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INTRODUCTION
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CHAPTER 2
NEED OF THE STUDY
Growth in the number and size of ingestible funds a large part of household savings is
being directed towards financial assets.
Increased market volatility risk and return parameters of financial assets are
continuously changing because of frequent changes in governments industrial and fiscal
policies, economic uncertainty and instability.
minimum risks
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SCOPE OF THE STUDY
The study covers the calculation of correlations between the different securities in
order to find out at what percentage funds should be invested among the companies in the
portfolio. Also the study includes the calculation of individual Standard Deviation of
securities and ends at the calculation of weights of individual securities involved in the
portfolio. These percentages help in allocating the funds available for investment based on
risky portfolios.
METHODOLOGY
Publications
Period of study:
For different companies, financial data has been collected from the year 2009-2013.
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Selection of Companies:
MARUTI
ACC
ICICI
RELIANCE
TCS
LIMITATIONS
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.
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CHAPTER II - REVIEW OF LITERATURE
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PORTFOLIO MANAGEMENT & ITS PHASES
SECURITY ANALYSIS: It refers to the analysis of trading securities from the point
of view of their prices, return, and risk. All investment is risky and the expected return
is related to risk. The securities available to an investor for investment are numerous
and of various types. The shares of over more than 7000 are listed in stock exchanges
of the country. Securities classified into ownership securities such as equity shares and
preference shares and debentures and bonds. Recently ,a number of new securities
such as convertible debentures and deep discount bonds, zero coupon bonds, Flexi
bonds, Floating rate bonds GDRs Euro currency bonds etc, are issued to raise funds
for their projects by companies from which investor has to choose those securities the
is worthwhile to be included in his investment portfolio. This calls for detailed
analysis of the available securities.
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PORTFOLIO REVISION
The portfolio which is once selected has to be continuously reviewed over a period of
time and then revised depending on the objectives of the investor. The care taken in
construction of portfolio should be extended to the review and revision of the portfolio.
Fluctuations that occur in the equity prices cause substantial gain or loss to the investors.
The investor should have competence and skill in the revision of the portfolio. The
portfolio management process needs frequent changes in the composition of stocks and
bonds. In securities, the type of securities to be held should be revised according to the
portfolio policy.
An investor purchases stock according to his objectives and return risk framework.
The prices of stock that he purchases fluctuate, each stock having its own cycle of
fluctuations. These price fluctuations may be related to economic activity in a country or due
to other changed circumstances in the market.
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EVALUATION OF PORTFOLIO
Portfolio manager evaluates his portfolio performance and identifies the sources of
strengths and weakness. The evaluation of the portfolio provides a feed back about the
performance to evolve better management strategy. Even though evaluation of portfolio
performance is considered to be the last stage of investment process, it is a continuous
process. There are number of situations in which an evaluation becomes necessary and
important.
i. Self Valuation: An individual may want to evaluate how well he has done. This is a
part of the process of refining his skills and improving his performance over a period
of time.
iii. Evaluation of Mutual Funds: An investor may want to evaluate the various mutual
funds operating in the country to decide which, if any, of these should be chosen for
investment. A similar need arises in the case of individuals or organizations who
engage external agencies for portfolio advisory services.
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NEED FOR EVALUATION OF PORTFOLIO:
We can try to evaluate the performance of portfolio as a whole during the period
without examining the performance of individual securities within the portfolio.
PORTFOLIO THEORIES
MARKOWITZ MODEL:
Markowitz model is a theoretical framework for analysis of risk and return and
their relationships. He used statistical analysis for the measurement of risk and
mathematical programming for selection of assets in a portfolio in an efficient manner.
Markowitz apporach determines for the investor the efficient set of portfolio through
three important variables i.e.
Return
Standard deviation
Co-efficient of correlation
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holding stocks from textile, banking and electronic companies is better than investing
all the money on the textile companys stock.
ASSUMPTIONS:
All investors would like to earn the maximum rate of return that they can
achieve
All investors have the same expected single period investment horizon.
All investors before making any investments have a common goal. This is the
avoidance of risk because Investors are risk-averse.
Investors base their investment decisions on the expected return and standard
deviation of returns from a possible investment.
The investor assumes that greater or larger the return that he achieves on his
investments, the higher the risk factor surrounds him. On the contrary when
risks are low the return can also be expected to be low.
The investor can reduce his risk if he adds investments to his portfolio.
An investor should be able to get higher return for each level of risk by
determining the efficient set of securities.
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Investors make their decisions only on the basis of the expected returns,
standard deviation and covariances of all pairs of securities.
The investor can lend or borrow any amount of funds at the risk less rate of
interest. The risk less rate of interest is the rate of interest offered for the
treasury bills or Government securities.
Individual assets are infinitely divisible, meaning that an investor can buy a
fraction of a share if he or she so desires.
There is a risk free rate at which an investor may either lend (i.e. invest)
money or borrow money.
There is no personal income tax. Hence, the investor is indifferent to the form
of return either capital gain or dividend.
