary policy uses a

variety of tools to control one or both of these, to influence outcomes like economic growth,

inflation, exchange rates with other currencies and unemployment. Where currency is under a

monopoly of issuance, or where there is a regulated system of issuing currency through banks

which are tied to a central bank, the monetary authority has the ability to alter the money supply

and thus influence the interest rate (in order to achieve policy goals). The beginning of monetary

policy as such comes from the late 19th century, where it was used to maintain the gold standard.

2. INFLATION

Inflation is a rise in the general level of prices of goods and services in a given economy over a

period of time. It may also refer to the rise in the prices of some more specific set of goods or

services. In either case, it is measured as the percentage rate of change of a price index.

[1] Mainstream economists overwhelmingly agree that high rates of inflation are caused by high

rates of growth of the money supply.[2] Views on the factors that determine moderate rates of

inflation, especially in the short run, are more varied: changes in inflation are sometimes

attributed mostly to changes in real demand for goods and services or fluctuations in available

10

http://en.wikipedia.org/wiki/Gold_standard

http://en.wikipedia.org/wiki/Unemployment

http://en.wikipedia.org/wiki/Inflation

http://en.wikipedia.org/wiki/Economic_growth

http://en.wikipedia.org/wiki/Fiscal_policy


http://en.wikipedia.org/wiki/Interest_rates

http://en.wikipedia.org/wiki/Interest_rates

http://en.wikipedia.org/wiki/Recession

http://en.wikipedia.org/wiki/Unemployment

http://en.wikipedia.org/wiki/Contractionary_monetary_policy

http://en.wikipedia.org/wiki/Expansionary_monetary_policy

http://en.wikipedia.org/wiki/Monetary_theory

http://en.wikipedia.org/wiki/Monetary_policy#_note-fed%23_note-fed

http://en.wikipedia.org/wiki/Foreign_exchange_market

http://en.wikipedia.org/wiki/Money

http://en.wikipedia.org/wiki/Money_supply

http://en.wikipedia.org/wiki/Central_bank

http://en.wikipedia.org/wiki/Government

supplies (i.e. changes in scarcity), and sometimes to changes in the supply or demand for money.

In the mid-twentieth century, two camps disagreed strongly on the main causes of inflation (at

moderate rates): the "monetarists" argued that money supply dominated all other factors in

determining inflation, while "Keynesians" argued that real demand was often more important

than changes in the money supply.

A variety of inflation measures are in use, because there are many different price indices,

designed to measure different sets of prices that affect different people. Two widely known

indices for which inflation rates are commonly reported are the Consumer Price Index (CPI),

which measures nominal consumer prices, and the GDP deflator, which measures the nominal

prices of goods and services produced by a given country or region

A movie ticket was for a few paise in my dad’s time. Now it is worth Rs.50. My dads first salary

for the month was Rs.400 and over he years it has now become Rs.75,000. This is what inflation

is, the price of everything goes up. Because the price goes up, the salaries go up.

Inflation today is caused more by global rather than by domestic factors. Naturally, as the Indian

economy undergoes structural changes, the causes of domestic inflation too have undergone

tectonic changes.

Needless to emphasise, causes of today's inflation are complicated. However, it is indeed

intriguing that the policy response even to this day unfortunately has been fixated on the

traditional anti-inflation instruments of the pre-liberalisation era.

Global imbalance the cause for global liquidity

The reason for this imbalance in the global economy is the fact that after the Asian currency

crisis; many countries found the virtues of a weak currency and engaged in 'competitive

devaluation.'

Under this scenario, many countries simply leveraged their weak currency vis- -vis the US�

dollar to gain to the global (read US) markets. This mercantilist policy to maintain their

11

competitiveness is achieved when their central banks intervenes in the currency markets leading

to accumulation of foreign exchange, notably the US dollar, against their own currency.

Naturally, as the players fear a fall in the value of the dollar and reach out to various assets and

commodities, the prices of these commodities and assets too will rise.

The psychological dimension

But as the imbalance shows no sign of correcting, players seek to shift to commodities and assets

across continents to hedge against the impending fall in the US dollar. Thus, it is a fight between

central banks and the psychology of market players across continents. As a corrective measure,

economists are coming to the conclusion that most of the currencies across the globe are highly

undervalued vis- -vis the dollar, which, in turn, requires a significant dose of devaluation. For�

instance, a consensus exists amongst economists and currency traders that the Yen is one of the

most highly undervalued currencies (estimated at around 60%) along with the Chinese Yuan

(estimated at 50%) followed by other countries in Asia.

This artificial undervaluation of currencies is another fundamental cause for increasing global

liquidity.

In 2005, international crude oil prices gained another 35 per cent and global demand for oil grew

by only 1.6 per cent. Nonetheless, the world's supply of dollars increased by a further $460

billion. Naturally, with all currencies refusing to be revalued, this leads to increased global

liquidity. While one is not sure as to whether the increase in the prices of crude led to the

increase of other commodities or vice versa, the fact of the matter is that, in the aggregate,

increased liquidity has led to the increase in commodity prices as a whole. This Reserve Bank of

India's strategy of dealing with excessive liquidity through the Market Stabilization Scheme

(MSS) has its own limitations. Similarly, the increase in repo rates (ostensibly to make credit

overextension costly) and increase in CRR rates (to restrict excessive money supply) are policy

interventions with serious limitations in the Indian context with such huge forex inflows.

A consumer price index (CPI) is an index number measuring the average price of consumer

goods and services purchased by households. It is one of several price indices calculated by

12

http://en.wikipedia.org/wiki/Price_index

http://en.wikipedia.org/wiki/Index_number

national statistical agencies. The percent change in the CPI is a measure of inflation. The CPI can

be used to index (i.e., adjust for the effects of inflation) wages, salaries, pensions, or regulated or

contracted prices. The CPI is, along with the population census and the National Income and

Product Accounts, one of the most closely watched national economic statistics.

Introduction

Two basic types of data are required to construct the CPI: price data and weighting data. The

price data are collected for a sample of goods and services from a sample of sales outlets in a

sample of locations for a sample of times. The weighting data are estimates of the shares of the

different types of expenditure as fractions of the total expenditure covered by the index. These

weights are usually based upon expenditure data obtained for sampled periods from a sample of

households. Although some of the sampling is done using a sampling frame and probabilistic

sampling methods, much is done in a commonsense way (purposive sampling) that does not

permit estimation of confidence intervals. Therefore, the sampling variance is normally ignored,

since a single estimate is required in most of the purposes for which the index is used. Stocks

greatly affect this cause.

The coverage of the index may be limited. Consumers' expenditure abroad is usually excluded;

visitors' expenditure within the country may be excluded in principle if not in practice; the rural

population may or may not be included; certain groups such as the very rich or the very poor

may be excluded. Black market expenditure and expenditure on illegal drugs and prostitution are

often excluded for practical reasons, although the professional ethics of the statistician require

objective description free of moral judgments. Saving and investment are always excluded,

though the prices paid for financial services provided by financial intermediaries may be

included along with insurance.

The index reference period, usually called the base year, often differs both from the weight-

reference period and the price reference period. This is just a matter of rescaling the whole time-

series to make the value for the index reference-period equal to 110. Annually revised weights

13

http://en.wikipedia.org/wiki/Sampling_(statistics)

http://en.wikipedia.org/wiki/Sampling_(statistics)

http://en.wikipedia.org/wiki/National_Income_and_Product_Accounts

http://en.wikipedia.org/wiki/National_Income_and_Product_Accounts

http://en.wikipedia.org/wiki/Census

http://en.wikipedia.org/wiki/Pension


are a desirable but expensive feature of an index, for the older the weights the greater is the

divergence between the current expenditure pattern and that of the weight reference-period.

14

CHAPTER-III

COMPANY PROFILE

COMPANY PROFILE

Introduction to India bulls

15

India bulls is India’s leading Financial and Real Estate Company with a wide presence

throughout India. They ensure convenience and reliability in all their products and services. India

bulls has over 640 branches all over India. The customers of India bulls are more than 4,50,000

which covers from a wide range of financial services and products from securities, derivatives

trading, depositary services, research & advisory services, consumer secured & unsecured credit,

loan against shares and mortgage & housing finance. The company employs around 4000

Relationship managers who help the clients to satisfy their customized financial goals. India

bulls entered the Real Estate business in the year 2005 with its group of companies. Large scale

projects worth several hundred million dollars are evaluated by them.

India bulls Financial Services Ltd is listed on the National Stock Exchange (NSE), Bombay

Stock Exchange (BSE) and Luxembourg Stock Exchange. The market capitalization of India

bulls is around USD 2500 million (29thDecember, 2006). Consolidated net worth of the group is

around USD 700 million. India bulls and its group companies have attracted USD 500 million of

equity capital in Foreign Direct Investment (FDI) since March 2000. Some of the large

shareholders of India bulls are the largest financial institutions of the world such as Fidelity

Funds, Goldman Sachs, Merrill Lynch, Morgan Stanley and Farallon Capital.

India bulls Group is one of the top business houses in the country with business interests in Real

Estate, Infrastructure, Financial Services, Retail, Multiplex and Power sectors. India bulls Group

companies are listed in Indian and overseas financial markets. The Net worth of the Group

exceeds USD 3 billion. India bulls has been conferred the status of a “Business Super brand” by

The Brand Council, Super brands India. India bulls Financial Services is an integrated financial

services powerhouse providing Consumer Finance, Housing Finance, Commercial Loans, Life

Insurance, Asset Management and Advisory services. India bulls Financial Services Ltd is

amongst 68 companies constituting MSCI - Morgan Stanley India Index.

India bulls Financial is also part of CLSA’s model portfolio of 30 Best Companies in Asia. India

bulls Financial Services signed a joint venture agreement with Sogecap, the insurance arm of

Societé Generale (SocGen) for its upcoming life insurance venture. India bulls Financial

16

Services in partnership with MMTC Limited, the largest commodity trading company in India,

has set up India’s 4th Multi-Commodities Exchange.

India bulls Real Estate Limited is India’s third largest property company with development

projects spread across residential projects, commercial offices, hotels, malls, and Special

Economic Zones (SEZs) infrastructure development. India bulls Real Estate partnered with

Farallon Capital Management LLC of USA to bring the first FDI into real estate. India bulls Real

Estate is transforming 14 million sqft in 16 cities into premium quality, high-end commercial,

residential and retail spaces. India bulls Real Estate has diversified significantly in the following

business verticals within the real estate space: Real Estate Development, Project Advisory &

Facilities Management: Residential, Commercial (Office and Malls) and SEZ Development.

