CHAPTER I

INTRODUCTION

INTRODUCTION:
The financial market is the driver of the economic growth and development of any
country. A sound financial market can take the country to the apex. Financial
resources were by allocating the resources through one of the ways such as portfolios,
which are combinations of various securities. Portfolio analysis includes analyzing the
range of possible portfolios that can be constituted from a given set of securities.
A combination of securities with different risk- return characteristics will
constitute the portfolio of the investor. A portfolio is a combination of various assets
and/or instruments of investments. The portfolio is also built up out of the wealth or
income of the investor over a period of time with a view to suit his risk and return
preferences to that of the portfolio that he holds. The portfolio analysis is an analysis
of the risk-return characteristics of individual securities in the portfolio and changes
that may take place in combination with other securities due to interactions among
themselves and impact of each one of them on others.
As individuals are becoming more and more responsible for ensuring their own
financial future, portfolio or fund management has taken on an increasingly important
role in banks ranges of offerings to their clients. In addition, as interest rates have
come down and the stock market has gone up and come down again, clients have a
choice of leaving their saving in deposit accounts, or putting those savings in unit
trusts or investment portfolios which invest in equities and/or bonds. Investing in unit
trusts or mutual funds is one way for individuals and corporations alike to potentially
enhance the returns on their savings.

Objectives of the study:

To study the role of securities in Indian financial markets
To study the investment pattern and its related risks & returns.
To find out optimal portfolio, which gave optimal return at a minimize risk to
the investor.
To understand portfolio selection process.
To study the usefulness of efficient frontier technique in portfolio selection
process.
To see whether the portfolio risk is less than individual risk on whose basis the
portfolios are constituted
To see whether the selected portfolios is yielding a satisfactory and constant
return to the investor
To understand, analyze and select the best portfolio.

Limitations of the study:

This study has been conducted purely to understand Portfolio Management for
investors.
Construction of Portfolio is restricted to two companies based on Markowitz
model.
Very few and randomly selected scripts / companies are analyzed from BSE
listings.
Detailed study of the topic was not possible due to limited size of the project.

 There was a constraint with regard to time allocation for the research study i.e.
for a period of 45 days.

RESEARCH METHODOLOGY:
Research design or research methodology is the procedure of collecting, analyzing
and interpreting the data to diagnose the problem and react to the opportunity in such
a way where the costs can be minimized and the desired level of accuracy can be
achieved to arrive at a particular conclusion.
The methodology used in the study for the completion of the project and the
fulfillment of the project objectives, is as follows:

Market prices of the companies have been taken for the years of different
dates, there by dividing the companies into 5 sectors.

A final portfolio is made at the end of the year to know the changes
(increase/decrease) in the portfolio at the end of the year.

Sources of the data:

Primary data:
The primary data information is gathered from Karvy finapolis by interviewing Karvy
executives.
Secondary data:
The secondary data is collected from various financial books, magazines and from stock lists
of various newspapers and Karvy as part of the training class undertaken for project.

CHAPTER-II
REVIEW OF LITERATURE

As portfolio is a collection of investments held by an institution or a private

individual. In building up an investment portfolio a financial institution will typically
conduct its own investment analysis, whilst a private individual may make use of the
services of a financial advisor or a financial institution which offers portfolio
management services. Holding a portfolio is part of an investment and risk-limiting
strategy called diversification. By owning several assets, certain types of risk (in
particular specific risk) can be reduced. The assets in the portfolio could include
stocks, bonds, options, warrants, gold certificates, real estate, futures contracts,
production facilities, or any other item that is expected to retain its value.
Portfolio management involves deciding what assets to include in the portfolio,
given the goals of the portfolio owner and changing economic conditions. Selection
involves deciding what assets to purchase, how many to purchase, when to purchase
them, and what assets to divest. These decisions always involve some sort of
performance measurement, most typically expected return on the portfolio, and the
risk associated with this return (i.e. the standard deviation of the return). Typically the
expected returns from portfolios, comprised of different asset bundles are compared.
The unique goals and circumstances of the investor must also be considered. Some
investors are more risk averse than others. Mutual funds have developed particular
techniques to optimize their portfolio holdings

Thus, portfolio management is all about strengths, weaknesses, opportunities and

threats in the choice of debt vs. equity, domestic vs. international, growth vs.
safety and numerous other trade-offs encountered in the attempt to maximize
return at a given appetite for risk.

Aspects of Portfolio Management:

Basically portfolio management involves
A proper investment decision making of what to buy & sell
Proper money management in terms of investment in a basket of assets so
as to satisfy the asset preferences of investors.
Reduce the risk and increase returns.

OBJECTIVES OF PORTFOLIO MANAGEMENT:

The basic objective of Portfolio Management is to maximize yield and minimize risk.
The other ancillary objectives are as per needs of investors, namely:
Regular income or stable return
Appreciation of capital
Marketability and liquidity
Safety of investment
Minimizing of tax liability.

NEED FOR PORTFOLIO MANAGEMENT:

The Portfolio Management deals with the process of selection securities from the
number of opportunities available with different expected returns and carrying

different levels of risk and the selection of securities is made with a view to provide
the investors the maximum yield for a given level of risk or ensure minimum risk for
a level of return.
Portfolio Management is a process encompassing many activities of investment in
assets and securities. It is a dynamics and flexible concept and involves regular and
systematic analysis, judgment and actions. The objectives of this service are to help
the unknown investors with the expertise of professionals in investment Portfolio
Management. It involves construction of a portfolio based upon the investors
objectives, constrains, preferences for risk and return and liability. The portfolio is
reviewed and adjusted from time to time with the market conditions. The evaluation
of portfolio is to be done in terms of targets set for risk and return. The changes in
portfolio are to be effected to meet the changing conditions.
Portfolio Construction refers to the allocation of surplus funds in hand among a
variety of financial assets open for investment. Portfolio theory concerns itself with
the principles governing such allocation. The modern view of investment is oriented
towards the assembly of proper combinations held together will give beneficial result
if they are grouped in a manner to secure higher return after taking into consideration
the risk element.
The modern theory is the view that by diversification, risk can be reduced. The
investor can make diversification either by having a large number of shares of
companies in different regions, in different industries or those producing different
types of product lines. Modern theory believes in the perspectives of combination of
securities under constraints of risk and return.

ELEMENTS:
Portfolio Management is an on-going process involving the following basic tasks.
Identification of the investors objective, constrains and preferences which help
formulated the invest policy.
Strategies are to be developed and implemented in tune with invest policy
formulated. This will help the selection of asset classes and securities in each
class depending upon their risk-return attributes.
Review and monitoring of the performance of the portfolio by continuous
overview of the market conditions, companys performance and investors
circumstances.
Finally, the evaluation of portfolio for the results to compare with the targets
and needed adjustments have to be made in the portfolio to the emerging
conditions and to make up for any shortfalls in achievements (targets).

Schematic diagram of stages in portfolio management:

Specification and
quantification of
investor
objectives,
constraints, and
preferences

Portfolio policies
and strategies

Capital market
expectations

Relevant
economic, social,
political sector
and security
considerations

Monitoring investor
related input factors

Portfolio construction
and revision asset
allocation, portfolio
optimization, security
selection,
implementation and
execution

Monitoring
economic and
market input factors

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Attainment of
investor
objectives
Performance
measurement

Process of portfolio management:

The Portfolio Program and Asset Management Program both follow a disciplined
process to establish and monitor an optimal investment mix. This six-stage process
helps ensure that the investments match investors unique needs, both now and in the
future.

1. IDENTIFY GOALS AND OBJECTIVES:

When will you need the money from your investments? What are you saving your
money for? With the assistance of financial advisor, the Investment Profile
Questionnaire will guide through a series of questions to help identify the goals
and objectives for the investments.

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2. DETERMINE OPTIMAL INVESTMENT MIX:

Once the Investment Profile Questionnaire is completed, investors optimal
investment mix or asset allocation will be determined. An asset allocation
represents the mix of investments (cash, fixed income and equities) that match
individual risk and return needs.
This step represents one of the most important decisions in your portfolio
construction, as asset allocation has been found to be the major determinant of
long-term portfolio performance.