It is believed that holding two securities is less risky than by having only one
investment in a persons portfolio. When two stocks are taken on a portfolio and if
they have negative correlation then risk can be completely reduced because the gain
on one can offset the loss on the other. This can be shown with the help of following
example:
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INTER- ACTIVE RISK THROUGH COVARIANCE:
Covariance of the securities will help in finding out the inter-active risk. When
the covariance will be positive then the rates of return of securities move together
either upwards or downwards. Alternatively it can also be said that the inter-active risk
is positive. Secondly, covariance will be zero on two investments if the rates of return
are independent. Holding two securities may reduce the portfolio risk too. The
portfolio risk can be calculated with the help of the following formula:
Markowitz, William Sharpe, John Lintner and Jan Mossin provided the basic
structure of Capital Asset Pricing Model. It is a model of linear general equilibrium
return. In the CAPM theory, the required rate return of an asset is having a linear
relationship with assets beta value i.e. undiversifiable or systematic risk (i.e. market
related risk) because non market risk can be eliminated by diversification and
systematic risk measured by beta. Therefore, the relationship between an assets return
and its systematic risk can be expressed by the CAPM, which is also called the
Security Market Line.
Formula can be used to calculate the expected returns for different situations, like
mixing risk less assets with risky assets, investing only in the risky asset and mixing
the borrowing with risky assets.
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THE CONCEPT
According to CAPM, all investors hold only the market portfolio and risk less
securities. The market portfolio is a portfolio comprised of all stocks in the market.
Each asset is held in proportion to its market value to the total value of all risky assets.
The investor always like to purchase a combination of stock that provides the
highest return and has lowest risk. He wants to maintain a satisfactory reward to risk
ratio traditionally analysis paid more attention to the return aspects of the stocks. Now
a days risk has received increased attention and analysts are providing estimates of
risk as well as return. Sharp has developed a simplified model to analyze the portfolio.
He assumed that the return of a security is linearly related to a single index like to
market index. Strictly speaking the market index should consist of all the securities
trading on the exchange.In the absence of it, a popular index can be treated as a
surrogate for the market index.Sharpe has provided a model for the selection of
appropriate securities in a portfolio.
The selection of any stock is directly related to its excess return beta ratio
Ri Rf/ai
Where Ri = the expected return on stock i
Rf = the return on a risk less asset
Ai = the expected change in the rate of return on stock I associatd
with one unit change in the market return
Causal observation of the stock prices over a period of time reveals that most
of the stock process move with the market index. When sensex increases, stock prices
also tend to increase and vice versa. This indicates that some underlying factor affect
the market index as well as the stock prices. Stock prices are related to the market
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index and this relationship could be used to estimate the return on stock. Towards the
purpose, the following equation can be used:
Ri = a+a iRm+ei
The foundation for Apt is the law of one price. The law of one price states that
two identical goods should sell at the same price. If they sold at different prices
anyone could engage in arbitrage by simultaneously buying at low prices and selling
at the high prices and make a risk less profit. Arbitrage also applies to financial assets.
If two financial assets have the same risk, they should have the same expected return.
If they do not have the same expected return, a riskless profit could be earned by
simultaneously issuing(or selling short) at the low return and buying the high-return
asset. Arbitrage causes prices to be revised as suggested by the law of one price.
The arbitrage pricing line for one risk factor can be written as:
r= 0+ Ii
Where is the expected return on the security i
0 is the return on the zero beta portfolio
I is the factor risk premium
i is the sensitivity of the ith asset to the risk factor
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Two factor Arbitrage pricing:
The Two-factor model describes the return of ith security as follows
= 0+ I1i+ 2i2
Where 2 is the risk premium associated with risk factor2
i2 is the factor beta coefficient for factor
2 and the factor 1 &2 are uncorrelated
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Portfolio Management
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PORTFOLIO MANAGEMENT
Portfolio management is the management of various financial assets which comprise the
portfolio.
In the small firm, the portfolio manager performs the job of security analyst.
In the case of medium and large sized organizations, job function of portfolio manager and
security analyst are separate.
CLIENTS
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CHARACTERISTICS OF PORTFOLIO MANAGEMENT:
Individuals will benefit immensely by taking portfolio management services for the
following reasons:
Whatever may be the status of the capital market, over the long period capital markets
have given an excellent return when compared to other forms of investment. The
return from bank deposits, units, etc., is much less than from the stock market.
The Indian Stock Markets are very complicated. Though there are thousands of
companies that are listed only a few hundred which have the necessary liquidity. Even
among these, only some have the growth prospects which are conducive for
investment. It is impossible for any individual wishing to invest and sit down and
analyze all these intricacies of the market unless he does nothing else.
Even if an investor is able to understand the intricacies of the market and separate
from the grain the trading practices in India are so complicated that it is really a
difficult task for an investor to trade in all the major exchanges of India, look after his
deliveries and payments
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Process of Portfolio Management:
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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.
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, when the
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investors needs or other life circumstances change, the portfolio has the
flexibility to accommodate such changes.
Advisory role:
Advice new investments, review the existing ones, identification of objectives,
recommending high yield securities etc.
Conducting market and economic service:
This is essential for recommending good yielding securities they have to study
the current fiscal policy, budget proposal; individual policies etc further portfolio
manager should take in to account the credit policy, industrial growth, foreign
exchange possible change in corporate laws etc.