India bulls Securities Limited is India’s leading capital markets company with All-India Presence

and an extensive client base. India bulls Securities possesses state of the art trading platform,

best broking practices and is the pioneer in trading product innovations. Power India bulls, in-

house trading platform, is one of the fastest and most efficient trading platforms in the country..

Indiabulls Securities Limited is the first brokerage house to be assigned the highest rating BQ – 1

by CRISIL.

Growth of Indiabulls:

Year 2000-01:

One of India’s first trading platforms was set up by Indiabulls Financial Services Ltd. with the

development of an in-house team.

Year 2001-03:

The service offered by Indiabulls was increased to include Equity, F&O, Wholesale Debt,

Mutual fund, IPO Financing/Distribution and Equity Research.

Year 2003-04:

In this particular year Indiabulls ventured into Distribution and Commodities Trading business.

17

Year 2004-05:

This was one of the most important years in the history of Indiabulls. In this year:

India bulls came out with its initial public offer (IPO) in September 2004.

India bulls started its Consumer Finance business.

India bulls entered the Indian Real Estate market and became the first company to bring

FDI in Indian Real Estate.

India bulls won bids for landmark properties in Mumbai.

Year 2005-06:

In this year the company acquired over 115 acres of land in Sonepat for residential home site

development. The world renowned investment banks like Merrill Lynch and Goldman Sachs

increased their shareholding in Indiabulls. It also became a market leader in securities brokerage

industry, with around 31% share in Online Trading. The world’s largest hedge fund, Farallon

Capital and its affiliates committed Rs. 2000 million for Indiabulls subsidiaries Viz. Indiabulls

Credit Services Ltd. and Indiabulls Housing Finance Ltd. In the same year, the Steel Tycoon Mr.

L N Mittal promoted LNM India Internet venture Ltd. acquired 8.2% stake in Indiabulls Credit

Services Ltd.

Year 2006-07:

In this year, Indiabulls Financial Services Ltd. was included in the prestigious Morgan Stanley

Capital International Index (MSCI). Indiabulls Financial Services Ltd. was benefited with the

Farallon Capital agreeing to invest Rs. 6,440 million in it. The company also received an “in

principle approval” from Government of India for development of multi product SEZ in the state

of Maharashtra. Indiabulls Financial Services Ltd acquired 100% of the equity share capital of

Noble Realtors Pvt. Ltd. Noble Realtors is a Company engaged in the business of construction

and development of real estate projects. Indiabulls Real Estate Business was demerged to

become a separate entity called Indiabulls Real Estate Ltd. The Board of Indiabulls Financial

The Board of Directors

18

Sameer Gehlaut Chairman and CEO

Gagan Banga Executive Director

Rajiv Rattan CEO

Shamsher Singh Director

Aishwarya Katoch Director

Karan Singh Director

Prem Prakash Mirdha Director

Saurabh K Mittal Director

Amit Jain Company Secretary

19

Senior Vice President

Regional Manager

Branch Manager

Senior Sales Manager

Support System Sales Function

RM/SRM

ARM

Local Compliance

Officer

Back Office

Executive

Dealer

Organization Structure- Board of Directors:

20

Trading Products of Indiabulls Securities:

21

Indiabulls Securities

Trading Products

Cash Account Intraday Account Margin Trading

22

Indiabulls Securities provide three products for trading. They are

Cash Account

Intraday Account

Margin Trading (Mantra)

Cash Account: It provides the client to buy 4 times of cash balance in his trading account.

Intraday Product: It provides the client to buy 8 times of his cash balance in the trading

account.

Mantra Account: Also called as margin trading, is a special account to buy on leverage for a

longer duration

The subsidiaries of India bulls Financial Services Ltd. include:

India bulls Capital Services Ltd. India bulls Commodities Pvt. Ltd. India bulls Credit Services Ltd. India bulls Finance Co. Pvt. Ltd India bulls Housing Finance Ltd. India bulls Insurance Advisors Pvt. Ltd. India bulls Resources Ltd. India bulls Securities Ltd

India bulls Financial Services Ltd:

India bulls Financial Services Ltd. was incorporated in the year 2005.The Auditors of India bulls

Financial Services Ltd. are Deloitte, Haskins & Sells. The main activity of this company is in

relation to securities and stock brokerage. It was also responsible for setting up one of India’s

first trading platforms.

23

India bulls Financial Services is one of India’s leading and fastest growing private sector

financial services companies. India bulls Financial Services is an integrated financial services

powerhouse providing Consumer Finance, Housing Finance, Commercial Loans, Life Insurance,

Asset Management and Advisory services. The company is focused on providing multiple

financial services through an extensive network of consumer touch-points covering Tier 1, Tier 2

& Tier 3 cities. India bulls serves more than 500,000 customers across different financial

products through its branch network, call centers & the internet. It also ranks among the top

private sector financial services and banking groups in terms of net worth.

India bulls Securities Limited:

India bulls Securities Limited is India’s leading capital markets company with All-India Presence

and an extensive client base. India bulls Securities is the first and only brokerage house in India

to be assigned the highest rating BQ – 1 by CRISIL. India bulls Securities Ltd is listed on NSE,

BSE & Luxembourg stock exchange

India bulls Real Estate Limited:

India bulls Real Estate Limited with projects covering a total land area in excess of 10,000 acres

is one of the largest listed real estate companies in India and a leading national player across

multiple realty and infrastructure sectors. IBREL projects include High-end Office and

Commercial Spaces, Premium Residential Developments, Integrated Townships, Luxury Resorts

and Special Economic Zones. IBREL is partners with internationally renowned consultants and

construction companies for its developments at various stages of execution.

Store One Retail India Ltd:

Retailing in India is gradually inching its way to becoming the next booming industry. The

whole concept of shopping has changed in terms of consumer buying behavior and leading to a

revolution in shopping. Modern retail has entered India in the form of sprawling shopping

centers, multi-storied lifestyle malls and huge complexes offer shopping, entertainment and food

all under one large roof.

24

A retail business works on a network environment as the stores connect to one another as well as

to supplier sites. This is because in the retail business quick response is the key to success. Retail

is buzzing with lot of excitement and euphoria. The market is growing and government policies

are becoming more favorable and emerging technologies are facilitating operations.

The next few years will be amongst the most remarkable in the evolution of modern retail in India and Store One Retail India Ltd. is amongst those that have aspired to emerge into this booming industry.

Store One Retail India Ltd. is the retail arm of Indiabulls Group, a business conglomerate

catering to the entire Indian consumption space.

Store One Retail operates on multiple retail formats in both value and lifestyle segment of the

Indian consumer market.

The company has forayed in multiple formats which include Store One (in the process of being

re-branded) - a chain of lifestyle stores, “happystore” - a hyper format retail chain offering great

value for money on daily needs, apparels, home and appliances. The company already has

operational stores at Pune, Nagpur & Faridabad (NCR) .The Company plans to stretch its

footprint across the nation with the addition of more such stores.

INDIABULLS POWER BUSINESS:

India bulls Power Limited was established in 2007 to capitalize on emerging opportunities in the

Indian power sector. It develops and intends to operate and maintain power projects in India.

India bulls is currently developing Five Thermal Power Projects with an aggregate capacity of

approximately 6600 MW. These projects include, Amravati Phase-I (1320 MW), Amravati

Phase-II (1320 MW), Nasik (1335 MW) in Maharashtra, Bhaiyathan Thermal Power Project

(1320 MW) & Chhattisgarh Power Project (1320 MW) in the State of Chhattisgarh. In addition

to the above Indiabulls is also developing four medium size Hydro Power Projects in Arunachal

Pradesh aggregating to 167 MW. Indiabulls has also entered into MoUs with the Govt. of

Madhya Pradesh and Jharkhand for setting up of 2640 MW & 1320 MW Thermal Power

Projects in each of these States respectively.

25

Indiabulls power trading ltd:

Indian Power Trading sector has come a long way since trading was recognized as a distinct

activity in the Indian Electricity Act 2003. By the end of FY 2008-09 the traded volume has

increased manifold since 2003. The market has matured in terms of volume traded, number of

trading entities and sophistication of the trading instruments. India saw its first online exchange

for trading of electricity in 2008 thus further improving the price discovery mechanism. The

country today has two operational Power Exchanges which are operating on Day Ahead

contracts. The electricity futures have also been introduced on an Indian Commodity Exchange.

These developments in the market open up a new dimension in the Indian energy sector for

optimization of Demand and Supply by way of trading. Trading of electric power would help the

entities with surplus or deficit power situations to ensure optimal utilization of their resources &

create an inter-regional & intra-regional balance in respect of power.

Indiabulls group companies Indiabulls Power Trading Limited and Indiabulls Power Generation

Limited have been awarded with Category “A” Interstate Power Trading License by the Hon’ble

Central Electricity Regulatory Commission (Vide License No. 32/Trading/CERC dated

12.09.2008 and Vide License No. 33/Trading/CERC dated 12.09.2008). Indiabulls has also been

granted a category ‘F’ trading license for intrastate trading in Maharashtra by Hon’ble MERC

(Vide License No. 2 of 2008 dated 21st August 2008).

Mutual Fund

26

Assets Under management as on 28th Feb 2010

Asset under management of mutual fund industry for the month of February 2010

augmented by meager 1.08% to Rs. 7,66,869 crores compared to Rs. 7,58,712 crores in the prior

month. The industry has seen growth for the second consecutive month led by the strong

sentiments of the investors in the market & investments by banks & corporate. The total assets of

income funds stood at Rs. 4,76,384 crores (up by 1.21%) while liquid funds went up to Rs.

73,030 crores (up by 2.14%). Mutual Funds were net sellers of Rs 697.40 crore in the equity

market and net buyer of Rs 11,973.60 crore in debt market. The MF industry recorded the net

inflow of Rs. 6,365 crores in February 2010 against net inflow of Rs 97,242 crore in January

2010

27

CHAPTER-IV

REVIEW OF LITERATURE

MEANING:

A portfolio is a collection of assets. The assets may be physical or financial like Shares, Bonds,

Debentures, Preference Shares, etc. The individual investor or a fund manager would not like to put all

his money in the shares of one company that would amount to great risk. He would therefore, follow the

age old maxim that one should not put all the eggs into one basket. By doing so, he can achieve

objective to maximize portfolio return and at the same time minimizing the portfolio risk by

diversification.

