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PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS EXAM NO: MBA04004011 ROLL NO: 419

KARNATAK
DHARWAD B.V.V.SANGHAS

UNIVERSITY

INSTITUTE OF MANGEMENT STUDIES


BAGALKOT

A PROJECT REPORT ON PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS AT HYDERABAD STOCK EXCHANGE
HYDERABAD Submitted in partial fulfillment for the degree of Master of Business Administration. COMPANY GUIDE INSTITUTE GUIDE

T.S.V.PRASAD Submitted by

Prof. PRAMOD. S.G.

THUNGA MANJUNATH MBA IIYEAR

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

DECLARATION

I, THUNGA MANJUNATH declare that this project titled PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS at Hyderabad Stock Exchange, is my original work & is being submitted to Karnatak University for the partial fulfillment for the award of M. B. A. During the year 2004 2006. I also declare that this project is not copied and is not before. submitted by any other person

Yours faithfully Place: Date: (THUNGA MANJUNATH)

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

ACKNOWLEDGEMENT

I take this opportunity to express my sincere thanks to Mr S. SARVESWAR REDDY, EXECUTIVE DIRECTOR of Hyderabad Stock Exchange Ltd for giving me an opportunity to do this project. I thank Mr. CHANDRAMOULI. CEO of Hyderabad Stock Exchange Ltd and Mr.T.S.V. PRASAD, Program Co-ordination faculty for giving me valuable information. And would specially like to thank Mr. MALLESWAR, for his co-operation in providing various materials for my project. I thank Director of our Institute Mr.A.V. KAPILESHWAR for helping me in this project. My special thanks to Mr. RAJA SHEKAR, for his motivation, guidance and assistance in completion of this project. Also, I express thanks to my internal guide Prof: Pramod.S.G for his valuable suggestion in completion of this project. Finally, I thank all my friends who shared the valuable information, views and their ideas.

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

CONTENTS
1. 2. 3. 4. 5. Executive summary. Introduction to Portfolio Management Stock Exchange in India Company profile of HSE Portfolio Management Objectives Need for portfolio management Elements of portfolio management

6. Investment Decisions and process 7. Markowitz model 8. Analysis 9. Pie diagrams 10. Recommendations 11. Conclusions 12. Bibliography

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

EXECUTIVE SUMMARY
Investment is one of the most fruitful, ever-changing and exciting dimensions of our lives. Investment is an activity by which we employ our savings in a profitable venture to earn a higher and regular return. Portfolio is a combination of securities. Portfolio is constructed in such a manner to meet the investors goals and objectives. Investors should decide how best to reach the goals with the securities available and try to maximum return with minimum risk by diversifying his portfolio and allocate funds among the securities.

Purpose of the Study:


The purpose of the study is to find out at what percentage of investment should be invested between two companies, on the basis of risk and return of each security in comparison. These percentages help in allocating the funds available for investment based on risky portfolios.

OBJECTIVES:
The main objective of the study is to diversify from different securities to maximize the return to the investors and to minimize the risk involved in investment.

The secondary objectives are:


a) Regular return b) Appreciation of capital c) More liquidity d) Safety of investment 5

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

Methodology of the study:


For methodology of the study, ten securities or stocks constituting the Senses Market are selected of one month closing share movement prices data from websites dated from 1 st June 2005 to 30th June 2005. In order to know the risk of the stock or security, I used the standard deviation, and for the comparison of the stocks or securities of two companies with each other by using the correlation co-efficient, and for the construction of the optimal portfolio on the basis of what percentage of investment should be invested when two securities are combined i.e. calculation of two assets portfolio by using minimum variance equation. And final step is to calculate the portfolio risk that shows how much is the risk is reduced by combining two stocks.

Some of the important findings of my study are:


According to the study on portfolio management and investment decisions, I find out that BHEL and RELIANCE Securities are having more returns with higher portfolio risk. And SBI and JINDAL, SBI and WIPRO Securities having moderate returns with the moderate portfolio risk. Finally the RAYMOND and HLL Securities having low returns with the low portfolio risk.

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

INTRODUCTION TO PORTFOLIO MANAGEMENT


Portfolio is a combination of securities that have return and risk characteristics of their own; portfolio may not take on the aggregate characteristics of their individual parts. Thus, a portfolio is a combination of various assets and/or instruments of investments. The combination may have different features of risk and return separate from those of the components. The portfolio is also built up of the wealth or income of the investor over a period of time with a view to suit is return or risk preferences to that of the portfolio that he holds. The portfolio analysis is thus an analysis of risk return characteristics of individual securities in the portfolio and changes that may take place in combination with other securities due interaction among them and impact of each one them on others. Security analysis is only a tool for efficient portfolio management; both of them go together and cannot be dissociated. Portfolios are combination of assets held by the investors. These combinations may be various assets classed like equity and debt or of different issues like Govt. bonds and corporate debts are of various instruments like discount bonds, debentures and blue chip equity nor scripts of emerging blue chip companies. Portfolio analysis includes portfolio constructions, selection of securities, and revision of portfolio evaluation and monitoring of the performance of the portfolio. All these are part of the portfolio management.

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

STOCK EXCHANGES
The investor wants liquidity for their investments. The securities, which they hold should easily be sold when they need cash. Similarly, there are others who want to invest in new securities. There should be a place where the securities need to be sold and purchased. Stock Exchanges provide a place where securities of different companies can be purchased and sold. Stock Exchange is a body of persons, whether incorporated or not, formed, with a view to help, regulate and control the business of buying and selling securities. Stock Exchanges are organized and regulated markets for various securities issued by corporate sector and other institutions. The Stock Exchanges enable flexible purchase and sale of securities as commodity exchanges allow trading in commodities. Stock Exchanges are an integral part of nations economic life. By virtue of holding the responsibility of mobilizing savings of small and big investors and allocating them to the business firms and for the entrepreneurs, towards productive investment. The following definitions explain the meaning and scope of Stock Exchanges. DEFINITION:

According to the securities contract act, 1956


Stock Exchange means any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying and selling in securities

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

CHARACTERISTICS OF STOCK EXCHANGES:


The following are some of the salient features of Stock Exchange: It is a place where securities are purchased and sold. A Stock Exchange is an association of persons whether incorporated or not. The trading in an exchange is strictly regulated and rules and regulations are prescribed for various transactions. Both genuine investors and speculators buy and shell shares. The securities of corporations, trusts, governments, municipal corporations, etc., are allowed to deal at Stock Exchanges.

LISTING OF SECURITIES:
The term listing means admission of securities of a company to dealing on a recognized Stock Exchange. Listed securities are also known as quoted securities. With effect from 13th February 1989, any company can list, de-list and re-list its securities by paying a stipulated fee, provided its equity capital is at least Rs. 3 crore, and at least Rs.1.8 crore (i.e., 60%) of its capital is offered for public subscription.

The main purpose for listing requirement is:


To ensure proper supervision and control of dealing in securities. To protect the interests of shareholders and general investors To avoid the concentration of economic power To give promoters an opportunity to invest sufficiently in the company for their selfbenefit To require promoters to have a reasonable stake in the company.

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

The securities of an entity may be listed at any of the following stages:


At the time of public issue of shares/debentures At the time of right issue of shares/debentures At the time of bonus issue Shares issued on amalgamations/mergers.

ROLE AND FUNCTIONS OF STOCK EXCHANGE


The Stock Exchange plays important role in the economic development of a country. The importance of Stock Exchange will be clear from the functions they perform:

1.

Ensures liquidity of capital:


The exchanges provide a ready market where buyers and sellers are always available

and those who are in need of hard cash can sell their holdings. Had this not been possible then many persons would have feared for blocking their savings in securities. It is because of exchanges that many persons invest in securities and they can again convert them into cash.

Continuous market for securities:


The securities once listed continue to be traded at the exchange irrespective of the fact that their owners changing, thus it provides a regular market for trading securities.

Evaluation of securities:
The investors can evaluate the worth of their holdings from the prices quoted at different Stock Exchanges for those securities. The securities are quoted under the free atmosphere of demand and supply and the prices are set on the basis of free market.

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B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

Mobilizing surplus savings:


The investors do not have any difficulty in investing their savings by purchasing shares, bonds etc., from the exchange. If this facility was not there then many persons who want to invest their savings will not find avenues to do so. In this way, Stock Exchanges play an important role in mopping up surplus funds of investors.

Safety in dealings:
The dealings at Stock Exchanges are governed by well-defined rules and regulations of securities contract (regulation) Act 1956. There is no scope for manipulating transactions. The safety in dealings brings confidence in the minds of all concerned parties and helps in increasing various dealings.

Listing of securities:
Only listed securities can be purchased and sold at Stock Exchanges. The listing is allowed only after a critical examination of capital structure, management and prospects of the company. The listing of securities gives privilege to the company. The investors can form their own views about the securities because listing a security does not guarantee the financial stability of the company.

Helpful in raising capital:


The new and existing concerns need capital for their activities. The new concerns raise capital for the first time and existing units increase their capital for expansion and diversification purposes. The exchanges are helpful in raising capital both by new and old concerns.

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B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

Clearing house of business information:


The companies listing securities with exchange have to provide financial statements, annual reports and other reports to ensure maximum publicity of corporation operations and working. The economic and other informations provide at Stock Exchanges help companies to decide their policies.

ORGANISATION OF STOCK EXCHANGES


Some of the recognized Stock Exchanges in Mumbai, Ahmedabad and Indoor are voluntary non-profit making organizations where those situated in Kolkata, Delhi and Bangalore function as joint Stock Exchanges limited by shares and Stock Exchanges functioning in Chennai and Hyderabad are formed as companies limited by guarantee. Uniformly in their organization is ensured through Articles of Association, which define the constitution of the recognized Stock Exchanges. The Stock Exchange Mumbai was the first to get permanent recognition followed by Kolkata, Hyderabad, Indoor and Bangalore. The other exchanges were given, at the first instance, official recognition for a period of five years and at the end of each term the recognition has been renewed for another five-year period. At, present there are more than 24 Stock Exchanges in India. As per the present guidelines, the proposed region in which the Stock Exchange is to be set up must be industrially developed with a sizable number of industrial units and should be able to attract at least 50 companies independently.

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PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

SECURITIES CONTROL (REGULATION) ACT (SCR ACT) 1956


The Securities Control (regulation) Act is formed in 1956 with the main objective of controlling and regulating the activities of Stock Exchanges in India. The Act sets up a general framework of control, which makes government influence all pervasive. Any Stock Exchange has to be recognized under the SCR before it starts its operations. Stock Exchange is an association of member brokers for the purpose of self-regulation and protecting the interests of its members. The central government, ministry of Finance, and Stock Exchange Division grant the recognition to Stock Exchanges under section 3 of the Act.

Bye-laws:
Besides the above Act, the Securities Contracts (regulation) Rules were also made in 1957 to regulate certain matters of trading on the Stock Exchanges. There are also byelaws of the Exchanges, which are concerned with the following subjects: Opening/closing of the Stock Exchanges. Tuning of trading Regulation of blank transfers Regulation of badla or carryover business Control of the settlement and other activities of the Stock Exchanges Fixation of margins, market prices or making up prices (Havala rates) Regulation of taravani business (jobbing) etc Regulation of brokers trading Brokerage charges, trading rules on the exchange Arbitration and settlement of disputes 13

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS Settlement and clearing of the trading Regulation of Stock Exchanges

The SCR Act is the basis for operation of the Stock Exchanges in India. RECOGNITION BY GOVERNMENT
Stock Exchange is recognized only after the Government is satisfied that its Rules and Byelaws conform to the conditions prescribed for ensuring fair dealings and protection to investors. Government has also to be satisfied that it would be in the interest of the trade and public interest to grant such recognition. Mumbai, Calcutta, Delhi, Chennai, Ahmedabad, Hyderabad, Indore, Bangalore etc have so far been granted permanent recognition. Others are granted temporary recognition from time to time. The rules can be amended, varied or rescinded only after with the approval of Government. Likewise, the byelaws of the recognized exchanges in detail for the regulation and control of contracts in securities and for eve of the trading activities of members must also be sanctioned by Government amendments or modifications must be similarly approved. The Act empowered the Government with power to make enquiries into the affairs of a recognized stock exchanges members, to suspend its business, and lastly, to withdraw the recognition to an exchange should such steps be deemed indispensable in the public interest.

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PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)


SEBI was given statutory status by an Act of Parliament on April 4, 1992. SEBI was authorized a) To regulate all merchant banks on issue activity b) To lay guidelines, and supervise and regulate the working of mutual funds and c) To oversee the working of Sock Exchanges in India.

FUNCTIONS OF SEBI:
Under the SEBI Act, SEBI has been assigned the following main functions: 1. Regulating the business in Stock Exchanges and other securities markets. 2. Registering and regulating the working of stock-brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deals, registrars to an issue, merchant bankers, underwriters, portfolio managers, and other intermediaries associated with the securities markets. 3. Registering and regulating of collective investment schemes including mutual funds 4. Promoting and regulating the working of self-regulatory organizations 5. Prohibiting fraudulent and unfair trade practices relating to securities market. 6. Promoting investors education and training of intermediaries of Securities market 7. Prohibiting insiders trading in securities 15

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS 8. Regulating substantial acquisition of shares and takeover of companies.

