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1.1 INTRODUCTIOTN AND MEANING

A portfolio is a collection of assets. The assets may be physical or financial like Shares,
Bonds, Debentures, preference Shares etc. The individual investor or a fund manager would not
like to put all his money in the shares of one company that would amount to great risk. He would
therefore, follow the age old maxim that one should not put all the eggs into one basket. By
doing so, he can achieve objective to maximize portfolio return and at the same time minimizing
the portfolio risk by diversification.

 Portfolio management is the management of various financial assets which comprise the
portfolio.
 Portfolio management is a decision – support system tat is designed with a view to meet
the multi-faced needs of investors.

According to Securities and Exchange Board of India Portfolio Management

is defined as
 PORTFOLIO means the total holdings of securities belonging to any person.

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

a client, advises or directs or undertakes on behalf of the client (whether as a
discretionary portfolio manager to otherwise) the management or administration of a
portfolio of securities or the funds of the client.
 DISCRETIONARY PORTFOLIO MANAGER means a portfolio manager who
exercises or may, under a contract relating to portfolio management exercises any degree
of discretion as to the investments or management of the portfolio of securities or the
funds of the client.

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1.2 FUNCTIONS OF PORTFOLIO MANAGEMENT:
 To frame the investment strategy and select an investment mix to achieve the desired
investment objectives.
 To provide a balanced portfolio which not only can hedge against the inflation but can
also optimize returns with the associated degree of risk
 To make timely buying and selling of securities.
 To maximize the after-tax return by investing in various tax saving investment
instruments.

IMPORTANCE OF PORTFOLIO MANAGEMENT:

 Emergence of institutional investing on behalf of individuals. A number of financial

institutions, mutual funds and other agencies are undertaking the task of investing money
of small investors, on their behalf.
 Growth in the number and size of investible funds – a large part of household savings is
being directed towards financial assets.
 Increased market volatility – risk and return parameters of financial assets are
continuously changing because of frequent changes in government’s industrial and fiscal
policies, economic uncertainty and instability.
 Greater use of computers for processing mass of data.
 Professionalization of the field and increasing use of analytical methods
(E.g. quantitative techniques) in the investment decision- making
 Larger direct and indirect costs of errors or shortfalls in meeting portfolio objectives –
increased competition and greater scrutiny by investors.

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CHARCTERISTICS 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 chaff
from the grain the trading practices in India are so complicated that it is really a difficult
task for an investor to trade in all the major exchanges of India, look after his deliveries
and payments. This is further complicated by the volatile nature of our markets which
demands constant reshuffling of portfolios.

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1.3 STRUCTURE / PROCESS OF TYPICAL PORTFOLIO
MANAGEMENT:

In the small firm, the portfolio manager performs the job of security analyst.
In the case of medium and larger sized organizations, job function of portfolio manager and
security analyst are separate.

FIG: 1

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 Fig 1

TYPES OF PORTFOLIO MANAGEMENT

1. DISCRETIONARY PROTFOLIO MANAGEMENT SERVICE
(DPMS):
In this type of service, the client parts with him money in favour of the manager, who in return
handles all the paper work, makes all the decisions and gives a good return on the investment and
charges fees. In the Discretionary Portfolio Management Service, to maximize the yield, almost
all portfolio managers park the funds in the money market securities such as overnight market,
18 days treasury bills and 90 days commercial bills. Normally, the return of such investment
varies form 14 to 18 percent, depending on the call money rates prevailing at the time of
investment.

2. NON-DISCRETIONARY PROTFOLIO MANAGEMENT SERVICE

(NDPMS):
The manager functions as a counselor, but the investor is free to accept or reject the manager’s
advice, the paper work is also undertaken by the manager for a service charge. The manager
concentrates on stock market instruments with a portfolio tailor-made to the risk taking ability of
the investor.

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STEPS IN PORTFOLIO MANAGEMENT

 Specification and qualification of investor objectives, constraints, and

Preferences in the form of an investment policy statement.

 Determination and qualification of capital market expectations for the

Economy. Market sectors, industries and individual securities.

 Allocation of assets and determination of appropriate portfolio strategies for

each asset class and selection of individual securities.

 Performance measurement and evaluation to ensure attainment of investor

Objectives.

 Rebalancing the portfolio when necessary by repeating the asset allocation,

Portfolio strategy and security selection.

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CRITERIA FOR PORTFOLIO DECISIONS

 In portfolio management emphasis is put on identify the collective importance of all

investors holdings. The emphasis shifts from individual assets selection to a more
balanced emphasis on diversification and risk-return interrelationships of individual
assets within the portfolio. Individual securities are important only to he extent they
affect the aggregate portfolio. In short, all decisions should focus on the impact which the
decision will have on the aggregate portfolio of all assets held.

 Portfolio strategy should be mouded to the unique needs and characteristics of the
portfolio’s owner.

 Diversification across securities will reduce a portfolio’s risk. If the risk and return are
lower than the desired level, leverages (borrowing) can be used to achieve the desired
level.

 Larger portfolio return comes only with larger portfolio risk. The most important
decision to make is the amount of risk which is acceptable.

 The risk associated with a security type depends on when the investment will be
liquidated. Risk is reduced by selecting securities with a payoff close to when the
portfolio is to be liquidated.

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  Competition for abnormal returns is extensive, so one has to be careful I evaluating the
risk and return from securities. Imbalances do not last long and one has to act fast to
profit from exceptional opportunities.

1.4 QUALITIES OF PORTFOLIO MANAGER

1. SOUND ENERAL KNOWLEDGE:

Portfolio management is an exciting and challenging job. He has to work in an extremely
uncertain and confliction environment. In the stock market every new piece of information
affects the value of the securities of different industries in a different way. He must be able to
judge and predict the effects of the information he gets. He must have sharp memory, alertness,
fast intuition and self-confidence to arrive at quick decisions.

2. ANALYTICAL ABILITY:
He must have his own theory to arrive at the intrinsic value of the security. An analysis
of the security’s values, company, etc, it is a continuous job of the portfolio manager. A good
analyst makes a good financial consultant. The analyst can know the strengths, weaknesses,
opportunities of the economy, industry and the company.

3. MARKETING SKILLS:
He must be food salesman. He has to convince the clients about the particular security.
He has to compete with the stock brokers in the stock market. In this context, the marketing
skills help him a lot.

4. EXPERIENCE:

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 In the cyclical behavior of the stock market history is often repeated, therefore the
experience of the different phases helps to make rational decisions. The experience of the
different types of securities, clients, market trends, etc., makes a perfect professional manager.

1.5 PROCESS/BUILDING PORTFOLIO

Portfolio decisions for an individual investor are influenced by a wide variety of factors.
Individual differ greatly in their circumstances and therefore, a financial programme well suited
to one individual may be inappropriate for another. Ideally, an individual’s portfolio should be
tailor-made to fit one’s individual needs.
INVESTOR’S CHARACTERISTICS:
An analyst of an individual’s investment situation requires a study of personal characteristics
such as age, health conditions, personal habits; family responsibilities, business or professional
situation, and tax status, all of which affect the investor’s willingness t assume risk.
STAGE IN THE LIFE CYCLE:
One of the most important factors affecting the individual’s investment objective is his stage in
the life cycle. A young person may put greater emphasis on growth and lesser emphasis on
liquidity. He can afford to wait for realization of capital gains as his time horizon is large.
FAMILY RESPONSIBILITIES:
The investor’s marital status and his responsibilities towards other members of the family can
have a large impact on his investment needs and goals.
INVESTOR’S EXPERIENCE:
The success of portfolio depends upon the investor’s knowledge and experience in financial
matters. If an investor has an aptitude for financial affairs, he may wish to be more aggressive in
his investments.
ATTITUDE TOWARDS RISK:

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A person’s psychological make-up and financial position dictate his ability to assume the risk.
Different kinds of securities have different kinds of risks. The higher the risk, the greater the
opportunity for higher gain or loss

LIQUIDITY NEEDS:
Liquidity needs vary considerably among individual investors. Investors with regular income
from other sources may not worry much about instantaneously liquidity, but individuals who
depend heavily upon investment for meeting their general or specific needs, must plan portfolio
to match their liquidity needs. Liquidity can be obtained in two ways

a) By allocating an appropriate percentage of the portfolio to bank deposits, and

b) By requiring that bonds and equities purchased be highly marketable.
TAX CONSIDERATIONS:
Since different individuals, depending upon their incomes, are subjected to different marginal
rates of taxes, tax considerations become most important factor in individual’s portfolio strategy.
There are differing tax treatments for investment in various kinds of assets.
TIME HORIZON:
In investment planning, time horizons become an important consideration. It is highly
variable from individual to individual. Individuals in their young age have ling time horizon for
planning, they can smooth out and absorb the ups and downs of risky combination.
0020Individuals who are old have smaller time horizon, they generally tend to avoid volatile
portfolios.
INDIVIDUAL’S FINANCIAL OBJECTIVES:
In the initial stages, the primary objectives of an individual could be to accumulate wealth via
regular monthly savings and have an investment programme to achieve long term capital gains.

