INTRODUCTION

NEED & IMPORTANCE:

Economic liberalization has accelerated the pace of development in the securities market, which has undergone a sea change during the last 2 decades. In India, the role of securities market in mobilizing & channel sing private capital for the economic development of the country has increased over the year and securities market itself has undergone structural transformation with the introduction of computerized online trading & interconnected market system.

Over the years as investment in securities gathered momentum, the investment decisions were more often made by the whims & fancies of the investors & rumors heard rather than by rational analysis. Only recent security analysis & 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, debenture & bonds is profitable well as exiting. It is indeed rewarding but involves a great risk if risky & 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 a portfolio. Creation of a 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 portfolio.

OBJECTIVES OF THE STUDY 1. How to analyze securities and Portfolio Management 2. To study the investment pattern and its related risk & return 3. To assist the investors to choose wisely between the investment 4. To understand, analyze and select the best portfolio of securities 5. To strike the balance between costs of funds, risk and returns. alternative

SCOPE OF STUDY : This study covers markowitz model. The study covers the calculation of Return on between the different securities in order to find out at what percentage funds should be invested among the companies in the different securities(means 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.

RESEARCH METHODOLOGY PRIMARY SOURCE OF DATA : Primary source of data is the data which needs the personal efforts of collecting and which are not readily available. Primary data is the first hand information, which has been collected directly from the company Financial Analysts and Investors.

SECONDARY DATA : y y y Companies Annual Reports Information from web sites Publication(News Papers, Magazines)
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y y

Information provided by Hyderabad Stock Exchange. Text Books

Period of Study For different companies, financial data has been collected from the year 2004-05 TO 2008-09.

Selection of Companies Companies selected for analysis are:y y y y y GE Infosys Indian Tobacco Corporation (ITC) Hero Honda Reliance

Limitation of the study y y y y This study has been conducted purely to understand portfolio management for investor. For study purpose 5 companies have been taken for calculations. Study is limited to period from 2004-05-2008-09 Data collection was strictly confined to secondary source. No primary data associated with the project. y y y There was a constraint with regard to time allocated for the research study, a period of one and half month i.e., from Apr 1st to May 15th 2010. Detailed study of the topic was not possible due to limited size of the project The availability of information in the form of annual reports and price fluctuations of the companies was a big constraint to the study.

INTRODUCTION KARVY COMPUTERSHARE PVT LIMITED

Historical Background: The birth of Karvy was on a modest scale in 1981. It began with the vision and enterprise of a small group of practicing Chartered Accountants who founded the flagship company Karvy Consultants Limited. We started with consulting and financial accounting automation, and carved inroads into the field of registry and share accounting by 1985. Since then, we have utilized our experience and superlative expertise to go from strength to strengthto better our services, to provide new ones, to innovate, diversify and in the process, evolved Karvy as one of Indias premier integrated financial service enterprise. Thus over the last 20 years Karvy has traveled the success route, towards building a reputation as an integrated financial services provider, offering a wide spectrum of services. And we have made this journey by taking the route of quality service, path breaking innovations in service, versatility in service and finallytotality in service. Our highly qualified manpower, cutting-edge technology, comprehensive infrastructure and total customer-focus has secured for us the position of an emerging financial services giant enjoying the confidence and support of an enviable clientele across diverse fields in the financial world. Our values and vision of attaining total competence in our servicing has served as the building block for creating a great financial enterprise, which stands solid on our fortresses of financial strength - our various companies.With the experience of years of holistic financial servicing behind us and years of complete expertise in the industry to look forward to, we have now emerged as a premier integrated financial services provider. And today, we can look with pride at the fruits of our mastery and experience comprehensive financial services that are competently segregated to service and manage a diverse range of customer requirements.
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PROFILE OF KARVY FINANCIAL POLICYS:

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 indepth knowledge of market functioning and changing trends, planning with foresight and choosing one’ 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.

We offer trading on a vast platform; National Stock Exchange, Bombay Stock Exchange and Hyderabad Stock Exchange. More importantly, we make trading safe to the maximum possible extent, by accounting for several risk factors and planning accordingly. We are assisted in this task by our in-depth research, constant feedback and sound advisory facilities. Our highly skilled research team, comprising of technical analysts as well as fundamental specialists, secure result-oriented information on market trends, market analysis and market predictions. This crucial information is given as a constant feedback to our customers, through daily reports delivered thrice daily; The Presession Report, where market scenario for the day is predicted, The Mid-session Report, timed to arrive during lunch break, where the market forecast for the rest of the day is given and The Post-session Report, the final report for the day, where the market and the report itself is reviewed. To add to this repository of information, we publish a monthly magazine “ Karvy ; The Finapolis & rdquo;, which analyzes the latest stock market trends and takes a close look at the various investment options, and products available in the market, while a weekly report, called “ Karvy Bazaar Baatein”, keeps you more informed on the immediate trends in the stock market. In addition, our specific industry reports give comprehensive information on various industries. Besides this, we also offer special portfolio analysis packages that provide
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daily technical advice on scrips for successful portfolio management and provide customized advisory services to help you make the right financial moves that are specifically suited to your portfolio. Our Stock Broking services are widely networked across India, with the number of our trading terminals providing retail stock broking facilities. Our services have increasingly offered customer oriented convenience, which we provide to a spectrum of investors, high-networth or otherwise, with equal dedication and competence. But true to our spirit, this success is not our final destination, but just a platform to launch further enhanced quality services to provide you the latest in convenient, customer-friendly stock management. Over the years we have ensured that the trust of our customers is our biggest returns. Factors such as our success in the Electronic custody business has helped build on our tradition of trust even more. Consequentially our retail client base expanded very fast.

KARVY ALLIANCES: KARVY COMPUTERSHARE PVT LIMITED

Karvy Computershare Private Limited is a 50:50 joint venture of Karvy Consultants Limited and Computershare 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 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 corporates and mutual funds and 16 million investors.

KARVY COMPUTERSHARE PVT LIMITED

Mutual Fund Services Issue Registry Corporate Shareholder Services We have traversed wide spaces to tie up with the worlds largest transfer agent, the leading Australian company, Computershare 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 Computershare 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.

