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KARNATAK
DHARWAD B.V.V.SANGHAS
UNIVERSITY
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
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
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.
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
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.
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.
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:
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.
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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.
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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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.
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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
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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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
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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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 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
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:
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
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
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.
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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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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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
YEAR
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j) Tax benefits
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.
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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 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
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.
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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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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:
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.
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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:
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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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
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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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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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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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
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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
SL.NO.
SECTOR
COMPANY
ENERGY
RELIANCE
OIL
PHARMA
CIPLA
STEEL
JINDAL STEEL
ELECTRONIC
BHEL
TEXTILE
RAYMOND
FMCG
HLL
BANKING
SBI
AUTOMOBILE
HERO HONDA
10
SOFTWARE
WIPRO
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
PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS Company Name BHEL & Reliance Reliance & Indian Oil Correlation coefficient Risk(%) -0.6442 -0.9343 6.6600 Portfolio 15.8189
-0.1194
9.1266
+0.6318 -0.4335
11.2473 3.8885
+0.0130
9.5838
-0.7349
4.1158
-0.4182
4.4160
59
STANDARD DEVIATION
STANDARD DEVIATION
10% 7% 4% 4% 10% 29%
8%
12%
7%
9%
CORRELATION COEFFICIENT
60
CORRELATION COEFFICIENT
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
PORTFOLIO RISK
RELIANCE & BHEL RELIANCE & IOC SBI & JINDAL BHEL &IOC RAYMOND & HLL SBI & WIPRO CIPLA & BHEL HERO HONDA & RAYMOND
62
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
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
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
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
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
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
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
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
= 674.3696
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
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
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
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
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
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
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
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
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
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
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
: 0.70 0.30
: 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
: 0.79 : 0.21
81
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
=
= 1-Xa 82
= 1-0.83 = 0.17
FORMULA: Xa Xb Xa Xb a
=
2 b ab a b
(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
2 b ab a b
(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
(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 =
(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
2a + 2 b 2 Pab a b 86
(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
Xa Xb
2a + 2 b 2 Pab a b = 1- Xa 87
(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
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.
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)
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.
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
= =
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.
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.
PORTFOLIO MANAGEMENT AND INVESTMENT DECISIONS 2 (0.67) (0.33) (0.6318) (11.81) (13.42)
= =
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 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)
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 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)
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.
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)
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.
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)
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
90% % OF INVESTMENT 80% 70% 60% 50% 40% 30% 20% 10% 0% RELIANCE BHEL
98
80% 70% 60% 50% 40% 30% 20% 10% 0% RELIANCE IOC
% OF INVESTM ENT
99
% OF INVESTMENT
100
101
HLL 45%
RAYMOND 55%
102
103
55%
CIPLA
45%
BHEL
0%
10%
20%
30%
40%
50%
60%
% OF INVESTMENT
104
HERO HONDA
29% 71%
RAYMOND
0%
20%
40%
60%
80%
% OF INVESTMENT
105
BIBLIOGRAPHY
1. Donald E.Fischer & Ronald J. Jordon. Security Analysis and Portfolio Management, 6th Edition. 1. V.K. Bhalla Investments managements S. Chand Publication.