An investor invests his funds in portfolio expecting to get a good return consistent with the risk

that he has to beat. Portfolio management comprises all the processes involved in the creation &

maintenance of an investment portfolio. It deals specifically with Secutity Analysis, Portifolio Analysis,

28

Selection and Revision & Evaluation. Portfolio Management is a complex process, which tires to make

investment activity more rewarding & less risky.

Portfolio management is the management of various financial assets which comprise the

portfolio.

Portfolio management is a decision – support system that is designed with a view to meet the

multi-faced needs of investors.

According to Securities and Exchange Board of India Portfolio Manager is defined as: “portfolio

means the total holdings of securities belonging to any person”.

PORTFOLIO MANAGER means any person who pursuant to a contract or arrangement with a

client, advises or directs or undertakes on behalf of the client (whether as a discretionary

portfolio manager or otherwise) the management or administration of a portfolio of securities or

the funds of the client.

DISCRETIONARY PORTFOLIO MANAGER means a portfolio manager who exercises or

may, under a contract relating to portfolio management exercises any degree of discretion as to

the investments or management of the portfolio of securities or the funds of the client.

FUNCTIONS OF PORTFOLIO MANAGEMENT :

To frame the investment strategy and select an investment mix to achieve the desired investment

objectives

To provide a balanced portfolio which not only can hedge against the inflation but can also

optimize returns with the associated degree of risk

To make timely buying and selling of securities

To maximize the after-tax return by investing in various tax saving investment instruments.

STRUCTURE / PROCESS OF TYPICAL PORTFOLIO MANAGEMENT

In the small firm, the portfolio manager performs the job of security analyst.

In the case of medium and large sized organizations, job function of portfolio manager and security

analyst are separate.

29

RESEARCH

(e.g. Security

Analysis)

PORTFOLIO

MANAGERS

OPERATIONS

(e.g. buying and

selling of Securities)

CLIENTS

CHARACTERISTICS OF PORTFOLIO MANAGEMENT:

Individuals will benefit immensely by taking portfolio management services for the following

reasons:

Whatever may be the status of the capital market, over the long period capital markets have

given an excellent return when compared to other forms of investment. The return from bank

deposits, units, etc., is much less than from the stock market.

The Indian Stock Markets are very complicated. Though there are thousands of companies that

are listed only a few hundred which have the necessary liquidity. Even among these, only some

have the growth prospects which are conducive for investment. It is impossible for any

individual wishing to invest and sit down and analyse all these intricacies of the market unless he

does nothing else.

30

Even if an investor is able to understand the intricacies of the market and separate chaff from the

grain the trading practices in India are so complicated that it is really a difficult task for an

investor to trade in all the major exchanges of India, look after his deliveries and payments.

TYPES OF PORTFOLIO MANAGEMENT:

1. DISCRETIONARY PORTFOLIO MANAGEMENT SERVICE (DPMS):

In this type of service, the client parts with his money in favour of the manager, who in return,

handles all the paper work, makes all the decisions and gives a good return on the investment and

charges fees. In the Discretionary Portfolio Management Service, to maximize the yield, almost all

portfolio managers park the funds in the money market securities such as overnight market, 18 days

treasury bills and 90 days commercial bills. Normally, the return of such investment varies from 14 to

18 percent, depending on the call money rates prevailing at the time of investment.

2. NON-DISCRETIONARY PORTFOLIO MANAGEMENT SERVICE (NDPMS):

The manager functions as a counselor, but the investor is free to accept or reject the manager‘s

advice; the paper work is also undertaken by manager for a service charge. The manager concentrates on

stock market instruments with a portfolio tailor-made to the risk taking ability of the investor.

Risk of Portfolio Management

There was a time when portfolio management was an exotic term. The scenario has

changed drastically. It is now a familiar term and is widely practiced in India. The theories

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

financial newspapers and the cover pages of investments journals in India.

capital markets have become active. The Indian stock markets are steadily moving towards

efficiency, with rapid computerization, increasing higher market transparency, better

infrastructure, better customer service etc. The markets are mutual funds have been set up

the country since1987. With this development investment in securities has gained

considered momentum.

31

Professional portfolio management backed by competent research began to be practiced by

mutual funds, investment consultant and big brokers. The Securities Exchange Board of

India (SEBI), The Stock Market Regulatory body in India is supervising the whole process.

IMPORTANCE OF PORTFOLIO MANAGEMENT:

Emergence of institutional investing on behalf of individuals. A number of financial institutions,

mutual funds and other agencies are undertaking the task of investing money of small investors,

on their behalf.

Growth in the number and size of investible funds – a large part of household savings is being

directed towards financial assets.

Increased market volatility – risk and return parameters of financial assets are continuously

changing because of frequent changes in government‘s industrial and fiscal policies, economic

uncertainty and instability.

Greater use of computers for processing mass of data.

Professionalization of the field and increasing use of analytical methods (e.g. quantitative

techniques) in the investment decision – making

Larger direct and indirect costs of errors or shortfalls in meeting portfolio objectives – increased

competition and greater scrutiny by investors.

STEPS IN PORTFOLIO MANAGEMENT:

Specification and qualification of investor objectives, constraints, and preferences in the form of

an investment policy statement.

Determination and qualification of capital market expectations for the economy, market sectors,

industries and individual securities.

Allocation of assets and determination of appropriate portfolio strategies for each asset class and

selection of individual securities.

Performance measurement and evaluation to ensure attainment of investor objectives.

32

Monitoring portfolio factors and responding to changes in investor objectives, constrains and / or

capital market expectations.

Rebalancing the portfolio when necessary by repeating the asset allocation, portfolio strategy and

security selection.

CRITERIA FOR PORTFOLIO DECISIONS:

In portfolio management emphasis is put on identifying the collective importance of all investors

holdings. The emphasis shifts from individual assets selection to a more balanced emphasis on

diversification and risk-return interrelationships of individual assets within the portfolio.

Individual securities are important only to the extent they affect the aggregate portfolio. In short,

all decisions should focus on the impact which the decision will have on the aggregate portfolio

of all the assets held.

Portfolio strategy should be molded to the unique needs and characteristics of the portfolio‘s

owner.

Diversification across securities will reduce a portfolio‘s risk. If the risk and return are lower

than the desired level, leverages (borrowing) can be used to achieve the desired level.

Larger portfolio returns come only with larger portfolio risk. The most important decision to

make is the amount of risk which is acceptable.

The risk associated with a security type depends on when the investment will be liquidated. Risk

is reduced by selecting securities with a payoff close to when the portfolio is to be liquidated.

QUALITIES OF PORTFOLIO MANAGER:

1. SOUND GENERAL KNOWLEDGE: Portfolio management is an exciting and challenging

job. He has to work in an extremely uncertain and confliction environment. In the stock market every

new piece of information affects the value of the securities of different industries in a different way. He

must be able to judge and predict the effects of the information he gets. He must have sharp memory,

alertness, fast intuition and self-confidence to arrive at quick decisions.

33

2. ANALYTICAL ABILITY: He must have his own theory to arrive at the intrinsic value of

the security. An analysis of the security‘s values, company, etc. is s continuous job of the portfolio

manager. A good analyst makes a good financial consultant. The analyst can know the strengths,

weaknesses, opportunities of the economy, industry and the company.

3. MARKETING SKILLS: He must be good salesman. He has to convince the clients about

the particular security. He has to compete with the stock brokers in the stock market. In this context,

the marketing skills help him a lot.

4. EXPERIENCE: In the cyclical behavior of the stock market history is often repeated,

therefore the experience of the different phases helps to make rational decisions. The experience of the

different types of securities, clients, market trends, etc., makes a perfect professional manager.

PORTFOLIO BUILDING:

Portfolio decisions for an individual investor are influenced by a wide variety of factors.

Individuals differ greatly in their circumstances and therefore, a financial programme well suited to one

individual may be inappropriate for another. Ideally, an individual‘s portfolio should be tailor-made to

fit one‘s individual needs.

Investor‘s Characteristics:

An analysis of an individual‘s investment situation requires a study of personal characteristics

such as age, health conditions, personal habits, family responsibilities, business or professional situation,

and tax status, all of which affect the investor‘s willingness to assume risk.

Stage in the Life Cycle:

One of the most important factors affecting the individual‘s investment objective is his stage in

the life cycle. A young person may put greater emphasis on growth and lesser emphasis on liquidity. He

can afford to wait for realization of capital gains as his time horizon is large.

Family responsibilities:

The investor‘s marital status and his responsibilities towards other members of the family can have a

large impact on his investment needs and goals.

34

Investor‘s experience:

The success of portfolio depends upon the investor‘s knowledge and experience in financial

matters. If an investor has an aptitude for financial affairs, he may wish to be more aggressive in his

investments.

Attitude towards Risk:

A person‘s psychological make-up and financial position dictate his ability to assume the risk.

Different kinds of securities have different kinds of risks. The higher the risk, the greater the opportunity

for higher gain or loss.

Liquidity Needs:

Liquidity needs vary considerably among individual investors. Investors with regular income

from other sources may not worry much about instantaneous liquidity, but individuals who depend

heavily upon investment for meeting their general or specific needs, must plan portfolio to match their

liquidity needs. Liquidity can be obtained in two ways:

1. by allocating an appropriate percentage of the portfolio to bank deposits, and

2. by requiring that bonds and equities purchased be highly marketable.

Tax considerations:

Since different individuals, depending upon their incomes, are subjected to different marginal rates

of taxes, tax considerations become most important factor in individual‘s portfolio strategy. There are

differing tax treatments for investment in various kinds of assets.

Time Horizon:

In investment planning, time horizon become an important consideration. It is highly variable from

individual to individual. Individuals in their young age have long time horizon for planning, they can

35

smooth out and absorb the ups and downs of risky combination. Individuals who are old have smaller

time horizon, they generally tend to avoid volatile portfolios.

Individual‘s Financial Objectives:

In the initial stages, the primary objective of an individual could be to accumulate wealth via regular

monthly savings and have an investment programme to achieve long term capital gains.

Safety of Principal:The protection of the rupee value of the investment is of prime importance to most

investors. The original investment can be recovered only if the security can be readily sold in the

market without much loss of value.

Assurance of Income:

`Different investors have different current income needs. If an individual is dependent of its

investment income for current consumption then income received now in the form of dividend and

interest payments become primary objective.