MUTUAL FUND SERVICES

Excellence has to be the order of the day when two companies with such similar ideologies of growth, vision and competence, get together. www.karisma.karvy.com We have attained a position of immense strength as a provider of across-the-board transfer agency services to AMCs, Distributors and Investors. Nearly 40% of the top-notch AMCs including prestigious clients like Deutsche AMC and UTI swear by the quality and range of services that we offer. Besides providing the entire back office processing, we provide the link between various Mutual Funds and the investor, including services to the distributor, the prime channel in this operation. Carrying the limitless' ideology forward, we have explored new dimensions in every aspect of Mutual Fund servicing right from volume management, cost effective pricing, delivery in the least turnaround time, efficient back-office and front-office operations to customized service. We have been with the AMCs every step of the way, helping them serve their investors better by offering them a diverse and customized range of services. The first to market' approach that is our anthem has earned us the reputation of an innovative service provider with a visionary bent of mind.
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Our service enhancements such as Karvy Converz', a full-fledged call center, a top-line website (www.karvymfs.com), the m-investor' and many more, creating a galaxy of customer advantages. www.karvymfs.com

ISSUE REGISTRY
In our voyage towards becoming the largest transaction-processing house in the Indian Corporate segment, we have mobilized funds for numerous corporate, Karvy has emerged as the largest transaction-processing house for the Indian Corporate sector. With an experience of handling over 700 issues, Karvy today, has the ability to execute voluminous transactions and hard-core expertise in technology applications have gained us the No.1 slot in the business. Karvy is the first Registry Company to receive ISO 9002 certification in India that stands testimony to its stature Karvy has the backing of skilled human resources complemented by requisite technological packages to ensure a faster processing capability. Karvy has the benefit of a good synergy between depositories and registry that enables faster resolution to related customer queries. Apart from its unique investor servicing presence in all the phases of a public Issue, it is actively coordinating with both the main depositories to develop special models to enable the customer to access depository (NSDL, CDSL) services during an IPO. Our trust-worthy reputation, competent manpower and high-end technology and infrastructure are the solid foundations on which our success is built.

http://karisma.karvy.com

CORPORATE SHAREHOLDER SERVICES

Karvy has been a customer centric company since its inception. Karvy offers a single platform servicing multiple financial instruments in its bid to offer complete financial solutions to the varying needs of both corporate and retail investors where an extensive range of services are provided with great volume-management capability. Today, Karvy is recognized as a company that can exceed customer expectations which is the reason for the loyalty of customers towards Karvy for all his financial needs. An

opinion poll commissioned by The Merchant Banker Update and conducted by the reputed market research agency, MARG revealed that Karvy was considered the Most Admired in the registrar category among financial services companies. We have grown from being a pure transaction processing business, to one of complete shareholder solutions.

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. Our horizontal offerings do justice to our stance as a comprehensive BPO unit and include a variety of services in Finance and Accounting Outsourcing Operations, Human Resource Outsourcing Operations, Research and Analytics Outsourcing Operations and Insurance Back Office Outsourcing Operations. www.karvyglobal.com

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. Our commitment to excel in this sector stems from the immense importance that commodities broking has to a cross-section of investors – farmers, exporters, importers, manufacturers and the Government of India itself. www.karvycomtrade.com

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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 :
y

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.

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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 20 million individual investors in various capacities, and provides investor services to over 300 corporates, comprising the who's 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, Realty Services, Personal Finance Advisory Services, placement of equity, IPOs, 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. 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.

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SECURITY ANALYSIS. Security analysis examines the industries and securities of individual companies. Primarily to develop value and return expectations for securities and thus to distinguish overpriced securities from under priced ones, with the evolution of portfolio theory and new methods of addressing investment management issues, the job of financial analysis has become more demanding. The process of investment management beings with as evaluation of the available investment opportunities, the financial analyst must have clear picture and of the current state of capital markets and the various classes of fixed income and equity avenues of investment. He should be able to design a framework for evolution of risk return profile of various securities. Today money flows effortlessly into those avenues, which offer higher returns. These developments have transformed the task of security analysis calling for application of scientific tools and techniques. Portfolio management involves investing through a rational decision making process in which the investors attempt to select portfolio of securities that meet predetermine levels of return based on their capacity to bear risk.

INVESTMENT
Physical investment is the current product set aside during a given period to be used for future production--in other words, an addition to the stock of capital goods. As measured by the national income and product accounts, private domestic investment consists of investment in residential and nonresidential structures, producers' durable equipment, and the change in business inventories. Financial investment is the purchase of a financial security. Investment in human capital is spending on education, training, health services, and other activities that increase the productivity of the workforce. Investment in human capital is not treated as investment by the national income and product accounts.

Characteristics of investment are Return, Risk, Safety, and Liquidity. Risk and return of an investment are related. Normally, the higher the risk, the higher is the return.
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The safety of an investment implies the certainty of return of capital without loss of money or time. Every investment which is easily saleable and marketable, without loss of money and time is said to processes liquidity, some investment like company deposited, bank deposits, post office deposits, NSE, NSS etc are not marketable. Some investment instruments like preference shares and debentures and marketable but there are no buyers in many cases and hence there liquidity is negligible. Equity shares of company listed open stock exchanges are easily marketable through stock exchange.

Hence an investor generally prefers liquidity for his investment, safety of his funds, good return with minimum risk and maximum return.

RETURN
The amount of money that you receive as a percentage of an initial investment: For example, if you initially invested $100 in a one-year investment, and in a year your investment had grown to $110, the return on would be $10, or 10%. y Single period Return

It refers to a situation where an investor is concerned with return form a single period.