Financial analysis:
He should evaluate the financial statement of company in order to understand,
their net worth future earnings, prospectus and strength.
Study of stock market:
He should observe the trends at various stock exchange and analysis scripts so
that he is able to identify the right securities for investment.
Study of industry:
He should study industry to know its future prospects, technical changes etc,
required for investment proposal he should also see the problems of the industry.
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A portfolio manager in the Indian context has been Brokers (Big brokers) who
on the basis of their experience, market trends, insider trader, helps the limited
knowledge persons.
RISK
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SOURCE OF INVESTMENT RISKS:
Business risk:
As a holder of corporate securities (equity shares or debentures), you are
exposed to the risk of poor business performance. This may be caused by a variety of
factors like heightened competition. Emergence of new technologies, development of
substitute product, shifts in consumer preferences, inadequate supply of essential
inputs, changes in government al policies, and so on.
Financial Risk:
It refers to the variability of the income to the equity capital due to the debt capital.
Financial risk in a company is associated with the capital structure of the company.
Capital structure of the company consists of equity funds and borrowed funds.
Systematic risk affected from the entire market is (the problems, raw material
availability, tax policy or government policy, inflation risk, interest risk and financial
risk).It is managed by the use of Beta of different company shares.
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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 considerable extent by
investing in large portfolio of securities. The unsystematic risk stems from
inefficiency magnitude of those factors different form one company
Based on the below pyramid diagram the type of risks will be described
1. Systematic Risk:
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economic conditions
political conditions
sociological changes
The systematic risk is unavoidable. Systematic risk is further sub-divided into three
types. They are
Market Risk
a) Market Risk:
One would notice that when the stock market surges up, most stocks post higher
price. On the other hand, when the market falls sharply, most common stocks will
drop. It is not uncommon to find stock prices falling from time to time while a
companys earnings are rising and vice-versa. The price of stock may fluctuate widely
within a short time even though earnings remain unchanged or relatively stable.
Interest rate risk is the risk of loss of principal brought about the changes in the
interest rate paid on new securities currently being issued.
The typical investor seeks an investment which will give him current income and / or
capital appreciation in addition to his original investment.
2. Un-systematic Risk:
Un-systematic risk is unique and peculiar to a firm or an industry. The nature and
mode of raising finance and paying back the loans, involve the risk element. Financial
leverage of the companies that is debt-equity portion of the companies differs from
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each other. All these factors affect the un-systematic risk and contribute a portion in
the total variability of the return.
Managerial inefficiently
Labour problems
The nature and magnitude of the above mentioned factors differ from industry
to industry and company to company. They have to be analyzed separately for each
industry and firm. Un-systematic risk can be broadly classified into:
Business Risk
Financial Risk
BUSINESS RISK:
Business risk is that portion of the unsystematic risk caused by the operating
environment of the business. Business risk arises from the inability of a firm to
maintain its competitive edge and growth or stability of the earnings. The volatibility
in stock prices due to factors intrinsic to the company itself is known as Business risk.
Business risk is concerned with the difference between revenue and earnings before
interest and tax. Business risk can be divided into.
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ii) External Business Risk
External business risk is the result of operating conditions imposed on the firm by
circumstances beyond its control. The external environments in which it operates exert
some pressure on the firm. The external factors are social and regulatory factors,
monetary and fiscal policies of the government, business cycle and the general
economic environment within which a firm or an industry operates.
FINANCIAL RISK:
It refers to the variability of the income to the equity capital due to the debt
capital. Financial risk in a company is associated with the capital structure of the
company. Capital structure of the company consists of equity funds and borrowed
funds.
RETURN ON PORTFOLIO:
RISK ON PORTFOLIO:
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The expected returns from individual securities carry some degree of risk.
Risk on the portfolio is different from the risk on the individual securities. The risk is
reflected in the variability of the returns from zero to infinity. Risk of the individual
assets 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. These are two measures of risk in this context one is the absolute
deviation and other standard deviation.
Most investors invest in portfolio of assets, because as to spread risk by not
putting all eggs in one basket. Hence, what really mater to them are 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.
All investment has some risk. Investment in shares of companies has its own
risk or uncertainty; these risks arise out of variability of yields and uncertainty of
appreciation or depreciation of shares prices, losses of liquidity etc. The risk over time
can be represented by the variance of the returns. While the returns over time is
capital appreciation plus payout, divided by the purchase price of the share.
Normally, the higher the risk that the investor takes, the higher is the return.
There is, how ever, 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 round 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 objectives of the portfolio manager are to
reduce that variability and thus reduce the risky by choosing an appropriate portfolio.
Traditional approach advocates that one security 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.
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RISK AND EXPECTED RETURN:
There is a positive relationship between the amount of risk and the amount of
expected return i.e., the greater the risk, the larger the expected return and larger the
chances of substantial loss. One of the most difficult problems for an investor is to
estimate the highest level of risk he is able to assume.
Risk is measured along the horizontal axis and increases from the left to right.
Expected rate of return is measured on the vertical axis and rises from bottom to
top.