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SAFETY OF PRINCIPAL:

The protection of the rupee value of the investment is of prime importance to most
investors. The original investment can be recovered only if the security can be readily sold in the
market without much loss of value.
ASSURANCE OF INCOME:
Different investors have different current income needs. If an individual is dependent of
its investment income for current consumption then income received now in the form of dividend
and interest payments become primary objective.
INVESTMENT RISK:
All investment decisions revolve around the trade-off between risk and return. All
rational investors want a substantial return from their investment. An ability to understand,
measure and properly mange investment risk is fundamental to any intelligent investor or a
speculator. Frequently, the risk associated with security investment is ignored and only the
rewards are emphasized. An investor who does not fully appreciate the risks in security
investments will find it difficult to obtain continuing positive results.

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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

E(r)

RETURN

R (f)

X
RISK
FIG: 2

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  Risk is measured along the horizontal axis and increases from the left to right.
 Expected rate of return is measured on the vertical axis and rises from bottom to top.
 The line from 0 to R (f) is called the rate of return or risk less investments commonly
associated with the yield on government securities.
 The diagonal line from R (f) to E (r) illustrates the concept of expected rate or return
increasing as level of risk increases.

TYPES OF RISKS

Risk consists of two components. They are

1. Systematic Risk.
2. Unsystematic Risk.
I. SYSTEMATIC RISK:
Systematic risk is caused by factors external to the particular company and uncontrollable
by the company. The systematic risk affects the market as a whole.
Factors affect the systematic risk are:
 Economic Conditions.
 Political Conditions.
 Sociological Changes.
The systematic risk is unavoidable. Systematic risk is further sub-divided into three types. They
are:
1. Market Risk.
2. Interest Rate Risk.
3. Purchasing Power Risk.

1. MARKET RISK:

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 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 no
uncommon to find stock prices falling from time to me while a company’s earnings are raising
and vice-versa. The price of stock may fluctuate widely within a short time even though
earnings remain unchanged or relatively stable.

2. INTEREST RATE RISK:

Interest rate risk is the risk/loss of principal brought about the changes in the interest rate
paid on new securities currently being issued.

s. PURCHASING POWER RISK:

The typical investor seeks an investment which will give him current income and capital
appreciation in addition to his original investment.
II. UN-SYSTEMATIC RISK:
Un-systematic risk is unique and peculiar to a firm or an industry. The nature and mode
of raising finance and paying back the loans, involve the risk element. Financial leverage of the
companies that is debt-equity portion of the companies differs from each other. All these factors
affect the un-systematic risk and contribute a portion in the total variability of the return.
 Managerial inefficiency

 Technological change in the production process.

 Availability of raw materials.

 Changes in the consumer preference.

 Labor problems.

The nature and magnitude of the above mentioned factors differ from industry to industry
and company to company. They have to be analyzed separately for each industry and firm. Un-
systematic risk can be broadly classified into:
a. Business Risk.

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 b. Financial Risk.

(a) Business Risk:

Business risk is that portion of the unsystematic risk caused by the operating environment
of the business. Business risk arises from the inability of a firm to maintain its competitive edge
and growth or stability of the earnings. The volatility in stock prices due to factors intrinsic to
the company itself is known as Business risk is concerned with the difference between revenue
and earnings before interest and tax. Business risk can be divided into

Internal Business Risk.

i. External Business Risk.

i. Internal business risk is associated with the operational efficiency of the firm. The
operational efficiency differs from company to company. The efficiency of operation
is reflected on the company’s achievement of its pre-set goals and the fulfillment of
the promises to its investors.

ii. External business risk 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 economics environment within which a firm or an industry operates.

(b) Financial Risk:

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 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 consists of
equity funds and borrowed funds.

PORTFOLIO ANALYSIS
Various groups of securities when held together behave in a different manner and give
interest payments and dividends also, which are different to the analysis of individual securities.
A combination of securities held together will give a beneficial result if they are grouped in a
manner to secure higher return after taking into consideration the risk element.
There are two approaches in construction of the portfolio of securities.
They are:
o Traditional approach
o 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 of the situation. Traditional
approach is a comprehensive financial plan for the individual. It takes into account the
individual needs such as housing, life insurance and pension plans.

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Traditional approach basically deals with two major decisions.
They are
Determining the objectives of the portfolio
Selection of securities to be included in the portfolio.
MODERN APPROACH:
Modern approach theory was brought out by Markowitz and Sharpe. It is the
combination of securities to get the most efficient portfolio. Combination of securities can be
made in many ways. Markowitz developed the theory of diversification through scientific
reasoning and method. Modern portfolio theory believes in the maximization of return through a
combination of securities. The modern approach discusses the relationship between different
securities and then draws interrelationship of risks between

them. Markowitz gives more attention to the process of selecting the portfolio. It does not deal
with the individual needs.

1.6 THEORIES OF PORTFOLIO MANAGEMENT

2.5 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 approach
determines for the investor the efficient set of portfolio through three important variables i.e.
o Return
o Standard deviation
o Co-efficient 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 risk ad
return, between the limits of zero ad infinity. According to this theory, the effects of one security

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purchase over the effects of the other security purchase are taken into consideration and then the
results are evaluated. Most people agree that holding two stocks is less risky than holding one
stock. For example, holding stocks from textile, banking and electronic companies is better than
investing all the money on the textile company’s stock.

Markowitz had given up the single stock portfolio and introduced diversification. The
single stock portfolio would be preferable if the investor is perfectly certain that his expectation
of highest return would turn out to be real. In the world of uncertainty, most of the risk averse
investors would like to join Markowitz rather than keeping a single stock, because diversification
reduces the risk.

ASSUMPTIONS:

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

their investment.

o All investors have the same expected single period investment horizon.

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

of risk because investors are risk-averse.

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

return from a possible investment.

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

o 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.

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

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 o An investor should be able to get higher return for each level of risk

“By determining the efficient set of securities”

SHARPE’S PERFORMANCE MEASURE

Since the Sharpe ratio was derived in 1966 by William Sharpe, it has been one of the most
referenced risk/return measures used in finance, and much of this popularity can be attributed to its
simplicity. The ratio's credibility was boosted further when Professor Sharpe won a Nobel Memorial Prize
in Economic Sciences in 1990 for his work on the capital asset pricing model (CAPM).

Sp = Risk premium
Total risk

= rp–rf
σp
Where rp = realized return on the portfolio

rf = risk-free rate of return

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 σ p = standard deviation of returns for portfolio

Therefore, Sharpe assumes that the portfolio under consideration is the whole or
substantially the whole of the investor’s total portfolio. This means that, if there are any
unsystematic risks still left in the portfolio and this cannot be eliminated.

TREYNOR’S PERFORMANCE MEASURE

The performance measures developed by jack Treynor is referred to as Treynor Ratio or

reward to volatility ratio. It is concerned with systematic risk (or beta) and therefore it is the
relationship between rewards or risk premium for calculating Treynor index may be stated as
follows:

Tp = Risk premium
Portfolios β

= rp–rf
βp
Where rp = realized return on the portfolio

rf = risk-free rate of return

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 βp = Standard deviation of return for portfolio

Therefore, Treynor assumes that the portfolio under consideration is itself only a part of
the investor’s total portfolio. The investor can therefore, eliminate any unsystematic risk by
ensuring that his total portfolio is well diversified.