MULTI-PERIOD RETURN It refers to situation where more than single period returns are under consideration. Investor is concern with computing the return per period, over a longer period. EX-POST RETURN They properly measure the returns generated by an investment, one must consider both the price changed and cash flow derived from the investment during the period it was held. EX-ANTE RETURN The majority of investors tend to emphasize the return they expect from a security while making investment decisions and the expected return of a security. This enable investor to lock into future prospects from an investment and the measurement of returns form expectations of benefits in known as ex-ante returns.
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RISK: One of the investment terms you hear most often is also one of the hardest to define risk. Not only does risk mean different things to different people, your own definition will probably change during your lifetime. Every investment holds some degree of risk, even a Treasury bill. Here are three risk considerations you should review when planning your investments.

In futures trading Risk, is the probability of loss of trading capital. Market risk may be one of the things considered by fundamental traders but it is not all of it. Market risk if it exists in futures, may not be considered at all by technical traders who base there decisions on price action. Prices move first and fundamentals come second. SECURITY ANALYSIS It refers to the analysis of trading securities from the point of view of their prices, return and risk. All invest are 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 7000 companies are listed in stock exchanges of the country. Securities classified into ownership securities such as equity shares and preferences shares and creditor ship securities such as debentures and bonds. Recently a number of new securities such as Convertible debentures, Deep discount bonds, Zero coupon bonds, Flexi bonds, Floating rate bonds, Global depository receipts, Euro currency bonds etc., are issued to rise funds for their projects by companies from which investor has to chooses those securities that is worthwhile to be included in his investment portfolio. This calls for detailed analysis of the available securities.

Security analysis is the phase of the portfolio management process. It examines the risk return characteristics of individual securities. A basic strategy in securities investment is to buy under priced securities and sell over priced securities. But the problem is how identifying such securities in other words Mis-priced securities. This is what security analysis is all about.
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The security market emerges out of the new issues made by companies, government, local bodies and public undertakings. All securities are in the form of IOUs except those of ownership shares. Securities of more than one year come into categories of capital and stock market.

TRADING: The market in securities is influenced by the forces of supply and demand that determine volume of trading. Turnover and also the price: The volume of trading is reflected in the number of deal per day hours, numbers of days in a year in which the company share is traded or the number of shares traded in a day or a year. The main constituents of and players in the market are as follows. a) Investment traded such as equity and preference shares in the category of ownership capital and debentures, bonds and p.s.u bonds and government securities in the category of debt capital. A number of new investments like warrants, zero coupon bonds etc are also being issued at present. b) The institution or players in the market are the issuers of capital namely corporate units, government and semi-government bodies and public sector undertakings that are the major borrowers, the investors and intermediaries such as bank, financial institution and brokers. More recently, a number of mutual funds, FFIs, NRIs, and OCBs have also started as players in the market. c) Intermediaries are brokers, merchant bankers, financial investment, financial and investment consultancy firm etc., these are active both primary and secondary market. MARKET ANALYSIS: The security market analysis refers to the analysis of market and securities traded price trends and other indicators. VALUATION: The basic objective of market analysis is to know the fair valuation of shares for buying and selling. The market comprises of various securities whose price change from day and from time to time. The investors should have information of fair prices for
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making their decisions of buying and selling. It is, therefore Necessary to make security valuation an important part of market analysis. The valuation analysis in particular has to components, namely, the market valuation at macro level & the individual security valuation at micro level. The macro level analysis is done with help of suitable price indices of the leading scrips in the market and their price-earnings ratio. The BSE national index of securities price has 100 scrips in it and their P/E ratio, Represents the market valuation of securities, these are published by the BSE on a daily basis. As regards the individual security valuation, the intrinsic value is basis on which over valuation or under valuation is judged. It is determined by expected to the present time by a suitable discount rate. But in actual practice this method is not followed. The methods of valuation are i) ii) Discounted value of future income streams or dividends No. of years of payback period. This methods used in the form of P/E ratio.

THEORETICAL FRAMEWORK: a) The first theoretical tool is the savings investment theory saving promote capital formation and economic growth through increase in output and incomes of the country. The mobilization of savings for capital formation is through capital market comprising the new issues market and stock market. b) Secondly, market behavior depends on the players and their role in trading. Analysis of market price behavior is thus possible though the number of buyers and sellers available and information in the market. The capital market efficiency theory, Random Walk Theory and many other theories explain how prices behavior in the market. To explain why share price fluctuate and what the fair prices are, theses theories are used. The theory of Trend Walkers explains the market trends as set by a few trend setters or leaders followed by a mass of trend walkers.

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c) Third theoretical tool in investment analysis is fundamental analysis that explains why prices are what they are. The market price & indidvual share prices are explained by fundamental factors namely. Economy, industry and company analysis. In security valuation the most important tools is the ratio analysis or examination of balance sheet of a company whose share is being examined. This enables us to locate the undervalued shares and overvalued shares and to decide what shares s to buy and what share to sell. d) Fourth theoretical tool is technical analysis, which is an analysis of the price behavior of aggregate market and of individual share with help of charts on price. Trading volume theories in this analysis. This explains the price behavior. e) Lastly, Risk Return Analysis, which are two major characteristic of any investment. In this, the choice of scrips is decided by an analysis of risks involved in relation to the return in the background of marker risk and marker return. Portfolio theory provides the linkage of market to investment. An efficient portfolio is to be developed by minimize the risks and maximize the returns.

A brief explain of these theories are given bellow:

FUNDAMENTAL ANALYSIS: Fundamental analysis is a stock valuation method that uses financial analysis to predict price movement (compare to technical analysis).

Fundamental analysis attempts to analyze the company's operations and the market in which the company is operating to understand the stability and growth potential of a company. It is presumed that this will be reflected in the stock price. Another application of fundamental analysis presumes that the market is indeed somewhat efficient, but some stocks (perhaps because they are small and therefore not closely watched) are either over- or undervalued. This use of fundamental analysis can be viewed as a type of arbitrage. Sometimes earnings multiples, such as the P/E ratio, are used to determine value, where cash flows are relatively stable and predictable. The obvious caveat is that the P/E
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ratio is ultimately not an objective measure, because it must be interpreted. A high P/E ratio might be an overvalued stock, or it might be a company with high potential for growth. Other techniques include discounted cash flow, book value, and dividend yield analysis. The analysis of Economy, Industry and company fundamentals constitute the main activity in the fundamental approach to security analysis. A company belongs to an industry and the industry operates within the economy. As such industry and economy factors affect the performance of the company. These factors are:y y y Economy wide factors such as growth rate of the economy, inflation rate, and foreign exchange rate etc. that affect all companies. Industry wide factors such as demand supply gap in the industry the emergence of substitute products, changes in government policy relating to industry. Company specific factors such as age of it plant, the quality management, brand image of its product etc.