3. CREATE A CUSTOMIZED INVESTMENT POLICY STATEMENT

When the optimal investment mix is determined, the next step is to formalize our
goals and objectives in order to utilize them as a benchmark to monitor progress
and future updates.
4. SELECT INVESTMENTS
The customized portfolio is created using an allocation of select QFM Funds.
Each QFM Fund is designed to satisfy the requirements of a specific asset class,
and is selected in the necessary proportion to match the optimal investment mix.
5 MONITOR PROGRESS
Building an optimal investment mix is only part of the process. It is equally
important to maintain the optimal mix when varying market conditions cause
investment mix to drift away from its target. To ensure that mix of asset classes
stays in line with investors unique needs, the portfolio will be monitored and
rebalanced back to the optimal investment mix
6. REASSESS NEEDS AND GOALS
Just as markets shift, so do the goals and objectives of investors. With the
flexibility of the Portfolio Program and Asset Management Program.
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when the investors needs or other life circumstances change, the portfolio has the
flexibility to accommodate such changes.

RISK:
Risk refers to the probability that the return and therefore the value of an asset or
security may have alternative outcomes. Risk is the uncertainty (today) surrounding
the eventual outcome of an event which will occur in the future. Risk is uncertainty of
the income/capital appreciation or loss of both. All investments are risky. The higher
the risk taken, the higher is the return. But proper management of risk involves the
right choice of investments whose risks are compensation.

RETURN:
Return-yield or return differs from the nature of instruments, maturity period and the
creditor or debtor nature of the instrument and a host of other factors. The most
important factor influencing return is risk return is measured by taking the price
income plus the price change.

PORTFOLIO RISK:
Risk on portfolio is different from the risk on individual securities. This risk is
reflected by in the variability of the returns from zero to infinity. The expected return
depends on probability of the returns and their weighted contribution to the risk of the
portfolio.

RETURN ON PORTFOLIO:
Each security in a portfolio contributes returns in the proportion of its investment in
security. Thus the portfolio of expected returns, from each of the securities with
weights representing the proportionate share of security in the total investments.

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RISK RETURN RELATIONSHIP:

The risk/return relationship is a fundamental concept in not only financial analysis,
but in every aspect of life. If decisions are to lead to benefit maximization, it is
necessary that individuals/institutions consider the combined influence on expected
(future) return or benefit as well as on risk/cost. The requirement that expected
return/benefit be commensurate with risk/cost is known as the "risk/return trade-off"
in finance.
All investments have some risks. An investment in shares of companies has its own
risks or uncertainty. These risks arise out of variability of returns or yields and
uncertainty of appreciation or depreciation of share prices, loss of liquidity etc. and
the overtime can be represented by the variance of the returns. Normally, higher the
risk that the investors take, the higher is the return.

.
.

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

1.
2.

Systematic Risk
Un-systematic Risk

1. SYSTEMATIC RISK:
Systematic risk refers to that portion of total variability in return caused by factors
affecting the prices of all securities. Economic, Political and sociological changes are
sources of systematic risk. Their effect is to cause prices of nearly all individual
common stocks and/or all individual bonds to move together in the same manner.
i.

Market Risk:

Variability in return on most common stocks that are due to basic sweeping changes in
investor expectations is referred to as market risk. Market risk is caused by investor
reaction to tangible as well as intangible events.
ii.

Interest rate-Risk:

Interest rate risk refers to the uncertainty of future market values and of the size of
future income, caused by fluctuations in the general level of interest rates.
iii.

Purchasing-Power Risk:

Purchasing power risk is the uncertainty of the purchasing power of the amounts to be
received. In more events everyday terms, purchasing power risk refers to the impact
of or deflation on an investment.

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2. UNSYSTEMATIC RISK:
Unsystematic risk is the portion of total risk that is unique to a firm or industry.
Factors such as management capability, consumer preferences, and labor strikes
Cause systematic variability of return in a firm. Unsystematic factors are largely
independent of factors affecting securities markets in general. Because these factors
affect one firm, they must be examined for each firm.
Unsystematic risk that portion of risk that is unique or peculiar to a firm or an
industry, above and beyond that affecting securities markets in general. Factors such
as management capability, consumer preferences, and labor strikes can cause
unsystematic variability of return for a companys stock.

i.

Business Risk:

Business risk is a function of the operating conditions faced by a firm and the
variability these conditions inject into operating income and expected dividends.
Business risk can be divided into two broad categories
a. Internal Business Risk
b. External Business Risk
a. Internal business risk is associated with the operational efficiency of the firm.
The operational efficiency differs from company to company. The efficiency
of operation is reflected on the companys achievement of its pre-set goals and
the fulfillment of the promises to its investors.

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b. External business risk is the result of operating conditions imposed on the firm
by circumstances beyond its control. The external environments in which it
operates exert some pressure on the firm. The external factors are social and
regulatory factors, monetary and fiscal policies of the government and the general
economic environment within which a firm or an industry operates.

ii.

Financial Risk:

Financial risk is associated with the way in which a company finances its activities.
Financial risk is avoided risk to the extent that management has the freedom to decide
to borrow or not to borrow funds. A firm with no debit financing has no financial risk

MARKOWITZ MODEL
THE MEAN VARIANCE CRITERION:
Dr. Harry M. Markowitz is credited with developing the first modern portfolio
analysis model in order to arrange for the optimum allocation of assets with in
portfolio. To reach these objectives, Markowitz generated portfolio with in a reward
risk context. In essence, Markowitz model is a theoretical framework for the analysis
of risk return choices. Decisions are based on the concept of efficient portfolios.
Markowitz model is a theoretical framework for the analysis of risk, return
choices and this approach determines an efficient set of portfolio return through three
important variable that is,
Return
Standard Deviation
Coefficient of correlation
Markowitz model is also called as a Full Covariance Model. Through this model the
investor can find out the efficient set of portfolio by finding out the trade off between

17

risk and return, between the limits of zero and infinity. According to this theory, the
effect of one security purchase over the effects of the other security purchase is taken
into consideration and then the results are evaluated. Markowitz had given up the
single stock portfolio and introduced diversification. The single stock portfolio would
be preferable if the investor is perfectly certain that his expectation of highest return
would turn out to be real.
In the world of uncertainty, most of the risk averse investors would like to join
Markowitz rather than keeping a single stock, because diversification reduces the risk.
A portfolio is efficient when it is expected to yield the highest return for the level of
risk accepted or, alternatively the smallest portfolio risk for a specified level of
expected return level chosen, and asset are substituted until the portfolio combination
expected returns, set of efficient portfolio is generated.

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

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THE SPECIFIC MODEL:

In developing this model, Markowitz first disposed of the investor behavior rule
that the investor should maximize expected return. This rule implies non-diversified
single security analysis portfolio with the highest expected return is the most desirable
portfolio. Only by buying that single security portfolio would obviously be preferable
if the investor were perfectly certain that this highest expected return would turn out
to be the actual return. However, under real world conditions of uncertainty, most risk
adverse investors join with Markowitz in discarding the role of calling for maximizing
the expected returns. As an alternative, Markowitz offers the expected
returns/variance rule.
Markowitz has shown the effect of diversification by regarding the risk of securities.
According to him, the security with the covariance, which is either negative or low
amongst them, is the best manner to reduce risk. Markowitz has been able to show
that securities, which have, less than positive correlation will reduce risk with out, 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 that brings the maximum results.
Henry Markowitz has given the following formula for a two-security portfolio and
three security portfolios.