Investment Risk:

All investment decisions revolve around the trade-off between risk and return. All rational

investors want a substantial return from their investment. An ability to understand, measure and properly

manage investment risk is fundamental to any intelligent investor or a speculator. Frequently, the risk

associated with security investment is ignored and only the rewards are emphasized. An investor who

does not fully appreciate the risks in security investments will find it difficult to obtain continuing

positive results.

RISK AND EXPECTED RETURN:

There is a positive relationship between the amount of risk and the amount of expected return

i.e., the greater the risk, the larger the expected return and larger the chances of substantial loss. One of

the most difficult problems for an investor is to estimate the highest level of risk he is able to assume.

36

Risk is measured along the horizontal axis and increases from the left to right.

Expected rate of return is measured on the vertical axis and rises from bottom to top.

The line from 0 to R (f) is called the rate of return or risk less investments commonly associated

with the yield on government securities.

The diagonal line form R (f) to E(r) illustrates the concept of expected rate of return increasing

as level of risk increases.

TYPES OF RISKS:-

Risk consists of two components. They are

1. Systematic Risk

2. Un-systematic Risk

1. Systematic Risk:

Systematic risk is caused by factors external to the particular company and uncontrollable by the

company. The systematic risk affects the market as a whole. Factors affect the systematic risk are

37

economic conditions

political conditions

sociological changes

The systematic risk is unavoidable. Systematic risk is further sub-divided into three types. They are

a) Market Risk

b) Interest Rate Risk

c) Purchasing Power Risk

a). Market Risk:

One would notice that when the stock market surges up, most stocks post higher price. On the other

hand, when the market falls sharply, most common stocks will drop. It is not uncommon to find stock

prices falling from time to time while a company‘s earnings are rising and vice-versa. The price of stock

may fluctuate widely within a short time even though earnings remain unchanged or relatively stable.

b). Interest Rate Risk:

Interest rate risk is the risk of loss of principal brought about the changes in the interest rate paid on

new securities currently being issued.

c). Purchasing Power Risk:

The typical investor seeks an investment which will give him current income and / or capital

appreciation in addition to his original investment.

2. Un-systematic Risk:

Un-systematic risk is unique and peculiar to a firm or an industry. The nature and mode of raising

finance and paying back the loans, involve the risk element. Financial leverage of the companies that is

debt-equity portion of the companies differs from each other. All these factors Factors affect the un-

systematic risk and contribute a portion in the total variability of the return.

38

Managerial inefficiently

Technological change in the production process

Availability of raw materials

Changes in the consumer preference

Labour problems

The nature and magnitude of the above mentioned factors differ from industry to industry and company

to company. They have to be analyzed separately for each industry and firm. Un-systematic risk can be

broadly classified into:

a) Business Risk

b) Financial Risk

a. Business Risk :

Business risk is that portion of the unsystematic risk caused by the operating environment of the

business. Business risk arises from the inability of a firm to maintain its competitive edge and growth or

stability of the earnings. The volatibility in stock prices due to factors intrinsic to the company itself is

known as Business risk. Business risk is concerned with the difference between revenue and earnings

before interest and tax. Business risk can be divided into.

i). Internal Business Risk:

Internal business risk is associated with the operational efficiency of the firm. The operational

efficiency differs from company to company. The efficiency of operation is reflected on the company‘s

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

ii).External Business Risk:

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

39

external factors are 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.

b. Financial Risk :

It refers to the variability of the income to the equity capital due to the debt capital. Financial risk in a

company is associated with the capital structure of the company. Capital structure of the company

consists of equity funds and borrowed funds.

PORTFOLIO ANALYSIS:

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

payments and dividends also, which are different to the analysis of individual securities. A combination

of securities held together will give a beneficial result if they are grouped in a manner to secure higher

return after taking into consideration the risk element.

SELECTION OF PROTFOLIO:

The selection of portfolio depends on the various objectives of the investor. The selection of

portfolio under different objectives are dealt subsequently.

Objectives and asset mix: if the main objective is getting adequate amount of current income, sixty per

cent of the invenstment is made on debts and 40 per cent on equities. The proportions of investments on

debt and equity differ according to the individual’s preferences.

Growth of income and asset mix: Here the investor requires a certain percentage of growth in the

income received from his investment. The debt portion of the portfolio may consist of 60 to 100 percent

equities and 0 to 40 percent debt instrument. The debt portion of the portfolio may consist of concession

regarding tax exemption. Appreciation of principal amount is given third priority. For example

computer software, hardware and non-conventional energy producing company shares provides good

possibility of growth in dividend.

Capital appreciation and asset mix: Capital appreciation means that the valu of the original

investment increases over the years. Investment in real estates like land and house may provide a faster

40

rate of capital appreciation but they lack liquidity. In the capital market, the values of the shares are

much higher than their original issue prices.

Safety of principal and asset mix: Usually, the risk averse investors are very particular about the

stability of principal. According to the life cycle theory, people in the third stage of life also give more

importance to the safety of the principal. All the investors have this objective in their mind. No one like

to lose his money invested in different assets.

Risk and return analysis: The traditional approach to portfolio building has some basic assumptions.

First, the individual prefers larger to smaller returns from securities. To achieve this goal, the investor

has to take more risk. The ability to achieve higher returns is dependent upon his ability to judge risk

and his ability to take specific risks.

Diversification: Once the asset mix is determined and the risk and return are analyzed, the final step is

the diversification of portfolio. Financial risk can be minimized by commitments to top-quality bonds,

but these securities offer poor resistance to inflation. Stocks provide better inflation protection than

bonds but are more vulnerable to financial risks.

PORTFOLIO CONSTRUCTION:

Portfolio is a combination of securities such as stocks, bonds and money market instruments. The

process of blending together the broad asset so as to obtain optimum return with minimum risk is called

portfolio construction. Diversification of investments helps to spread risk over many assets. A

diversification of securities gives the assurance of obtaining the anticipated return on the portfolio.

APPROACHES IN PORTFOLIO CONSTRUCTION:

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

Traditional approach

Modern approach

TRADITIONAL APPROACH:

41

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 of the situation. Traditional approach is a comprehensive

financial plan for the individual. It takes into account the individual needs such as housing, life

insurance and pension plans. Traditional approach basically deals with two major decisions. They are

a) Determining the objectives of the portfolio

b) Selection of securities to be included in the portfolio

MODERN APPROACH:

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

securities to get the most efficient portfolio. Combination of securities can be made in many ways.

Markowitz developed the theory of diversification through scientific reasoning and method. Modern

portfolio theory believes in the maximization of return through a combination of securities. The modern

approach discusses the relationship between different securities and then draws inter-relationships of

risks between them. Markowitz gives more attention to the process of selecting the portfolio. It does not

deal with the individual needs.

In the modern approach, the final step is asset allocation process that is to choose the portfolio

that meets he requirement of the investor. The risk taker i.e. who are willing to accept a higher

probability of risk for getting the expected return would choose high risk portfolio. Investor with lower

tolerance for risk would choose low level risk portfolio. The risk neutral investor would choose the

medium level risk portfolio.

MARKOWITZ MODEL:

Harry Markowitz opened new vistas to modern portfolio selection by publishing an article in the

journal of Finance in March 1952. His publication indicated the importance of correlation among the

different stocks reruns in the construction of a stock portfolio.

42

Most people agree that holding two stocks is less risky than holding one stock. For example,

holding stocks from textile, banking, and electronic companies is better than investing all the money on

the textile company’s stock. But building up the optimal portfolio is very difficult. Markowitz

provides an answer to it with the help of risk and return relationship.

Markowitz model is a theoretical framework for analysis of risk and return and their

relationships. He used statistical analysis for the measurement of risk and mathematical programming

for selection of assets in a portfolio in an efficient manner. Markowitz approach determines for the

investor the efficient set of portfolio through three important variables i.e.

Return

Standard deviation

Co-efficient of correlation

Markowitz model is also called as an “Full Covariance Model“. Through this model the investor

can find out the efficient set of portfolio by finding out the trade off between risk and return, between

the limits of zero and infinity. According to this theory, the effects of one security purchase over the

effects of the other security purchase are taken into consideration and then the results are evaluated.

Most people agree that holding two stocks is less risky than holding one stock. For example, holding

stocks from textile, banking and electronic companies is better than investing all the money on the

textile company‘s stock.

Markowitz had given up the single stock portfolio and introduced diversification. The single stock

portfolio would be preferable if the investor is perfectly certain that his expectation of highest return

would turn out to be real. In the world of uncertainty, most of the risk adverse investors would like to

join Markowitz rather than keeping a single stock, because diversification reduces the risk.

ASSUMPTIONS:

All investors would like to earn the maximum rate of return that they can achieve from their

investments.

All investors have the same expected single period investment horizon.

All investors before making any investments have a common goal. This is the avoidance of risk

because Investors are risk-averse.

43

Investors base their investment decisions on the expected return and standard deviation of returns

from a possible investment.

Perfect markets are assumed (e.g. no taxes and no transaction costs).

The investor assumes that greater or larger the return that he achieves on his investments, the

higher the risk factor surrounds him. On the contrary when risks are low the return can also be

expected to be low.

The investor can reduce his risk if he adds investments to his portfolio.

An investor should be able to get higher return for each level of risk “by determining the

efficient set of securities“.

An individual seller or buyer cannot affect the price of a stock. This assumption is the basic

assumption of the perfectly competitive market.

Investors make their decisions only on the basis of the expected returns, standard deviation and

covariance’s of all pairs of securities.

Investors are assumed to have homogenous expectations during the decision-making period.

The investor can lend or borrow any amount of funds at the riskless rate of interest. The riskless

rate of interest is the rate of interest offered for the treasury bills or Government securities.

Investors are risk-averse, so when given a choice between two otherwise identical portfolios,

they will choose the one with the lower standard deviation.

Individual assets are infinitely divisible, meaning that an investor can buy a fraction of a share if

he or she so desires.

There is a risk free rate at which an investor may either lend (i.e. invest) money or borrow

money.

There is no transaction cost i.e. no cost involved in buying and selling of stocks.

THE EFFECT OF COMBINING TWO SECURITIES:

It is believed that holding two securities is less risky than by having only one investment in a

person‘s portfolio. When two stocks are taken on a portfolio and if they have negative correlation then

risk can be completely reduced because the gain on one can offset the loss on the other. This can be

shown with the help of following example:

44

INTER- ACTIVE RISK THROUGH COVARIANCE:

Covariance of the securities will help in finding out the inter-active risk. When the covariance

will be positive then the rates of return of securities move together either upwards or downwards.