Fundamental analysis involves three steps: 1) Economy analysis 2) Industry analysis 3) Company analysis

 ECONOMY ANALYSIS: The performance of a company depends on the performance of the economy. It the economy is booming income rise and demand fro goods will increase, if the economy is in recession, the performance of the company will be generally bad. Investors are concerned with those variables in the economy, which affect the performance of the company in which they tend to invest. Those are:-

 GROWTH RATE NATIONAL INCOME: The rate of growth of the national economy is an important variable. GNP (Gross national product), NNP (Net national income) and GDP (Gross domestic product) are the difference measures indicates growth rate of the economy. These estimates are made
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available by government. An economy typically passes through different phases, such as depression, recovery boom and recession. During a depression, demand is low and declining. Inflation is often high and so is interest rate. During the recovery stage, the economy beings to revive after a depression, Demand picks up landing to more investment in the economy. In the boom phase, investment and production are maintained at a high level to satisfy high demand. In recession stage, the economy slowly beings to experience a downturn in demand, production, employment etc., and the profits also decline.  INFLATION: Inflation prevailing in the economy has considerable impact. Higher rates of inflation upset business plans, lead to cost escalation and result in a squeeze on profit margins, High rates of inflation in an economy are likely to affect the performance of companies. Inflation is measured both in terms of wholesale prices through wholesale price index (WPI) and in terms of retail prices through consumer price Index  INTEREST RATE: Interest rate determines the cost and availability of credit for companies operating in an economy. A low interest rate stimulates investment by making credit available easily and cheaply. Higher interest rate results in higher cost of production, which may lead to lower profitability and lower demand. An investor has to evaluate and consider the other factors like government revenue, expenditure, deficits, exchange rate, and infrastructure economic and political stability for a good performance of the economy.  INDUSTRY ANALYSIS: An investor ultimately invests his money in the securities of one or more specific companies. The performance of companies would be influenced by the fortunes of the industry to which it belongs. An industry is generally described as a homogenous group of companies. As industry is defined as A group of firm products, which serve the same need to a common set of buyers:

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Market experts believe that each poll has a stage and the decline stage. Even industry has a life cycle theory.

(i) (ii) (iii) (iv)

The pioneering stage The Expansion stage The stagnation stage The Decay stage

Technological advances in one country can affect the growth of another industry. All these stages give an insight into merited of invest in a given industry at a given time. An industry usually exhibits low profitability in the pioneering stages, high profitability in the growth or expansion stage, and medium but steady profitability in the stagnation or maturity stage and declining profitability in the decay stage.

COMPANY ANALYSIS: It is the final stage of fundamental analysis. It deals with the estimation of return and risk of individual shares. In company analysis, the analyst tries to forecast the future earnings of the company. The level, trend and stability of earning of a company, however depend upon a number of factors concerning the operations of the company.

TECHNICAL ANALYSIS: A method of evaluating securities by relying on the assumption that market data, such as charts of price, volume, and open interest, can help predict future (usually shortterm) market trends. Unlike fundamental analysis, the intrinsic value of the security is not considered. Technical analysts believe that they can accurately predict the future price of a stock by looking at its historical prices and other trading variables. Technical analysis assumes that market psychology influences trading in a way that enables predicting when a stock will rise or fall. For that reason, many technical analysts are also market timers, who believe that technical analysis can be applied just as easily to the market as a whole as to an individual stock.

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DOW THEORY: Dow Theory is based on the philosophy that the market prices reflect every significant factor that affects supply and demand - volume of trade, fluctuations in exchange rates, commodity prices, bank rates, and so on. In other words, the daily closing price reflects the psychology of all players involved in a particular marketplace - or the combined judgment of all market participants. The goal of the theory is to determine changes in the major trends or movements of the market. Markets tend to move in the direction of a trend once it becomes established, until it demonstrates a reversal. Dow Theory is interested in the direction of a trend and doesn't offer any forecasting ability for determining the ultimate duration of a trend.

Much of today's technical analysis is based on Dow's original "trend following' system y y y y y y y Classification of a trend Principles of confirmation or divergence Use of volume to confirm trends Use of percentage retrenchment Recognition of major bull and bear markets Signaling the large central section of important market moves Dow Theory has been successful in identifying 68% the major trends over the years The three trends are: y y y Uptrend: successively higher peaks (highs) and higher troughs (lows) Downtrend: successively lower peaks and troughs Sideways Channel: peaks and troughs don't successively rise or fall.

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ELLIOT WAVE THEORY: Interprets market actions in terms of recurrent price structures, in other words that market cycles are composed of two major types of waves, Impulse waves and Corrective waves. These waves are fractal in nature, meaning that market structures are built from similar patterns on larger or smaller scales. Therefore the wave can be counted on a longterm yearly market chart as well as short-term hourly market chart.

EFFICIENT MARKET THEORY: The (now largely discredited) theory that all market participants receive and act on all of the relevant information as soon as it becomes available, If this were strictly true, no investment strategy would be better than a coin toss. Proponents of the efficient market theory believe that there is perfect information in the stock market. This means that whatever information is available about a stock to one investor is available to all investors (except, of course, insider information, but insider trading is illegal). Since everyone has the same information about a stock, the price of a stock should reflect the knowledge and expectations of all investors. The bottom line is that an investor should not be able to beat the market since there is no way for him/her to know something about a stock that isnt already reflected in the stock's price. Proponents of this theory do not try to pick stocks that are going to be winners; instead, they simply try to match the market's performance. However, there is ample evidence to dispute the basic claims of this theory, and most investors don't believe it.