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

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

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

p Standard deviation of the portfolio return

X1= proportion of the portfolio invested in security 1

X2= proportion of the portfolio invested in security 2
X3= proportion of the portfolio invested in security 3
1= standard deviation of the return on security 1
2= standard deviation of the return on security 2
3= standard deviation of the return on security 3
r12= coefficient of correlation between the returns on securities 1 and 2
r13= coefficient of correlation between the returns on securities 1 and 3
r23= coefficient of correlation between the returns on securities 2 and 3

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CAPITAL ASSET PRICING MODEL: (CAPM)

The CAPM is a model for pricing an individual security (asset) or a portfolio.
For individual security perspective, the security market line (SML) is used and its
relation to expected return and systematic risk (beta) to show how the market must
price individual securities in relation to their security risk class. The SML enables us
to calculate the reward-to-risk ratio for any security in relation to that of the overall
market. Therefore, when the expected rate of return for any security is deflated by its
beta coefficient, the reward-to-risk ratio for any individual security in the market is
equal to the market reward-to-risk ratio, thus:
Individual securitys / beta =
Reward-to-risk ratio

Markets securities (portfolio)

Reward-to-risk ratio

,
The Security Market Line, seen here in a graph, describes a relation between the beta
and the asset's expected rate of return

Capital Asset Pricing Model

21

The market reward-to-risk ratio is effectively the market risk premium and by
rearranging the above equation and solving for E (Ri), we obtain the Capital Asset
Pricing Model (CAPM).

Where:

is the expected return on the capital asset

is the risk-free rate of interest

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

or also

,
is the expected return of the market

is sometimes known as the market premium or risk premium (the

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

22

Beta measures the volatility of the security, relative to the asset class. The equation is
saying that investors require higher levels of expected returns to compensate them for
higher expected risk. We can think of the formula as predicting a security's behavior
as a function of beta:
CAPM says that if we know a security's beta then we know the value of r that
investors expect it to have.

Assumptions of CAPM:

All investors have rational expectations.

There are no arbitrage opportunities.

Returns are distributed normally.

Fixed quantity of assets.

Perfectly efficient capital markets.

Investors are solely concerned with level and uncertainty of future wealth

Separation of financial and production sectors. Thus, production plans are

fixed.

Risk-free rates exist with limitless borrowing capacity and universal access.

The Risk-free borrowing and lending rates are equal.

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

Perfect information, hence all investors have the same expectations about
security returns for any given time period.

Shortcomings Of CAPM:
23

The model assumes that asset returns are (jointly) normally distributed random
variables. It is however frequently observed that returns in equity and other
markets are not normally distributed.

The model assumes that the variance of returns is an adequate measurement of

risk.

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

The model assumes that given a certain expected return investors will prefer
lower risk (lower variance) to higher risk and conversely given a certain level
of risk will prefer higher returns to lower ones.

The model assumes that all investors have access to the same information and
agree about the risk and expected return of all assets. (Homogeneous
expectations assumption)

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

The market portfolio consists of all assets in all markets, where each asset is
weighted by its market capitalization. This assumes no preference between
markets and assets for individual investors, and that investors choose assets
solely as a function of their risk-return profile. It also assumes that all assets
are infinitely divisible as to the amount which may be held or transacted.

The market portfolio should in theory include all types of assets that are held
by anyone as an investment (including works of art, real estate, human
capital...)

Unfortunately, it has been shown that this substitution is not innocuous and can lead
to false inferences as to the validity of the CAPM, and it has been said that due
to the in observability of the true market portfolio, the CAPM might not be
empirically testable.
24

The efficient frontier:

The CAPM assumes that the risk-return profile of a portfolio can be optimized - an
optimal portfolio displays the lowest possible level of risk for its level of return.
Additionally, since each additional asset introduced into a portfolio further diversifies
the portfolio, the optimal portfolio must comprise every asset, with each asset valueweighted to achieve the above. All such optimal portfolios, i.e., one for each level of
return, comprise the efficient frontier.
A line created from the risk-reward graph, comprised of optimal portfolios.

Risk Reward Graph

The optimal portfolios plotted along the curve have the highest expected return
possible for the given amount of risk.
25

Because the unsystemic risk is diversifiable, the total risk of a portfolio can be viewed
as beta.

Security Market Line

Note 1: The expected market rate of return is usually measured by looking at the
arithmetic average of the historical returns on a market portfolio.
Note 2: The risk free rate of return used for determining the risk premium is
usually the arithmetic average of historical risk free rates of return and not the
current risk free rate of return.

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Measuring the Expected Return and Standard Deviation of a

Portfolio
The expected return on a portfolio is the weighted average of the returns of individual
assets, where each asset's weight is determined by its weight in the portfolio.
The formula is:
E (Rp) = [WaX E (Ra)] + [WaX E (Ra)]
Where
E= is stands for expected
Rp= Return on the portfolio
Wa= Weight of asset n where n my stand for asset a, betc.
Ra= Return on asset n where n may stand for asset a, betc
The portfolio standard deviation (p) measure the risk associated with the expected
return of the portfolio.
The formula is p = wa2 2 + wa2 2 + 2wawbrab a b
The term rab represents the correlation between the returns of investments a and b. The
correlation coefficient, r, will always reduce the portfolio standard deviation as long
as it is less than +1.00.
Portfolio diversification:

27

Diversification occurs when different assets make up a portfolio.The benefit of

diversification is risk reduction; the extent of this benefit depends upon how the
returns of various assets behave over time.
The market rewards diversification. We can lower risk without sacrificing expected
return, and/or we can increase expected return without having to assume more risk.
Diversifying among different kinds of assets is called asset allocation.
The diversification can either be vertical or horizontal.
In vertical diversification a portfolio can have scripts of different companies within
the same industry. In horizontal diversification one can have different scripts chosen
from different industries.
For example: If portfolio only consisted of stocks of technology companies, it would
likely face a substantial loss in value if a major event adversely affected the
technology
There are different ways to diversify a portfolio whose holdings are concentrated in
one industry. We can invest in the stocks of companies belonging to other industry
groups. We can allocate our portfolio among different categories of stocks, such as
growth, value, or income stocks. We can include bonds and cash investments in our
asset-allocation decisions. We can also diversify by investing in foreign stocks and
bonds.
Diversification requires us to invest in securities whose investment returns do not
move together. In other words, the investment returns have a low correlation. The
correlation coefficient is used to measure the degree to which returns of two securities
are related. As we increase the number of securities in our portfolio, we reach a point
28

where likely diversified as much as reasonably possible. Diversification should

neither be too much or too less. It should be adequate according to the size of the
portfolio.

The Efficient Frontier and Portfolio Diversification

The graph on the shows how volatility increases the risk of loss of principal, and how
this risk worsens as the time horizon shrinks. So all other things being equal, volatility
is minimized in the portfolio.
If we graph the return rates and standard deviations for a collection of securities, and
for all portfolios we can get by allocating among them. Markowitz showed that we get
a region bounded by an upward-sloping curve, which he called the efficient frontier.
It's clear that for any given value of standard deviation, we would like to choose a
portfolio that gives you the greatest possible rate of return; so we always want a
portfolio that lies up along the efficient frontier, rather than lower down, in the interior

29

of the region. This is the first important property of the efficient frontier: it's where the
best portfolios are.

Two Securities Portfolio

The second important property of the efficient frontier is that it's curved, not straight.
If we take a 50/50 allocation between two securities, assuming that the year-to-year
performance of these two securities is not perfectly in sync that is, assuming that the
great years and the lousy years for Security 1 don't correspond perfectly to the great
years and lousy years for Security 2, but that their cycles are at least a little off then
the standard deviation of the 50/50 allocation will be less than the average of the
standard deviations of the two securities separately. Graphically, this stretches the
possible allocations to the left of the straight line joining the two securities

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THE FOUR PILLARS OF DIVERSIFICATION:

a. The yield provided by an investment in a portfolio of assets will be closer to
the Mean Yield than an investment in a single asset.
b. When the yields are independent - most yields will be concentrated around the
Mean.
c. When all yields react similarly - the portfolio's variance will equal the
variance of its underlying assets.
d. If the yields are dependent - the portfolio's variance will be equal to or less
than the lowest

Market portfolio:
The efficient frontier is a collection of portfolios, each one optimal for a given amount
of risk. A quantity known as the Sharpe ratio represents a measure of the amount of
additional return (above the risk-free rate) a portfolio provides compared to the risk it
carries. The portfolio on the efficient frontier with the highest Sharpe Ratio is known
as the market portfolio, or sometimes the super-efficient portfolio.
This portfolio has the property that any combination of it and the risk-free asset will
produce a return that is above the efficient frontier - offering a larger return for a
given amount of risk than a portfolio of risky assets on the frontier would.