The line from 0 to R (f) is called the rate of return or risk less investments
The diagonal line form R (f) to E(r) illustrates the concept of expected rate of
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Experience has shown that beyond the certain securities by adding more securities
expensive.
An assets total risk can be divided into systematic plus unsystematic risk, as
shown below
Systematic risk (undiversifiable risk) + unsystematic risk (diversified risk)
=Total risk
=Var(r).
Unsystematic risk is that portion of the risk that is unique to the firm
(for example, risk due to strikes and management errors.) Unsystematic risk can be
reduced to zero by simple diversification.
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INDUSTRY PROFILE
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INTRODUCTION OF STOCK EXCHANGE
Stock exchange is an organized market place where securities are traded These
securities are issued by the Government, Semi-Government Bodies, public sector
undertakings and companies for borrowing funds and raising resources. Securities are
defined as any monetary claims (promissory notes or I.O.U)and also include shares,
debentures, bonds and etc., if these securities are marketable as in the case of the
Government stock, they are transferable by endorsement and alike movable property.
They are trade able on the stock exchange, So is the case with the shares of the
companies.
Under the securities Contract Regulation Act of 1956, securities trading are
regulated by the central Government and such trading can take place only in Stock
Exchanges recognized by the Government under this Act. As referred to earlier there
are at present 23 such recognized stock exchanges in India, of these major stock
Exchanges, like Bombay, Calcutta, Delhi, Chennai, Hyderabad, and Bangalore etc.,
are permanently recognized while a few are temporarily recognized. The above act
has also laid down that trading in approved contracts should be done through
registered members of the Exchange. As per the rules made under the above act,
trading in securities permitted to be trade would be in the normal trading hours (10
A.M to 4 P.M) on working days in the trading ring, as specified for trading purpose.
Contracts approved to be traded are the following:
a. Spot delivery deals are for delivery of shares on the same day or the next day
as the payment is made.
b. Hand delivery deals for delivering shares within a period of 7 to 14 days form
the date of contract.
c. Delivery through clearing for delivering shares within a period of two months
from the date of the contract, which is now reduced to 15 days.
d. Special Delivery deals for delivering of shares for specified longer periods as
may be approved by the governing board of the Stock Exchange.
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Except in those deals meant for delivery on a spot basis, all the rest are to be put
through by the registered brokers of a Stock Exchange. The securities Contracts
(Regulation) rules of 1957 laid down the condition for such trading, the treading
hours, rules of trading, settlement of disputes, etc. as between the members and of the
members with reference to their clients.
The origin of the Stock Exchange in India can be traced back to the later half
of 19 century. After the American Civil War (1860-61) due to the share mania of the
public, the number of brokers dealing in shares increased. The brokers Organized an
informal association tin Mumbai named "The Native Stock and Share Brokers
association in 1875"
Increased activity in trade and commerce during the First World War and
Second World War resulted in an increase in the stock trading. The Growth of Stock
Exchanges suffered a set after the end of World War. World wide depression affected
them most of the Stock Exchanges in the early stages had a speculative nature of
interest to regulate the speculative nature of stock exchange working. In that
direction, securities and Contract Regulation Act 1956 was passed, this gave powers
of Central Government to regulate the stock exchanges. Further to develop secondary
makes in the country, stock exchanges are Mumbai, Chennai, Delhi, Hyderabad,
Ahmadabad and Indore. The Bangalore Stock Exchange was recognized in 1963. At
present there are 23 Stock Exchanges.
Till recent past, floor trading took place in all the Stock Exchanges. In the
floor trading system the trade takes place through open outcry system during the
official trading hours. Trading posts are assigned for different securities where by and
sell activities of securities took place. This system needs a face - to - face contact
among the traders and restricts the trading volume. The speed of the new information
reflected on the prices was rather then the investors.
The setting up of NSE and OTCEI (Over the counter change of India with the
screen based trading facility resulted in more and more Sock exchanges turning
towards the computer based trading. BSE introduced the screen based trading system
in 1995, which known as BOLT (Bombay on - Line Trading System).
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Madras Stock Exchanges introduced Automated Network Trading System
(MANTRA) on October 7, 1996 Apart from Bombay Stock Exchanges has introduced
screen based trading.
Maintain Active Trading: Shares are traded on the stock exchanges, enabling
the investors to buy and sell securities. The prices may vary from transaction to
transaction. A continuous trading increases the liquidly or marketability or the shares
traded on the stock exchanges.
Ensures safe and fair dealings: The rules, regulations and bylaws of the
Stock Exchanges provide a measure of safety to the investors. Transactions are
conducted under competitive conditions enabling the investors to get a fair deal.
INDUSTRY PROFILE
This Securities Contract Regulation Act, 1956 and securities and Exchange
hoard of India (SEBI) Act, 1992, provides a comprehensive legal framework. A 3-tier
retaliatory structure comprising the ministry of finance, SEBI and the Governing
Boards of the Stock Exchanges regulates the functioning of Stock Exchanges.
The Securities and Exchange Board of India: The securities and Exchange
Board of India even though established in the year 1988, received statutory powers
are vested in the hands of SEBI. SEBI has the powers to regulate the business of
Stock exchanges, other security and mutual funds. Registration and regulation of
market intermediaries are also carried out By SEBI. It has responsibility to prohibit
the fraudulent unfair trade practices and insider dealings. Takeovers are also
monitored by the SEBI has the multi pronged duty to promote the healthy growth of
the capital market and protect the investors.