RECENT DEVELOPMENTS IN SECONDARY MARKET AND ROLE OF SEBI IN REGULATING THE MARKETS:
The century-old Indian capital market is two steps forward and one step back, or vice-versa, but whatever may be the phrase, according to some surveys made recently, it is found that though Indian capital marker is firmly on the road to renewed growth, the investors confidence is totally shattered and the SEBIs reformists will did not find much favor with investors, in restoring their faith in the capital market. Since 1995-96, SEBI has been showing its reformist will in more than one way. Several measures in conjunction with the stock exchanges were introduced by SEBI, for safeguarding the investors interests by ensuring better transparency and efficiency of markets. Some note worthy reforms in the capital market introduced by SEBI are as follows: Electronic trading De-mat trading Stock watch surveillance system Fast clearance of investigation Levy of heavy penalty on defaulting brokers Buy back of shares by the corporate Compulsory rolling settlement

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B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS Swadeshi EDGAR (Electronic Data Gathering, Analysis and Retrieval) etc

The constitution of SEBI has heralded a new era in the Indian Capital Market with its heavy agenda

To protect the interests of investors To promote and regulate the securities market by regulating the business in stock exchanges To regulate the working of stock brokers, merchant bankers & other intermediaries To regulate the working of depositories and participants To regulate the working of venture capital funds and mutual funds To prohibit the fraudulent and unfair trade practices To promote investors education and to train intermediaries

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PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

Company Profile ORIGIN


Rapid growth in industries in the erstwhile Hyderabad State saw efforts at starting the Stock Exchange. In November 1941 some leading bankers and brokers formed the share and stock Brokers Association. In 1942, Mr. Gulab Mohammed, the Finance Minister formed a Committee for the purpose of constituting Rules and Regulations of the Stock Exchange. Sri Purushothamdas Thakurdas, President and Founder Member of the Hyderabad Stock Exchange performed the opening ceremony of the Exchange on 14.11.1943 under Hyderabad Companies Act, Mr. Kamal Yar Jung Bahadur was the first President of the Exchange. The HSE started functioning under Hyderabad Securities Contract Act of No. 21 of 1352 under H.E.H. Nizams Government as a Company Limited by guarantee. It was the 6th Stock Exchange recognized under Securities Contract Act, after the Premier Stock Exchanges, Ahmedabad, Bombay, Calcutta, Madras and Bangalore stock Exchange. All deliveries were completed every Monday or the next working day. The Securities Contracts (Regulation) Act 1956 was enacted by the Parliament, passed into Law and the rules were also framed in 1957. The Government of India brought the Act and the Rules into force from 20th February 1957. The HSE was first recognized by the Government of India on 29 th September 1958 as Securities Regulation Act was made applicable to twin cities of Hyderabad and Secunderabad from that date. In view of substantial growth in trading activities, and for the

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B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS yeoman services rendered by the Exchange, the Exchange was bestowed with permanent recognition with effect from 29th September 1983. The Exchange has a significant share in achievements of erstwhile State of Andhra Pradesh to its present state in the matter of Industrial development.

OBJECTIVES
The Exchange was established on 18th October, 1943 with the main objective to create , protect and develop a healthy Capital Market in the State of Andhra Pradesh to effectively serve the Public and Investors interests.

The property, capital and income of the Exchange, as per the Memorandum and Articles of Association of the Exchange, shall have to be applied solely towards the promotion of the objects of the Exchange. Even in case of dissolution, the surplus funds shall have to be devoted to any activity having the same objects, as Exchange or be distributed in Charity, as may be determined by the Exchange or the High Court of judicature. Thus, in short, it is a Charitable Institution.

The Hyderabad Stock Exchange Limited is now on its stride of completing its 62 nd year in the history of Capital Markets serving the cause of saving and investments. The Exchange has made its beginning in 1943 promoting the mobilization of and today occupies a prominent place among the Stock Exchange has been of 19 Regional Stock Exchanges in India. The Hyderabad

funds into the Industrial sector for development

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS industrialization in the State of Andhra Pradesh.

GROWTH
The Hyderabad Stock Exchange Ltd., established in 1943 as a Non-profit making organization, catering to the needs of investing population started its operations in a small way in a rented building in Koti area. It had shifted into Aiyangar Plaza, Bank Street in 1987. In September 1989, the then Vice-President of India, Honble Dr. Shankar Dayal Sharma had inaugurated the own building of the Stock exchange at Himayathnagar, Hyderabad. Later in order to bring all the trading members under one roof, the exchange acquired still a larger premises situated 6-3-654/A ; Somajiguda, Hyderabad - 82, with a six storied building and a constructed area of about 4,86,842 sft (including cellar of 70,857 sft). Considerably, there has been a tremendous perceptible growth which could be observed from the statistics. The number of members of the Exchange was 55 in 1943, 117 in 1993 and increased to 300 with 869 listed companies having paid up capital of Rs.19128.95 crores as on 31/03/2000. The business turnover has also substantially increased to Rs. 1236.51 crores in 1999-2000. The Exchange has got a very smooth settlement system.

GOVERNING BOARD
At present, the Governing Board consists of the following:

MEMBERS OF THE EXCHANGE


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B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS Sri Hari Narayan Rathi Sri Rajendra V. Naniwadekar Sri K. Shiva Kumar Sri R.D. Lahoti Sri Ram Swaroop Agrawal Sri Dattatray

SEBI NOMINEE DIRECTORS


Sri. N.S. Ponnunambi -Registrar of Companies [Govt. of India.]

PUBLIC NOMINEE DIRECTORS Dr. N.R. Sivaswamy (Chairman, HSE) -FormarCBDT Justice V. Bhaskara Rao -Retd. Judge High Court. Sri P. Muralimohan Rao Dr B. Brahmaiah EXECUTIVE DIRECTOR Sri S SARVESHWAR REDDY -Mogili&Co.-Chartered Accountants -G.M. JNIDB Chairman

COMPUTERIZATION
The Stock Exchange business operations are equipped with modern communication systems. Online computerization for simultaneously carrying out the trading transactions, monitoring functions have been introduced at this Exchange since 1988 and the Settlement and Delivery System has become simple and easy to the Exchange members. The HSE Online Securities Trading System was built around the most sophisticated state of the art computers, communication systems, and the proven VECTOR Software from CMC and was one of the most powerful SBT Systems in the country, operating in a WAN environment, connected through 9.6 KBPS 2 wire Leased Lines from the offices of the members to the office of the Stock Exchange at Somajiguda, where the Central System CHALLENGE-L 21

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS DESK SIDE SERVER made of Silicon Graphics(SGI Model No. D-95602-S2) was located and connected all the members who were provided with COMPAQ DESKPRO 2000/DESKTOP 5120 Computers connected through MOTOROLA 3265 v. 34 MANAGEABLE STAND ALONE MODEMS (28.8 kbps) for carrying out business from computer terminals located in the offices of the members.

INTER CONNECTED MARKET SYSTEM (ICMS)


The HSE was the convener of a Committee constituted by the Federation of Indian Stock Exchanges for implementing an Inter-connected Market System(ICMS) in which the Screen Based Trading systems of various Stock Exchanges was inter-connected to create a large National Market. SEBI welcomed the creation of ICMS. The HOST provided the net-work for HSE to hook itself into the ISE. The ISE provided the members of HSE and their investors, access to a large national network of Stock Exchanges. The Inter-connected Stock Exchange is a National Exchange and all HSE Members could have trading terminals with access to the National Market without any fee, which was a boon to the Members of an Exchange/Exchanges to have the trading rights on National Exchange (ISE), without any fee or expenditure.

ON-LINE SURVEILLANCE
HSE pays special attention to Market Surveillance and monitoring exposures of the members, particularly the mark to market losses. By taking prompt steps to collect the margins for mark to market losses, the risk of default by members is avoided. It is heartening that there have been no defaults by members in any settlement since the introduction of Screen Based Trading. 22

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IMPROVEMENT IN THE VOLUMES


It is heartening that after implementing HOST, HSE's daily turnover has fairly stabilized at a level of Rs. 20.00 crores. this should enable in improving our ranking among Indian Stock Exchanges for 14th position to 6th position. We shall continuously strive to improve upon this to ensure a premier position for our Exchange and its members and to render excellent services to investors in this region. The number of transactions, turnovers of the Exchange, number of listed companies and the paid up capital listed have grown up substantially as may be seen from the following figures.

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PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

NUMBER OF YEAR TRANSACTIONS IN Thousands 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 515.949 421.985 603.635 860.642 720.521 240.64 427.83 513.168 513.440 427.205 34.326 4.203 2.277 4.401

TURNOVERS Rs.IN Crores 587.75 676.00 984.46 1160.48 1107.30 479.98 1860.86 1269.90 1236.51 977.83 41.26 4.58 2.73 14.13

MARKET LISTED COMPANIES 236 274 372 668 727 851 852 856 869 934 . . 856 820 CAPIT Rs.IN Crores 2740.56 10228.48 13156.15 18588.71 20159.31 22050.69 18705.10 18753.93 19128.95 14717.08 . . 22126.65 14456.95

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SETTLEMENT GUARANTEE FUND

The Exchange has introduced Trade Guarantee Fund on 25/01/2000. This will insulate the trading member from the counter-party risks while trading with another member. In other words, the trading member and his investors will be assured of the timely completion of the pay-out of funds and securities notwithstanding the default, if any, of any trading member of the Exchange. The shortfalls, if any, arising from the the default of any member will be met out of the Trade Guarantee Fund. several pay-ins worth of crores of rupees in all the settlements have been successfully completed after the introduction of Trade Guarantee Fund ,without utilizing any amount from the Trade Guarantee Fund.

The Trade Guarantee Fund will be a major step in re-building this confidence of the members and the investors in HSE. HSE's Trade Guarantee Fund has a corpus of Rs. 2.00 crores initially which will later be raised to Rs. 5.00 crores. At present Rs. 3.20 Crores is stood in the credit of SGF.

The Trade Guarantee Fund had strict rules and regulations to be complied with by the members to avail the guarantee facility. The HOST system facilitated monitoring the compliance of members in respect of such rules and regulations.

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CURRENT DIVERSIFICATIONS

A) DEPOSITORY PARTICIPANT
The Exchange has also become a Depository Participant with National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL). Our own DP is fully operational and the execution time will come down substantially. The depository functions are undertaken by the Exchange by opening the accounts at Hyderabad of investors, members of the Exchange and other Exchanges. The trades of all the Exchanges having On-line trading which get into National depository can also be settled at Hyderabad by this exchange itself. In short all the trades of all the investors and members of any Exchange at Hyderabad in dematerialized securities can be settled by the Exchange itself as a participant of NSDL and CDSL. The exchange has about 15,000 B.O. accounts.

B)

FLOATING

OF OF

SUBSIDIARY STOCK

COMPANY EXCHANGES

FOR OF

THE THE

MEMBERSHIP COUNTRY.

MAJOR

The Exchange had floated a Subsidiary Company in the name and style of M/s HSE Securities Limited for obtaining the Membership of NSE and BSE. The Subsidiary had obtained membership of both NSE and BSE. About 113 Sub-brokers may registered with HSES, of which about 75 sub-brokers are active. Turnover details are furnished here under. 26

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YEAR

NSE CASH Rs.In Lakhs

NSE F&O Rs.IN Lakhs

BSE CASH Rs.IN Lakhs --17558.59 39519.96

2001-02 2002-03 2003-04 2004-05

338236.81 426143.50 617808.46 484189.11

-16657.08 312203.56 354370.71

C) FACILITY TO TRADE AT NSE,DERIVATIVES TRADING, NET TRADING ETC


The Exchange has incorporated a Subsidiary "HSE securities Limited " with a paid up capital of Rs. 2.50 crores initially to take NSE Membership, so that the members of the exchange will have access to the NSE's Trading Screen as Sub-brokers, Derivatives Trading and Net Trading etc. The Members of this Exchange will also have equal opportunity of participating in such trading like any other NSE member.

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PORTFOLIO MANAGEMENT PORTFOLIO:


A portfolio is a collection of securities. Since it is really desirable to invest the entire funds of an individual or an institution or a single security, it is essential that every security be viewed in a portfolio context. Thus it seems logical that the expected return of the portfolio should depend on the expected return of each of the security contained in the portfolio. Portfolio analysis considers the determine of future risk and return in holding various blends of individual securities. Portfolio expected return is a weighted average of the expected return of the individual securities but portfolio variance, in short contrast, can be something reduce portfolio risk by adding security with greater individual risk than any other security in the portfolio. This is because risk depends greatly on the co-variance among returns of individual securities. Portfolios, which are combinations of Since portfolios expected return is a weighted average of the expected return of its securities, the contribution of each security to the portfolios expected returns depends on its expected returns and its proportionate share of the initial portfolios market value. It follows that an investor who simply wants the greatest possible expected return should hold one security; the one, which is considered to have a greatest, expected return. Very few investors do this, and very few investment advisors would counsel such and extreme policy instead, investors should diversity, meaning that their portfolio should include more than one security.

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PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

OBJECTIVES OF PORTFOLIO MANAGEMENT:


The main objective of the investment portfolio management is to maximize the return from the investment and to minimize the risk involved in investment. Moreover, risk in prices or inflation erodes the value of money and hence investment must provide a protection against inflation.

The secondary objectives are:


e) Regular return f) Stable income g) Appreciation of capital h) More liquidity i) Safety of investment

j) Tax benefits

NEED FOR PORTFOLIO MANAGEMENT:


Portfolio management is a process encompassing many activities of investment in assets and securities. It is a dynamic and flexible concept and involves regular and systematic analysis, judgment and actions. The objective of this service is to help the unknown and investors with the expertise of professionals in investment portfolio management. It involves construction of a portfolio based upon the investors objectives, constraints, preferences for risk and returns and tax liability. The portfolio is reviewed and adjusted from time to time in tune with the market conditions. The evaluation of portfolio is to be done in terms of targets set for risk and return. The changes in the portfolio are to be effected to meet the changing conditions. 29

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Portfolio construction refers to the allocation of surplus funds in hand among a variety of financial assets open for investment. Portfolio theory concerns itself with the principles governing such allocation. The modern view of investments is oriented more toward the assembly of proper combinations of individual securities to form investment portfolios. A combination of securities held together will give a beneficial result if they grouped in a manner to secure higher return after taking into consideration the risk element. The modern theory is of the view that by diversification risk can be reduce. The investors 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 combination of securities under constraints of risk and return.