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Relationship between a Single Security and the Market Portfolio

PORTFOLIO PERFORMANCE EVALUATION:

A Portfolio manager evaluates his portfolio performance and identifies the sources of
strengths and weakness. The evaluation of the portfolio provides a feed back about the
performance to evolve better management strategy. Even though evaluation of
portfolio performance is considered to be the last stage of investment process, it is a
continuous process. There are number of situations in which an evaluation becomes
necessary and important.

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Evaluation has to take into account:

Rate of returns, or excess return over risk free rate.
Level of risk both systematic (beta) and unsystematic and residual risks
through proper diversification.

Some of the models used to evaluate portfolio performance are:

Sharpes ratio
Treynors ratio
Jensens alpha

Sharpes ratio:
A ratio developed by Nobel Laureate William F. Sharpe to measure risk-adjusted
performance. It is calculated by subtracting the risk-free rate from the rate of return
for a portfolio and dividing the result by the standard deviation of the portfolio
returns.

The Sharpe ratio tells us whether the returns of a portfolio are due to smart investment
decisions or a result of excess risk. This measurement is very useful because although
one portfolio or fund can reap higher returns than its peers, it is only a good
investment if those higher returns do not come with too much additional risk. The

33

greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been.

Treynors ratio:
The Treynor ratio is a measurement of the returns earned in excess of that which
could have been earned on a risk less investment.
The Treynor ratio is also called reward-to-volatility ratio. It relates excess return over
the risk-free rate to the additional risk taken; however systematic risk instead of total
risk is used. The higher the Treynor ratio, the better is the performance under analysis.
Treynors ratio = (Average Return of the Portfolio - Average Return of the Risk-Free
Rate) / Beta of the Portfolio
Like the Sharpe ratio, the Treynor ratio (T) does not quantify the value added, if any,
of active portfolio management. It is a ranking criterion only. A ranking of portfolios
based on the Treynor Ratio is only useful if the portfolios under consideration are subportfolios of a broader, fully diversified portfolio. If this is not the case, portfolios
with identical systematic risk, but different total risk, will be rated the same.

Jensens alpha:

34

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

quantifies the added return as the excess return above the security market line in the
capital asset pricing model. Jensen's alpha (or Jensen's Performance Index) is used to
determine the excess return of a stock, other security, or portfolio over the security's
required rate of return as determined by the Capital Asset Pricing Model.
This model is used to adjust for the level of beta risk, so that riskier securities are
expected to have higher returns. The measure was first used in the evaluation of
mutual fund managers by Michael Jensen in the 1970's.
To calculate alpha, the following inputs are needed:

The realized return (on the portfolio),

The market return,

The risk-free rate of return, and

The beta of the portfolio.

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

Where

Rjt = average return on portfolio j for period oft

Rft = risk free rate of return for period oft
j = intercept that measures the forecasting ability to the manager
j = systematic risk measure
35

RMt = average return on the market portfolio for periodt

Portfolio management in India:

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

banks

and

UTI,

no

other

agency

had

professional

portfolio

managementuntil1987. After the setting up of public sector Mutual Funds, since 1987,
professional portfolio management, backed by competent research staff became the
order of the day. After the success of mutual funds in portfolio management, a number
of brokers and investment consultants some of whom are also professionally qualified
have become portfolio managers. They have managed the funds of clients on both
discretionary and non-discretionary basis.
The recent CBI probe into the operations of many market dealers has revealed the
unscrupulous practices by banks, dealers and brokers in their portfolio operations. The
SEBI has then imposed stricter rules, which included their registration, a code of
conduct and minimum infrastructure, experience and expertise etc.
The guidelines of SEBI are in the direction of making portfolio management a
responsible professional service to be rendered by experts in the field.

PORTFOLIO ANALYSIS:
Portfolio analysis includes portfolio construction, selection of securities, revision of
portfolio evaluation and monitoring the performance of the portfolio. All these are
part of subject of portfolio management which is a dynamic concept. Individual
36

securities have risk-return characteristics of their own. Portfolios, which are

combinations of securities may or may not take on the aggregate characteristics of
their individuals parts.

Portfolio analysis considers the determination of future risk and return in holding
various blends of individual securities. As we know that expected return from
individual securities carries some degree of risk. Various groups of securities when
held together behave in a different manner and give interest payments and dividends
also, which are different to the analysis of individual securities. A combination of
securities held together will give a beneficial result if they are grouped in a manner to
secure higher return after taking into consideration the risk element.
There are two approaches in construction of the portfolio of securities. They are

Traditional approach
Modern approach

TRADITIONAL APPROACH:
Traditional approach was based on the fact that risk could be measured on each
individual security through the process of finding out the standard deviation and
that security should be chosen where the deviation was the lowest. Traditional
approach believes that the market is inefficient and the fundamental analyst can
take advantage for the situation. Traditional approach is a comprehensive financial
plan for the individual. It takes into account the individual needs such as housing,
life insurance and pension plans.
Traditional approach basically deals with two major decisions. They are
a) Determining the objectives of the portfolio

37

b) Selection of securities to be included in the portfolio

38

MODERN APPROACH:
Modern approach theory was brought out by Markowitz and Sharpe. It is the
combination of securities to get the most efficient portfolio. Combination of securities
can be made in many ways. Markowitz developed the theory of diversification
through scientific reasoning and method. Modern portfolio theory believes in the
maximization of return through a combination of securities. The modern approach
discusses the relationship between different securities and then draws interrelationships of risks between them. Markowitz gives more attention to the process of
selecting the portfolio. It does not deal with the individual needs.

39

CHAPTER-III
INDUSTRY PROFILE

40

Bombay Stock Exchange Limited is the oldest stock exchange in Asia with a rich
heritage. Popularly known as "BSE", it was established as "The Native Share & Stock
Brokers Association" in 1875. BSE has played a pioneering role in the Indian
Securities Market - one of the oldest in the world. Much before actual legislations
were enacted, BSE had formulated comprehensive set of Rules and Regulations for
the Indian Capital Markets. It also laid down best practices adopted by the Indian
Capital Markets after India gained its Independence.

Vision:
"Emerge as the premier Indian stock exchange by establishing global benchmarks"
BSE is the first stock exchange in the country to obtain permanent recognition in
1956 from the Government of India under the Securities Contracts (Regulation) Act,
1956.The Exchange's pivotal and pre-eminent role in the development of the Indian
capital market is widely recognized and its index, SENSEX, is tracked worldwide.
SENSEX, first compiled in 1986 was calculated on a "Market CapitalizationWeighted" methodology of 30 component stocks representing a sample of large, wellestablished and financially sound companies. The base year of SENSEX is 1978-79.
From September 2003, the SENSEX is calculated on a free-float market capitalization
methodology. The "free-float Market Capitalization-Weighted" methodology is a
widely followed index construction methodology on which majority of global equity
benchmarks are based.

41

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

introduction of BSE National Index (Base: 1983-84 = 100). It comprised of 100
stocks listed at five major stock exchanges in India at Mumbai, Calcutta, Delhi,
Ahmedabad and Madras. The BSE National Index was renamed as BSE-100 Index
from October 14, 1996 and since then it is calculated taking into consideration only
the prices of stocks listed at BSE. The Exchange launched dollar-linked version of
BSE-100 index i.e. Dollex-100 on May 22, 2006. The Exchange constructed and
launched on 27th May, 1994, two new index series viz., the 'BSE-200' and the
'DOLLEX-200' indices. The launch of BSE-200 Index in 1994 was followed by the
launch of BSE-500 Index and 5 sectoral indices in 1999. In 2001, BSE launched the
BSE-PSU Index, DOLLEX-30 and the country's first free-float based index - the BSE
TECK Index. The Exchange shifted all its indices to a free-float methodology (except
BSE PSU index).
The Exchange has a nation-wide reach with a presence in 417 cities and towns of
India. The systems and processes of the Exchange are designed to safeguard market
integrity and enhance transparency in operations. During the year 2005-2006, the
trading volumes on the Exchange showed robust growth.
The Exchange provides an efficient and transparent market for trading in equity, debt
instruments and derivatives. The BSE's On Line Trading System (BOLT) is a
proprietary system of the Exchange and is BS 7799-2-2002 certified. The surveillance
and clearing & settlement functions of the Exchange are ISO 9001:2000 certified.