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PORTFOLIO MANAGEMENT

INTRODUCTION:Many times the investors go on acquiring assets in an adhoc & unplanned manner & the result is high risk, low return profile that they may face. All such assets of financial nature such as gold, silver, real estate, building, insurance policies, Post Office certificate, NSC or NSS would constitute his portfolio & the wise investor not only plans his portfolio as per risk return profile or preferences but manages his portfolio efficiently so as to secure the highest return for the lowest risk possible at that level of investment. This is in short the Portfolio Management.

The basic principle is that the higher the risk, the higher is the return & investor should have clear perception of elements of risk & return when he makes investments. Risk return analysis is essential for the investment & portfolio management. An investor considering investment in securities is faced with the problem of choosing from among a large number of securities. He would attempt to choose the most desirable securities & like to allocate his funds over group of securities. As the economic and financial environment keep changing the risk return characteristics of individual securities as well as portfolio also change.

An investor invests his funds in portfolio expecting to get a good return consistent with the risk that he has to beat. Portfolio management comprises all the processes involved in the creation & maintenance of an investment portfolio. It deals specifically with Security Analysis, Portfolio Analysis, Selection, and Revision & Evaluation. Portfolio Management is a complex process, which tries to make investment activity more rewarding & less risky. RISK OF PORTFOLIO MANAGEMENT: There was a time when portfolio management was an exotic term. The scenario has changed drastically. It is now a familiar term and is widely practiced in India. The theories and concepts relating to portfolio management now find their way to the front pages financial newspapers and the cover pages of investment journals in India.
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Indian capital markets have become active. The Indian stock markets are steadily moving towards higher efficiency, with rapid computerization, increasing market transparency, better infrastructure, better customer service etc. The markets are mutual funds have been set up the country since 1987. With this development investment in securities has gained considered momentum.

Professional portfolio management backed by competent research began to be practiced by mutual funds, investment consultant and big brokers. The Securities Exchange Board of India (SEBI), The Stock Market Regulatory body in India is supervising the whole process.

With the advent of computer the whole process of portfolio management has become quite easy. The computer can absorb large volumes of data perform computations accurately and quickly give out results in desired form. The trend towards liberalization and globalization of the economy has promoted free flow of capital across international border. Portfolio now include not only domestic securities but also foreign securities such as Options and Future in the field of investment management and trading in derivation securities, their valuation etc., have broadened its scope.

PORTFOLIO THEORIES

MARKOWITZ THEORY; Markowitz approach determines for the investor the efficient set of portfolio through 3 important variables, i.e., Standard Deviation, Covariance and Co-efficient of Correlation. Markowitz model is called the Full Covariance Model. Through this method, the investor can with the use of computer, find out the efficient set of portfolio by finding out the trade off between risk and return between the limits of zero to infinity. According to this theory, the effects of one security purchase over the effects of the other security purchase are taken into consideration and then the results are evaluated.

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ASSUMPTION UNDER MARKOWITZ THEORY; Markowitz theory is based on the modern portfolio theory under several assumptions. The assumptions are:1. The market is efficient and all investors have in their knowledge all the facts about the stock market and so on investor can continuously make superior returns either by predicting past behavior of stocks through technical analysis the intrinsic value of shares. Thus all investors are in equal category. 2. All investor before making any investment have a common goal. This is the avoidance of risk because they are risk avers. 3. All investors would like to earn the maximum rate of return that they can achieve from their investments. 4. The investors base their decisions on he expected rate of return of an investment. The expected rate of return can be found out by finding out the purchase price of a security divided by the income per year and by adding annual capital gains. It is also necessary to know the standard deviation of the rate of return, which is begin offered on the investment. The rate of return and standard deviation are important parameters for finding out whether investment is worthwhile for a person.

5. Markowitz brought out the theory that it was useful insight to find out how the security returns are correlated to each other. By combining the assets in such way that they give the lowest risk maximum returns could be brought out by the investor. 6. From the above it is clear that investor assumes that while making an investment he will combine his investments in such a way that he gets a maximum return and is surrounded by minimum risk. 7. The investor assumes that greater or larger the return that he achieves on his investments, the higher the risk factor that surrounds him. On the contrary when risks are low the return can also be expected to be below. 8. The investor can reduce his risk if he adds investments to his portfolio. 9. An investor should be able to get higher for each level of risk by determining the efficient set of securities.
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THE SHARPE INDEX MODEL: The investor always likes to purchase a combination of stock that provides he highest return and has lowest risk. He wants to maintain a satisfactory reward to risk ratio. Traditionally analysis paid more attention to the return aspect 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 the 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. SINGLE INDEX MODEL: Casual observation of the stock prices over a period of time reveals that most of the stock prices move with the market index. When sensex increases, stock prices also tend to increase and vice- versa. This indicates that some underlying factors affect the market index as well as the stock prices. Stock prices are related to the market index and the relationship could be used to estimate the return on stock. Towards this purpose, the following equation can be used.  R j ! a i  a iR m  ei Where R = Expected return on security I
 a i = Intercept of the straight line or alpha co-efficient a i = Slope of straight line or beta co-efficient

Rm = The rate of return on marker index ei = Error team

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CORNER PORTFOLIO The entry or exit of a new stock in the portfolio generates a series of corner portfolio. In a one stock portfolio, itself is the corner portfolio. In a two stock portfolio, the minimum attainable risk (variance) and the lowest return would be the corner portfolio. As the member of stocks increases in a portfolio, the corner portfolio would be the one with lowest return and risk combination.

SHARPES OPTIMAL PORTFOLIO 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 ration.
i  f / i

Where,

The excess return is the difference between the expected return on the stock and the risk less rate of interest such as the rate offered on the government security or Treasury bill. The excess return to beta ratio measures the additional return on security (excess of the risk less asset return) per unit of systematic risk or non-diversifiable risk. This ratio provides a relationship between potential risk and reward.

The steps for finding out the stocks to be included in the optimal portfolio are given below: 1. Finding out the excess return to beta ratio for each stock under consideration. 2. Rank them from the highest to the lowest 3. Proceed to calculate C for all the stocks according to the ranked order using the following formula.