The Governing Board: The Governing Board of the Stock exchange consists
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of elected members directors, government nominees and public representatives.
Rules, by laws and regulations of the Stock Exchange substantial powers to the
executive director for maintaining efficient and smooth day - to -day functioning of
stock Exchange. The Governing Board has the responsibility to maintain and orderly
and well-regulated market.
Six members of the stock exchange are elected by the member of the stock
exchange.
Central Government nominates not more then three members.
The board nominates three public representatives.
SEBI nominates persons not exceeding three and
The Stock Exchange appoints One Executive Director.
One third of the elected members retire at annual general meeting (AGM).
The retired members can offer himself for election if he is not elected for two
consecutive years. If a member serves in the governing body for two year
consecutively, he should refrain offering himself for another two years.
The members of the governing body elect the president and vice-president. It
needs to approval from and Central Government or the Board. The office tenure for
the president and vice-president is on year. They can offer themselves for re-
elections, if for re-election after a gap of one-year period.
The instruments traded are securities that are quoted after being listed by the
companies that issued them to the public. The securities issued by the central and
state government, semi-government bodies are also listed and quoted on the Stock
Exchanges as per the rules. The broker members are eligible to deal in them also. In
fact some members specialized in Government securities market, but public are not in
general interested in these securities, and they are less attractive to the public, banks,
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financial institutions, insurance companies etc, deal in Government securities market.
But for individual investors, corporate securities are relevant as they higher rate of
interests and higher returns due to capital appreciation and dividends.
The corporate securities in which individual investors are invested and are
traded on the exchanges are as follows:
Equity Shares: These are ownership capital and have a variable dividend,
depending on the net earnings and dividend policy of the company. The prices of
these shares vary widely and with a face value of Rs. 10/- (or Rs.50/- or Rs.100/-)
they are normally quoted at a premium, which leads to capital appreciation.
Preference Shares: These are also ownership capital but with a fixed
dividend, now a days preference shares are not popular and have no public interest in
them; only financial interests hold them.
STOCK EXCHANGES
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BOMBAY STOCK EXCHANGE
Trading in securities has been in vogue in India for a little over 200
years. Dealing in securities dates back to 1793, most of them being transactions in
loan securities of the East India Company. Rampant speculation was a common
feature even during those times. The broking community prospered as there was
high rise in prices which led to a share mania during 1861-65. This bubble burst in
1865 when the American Civil War ended. The brokers realized that investor
confidence in securities market could be sustained only by organizing themselves
into a regulated body with defined rules and regulations. This realization resulted in
formation of The Native Share and Stock Brokers Association which later came to
be known as Bombay Stock Exchange. In 1875, these brokers assembled at a place,
now called Dalal Street.
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Badla Mechanism
Badla was allowed in the specified group of shares of BSE. This specified
group was also known as the forward group as one could buy or sell shares in it
without physical delivery. The carry forward session (badla session) was held on
every Saturday at BSE.
. To establish a nation wide trading facility for equities, debt instruments and
hybrids.
To ensure equal access investors all over the country through appropriate
communication network.
To provide a fair, efficient and transparent securities market to investors using
an electronic communication network.
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To enable shorter settlement cycle and book entry settlement system.
To meet current international standards of securities market.
Promoters of NSE: IDBI, ICICI, IFCI, LIC, GIC, SBI, Bank of Baroda.
Canara Bank, Corporation Bank, Indian, Oriental Bank of commerce. Union Bank of
India, Punjab National Bank, Infrastructure Leasing and Financial Services, Stock
Holding Corporation of India and SBI capital market are the promoters of NSE.
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B. The applicant must be engaged in the business of securities and must not be
engaged in any fund-based activities.
C. The minimum net worth requirements prescribed are as follows:
i. Individual and registered firm - Rs. 75 Lakes.
ii. Corporate bodies - Rs.100Lakhs.
iii. In the case of registered partnership firm each partner should
contribute at least 5% of the minimum net worth requirement of the
firm.
D. A corporate trading member should consist only of individuals (maximum of
4) who should directly hold at least 405 of the paid-up capital in case of listed
companies and at least 51% IN CASE OF OTHER COMPANIES.
E. The minimum prescribed qualification of graduation and two years experience
of handling securities as broker, sub-broker, authorized assistant, etc must be
fulfilled by
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COMPANY PROFILE
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COMPANY PROFILE
Incorporated in 1993, Net worth Stock Broking Limited (NSBL) has been a
A Member, at the National Stock Exchange of India (NSE) and Bombay Stock
Exchange, Mumbai (BSE) on the Capital Market and Derivatives (Futures & Options)
segment, NSBL has been traditionally servicing Institutional clients and in the recent
past has forayed into retail broking, establishing branches across the country. Presence
is being marked in the Middle East, Europe and the United States too, as part of our
Depository Services India (CDSL) with plans to become one at National Securities
Depository (NSDL) by the end of this quarter. We have our customers participating in
the booming commodities markets with our membership at the Multi Commodity
(NCDEX), through Networth Stock.Com Ltd. With its strong support and business
units of research, distribution & advisory, NSBL aims to become a one-stop solution
resources drawn from top financial service & broking houses form the backbone of
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our sizeable infrastructure. Highly technology oriented, the companys scalability of
operations and the highest level of service standards has ensured rapid growth in the
number of locations & the clients serviced in a very short span of time. Networth, as
each one of our 400 plus and ever growing team members are addressed, is a
251-2004
Stock.Com Ltd.)