42

The Exchange is professionally managed under the overall direction of the Board of
Directors. The Board comprises eminent professionals, representatives of Trading
Members and the Managing Director of the Exchange. The Board is inclusive and is
designed to benefit from the participation of market intermediaries.
BSE as a brand is synonymous with capital markets in India. The BSE SENSEX is the
benchmark equity index that reflects the robustness of the economy and finance. It
was the
First in India to introduce Equity Derivatives
First in India to launch a Free Float Index
First in India to launch US$ version of BSE Sensex
First in India to launch Exchange Enabled Internet Trading Platform
First in India to obtain ISO certification for Surveillance, Clearing & Settlement
'BSE On-Line Trading System (BOLT) has been awarded the globally
recognized the Information Security Management System standard
BS7799-2:2002.
First to have an exclusive facility for financial training
Moved from Open Outcry to Electronic Trading within just 50 days

43

In 2002, the name The Stock Exchange, Mumbai, was changed to BSE. BSE,
which had introduced securities trading in India, replaced its open outcry system
of trading in 1995, when the totally automated trading through the BSE Online
trading (BOLT) system was put into practice. The BOLT network was expanded,
nationwide, in 1997. It was at the BSE's International Convention Hall that Indias
1st Bell ringing ceremony in the history Capital Markets was held on February
18th, 2002. It was the listing ceremony of Bharti Tele ventures Ltd.
BSE with its long history of capital market development is fully geared to
continue its contributions to further the growth of the securities markets of the
country, thus helping India increase its sphere of influence in international
financial markets.

44

NATIONAL

STOCK

EXCHANGE

OF

INDIA

LIMITED

The National Stock Exchange of India Limited has genesis in the report of the High
Powered Study Group on Establishment of New Stock Exchanges, which
recommended promotion of a National Stock Exchange by financial institutions
(FIs) to provide access to investors from all across the country on an equal footing.
Based on the recommendations, NSE was promoted by leading Financial Institutions
at the behest of the Government of India and was incorporated in November 1992 as
a tax-paying company.
On its recognition as a stock exchange under the Securities Contracts (Regulation)
Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market
(WDM) segment in June 1994. The Capital Market (Equities) segment commenced
operations in November 1994 and operations in Derivatives segment commenced in
June 2000.
The national stock exchange of India ltd is the largest stock exchange of the country.
NSE is setting the agenda for change in the securities markets in India. For last 5
years it has played a major role in bringing investors from 347 cities and towns
online, ensuring complete transparency, introducing financial guarantee to
settlements, ensuring scientifically designed and professionally managed indices and
by nurturing the dematerialization effort across the country.

45

NSE is a complete capital market prime mover. Its wholly owned subsidiaries,
National securities cleaning corporation ltd (NSCCL) provides cleaning and
settlement of securities, India index services and products ltd (IISL) provides indices
and index services with a consulting and licensing agreement with Standard & Poors
(S&P), and IT ltd forms the technology strength that NSE works on.
Today, NSE is one of the largest exchanges in the world and still forging ahead. At
NSE, we are constantly working towards creating a more transparent, vibrant and
innovative capital market.

OVER THE COUNTR EXCHANGE OF INDIA

OTCEI was incorporated in 1990 as a section 25 company under the companies Act
1956 and is recognized as a stock exchange under section 4 of the securities Contracts
Regulation Act, 1956. The exchange was set up to aid enterprising promotes in raising
finance for new projects in a cost effective manner and to provide investors with a
transparent and efficient mode of trading Modeled along the lines of the NASDAQ
market of USA, OTCEI introduced many novel concepts to the Indian capital markets
such as screen-based nationwide trading, sponsorship of companies, market making
and scrip less trading. As a measure of success of these efforts, the Exchange today
has 115 listings and has assisted in providing capital for enterprises that have gone on
to build successful brands for themselves like VIP Advanta, Sonora Tiles & Brilliant
mineral water, etc.

46

Need for OTCEI:

Studies by NASSCOM, software technology parks of India, the venture capitals funds
and the governments IT tasks Force, as well as rising interest in IT, Pharmaceutical,
Biotechnology and Media shares have repeatedly emphasized the need for a national
stock market for innovation and high growth companies.
Innovative companies are critical to developing economics like India, which is
undergoing a major technological revolution. With their abilities to generate
employment opportunities and contribute to the economy, it is essential that these
companies not only expand existing operations but also set up new units. The key
issue for these companies is raising timely, cost effective and long term capital to
sustain their operations and enhance growth. Such companies, particularly those that
have been in operation for a short time, are unable to raise funds through the
traditional financing methods, because they have not yet been evaluated by the
financial world.

Who would find OTCEI helpful?

High-technology enterprises
Companies with high growth potential
Companies focused on new product development
Entrepreneurs seeking finance for specific business projects
The Indian economy is demonstrating signs of recovery and it is essential that these
companies have suitable financing alternative to fund their growth and maintain
competitiveness.

47

OTCEI, With its entry guidelines and eligibility requirement tailored for such
innovative and growth oriented companies, is ideally positioned as the preferred route
for raising funds through initial public offer(IPOs) or primary issues, in this country.

CHAPTER-IV
COMPANY PROFILE

48

49

Angel Broking's tryst with excellence in customer relations began in 1987. Today,
Angel has emerged as one of the most respected Stock-Broking and Wealth
Management Companies in India. With its unique retail-focused stock trading
business model, Angel is committed to providing Real Value for Money to all its
clients.
The Angel Group is a member of the Bombay Stock Exchange (BSE), National Stock
Exchange (NSE) and the two leading Commodity Exchanges in the country: NCDEX
& MCX. Angel is also registered as a Depository Participant with CDSL.
Our Business

Equity Trading

Commodities

Portfolio Management Services

Mutual Funds

Life Insurance

IPO

Depository Services

Investment Advisory
Angel Group

Angel Broking Ltd.

Angel Commodities Broking Ltd.

Angel Securities Ltd.

Our Vision
To provide best value for money to investors
through innovative products, trading/investments
strategies, state of the art technology and
personalized service.

50

Mr. Dinesh

Mr. Lalit

Mr. Amit

Mr. Sachinn

Thakkar

Thakkar

Majumda

Joshi

Founder,

Managing

r
Chief Strategy

Executive

Chairman

Director -

Officer

Director & CFO

&

Institutional

Managing

broking

Director

Mr. Vinay

Mr. Nikhil

Mr.

Mr. Ketan

Agrawal

Daxini

Santanu

Shah

Executive

Executive

Syam
Executive

Director

Director -

Director

Director

Equity Broking

Sales and

Operations

Information

Marketing

Associate

Technology
and B2B
Business

51

Mr. Naveen
Mathur
Investing in shares or stock market is inarguably the best route to long-term wealth
accumulation. However, it can also be a very risky proposition due to high risk-return
trade-off prevalent in the stock market. Hence, it is more appropriate to take help of
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Angel provides guidance in the exciting world of stock market with suitable trading
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Wide range of daily, weekly and special Research reports

Expert Sector Analysts with professional industry experience

Advisory

Real-time market information with News updates

Investment Advisory services

Dedicated Relationship Managers

Portfolio Management Services

Support
52

24x7 Web-enabled Back Office

Centralized Help Desk

Live Chat support system

It all started in the year 2002 with the US lowering its interest rates fearing the
slowdown of their economy. To be in line with the world, India also lowered its
interest rates, thereby initiating a new consumption cycle. This had a cascading effect
on all sectors: commodities, agriculture, infrastructure, banking, auto and auto
ancillary, IT and IT enabled services.
The stupendous growth trajectory achieved in the past 4 years was due to sound
government fiscal policies which assisted in giving a fillip to the Indian economy.