CAPITAL ASSETS PRICING MODEL (CAPM)

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 of returns of an asset is having a linear relationship with asset’s beta
value i.e., no diversifiable 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.

Rp = Rf Xf + Rm(1-Xf)
Rp = Portfolio return
Xf = The proportion of funds invested in risk free assets
1-Xf = The proportion of funds invested in risky assets
Rf = Risk free rate of return
Rm = Return on risky assets

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 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.

THE CONCEPT:
According to CAPM, all investors hold only the market portfolio and risk less securities.
The market portfolio is a portfolio comprised of all stocks in the market. Each asset is held in
proportion to its market value to the total value of all risky assets.
For example, is Satyam Industry Share represents 15% of all risky assets, then the market
portfolio of the individual investor contain 15% of Satyam Industry shares. At this stage, the
investor has the ability to borrow or lend any amount of money at the risk less of interest.

ASSUMPTIONS:

o An individual seller or buyer cannot affect the price of a stock. This assumption is the
basic assumption of the perfectly competitive market.
o Investors make their decisions only on the basis of the expected return, standard deviation
and covariance of all pairs of securities.
o Investors are assumed to have homogenous expectations during the decision-making
period.
o 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 of Government
Securities.
o Investors are risk-averse, so when given, a choice between two otherwise identical
portfolios, they will choose the one with the lower standard deviation.
o Individual assets are infinitely divisible, meaning that an investor can buy a fraction of a
share if he or she so desires.

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 o There is a risk free rate at which an investor may either lend (i.e., invest) money or
borrow money.
o There is no transaction cost i.e., no cost involved in buying and selling of stocks.
o There is no personal income tax. Hence, the investor is indifferent to the form of return
either capital gain or dividend.

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.
1. 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.
2. Evaluation of Managers:

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 A mutual fund or similar organization might want to evaluate its managers. A mutual
fund may have several managers each manager will run a separate fund or sun-fund. It is often
necessary to compare the performance of these managers.
3. 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 individual or organizations who engage external agencies for portfolio advisory services.
4. Evaluation of Groups:
Academics or researchers may want to evaluate the performance of a whole group of
investors and compare it with another group of investors who use different techniques or who
have different skills or access to different information.

NNEED FOR EVALUATION OF PORTFOLIO

• We can try to evaluate every transaction. Whenever a security is brought or sold, we can
attempt to assess whether the decision was correct and profitable.
• We can try to evaluate the performance of a specific security in the portfolio to determine
whether it has been worthwhile to include it in out 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 REVISION

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 The portfolio which is once selected has to be continuously reviewed over a period of
time and then revised depending on the objectives of the investor. The care taken in construction
of portfolio should be extended to the review and revision of the portfolio. Fluctuations that
occur in the equity prices cause substantial gain or loss to the investors.
The investor should have competence and skill in the revision of the portfolio. The
portfolio management process needs frequent changes in the composition of stocks and bonds.
In securities, the type of securities to be held should be revised according to the portfolio policy.
An investor purchases stock according to his objectives and return risk framework. The
prices of stock that he purchases fluctuate, each stock having its own cycle of fluctuations.
These price fluctuations may be related to economic activity in a country or due to other changed
circumstances in the market.
If an investor is able to forecast these changes by developing a framework for the future
through careful analysis of the behavior and movement of stock prices is in a position to make
higher profit than if he was to supply buy securities and hold them through the process of
diversification. Mechanical methods are adopted to earn better profit through proper timing. The
investor uses formula plans to help him in making decisions for the future by exploiting the
fluctuations in prices.

HISTORY OF STOCK EXCHANGES IN INDIA

The origin of the stock exchange in India can be traced back to the later half of19th century
.After the American civil war (1860-61) due to the share mania of the public the number of
broker dealing in shares increased. The broker organized an informal association in 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 resulted in
an increase in stock trading. The growth of stock exchanges suffered asset back the end of world
war. Worldwide depression affected them. Most of stock exchange in the early stages had a
sddpecu;lative nature of workinfg without technical strength. After independence, government
took keen interest to regulate the speculative nature of stock exchange working. In that direction,
securities and contract government to regulation act 1956. was passed. This gave powers to

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central government to regulate the stock exchanges. Further to develop secondary market in the
country, stock exchanges were estavblished in different centers like Chennai, delhi, nagpur,
kanpur, Hyderabad, and bnaglore. The SER Act recognized the stock exchanges in Mumbai,
Chennai, delhi, Hyderabad, Ahemadabad, and indoor. The banglore stock exchange was
recognized in 1963. at present there are 23 stock exchanges.
The setting up of national stock exchange (NSE) and OTCEI (Over the counter exchange of
india) with screen based trading facility resulted in more stock exchanges turning towards the
computer based trading. Bombay stock exchange (BSE) introduced the screen based trading
system in 1995, which is known as BOLT (Bombay on-line terading system).
Madras stock exchange introduced Automated Network trding System (MANTRA) on October
7th 1996. apart from Bombay stock exchange , (BSE), Delhi, Pune , Bangalore, Kolkata, and
Ahmedabad Stock exchanges have introduced screen based trading.

DEFINITION OF STOCK EXCHANGE

:
“Stock exchange means any body or individual whether
incorporarted or not, constituted for the purpose of assisting, regulating or controlling the
business of buying, selling or dealing in securities.”
NEED FOR STOCK EXCHANGE:
As the business and industry expanded and economy became
more complex in nature, a need for permanent finance arose. Entrepreneurs require money for
long-term needs, where as investors demand liquidity. The solution to this problem gave way for
the origin of “Stock Exchange”, which is a ready market for investment and liquidity.
FUNCTIONS OF STOCK EXCHANGE:

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 Maintains active trading: Shares are traded on the stock
exchanges, enabling the investors to buy and sell securities. The prices may vary from
transaction. A continuous trading increases the liquidity or marketability of the shares traded on
the stock exchanges.
Fixation of prices: prices are determined by the transition that flow from investors
demand and the supplies preference. Usually the trade’s prices are named known to the public.
This helps the investors to make better decisions
ENSURES SAFE AND FAIR DEALINGS:
The rules, regulations and byelaws of the stock exchanges provide a measure of
safety to the investor’s it get a fair deal. Aids in financing the industry. Continuous market for
shares provides a favorable climate for rising capital. The negotiability and transferability of the
securities help the companies to raise long term funds. Investor willing to subscribe the initial
pubic offerings (IOP).This stimulates the capital formation.
DISSEMINATION OF INFORMATION:
Stock exchange provide information through their various publics their publish the
share prices traded on their basis along with the volume traded. Directory of corporate
information is useful for the investor’s assessment regarding the corporate. Handbooks and
pamphlets provide information regarding of the stock exchanges.

PERFORMANCE INDUCERS:

The prices of stocks reflects the performance of the traded companies this makes the
corporate more the with its public image tries to maintain good performance.
SELF-REGULATING ORGANIZATION:
The stock exchange monitors the integrity of the member brokers listed companies and clients
continuous internal audit safeguards the investor’s against unfair practices it settles the disputes
between member brokers investors and brokers..

INSTRUMENT TRADEED IN THE STOCK EXCHANGE:

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 The securities in which individual investors are allowed ti trade in the exchange are
as follows
1. Equity shares
2. Preference shares.
3. Convertible&party convertible debentures
4. Government securities.