Hyderabad (Somajiguda)
401, Dega Towers, 4th Floor, Raj Bhavan Road, Somajiguda Hyderabad - 500 082
Andhra Pradesh.
Maharashtra.
45
5, Church gate House, 2nd Floor, 32/ 34 Veer Narirnan Road, Fort
Maharashtra.
PMS
46
Corporate finance
Net trading
Depository services
Commodities Broking
Infrastructure
state-of-the-art dealing room, research wing & management and back offices.
47
All of 107 branches and franchisees are fully wired and connected to hub at
1993: Networth Started with 300 Sq.ft. of office space & 10 employees
2006: Spread over 42 cities (around 70,000 Sq.ft of office space) with over 107
Every investor has different needs, different preferences, and different viewpoints.
Whether investor prefer to make own investment decisions or desire more in-depth
assistance, company committed to providing the advice and research to help you
succeed.
Market Musing
Company Reports
Weekly Notes
IPOs
Sector Reports
Stock Stance
Pre-guarter/Updates
48
Bullion Tracker
F&O Tracker
QUALITY POLICY
To achieve and retain leadership, Networth shall aim for complete customer
quality financial services. In the process, Networth will strive to exceed Customers
expectations.
relationships with its clients and investors to provide high quality of services.
Establish a partner relationship with in its investor service agents and vendors
Provide high quality of work life for all its employees and equip them with
Continue to uphold the values of honesty & integrity and strive to establish
financial products and services to meet the changing needs of investors and
clients.
49
Strive to be a reliable source of value-added financial products and services and
constantly guide the individuals and institutions in making a judicious choice of it.
Strive to keep all stake-holders (share holders, clients, investors, employees, suppliers
Key Personnel:
capital markets.
Over 12 years of experience in the capital markets and has the prior work
50
we have sought to provide premium financial services and information, so that the
power of investment is vested with the client. We equip those who invest with us to
make intelligent investment decisions, providing them with the flexibility to either tap
into our extensive knowledge and expertise, or make their own decisions. We made
our debut into the financial world by servicing Institutional clients, and proved its
array of financial products & services spanning entire India.Our strong support,
wide array of products & services coalesce to provide you with a one-stop solution to
cater to all your investment needs. Our single minded objective is to help you grow
your Networth.
NSBL is a member of the National Stock Exchange of India Ltd (NSE) and the
Bombay Stock Exchange Ltd (BSE) in the Capital Market and Derivatives (Futures &
Options) segment. NSBL has also acquired membership of the currency derivatives
segment with NSE, BSE & MCX-SX. It is Depository participants with Central
Depository Services India (CDSL) and National Securities Depository (India) Limited
(NSDL). With a client base of over 1L loyal customers, NSBL is spread across the
country though its over 230+ branches. NSBL is listed on the BSE since 1994.
51
NWSL is into the business of delivery of Financial Planning & Advice. Its vision is
to Advice & Execute money related solutions to/for our customers in the most
Convenient & Consolidated manner, while making sure that their experience with us
is always pleasant & memorable resulting in positive advocacy. The product &
Services include Financial Planning, Life Insurance, On-line Trading Account, Mutual
NetworthStock.ComLtd.[NSCL]
NetworthSoftTechLtd.[NSL]
functions within the Financial Services Industry is at its core. It also provides data
center services which include hosting of websites, applications & related services. It
satisfaction.
against securities
52
Principles & Values
At Net worth Stock Broking Ltd. success is built on teamwork, partnership and the
diversity of the people.
At the heart of our values lie diversity and inclusion. They are a fundamental part of
our culture, and constitute a long-term priority in our aim to become the world's best
international bank.