ELEMENTS OF PORTFOLIO MANAGEMENT:


Portfolio management is on-going process involving the following basic tasks:
Identification of the investors objectives, constraints and preferences. Strategies are to be developed and implemented in tune with investment policy formulated. Review and monitoring of the performance of the portfolio. Finally the evaluation of the portfolio.

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RISK:
Risk is uncertainty of the income/capital appreciation or loss or both. All investments are risky. The higher the risk taken, the higher is the return. But proper management of risk involves the right choice of investments whose risks are compensating. The total risks of two companies may be different and even lower than the risk of a group of two companies if their risks are offset by each other.

The two major types of risks are:


Systematic or market related risks and Unsystematic or company related risks.

The Systematic risks affected from the entire market are (the market problems, raw materials availability, tax policy or Govt. policy, inflation risk, interest risk and financial risk). It is managed by the use of Beta of different company shares. The Unsystematic risks are mismanagement, increasing inventory, wrong financial policy, defective marketing etc. This is diversifiable or avoidable because it is possible to eliminate or diversify away this component of risk to a considerable extent by investing in a large portfolio of securities. The unsystematic risk stems from managerial inefficiency technological change in the production processes, labour problems etc, the nature and magnitude of those factors differ from one company to another.

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RETURN ON PORTFOLIO:
Each security in a portfolio contributes return in the proportion of its investments in security. Thus the portfolio expected return is the weighted average of the expected return, from each of the securities, with weights representing the proportions share of the security in the total investment. Why does an investor have so many securities in his portfolio? If the security ABC gives the maximum return why not he invest in that security all his funds and thus maximize return? The answer to this question lie in the investors perception of risk attached to investments, his objectives of income, safety, appreciation, liquidity and hedge against loss of value of money etc. This pattern of investment in different asset categories, types of investments, etc., would all be described under the caption of diversification, which aims at the reduction or even elimination of non-systematic risks and achieve the specific objectives of investors.

RISK ON PORTFOLIO:
The expected return from individual securities carries some degree of risk. Risk on the portfolio is different from the risk on individual securities. This risk is reflected in the variability of the returns from zero to infinity. Risk of the individual asset or a portfolio is measured by the variance of its return. The expected return depends on the probability of the returns and their weighted contribution to the risk of the portfolio. There are two measures of risk in this context one is the absolute deviation and other standard deviation. Most investors invest in a portfolio of assets, because as to spread risk by not putting all eggs in one basket. Hence, what really matters to them is not the risk and return of stocks in isolation, but the risk and return of the portfolio as a whole. Risk is mainly reduced by Diversification. 32

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PORTFOLIO DIVERSIFICATION:
Diversification is a technique of reducing the risk involved in investment and in portfolio management. This is a process of conscious selection of assets instruments and splits of companies/ Govt. securities, in a manner that the total risks are brought down. This process helps in the reduction of risk and promotes the optimization of returns for a given level of risks in portfolio management. Traditional form of diversification is concentrated upon holding a number of security types across industry lines (utility, mining, manufacturing groups). Holding one stock each from mining, utility, manufacturing groups is superior to holding three mining stocks. The best diversification comes through holding large number of securities scattered across industries. Risk of a portfolio is determined by the degree of covariance (correlation) between the returns of assets in the portfolio.

ELEMENTS OF PORTFOLIO MANAGEMENT:


Portfolio Management is on-going process involving the following basic tasks: 1. Identification of the investors objectives, constraints and preferences. 2. Strategies are to be developed and implemented in tune with investment policy formulated. 3. Review and monitoring of the performance of the portfolio. 4. Finally the evaluation of the portfolio.

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RISK-RETURN ANALYSIS:
All investments have some risks. Investments in shares of companies have its own risks or uncertainty. These risks arise out of variability of returns or yields and uncertainty of appreciation or depreciation of share prices, loss of liquidity etc. The Risk over time can be represented by the variance of the returns. While the return over time is capital appreciation plus payout, divided by the purchase price of the share. Y (SML) Security Market Line EXPECTED RETURN Variablereturn } Risk Free Return 0 RISK X

Normally, the higher the risk that the investor takes, the higher is the return. There is, however, a risk less return on capital of about 12%, which is the bank rate charged by the R.B.I or long-term, yielded on Government securities at around 13% to 14%. This risk less return refers to lack of variability of return and no uncertainty in the repayment or capital. But other risks such as loss of liquidity due to parting with money etc., may, however, remain but are rewarded by the total return on the capital. Risk-return is subject to variation and the objective of the portfolio manager is to reduce that variability and thus reduce the risky by choosing an appropriate portfolio. Traditional approach advocates that one securities holds the better it is according to the modern approach diversification should not be quantity that should be related to the quality of scripts which leads to quality of portfolio. Experience has shown that beyond the certain securities by adding more securities expensive. 34

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Simple Diversification reduces risk:


An assets total risk can be divided into systematic plus unsystematic risk, as shown below. Systematic risk (undiversifiable risk) +Unsystematic risk (diversifiable risk) =Total risk=Var (r) Unsystematic risk is that portion of the risk that is unique to the firm (for example, risk due to strikes and management errors). Unsystematic risk can be reduced to zero by simple diversification. Simple diversification is the random selection of securities that are to be added to a portfolio. As the number of randomly selected securities added to a portfolio is increased, the level of unsystematic risk approaches zero. However, market-related systematic risk cannot be reduced by simple diversification. This risk is common to all securities.

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CAPITAL ASSET PRICING MODEL (CAPM)


The relevant risk for an individual asset is systematic risk (or market-market risk) because non market risk can be eliminated by diversification, the relationship between an assets return and its systematic risk can be expressed by the CAPM, which is also called the security market (SML). The equation for the CAPM is as follows: E (ri) =R+ [E (rm)-R] bi Where E (ri) is the expected return for an asset, R is the risk-free rate (usually assumed to be a short-term T-bill rate), E (rm) equals the expected market return (usually assumed to be the S&P500), Bi denotes for the assets beta. The CAPM is an equilibrium model for measuring the risk return tradeoff for all assets including both inefficient and efficient portfolios. A graph of the CAPM is given below:\

E(rj) CAPM or SML u Eo E(rm) Eu R o Capm or security market line bi=beta

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Assumptions underlying CAPM


The capital Asset Pricing Model [CAPM] is an equilibrium model. The derivation of the model is based on several assumptions about investors and the market, which we present below for completeness. Investors are assumed to take into account only two parameters of return distribution, namely the mean the mean and the variance, in making a choice of portfolio. In other words, it is assumed that a security can be completely represented in terms of its expected return and variance and those investors behave as if a security were a commodity with two attributes, namely, expected return which is a desirable attribute and variance, which is an undesirable attribute. Investors are supposed to be risk averse and for every additional unit of risk they take, they demand compensation in terms of expected return. Again, the capital market is assumed to be efficient. An efficient market implies that all new information that could possibly affect the share prices becomes available to all the investors quickly and more or less simultaneously. Thus in an efficient market no single investor has an edge over another in terms of the information possessed by him since all investors are supposedly well informed and rational, meaning that all of them process the available information more or Less alike. And finally in an efficient market, all investors are price takers, i.e., no investor are so big as to effect the price of security significantly by virtue of his trading in that security. Capital Asset Pricing Model also assumes that the difference between lending and borrowing rates are negligibly small for investors. Also, the investors are assumed to make a single period investment decisions. The cost of transactions and information are assumed to be negligibly small. The model also ignores the existence of taxes, which may influence the investors behavior.

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The fact that some of the above assumptions are some what restrictive has attracted considerable criticism of the model. This, however, need not distract us from the main thrust of the model. The Capital Asset Pricing Model merely implies that in a reasonably wellfunctioning market where a large number of knowledgeable financial analysts operate, all securities will yield returns consistent with their risk, since if this were not is, the knowledgeable analysts will be able to take advantage of the opportunities for disproportionate returns and thereby reduce such opportunities. Hence, according to CAPM, in an efficient market, returns disproportionate to risk are difficult to come by. Assumptions concerning the investor behavior, market efficiency, lending and borrowing rates, etc., are to be taken not in their literal sense, but rather as approximate conditions. Factors such as taxes, transaction cost, etc., can be easily incorporated into the model for greater rigor.

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INVESTMENT DECISIONS
Definition of Investment:
According to F. Amling, Investment may be defined as the purchase by an individual or institutional investor of a financial or real asset that produces a return proportional to the risk assumed over some future investment period. According to D. E. Fisher and R.J Jordan, Investment is a commitment of funds made in the expectation of some positive rate of return. If the investment is properly undertaken, the return will be commensurate with the risk the investor assumes.

Concept of Investment:
Investment will generally be used in its financial sense and as such investment is the allocation of monetary resources to assets that are expected to yield some gain or positive return over a given period of time. Investment is a commitment of a persons funds to derive future income in the form of interest, dividends, rent, premiums, pension benefits or the appreciation of the value of his principal capital. Any investor would like to know the media or range of investments so that he can use his discretion and save in those investments, which will give him both security and stable return. The ultimate objective of the investor is to derive a variety of investments that meet his preference for risk and expected return. The investor will select the portfolio, which will maximize his utility. Another important consideration is the temperament and psychology of the investor. It is not only the construction of a portfolio that will promise the highest expected return, but it is the satisfaction of the need of the investor.

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PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS Many types of investment media or channels for making investments are available. Securities ranging from risk free instruments to highly speculative shares and debentures are available for alternative investments. All investments are risky, as the investor parts with his money. An efficient investor with proper training can reduce the risk and maximize returns. He can avoid pitfalls and protect his interests. Money and information are the basis and the first requirement of investment is the availability of money or savings. But, money is not enough, as investments are generally made on the basis of information of the companies, instruments, industry and economy. Both money and information flow do help making investment management. There are different methods of classifying the investment avenues. A major

classification is Physical Investments and Financial Investments. They are physical, if savings are used to acquire physical assets, useful for consumption or production. Some physical assets like ploughs, tractors or harvesters are useful in agricultural production. A few useful physical assets like cars, jeeps etc., are useful in business. Many items of physical assets are not useful for further production or goods or create income as in the case of consumer durables, gold, silver etc. Among different types of investments, some are marketable and transferable and others are not. Examples of marketable assets are shares and debentures of public limited companies, particularly the listed companies on Stock Exchange, bonds of P.S.U., Government Securities etc. Non-marketable securities or investments in bank deposits, provident fund and pension funds, insurance certificates, post office deposits, national savings certificate, company deposits, private limited companies shares etc.

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Investment Process:
The investment process may be described in the following stages: 1. Investment Policy: The first stage determines and involves personal financial affairs and objectives before making investment. It may also be called the preparation of investment policy stage. The investor has to see that he should be able to create an emergency fund, an element of liquidity and quick convertibility of securities into cash. This stage may, therefore, be called the proper time of identifying investment assets and considering the various features of investments. 2. Investment Analysis:

After arranging a logical order of types of investment

preferred, the next step is to analyze the securities available for investment. The investor must make a comparative analysis of type of industry, kind of securities etc. the primary concerns at this stage would be to form beliefs regarding future behavior of prices and stocks, the expected return and associated risks. 3. Investment valuation: Investment value, in general, is taken to be the present worth to the owners of future benefits from investments. The investor has to bear in mind the value of these investments. An appropriate set of weights have to be applied with the use of forecasted benefits to estimate the value of the investment assets such as stocks, debentures and bonds and other assets. Comparison of the value with the current market price of the asset allows a determination of the relative attractiveness of the asset. Each asset must be value on its individual merit.

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PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS 4. Portfolio Construction and Feed-back: Portfolio construction requires knowledge of the different aspects of securities in relation to safety and growth of principal, liquidity of assets etc. In this stage, we study, determination of diversification level, consideration of investment timing, selection of investment assets, allocation of invest able wealth to different investments, evaluation of portfolio for feed-back.

INVESTMENT DECISIONS-GUIDELINES FOR EQUITY INVESTMENT


Equity shares are characterized by price fluctuations, which can produce substantial gains or inflict severe losses. Given the volatility and dynamism of the stock market, investor requires greater competence and skill-along with a touch of good luck too-to invest in equity shares. Here are some general guidelines to play to equity game, irrespective of whether you are aggressive or conservative.
Adopt a suitable formula plan Establish value anchors Assets market psychology Combine fundamental and technical analyze Diversify sensibly Periodically review and revise your portfolio

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Requirement of Portfolio:
1. Maintain adequate diversification when relative values of various securities in the portfolio change. 2. Incorporate new information relevant for risk return assessment 3. Expand or contract the size of portfolio to absorb funds or with draw funds and 4. Reflect changes in investor risk disposition.

Types of Investors and Factors Influence on Investors on Investors Decision


There are four types of Investors in a market. They are as follows:

Types of Investors:
Type A Investor: No Market Timing and No stock-picking skills
If the investor does not believe that he has any special skills in picking undervalued stocks or in predicting the movement of the market, then the portfolio design problem becomes relatively simple. The Investor simply choices a diversified portfolio (in the manner described above) and then adjusts its beta to the desired level. If he weighs the chooses securities in proportion to market capitalization, he can expect to get a portfolio beta close to one. To achieve a higher or lower beta, he can shift the weights towards high or low beta stocks. He can achieve the same effects by increasing or decreasing the allocation to the equity portfolio in the overall portfolio. The type A investor would hold a passive, diversified portfolio with the constant beta equal to the target beta. He may also prefer to invest his money in a mutual fund and let it do the portfolio management for him.