STOCK EXCHANGE IN INDIA:

S.No NAME OF THE STOCK EXCHANGE YEAR
1 BOMBAY Stock Exchange 1875
2 Hyderabad Stock Exchange 1943
3 Ahmedabad share & Stock Exchange 1957
4 Calcutta Stock Exchange association Limited 1957
5 Delhi Stock Exchange Association Limited 1957
6 Madras Stock Exchange Association Limited 1957
7 Indoor Stock Brokers Association 1958
8 Banglore Stock Exchange 1963
9 Cochin Stock Exchange 1978
10 Pine Stock Exchange Limited 1982

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11
U.P Stock Exchange Association Limited 1982
12 Ludhiana Stock Exchange Association Limited 1983
13 Jaipur Stock Exchange Limited 1984
14 Gauhathi Stock Exchange Limited 1984
15 Mangalore Stock Exchange Limited 1985
16 Mabhad Stock Exchange Limited, Patna 1986
17 Bhuvaneswar Stock Exchange Limited 1989
18 Over the counter exchange of India, Bombay 1989
19 Saurashtra Kutch Stock Exchange Limited 1990
20 Vadodara Stock Exchange Limited 1991
21 Coimbatore Stock Exchange Limited 1991
22 Meerut Stock Exchange Limited 1991
23 National Stock Exchange Limited 1992
24 Integrarted Stock Exchange 1999

STOCK EXCHANGE IN WORLD:

S.No COUNTRY INDEX
1 Russia Moscow Times
2 Argentina Merval
3 Thailand SET
4 Pakistan Karachi 100
5 Indonesia Jak comp
6 US NASDAQ
7 Czech Republic PX50
8 Mexico IPC
9 Brazil Bovespa
10 Japan Nikkei 225
11 Malaysia KISE COMP
12 China Shanahai comp
13 Singapore Straits Times
14 South Korea Seoul COMP
15 Spain Madrid General
16 US S&P 500
17 India SENSEX
18 US Dow jones
19 Germany Dax
20 Hong Kong Hang seng

30
21 Canada
S & P TSX COMPOSITE
22 India NIFTY
23 UK FISE 100
24 Australia All Ordinates
25 France CAC 40

COMPANY PROFILE

31
COMPANY PROFILE

OVERVIEW:

KARVY, is a premier integrated financial services provider, and ranked among the
top five in the country in all its business segments, services over 16 million individual investors
in various capacities, and provides investor services to over 392 corporate, comprising the who
is who of Corporate India

KARVY covers the entire spectrum of financial services such as Stock broking, Depository
Participants, Distribution of financial products like mutual funds, bonds, fixed deposit, Merchant
Banking & Corporate Finance, Insurance Broking, Commodities Broking, Personal Finance
Advisory Services, placement of equity, IPO’s, among others. Karvy has a professional
management team and ranks among the best in technology, operations, and more importantly, in
research of various industrial segments.

KARVY ALLIANCES:

Karvy Computer share Private Limited is a 50:50 joint venture of Karvy Consultants Limited and
Computer share Limited, Australia. Computer share Limited is world's largest -- and only global
-- share registry, and a leading financial market services provider to the global securities
industry.

The joint venture with Computer share, reckoned as the largest registrar in the world, servicing
over 60 million shareholder accounts for over 7,000 corporations across eleven countries spread

32
across five continents. Computer share manages more than 70 million shareholder accounts for
over 13,000 corporations around the world.

Karvy Computer share Private Limited, today, is India's largest Registrar and Share Transfer
Agent servicing over 300 corporate and mutual funds and 16 million investors.

BOARD OF DIRECTORS:

1. C. Parthasarathy Chairman & Managing Director

2. M. Yugandhar Managing Director

3. M. S. Ramakrishna Executive Director

MANAGEMENT TEAM:
1. K. Sridhar

2. V. Mahesh

3. V. Ganesh

4. S. Gopichand

5. J. Ramaswamy

6. M. S. Manohar

7. S. Ganapathy Subramanian

ACHIEVEMENTS:

• Among the top 5 stock brokers in India (4% of NSE volumes)

• India's No. 1 Registrar & Securities Transfer Agents

• Among the top 3 Depository Participants

• Largest Network of Branches & Business Associates

33
 • ISO 9002 certified operations by DNV

• Among top 10 Investment bankers

• Largest Distributor of Financial Products

• Adjudged as one of the top 50 IT uses in India by MIS Asia

Full Fledged IT driven operations

QUALITY POLICY:

To achieve and retain leadership, Karvy shall aim for complete customer satisfaction, by
combining its human and technological resources, to provide superior quality financial
services. In the process, Karvy will strive to exceed Customer's expectations.

QUALITY OBJECTIVES:

As Per the Quality Policy, Karvy will:

• Build in-house processes that will ensure transparent and harmonious relationships with
its clients and investors to provide high quality of services.
• Establish a partner relationship with its investor service agents and vendors that will help
in keeping up its commitments to the customers.
• Provide high quality of work life for all its employees and equip them with adequate
knowledge & skills so as to respond to customer's needs.
• Continue to uphold the values of honesty & integrity and strive to establish unparalleled
standards in business ethics.
• Use state-of-the art information technology in developing new and innovative financial
products and services to meet the changing needs of investors and clients.
• 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 same.

Strive to keep all stake-holders (shareholders, clients, investors, employees, suppliers and
regulatory authorities) proud and satisfied.

34
 .

KARVY GROUP OF COMPANIES:

1. KARVY CONSULTANTS LIMITED.

As the flagship company of the Karvy Group, Karvy Consultants Limited has always
remained at the helm of organizational affairs, pioneering business policies, work ethic and
channels of progress.

Having emerged as a leader in the registry business, the first of the businesses that we ventured
into, we have now transferred this business into a joint venture with Computer share Limited of
Australia, the world’s largest registrar. With the advent of depositories in the Indian capital
market and the relationships that we have created in the registry business, we believe that we
were best positioned to venture into this activity as a Depository Participant. We were one of the
early entrants registered as Depository Participant with NSDL (National Securities Depository
Limited), the first Depository in the country and then with CDSL (Central Depository Services
Limited). Today, we service over 6 lakhs customer accounts in this business spread across over
250 cities/towns in India and are ranked amongst the largest Depository Participants in the
country. With a growing secondary market presence, we have transferred this business to Karvy
Stock Broking Limited (KSBL), our associate and a member of NSE, BSE and HSE.

35
2. KARVY STOCK BROKING LIMITED:

Member - National Stock Exchange (NSE), The Bombay Stock Exchange (BSE), and The
Hyderabad Stock Exchange (HSE).Karvy Stock Broking Limited, one of the cornerstones of the
Karvy edifice, flows freely towards attaining diverse goals of the customer through varied
services. Creating a plethora of opportunities for the customer by opening up investment vistas
backed by research-based advisory services. Here, growth knows no limits and success
recognizes no boundaries. Helping the customer create waves in his portfolio and empowering
the investor completely is the ultimate goal.

It is an undisputed fact that the stock market is unpredictable and yet enjoys a high success rate
as a wealth management and wealth accumulation option. The difference between
unpredictability and a safety anchor in the market is provided by in-depth knowledge of market
functioning and changing trends, planning with foresight and choosing one & rescue’s options
with care. This is what we provide in our Stock Broking services.
We offer services that are beyond just a medium for buying and selling stocks and shares.
Instead we provide services which are multi dimensional and multi-focused in their scope. There
are several advantages in utilizing our Stock Broking services, which are the reasons why it is
one of the best in the country.

36
3. DISTRIBUTION OF FINANCIAL PRODUCTS:

The paradigm shift from pure selling to knowledge based selling drives the business today.
With our wide portfolio offerings, we occupy all segments in the retail financial services
industry.

A 1600 team of highly qualified and dedicated professionals drawn from the best of academic
and professional backgrounds are committed to maintaining high levels of client service
delivery. This has propelled us to a position among the top distributors for equity and debt issues
with an estimated market share of 15% in terms of applications mobilized, besides being
established as the leading procurer in all public issues.

To further tap the immense growth potential in the capital markets we enhanced the scope of our
retail brand, Karvy – the Finapolis, thereby providing planning and advisory services to the mass
affluent. Here we understand the customer needs and lifestyle in the context of present earnings
and provide adequate advisory services that will necessarily help in creating wealth. Judicious
planning that is customized to meet the future needs of the customer deliver a service that is
exemplary. The market-savvy and the ignorant investors, both find this service very satisfactory.
The edge that we have over competition is our portfolio of our monthly magazine, Finapolis,
provides up-dated market information on market trends, investment options, opinions etc. Thus
empowering the investor to base every financial move on rational thought and prudent analysis
and embark on the path to wealth creation.