Ci ! W2

4. The calculated values of Ci start declining after a particular Ci and that point is taken as the cut-off point and that stock ratio is the cut-off ratio.

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 associated with

one unit changer in the market return.

 / N  i  f i / W 2ei 1  W2 N Fi / W 2ei F

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CAPITAL ASSET PRICE THEORY: We have seen that diversifiable risk can be eliminated by diversification. The remaining risk portion is the un-diversifiable risk i.e., market risk. As a result, investors are interested in knowing the systematic risk when they search for efficient portfolios. They would like to have assets with low beta coefficient i.e., systematic risk. Investors would opt for high beta co-efficient only if they provide high rate of return. The risk were averse nature of the investors is the underlying factor for this behavior. The capital asset pricing theory helps the investors top understand and the risk and return relationship of the securities. It also explains how assets should be priced in the capital market.

THE CAPM THEORY: Markowitz, William Sharpe, John Lintner and Jan Mossin provided the basis structure for the CAPM model. It is a model of linear general equilibrium return. In the CAPM theory, the required rate of return of an asset is having a linear relationship with assets beta value i.e., undiversifiable or systematic risk.

ASSUMPTIONS: 1. An individual seller or buyer cannot affect the price of a stock. This assumption is the basic assumption of the perfect competitive market. 2. Investors make their decisions only on the basis of the expected returns, standard deviations and covariances of all pairs of securities. 3. Investors are assumed to have homogenous expectations during the decision making period. 4. The investor can lend or borrow any amount of funs 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. 5. Assets are infinitely divisible, according to this assumption, investor could buy and quantity of share i.e., they can even buy ten rupees worth of Reliance Industry shares. 6. There is no transaction cost i.e., no cost involved in buying and selling of stocks.

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7. There is no personal income tax. Hence, the investor is indifferent to the form of return either gain or dividend. 8. Unlimited quantum if short sales are allowed. Any amount of shares an individual can sell short.

LENDING AND BORROWING: Here, it is assumed that the investor could borrow or lend any amount of money at risk less rate of interest. When this opportunity is given to the investors, they can mix risk free assets with the risk assets in a portfolio to obtain in desired rate of risk return combination. The expected return on the combination of risky and risk free combination Rp = RfXf + Rm(1 Xf) Where, Rp = Portfolio return Xf = The proportion of funds invested in risk free assets 1 Xf = The proportion of funds invested in risk assets. Rf = Risk free rate of return Rm = Return on risky assets This formula can be used to calculate the expected returns for different situation like mixing risk less assets with risky assets, investing only in the risky asset and mixing the borrowing with risk 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 all risky assets. For example, if Reliance Industry share represents 20% of all risky assets, then the market portfolio of the individual investor contains 20% of Reliance Industry shares. At this stage, the investor has the ability to borrow or lend any amount of money at the risk less rate of interest. The efficient frontier of the investor is given in figure.

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The figure shows the efficient of the investor. The investor prefers any point between B & C because, with the same level of risk they face on line BA, they are liable to get superior profits. The ABC lines show the investors portfolio of risky assets. The investors can combine risk less asset either by lending or borrowing. This is shown in figure,

The line RfS represent all possible combination of risk less and risky asset. The S portfolio does not represent any risk less asset but the line RfS gives the combination of both. The portfolio along the path RfS is called lending portfolio i.e., some money is invested in the risk less asset or may b deposited in the bank for a fixed rate of interest if it crosses the point S, it becomes borrowing portfolio. Money is borrowed and invested in the risky asset. The straight lines are called Capital Market Line (CML). It gives the desirable set of investment opportunities between risk free and risky investments. The CML represents linear relationship between the required rates of return for efficient portfolio and their standard deviations. v

E(Rp) = Portfolios expected rate of return Rm = Expected return on market portfolio

W m = Standard deviation of market portfolio 31

E p ! R

R f  R m

Rf

W p = Standard deviation of the portfolio

For a portfolio on the capital market line, the expected rate of return in excess of the risk free rate is in proportion to the standard deviation of the market portfolio. The slope of the line gives the price of the risk. The slope equals the risk premium for the market portfolio Rm Rf divided by the risk or standard deviation of the market portfolio. Thus, the expected return of an efficient portfolio is Expected return = Price of time + (Price of risk X amount of risk) Price of time is the risk free rate of return. Price of risk is the premium amount higher and above the risk free return.

SECURITY MARKET LINE: The Capital Market Line measures the risk-return relationship of an efficient portfolio. But, it does not show the risk- return trade off for other portfolio and individual securities. Inefficient portfolios lie below the capital market line and the risk-return relationship cannot be established with the help of his capital market line. Standard deviation includes the systematic and unsystematic risk. Unsystematic risk can be diversified and it is not related to the market. If the unsystematic risk is eliminated, then the matter of concern is systematic risk alone. This systematic risk could be measured by beta. The beta analysis is useful for individual securities and portfolio whether efficient or inefficient. When an additional security is added to the market portfolio, an additional risk is also added to it. The variance of a portfolio is equal to the weighted sum of the covariance of the individual securities in the portfolio. If we add an additional security to the market portfolio, its marginal contribution to the variance of the market is the covariance between the securitys return and market portfolios return. If the security is included, the covariance between the security and the market measures the risk. Dividing it by standard deviation of market portfolio Cov lm W m can standardize covariance. This shows the systematic risk of the security, and then the expected return of the security is given by the equation.

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This equation can be rewritten as follows:

i f m

The first term of the equation is nothing but the beta coefficient of the stock. The beta coefficient of the equation of SML is same as the beta of the market (Single index) model. In equilibrium, all efficient and inefficient portfolio lie along the security market line, The SML line helps to determine the expected return for a given security beta. In other words, when betas are given, we can generate expected returns for the given securities. This is explained in figure. If we assume the expected market risk premium to be 8% and the risk free rate of return to be 7%, we can calculate expected return for A, B, C and D securities using the formula.
E R i ! Rf  F ?E R m  R f A

MARKET IMPERFECTION AND SML: Information regarding the share price and market condition may not be immediately available to all investors; imperfect information may effect the valuation of securities. In a market with perfect information, all securities should lie on SML. Market imperfections would lead to a band to SML rather than a single line. Market imperfections after the width of the SML to a band, if imperfections were more, the width also would be larger.