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Type B Investor: Only Stock-Picking Skills


An investor who has and wishes to exploit his stock picking skills should start with a base portfolio similar to that of the type A investor. He should then adjust the weights of the stocks, which are in his opinion mis-priced. Specifically, he should overweight the stocks which are overvalued and underweight those which are under valued. For example, the base portfolio may have 2% in stock X and 1.5% in stock Y. The investor who finds X undervalued and Y overvalued may change the weights to 3% to X, he may have a problem as he would then have to short sell Y to the extent of 0.5% of the portfolio. This may not be legally or practically possible. The investor then has to raise the weight of X to 4%, eliminate Y from the portfolio and reduce the weight of some other stocks by 0.5%. The investor can deal with this problem in a slightly different manner. He can put, say 90%, of his equity investment in the diversified portfolio and reserve the remaining 10% for the mis-priced stocks. How large a fraction he should devote to mis-priced scripts depends on how good analyst may choose a larger fraction. What we are doing in this decision is to balance the profit potential of investing in undervalued stocks against the benefit of diversification. Unless we are confident about our analysis, we should give primacy to the need for diversification. Since the average beta of the undervalued and overvalued stocks is likely to be close to one, the overall beta is likely to remain close to the target value, unless the target beta is substantially different from one and the percentage of the portfolio devoted to mis-priced stocks is large. If, for some reason, this is not so, the investor would have to take further action to maintain to the beta at the target value. The portfolio of the type B investor is concentrated but has a constant beta.

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Type C Investor: Only Market-timing Skills


The type C investor holds a well-diversified portfolio but switches actively between defensive and offensive portfolios to take advantage of the market timing. If he expects the market to rise, he should push his portfolio beta above his target level by any of the techniques described in the section on market timing. The converse should be done if the investor is bearish about the market. In either case, the portfolio would remain diversified all through. The portfolio of this investor is diversified, but its beta is managed and not constant.

Type D Investor: Both Stock-picking and Market-timing Skills


This type of investor would use the techniques used by both the type B and type C investor. These investors would have the most active and aggressive portfolio management strategies. Using their superior ability to predict booms and busts in the market as a whole and their skills in identifying undervalued scripts, they should hold highly concentrated portfolios and let the beta fluctuate quite sharply around the long run target value. A pitfall to be very strenuously avoided is that of assuming that one has a skill which one in reality does not have. For example, an investor who does not have very good abilities in scrip selection may still think that he does have such skills. He would then end up with an ill-diversified portfolio, which earns mediocre returns; he would have been better off with a passive portfolio.

Qualities For Successful Investing:


Contrary thinking Patience Composure Flexibility and Openness 45

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INVESTORS PORTFOLIO CHOICE


An investor tends to choose that portfolio, which yield maximum return by applying utility theory. Utility theory is the foundation for the theory of choice under uncertainty. Cardinal and ordinal theories are the two alternatives, which is used by economists to determine how people and societies choose to allocate scare resources and to distribute wealth among one another. The former theory implies that a consumer is capable of assigning to every commodity or combination of commodities a number representing the amount of degree of utility associated with it. Were as the latter theory, implies that a consumer needs not be liable to assign numbers that represent the degree or amount of utility associated with commodity or combination of commodity. The consumer can only rank and order the amount or degree of utility associated with commodity. In explaining how investment decisions or portfolio choices are made utility theory is used here not to imply that individual actually make decision using a utility curve, but rather as an expository vehicle that helps explain how investors presumable act. In an uncertain environment it becomes necessary to ascertain how different individual will react to risky situation. The risk is defined as the probability of success or failure or risk could be described as variability of outcomes, payoffs or returns. This implies that there is a distribution of outcomes associated with each investment decision. Therefore we can say that there is a relationship between the expected utility and risk. Expected utility has been defined as the numerical value assigned to the probability distribution associated with a particular portfolio return. This numerical value is calculated by taking a weighted average of the utilities of the various possible returns. The weights are the probabilities of occurrence associated with each of the possible returns. 46

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LINEAR UTILITY FUNCTION AND RISK


The shape of an individuals utility function affects his or her reaction to risk suppose an individual has Rs.50,000 and whose behavior is linear utility function is offered a chance to gain Rs.1,00,000 with a probability of 1|2 or to lose Rs.1,00,000 with a probability of 1|2. This individual would be no better or worse off accepting or rejecting this opportunity his wealth would remain at Rs.50000 with utility UI. Any payment for this chance could reduce his wealth and therefore be undesirable because the expected value of the fair game is zero.

CONCAVE UTILITY FUNCTION AND RISK


In case of a concave utility function, if an individual participants and wins his or her utility or if he/she loses, than expected value of this fair game, having a 50 percent chance of winning and a 50 percent chance of losing. If the utility of winning is less than the utility of losing, than the utility of doing nothing is greater than the expected utility of accepting the fair game. In fact the individual should be willing to pay up to the difference in this situation. Hence, an investor with concave utility functions are said to be risk averse. That is, they would reject a fair game because the utility derived from winning is less than the utility lost should they lose the game [i.e., the expected utility of participating in a fair game is negative. Hence the convex utility function is not realistic in real world decision; therefore it is not worth exploring.

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PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

UNCERTAIN OUTCOMES, INSURANCE AND EXPECTED RETURNS


The below figure plots the utility of wealth curve for an individual who prefers more wealth to less but it can be characterized as having decreasing marginal utility. An extra rupee increases his utility but not by as much as a loss of a rupee would decrease his utility. Assume that this individual is a fairly well off person with a current wealth [Wo] of Rs.1000000 which provides a correspondence utility of wealth [Uo]. If he is offered by broker to play a usual coin-tossing game. If head comes, the individual will pay the odds of winning or losing are identical since it is a fair count but still the individual declines to expose himself to a risk without a corresponding return. The individual has two choices; to play the game or not to play the game. If he decides not to play the game, his wealth remains the same and his utility remains at Uo. If he plays the game, his wealth will be either Rs. 950000 or Rs.1050000 with respective utility of UI and UW. If he decides to play the game with a fair coin, his expected utility is less than uo lies in the fact that individual has decreasing marginal utility of wealth. The increased satisfaction obtained by a Rs.50000 increase in his wealth is more than offset by the decreased satisfaction associated with a Rs.50000 loss. Individuals with decreasing marginal utility are risk averse. When deciding whether to buy or sell securities, however, one consciously accepts risks, and a possible expected return is required in order for the expected utility of wealth not to fall [and, one hopes, to increase]. To illustrate, assume that an individual has fully insured the risks in his wealth, resulting in a current certain wealth of C and corresponding utility of Uc.

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PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

Now if a broker offers to play the game again. If he plays, the outcomes would result in wealth levels WI, and Ww. Clearly, the individual will play only if his expected utility does not fall if his expected wealth is equal to E [W]. The individual will demand an expected return to freely take on the change outcome. The broken can provide this return either by changing the odds of winning and losing or by paying him to play. The form of return is unimportant. The important fact is that the individual demands a positive expected return simply because he has a decreasing marginal utility of wealth curve. The return, which must be paid to induce people to accept the uncertain outcomes associated with securities, is known as the risk premium. The risk premium will depend upon both the risk aversion of an individual and the size of the risk.

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MARKOWITZ MODEL

THE MEAN-VARIANCE CRITERION


Dr. Harry M. Markowitz is credited with developing the first modern portfolio analysis in order to arrange for the optimum allocation of assets within portfolio. To reach this objective, Markowitz generated portfolios within a reward risk context. In essence, Markowitzs model is a theoretical framework for the analysis of risk return choices. Decisions are based on the concept of efficient portfolios.

A portfolio is efficient when it is expected to yield the highest return for the level of risk accepted or, alternatively, the smallest portfolio risk for a specified level of expected return. To build an efficient portfolio an expected return level is chosen, and assets are substituted until the portfolio combination with the smallest variance at the return level is found. At this process is repeated for other expected returns, set of efficient portfolio is generated.

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ASSUMPTIONS: The Markowitz model is based on several assumptions regarding investor behavior:
1. Investors consider each investment alternative as being represented by a probability distribution of expected returns over some holding period. 2. Investors maximize one period-expected utility and posses utility curve, which demonstrates diminishing marginal utility of wealth. 3. Individuals estimate risk on the basis of the variability of expected returns. 4. Investors base decisions solely on expected return and variance of returns only. 5. For a given risk level, investors prefer high returns to lower returns. Similarly for a given level of expected return, investor prefer less risk to more risk. Under these assumptions, a single asset or portfolio of assets is considered to be efficient if no other asset or portfolio of assets offers higher expected return with the same risk or lower risk with the same expected return.

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THE SPECIFIC MODEL


In developing his model, Markowitz first disposed of the investment behavior rule that the investor should maximize expected return. This rule implies that the non-diversified single security portfolio with the highest return is the most desirable portfolio. Only by buying that single security can expected return be maximized. The single-security portfolio would obviously be preferable if the investor were perfectly certain that this highest expected return would turn out to be the actual return. However, under real world conditions of uncertainty, most risk adverse investors join with Markowitz in discarding the role of calling for maximizing expected returns. As an alternative, Markowitz offers the expected returns/variance of returns rule. Markowitz has shown the effect of diversification by reading the risk of securities. According to him, the security with covariance which is either negative or low amongst themselves is the best manner to reduce risk. Markowitz has been able to show that securities which have less than positive correlation will reduce risk without, in any way, bringing the return down. According to his research study a low correlation level between securities in the portfolio will show less risk. According to him, investing in a large number of securities is not the right method of investment. It is the right kind of security which bring the maximum results.

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

p2 = x12 12 + x22 22 + 2 (x1) (x2) (12) 12 p = x12 12 + x22 22 + 2 (x1) (x2) (12) 12

Where p2 = variance of the portfolio return p = standard deviation of the portfolio return X1 = proportion of the portfolio invested in security 1 X2 = proportion of the portfolio invested in security 2 1 = standard deviation of the return on security 1 2 = standard deviation of the return on security 2 12= coefficient of correlation between the returns on securities 1 and 2

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PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

Practical study of selected scripts

Purpose of the Study:


The purpose of the study is to find out at what percentage of investment should be invested between two companies, on the basis of risk and return of each security in comparison. These percentages helps in allocating the funds available for investment based on risky portfolios.

Implementation of Study:
For implementing the study, ten securities or stocks constituting the Sensex Market are selected of one month closing share movement prices data from websites dated from 1 st June 2005 to 30th June 2005. In order to know the risk of the Stock or Security, we use the formula, which is given below. Standard Deviation = variance n Variance =1/n-1 (R-R)2 t=1 Where (R-R)2 = squares of difference between sample and mean. n = number of sample observations. After that, we need to compare the Stocks or Securities of two companies with each other by using the formula or Correlation Co-Efficient as given below:

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B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

Formula:
n Co-Variance (COV AB) = 1/n (RA-RA)(RB- RB) t=1 COVAB Correlation Coefficient (PAB) = (Std.A) (Std.B) Where (RA-RA)(RB-RB) = combined deviations of A & B (Std.A)(Std.B) = Standard deviations of A & B COVAB = covariance between A & B n = number of observations The next step would be the construction of the optimal portfolio on the basis of what percentage of investment should be invested when two securities and stocks are combined i.e., Calculation of two assets portfolio weight by using minimum variance equation which is given below: Xa = 2 b - Pab a b 2
a

+ 2

-2 Pab a b

55

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS Where a = Standard deviation of A b = Standard deviation of B Pab = correlation co-efficient between A & B The next and final step is to calculate the portfolio risk (combined risk), that shows how much is the risk is reduced by combining two stocks or securities by using this formula: p = Where X1 X2 1 2 X12 p = Proportion of Investment in Security 2. = Proportion of Investment in Security 1. = Standard Deviation of Security 1. = Standard Deviation of Security 2. = Correlation Co-Efficient between Security 1 and 2. = Portfolio Risk. X12 12 + X22 22 + 2(X1)(X2)(X12) 1 2

Scripts Which I Have Selected


56

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

SL.NO.

SECTOR

COMPANY

ENERGY

RELIANCE

OIL

INDIAN OIL CORP.