37
4. KARVY INVESTOR SERVICES LIMITED:

Recognized as a leading merchant banker in the country, we are registered with SEBI as a
Category I merchant banker. This reputation was built by capitalizing on opportunities in
corporate consolidations, mergers and acquisitions and corporate restructuring, which have
earned us the reputation of a merchant banker. Raising resources for corporate or Government
Undertaking successfully over the past two decades have given us the confidence to renew our
focus in this sector.

Our quality professional team and our work-oriented dedication have propelled us to offer value-
added corporate financial services and act as a professional navigator for long term growth of our
clients, who include leading corporate, State Governments, foreign institutional investors, public
and private sector companies and banks, in Indian and global markets.

We have also emerged as a trailblazer in the arena of relationships, both at the customer and
trade levels because of our unshakable integrity, seamless service and innovative solutions that
are tuned to meet varied needs. Our team of committed industry specialists, having extensive
experience in capital markets, further nurtures this relationship.

Our financial advice and assistance in restructuring, divestitures, acquisitions, de-mergers, spin-
offs, joint ventures, privatization and takeover defense mechanisms have elevated our
relationship with the client to one based on unshakable trust and confidence.

38
5. KARVY COMPUTERSHARE PVT LIMITED:

We have traversed wide spaces to tie up with the world’s largest transfer agent, the leading
Australian company, Computer share Limited. The company that services more than 75 million
shareholders across 7000 corporate clients and makes its presence felt in over 12 countries across
5 continents has entered into a 50-50 joint venture with us.
With our management team completely transferred to this new entity, we will aim to enrich the
financial services industry than before. The future holds new arenas of client servicing and
contemporary and relevant technologies as we are geared to deliver better value and foster bigger
investments in the business. The worldwide network of Computer share will hold us in good
stead as we expect to adopt international standards in addition to leveraging the best of
technologies from around the world.

Excellence has to be the order of the day when two companies with such similar ideologies of
growth, vision and competence, get together.

39
6. KARVY GLOBAL SERVICES LIMITED:

The specialist Business Process Outsourcing unit of the Karvy Group. The legacy of
expertise and experience in financial services of the Karvy Group serves us well as we enter the
global arena with the confidence of being able to deliver and deliver well.

Here we offer several delivery models on the understanding that business needs are unique and
therefore only a customized service could possibly fit the bill. Our service matrix has
permutations and combinations that create several options to choose from.

Be it in re-engineering and managing processes or delivering new efficiencies, our service meets
up to the most stringent of international standards. Our outsourcing models are designed for the
global customer and are backed by sound corporate and operations philosophies, and domain
expertise. Providing productivity improvements, operational cost control, cost savings, improved
accountability and a whole gamut of other advantages

We operate in the core market segments that have emerging requirements for specialized
services. Our wide vertical market coverage includes Banking, Financial and Insurance Services
(BFIS), Retail and Merchandising, Leisure and Entertainment, Energy and Utility and
Healthcare.

40
7.KARVY COMTRADE LIMITED:

At Karvy Commodities, we are focused on taking commodities trading to new dimensions

of reliability and profitability. We have made commodities trading, an essentially age-old
practice, into a sophisticated and scientific investment option.

Here we enable trade in all goods and products of agricultural and mineral origin that include
lucrative commodities like gold and silver and popular items like oil, pulses and cotton through a
well-systematized trading platform.

Our technological and infrastructural strengths and especially our street-smart skills make us an
ideal broker. Our service matrix is holistic with a gamut of advantages, the first and foremost
being our legacy of human resources, technology and infrastructure that comes from being part
of the Karvy Group.

Our wide national network, spanning the length and breadth of India, further supports these
advantages. Regular trading workshops and seminars are conducted to hone trading strategies to
perfection. Every move made is a calculated one, based on reliable research that is converted into
valuable information through daily, weekly and monthly newsletters, calls and intraday alerts.
Further, personalized service is provided here by a dedicated team committed to giving hassle-
free service while the brokerage rates offered are extremely competitive.

41
8. Karvy Insurance Broking Limited:

At Karvy Insurance Broking Limited., we provide both life and non-life insurance
products to retail individuals, high net-worth clients and corporate. With the opening up of the
insurance sector and with a large number of private players in the business, we are in a position
to provide tailor made policies for different segments of customers. In our journey to emerge as a
personal finance advisor, we will be better positioned to leverage our relationships with the
product providers and place the requirements of our customers appropriately with the product
providers. With Indian markets seeing a sea change, both in terms of investment pattern and
attitude of investors, insurance is no more seen as only a tax saving product but also as an
investment product. By setting up a separate entity, we would be positioned to provide the best
of the products available in this business to our customers.

Our wide national network, spanning the length and breadth of India, further supports these
advantages. Further, personalized service is provided here by a dedicated team committed in
giving hassle-free service to the clients.

42
9. KARVY REALTY & SERVICES (INDIA) LIMITED:

KARVY Realty & Services (India) Limited (KRSIL) is engaged in the business of real estate
and property services offering value added property services and offers individuals and
establishments a myriad of options across investments, financing and advisory services in the
realty sector.

KARVY Realty & Services (India) Limited …………………………………………Take a

Realty Byte !!!

Promoted by the KARVY Group of companies, India’s largest integrated financial services
company. KARVY Realty & Services India Limited carries forward its legacy of trust and
excellence in investor and customer services delivered with a passion for services and the highest
level of quality that align with global standards.

KARVY Realty & Services (India) Limited welcomes you to take a reality check on realty
options that you can be rest assured of and of course profit from.

43
2

44
2.1 IMPORTANCE AND NEED OF THE STUDY

45
 Portfolio management has emerged as a separate academic discipline in India. Portfolio
theory that deals with the rational investment decision-making process has now become an
integral part of financial literature.
Investing in securities such as shares, debentures & bonds is profitable
Well as exciting. It is indeed rewarding but involves a great deal of risk & need artistic skill.
Investing in financial securities is now considered to be one of the most risky avenues of
investment. It is rare to find investors investing their entire savings in a single security. Instead
they tend to invest in a group of securities. Such group of securities is called as PORTFOLIO.
Creation of portfolio helps to reduce risk without sacrificing returns. Portfolio management
deals with the analysis of individual securities as well as with the theory & practice of optimally
combining securities into portfolios.
The modern theory is of the view that by diversification risk can be reduced. The
investor can make diversification either by having a large number of shares of companies in
different regions. In different industries or those producing different types of product lines
Modern theory believes in the perspective of combinations of securities under constraints of risk
and return.

46
2.2 OBJECTIVES OF THE STUDY

 To Study the investment pattern and its related risk & returns.

 To find optimal portfolio, which gives optimal return at a minimize risk to the investor.

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

are constituted.

 To see whether the portfolio is yielding a satisfactory and constant return to the investor.

 To understand, analyze and select the best portfolio.

SCOPE OF THE STUDY

This study covers the Markowitz model. The study covers the calculation of correlations
between the different securities in order to find out at what percentage funds should be invested
among the companies in the portfolio. Also the study includes the calculation of individual
Standard Deviation of securities and ends at the calculation of weights of individual securities
involved in the portfolio. These percentages help in allocating the funds available for investment
based on risky portfolios.

47
2.3 METHODOLOGY
Data was also gathered from Primary and Secondary sources like the books and internet sites of
the various companies. The data from the internet sites was collected in the month of May 2010
so there might be some modification of the data presently.
Primary data collected from Organizations official sites.
Secondary data collected from different books.

LIMITATIONS OF THE STUDY

 The time duration of the project will be of 45 days..
 The project work done at Hyderabad Branch.