Indian economy has been growing at 7-8% over the last few years and is not
only expected to recover soon but also maintain a high trajectory for a long time to
come.

Financial sector leading from the front with growth rates much higher at 20%.

Demat accounts growing @ 20% CAGR over the last few years.

But, equity penetration is still very low: 116cr population*, 17cr PAN* card
holders, only 1.47cr Demat accounts*.

Historically, Equity (@ 15% CAGR) as an asset class outperforms all others.

Historically, the Sensex has been growing at a compounded rate of 17% per annum.

Fiscal stimulus and RBIs Monetary Policy will put economy on strong growth
path.

Interest rates on a decline, equities expected to gain from this.

Indian economy expected to bounce back by year end.

Corporate earnings to improve in the second half of the current financial year.

53

CHAPTER-V
DATA ANALYSIS
&
INTERPRETATION

54

CALCULATED EXPECTED RETURNS AND STANDARD

DEVIATIONS
Company name

Expected return (%)

Standard deviation (%)

19.03
63.69

56.91
65.12

9.02
-8.25

54.82
52.43

13.71
125.18

17.97
126.51

12.46
49.43

68.25
38.83

-13.68
16.82

34.76
40.41

CEMENT
GACL
LNT
PHARMACEUTICAL
RANBAXY
CIPLA
TELECOM
BSNL
BHARTI ARTL
BANKING
ING VYSYA
ICICI
I.T.
WIPRO
INFOSYS

INTERPRETATION:
As GACL yielding expected return of 19.03with deviation of 56.91 ,where as
in LNT they have expected return of 63.69 with deviation of 65.12 it has
concept of risk return trade off.
As RANBAXY is yielding expected return of 9.02 with deviation of 54.82,
where as in CIPLA they have a expected return of -8.25 with deviation 52.43.
As BSNL is yielding expected return of 13.71 with deviation of 17.97,where
as in BHARTI ARTL they have a expected return of 125.18 with deviation of
126.51 it has concept of risk return trade off
As ING VYSYA is yielding expected return of 12.46 with deviation of 68.25
where as in ICICI they have expected return of 49.43 with deviation of 38.83
it has concept of risk return trade off.

55

 As WIPRO is yielding expected return of -13.68 with deviation of 34.76,

where as in INFOSYS they have a expected return of 16.82 with deviation of
40.41.

56

Portfolio Returns and Risks of Companies

Company name

Returns (%)

Risks (%)

38.2338

44.23

-0.6512

48.63

253.99

252.45

48.3209

38.81

-1.175

28.47

CEMENT
GACL
LNT
PHARMACEUTICAL
RANBAXY
CIPLA
TELECOM
BSNL
BHARTI ARTL
BANKING
ING VYSYA
ICICI
I.T.
WIPRO
INFOSYS

INTERPRETATION:

This combination yields a return of 38.2338 with a risk of 44.23

This combination yield a return of -0.6512 with a risk of 48.63
This combination yield a return of 253.99 with a risk of 252.45
This combination yield a return of 48.3209 with a risk of 38.81
This combination yield a return of -1.175 with a risk of 28.47

57

CORRELATION COEFFICIENT BETWEEN THE COMPANIES

Correlation coefficient (r)

Company name
CEMENT
GACL
LNT

0.66

PHARMACEUTICAL
RANBAXY
CIPLA

0.65

TELECOM
MTNL
BHARTI ARTL

0.95

BANKING
ING VYSYA
ICICI

0.54

I.T.
WIPRO
INFOSYS

0.17

INTERPRETATION:
As Cement company has 0.66,Pharmaceutical has 0.65,TeleCom has
0.95,Banking Has 0.54& IT has 0.17 correlations. The highest is with
TeleCom & lowest is with IT.

58

CALCULATION OF AVERAGE RETURN OF COMPANIES:

Average return = R/N

GUJARAT AMBUJA CEMENT LTD (GACL):

Opening
share price
(P0)

Closing
share price
(P1)

(P1-P0)

(P1-P0)/
P0*100

2006-2007

164.00

303.85

139.85

85.27

2007-2008

306.10

401.55

95.45

31.18

2008-2009

405.00

79.60

-325.40

-80.35

2009-2010

80.00

141.30

61.30

76.63

2010-2011

144.80

119.35

-25.45

-17.58

Year

95.15

TOTAL RETURN
Average return = 95.15/5 = 19.03

LARSEN AND TOUBRO (LNT):

Opening
share price
(P0)

Closing
share price
(P1)

(P1-P0)

(P1-P0)/
P0*100

2006-2007

213.70

527.35

313.65

146.77

2007-2008

530.00

982.00

452.00

85.28

2008-2009

988.70

1844.20

855.50

86.53

2009-2010

1845.00

1442.95

-402.05

-21.79

2010-2011

1400.00

1703.20

303.20

21.66

Year

TOTAL RETURN
Average return = 318.45/5 = 63.69

59

318.45

RANBAXY LABORATORIES:
Opening
share price
(P0)

Closing
share price
(P1)

(P1-P0)

(P1-P0)/
P0*100

2006-2007

597.80

1098.20

500.40

83.71

2007-2008

1100.10

1251.40

151.30

13.75

2008-2009

1252.00

362.35

-889.65

-71.06

2009-2010

364.40

391.85

27.45

7.53

2010-2011

393.00

349.15

-43.85

11.16

Year

45.09

TOTAL RETURN
Average return = 45.09/5 =9.02

CIPLA:
Opening
share price
(P0)

Closing
share price
(P1)

(P1-P0)

(P1-P0)/
P0*100

2006-2007

904.00

1317.25

413.25

45.71

2007-2008

1339.00

317.25

-1021.75

-76.31

2008-2009

320.00

443.40

123.40

38.56

2009-2010

445.00

250.70

-194.30

-43.66

2010-2011

253.40

239.30

-14.10

-5.56

Year

TOTAL RETURN
Average return = -41.26/5 = -8.25

MTNL:
60

-41.26

Year

Opening
share price
(P0)

Closing
share price
(P1)

(P1-P0)

2006-2007

95.15

137.70

42.55

44.72

2007-2008

139.10

154.90

15.80

11.36

2008-2009

156.00

144.20

11.80

7.56

2009-2010

145.20

142.85

-2.35

-1.62

2010-2011

143.00

152.35

9.35

6.54

(P1-P0)/
P0*100

68.56

TOTAL RETURN
Average return = 68.56/5 = 13.71

BHARTI ARTL:
Opening
share price
(P0)

Closing
share price
(P1)

(P1-P0)

(P1-P0)/
P0*100

2006-2007

23.50

105.10

81.60

347.23

2007-2008

106.25

215.60

109.35

102.92

2008-2009

218.90

345.70

126.80

57.93

2009-2010

348.90

628.85

279.95

80.24

2010-2011

635.00

862.80

227.80

35.87

Year

TOTAL RETURN
Average return = 624.19/5 = 125.18

ING VYSYA:

61

624.19

Opening
share price
(P0)

Closing
share price
(P1)

(P1-P0)

2006-2007

252.05

549.00

296.95

117.81

2007-2008

560.00

585.75

25.75

4.60

2008-2009

585.00

162.25

-422.75

-72.26

2009-2010

164.50

157.45

-7.05

-4.29

2010-2011

159.00

185.15

26.15

16.45

Year

(P1-P0)/
P0*100

62.31

TOTAL RETURN
Average return = 62.31/5 = 12.46

ICICI:
Opening
share price
(P0)

Closing
share price
(P1)

(P1-P0)

(P1-P0)/
P0*100

2006-2007

141.70

295.70

154.00

108.68

2007-2008

299.70

370.75

71.05

23.71

2008-2009

374.85

584.70

209.85

55.98

2009-2010

586.25

890.40

304.15

51.88

2010-2011

889.00

950.25

61.25

6.89

Year

TOTAL RETURN
Average return = 247.14/5 = 49.43

WIPRO:

62

247.14

Opening
share price
(P0)

Closing
share price
(P1)

(P1-P0)

(P1-P0)/
P0*100

2006-2007

1644.40

1737.60

93.2

5.67

2007-2008

1744.40

748.00

-996.40

-57.12

2008-2009

753.00

463.45

-289.55

-38.45

2009-2010

464.00

604.55

140.55

30.29

2010-2011

607.90

554.35

-53.55

-8.81

Year

-68.42

TOTAL RETURN
Average return = -68.42/5 = -13.68

INFOSYS COMP:
Opening
share price
(P0)

Closing
share price
(P1)

(P1-P0)

(P1-P0)/
P0*100

2006-2007

280.10

367.35

87.25

31.15

2007-2008

370.00

409.90

39.90

10.78

2008-2009

412.00

737.80

325.80

79.08

2009-2010

740.70

483.95

-256.75

-34.66

2010-2011

486.00

474.95

-11.05

-2.27

Year

TOTAL RETURN
Average return = 84.08/5 = 16.82

CALCULATION OF STANDARD DEVIATION:

Standard Deviation = Variance

63

84.08

Variance

1/n-1 (d2)

KESORAM CEMENT LTD:

Year

Return (R)

Avg. Return
(R )

d=
(R-R)

d2

2006-2007

85.27

19.03

66.24

4387.74

2007-2008

31.18

19.03

12.15

147.62

2008-2009

-80.35

19.03

-61.32

3760.14

2009-2010

76.63

19.03

57.60

3317.76

2010-2011

-17.58

19.03

-36.66

1343.96
d2=12957.22

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

Variance

3239.305 = 56.91

LARSEN & TOUBRO

Year

Return (R)

Avg. Return
(R )

d=
(R-R)

D2

2006-2007

146.77

63.69

83.08

6902.29

2007-2008

85.28

63.69

21.59

466.13

2008-2009

86.53

63.69

22.84

521.67

2009-2010

-21.79

63.69

-85.48

7306.83

2010-2011

21.66

63.69

-42.03

1766.52
d2=16963.44

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

Variance

RANBAXY LABORATORIES:

64

4240.86 = 65.12

Year

Return (R)

Avg. Return
(R )

d=
(R-R)

D2

2006-2007

83.71

9.02

74.69

5578.60

2007-2008

13.75

9.02

4.73

22.37

2008-2009

-71.06

9.02

80.08

6412.81

2009-2010

7.53

9.02

-1.49

2.22

2010-2011

11.16

9.02

2.14

4.58
d2=12020.58

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

Variance

3005.145 = 54.82

CIPLA:

Year

Return (R)

Avg. Return
(R )

d=
(R-R)

D2

2006-2007

45.17

-8.25

53.96

2911.68

2007-2008

-76.31

-8.25

-68.06

4632.16

2008-2009

38.56

-8.25

46.81

2191.18

2009-2010

-43.66

-8.25

-35.41

1253.87

2010-2011

-5.56

-8.25

-2.69

7.24
d2=10996.13

TOTAL

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

Standard Deviation =

Variance

BSNL:

65

2749.0325 = 52.43

Year

Return (R)

Avg. Return
(R )

d=
(R-R)

d2

2006-2007

44.72

13.72

31

961

2007-2008

11.36

13.72

-2.36

5.57

2008-2009

7.56

13.72

-6.16

37.95

2009-2010

-1.62

13.72

-15.34

235.32

2010-2011

6.54

13.72

-7.18

51.55
d2=1291.39

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

Variance

= 322.8475 = 17.97

BHARTI ARTL:
Year

Return (R)

Avg. Return
(R )

d=
(R-R)

D2

2006-2007

347.23

125.18

222.05

49306.20

2007-2008

102.92

125.18

-22.26

495.51

2008-2009

57.93

125.18

-67.25

4522.56

2009-2010

80.24

125.18

-44.94

2019.60

2010-2011

37.59

125.18

-87.59

7672.01
d2=64015.88

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

Variance

ING VYSYA:

66

= 16003.97 = 126.51

Year

Return (R)

Avg. Return
(R )

d=
(R-R)

D2

2006-2007

117.81

12.46

105.35

11098.62

2007-2008

4.60

12.46

-7.86

61.78

2008-2009

-72.26

12.46

-84.72

7177.48

2009-2010

-4.29

12.46

-16.75

280.56

2010-2011

16.45

12.46

3.99

15.92
d2=18634.36

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

Variance

= 4658.59 = 68.25

ICICI:

Year

Return (R)

Avg. Return
(R )

d=
(R-R)

d2

2006-2007

108.68

49.43

59.25

3410.56

2007-2008

23.71

49.43

-25.72

661.52

2008-2009

55.98

49.43

6.55

42.90

2009-2010

51.88

49.43

2.45

6.00

2010-2011

6.89

49.43

-42.54

1809.65
d2=6030.63

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

Variance

WIPRO:

67

= 1507.6575 = 38.83

Year

Return (R)

Avg. Return
(R )

d=
(R-R)

d2

2006-2007

5.67

-13.68

19.35

374.42

2007-2008

-57.12

-13.68

-43.44

1887.03

2008-2009

-38.45

-13.68

-24.77

613.55

2009-2010

30.29

-13.68

43.97

1933.36

2010-2011

-8.81

-13.68

-4.87

23.72
d2=4832.08

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

Variance

= 1208.02 = 34.76

INFOSYS:

Year

Return (R)

Avg. Return
(R )

d=
(R-R)

d2

2006-2007

31.15

16.82

14.33

205.55

2007-2008

10.78

16.82

-6.04

36.48

2008-2009

79.08

16.82

62.26

3876.31

2009-2010

-34.66

16.82

51.48

2050.19

2010-2011

-2.27

16.82

19.09

364.43
d2=6532.76

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

Variance

= 1633.19 = 40.41

CALCULATION OF PORTFOLIO RETURN:

Rp = W1R1 + W2R2 (for two securities)
68

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

Where,
W1, W2, W3 are the weights of the securities
R1, R2, R3 are the Expected returns
GACL & LNT:
Rp = (0.57)(19.03) + (0.43)(63.69)
= 38.2338
RANBAXY & CIPLA:
Rp = (0.44)(9.02) + (0.56)(-8.25)
= -0.6512
MTNL & BHARTI ARTL:
Rp = (-1.15)(13.17) + (2.15)(125.18)
= 253.99
ING VYSYA & ICICI:
Rp = (0.03)(12.46) + (0.97)(49.43)
= 48.3209
WIPRO & INFOSYS:
Rp = (0.59)(-13.68) + (0.41)(16.82)
= - 1.175

CALCULATION OF PORTFOLIO RISK:

For two securities:

69

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

Where,

P = portfolio risk
Xa = proportion of investment in security A
Xb = proportion of investment in security B
R12 = correlation co-efficient between security 1 & 2
a

= standard deviation of security 1

b = standard deviation of security 2

For three securities:

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

2(Xa)(Xc)(rac)(a)(c) + 2(Xb)(Xc)(rbc)(b)(c)
GACL & LNT:
p = (0.57)2 *(56.91)2 +(0.43)2 *(65.12)2 +2(0.57)(0.43)(0.066)(56.91)(65.12)
= 1956.259145
= 44.23

RANBAXY & CIPLA:

70

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

= 2364.537348
= 48.63
MTNL & BHARTI ARTL:
p =(-1.15)2 *(17.97)2+(2.15)2*(126.51)2+2(-1.15)(2.15)(0.95)(17.97)(126.51)
= 63729.36593
= 252.45
ING VYSYA & ICICI:
p = (0.03)2 *(68.25)2 + (0.97)2 *(38.83)2 +2(0.03)(0.97)(0.54)(68.25)(38.83)
= 1506.140849
= 38.81
WIPRO & INFOSYS:
p = (0.59)2 *(34.76)2 + (0.41)2 *(40.41)2 +2(0.59)(0.41)(0.17)(34.76)(40.41)
= 810.6233835
= 28.47