Alternatively it can also be said that the inter-active risk is positive. Secondly, covariance will be zero

on two investments if the rates of return are independent.

Holding two securities may reduce the portfolio risk too. The portfolio risk can be calculated

with the help of the following formula:

CAPITAL ASSET PRICING MODEL (CAPM):

Markowitz, William Sharpe, John Lintner and Jan Mossin provided the basic structure for the Capital

Asset Pricing Model. It is a model of linear general equilibrium return. In the CAPM theory, the

required rate return of an asset is having a linear relationship with asset‘s beta value i.e. undiversifiable

or systematic risk (i.e. market related risk) because non market risk can be eliminated by diversification

and systematic risk measured by beta. Therefore, the relationship between an assets return and its

systematic risk can be expressed by the CAPM, which is also called the Security Market Line.

Lending and borrowing:- Here, it is assumed that the investor could borrow or lend any amount of

money at riskless rate of interest. When this opportunity is given to the investors, they can mix risk free

assets with the risky assets in a portfolio to obtain a desired rate of risk-return combination.

Rp = Portfolio return

Xf = The proportion of funds invested in risk free assets

1- Xf = The proportion of funds invested in risky assets

Rf = Risk free rate of return

45

Rm = Return on risky assets

The expected return on the combination of risky and risk free combination is

Rp= Rf Xf+ Rm(1- Xf)

Formula can be used to calculate the expected returns for different situtions, like mixing riskless assets

with risky assets, investing only in the risky asset and mixing the borrowing with risky assets.

THE CONCEPT:

According to CAPM, all investors hold only the market portfolio and risk less securities. The

market portfolio is a portfolio comprised of all stocks in the market. Each asset is held in proportion to

its market value to the total value of all risky assets.

For example, if Reliance Industry share represents 15% of all risky assets, then the market portfolio of

the individual investor contains 15% of Satyam Industry shares. At this stage, the investor has the

ability to borrow or lend any amount of money at the risk less rate of interest. Eg.: assume that

borrowing and lending rate to be 12.5% and the return from the risky assets to be 20%. There is a trade

off between the expected return and risk. If an investor invests in risk free assets and risky assets, his

risk may be less than what he invests in the risky asset alone. But if he borrows to invest in risky assets,

his risk would increase more than he invests his own money in the risky assets. When he borrows to

invest, we call it financial leverage. If he invests 50% in risk free assets and 50% in risky assets, his

expected return of the portfolio would be


= (12.5 x 0.5) + 20 (1-0.5)

= 6.25 + 10

= 16.25%

46

if there is a zero investment in risk free asset and 100% in risky asset, the return is


= 0 + 20%

= 20%

if -0.5 in risk free asset and 1.5 in risky asset, the return is

Rp= Rf Xf+ Rm(1- Xf) = (12.5 x -0.5) + 20 (1.5)

= -6.25+ 30

EVALUATION OF PORTFOLIO:

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.

i. Self Valuation: An individual may want to evaluate how well he has done. This is a part of the

process of refining his skills and improving his performance over a period of time.

ii. Evaluation of Managers: A mutual fund or similar organization might want to evaluate its

managers. A mutual fund may have several managers each running a separate fund or sub-fund.

It is often necessary to compare the performance of these managers.

iii. Evaluation of Mutual Funds : An investor may want to evaluate the various mutual funds

operating in the country to decide which, if any, of these should be chosen for investment. A

similar need arises in the case of individuals or organizations who engage external agencies for

portfolio advisory services

47

iv. Evaluation of Groups : Academics or researchers may want to evaluate the performance of a

whole group of investors and compare it with another group of investors who use different

techniques or who have different skills or access to different information.

NEED FOR EVALUATION OF PORTFOLIO:

We can try to evaluate every transaction. Whenever a security is brought or sold, we can attempt

to assess whether the decision was correct and profitable.

We can try to evaluate the performance of a specific security in the portfolio to determine

whether it has been worthwhile to include it in our portfolio.

We can try to evaluate the performance of portfolio as a whole during the period without

examining the performance of individual securities within the portfolio.

NEED & IMPORTANCE:

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.

The modern theory is of 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

perspective of combinations of securities under constraints of risk and return.

PORTFOLIO REVISION:

48

The portfolio which is once selected has to be continuously reviewed over a period of time and

then revised depending on the objectives of the investor. The care taken in construction of portfolio

should be extended to the review and revision of the portfolio. Fluctuations that occur in the equity

prices cause substantial gain or loss to the investors.

The investor should have competence and skill in the revision of the portfolio. The portfolio

management process needs frequent changes in the composition of stocks and bonds. In securities, the

type of securities to be held should be revised according to the portfolio policy.

An investor purchases stock according to his objectives and return risk framework. The prices of

stock that he purchases fluctuate, each stock having its own cycle of fluctuations. These price

fluctuations may be related to economic activity in a country or due to other changed circumstances in

the market.

If an investor is able to forecast these changes by developing a framework for the future through

careful analysis of the behavior and movement of stock prices is in a position to make higher profit than

if he was to simply buy securities and hold them through the process of diversification. Mechanical

methods are adopted to earn better profit through proper timing. The investor uses formula plans to help

him in making decisions for the future by exploiting the fluctuations in prices.

PASSIVE MANAGEMENT:

Passive management is a process of holding a well diversified portfolio for a long term with the

buy and hold approach. passive management refers to the investor’s attempt to construct a portfolio that

resembles the overall market returns. The simplest form of passive management is holding the index

fund that is designed to replicate a good and well defined index of the common stock such as BSE-

sensex or NSE-Nifty.

ACTIVE MANAGEMENT:

Active management is holding securities based on gthe forecast about the future. The portfolio

managers who pursue active strategy with respect to market components are called ‘market timers’. The

portfolio managers vary their cash position or beta of the equity portion of the portfolio based on the

market forecast. The managers may indulge in ‘ group rotation’s. here, the group rotation means

49

changing the investment in different industries’ stocks depending on the assessed expectations regarding

their future performance.

FORMULA PLANS:

The formula plans provide the basic rules and regulations for the purchase and sale of securities.

The amount to be spent on the different types of securities is fixed. The amount may be fixed either in

constant or variable ratio. This depends on the investor‘s attitude towards risk and return. The

commonly used formula plans are

i. Average Rupee Plan

ii. Constant Rupee Plan

iii. Constant Ratio Plan

iv. Variable Ratio Plan

ADVANTAGES:

Basic rules and regulations for the purchase and sale of securities are provided.

The rules and regulations are rigid and help to overcome human emotion.

50

The investor can earn higher profits by adopting the plans.

A course of action is formulated according to the investor‘s objectives.

It controls the buying and selling of securities by the investor.

It is useful for taking decisions on the timing of investments.

DISADVANTAGES:

The formula plan does not help the selection of the security. The selection of the security has to

be done either on the basis of the fundamental or technical analysis.

It is strict and not flexible with the inherent problem of adjustment.

The formula plans should be applied for long periods, otherwise the transaction cost may be

high.

Even if the investor adopts the formula plan, he needs forecasting. Market forecasting helps him

to identify the best stocks.

51

CHAPTER-V

ANALYSIS & INTERPRETION

52

4.1CALCULATION OF AVERAGE RETURN OF COMPANIES:

Average Return = (R)/N

R=Total Returns

N=Number of years

4.1.1WIPRO:

Year

Opening share price (P0)

Closingshare price (P1) (P1-P0)

(P1-P0)/ P0*100

2007-08 1,700.60 1233.45 -467.15 -27.47

2008-09 1,233.45 1361.20 127.75 10.36

2009-10 1,361.20 2,012 650.8 47.87

2011-12 670.95 559.7 -111.25 -16.58

2011-12 559.70 559.40 -0.3 -0.05

TOTAL RETURN 14.13

4.1.1 Table Average Return of WIPRO

Average Return=14.13/5=2.83

53

Figure 4.1.1- Average Return of WIPRO

Interpretation:

It is observed that the opening share price was around 1700 in the financial year 2006-07 and

depleted to 559.70 by the year 2011-12. Similarly, the closing share price was 1233 in 2006-07

and 559 in 2011-12. It could be observed that there is a big change in opening share price and

closing share price in the financial year 2006-07 and in contrast there was negligble change in

the opening share price and closing share price during the financial year 2011-12. There was a

heavy volatality during the first four financial years and that scenario completely changed in the

year 2011-12. WIPRO’s increasing revenues and net profits caused stability in the share prices

during the last financial year. This caused the average return to stand at 2.83.

54

4.1.2ITC LTD:

Year



(P1-P0)/ P0*100

2007-08 696.70 628.25 -68.45 -9.822008-09 628.25 1043.10 414.85 66.032009-10 1043.10 1342.05 298.95 28.662011-12 1342.05 2932 1589.95 118.472011-12 195.15 151.15 -44 -22.55TOTAL RETURN 180.79

4.1.2Table Average Return of ITC LTD

Average Return = 180.79/5 = 36.16

Interpretation:

It is observed that opening share price was around 696 in the financial year 2006-07 and

depleted to 195.17 by the year 2011-12.Simillarly, the closing share price was 628 in 2006-07




volatality during the first four financial years and that scenario completely changed in the year

2011-12. ITC LTD’s increasing revenues and net profits caused stability in the share prices


55

4.1.3DR REDDY LABORATORIES LTD:

Year



(P1-P0)/ P0*100

2007-08 1090.95 916.30 -174.65 -16.002008-09 916.30 974.35 58.2 6.332009-10 974.35 739.15 23.52 -24.142011-12 739.15 1,421.40 682.25 92.302011-12 1,421.40 1456.55 35.15 2.47 TOTAL RETURN 60.96

4.1.3 Table Average Return of DR REDDY LABORATORIES LTD

Average Return = 60.96/5 = 12.19

Interpretation:







year 2011-12. DR REDDY LABORATORIES LTD’s increasing revenues and net profits

caused stability in the share prices during the last financial year. This caused the average return

to stand at 12.19

56

4.1.4ACC:

YearOpening share price (P0)


(P1-P0)/ P0*100

2007-08 153.40 138.50 -14.19 -9.72008-09 138.50 254.65 116.15 83.862009-10 254.65 360.55 105.9 41.582011-12 360.55 782.20 421.61 116.952011-12 782.20 735.25 -46.95 -6.00 TOTAL RETURN 226.8

4.1.4Table Average Return of ACC

Average Return = 226.8/5 = 45.36

Interpretation:







year 2011-12. ACC ’s increasing revenues and net profits caused stability in the share prices


57

4.1.5BHARAT HEAVY ELECTRICALS LTD:


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

2007-08 169.00 223.15 54.15 32.042008-09 223.15 604.35 38.12 170.832009-10 604.35 766.40 162.05 26.812011-12 766.40 2241.95 1475.55 192.532011-12 2241.95 2261.35 19.4 0.87 TOTAL RETURN 423.08

4.1.5 Table Average Return of BHARAT HEAVY ELECTRICALS LTD

Average Return = 423.08/5 = 84.62

Interpretation:







year 2011-12. BHARAT HEAVY ELECTRICALS LTD ’s increasing revenues and net profits


to stand at 84.62.