48
3

49
 CALCULATION OF AVERAGE RETURNS OF COMPANIES
AVERAGE RETURN = Σ(R)/N
DR. REDDY LABORATRIES LTD

Opening Share Closing

Year Price (PO) Share Price (P1-P0) (P1-P0)/P0*100

2005-2006 1158.75 1090.95 -67.80 -5.85

2006-2007 1096.1 916.3 -179.80 -16.4

2007-2008 914.95 974.35 59.40 6.49

2008-2009 979.65 739.15 -240.50 -24.55

2009-2010 743.50 1421.4 677.90 91.18

Total Returns 50.87

Average Return = 50.87/5 =10.174

HINDUSTAN UNILEVER LIMITED (HULL):

Opening Share Closing

Year Price (PO) Share Price (P1-P0) (P1-P0)/P0*100
2005-2006 222.20 225.15 2.95 1.33
2006-2007 227.25 148.35 -78.90 -34.72
2007-2008 149.15 154.40 5.26 3.52
2008-2009 154.80 131.95 -22.85 -14.76
2009-2010 132.20 272.00 139.80 105.75
Total Returns 61.12

Average Return = 61.12/5 = 12.22

50
 BHARAT HEAVY ELECTRICALS LTD

Opening Share Closing

Year Price (PO) Share Price (P1-P0) (P1-P0)/P0*100
2005-2006 128.65 169.00 40.35 31.36
2006-2007 180.80 223.15 42.35 23.42
2007-2008 223.65 604.35 380.70 170.22
2008-2009 637.05 766.40 129.35 20.30
2009-2010 801.65 2241.95 1440.30 179.67
Total Returns 424.98

Average Return = 424.98/5 = 84.992

BAJAJ AUTOMOBILES LIMITED;

Opening Share Closing

Year Price (PO) Share Price (P1-P0) (P1-P0)/P0*100
2005-2006 249.80 462.80 213.00 85.27
2006-2007 467.65 480.00 12.35 2.64
2007-2008 480.20 910.85 430.35 89.68
2008-2009 914.20 1082.10 167.90 18.37
2009-2010 1089.35 2746.25 1656.90 152.10
Total Returns 348.06

Average Return = 348.06/5 = 69.60

51
PORTFOLIO CONSTRUCTION AND ANALYSIS
Portfolio analysis believes in the maximization of return through a combination of securities.
The modern portfolio theory discusses the relationship between different securities and then
draws inter-relationship or risks between them. It is not necessary to achieve success only by
trying to get all securities of minimum risk. The theory states that by combining a security of
low risk with another security of high risk, success can be achieved by an investor in making a
choice of investment outlets.

.1 AVERAGE RETURNS OF THE COMPANIES:

AVERAGE
S.NO NAME OF THE COMPANY RETURN

1 DR.Reddy Lab.Ltd. 10.174

2 Hindustan Unilever Ltd. 12.22

3 Bharat Heavy Electronics Ltd. 84.992

4 Bajaj Automobiles Ltd. 69.6

Formula: _
AVERAGE RETURN (R) = Σ(R)/N

Where Σ(R) = Total Return

N = No. of years

Analysis

52
 Average return of BHEL is high and Dr. Reddy’s Lab is low at 10.174 and Hindustan Unilever
Ltd is also have least performance as 12.22 average return

CALCULATION OF STANDARD DEVIATION;

Standard Deviation = Variance

_
Variance = 1/n-1 (R-R)2
DR.REDDY

Avg.__ __ __
Year Returns Return( R) (R-R) (R_R)2
2005-2006 -5.85 10.174 -16.02 256.77
2006-2007 -16.40 10.174 -26.57 706.18
2007-2008 6.49 10.174 -3.68 13.57
2008-2009 -24.55 10.174 -34.72 1205.76
2009-2010 91.18 10.174 81.01 6561.97
Total Returns 8744.25
_
Variance =1/n-1 (R_R)2 =1/5-1(8744.25) = 2186.06
Standard Deviation = Variance = 2186.06 = 46.75
HULL:

Avg.__ __ __
Year Returns Return( R) (R-R) (R_R)2
2005-2006 1.33 12.2200 -10.89 118.59
2006-2007 -34.72 12.2200 -46.94 2203.36
2007-2008 3.52 12.2200 -8.70 75.69
2008-2009 -14.76 12.2200 -26.98 727.92
2009-2010 105.75 12.2200 93.53 8747.86
Total Returns 11873.46
2
Variance =1/n-1 (R_R) =1/5-1(11873.43) = 2968.35
Standard Deviation = Variance = 2968.35 = 54.48

53
 BHEL:

Avg.__ __ __
Year Returns Return( R) (R-R) (R_R)2
2005-2006 31.36 84.99 -53.63 2876.39
2006-2007 23.42 84.99 -61.57 3791.11
2007-2008 170.22 84.99 85.23 7263.81
2008-2009 20.30 84.99 -64.69 4185.05
2009-2010 179.67 84.99 94.68 8963.92
Total Returns 27080.28

Variance =1/n-1 (R_R)2 =1/5-1(27080.29) = 6770.07

Standard Deviation = Variance = 6770.07 = 82.28

BAJAJ:

Avg.__ __ __
Year Returns Return( R) (R-R) (R_R)2
2005-2006 85.27 69.60 15.67 245.55
2006-2007 2.64 69.60 -66.96 4483.64
2007-2008 89.68 69.60 20.08 403.21
2008-2009 18.37 69.60 -51.23 2624.51
2009-2010 152.10 69.60 82.50 6806.25
Total Returns 14563.16

Variance =1/n-1 (R_R)2 =1/5-1(14563.16) = 3640.79

54
Standard Deviation = Variance = 3640.79 = 60.33

STANDARD DEVIATION OF COMPANIES:

Formula:
Standard deviation = Variance
_
Variance = 1/n-1 (R-R)2
AVERAGE
S.NO NAME OF THE COMPANY RETURN

1 DR.Reddy Lab.Ltd. 46.75

2 Hindustan Unilever Ltd. 54.48

3 Bharat Heavy Electronics Ltd. 82.28

4 Bajaj Automobiles Ltd. 60.33

Based on the above calculations Standard Deviation of BHEL is high and DR.Reddy Lab Ltd. Is
a low & other company having medium standard deviations?

55
 STANDARD DEVIATION

90
80
70
60
50
40
30
20
10
0
DR.Reddy Hindustan Bharat Heavy Bajaj
Lab.Ltd. Unilever Ltd. Electronics Automobiles
Ltd. Ltd.

Analysis
Standard deviation is the indication at risk associated with a security it shows
uncertainty of return from a security from above analysis BHEL have high Standard deviation
and it has practical to get good return Dr. Reddy’s Lab has 46.75 is low risky.

56
CALCULATION OF CORRELATION:
__ __
Covariance (COV ab) = 1/n-1 (RA-RA) (RB-RB)
Correlation Coefficient = COV ab/σa*σb

1. DR.REDDY & OTHER COMPANIES:

i. DR.REDDY (RA) HULL;

__ __ __ __
Year (RA-RA) (RB-RB) (RA-RA)(RB-RB)

2005-2006 -16.02 -10.89 174.50

2006-2007 -26.57 -46.94 1247.38

2007-2008 -3.68 -8.70 32.05

2008-2009 -34.72 -26.98 936.85

2009-2010 81.01 93.53 7576.49

Total Returns 9967.27

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

Correlation Coefficient = COV ab/σa*σb
σa = 46.75; σb = 54.48
= 2491.82/ (46.75) (54.48) = 0.978

57
 ii. DR.REDDY (RA) & BHEL (RB):

__ __ __ __
Year (RA-RA) (RB-RB) (RA-RA)(RB-RB)
2005-2006 -16.02 -53.632 859.40
2006-2007 -26.57 -61.572 1636.21
2007-2008 -3.68 85.228 -313.98
2008-2009 -34.72 -64.692 2246.37
2009-2010 81.01 94.678 7669.49
Total Returns 12097.49
Covariance (COV ab) =1-5-1(12097.48) = 3024.37
Correlation Coefficient = COV ab/σa*σb
σa = 46.75; σb = 82.28
= 3024.37/ (46.75) (82.28) = 0.786
iii. DR.REDDY (RA) & BAJAJ (RB):