PHARMA

CIPLA

STEEL

JINDAL STEEL

ELECTRONIC

BHEL

TEXTILE

RAYMOND

FMCG

HLL

BANKING

SBI

AUTOMOBILE

HERO HONDA

10

SOFTWARE

WIPRO

Calculated Average And Standard Deviation


57

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

Company Name

Average

Standard Deviation

Reliance

593.5456

44.7922

Indian Oil

445.6374

13.4126

Cipla

297.1196

10.7145

Jindal Steel

898.0435

18.4243

Bhel

869.5652

11.8100

Raymond

343.6717

05.8073

HLL

151.8435

06.6868

SBI

674.3639

11.3606

Hero Honda

560.8609

15.3432

Wipro

737.7630

17.4849

CALCULATED CORRELATION CO-EFFICIENT AND PORTFOLIO RISK BETWEEN TWO COMPANIES


58

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS Company Name BHEL & Reliance Reliance & Indian Oil Correlation coefficient Risk(%) -0.6442 -0.9343 6.6600 Portfolio 15.8189

SBI & JINDAL Steel

-0.1194

9.1266

BHEL & Indian Oil Raymond & HLL

+0.6318 -0.4335

11.2473 3.8885

SBI & WIPRO

+0.0130

9.5838

CIPLA & BHEL

-0.7349

4.1158

Hero Honda & Raymond

-0.4182

4.4160

59

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

STANDARD DEVIATION

STANDARD DEVIATION
10% 7% 4% 4% 10% 29%

8%

12%

7%

9%

RELIANCE CIPLA BHEL HLL HERO HONDA

INDIAN OIL CORP JINDAL STEEL RAYMOND SBI WIPRO

CORRELATION COEFFICIENT
60

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

CORRELATION COEFFICIENT

10% 19% 2% 10% 16%

16%

24% 3%
RE LIANC E & B HE L RE LIANC E & IO C SB I & J INDAL B HE L &IO C RAYMO ND & HLL SB I & WIPRO C IPLA & B HE L HE RO HO NDA & RAYMO ND

61

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

PORTFOLIO RISK

PORTFOLIIO RISK 15% 6% 17% 14% 10% 24% 6% 8%

RELIANCE & BHEL RELIANCE & IOC SBI & JINDAL BHEL &IOC RAYMOND & HLL SBI & WIPRO CIPLA & BHEL HERO HONDA & RAYMOND

CALCULATION OF STANDARD DEVIATION OF RELIANCE

62

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS R SHARE PRICE 541.0000 529.8500 533.1500 555.2000 552.3000 547.8500 558.4500 559.0500 566.5500 569.6000 574.0500 574.9500 590.2500 600.2500 630.5000 646.1500 654.5500 650.6000 654.6500 648.6500 629.5500 641.8500 642.5500 13651.5500 R AVERAGE 593.5456 593.5456 593.5456 593.5456 593.5456 593.5456 593.5456 593.5456 593.5456 593.5456 593.5456 593.5456 593.5456 593.5456 593.5456 593.5456 593.5456 593.5456 593.5456 593.5456 593.5456 593.5456 593.5456 13651.55 = 593.5456 23
t=1

DATE 01/06/05 02/06/05 03/06/05 04/06/06 06/06/05 07/06/05 08/06/05 09/06/05 10/06/05 13/06/05 14/06/05 15/06/05 16/06/05 17/06/05 20/06/05 21/06/05 22/06/05 23/06/05 24/06/05 27/06/05 28/06/05 29/06/05 30/06/05 TOTAL

[ R-R ]2 SQUARE DEVIATIONS DEVIATIONS -52.5456 2761.0401 -63.6956 4057.1294 -60.6956 3647.6285 -38.3456 1470.385 -41.2456 1701.1995 -45.6956 2088.0879 -35.0956 1231.7011 -34.4956 1189.9464 -26.9956 726.6044 -23.9456 573.3918 -19.4956 380.0784 -26.9956 345.7963 -3.2956 10.8609 6.7044 44.9489 36.9544 1365.6276 52.6044 2767.2228 61.0044 3721.5368 57.0544 3255.2045 61.1044 3733.7476 55.1044 3036.4948 36.0044 1296.3168 48.3044 2333.315 49.0044 2401.4312 44139.6957 R-R

R Average(R) = = N

n _ Variance = 1/n-1 (R-R) 2 Variance = 1/23-1(44139.6957) Variance = 2006.3498 Standard deviation = Variance ________________ Standard deviation = 2006.3498 =44.7922 CALCULATION OF STANDARD DEVIATION OF IOC 63

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS R SHARE PRICE 463.6500 461.5000 461.6000 459.5500 459.0500 458.8500 458.6000 457.2500 453.5500 453.2500 450.9000 450.1000 444.2000 440.3500 437.2500 431.2500 430.1000 429.3500 432.0500 433.1000 431.0000 429.7500 423.4000 10249.6500 R AVERAGE 445.6374 445.6374 445.6374 445.6374 445.6374 445.6374 445.6374 445.6374 445.6374 445.6374 445.6374 445.6374 445.6374 445.6374 445.6374 445.6374 445.6374 445.6374 445.6374 445.6374 445.6374 445.6374 445.6374 R-R DEVIATIONS 18.0126 15.8626 15.9626 13.9126 13.4126 13.2126 12.9626 11.6126 7.9126 7.6126 5.2626 4.4626 -1.4374 -5.2874 -8.3874 -14.3874 -15.2374 -16.2874 -13.5874 -12.5374 -14.6374 -15.8874 -22.2374 [R-R] 2 SQUARE DEVIATIONS 324.4537 251.622 254.8045 193.5604 179.8978 174.5728 168.029 134.8524 62.6092 57.9517 27.9649 19.9148 2.0661 27.9566 70.3485 206.9973 232.1784 265.2794 184.6174 157.1864 214.2535 252.4095 494.502 3958.0283

DATE 01/06/05 02/06/05 03/06/05 04/06/05 06/06/05 07/06/05 08/06/05 09/06/05 10/06/05 13/06/05 14/06/05 15/06/05 16/06/05 17/06/05 20/06/05 21/06/05 22/06/05 23/06/05 24/06/05 27/06/05 28/06/05 29/06/05 30/06/05 TOTAL

R Average(R) = = N

10249.6500 = 445.6374 23
t=1

n _ Variance = 1/n-1 (R-R) 2 Variance = 1/23-1(3958.0283) Variance = 179.8981 _______________ Standard deviation = Variance ________________ Standard deviation = 179.8981 = 13.4126 CALCULATION OF STANDARD DEVIATION OF CIPLA 64

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS R DATE 01/06/05 02/06/05 03/06/05 04/06/05 06/06/05 07/06/05 08/06/05 09/06/05 10/06/05 13/06/05 14/06/05 15/06/05 16/06/05 17/06/05 20/06/05 21/06/05 22/06/05 23/06/05 24/06/05 27/06/05 28/06/05 29/06/05 30/06/05 TOTAL R SHARE PRICE 292.2000 289.3000 290.7500 289.5000 289.8500 289.8000 295.4000 293.6000 291.4500 290.1000 290.4000 288.2000 285.9500 284.9500 284.7500 304.8500 312.4500 310.7000 314.3000 310.7000 310.9000 310.0000 313.6500 6833.7500 R-R ( R-R )

SQUARE AVERAGE DEVIATIONS DEVIATIONS 297.1196 -4.9196 24.2025 297.1196 -7.8196 61.1461 297.1196 -6.3696 40.5718 297.1196 -7.6196 58.0583 297.1196 -7.2696 52.8471 297.1196 -7.3196 53.5765 297.1196 -1.7196 2.957 297.1196 -3.5196 12.3876 297.1196 -5.6696 32.1444 297.1196 -7.0196 49.2748 297.1196 -6.7196 45.1530 297.1196 -8.9196 79.5593 297.1196 -11.1696 124.7600 297.1196 -12.1696 148.0992 297.1196 -12.3696 153.0070 297.1196 7.7304 59.7591 297.1196 15.3304 235.0211 297.1196 13.5804 184.4273 297.1196 17.1804 295.1661 297.1196 13.5804 184.4273 297.1196 13.7804 189.8994 297.1196 12.8804 165.9047 297.1196 16.5304 273.2541 2525.6037 6833.7500 = 297.1196 23
t=1

R Average (R) = = N

n _ Variance = 1/n-1 (R-R) 2 Variance = 1/23-1(2525.6037) Variance = 114.8002 _______________ Standard deviation = Variance ________________ Standard deviation = 114.8002 =10.7145 65

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS CALCULATION OF STANDARD DEVIATION OF JINDAL STEEL R SHARE PRICE 905.6000 898.6500 900.6000 903.0500 905.0500 901.9000 899.5500 900.0000 900.0500 900.0000 886.5500 899.3000 879.5500 886.0000 895.3000 897.8500 914.0000 920.3000 922.4000 922.7500 897.8500 888.6000 830.0000 20654.9000 [R-R] 2 SQUARE AVERAGE DEVIATIONS DEVIATIONS 898.0435 7.5565 57.1006 898.0435 0.6065 0.3678 898.0435 2.5565 6.5357 898.0435 5.0065 25.0650 898.0435 7.0065 49.0910 898.0435 3.8565 14.8726 898.0435 1.5065 2.2695 898.0435 1.9565 3.8279 898.0435 2.0065 4.0260 898.0435 1.9565 3.8279 898.0435 -11.4935 132.1005 898.0435 1.2565 1.5788 898.0435 -18.4935 342.0095 898.0435 -12.0435 145.0459 898.0435 -2.7435 7.5268 898.0435 -0.1935 0.0374 898.0435 15.9565 254.6099 898.0435 22.2565 495.3518 898.0435 24.3565 593.2391 898.0435 24.7065 610.4111 898.0435 -0.1935 0.0374 898.0435 -9.4435 89.1797 898.0435 -68.0435 4629.9179 7468.0298 R R-R 20654.9000 = 898.0435 23
t=1

DATE 01/06/05 02/06/05 03/06/05 04/06/05 06/06/05 07/06/05 08/06/05 09/06/05 10/06/05 13/06/05 14/06/05 15/06/05 16/06/05 17/06/05 20/06/05 21/06/05 22/06/05 23/06/05 24/06/05 27/06/05 28/06/05 29/06/05 30/06/05 TOTAL

R Average(R) = = N

n _ Variance = 1/n-1 (R-R) 2 Variance = 1/23-1(7468.0298) Variance = 339.4559 _______________ Standard deviation = Variance ________________ 66

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS Standard deviation = 339.4559 = 18.4243 CALCULATION OF STANDARD DEVIATION OF BHEL R DATE 01/06/05 02/06/05 03/06/05 04/06/05 06/06/05 07/06/05 08/06/05 09/06/05 10/06/05 13/06/05 14/06/05 15/06/05 16/06/05 17/06/05 20/06/05 21/06/05 22/06/05 23/06/05 24/06/05 27/06/05 28/06/05 29/06/05 30/06/05 TOTAL R SHARE PRICE 880.1500 870.3500 869.4500 865.8500 870.3000 872.7500 880.4000 888.2000 876.3000 881.0000 883.1000 881.1000 879.7000 874.7500 873.0000 866.7500 853.5500 850.5500 849.1500 865.6000 847.9500 852.1100 867.9500 20000.0100 AVERAGE 869.5652 869.5652 869.5652 869.5652 869.5652 869.5652 869.5652 869.5652 869.5652 869.5652 869.5652 869.5652 869.5652 869.5652 869.5652 869.5652 869.5652 869.5652 869.5652 869.5652 869.5652 869.5652 869.5652 20000.0100 = 869.5652 23
t=1

R-R DEVIATIONS 10.5848 0.7848 -0.1152 -3.7152 0.7348 3.1848 10.8348 18.6348 6.7348 11.4348 13.5348 11.5348 10.1348 5.1848 3.4348 -2.8152 -16.0152 -19.0152 -20.4152 -3.9652 -21.6152 -17.4652 -1.6152

( R-R ) 2 SQUARE DEVIATIONS 112.0380 0.6159 0.0133 13.8027 0.5399 10.1430 117.3929 347.2558 45.3575 130.7547 183.1908 133.0516 102.7142 26.8822 11.7979 7.9254 256.4866 361.5778 416.7804 15.7228 467.2169 305.0332 2.6089 3068.9024

R Average(R) = = N

n _ Variance = 1/n-1 (R-R) 2 Variance = 1/23-1(3068.9024) Variance = 139.4956 _______________ Standard deviation = Variance ________________ 67

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS Standard deviation = 139.4956 = 11.81

CALCULATION OF STANDARD DEVIATION OF RAYMOND R DATE 01/06/05 02/06/05 03/06/05 04/06/05 06/06/05 07/06/05 08/06/05 09/06/05 10/06/05 13/06/05 14/06/05 15/06/05 16/06/05 17/06/05 20/06/05 21/06/05 22/06/05 23/06/05 24/06/05 27/06/05 28/06/05 29/06/05 30/06/05 TOTAL R-R ( R-R )2

R SHARE PRICE AVERAGE DEVIATIONS SQUARE DEVIATIONS 344.2000 343.6717 0.5283 0.2791 340.9000 343.6717 -2.7717 7.6823 342.4500 343.6717 -1.2217 1.4926 343.7500 343.6717 0.0783 0.0061 344.4500 343.6717 0.7783 0.6058 343.2500 343.6717 -0.4217 0.1778 340.7500 343.6717 -2.9217 8.5363 351.4000 343.6717 7.7283 59.7266 342.8500 343.6717 -0.8217 0.6752 342.6500 343.6717 -1.0217 1.0439 346.3500 343.6717 2.6783 7.1733 351.2000 343.6717 7.5283 56.6753 352.1500 343.6717 8.4783 71.8816 341.1500 343.6717 -2.5217 6.3590 340.0000 343.6717 -3.6717 13.4814 354.2000 343.6717 10.5283 110.8451 349.8000 343.6717 6.1283 37.5561 349.2000 343.6717 5.5283 30.5621 342.4000 343.6717 -1.2717 1.6172 340.1000 343.6717 -3.5717 12.7570 336.0000 343.6717 -7.6717 58.8550 330.4000 343.6717 -13.2717 176.1380 334.8500 343.6717 -8.8217 77.8224 7904.4500 741.9492 R 7904.4500 Average(R) = = = 343.6717 N 23 n _ Variance = 1/n-1 (R-R) 2
t=1

Variance = 1/23-1(741.9492) Variance = 33.7250 _______________ Standard deviation = Variance ________________ 68