58

4.1.6HEROHONDA AUTOMOBILES LIMITED:



(P1-P0)/ P0*100

2007-08 338.55 188.20 -150.35 -44.402008-09 188.20 490.60 302.40 160.682009-10 490.60 548.00 57.40 11.702011-12 548.00 890.45 342.45 62.502011-12 890.45 688.75 -20.17 -22.65 TOTAL RETURN 167.82

4.1.6 Table Average Return of HERO HONDA AUTOMOBILES LIMITED

Average Return = 167.82/5 = 33.56

Interpretation:







year 2011-12.HEROHONDA AUTOMOBILES LIMITED’s increasing revenues and net profits


to stand at 33.56.

59

4.2CALCULATION OF STANDARD DEVIATION:

Standard Deviation = Variance

Variance = 1/n (R‒R)2

4.2.1WIPRO:

Year Return (R)

Avg. Return (R)

(R-R) (R -R)2

2007-08 -27.47 2.83 -30.29 917

2008-09 10.36 2.83 7.53 57

2009-10 47.87 2.83 45.04 2029

2011-12 -16.58 2.83 -19.41 377

2011-12 -0.05 2.83 -2.88 8

TOTAL 3388

4.2.1 Table Standarad Deviation of WIPRO

Variance = 1/n-1 (R-R)2 = 1/5 (3388) = 847

Standard Deviation = Variance = 847 = 33.09

60

Interpretation:

The above table and graph represents daily returns of WIPRO fund it reveals there was low

returns at the beginning & then there after there was continuous high returns .Here the price

variation is 847and yearly average return is 2.83 with s.d 33.0

4.2.2ITC LTD:

Year Return (R) Avg. Return (R) (R- R) (R-R)2

2007-08 -9.82 36.16 -45.98 2114.16

2008-09 66.03 36.16 29.87 892.22

2009-10 28.66 36.16 -7.5 56.25

2011-12 118.47 36.16 82.31 6775

2011-12 -22.55 36.16 -58.71 3447

TOTAL 13284

4.2.2.Table Standard Deviation of ITC LTD

Variance = 1/n (R-R)2 = 1/5 (13284) = 2656.8

Standard Deviation = Variance = 2656.8 = 51.54

61

Interpretation:

The above table and graph represents daily returns of ITC LTD fund it reveals there was low

returns at the beginning & then there after there was continuous high returns .Here the price

variation is 2656.8 and yearly average return is 36.16 with s.d 33.09

4.2.3DR REDDY LABORATORIES LTD:

Year Return (R)

Avg. Return (R)

(R-R) (R-R)2

2007-08 -16.00 12.19 -28.19 795

2008-09 6.33 12.19 -5.86 34

2009-10 -24.14 12.19 -36.33 1320

2011-12 92.30 12.19 80.11 6418

2011-12 2,47 12.19 -9.72 94

TOTAL 8,661

62

4.2.3 Table Standard Deviation of DR REDDY LABORATORIES LTD

Variance = 1/n-1 (R-R)2 = 1/5 (8,661) = 1732.2

Standard Deviation = Variance = 1732.2 = 41.62

Interpretation:

From the above table represented the returns can change in year wise. From the first year slightly

decreased and increased but the last year returns can be decreased why because the sales were

increased. So finally yearly returns increasing the value of share price.

63

4.2.4ACC:

Year Return (R)

Avg. Return (R) (R-R) (R-R)2

2007-08 -9.7 45.36 -55.06 3032

2008-09 83.86 45.36 38.5 1482

2009-10 41.58 45.36 -3.78 13.69

2011-12 116.95 45.36 71.59 5125

2011-12 -6.00 45.36 -51.36 2638

TOTAL 12,291

4.2.4.Table Standard Deviation of ACC

Variance = 1/n-1 (R-R)2 = 1/5 (12,291) = 2458


Interpetation:

The above table and graph represents daily returns of ACC equity fund it reveals there was

returns at the beginning & then there after there was continuous rise and increasing in sd also

positive returns Here the price variation is 2458and monthly average return is 45.36

64

4.2.5BHARAT HEAVY ELECTRICALS LTD:

Year Return (R)

Avg. Return (R) (R-R) (R-R)2

2007-08 32.04 84.62 -52.58 2765

2008-09 170.83 84.62 86.21 7432

2009-10 26.81 84.62 -57.81 3342

2011-12 192.53 84.62 107.91 11645

2011-12 0.87 84.62 -83.75 7014

TOTAL 32,198

4.2.5. Trable Standard Deviation of BHARAT HEAVY ELECTRICALS LTD

Variance = 1/n-1 (R-R)2 = 1/5 (32198) = 6440


65

Interpetation:

Risk is a major factor influence for all type of investors. In the above selected Equity Shares

average risk factor is 9.87% and the risk factor of bench mark is 8.7%, it is showing equities are

more risky. they get yearly SD 80.25

4.2.6HERO HONDA:

Year Return(R)

Avg.Return(R)

(R-R) (R-R)2

2007-08 -44.40 33.56 -77.97 6079

2008-09 160.68 33.56 127.12 16160

2009-10 11.70 33.56 -21.86 478

2011-12 62.50 33.56 28.94 838

2011-12 -22.65 33.65 -56.21 3160

TOTAL 26,715

4.2.6 Table Standard Deviation of HERO HONDA

Variance = 1/n-1 (R-R)2 = 1/5 (26,715) = 5343


66

Interpretation:

Hero Honda is the third leading company in manufacturing sector. The company profits are

decreasing. If its decrease in operating and other expenses then it will be in a good position as

soon as possible in a short run

4.3CALCULATION OF CORRELATION:

Covariance (COV ab) = 1/n (RA-RA)(RB-RB)

Correlation Coefficient = COV ab/aa*a b

4.3.1.1ACC (RA) & ITC (RB)

YEAR (RA-RA) (RB-RB) (RA-RA) (RB-RB)

2007-08 -55.06 -45.98 2532

2008-09 38.5 29.87 1149.99

2009-10 -3.78 -7.5 28.35

2011-12 71.59 82.31 5892.57

2011-12 -51.36 -58.71 3015

TOTAL 12617.9

67

4.3.1.1 Table Correlation of ACC & ITC

Covariance (COV ab) = 1/5 (12617.9) = 2523.58


aa = 49.57 ; ab = 51.54

= 2523.58/(49.57)(51.54) = 0.98

4.3.1.2 ACC (RA) & WIPRO (RB)


2007-08 -52.58 -77.97 4099.66

2008-09 86.21 127.12 10959.01

2009-10 -57.81 -21.86 1263.72

2011-12 107.91 28.94 3122.91

2011-12 -83.75 -56.21 4707.58

TOTAL 24152.88

68

4.3.1.2 Table Correlation of ACC & WIPRO



aa = 26 ; ab = 41.62

= 4830.57/(80.25)(73.09) = 0.8

4.3.1.3 WIPRO (RA) & DR REDDY (RB)


2007-08 -30.29 -28.19 853.87

2008-09 7.53 -5.86 -44.12

2009-10 44.98 -36.33 -1634.12

2011-12 -19.41 80.11 -1554.93

2011-12 -2.88 -9.72 27.99

TOTAL -2351.31

4.3.1.3Table Correlation of WIPRO & DR REDDY

Covariance (COV ab) = 1/5 (-2351.31) = 470.26


aa = 26.00 ; ab = 41.62

= -470.26/(26.00)(41.62) = -0.43

69

4.3.`1.4 ITC (RA) & BHEL (RB)


2007-08 -45.98 -52.58 2417.63

2008-09 -29.87 86.21 -2575.09

2009-10 -7,5 -57.81 -433.58

2011-12 82.31 107.91 8882.07

2011-12 -58.71 -83.75 4916.96

TOTAL 14075.15

4.3.1.4Table Correlation of ITC & BHEL



aa = 51.54 ; ab = 80.25

= 2815.03/(51.54)(80.25) = 0.68

4.3.1.5 ACC (RA) & BHEL (RB)


2007-08 -55.06 -52.58 2895.05

2008-09 38.5 86.21 3319.08

2009-10 -3.7 -57.81 213.89

2011-12 71.59 107.91 7725.27

2011-12 -51.3 -83.75 4296.37

TOTAL 18449.66

4.3.1.5Table Correlation of ACC & BHEL

70



aa = 49.57 ; ab = 80.25

= 18449.66/(49.57)(80.25) = 0.92

4.3.2. Correlation between ACC & other Companies:

4.3.2.1 ACC (RA) & HEROHONDA (RB)


2007-08 -55.06 -77.97 4293.02

2008-09 38.5 127.12 4894.12

2009-10 -3.78 -21.86 82.63

2011-12 71.59 28.94 2071.81

2011-12 -51.36 -56.21 2886.95

TOTAL 14228.53

4.3.2.1Table Correlation of ACC & HERO HONDA



aa = 49.58 ; ab = 73.04

= 2845.70/(49.57)(26.00) = 0.78

71

4.3.2.2 ACC (RA) & WIPRO (RB)


2007-08 -55.06 -30.29 1667.77

2008-09 38.5 7.53 289.90

2009-10 -3.78 44.98 -170.02

2011-12 71.59 -19.41 -1389.56

2011-12 -51.36 -2.88 147.91

TOTAL 546

4.3.2.2 Table Correlation of ACC &WIPRO

Covariance (COV ab) = 1/5 (546) = 109.2


aa = 49.57; ab = 26.00

= 109.2/(49.57)(26.00) = 0.08

4.3.2.3ACC (RA) & DR REDDY (RB)