CALCULATION OF CORRELATION BETWEEN TWO

COMPANIES

71

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

Correlation of coefficient = COVab / a* b

GACL & LNT:

YEAR

Dev. Of
GACL
(dx)

Dev. Of LNT
(dy)

Product of dev.
(dx)(dy)

2006-2007

66.24

83.08

5503.2192

2007-2008

12.15

21.59

262.3185

2008-2009

-61.32

22.84

-1400.5488

2009-2010

57.6

-85.48

-4923.648

2010-2011

-36.66

-42.03

1540.8198
dx. dy = 982.1607

TOTAL

COVab =1/(5-1)(982.1607) =245.54

Correlation of coefficient = 245.54/(56.91)(65.12) = 0.066

RANBAXY & CIPLA:

YEAR

Dev. Of
GACL
(dx)

Dev. Of LNT
(dy)

72

Product of dev.
(dx)(dy)

2006-2007

74.69

53.96

4030.2724

2007-2008

4.73

-68.06

-321.9238

2008-2009

80.08

46.81

3748.5448

2009-2010

-1.49

-35.41

52.7609

2010-2011

2.14

2.69

-5.7566
dx. dy =
7503.8977

TOTAL

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

Correlation of coefficient = 1875.97/(54.82)(52.43) = 0.65
MTNL & BHARTI ARTL:

YEAR

Dev. Of
GACL
(dx)

Dev. Of LNT
(dy)

Product of dev.
(dx)(dy)

2006-2007

31

222.05

6883.55

2007-2008

-2.36

-22.06

52.0616

2008-2009

-6016

-67.25

414.26

2009-2010

-15.34

-44.94

689.3796

2010-2011

-7.18

-87.59

628.8962
dx. dy =
8668.1474

TOTAL

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

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

ING VYSYA & ICICI:

YEAR

Dev. Of
GACL
(dx)

Dev. Of LNT
(dy)

73

Product of dev.
(dx)(dy)

2006-2007

105.35

59.25

6241.9875

2007-2008

-7.86

-25.72

202.1592

2008-2009

-84.72

6.55

-554.916

2009-2010

-16.75

2.45

-41.0375

2010-2011

3.99

-42.54

-169.7346
dx. dy =
5678.4586

TOTAL

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

Correlation of coefficient = 1419.61/(68.25)(38.83) = 0.54
WIPRO & INFOSYS:

YEAR

Dev. Of
GACL
(dx)

Dev. Of LNT
(dy)

Product of dev.
(dx)(dy)

2006-2007

19.35

14.33

277.2855

2007-2008

-43.44

-6.04

262.3376

2008-2009

-24.77

62.26

-1542.1802

2009-2010

43.97

51.48

2263.5756

2010-2011

-4.87

19.09

-92.9683
dx. dy =
1168.0802

TOTAL

COVab =1/(5-1)(1168.0802) = 233.62

Correlation of coefficient = 233.62/(34.76)(40.41) = 0.17

CALCULATION OF PORTFOLIO WEIGHTS:

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

Wa =

(b)2 - rab (a) (b)

74

(a)2 +(b)2 2rab(a)(b)

Where,
Xa is the proportion of security A
Xb is the proportion of security B
a = standard deviation of security A
b = standard deviation of security B
rab = correlation co-efficient between A&B
GACL & LNT:
(65.12)2- 0.066(56.91) (65.12)
Xa =
(56.91)2 + (65.12)2-2 (0.066) (56.91) (65.12)
= 0.57
Xb = 1- Xa
=1- 0.57
= 0.43
RANBAXY & CIPLA:
(52.43)2- 0.65(54.82) (52.43)
Xa =
(54.82)2 + (52.43)2 -2 (0.65) (54.82) (52.43)
= 0.44
Xb = 1-Xa
= 1-0.44
= 0.56

MTNL & BHARTI ARTL:

(126.51)2 0.95 (17.97) (126.51)
Xa =
(17.97)2 + (126.51)2 2(0.95) (17.97) (126.51)

75

= -1.15
Xb = 1 Xa
= 1- (-1.15)
= 2.15
ING VYSYA & ICICI:
(38.83)2 0.54(68.25) (38.83)
Xa =
(68.25)2 + (38.83)2 2 (0.54) (68.25) (38.83)
= 0.03
Xb = 1 Xa
= 1 0.03
= 0.97
WIPRO & INFOSYS:
(40.41)2 0.17(34.76) (40.41)
Xa =
(34.76)2 + (40.41)2 2 (0.17) (34.76) (40.41)
= 0.59
Xb = 1 Xb
= 1 0.59
= 0.41

76

CHAPTER-VI
FINDINGS,CONCLUSIONS
&
SUGGESTIONS

FINDINGS
77

 The investor can recognize and analyze the risk and return of the shares by using this
analysis.
The investor who bears high risk will be getting high returns.
The investor who is having optimum portfolio will be taking optimum returns
with minimum risk.
The investor should include all securities which are under valued in their portfolio
and remove those securities that are over valued.
The investor has to maintain the portfolio of diversified sectors stocks rather than
investing in a single sector of different stocks.

78

CONCLUSIONS
When we form the optimum of two securities by using minimum variance equation,
then the return of the portfolio may decrease in order to reduce the portfolio risk.
GACL & LNT
The prime objective of this combination is to reduce risk of portfolio. Least
preference is given to the portfolio returns. As per the calculations GACL, bears a
proportion of 0.57 whereas LNT bears a proportion of 0.43. The standard deviations
of the companies are 56.91 for GACL and 65.12 for LNT.
This combination yields a return of a return of 38.2338 and a risk of 44.23
respectively.
RANBAXY & CIPLA
As per the calculations RANBAXY, bears a proportion of 0.44 whereas CIPLA bears
a proportion of 0.56. The standard deviations of the companies are 54.82 for
RANBAXY and 52.43 for CIPLA.
This combination yields a return of a return of -.6512 and a risk of 48.63
respectively. The investors shall not invest in this combination as there is negative
return and there is not much difference in their standard deviation.
MTNL & BHARTI ARTL
The proportion of investment for MTNL is -1.15 and for BHARTI ARTL 2.15.
BHARTI ARTL bears a major proportion which is dominating one. The standard
deviations of the two companies are 67.97 and 126.51 respectively.
This combination yields a return of 253.99 and a risk of 252.45. hence investor
should invest his major proportion in BHARTI ARTL in order to minimize risk.

79

ING VYSYA & ICICI

In this situation optimum weights of ING VYSYA and ICICI are 0.03 and 0.97
respectively. The portfolio risk is 38.81, which is lesser than the individual risks of
two companies. Hence, it is recommended to invest the major proportion of the funds
in ICICI, in order to reduce the portfolio risk.
WIPRO & INFOSYS
The proportion of investments for WIPRO is 0.59 and for INFOSYS it is 0.41. The
standard deviations of the companies are 34.76 and 40.41 respectively.
This combination yields a return of -1.175 with a risk of 28.47.

80

SUGGESTIONS
Select your investments on economic grounds.
Public knowledge is no advantage.
Buy stock with a disparity and discrepancy between the situation of the firm and the expectations and appraisal of the public (Contrarian approach vs.
Consensus approach).
Buy stocks in companies with potential for surprises.
Take advantage of volatility before reaching a new equilibrium.
Listen to rumors and tips, check for yourself.
Dont put your trust in only one investment. It is like putting all the eggs in
one basket . This will help lesson the risk in the long term.
The investor must select the right advisory body which is has sound
knowledge about the product which they are offering.
Professionalized advisory is the most important feature to the investors.
Professionalized research, analysis which will be helpful for reducing any kind
of risk to overcome.

81

CHAPTER-VII
BIBLIOGRAPHY

82

BIBLIOGRAPHY
Books referred:
Security analysis and portfolio management by V.A. Avadhani
Security analysis and portfolio management by Fischer & Jordan
Investment decisions by V.K. Bhalla
Security analysis & portfolio management by Robbins
Websites:
www.geojit.com
www.investopedia.com
www.capitalmarket.com
www.icicidirect.com
www.karvy.com

83