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS Standard deviation = 33.7250 Standard deviation = 5.8073 CALCULATION OF STANDARD DEVIATION OF HLL R DATE 01/06/05 02/06/05 03/06/05 04/06/05 06/06/05 07/06/05 08/06/05 09/06/05 10/06/05 13/06/05 14/06/05 15/06/05 16/06/05 17/06/05 20/06/05 21/06/05 22/06/05 23/06/05 24/06/05 27/06/05 28/06/05 29/06/05 30/06/05 TOTAL R SHARE PRICE 149.0000 147.3500 146.8000 150.6000 147.6000 143.5000 142.4500 147.8000 145.9000 149.7000 148.0000 149.1000 149.2000 149.3500 148.4000 152.6500 154.4000 155.3500 163.2000 162.4500 162.8000 162.7500 164.0500 3492.4000 AVERAGE 151.8435 151.8435 151.8435 151.8435 151.8435 151.8435 151.8435 151.8435 151.8435 151.8435 151.8435 151.8435 151.8435 151.8435 151.8435 151.8435 151.8435 151.8435 151.8435 151.8435 151.8435 151.8435 151.8435 R-R DEVIATIONS -2.8435 -4.4935 -5.0435 -1.2435 -4.2435 -8.3435 -9.3935 -4.0435 -5.9435 -2.1435 -3.8435 -2.7435 -2.6435 -2.4935 -3.44435 0.8065 2.5565 3.5065 11.3565 10.6065 10.9565 10.9065 12.2065 ( R-R ) 2 SQUARE DEVIATIONS 8.0855 20.1915 25.4369 1.5463 18.0073 69.6140 88.2378 16.3499 35.3252 4.5946 14.7725 7.5268 6.9881 6.2175 11.8577 0.6504 6.5357 12.2955 128.9700 112.4978 120.0449 118.9517 148.9986 983.6962

R Average(R) = = N

3492.4000 = 151.8435 23
t=1

n _ Variance = 1/n-1 (R-R) 2 Variance = 1/23-1(983.6962) Variance = 44.7135 _______________ Standard deviation = Variance 69

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS ________________ Standard deviation = 44.7135 Standard deviation = 6.6868 CALCULATION OF STANDARD DEVIATION OF SBI R DATE 01/06/05 02/06/05 03/06/05 04/06/05 06/06/05 07/06/05 08/06/05 09/06/05 10/06/05 13/06/05 14/06/05 15/06/05 16/06/05 17/06/05 20/06/05 21/06/05 22/06/05 23/06/05 24/06/05 27/06/05 28/06/05 29/06/05 30/06/05 TOTAL R SHARE PRICE 660.2000 665.3000 662.4500 665.4000 682.3500 685.9500 689.9000 689.4000 680.6500 681.8500 686.2000 689.0000 679.9500 667.4000 657.0500 665.8500 661.2500 683.2000 678.6000 671.6500 662.0500 672.9500 681.9000 15520.5000 AVERAGE 674.3696 674.3696 674.3696 674.3696 674.3696 674.3696 674.3696 674.3696 674.3696 674.3696 674.3696 674.3696 674.3696 674.3696 674.3696 674.3696 674.3696 674.3696 674.3696 674.3696 674.3696 674.3696 674.3696 R-R DEVIATIONS -14.1696 -19.0696 -11.9196 -8.9696 7.9804 11.5804 15.5304 15.0304 6.2804 7.4804 11.8304 14.6304 5.5804 -6.9696 -17.3196 -8.5196 -13.1196 8.8304 4.2304 -2.7196 -12.3196 -1.4196 7.5304 ( R-R ) 2 SQUARE DEVIATIONS 200.7776 363.6496 142.0769 80.4537 63.6868 134.1057 241.1933 225.9129 39.4434 55.9564 139.9584 214.0486 31.1409 48.1756 299.9685 72.5834 172.1239 77.9760 17.8963 7.3962 151.7725 2.0153 56.7069 2839.0188

R 15520.5000 Average(R) = = N 23 n _ Variance = 1/n-1 (R-R) 2


t=1

= 674.3696

Variance = 1/23-1(2839.0188) Variance = 129.0645 _______________ 70

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS Standard deviation = Variance ________________ Standard deviation = 129.0645 Standard deviation = 11.3606 CALCULATION OF STANDARD DEVIATION OF HERO HONDA R DATE 01/06/05 02/06/05 03/06/05 04/06/05 06/06/05 07/06/05 08/06/05 09/06/05 10/06/05 13/06/05 14/06/05 15/06/05 16/06/05 17/06/05 20/06/05 21/06/05 22/06/05 23/06/05 24/06/05 27/06/05 28/06/05 29/06/05 30/06/05 TOTAL R SHARE PRICE 560.0000 557.9000 557.8500 557.7500 552.3000 555.2500 557.3000 555.6000 551.8000 545.6000 540.3500 549.4000 550.8000 551.0500 548.1500 550.1500 554.9000 580.8000 601.9500 584.8500 576.7000 576.8500 582.5000 12899.8000 AVERAGE 560.8609 560.8609 560.8609 560.8609 560.8609 560.8609 560.8609 560.8609 560.8609 560.8609 560.8609 560.8609 560.8609 560.8609 560.8609 560.8609 560.8609 560.8609 560.8609 560.8609 560.8609 560.8609 560.8609 12899.8000 = 560.8609 23
t=1

R-R DEVIATIONS -0.8609 -2.9609 -3.0109 -3.1109 -8.5609 -5.6109 -3.5609 -5.2609 -9.0609 -15.2609 -20.5109 -11.4609 -10.0609 -9.8109 -12.7109 -10.7109 -5.9609 19.9391 41.081 23.9891 15.8391 15.9891 21.6391

( R-R ) 2 SQUARE DEVIATIONS 0.7411 8.767 9.0655 9.6777 73.2890 31.4822 12.6800 27.6771 82.0999 232.8951 420.6970 124.5657 101.2217 96.2538 161.5670 114.7234 35.5323 397.5677 1688.3141 575.4769 250.8771 255.6513 468.2506 5179.0732

R Average(R) = = N

n _ Variance = 1/n-1 (R-R) 2 Variance = 1/23-1(5179.0732) Variance = 235.4124 71

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS _______________ Standard deviation = Variance ________________ Standard deviation = 235.4124 Standard deviation = 15.3432 CALCULATION OF STANDARD DEVIATION OF WIPRO R DATE 01/06/05 02/06/05 03/06/05 04/06/05 06/06/05 07/06/05 08/06/05 09/06/05 10/06/05 13/06/05 14/06/05 15/06/05 16/06/05 17/06/05 20/06/05 21/06/05 22/06/05 23/06/05 24/06/05 27/06/05 28/06/05 29/06/05 30/06/05 TOTAL R SHARE PRICE 711.2500 700.8000 721.6500 722.6000 716.2000 731.5500 734.4000 725.9000 723.8000 729.9000 723.2500 733.5500 734.5500 743.8000 756.5500 756.2500 759.2000 756.5500 749.8000 754.4000 740.6500 753.6500 766.3000 AVERAGE 736.7630 736.7630 736.7630 736.7630 736.7630 736.7630 736.7630 736.7630 736.7630 736.7630 736.7630 736.7630 736.7630 736.7630 736.7630 736.7630 736.7630 736.7630 736.7630 736.7630 736.7630 736.7630 736.7630 16946.5500 = 736.7630 23
t=1

R-R DEVIATIONS -25.5130 -35.9630 -15.1130 -14.1630 -20.5630 -5.2130 -2.3630 -10.8630 -12.9630 -6.8630 -13.5130 -3.2130 -2.2130 7.0370 19.7870 19.4870 22.4370 19.7870 13.0370 17.6370 3.8870 16.8870 29.5370

( R-R ) 2 SQUARE DEVIATIONS 650.9132 1293.3374 228.4028 200.5906 422.8370 27.1754 5.5838 118.0048 168.0394 47.1008 182.6012 10.3234 4.8974 49.5194 391.5254 379.7432 503.4190 391.5254 169.9634 311.0638 15.1088 285.1708 872.4344 6729.2808

16946.5500 R Average(R) = = N

n _ Variance = 1/n-1 (R-R) 2 Variance = 1/23-1(6729.2808) 72

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS Variance = 305.8764 _______________ Standard deviation = Variance ________________ Standard deviation = 305.8764 Standard deviation = 17.4893 CORRELATION BETWEEN BHEL & RELIANCE DEVIATION DEVIATION COMBINED OF BHEL RELIANCE DEVIATION (RA-RA)(RB-RB) -556.1847 -49.9883 6.9576 142.4616 -30.3073 -145.5313 -380.2538 -642.8186 -181.5406 -273.8131 -263.8690 -214.4965 -33.4002 34.7610 126.9310 -148.0919 -976.9977 -1084.9008 -1247.4585 -218.5000 -778.2423 -843.6460 -79.1519 -7838.0813 n __ __ Co-Variance (COVAB) = 1/n (RA-RA) (RB-RB) t=1 Co-Variance (COVAB) = 1/23 (-7838.5813) = -340.80279 73 DATE 01/06/05 02/06/05 03/06/05 04/06/05 06/06/05 07/06/05 08/06/05 09/06/05 10/06/05 13/06/05 14/06/05 15/06/05 16/06/05 17/06/05 20/06/05 21/06/05 22/06/05 23/06/05 24/06/05 27/06/05 28/06/05 29/06/05 30/06/05 TOTAL RA-RA 10.5848 0.7848 -0.1152 -3.7152 0.7348 3.1848 10.8348 18.6348 6.7348 11.4348 13.5348 11.5348 10.1348 5.1848 3.4348 -2.8152 -16.0152 -19.0152 -20.4152 -3.9652 -21.6152 -17.4652 -1.6152 RB-RB -52.5456 -63.6956 -60.3956 -38.3456 -41.2456 -45.6956 -35.0956 -34.4956 -26.9556 -23.9456 -19.4956 -18.5956 -3.2956 6.7044 36.9544 52.6044 61.0044 57.0544 61.1044 55.1044 36.0044 48.3044 49.0044

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS COVAB Correlation Coefficient (PAB) == (Std. A) (Std. B) -340.8079 == = -0.6442 (11.81)(44.7922) CORRELATION BETWEEN RELIANCE & IOC DEVIATIO DEVIATION N COMBINED OF BHEL RELIANCE DEVIATION (RA-RA) DATE 01/06/05 02/06/05 03/06/05 04/06/05 06/06/05 07/06/05 08/06/05 09/06/05 10/06/05 13/06/05 14/06/05 15/06/05 16/06/05 17/06/05 20/06/05 21/06/05 22/06/05 23/06/05 24/06/05 27/06/05 28/06/05 29/06/05 30/06/05 -52.5456 -63.6956 -60.3956 -38.3456 -41.2456 -45.6956 -35.0956 -34.4956 -26.9556 -23.9456 -19.4956 -18.5956 -3.2956 6.7044 36.9544 52.6044 61.0044 57.0544 61.1044 55.1044 36.0044 48.3044 49.0044 (RB-RB) (RA-RA)(RB-RB)

18.0126 -946.4829 15.8626 -1010.3778 15.9626 -964.0708 13.9126 -533.487 13.4126 -553.2107 13.2126 -603.7577 12.9626 -454.9302 11.6126 -400.5836 7.91126 -213.2889 7.6126 -182.2883 5.2626 -102.5975 4.4626 -82.9847 -1.4374 4.7371 -5.2874 -35.4488 -8.3874 -309.9513 -14.3874 -756.8405 -15.2374 -929.5484 -16.2874 -929.2678 -13.5874 -830.2499 -12.5374 -690.8659 -14.6374 -527.0108 -15.8874 -767.4313 -22.2374 -1089.7304 n __ __ Co-Variance (COVAB) = 1/n (RA-RA) (RB-RB) t=1 Co-Variance (COVAB) = 1/23 (-12909.6681) = -561.2899 COVAB 74

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS Correlation Coefficient (PAB) == (Std. A) (Std. B) -561.2899 == = (44.7922)(13.4126) CORRELATION BETWEEN SBI & JINDAL DEVIATION DEVIATION OF BHEL RELIANCE (RA-RA) DATE 01/06/05 02/06/05 03/06/05 04/06/05 06/06/05 07/06/05 08/06/05 09/06/05 10/06/05 13/06/05 14/06/05 15/06/05 16/06/05 17/06/05 20/06/05 21/06/05 22/06/05 23/06/05 24/06/05 27/06/05 28/06/05 29/06/05 30/06/05 TOTAL -14.1696 -19.0696 -11.9196 -8.9696 7.9804 11.5804 15.5304 15.0304 6.2804 7.4804 11.8304 14.6304 5.5804 -6.9696 -17.3196 -8.5196 -13.1196 8.8304 4.2304 -2.7196 -12.3196 -1.4196 7.5304 (RB-RB) 7.5565 0.6065 2.5565 5.0065 7.0065 3.8565 1.5065 1.9565 2.0065 1.9565 -11.4935 1.2565 -18.4935 12.04385 -2.7435 -0.1935 15.9565 22.2565 24.3565 24.7065 -0.1935 -9.4435 -68.0435 COMBINED DEVIATION (RA-RA)(RB-RB) -107.0726 -11.5657 -30.4725 -44.9063 55.9147 44.6598 23.3965 29.4070 12.6016 14.6354 -135.9727 18.3831 -103.2011 83.9384 47.5163 1.6485 -209.3429 196.5338 103.0377 -67.1918 2.3838 13.406 -512.3948 -574.6578

-0.9343

n __ __ Co-Variance (COVAB) = 1/n (RA-RA) (RB-RB) t=1 Co-Variance (COVAB) = 1/23 (-12909.6681) = -561.2899 75