2007-08 -55.06 -28.19 552.14

2008-09 38.5 -5.86 -225.61

2009-10 -3.78 -36.33 137.33

2011-12 71.59 80.11 5735.07

2011-12 -51.36 -9.72 499.21

TOTAL 7698.14

4.3.2.3 Table Correlation of ACC & DR REDDY

72



aa = 49.57 ; ab = 41.62

= 1539.63/(49.57)(41.62) = 0.74

4.3.2.4 ITC (RA) & HERO HONDA (RB)


2007-08 -45.98 -77.97 3585.06

2008-09 29.87 127.12 3797.07

2009-10 -7.5 -21.86 163.95

2011-12 82.31 28.94 2382.05

2011-12 -58.71 -56.21 3300.08

TOTAL 13228.21

4.3.2.4 Table Correlation of ITC & HERO HONDA



aa = 51.54 ; ab = 73.09

= 2645.64/(51.54)(73.09) = 0.70

73

4.3.3Correlation Between DR REDDY & Other Companies

4.3.3.1 ITC(RA) & WIPRO:


2007-08 -16.024 -10.89 174.50

2008-09 -26.574 -46.94 1,247.38

2009-10 -3.684 -8.7 32.05

2011-12 -34.724 -26.98 936.85

2011-12 81.006 93.53 7,576.49

TOTAL 9,967.28

4.3.3.1 Table Correlation of ITC & WIPRO

Covariance (COV ab) = 1/5-1 (9967.28) = 2491.82


aa = 46.75 ; ab = 54.48

= 2491.82/(46.75)(54.48) = 0.978

4.3.3.2 DR. REDDY (RA) & &ITC (RB)


2007-08 -28.19 -45.98 1296.17

2008-09 -5.86 29.87 -175.03

2009-10 -36.33 -7.5 272.47

2011-12 80.11 82.31 6593.85

2011-12 -9.72 -58.71 570.66

TOTAL 8558.12

4.3.3.2 Table Correlation of DR.REDDY & ITC

74



AA = 41.62; ab = 51.54

= 1711.62/(41.62)(51.54) = 0.79

4.3.3.3DR REDDY (RA) &HEROHONDA (RB)


2007-08 -28.19 -77.97 2197.97

2008-09 -5.86 127.12 744.92

2009-10 -36.33 -21.86 794.17

2011-12 80.11 28.94 2318.38

2011-12 -9.72 -56.21 546.36

TOTAL 6601.8

4.3.3.3 Table Correlation of DR.REDDY & HERO HONDA



aa = 41.62 ; ab = 73.09

= 1320.36/(41.62)(73.09) = 0.43

75

4.3.4Correlation Between HLL & Other Companies

4.3.4.1HEROHONDA (RA) & WIPRO(RB)


2007-08 -77.97 -30.29 2361.71

2008-09 127.12 7.53 957.21

2009-10 -21.86 45.04 -984.57

2011-12 28.94 -19.41 -561.72

2011-12 -56.21 -2.88 161.88

TOTAL 1934.51

4.3.4.1Table Correlation of HERO HONDA & WIPRO



aa = 73.09; ab = 26.00

= 386.90/(73.09)(26.00) = 0.20

4.3.4.2. DR REDDY (RA) & BHEL(RB)


2007-08 -28.19 -52.58 1482.23

2008-09 -5.86 86.21 -505.19

2009-10 -36.33 -57.81 2100.24

2011-12 80.11 107.91 8644.67

2011-12 -9.72 -83.75 814.05

TOTAL 12536

4.3.4.2Table Correlation of DR.REDDY & BHEL

76

Covariance (COV ab) = 1/5 (12536) = 386.90


aa = 41.62; ab = 80.25

= 2507.2/(41.62)(80.25) = 0.93

4.3.5 CORRELATION BETWEEN BHEL(RA) & WIPRO(RB)


2007-08 -52.58 -30.29 1592.65

2008-09 86.21 7.53 649.16

2009-10 -57.81 45.04 -2603.76

2011-12 107.91 -19.41 -2094.53

2011-12 -83.75 -2.88 241.2

TOTAL -2215.28

4.3.5Table Correlation of BHEL & WIPRO

Covariance (COV ab) = 1/5 (-2215.28) = -443.05


aa = 80.25; ab = 26.00

= -443.05/(80.25)(26.00) = -0.21

77

4.4CALCULATION OF PORTFOLIO WEIGHTS:

FORMULA : Wa = sb [sb-(nab*sa)]

sa2 + sb2 - 2nab*sa*sb

Wb = 1 – Wa

4.4.1CALCULATION OF WEIGHTS OF WIPRO & OTHE COMPANIES:

4.4.1.1ACC (a) & ITC (b):

sa = 49.57

sb = 51.54

nab = 0.98

Wa = 51.54 [51.54-(0.98*49.57)]

(49.57)2 + (51.54)2 – 2(0.98)*(49.57)*(51.54)

Wa = 152

106

Wa = 1.43

Wb = 1 – Wa

Wb = 1-1.43 = - 0.43

4.4.1.2BHEL (a) & HEROHONDA (b)

sa = 80.25

sb = 73.09

nab = 0.82

Wa = 73.09 [73.09-(0.82*80.25)]

(80.25)2 + (73.09)2 – 2(0.82)*(80.25)*(73.09)

Wa = 533

2163

Wa = 0.24

78

Wb = 1 – Wa

Wb = 1-0.24 = 0.76

4.4.1.3WIPRO (a) & DR REDYY (b)

sa = 26.00

sb = 41.62

nab = -0.43

Wa = 41.62 [41.62-(-0.43*26.00)]

(26.00)2 + (41.62)2 – 2(-0.43)*(41.62)*(26.00)

Wa = 2198

1477

Wa = 1.49

Wb = 1 – Wa

Wb = 1-1.49 = -0.49

4.4.1.4ITC (a) & BHEL (b)

sa = 51.54

sb = 80.25

nab = 0.68

Wa = 80.25 [80.25-(0.68*51.54)]

(51.54)2 + (80.25)2 – 2(0.68)*(51.54)*(80.25)

Wa = 3628

3471

Wa = 1.04

Wb = 1 – Wa

79

Wb = 1-1.04 =0.04

4.4.1.5ACC (a) & BHEL (b)

sa = 49.57

sb = 80.25

nab = 0.92

Wa = 80.25 [80.25-(0.92*49.57)]

(49.57)2 + (80.25)2 – 2(0.92)*(49.57)*(80.25)

Wa = 2781

1577

Wa = 1.76

Wb = 1 – Wa

Wb = 1-1.76 = -0.76

4.4.2CALCULATION OF WEIGHTS OF ACC & OTHER COMPANIES:

4.4.2.1ACC (a) & HEROHONDA (b)

sa = 49.57

sb = 73.09

nab = 0.78

Wa = 73.09 [73.09-(0.78*49.57)]

(49.57)2 + (73.09)2 – 2(0.78)*(49.57)*(73.09)

Wa = 2516

2148

80

Wa = 1.17

Wb = 1 – Wa

Wb = 1-1.17 = -0.17

4.4.2.2ACC(a) & WIPRO (b)

sa = 49.57

sb = 26.00

nab = 0.08

Wa = 26.00 [26.00-(0.08*49.57)]

(49.57)2 + (26.00)2 – 2(0.08)*(49.57)*(26.00)

Wa = 573

2927

Wa = 0.19

Wb = 1 – Wa

Wb = 1-0.19 = 0.81

4.4.2.3ACC (a) & DR REDDY (b)

sa = 49.57

sb = 41.62

nab = 0.74

Wa = 41.62 [41.62-(0.74*49.57)]

(49.57)2 + (41.62)2 – 2(0.74)*(49.57)*(41.62)

Wa = 206

1136

Wa = 0.18

Wb = 1 – Wa

Wb = 1-0.18 = 0.82

81

4.4.2.4ITC(a) & HERO HONDA (b)

sa = 51.54

sb = 73.09

nab = 0.70

Wa = 73.09 [73.09-(0.70*51.54)]

(51.54)2 + (73.09)2 – 2(0.70)*(51.54)*(73.09)

Wa = 2706

2724

Wa = 0.99

Wb = 1 – Wa

Wb = 1-0.99 = 0.01

4.4.3CALCULATION OF WEIGHTS OF DR REDDY & OTHER COMPANIES:

4.4.3.1DR REDDY (a) & ITC (b)

sa = 41.62

sb = 51.54

nab = 0.79

Wa = 51.54 [51.54-(0.79*41.62)]

(41.62)2 + (51.54)2 – 2(0.79)*(41.62)*(51.54)

Wa = 962

999

Wa = 0.96

Wb = 1 – Wa

Wb = 1-0.96 = 0.04

82

4.4.3.2DR REDDY (a) & HEROHONDA (b)

sa = 41.62

sb = 73.09

nab = 0.43

Wa = 73.09 [73.09-(0.43*41.62)]

(41.62)2 + (73.09)2 – 2(0.43)*(41.62)*(73.09)

Wa = 4034

4458

Wa = 0.90

Wb = 1 – Wa

Wb = 1-0.90 = 0.10

4.4.3.3DR REDDY (a) & BHEL (b)

sa = 41.62

sb = 80.25

nab = 0.75

Wa = 80.25 [80.25-(0.75*41.62)]

(41.62)2 + (80.25)2 – 2(0.75)*(41.62)

Wa = 3935

3162

Wa = 1.24

Wb = 1 – Wa

Wb = 1-1.24 = -0.24

4.4.4CALCULATION OF WEIGHTS OF ITC & OTHER COMPANIES

4.4.4.1ITC(a) & WIPRO (b)

sa = 51.54

sb = 26.00

83

nab = -0.02

Wa = 26.00 [26.00-(-0.02*51.54)]

(51.54)2 + (26.00)2 – 2(-0.02)*(51.54)*(26.00)

Wa = 690

3386

Wa = 0.20

Wb = 1 – Wa

Wb = 1-0.20 = 0.8

4.4.4.2HEROHONDA(a) & WIPRO(b)

sa = 73.09

sb = 26.00

nab = 0.20

Wa = 26.00 [26.00-(0.20*73.09)]

(73.09)2 + (26.00)2 – 2(0.20)*(73.09)*(26.00)

Wa = 296

5258

Wa = 0.05

Wb = 1 – Wa

Wb = 1-0.05 = 0.95

4.4.5CALCULATION OF WEIGHTS OF BHEL & WIPRO

sa = 80.25

sb = 26.00

nab = -0.21

84

Wa = 26.00 [26.00-(-0.21*80.25)]

(80.25)2 + (26.00)2 – 2(-0.21)*(80.25)*(26.00)

Wa = 1114

7992

Wa = 0.14

Wb = 1 – Wa

Wb = 1-0.14 = 0.86

4.5CALCULATION OF PORTFOLIO RISK:

RP = sa2*Wa2 + sb2*Wb2 + 2nab*sa*sb*Wa*Wb

CALCULATION OF PORTFOLIO RISK OF WIPRO & OTHER COMPANIES:

4.5.1Wipro (a) & ITC (b):

sa = 33.09

sb = 56.09

= 2/3

= 1/3

Nab = 0.98

RP = (2/3)2(49.57)2+(1/3)2(0.51.54)2+2(49.57)(51.54)*(0.98)*(2/3)*(1/3)

= 2505 = 50.04

4.5.2BHEL (a) & HEROHONDA (b):

sa = 80.25

sb = 73.09

= 2/3

85

= 1/3

nab = 0.82

RP = (2/3)2(80.25)2+(1/3)2(73.09)2+2(80.25)(73.09)*(0.82)*(2/3)*(1/3)

= 5613 = 74.91

4.5.3WIPRO (a) & DR REDDY (b):

sa = 41.62

sb = 26.00

= 2/3

= 1/3

nab = 0.43

RP = (2/3)2(41.62)2+(1/3)2(26.00)2+2(41.62)(26.00)*(0.43)*(2/3)*(1/3)

= 647 = 25.43

4.5.4ITC (a) & BHEL (b):

sa = 51.54

sb = 80.25

= 1/3

= 2/3

nab = 0.68

RP = (1/3)2(51.54)2+(2/3)2(80.25)2+2(51.54)(80.25)*(0.68)*(2/3)*(1/3)

= 4434 = 66.58

86

4.5.5ACC (a) & BHEL (b):

sa = 49.57

sb = 80.25

= 2/3

=1/3

nab = 0.92

RP = (2/3)2(49.57)2+(1/3)2(80.25)2+2(49.57)(80.25)*(0.92)*(2/3)*(1/3)

= 4786 = 69.18

4.6CALCULATION OF PORTFOLIO RISK OF ACC & OTHER COMPANIES

4.6.1ACC(a) & HEROHONDA(b):

sa = 49.57

sb = 73.09

= 2/3

= 1/3

nab = 0.78

RP = (2/3)2(49.57)2+(1/3)2(73.09)2+2(49.57)(73.09)*(0.78)*(2/3)*(1/3)

= 2944 = 54.25

4.6.2ACC (a) & WIPRO (b):

sa = 49.57

sb = 26.00

= 2/3

87

= 1/3

nab = 0.08

RP = (2/3)2(49.57)2+(1/3)2(26.00)2+2(49.57)(26.00)*(0.08)*(2/3)*(1/3)

= 1226 = 35.01

4.6.3ACC (a) & DR REDDY (b):

sa = 49.57

sb = 41.62

= 2/3

= 1/3

nab = 0.74

RP = (2/3)2(49.57)2+(1/3)2(41.62)2+2(49.57)(41.62)*(0.74)*(2/3)*(1/3)

= 1972 = 44.40

4.6.4ITC (a) & HEROHONDA (b):

sa = 51.54

sb = 73.09

= 2/3

= 1/3

nab = 0.70

RP = (2/3)2(51.54)2+(1/3)2(73.09)2+2(51.54)(73.09)*(0.70)*(2/3)*(1/3)

= 2949 = 54.30

88

4.7CALCULATION OF PORTFOLIO RISK OF DR REDDY & OTHER COMPANIES

4.7.1DRREDDY (a) & ITC (b):

sa = 41.62

sb = 51.54

= 1/3

= 2/3

nab = 0.79

RP = (1/3)2(41.62)2+(2/3)2(51.54)2+2(41.62)(51.54)*(0.79)*(2/3)*(1/3)

= 2135 = 46.2

4.7.2DRREDDY (a) & HEROHONDA (b):

sa = 41.62

sb = 73.09

= 1/3

= 2/3

nab = 0.43

RP = (1/3)2(41.62)2+(2/3)2(73.09)2+2(41.62)(73.09)*(0.43)*(2/3)*(1/3)

= 3172 = 56.32

4.7.3DRREDDY (a) & BHEL (b):

sa = 41.62

sb = 80.25

= 1/3

89

= 2/3

nab = 0.878

RP = (1/3)2(41.62)2+(2/3)2(80.25)2+2(41.62)(80.25)*(0.75)*(2/3)*(1/3)

= 4197 = 64.78

4.8CALCULATION OF PORTFOLIO RISK OF ITC & OTHER COMPANIES

4.8.1ITC (a) & WIPRO (b):

sa = 51.54

sb = 26.00

= 2/3

= 1/3

nab = -0.02

RP = (2/3)2(51.54)2+(1/3)2(26.00)2+2(51.54)(26.00)*(26.00)*(2/3)*(1/3)

= 1281 = 35.79

4.8.2HEROHONDA (a) & WIPRO (b):

sa = 73.09

sb = 26.00

= 2/3

= 1/3

nab = 0.20

RP = (2/3)2(73.09)2+(1/3)2(26.00)2+2(73.09)(26.00)*(0.20)*(0.67)*(0.33)

90

= 2646 = 51.44

4.8.3CALCULATION OF PORTFOLIO RISK OF BHEL (a) &WIPRO (b)

sa = 80.25

sb = 26.00

=2/3

=1/3

nab = -0.21

RP = (2/3)2(80.25)2+(1/3)2(26.00)2+2(80.25)(26.00)*(-0.21)*(2/3)*(1/3)

= 2778 = 52.

91

CHAPTER-VI

FINDINGS, CONCLUSIONS

&SUGGESTIONS

92

5.1FINDINGS

The investor can recognize and analyze the risk and return of the shares by using this

Analysis.

The investor who bears high risk will be getting high returns.

The investor who is having optimum portfolio will be taking optimum returns with

minimum risk.

The investor should include all securities which are under valued in their portfolio and

remove those securities that are over valued.

The investor has to maintain the portfolio of diversified sectors stocks rather than investing in

a single sector of different stocks.

5.2RECOMMENDATIONS & SUGGESTIONS

In India most of the people are income middle level they cannot invest heavy amount. So

mutual fund is right investment for such people.

The company should come up in the future with some more schemes in such a way that

should give returns, safe and liquidity so that the investors should get better confidence &

believe it

In the share market lot of fluctuations will be present so in mutual fund they have average

better returns, so that the investors will be safe.

In the present scenario customer needs good returns and the investment should be safe,

liquidity. These three terms should be present.

The investors need to be properly educated about the mutual funds products and on how

best to utilize their benefits by designing a proper investment portfolio.

5.3CONCLUSION

93

For any investment the factors to be conceder are return in investment and risk associated that

investment diversified in the investment in to different assets can reduced the risk . by following

modern portfolio theorem risk can be reduced for a required return.

Investment goals vary from person to person. While somebody wants security, others might

give more weight age to returns alone. With objectives defining any range, it is obvious that

the products required will vary as well.

94

BIBLIOGRAPHY

BIBLIOGRAPHY

95

Books referred:

1. Alexander. G.J, Sharpe. W.F and Bailey. J.V, “Fundamentals of Investments”, PHI, 3rd Ed.

2. Zvi Bodie, Alex Kane, Marcus.A.J, Pitabas Mohanty, “Investments”, TMH, 8th Ed.

3. Prasanna Chandra, “Investment Analysis and Portfolio Management”, TMH, 3rd Ed.

4. Charles.P.Jones, “Investments: Analysis and Management”, John Wiley &Sons, Inc. 9th Ed.

5. Francis. J.C. & Taylor, R.W., “Theory and Problems of Investments”. Schaum’s Outline Series,

McGraw Hill

6. Herbert. B. Mayo, “Investments: an Introduction”, Thomson – South Western. 9th Ed.

7. Peter L. Bernstein and Aswath Damodaran, “Investment Management”,Wiley Frontiers in

Finance.

8. Dhanesh Khatri, “Security Analysis and Portfolio Management”, 2010, Macmillan Publishers.

9. Sudhindra Bhat, “Security Analysis and Portfolio Management”, 2009, Excel Books.

10. Preeti Singh, Investment Management, 2010, HPH, 17th Revised Edition.

11. Stephen A. Ross, Randolph Westerfield, and Jeffrey Jaffe, “Corporate Finance”, TMH.

12. S. Chand “Investment Management: Security Analysis & Portfolio Management”.

13. S. Kevin, “Analysis and Portfolio Management”, PHI.

14. Punithavathy Pandian, “Security Analysis and Portfolio Management”, Vikas Publishing House

15. Donald E. Fisher and Ronald J. Jordan: “Securities Analysis and Portfolio Management”,

Prentice Hall.

16. Graham & Dodd, “Security Analysis and Portfolio Management”, McGraw Hill.

17. Jack Clark Francis, “Investment”, TMH, New Delhi.

1. Meir Kohn, “Financial Institutions and Markets”, 2009 2nd Ed. Oxford University Press.

2. Khan. M.Y., “Financial Services”, 2010, 5th Ed. Tata McGraw-Hill, Pvt. Ltd., New Delhi.

96

3. Gordon and Natarajan, “Financial Markets and Services’, 2009, HPH, 7th Ed. Mumbai.

4. Bharti Pathak, “Indian Financial System”, 2010, 3rd Ed. Pearson Education.

5. Avadhani. V.A., “Financial Services in India”, 2009, 1st Ed. HPH.

6. Dr. Gurusamy. S., “Financial Services”, Tata McGraw-Hill, Education Pvt. Ltd. 2nd Ed., New Delhi.

7. Vasant Desai, “Financial Markets and Financial Services”, 2009, HPH, 1st Ed., Mumbai.

8. Punithavathy Pandian, “Financial Services and Markets”, 2009 Vikas Publishing House.

9. Mishkin. F.S. and Eakins. S.G., “Financial Markets and Institutions”, 2006, 5th Ed. Pearson

Education,

10. Harold L Vogel, “Financial Markets Bubble and Crashes” 1st ed, 2009, Cambridge.

Security analysis and portfolio management by V.A. Avadhani

Security analysis and portfolio management by Fischer & Jordan

Investment decisions by V.K. Bhalla

Security analysis & portfolio management by Robbins

Websites:

www.geojit.com

www.investopedia.com

www.capitalmarket.com

97

http://www.capitalmarket.com/

http://www.investopedia.com/

http://www.geojit.com/

Documents

mirzarafath.files.wordpress.com · Web viewIndia bulls entered the Indian Real Estate market and became the first company to bring FDI in Indian Real Estate. India bulls won bids