Values
Responsive
Trustworthy
Creative
Courageous
Approach
Participation:- Focusing on attractive, growing markets where we can leverage
our relationships and expertise
Competitive positioning:- Combining global capability, deep local knowledge
and creativity to outperform our competitors
Management Discipline:- Continuously improving the way we work,
balancing the pursuit of growth with firm control of costs and risks
Commitment to stakeholders
Customers:- Passionate about our customers' success, delighting them with the
quality of our service
Our People:- Helping our people to grow, enabling individuals to make a
difference and teams to win
Communities:- Trusted and caring, dedicated to making a difference
Investors:- A distinctive investment delivering outstanding performance and
superior returns
53
CHAPTER V
54
MARUTI SUZIKI:
ACC CEMENTS:
D+(P1-P0)/
Year (P0) (P1) D (P1-P0) P0*100
2009 1074 1028 20 -46 15.72
2010 1028 478 20 -550 -33.50
2011 478 872 23 394 105.43
2012 872 1076 30.5 204 53.89
2013 1076 1136 11 60 16.58
AVERAGE RETURN 31.62
ICICI BANK:
D+(P1-P0)/
Year (P0) (P1) D (P1-P0) P0*100
2009 899 1231 10 332 46.93
2010 1231 448 11 -783 -52.61
2011 448 876 11 428 106.54
2012 876 1145 12 269 42.71
2013 1145 684 14 -461 -26.26
AVERAGE RETURN 23.46
RELIANCE:
55
D+(P1-P0)/
Year (P0) (P1) D (P1-P0) P0*100
2009 638 1424 11 786 134.20
2010 1424 615 13 -809 -43.81
2011 615 1089 13 474 90.07
2012 1089 1058 7 -31 4.15
2013 1058 692 8 -366 -26.59
AVERAGE RETURN 31.60
TCS:
D+(P1-P0)/
Year (P0) (P1) D (P1-P0) P0*100
2009 604 527 11.5 -77 -1.25
2010 527 239 14 -288 -40.65
2011 239 750 14 511 227.81
2012 750 1165 20 415 75.33
2013 1165 1161 14 -4 13.66
AVERAGE RETURN 54.98
56
Scrip Rate of Return (%)
Maruti 28.63
ACC 31.62
ICICI 23.46
Reliance 31.60
TCS 54.98
MARUTI:
57
Year Return (R) Avg. Return (R) (R-R) (R-R)2
2009 11.86 28.63 -16.77 281.37
2010 -42.58 28.63 -71.21 5071.44
2011 203.50 28.63 174.87 30578.32
2012 -2.91 28.63 -31.54 995.00
2013 -26.70 28.63 -55.33 3061.93
TOTAL 39988.07
__
2
Variance = 1/n (R-R) = 1/5 (39988.07) = 7997.613162
= 7997.613162
= 89.43
ACC CEMENTS:
__
2
Variance = 1/n (R-R) = 1/5 (10663.68) = 2132.73
= 46.18
ICICI BANK:
58
2009 46.93 23.46 23.47 550.79
2010 -52.61 23.46 -76.07 5786.30
2011 106.54 23.46 83.07 6901.42
2012 42.71 23.46 19.25 370.44
2013 -26.26 23.46 -49.72 2472.37
TOTAL 16081.33
__
Variance = 1/n (R-R)2 = 1/5 (16081.33) = 3216.26
RELIANCE:
__
Variance = 1/n.(R-R)2 = 1/5 (23772.11) = 4754.42
TCS:
59
2011 227.81 54.98 172.83 29869.34
2012 75.33 54.98 20.35 414.26
2013 13.66 54.98 -41.32 1707.62
TOTAL 44297.76
__
Variance = 1/n-1 (R-R)2 = 1/5 (44297.76) = 8859.55
60
Scrip Risk (%)
Maruti 89.43
ACC 46.18
ICICI 56.71
Reliance 68.95
TCS 94.13
CALCULATION OF CORRELATION:
61
Correlation Coefficient = COV ab/a*b
a = 89.43 ; b = 46.18
= 3588/(89.43)(46.18) = 0.868
62
MARUTI (RA) & TCS (RB)
63
= 2378/ (46.18) (56.71) = 0.908
64
ICICI WITH OTHER COMPANIES
65
RELIANCE WITH OTHER COMPANIES
66
CALCULATION OF PORTFOLIO WEIGHTS
Wa = b [b-(nab*a)]
a2 + b2 - 2nab*a*b
Wb = 1 Wa
67
MARUTI (a) & RELIANCE (b)
a = 89.43
b = 68.95
nab = 0.582
Wa = 68.95 [68.95 - (0.582*89.43)]
89.432 + 68.952 2(0.582)* 89.43*68.95
Wa = 1165.37
5574.37
Wa = 0.21
Wb = 1 Wa
Wb = 1-0.21 =0.79
Wa = 94.13 [94.13-(0.941*89.43)]
68
a = 46.18
b = 56.71
nab = 0.908
Wa = 56.71 [56.71-(0.908*46.18)]
46.182 + 56.712 2(0.908)* 46.18*56.71
Wa = 838.09
592.75
Wa = 1.413
Wb = 1 Wa
= 1- 1.413 = -0.413
a = 46.18
b = 94.13
69
nab = 0.964
Wa = 94.13 [94.13-(0.964*46.18)]
46.182 + 94.132 2(0.964)* 46.18*94.13
Wa = 4670
2612.18
Wa = 1.78
Wb = 1 Wa = 1- 1.78 = -0.78
Wa = 68.95 [68.95-(0.785*56.71)]
56.712 + 68.952 2(0.785)* 56.71*68.95
Wa = 1684.63
1831.184
Wa = 0.919
Wb = 1 Wa = 1- 0.919 = 0.08
70
56.712 + 94.132 2(0.852)* 56.71*94.13
Wa = 4312.38
2980.337
Wa = 1.446
Wb = 1 Wa = 1-1.446 = -0.446
71
MARUTI (a) & ACC (b):
a = 89.43
b = 46.18
Wa = -0.49
Wb = 1.49
nab = 0.868
RP = (89.43*-0.49)2+ () 2+2
*(46.18)*(-0.49)*(1.49)*(0.868)
1420.394 = 37.68%
MARUTI (a) & ICICI (b):
a = 89.43
b = 56.71
Wa = -0.44
Wb = 1.44
nab = 0.855
RP = (89.43*-0.44)2+(56.71*1.44)2+2(89.43)
**(1.44)*(0.855)
2722.28 = 52.17%
RP = (89.43*0.21)2+(68.95*0.79)2+2(89.43)
**(0.79)*(0.582)
72
4510.475 = 67.16%
RP = (89.43*0.924)2+(
)2+2(89.43)***(0.075)*(0.941)