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS COVAB Correlation Coefficient (PAB) == (Std. A) (Std. B) -561.2899 == = -0.9343 (44.7922)(13.4126) CORRELATION BETWEEN BHEL & IOC DEVIATION DEVIATION COMBINED OF BHEL RELIANCE DEVIATION (RA-RA) DATE 01/06/05 02/06/05 03/06/05 04/06/05 06/06/05 07/06/05 08/06/05 09/06/05 10/06/05 13/06/05 14/06/05 15/06/05 16/06/05 17/06/05 20/06/05 21/06/05 22/06/05 23/06/05 24/06/05 27/06/05 28/06/05 29/06/05 30/06/05 TOTAL 10.5848 0.7848 -0.1152 -3.7152 0.7348 3.1848 10.8348 18.6348 6.7348 11.4348 13.5348 11.5348 10.1348 5.1848 3.4348 -2.8152 -16.0152 -19.0152 -20.4152 -3.9652 -21.6152 -17.4652 -1.6152 (RB-RB) 18.0126 15.8626 159626 13.9126 13.4126 13.2126 12.9626 11.6126 7.9126 7.6126 5.2626 4.4626 -1.4374 -5.2874 -8.3874 -14.3874 -15.2374 -16.2874 -13.5874 -12.5374 -14.6374 -15.8874 -22.2374 (RA-RA)(RBB)

190.6598 12.449 -1.8389 -51.6881 9.8556 42.0795 140.4472 216.3985 53.2898 87.0486 71.2282 51.4752 -14.5678 -27.4141 -28.809 40.5034 244.0300 309.7082 277.3895 49.7133 316.3903 277.4766 35.9178 2301.7426 n __ __ Co-Variance (COVAB) = 1/n (RA-RA) (RB-RB) t=1 Co-Variance (COVAB) = 1/23 (2301.7426) = 100.0758 76

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS COVAB Correlation Coefficient (PAB) == (Std. A) (Std. B) 100.0758 == = +0.6318 (11.8100)(13.4126) CORRELATION BETWEEN RAYMOND & HLL DEVIATION DEVIATION OF BHEL RELIANCE (RA-RA) DATE 01/06/05 02/06/05 03/06/05 04/06/05 06/06/05 07/06/05 08/06/05 09/06/05 10/06/05 13/06/05 14/06/05 15/06/05 16/06/05 17/06/05 20/06/05 21/06/05 22/06/05 23/06/05 24/06/05 27/06/05 28/06/05 29/06/05 30/06/05 TOTAL 0.5283 -2.7717 -1.2217 0.0783 0.7783 -0.4217 -2.9217 7.7283 -0.8217 -1.0217 2.6783 7.5283 8.4783 -2.5217 -3.6717 10.5283 6.1283 5.5283 -1.2717 -3.5717 -7.6717 -13.2717 -8.8217 (RB-RB) -2.8435 -4.4935 -5.0435 -1.2435 -4.2435 -8.3435 -9.3935 -4.0435 -5.9435 -2.1435 -3.8435 -2.7435 -2.6435 -2.4935 -3.4435 0.8065 2.5565 3.5065 11.3565 10.6065 10.9565 10.9065 12.2065 COMBINED DEVIATION (RA-RA)(RB-RB) -1.5022 12.4546 6.1616 -0.0974 -3.3027 3.5185 27.4450 -31.2494 4.8838 2.1900 -10.2940 -20.6539 -22.4124 6.2879 12.6435 8.4911 15.667 19.3850 -14.4421 -37.8832 -84.0550 -144.7478 -107.6821 -359.1942

n __ __ Co-Variance (COVAB) = 1/n (RA-RA) (RB-RB) t=1 Co-Variance (COVAB) = 1/23 (-387.2392) = -16.8365 77

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS COVAB Correlation Coefficient (PAB) == (Std. A) (Std. B) -16.8365 == (5.8073)(6.6868) CORRELATION BETWEEEN SBI & WIPRO DEVIATION DEVIATION OF BHEL RELIANCE (RA-RA) DATE 01/06/05 02/06/05 03/06/05 04/06/05 06/06/05 07/06/05 08/06/05 09/06/05 10/06/05 13/06/05 14/06/05 15/06/05 16/06/05 17/06/05 20/06/05 21/06/05 22/06/05 23/06/05 24/06/05 27/06/05 28/06/05 29/06/05 30/06/05 TOTAL -14.1696 -19.0696 -11.9196 -8.9696 7.9804 11.5804 15.5304 15.0304 6.2804 7.4804 11.8304 14.6304 5.5804 -6.9696 -17.3196 -8.5196 -13.1196 8.8304 4.2304 -2.7196 -12.3196 -1.4196 7.5304 (RB-RB) -25.5130 -35.9630 -15.1130 -14.1630 -20.5630 -5.2130 -2.3630 -10.8630 -12.9630 -6.8630 -13.5130 -3.2130 -2.2130 7.0370 19.7870 19.4870 22.4370 19.7870 13.0370 17.6370 3.8870 16.8870 29.5370 COMBINED DEVIATION (RA-RA)(RBRB) 361.5090 685.8000 180.1409 127.0364 -164.1010 -60.3686 -36.6983 -163.2752 -81.4128 -51.3380 -159.8642 -47.0075 -12.3494 -49.0451 -342.7029 -166.0214 -294.3645 174.7271 55.1517 -47.9656 -47.8863 -23.9728 222.4254 58.4169

= -0.4335

n __ __ Co-Variance (COVAB) = 1/n (RA-RA) (RB-RB) t=1 Co-Variance (COVAB) = 1/23 (58.4169) = 2. 5399 COVAB 78

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS Correlation Coefficient (PAB) == (Std. A) (Std. B) 2.5399 == (11.3606)(17.4893) = +0.013

CORRELATION BETWEEN CIPLA & BHEL DEVIATION OF DEVIATION BHEL RELIANCE (RA-RA) DATE 01/06/05 02/06/05 03/06/05 04/06/05 06/06/05 07/06/05 08/06/05 09/06/05 10/06/05 13/06/05 14/06/05 15/06/05 16/06/05 17/06/05 20/06/05 21/06/05 22/06/05 23/06/05 24/06/05 27/06/05 28/06/05 29/06/05 30/06/05 TOTAL n __ __ Co-Variance (COVAB) = 1/n (RA-RA) (RB-RB) t=1 79 -4.9196 -7.8196 -6.3696 -7.6196 -7.2696 -7.3196 -1.7196 -3.5196 -5.6696 -7.0196 -6.7196 -8.9196 -11.1696 -12.1696 -12.3696 7.7304 15.334 13.5804 17.1804 13.5804 13.7804 12.8804 16.5304 (RB-RB) 10.5848 0.7848 -0.1152 -3.7152 0.7348 3.1848 10.8348 18.6348 6.7348 11.4348 13.5348 11.5348 10.1348 5.1848 3.4348 -2.8152 -16.0152 -19.0152 -20.4152 -3.9652 -20.6152 -17.4652 1.6152 COMBINED DEVIATION (RA-RA)(RB-RB) -52.0729 -6.1368 0.7338 28.3083 -5.3417 -23.3115 -18.6315 -65.5870 -38.1836 -80.2677 -90.9484 -102.8858 -113.2017 -63.0969 -42.4871 -21.7626 -245.5519 -258.2340 -350.7413 -53.849 -284.0857 -224.9588 -26.6999 -2138.9937

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS Co-Variance (COVAB) = 1/23 (-2138.9937) = -92.9997 COVAB Correlation Coefficient (PAB) == (Std. A) (Std. B) -99.9997 = =-0.7349 (10.7145)(11.81) CORRELATION BETWEEN HERO HONDA & RAYMOND DEVIATION DEVIATION OF BHEL RELIANCE (RA-RA) DATE 01/06/05 02/06/05 03/06/05 04/06/05 06/06/05 07/06/05 08/06/05 09/06/05 10/06/05 13/06/05 14/06/05 15/06/05 16/06/05 17/06/05 20/06/05 21/06/05 22/06/05 23/06/05 24/06/05 27/06/05 28/06/05 29/06/05 30/06/05 TOTAL 0.5283 -2.7717 -1.2217 0.0783 0.7783 -0.4217 -2.9217 7.7283 -0.8217 -1.0217 2.6783 7.5283 8.4783 -2.5217 -3.6717 10.5283 6.1283 5.5283 -1.2717 -3.5717 -7.6717 -13.2717 -8.8217 (RB-RB) -0.8609 -2.9609 -3.0109 -3.1109 -8.5609 -5.6109 -3.5609 -5.2609 -9.0609 -15.2609 -20.5109 -11.4609 -10.0609 -9.8109 -12.7109 -10.7109 -5.9609 19.9391 41.0891 23.9891 15.8391 15.9891 21.6191 COMBINED DEVIATION (RA-RA)(RB-RB) -0.4548 8.2067 3.6784 -0.2436 -6.6629 2.3661 10.4039 -40.6578 7.4453 15.5921 -54.9343 -86.2811 -85.2993 24.7401 46.6706 -112.7676 -36.5302 110.2293 -52.2530 -85.6819 -121.5128 -212.2025 -190.8936 -857.0429

n __ __ Co-Variance (COVAB) = 1/n (RA-RA) (RB-RB) t=1 Co-Variance (COVAB) = 1/23 (-857.0429) = -37.2627 80

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS COVAB Correlation Coefficient (PAB) == (Std. A) (Std. B) 1) BHEL RELIANCE : 0.83 : 0.17 2) INDIAN OIL RELIANCE : 0.68 : 0.32

3) SBI JINDAL STEEL:

: 0.70 0.30

4) BHEL INDIAN OIL

: 0.67 : 0.33

5) RAYMOND HLL

: 0.55 : 0.45

6) S.B.I WIPRO

: 0.71 : 0.29

7) CIPLA BHEL

: 0.55 : 0.45

8) RAYMOND HERO HONDA

: 0.79 : 0.21

-37.2627 == (5.8073)(15.3432) = -0.4182

TWO ASSETS PORTFOLIO WEIGHTS

81

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

PORTFOLIO WEIGHTS

BHEL & RELIANCE FORMULA: 2 b Pab a b Xa Xb Xa Xb a Xa = (11.81) 2 + (44.7922) 2 - 2 (-0.6442) (11.81) (44.7922) 2006 .3412 + 340.7791 = 139.4761 + 2006.3411 + 681.5582 = Xb 0.83 2347.1203 = 2827.3754
=

2a + 2 b 2 Pab a b = 1- Xa = BHEL = RELIANCE 11.81 b = 44.7922 Pab = -0.6442

(44.7922) 2 (-0.6442) (11.81) (44.7922)

= 1-Xa 82

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS Xb


RELIANCE & IOC

= 1-0.83 = 0.17

FORMULA: Xa Xb Xa Xb a
=

2 b ab a b

2a + 2 b 2 Pab a b = 1- Xa =IOC = RELIANCE 13.4126 b = 44.7922 Pab = -0.9343

(44. 7922) 2 (-0.9343) (13.4126) (44.7922) Xa = (13.4126) 2 + (44.7922) 2 - 2 (-0.9343) (13.4126) (44.7922) 2006 .3412 + 561.3086 = 179.8978 + 2479.2632 + 1122.6172 2567.6498 = 3781.7782 = Xb Xb 0.68 = 1-Xa = 1-0.68 = 0.32

SBI & JINDAL STEEL 83

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS FORMULA: Xa Xb Xa Xb a


=

2 b ab a b

2a + 2 b 2 Pab a b = 1- Xa = SBI = JINDAL STEEL 11.3606 b = 18.4243 Pab = -0.1194

(18.4243) 2 (-0.1194) (11.3603) (18.4243) Xa = (11.3606) 2 + (18.4243) 2 - 2 (-0.1194) (11.3606) (18.4243) 339.4548 + 24.9917 = (129.0632) + (339.4548) + (49.9834) 364.4465 = 518.5014 = Xb Xb = = = 0.70 1-Xa 1-0.70 0.30

BHEL & IOC


84

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS FORMULA: 2 b Pab a b Xa Xb Xa Xb a


=

2a + 2 b 2 Pab a b = 1- Xa = SBI = JINDAL STEEL 11. 8103 = 13.4126 Pab = -0.6318

(13.4126) 2 (0.6318) (11.8100) (13.4126) Xa = (11.8100) 2 + (13.4126) 2 - 2 (0.6318)(11.8100)(13.4126) 179.8978 100.0789 = (139.4761)+ (179.8978) (200.1578) 79.8189 = 119.2161 = Xb = Xb = = 0.67 1-Xa 1-0.67 0.33 =

RAYMOND & HLL


85

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS FORMULA: 2 b Pab a b Xa Xb Xa Xb a


=

2a + 2 b 2 Pab a b = 1- Xa = RAYMOND = HLL 5.8073 b = 6.6868 Pab = -0.4335

(6.6868) 2 (-0.4335) (5.8073) (6.6868) Xa = (5.8073) 2 + (6.6868) 2 - 2 (-0.4335) (5.8073) (6.6868) 44.7133 + 16.8338 = (33.7247) + (44.7133) + (33.6676) 61.5471 = 112.1056 = Xb Xb = = = 1-Xa 1-0.55 0.45 0.55

SBI & WIPRO


FORMULA: Xa =
2 b ab a b

2a + 2 b 2 Pab a b 86

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS Xb Xa Xb a


=

= 1- Xa = SBI = WIPRO 11.3606 b = 17.4893 Pab = 0.013

(17.4893) 2 (0.013) (17.4893) (11.3606) Xa = (11.3606) 2 + (17.4893) 2 - 2(0.013) (17.4893) (11.3606) 305.8756 2 .5830 = (129.0632) + (305.8756) - (5.166) 303.2926 = 429.7728 = Xb Xb = = = 0.71 1-Xa 1-0.71 0.29

CIPLA & BHEL


FORMULA:
2 b ab a b

Xa Xb

2a + 2 b 2 Pab a b = 1- Xa 87

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS Xa Xb a


=

=CIPLA = BHEL 10.7145 b = 11.81 Pab = -0.7349

(11.81) 2 (-0.7349) (10.7145) (11.81) Xa = (10.7145) 2 + (11.81) 2 - 2 (-0.7349) (10.7145) (11.81) 139.4761 + 9.2993 = 114.8005 + 139.4761 + 18.5986 148.7754 = 272.8752 = Xb = Xb = = 0.55 1-Xa 1-0.55 0.45

HERO HONDA & RAYMOND


FORMULA: Xa Xb Xa Xb =
2 b ab a b

2a + 2 b 2 Pab a b = 1- Xa = RAYMOND = HERO HONDA 88

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS a


=

5.8073 b = 15.3432

Pab = -0.4182

(15.3432)2 (-0.4182) (5.8073) (15.3432) Xa = (5.8073) 2 + (15.3432) 2 2 (-0.4182) (5.8073) (15.3432) 235.4138 + 37.2627 = (33.7247) + (235.4138) + (74.5254) 272.6765 = 343.6689 = Xb Xb = = = 0.79 1-Xa 1-0.79 0.21

PORTFOLIO RISK
p = X12 12 + X22 22 + 2 (X1) (X2) (X12) 1 2 Where X1 X2 1 2 X12 p = Proportion of Investment in Security 1. = Proportion of Investment in Security 2. = Standard Deviation of Security 1. = Standard Deviation of Security 2. = Correlation Co-Efficient between Security 1 and 2. = Portfolio Risk.