Empirical tests of the CAPM: In the CAPM, beta is use to estimate the systematic risk of the security and reflects the future volatility of the stock in relation to the market. Future volatility of the stock is estimated only through historical data. Historical data are used to plot the regression line or the characteristics line and calculate beta. If historical betas are stable over a period of time, they would be good proxy for their ex-ante or expected risk.

C im W2m

Ri  Rf !

Rm  R f Wm

ov Vim W m



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Robert A. levy, Marshall E. Blume and other studied the question of beta stability indepth. Levy calculated betas for the both individual securities and portfolios. His study results have provided the following conclusions.

1. The betas of individuals stocks are unstable; hence the past betas for the individual securities stocks estimators of future risk.

2. The betas of portfolio of ten or more randomly selected stocks are reasonably stable, hence he past portfolio betas are good estimators of future portfolio volatility. This is because of the errors in the estimate of individual securities betas tending to offset one another in a portfolio.

Various researchers have attempted to find out the validity of the model by calculating beta and realized rate of return. They attempted to test (1) whether the intercept is equal to Rf i.e., risk free rate of interest or the interest for treasury bills (2) whether the line is linear and pass through the beta = 1 being the required rate of return of the market. In general, the studies have showed the following results.

1. The studies generally showed a significant positive relationship between the expected return and the systematic risk. But the slope of the relationship is usually less than that of predicted by the CAPM. 2. The risk and return relationship appears to be linear. Empirical studies give no evidence of significant curvature in the risk/return relationship. 3. The attempt of the researchers to access the relative importance of the market and company risk has yielded results. The CAPM theory implies that unsystematic risk is not relevant, but unsystematic and systematic risks are positively related to security returns. Higher returns are needed to compensate both the risks. Most of the observed relationship reflects statistical problems rather than the true nature of capital market.
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4. According to Richard Roll, the ambiguity of the market portfolio leaves the CAPM untreatable. The practice of using indices, as proxies is loaded with problems. Different indices yield different betas for the same security. 5. If the CAPM were completely valid, it should apply to all financial assets including bonds. But, when bonds are introduced into the analysis, they do not all on the security market line. PRESENT VALIDITY OF CAPM The CAPM is greatly appealing at an intellectual level, logical and rational. The basic assumptions on which the model is built raise, some doubts in the minds of the investors. Yet, investment analysis has been more creative in adapting CAPM for their uses. 1. The CAPM focuses on the market risk, makes the investors to think about the risky ness of the assets in general CAPM provides basic concept, which is truly fundamental values. 2. The CAPM has been useful in the selection of securities and portfolio. Securities with higher returns are considered to be undervalued and attractive for buy. The below normal excepted return yielding securities are considered to be overvalued and suitable for sale. 3. In the CAPM, it has been assumed that investors consider only the market risk. Given the estimate of the risk free rate, the beta of the firm, stock and the required market rate of return, one can find out the expected returns for a firms security. This expected return could be used as an estimate of the cost of retained earnings. 4. Even through CAPM has been regarded as fuseful tools to financial analysis; it has it won critics too. They point out, when the model is ex-ante; the inputs also should be ex-ante, i.e. based on the expecat5ions of the f8re. Empirical test and analysis have used ex-post i.. Past data only: 5. The historical data regarding the market return, risk free rate of return and betas vary differently for different periods. The various methods used to estimate these inputs also affect the beta value. Since the inputs cannot be

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estimated precisely, the expected return found out through the CAPM model is also subjected to criticism.

ARBITRAGE PRICING THEORY: Arbitrage pricing theory is one of the tools used by the investors and portfolio managers. The capital asset pricing theory explains the returns of the securities on the basis of their respective bets. According to the previous model, the investor chooses the investment on the basis of expected return and variance. The alternative model deployed in asset pricing by Stephen Ross is known as Arbitrage Pricing Theory. The APT explains the nature of equilibrium in the asset pricing in a less complicated manner with fewer assumptions compare to CAPM. The Assumptions: 1. The investors have homogeneous expectations. 2. The investor are risk averse and utility maxi misers 3. Perfect competition prevails in the market and there is no transaction cost. The APT theory does not assume: a) Single period investment horizon b) No taxes c) Investors can borrow and lend at risk free rate of interest and d) The selection of the portfolio is based on the mean and variance analysis. These assumptions are present in CAPM theory.

ARBITRAGE PORTFOLIO: According to the APT theory an investor tries to find out the possibility to increase returns from his portfolio without increasing the funds in the portfolio. He also likes to keep the risk at the same level. For example, the investor holds A, B and C securities and he wants to change in proportion of securities can be denoted by X, Xb and X C . The increase in the investment in security A could be carried out only if he reduces the proportion of investment either in B or C because it has already stated that the investor tries to earn more income without

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increasing his financial commitment. Thus, arbitrage portfolio. If X indicates the change in proportion,
(X A  (X B  (X C !

The factor sensitivity indicates the responsiveness of a securitys return to a particular factor. The sensitiveness of securities to any factor is the weighted average of the sensitivities of the securities, weighted being the changes made in the proportion. For example, bA, bB and bC are sensitive in an arbitrage portfolio the sensitive become zero.
b A (X A  b B (XB  b C (X C ! 0

EFFECT ON PRICE: To buy stock A and B, the investor has to sell stock C. The buying pressure on stock A and B would lead to increase in their prices. Conversely selling of stock C will result in fall in the price of the stock C. With the low price there would be rise in the expected return of stock C. For example, it the stock C price Rs. 100 per share has earned 12% return, at Rs. 80 per share the return would be 12/80*100=15%.

At the same time, return rates would be declining in stock A and B with the rise in price. This buying and selling activity will continue until all arbitrage possibilities are eliminated. At this juncture, there exists an approximate linear relationship between expected return and sensitivities.