__ __ __ __
Year (RA-RA) (RB-RB) (RA-RA)(RB-RB)
2005-2006 -16.02 15.670 -251.10
2006-2007 -26.57 -66.960 1779.40
2007-2008 -3.68 20.080 -73.97
2008-2009 -34.72 -51.230 1778.91
2009-2010 81.01 82.500 6683.00
Total Returns 9916.24

Covariance (COV ab) =1-5-1(9916.23) = 2479.05

Correlation Coefficient = COV ab/σa*σb
σa = 46.75; σb = 60.33
= 2479.05/ (46.75) (60.33) = .878

58
2. HULL & OTHER COMPANIES:
i. HULL (RA) & BHEL (RB):

__ __ __ __
Year (RA-RA) (RB-RB) (RA-RA)(RB-RB)
2005-2006 -10.89 -53.632 584.05
2006-2007 -46.94 -61.572 2890.19
2007-2008 -8.70 85.228 -741.48
2008-2009 -26.98 -64.692 1745.39
2009-2010 93.53 94.678 8855.23

Total Returns 13333.38

Covariance (COV ab) =1-5-1(13333.38) = 3333.345

Correlation Coefficient = COV ab/σa*σb
σa = 54.48; σb = 82.28
= 3333.345/ (54.48) (82.28) = 0.743
ii. HULL (RA) & BAJAJ (RB):

__ __ __ __
Year (RA-RA) (RB-RB) (RA-RA)(RB-RB)
2005-2006 -10.89 15.670 -170.65
2006-2007 -46.94 -66.960 3143.10
2007-2008 -8.70 20.080 -174.70
2008-2009 -26.98 -51.230 1382.19
2009-2010 93.53 82.500 7716.23
Total Returns 11896.17

59
Covariance (COV ab) =1-5-1(11896.17) = 2974.04
Correlation Coefficient = COV ab/σa*σb
σa = 54.48; σb = 60.33
= 2974.04/ (54.48) (60.33) = 0.90

3. CORRELATION BETWEEN BHEL(RA) & BAJAJ(RB);

__ __ __ __
Year (RA-RA) (RB-RB) (RA-RA)(RB-RB)
2005-2006 -53.632 15.670 -840.41
2006-2007 -61.572 -66.960 4122.86
2007-2008 85.228 20.080 1711.38
2008-2009 -64.692 -51.230 3314.17
2009-2010 94.678 82.500 7810.94
Total Returns 16118.94

Covariance (COV ab) =1-5-1(16118.93) = 4029.73

Correlation Coefficient = COV ab/σa*σb
σa = 82.28; σb = 60.33
= 4029.73/ (82.28) (60.33) = 0.811

60
CALCULATION OF PORTFOLIO WEIGHTS:
Formula:
Wa = σb [σb - (nab*σa)]
σa2 + σb2 – 2nab*σa*σb
Wb = 1 – Wa

I. DR.REDDY & OTHER COMPANIES:

a) DR.REDDY (a) & HULL (b);

σa = 46.75,
σb = 54.48 ,
nab = 0.978

Wa = 54.48 [54.48-(0.978*46.75)]
(46.75)2 + (54.48)2 – 2(0.978)*(46.75)*(54.48)
Wa = 476.70
171.82
Wa = 2.77
Wb = 1-Wa
Wb = 1-2.77 = -1.77

b) DR.REDDY (a) & BHEL (b):

σa = 46.75,
σb = 82.28 ,
nab = 0.786

61
Wa = 82.28 [82.28 – (0.786*46.75)]
(46.75)2 + (82.28) 2 – 2(0.786)*(46.75)*(82.28)

Wa = 3746.20
2908.72

Wa = 1.28
Wb = 1-WA
Wb = 1-1.28 = -0.28

c) DR.REDDY (a) & BAJAJ AUTO (b):

σa = 46.75,
σb = 60.33 ,
nab = 0.878
Wa = 60.33 [60.33 – (0.878*46.75)]
(46.75)2 + (60.33) 2 – 2(0.878)*(46.75)*(60.33)

Wa = 1163.16
872.59

Wa = 1.33
Wb = 1-WA
Wb = 1-1.33 = -0.3

62
II. HULL & OTHER COMPANIES:
a) HULL (a) & BHEL (b):
σa = 54.48,
σb = 82.28 ,
nab = 0.743
Wa = 82.28 [82.28 – (0.743*54.48)]
(54.48)2 + (82.28) 2 – 2(0.743)*(54.48)*(82.28)

Wa = 3439.30
3276.90

Wa = 1.04
Wb = 1-WA
Wb = 1-1.04 = -0.04

b) HULL (a) & BAJAJ(b):

σa = 54.48,
σb = 60.33 ,
nab = 0.90
Wa = 60.33 [60.33 – (0.90*54.48)]
(54.48)2 + (60.33) 2 – 2(0.90)*(54.48)*(60.33)

Wa = 681.60
691.57

Wa = 0.98
Wb = 1-WA
Wb = 1-0.98 = 0.02

63
III. CALCULATION OF WEIGHTS OF BHEL (a) & BAJAJAUTO (b):
σa = 82.28,
σb = 60.33 ,
nab = 0.811
Wa = 60.33 [60.33 – (0.811*82.28)]
(82.28)2 + (60.33) 2 – 2(0.811)*(82.28)*(60.33)

Wa = -385.50
2358.16

Wa = -0.16
Wb = 1-WA
Wb = 1-(-1.16) = 1.16

64
3.3 CORRELATION COEFFICIENT BETWEEN THE SECURITIES
Formula: __ __
Covariance (COV ab) =1/n-1 (RA-RA) (RB-RB)
Correlation Coefficient = COV ab/σa*σb
Where
R = Return
_
R = Average Return
BAJAJ
SECURITY DR.REDDY HULL BHEL AUTO
DR.REDDY 1 0.978 0.786 0.879
HULL 1 0.743 0.9
BHEL 1 0.811
BAJAJ
AUTO 1

PORTFOLIO WEIGHTS:
Formula:
Wa = σb [σb - (nab*σa)]
σa2 + σb2 – 2nab*σa*σb
Wb = 1 – Wa
S.No. PORTFOLIO (A&B) CORRELATION WEIGHT OF A WEIGHT OF B

1 DR.REDDY & HULL 0.978 2.77 -1.77

2 DR.REDDY & BHEL 0.786 1.28 -0.28

3 DR.REDDY & BAJAJ AUTO 0.878 1.33 -0.33

4 HULL & BHEL 0.743 0.104 -0.04

5 HULL & BAJAJ AUTO 0.90 0.98 0.02

6 BHEL & BAJAJ AUTO 0.811 -0.16 1.16

65
Analysis

Correlation of coefficient is the indication of divertible risk

If correlation coefficient is positively high or positive value it is indication that we cant reduce
the risk by portfolio diversification if correlation coefficient is negative or negatively correlated
securities in the portfolio we can reduce or eliminate the risk by diversification
Portfolio HULL and BAJAJ and portfolio BHEL and Baja auto are positive correlated securities
so it is negative advised to set this to portfolio.