1. BHEL & RELIANCE 89

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS X1 = 0.83 X2 = 0.17 p = X12 12 + X22 22 + 2 (X1) (X2) (X12) 1 2 = (0.83)2 (11.81)2 + (0.17)2 (44.7922)2 + 2 (0.83) (0.17) (-0.6442) (11.81) (44.7922)

1 = 11.81 X12 = -0.6442 2 = 44.7922

= 0.6889 139.4761 + 0.0289 2006.3412 + 96.1679 = 96.0851 + 154.1516 = 15.8189

PORTFOLIO RISK
p = X12 12 + X22 22 + 2 (X1) (X2) (X12) 1 2 Where X1 X2 1 2 p = Proportion of Investment in Security 1. = Proportion of Investment in Security 2. = Standard Deviation of Security 1. = Standard Deviation of Security 2. = Portfolio Risk.

X12 = Correlation Co-Efficient between Security 1 and 2.

2. Reliance & IOC. X1 = 0.68 1 = 13.4126 X12 = -0.9343 90

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS X2 = 0.32 p = X12 12 + X22 22 + 2 (X1) (X2) (X12) 1 2 = (0.68)2 (13.4126)2 + (0.32)2 (44.7922)2 + 2 (0.68) (0.32) (-0.9343) (13.4126) (44.7922) 2 = 44.7922

= =

83.1847 + 205.4493 244.2815 6.66

PORTFOLIO RISK
p = X12 12 + X22 22 + 2 (X1) (X2) (X12) 1 2 Where X1 X2 1 2 p = Proportion of Investment in Security 1. = Proportion of Investment in Security 2. = Standard Deviation of Security 1. = Standard Deviation of Security 2. = Portfolio Risk.

X12 = Correlation Co-Efficient between Security 1 and 2.

3. SBI & JINDAL. X1 = 0.70 X2 = 0.30 1 = 11.3606 X12 = -0.1194 2 = 18.4243 91

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS p = = X12 12 + X22 22 + 2 (X1) (X2) (X12) 1 2 (0.70)2 (11.3606)2 + (0.30)2 (18.4243)2 + 2 (0.70) (0.30) (-0.1194) (11.3606) (18.4243) 63.2410 + 30.5509 + 10.4965

9.1216

PORTFOLIO RISK
p = X12 12 + X22 22 + 2 (X1) (X2) (X12) 1 2 Where X1 X2 1 2 p = Proportion of Investment in Security 1. = Proportion of Investment in Security 2. = Standard Deviation of Security 1. = Standard Deviation of Security 2. = Portfolio Risk.

X12 = Correlation Co-Efficient between Security 1 and 2.

4. BHEL & IOC. X1 = 0.67 X2 = 0.33 1 = 11.81 X12 = +0.6318 2 = 13.42

p = X12 12 + X22 22 + 2 (X1) (X2) (X12) 1 2 = (0.67)2 (11.81)2 + (0.33)2 (13.42)2 + 92

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS 2 (0.67) (0.33) (0.6318) (11.81) (13.42)

= =

62.6108 + 19.6125 + 44.2793 11.2473

PORTFOLIO RISK
p = X12 12 + X22 22 + 2 (X1) (X2) (X12) 1 2 Where X1 X2 1 2 p = Proportion of Investment in Security 1. = Proportion of Investment in Security 2. = Standard Deviation of Security 1. = Standard Deviation of Security 2. = Portfolio Risk.

X12 = Correlation Co-Efficient between Security 1 and 2.

5. RAYMOND & HLL. X1 = 0.55 X2 = 0.45 p = = 1 = 5.8073 X12 = -0.4335 2 = 6.6868

X12 12 + X22 22 + 2 (X1) (X2) (X12) 1 2 (0.55)2 (5.8073)2 + (0.45)2 (6.6868)2 + 2 (0.55) (0.45) (-0.4335) (5.8073) (6.6868)

= 10.2017 + 9.0544 4.1664 93

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS = 3.8885

PORTFOLIO RISK
p = X12 12 + X22 22 + 2 (X1) (X2) (X12) 1 2 Where X1 X2 1 2 p = Proportion of Investment in Security 1. = Proportion of Investment in Security 2. = Standard Deviation of Security 1. = Standard Deviation of Security 2. = Portfolio Risk.

X12 = Correlation Co-Efficient between Security 1 and 2.

6. SBI & WIPRO. X1 = 0.71 X2 = 0.29 p 1 = 11.3606 X12 = +0.013 2 = 17.4893

= X12 12 + X22 22 + 2 (X1) (X2) (X12) 1 2 = (0.71)2 (11.3606)2 + (0.29)2 (17.4893)2 + 2 (0.71) (0.29) (0.013) (11.3606) (17.4893)

= 65.0607 + 25.7241 + 1.0637 94

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS = 9.5838

PORTFOLIO RISK
p = X12 12 + X22 22 + 2 (X1) (X2) (X12) 1 2 Where X1 X2 1 2 p = Proportion of Investment in Security 1. = Proportion of Investment in Security 2. = Standard Deviation of Security 1. = Standard Deviation of Security 2. = Portfolio Risk.

X12 = Correlation Co-Efficient between Security 1 and 2.

7. CIPLA & BHEL. X1 = 0.55 X2 = 0.45 1 = 10.7145 X12 = -0.7349 2 = 11.81

p = X12 12 + X22 22 + 2 (X1) (X2) (X12) 1 2 = (0.55)2 (10.7145)2 + (0.45)2 (11.81)2 + 2 (0.55) (0.45) (-0.7349) (10.7145) (11.81)

= 34.7272 + 28.2439 46.0315 95

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS = 4.1158

PORTFOLIO RISK
p = X12 12 + X22 22 + 2 (X1) (X2) (X12) 1 2 Where X1 X2 1 2 p = Proportion of Investment in Security 1. = Proportion of Investment in Security 2. = Standard Deviation of Security 1. = Standard Deviation of Security 2. = Portfolio Risk.

X12 = Correlation Co-Efficient between Security 1 and 2.

8. HERO HONDA & RAYMOND.


X1 = 0.79 X2 = 0.21 1 = 5.8073 X12 = -0.4182 2 = 15.3432

p = X12 12 + X22 22 + 2 (X1) (X2) (X12) 1 2 (0.79)2 (5.8073)2 + (0.21)2 (15.3432)2 + 2 (0.79) (0.21) (-0.4182) (5.8073) (15.3432)

= 21.0476 + 10.8175 12.3638 96

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS = 4.4160

RECOMMENDATIONS

1. If the investor wants to take higher risk in order to get more returns, he can invest in the portfolio of the BHEL and RELIANCE, which consists the maximum portfolio risk of 15.8189%.

2. If the investor willing to take moderate risk, then he can prefer SBI & JINDAL STEEL or SBI & WIPRO.

3. If the investor wants to take low risk it is better to invest in RAYMOND & HLL.

97

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

CONCLUSIONS FOR TWO ASSETS PORTFOLIOS

1. BHEL & RELIANCE


In this combination, as per calculations and study BHEL bears a proportion of 0.83 and where as RELIANCE bears a proportion of 0.17, which is less compared BHEL proportion, the standard deviation of two companies are 11.8100 for BHEL and 44.7922 for RELIANCE. Here risk of BHEL is lesser than the RELIANCE i.e. 11.8100<44.7922. So investors can invest their money or fund in BHEL, which has less standard deviation means less risk. Where as, the portfolio risk of two companies are reduced to 15.8189.

90% % OF INVESTMENT 80% 70% 60% 50% 40% 30% 20% 10% 0% RELIANCE BHEL

98

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

2 . RELIANCE AND INDIAN OIL


As per this combination portfolio weights are 0.68 and 0.32 for Indian Oil and Reliance respectively and standard deviation of Indian Oil is 13.4126 which is less compare to the standard deviation of Reliance i.e. 44.7922, which means less risk involved in Indian Oil compare to Reliance. So, to any investor wants to invest his money or fund in this portfolio, it is suggested that he can invest some portion of fund in Indian Oil and rest of part in Reliance. The portfolio risk of the companies Reliance and Indian Oil 6.6600, which is less than the individual companies risk.

80% 70% 60% 50% 40% 30% 20% 10% 0% RELIANCE IOC

% OF INVESTM ENT

99

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

3. SBI AND JINDAL STEEL


Here in this combination, the proportion of investments for SBI is 0.70 and for Jindal Steel is 0.03 and there standard deviations are 11.3606 and 18.4243 respectively of SBI and Jindal Steel. The risk of SBI is lesser than the risk of Jindal Steel. So, the investor are 9.2216 which is less than the individual company risk. can invest most amount is SBI and rest at Jindal Steel.The portfolio risks of this combination of Assets

% OF INVESTMENT

80% 60% 40% 20% 0% SBI JINDAL

100

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

4. BHEL AND INDIAN OIL


The Investors are having another alternative with this combination. The proportion of investment at BHEL is 0.67 and for Indian Oil0.33. The standard deviation of BHEL and Indian Oil are 11.8100 and 13.4126 respectively The comparison of standard deviation shows that the risk involvement in BHEL is less than the Indian Oil. So investors are suggested to invest more money in BHEL compare to Indian Oil. If we compare the portfolio risk i.e. 11.2473 which is less compare to individual risk of both the companies.

80% % OF INVESTMENT 60% 40% 20% 0% BHEL IOC

101

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

4. RAYMOND AND HINDUSTAN LEVER LIMITED


The alternative for investment bearing the proportion of Investment in Raymond and HLL are 0.55 and 0.45, the standard deviation of both companies are 5.8073 and 6.6868. The risk involvement in Raymond is lesser to HLL. So Investors are suggested to fund or invest in both the companies but preferred to keep more in Raymond. If we compare the portfolio risk of both the companies is 3.8885. So the risk can be reduced to the extent of 3.8885.

HLL 45%

RAYMOND 55%

102

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

6. SBI AND WIPRO


If we take the option of SBI & WIPRO, the proportions of investment at both companies are 0.71 and 0.29 respectively for SBI & WIRPO. The Standard deviations are 11.3606 for SBI and 17.4893 for WIPRO. So investors are suggested to fund or invest more amount in SBI and part in WIPRO. An investor can invest his money on the basis of portfolio risk i.e.9.5838 which is lesser than to compare to an individual risk of both the companies.

HLL 29% SBI 71%

103

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

6. CIPLA & BHEL


The alternative of investment proposal is combination of CIPLA & BHEL. CIPLA bearing the proportions of investment is 0.55 and BHEL is 0.45. The investors can invest their funds either in CIPLA or BHEL because both the securities or stock bearing high standard deviation i.e., 10.7145 and 11.8100 for CIPLA and BHEL respectively, which gives an option to invest in any security. If we combined the stocks or securities, then portfolio risk would be 4.1158 which reduce the risk of individual stocks.

55%

CIPLA

45%

BHEL

0%

10%

20%

30%

40%

50%

60%

% OF INVESTMENT

104

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

8. RAYMOND & HERO HONDA


The last alternative portfolio for investment in the weights of 0.71 for Raymond and 0.29 for Hero Honda. The Raymond proportion is high because of bearing less standard deviation of 5.8073 compare to Hero Honda standard deviation of 15.3432. The investors should invest their money or funds under Raymond because risk involvement is less. The portfolio risk would be 4.4160 which reduce the risk of individual stocks or securities.

HERO HONDA

29% 71%

RAYMOND

0%

20%

40%

60%

80%

% OF INVESTMENT

105

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS

BIBLIOGRAPHY
1. Donald E.Fischer & Ronald J. Jordon. Security Analysis and Portfolio Management, 6th Edition. 1. V.K. Bhalla Investments managements S. Chand Publication.

3. WWW.Investopedia.com 4. WWW.NSEINDIA.COM 5. WWW.BSEINDIA.COM 6. WWW.GOOGLE.COM 7. WWW.HSEINDIA.COM 8. WWW.CAPITALMARKETS.COM 9. WWW.MONEYCONTROL.COM 10.WWW.INDIAINFOLINE.COM 11.WWW.BUSINESSSTANDARDS.COM


106

B.V.V. SANGHAS INSTITUTE OF MANAGEMENT STUDIES, BAGALKOT

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