7976 = 89.308%
2031.047 = 45.067%
ACC (a) & RELIANCE (b):
a = 46.18
73
b = 68.95
Wa= 0.85
Wb= 0.15
nab = 0.505
RP = (46.18*0.85)2+(68.95*0.15)2+2(46.18
**(0.15)*(0.505)
2057.80 = 45.362%
511.61 = 22.61%
RP =
(56.71*0.919)2+(68.95*0.081)2+2(56.71)
**(0.081)*(0.785)
3204.3 = 56.60%
74
b = 94.13
Wa = 1.446
Wb = -0.446
nab = 0.852
2620.675 = 51.19%
4224.66 = 65%
75
CALCULATION OF PORTFOLIO RETURNS
Rp=(RA*WA) + (RB*WB)
Where Rp = portfolio return
RA= return of A WA= weight of A
RB= return of B WB= weight of B
76
Rp = (28.63*-0.49) + (31.62*1.49)
Rp = (-14.03 + 47.11)
Rp = 33.08%
77
CALCULATION OF PORTFOLIO RETURN OF ACC & OTHER
COMPANIES
78
Rp = (21.55+2.55)
Rp = 24.10%
79
PORTFOLIO RETURNS & RISKS
80
CHAPTER VI
81
FINDINGS
Investors would be able to achieve when the returns of shares and debentures
Resultant would be known as diversified portfolio. Thus portfolio construction would
address itself to three major via, selectivity, timing and diversification. In case of
portfolio management, negatively correlated assets are most profitable. A rational
investor would constantly examine his chosen portfolio both for average return and
risk.
Individual risks on the selected stocks including Maruti, ACC, ICICI, Reliance
& TCS are 89.43%, 46.18%, 56.71%, 68.95% and 94.13% respectively.
Correlation between all the companies is positive which means all the
combinations of portfolios are at good position to gain in future.
Portfolios Returns of Reliance & TCS (37.43%) followed by ACC & ICICI
(35%) and Maruti & ACC (33.08%) stood on the top while Portfolio Returns
of ICICI & TCS (9.4%) , Maruti & ICICI (21.2%) and ICICI & Reliance
(24.10) stood at the bottom.
Portfolios Risk of Maruti & TCS (89. 3%) followed by Reliance & Maruti
(67%) and Reliance & TCS (65%) are very high while Portfolio Risks of ACC
& TCS (22.61%) , Maruti & ACC (37.68%) stood at the bottom.
82
SUGGESTIONS
All the stocks under consideration have given positive return which indicates
the positive performance of the stock market, specially the SENSEX stocks.
TCS has been the outstanding performer with a return of nearly 55%. This
indicates that Investors can be assured of good returns in the long run by
investing in blue chip companies. Rest of the stocks has given average returns
ranging from 24% to 32%.
Comparing the individual risks, TCS and Maruti are risky securities compared
to the other securities like Reliance, ACC and ICICI and it suggested that the
investors should be careful while investing in these securities.
The investors who require minimum return with low risk can invest in ICICI
and ACC.
It is recommended that the investors who require high risk with high return
should invest in TCS.
All the investors who invest in the securities are ultimately benefited by
investing in selected scripts of Industries.
Low Risk investors are advised to keep away from Maruti & TCS (risk of 89.
3%) and prefer the Portfolios of ACC & TCS (22.61%) , Maruti & ACC
(37.68%) which have the least risk.
83
Some general rules to follow while investing in securities include:
Never invest on the basis of an insider trader tip in a company which is not
sound (insider trader is person who gives tip for trading in securities based on
prices sensitive up price sensitive un published information relating to such
security).
Never invest in the so called promoter quota of lesser known company.
84
CONCLUSIONS
investment assets and securities. It is a dynamic and flexible concept and involves
held together will give a beneficial result if they grouped in a manner to secure higher
make wise choice between alternate investments without a post trading shares. Any
portfolio management must specify the objectives like Maximum returns, Optimum
This service renders optimum returns to the investors by proper selection and
continuous shifting of portfolio from one scheme to another scheme of from one plan
Greater Portfolio Return with less Risk is always is an attractive combination for the Investors.
85
BIBLIOGRAPHY
Books referred:
Web-site:
www.nseindia.com,http://www.answers.com/topics/national_stock_exchange_of_i
ndia.
www.bseindia.com,http;//www.answers.com/topics/bombay
_stock_exchange_of_india.
www.money control.com/nifty/nse
www.moneycontrol.com/sensex/bse
www.networthdirect.com
86