66
3.4 CALCULATION OF PORTFOLIO RISK
Rp = σa2* Wa2 + σb2* Wb2 + 2nab*σa*σb*Wa*Wb

I. DR.REDDY & OTHER COMPANIES:

i. DR.REDDY (a) & HULL (b);
σa = 82.28,
σb = 60.33 ,
Wa = 2.77
Wb = -1.77
nab = 0.978

Rp = (46.75)2 + (2.77)2 + (54.48)2 (-1.77)2 2(0.978)*(46.75)*(54.48)*(2.77)*(-1.77)

= 1627.96 = 40.34
ii. DR.REDDY (a) & BHEL (b);
σa = 46.75,
σb = 82.28 ,
WA = 1.28
Wb = -0.28
Nab = 0.786

Rp = (46.75)2 + (1.28)2 + (82.28)2 (-0.28)2 2(0.786)*(46.75)*(82.28)*(1.28)*(-0.28)

= 1923.33 = 43.85

67
iii. DR.REDDY (a) & BAJAJAUTO (b);
σa = 46.75,
σb = 60.33,
Wa = 1.33
Wb = -0.33
nab = 0.878

Rp = (46.75)2 + (1.33)2 + (60.33)2 (-0.33)2 2(0.878)*(46.75)*(60.33)*(1.33)*(-0.33)

= 2036.83 = 45.13

II. HULL & OTHER COMPANIES:

i. HULL (a) & BHEL (b);

σa = 54.48,
σb = 82.28,
Wa = 1.04
Wb = -0.04
nab = 0.743

Rp = (54.48)2 + (1.04)2 + (82.28)2 (-0.04)2 2(0.743)*(54.48)*(82.28)*(1.04)*(-0.04)

= 2939.24 = 54.21

68
ii. HULL (a) & BAJAJAUTO (b):
σa = 54.48,
σb = 60.33,
Wa = 0.98
Wb = -0.02
nab = 0.90

Rp = (54.48)2 + (0.98)2 + (60.33)2 (0.02)2 2(0.90)*(54.48)*(60.33)*(0.98)*(0.02)

= 2966.74 = 54.46

III. BHEL (a) & BAJAJAUTO (b):

σa = 82.28,
σb = 60.33,
Wa = -0.16
Wb = 1.16
nab = 0.811

Rp = (82.28)2 + (-0.16)2 + (60.33)2 (1.16)2 2(0.811)*(82.28)*(60.33)*(-0.16)*(1.16)

= 3552.07 = 59.59

69
3.4 PORTFOLIO RISK:

S.No. COMBINATION PROTFOLIO RISK

1 DR.REDDY & HULL 40.34

2 DR.REDDY & BHEL 43.85

3 DR.REDDY & BAJAJ AUTO 45.13

4 HULL & BHEL 54.21

5 HULL & BAJAJ AUTO 54.46

6 BHEL & BAJAJ AUTO 59.59

Rp = σa2* Wa2 + σb2* Wb2 + 2nab*σa*σb*Wa*Wb

Where,
σa = Standard Deviation of Security a
σb = Standard Deviation of Security b
Wa = Weight of Security a
Wb = Weight of Security b
nab = Correlation Coefficient between Security a & b

70
 PORTFOLIO RISK

70
60
50
40
30
20
10
0

HULL &
HULL &

BHEL &
DR.REDDY

DR.REDDY

DR.REDDY

BAJAJ

BAJAJ
AUTO

AUTO
BHEL
& BAJAJ
& BHEL
& HULL

AUTO

ANALYSIS:
It is proved fact that portfolio is lower than individual risks at assets of portfolio we absurd from
the calculations in that risk of portfolio.

NAME PORTFILIORETURN
DR.REDDY&BHEL 43.85
DR.REDDY&HULL 40.43
DR.REDDY7BAJAJ AUTO 45.13
HULL&BHEL 54.21
HULL&BAJAJAUTO 54.46
BHEL&BAJAJAUTO 59.59
So it is advised ti go for portfolio investment return their individual security investment.

71
3.5 CALCULATION OF PORTFOLIO RETURNS:

PR = (Ra*Wa) + (Rb*Wb)
Where,

Ra = Average Return of Security a

Rb = Average Return of Security b
Wa = weight of Security a
Wb = weight of Security b
PR = Portfolio Return

COMBINAITONS Ra Wa Rb Wb (Ra*Wa) + (Rb*Wb)

DR.REDDY & HULL 10.174 2.77 12.22 -1.77 6.55

DR.REDDY & BHEL 10.174 1.28 84.992 -0.28 -10.78

DR.REDDY & BAJAJAUTO 10.174 1.33 69.6 -0.33 -9.44

HULL & BHEL 12.22 1.04 84.992 -0.04 9.31

HULL & BAJAJAUTO 12.22 0.98 69.6 0.02 13.37

BHEL & BAJAJAUTO 84.992 -0.16 69.6 1.16 67.14

72
3.5 PORTFOLIO RETURN:

PR = (Ra*Wa) + (Rb*Wb)

Where,
Ra = Average Return of Security a
Rb = Average Return of Security b
Wa = weight of Security a
Wb = weight of Security b
PR = Portfolio Return

S.No. COMBINATION (Ra*Wa) + (Rb*Wb)

1 DR.REDDY & HULL 6.55

2 DR.REDDY & BHEL -10.78

3 DR.REDDY & BAJAJ AUTO -9.44

4 HULL & BHEL 9.31

5 HULL & BAJAJ AUTO 13.37

6 BHEL & BAJAJ AUTO 67.14

73
 PORTFOLIO RETURN

80
60
40
20
0
-20 1 2 3 4 5 6

Portfolio Return

ANALYSIS:
It is proved fact that portfolio is lower than individual risks at assets of portfolio we absurd from
the calculations in that risk of portfolio.

NAME PORTFILIORETURN
DR.REDDY&BHEL -10.78
DR.REDDY&HULL 6. 55
DR.REDDY7BAJAJ AUTO -9.44
HULL&BHEL 9.31
HULL&BAJAJAUTO 13.37
BHEL&BAJAJAUTO 67.14

So it is advised it go for portfolio investment return their individual security investment.

74
3.6 PORTFOLIO RISK & RETURN:

S.No. COMBINATION PORTFOLIO RISK PORTFOLIO RETURN

1 DR.REDDY & HULL 40.34 6.55

2 DR.REDDY & BHEL 43.85 -10.78

3 DR.REDDY & BAJAJ AUTO 45.13 -9.44

4 HULL & BHEL 54.21 9.31

5 HULL & BAJAJ AUTO 54.46 13.37

6 BHEL & BAJAJ AUTO 59.59 67.14

PORTFOLIO RISK-RETURN

80

60

40

20

0
1 2 3 4 5 6
-20

RISK RETURN

75
ANALYSIS:
As we absorbed portfolio 6 BHEL& BAJAJAUTO has the risk level of 59.59 and
return from that security is 67.14. So by analysis correlation between the assets we should put
our money into securities.

76
4

77
FINDINGS:
 As far as the average returns of the selected companies are concerned, Bharat Heavy
Electrical Limited is performing well in isolation where as Dr. Reddy’s Lab .Ltd. is
performing very poor.
 As far as the standard Deviation of the selected companies are concerned, Bharat Heavy
Electrical Limited is very high, where as Dr. Reddy’s Lab, Ltd, is giving less risk than
other companies. This means that the higher the risk the higher the return.
 As far as the correlation co-efficient is concerned the study selects only negatively
correlated scrips as suggested by Markowitz. The combination of securities with ITC is
negatively correlated.
 As far as Portfolio Risk & Return are concerned the combination of securities of BHEL
& Bajaj Auto is giving more return and meanwhile the risk involved in that security is
also more.

78
SUGGESTIONS:
.
• I suggest to investors to go for portfolio investment. Instead at having single asset
investment.
• Among the analyses combinations at portfolio BHEL&BAJAJAUTO is suitable for
investment
• Choose negatively correlated assets ti reduce the risk by diversification complete and
diversity investment by different sector.
• Choose portfolio by having concern a but your investment objectives and risk
tolerance.

79
CONCLUSIONS:

Before investing in shares you should look at the type of shares you want to buy and the way in
which you want to deal on the stock market. The main routes for investing in shares are;
.
 Invest your capital in a number of different companies( a portfolio of shares)
 Invest indirectly and spread your risk through collectively investments

80
BIBLIOGRAPHY
TEXT BOOKS:

1. V. K. Bhalla : Security Analysis & Portfolio Management

2. V. Avadhani : Investment Management
3. S. Kevin : Portfolio Management
4. Prasanna Chandra : Investment Analysis & Portfolio Management

ARTICLES:
1. KARVY FINANCIAL POLICIES

WEBSITES:

1. www.nseindia.com

2. www.bseindia.com

3. www.google.com

4. www.valueresearchonline.com

5. www.moneycontrol.com

6. www.wikipedia.com

7. www.investropedia.com

All the above sites were referred in the month of January and February 2011.

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