THE APT MODE: According to Stephen Ross, returns of the securities are influenced by a number of macroeconomic factors. The macro economic factors are growth rate of industrial production, rate of inflation, spread between long return and short-term interest rate and the arbitrage theory is represented by the equation:
R1 ! P 0  P 1bi1  P jbi j
R 1 = Average expected return
P 1 = Sensitivity of return to bi 1

bi 1 = The beta co-efficient relevant to the particular factor

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The equation is derived from the model

R1 ! E 1  b11I1  b12I2 ........  b y I j  e j

THE CONSTANTS OF THE APT EQUATION: The existence of the risk asset yields a risk free rate of return that is a constant. The asset does not have sensitivity to the factor for example, the industrial production. If bi = 0 R = P0  Pi0
Ri ! P o Ri ! P I

In other words, P o is equal to the risk free rate of return. If the single factor portfolios sensitivity is equal to one i.e., b i ! 1 then
Ri ! P0 ! P1

This can be written as

Ri ! P 0  P1 Ri  P 0 ! P1

Thus, P i is expected excess return over the risk free rate return for a portfolio with unit sensitivity to the factor. The excess return is known as Risk premium.

FACTORS AFFECTING THE RETURN: The specification of the factors is carried out by much financial analysis, Chen, Roll and Ross have taken four Marco economic variable and tested them. According to them the factor are inflation, the term structure of interest rates, risk premiums and industrial production. Inflation affects the discount rate or the required rate of return and the size of the future cash flows. The short-term inflation is measured by monthly percentage changes in the consumer price index. The interest rate on long-term bonds and short-term bonds differ. This difference affects the value of payments in future relative to short-term payment. The difference between the return on the high-grade bonds and low grade (more risky) bonds indicates the markets reaction to risk. The industrial production represents the business cycle. Changes in the industrial production have an
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impact on the expectations and opportunities of the investor. The real value of the cash flow is also affected by it. Burmeister and McElroy have estimated the sensitive with some other factors. They are given bellow:y y y y y Default risk Time premium Deflation Change in expected sales The market returns not due to the first four variables. The default risk is measured by the difference between the return on long term government bonds and the return on long term bonds issued by corporate plus one-half of one percent. Time premium is measure by the return on long term government bonds minus one moth Treasury bill rate one month ahead. Deflation is measured by expected inflation at the beginning of the month minus actual inflation during the month. According to them, the first four factors accounted 25% of the variation in the standard and poor composite index and all the four co-efficient were significant. Salmon Brothers identification five factors in their fundamental factor model Inflation is the only common factor identified by others. The other factors are given below:y y y y Growth rate in gross nation a product Rate of interest Rate of change in oil prices Rate of change in defense spending

APT and CAPM The simplest form of APT model is consistent with the simple form of the CAPM model, when only one factor is taken into consideration, the APT can be stated as.

Ri  P 0  biPI

It is similar to the capital market line equation:

R i ! R f F i  (R m  R F ) , Which is similar to CAPM model

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APT is more general and less restrictive than CAPM, in APT, the investor has no need to hold the market portfolio because it does not make use of the market portfolio concept. The portfolios are constructed on the basis of the factors eliminate arbitraged profits. APT is based on the law of one price to hold for all possible portfolio combinations. The APT model takes on to account of the impact of numerous factors on the security. The |Macro economic factors are taken into consideration and it is closer to reality then CAPM. The market portfolio is well defined conceptually. In APT model, factors are not well specified. Hence, the investor finds it difficult to establish equilibrium relationship. The well defined market portfolio is a significant advantage of the CAPM leading to the wide usage of the model in the stock market. The factors that have impact on one group of securities may not affect other group securities. There is a lack of constituency in the measurement of the APT model. Further, the influences of the factors are not independent of each other. It may be difficult to identify the influence corresponds exactly to each factor. Apart from this, not all variable that exerts influence on factor measurable.

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PORTFOLIO MANAGEMENT CONCEPTUAL FRAME WORK 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 of 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.

AVERAGE RETURNS OF THE COMPANY: S. No. 1 2 3 4 5 Average Return



Security Infosys Reliance Hero Honda GE ITC



Average 44.24 43.05 34.54 32.40 5.76

R ! Ri / N

Where R = Average Return Ri = Return of the Security I for the year T N = Number of Years Based on above average return of securities of Infosys is earning higher return and ITC is earning lowest return. Other securities are earning medium rage returns such are Reliance, GE and Hero Honda.

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STANDARD DEVIATION OF THE COMPANIES:

S. No. 1 2 3 4 5

Security Infosys Reliance Hero Honda GE ITC

Average 109.93 108.37 107.53 63.50 37.43

S.D ! 1/ n  1(R  R)2

T=1 Based on above calculations Standard deviations like that GE is highest and ITC is lower, where other securities are having medium standard deviation.

CORRELATION CO-EFFICIENT BETWEEN THE SECURITIES:

Security Infosys ITC GE Reliance Hero Honda Formula:

Infosys 1

ITC -0.3306 1

GE 0.9297 -0.0706 1

Reliance 0.7686 0.2618 0.8100 1

Hero Honda -0.0039 -0.4278 0.3490 0.0606 1

Correlation Co-efficient (n(ab ) ! COV (ab ) / Wa.Wb Where COV (ab) = 1/ n  1(RA  RA)(RB  RB

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PORTFOLIO WEIGHTS: S.NO 1 2 3 4 5 6 7 8 9 10 Formula: Weight of a (Wa) = Weight of b (Wb) = PORTFOLIO RISK:
Wb(Wb  nabWa) /(Wa 2  Wb 2 )  (2nab.W .Wb)

PORTFOLIO Infosys & ITC Infosys & GE Infosys & Reliance Infosys & Hero Honda ITC & GE ITC & Reliance ITC & Hero Honda GE & Reliance GE & Hero Honda Reliance & Hero Honda

CORRELATION -0.3306 0.9297 0.7686 -0.0039 -0.0706 0.2618 -0.4278 0.8100 0.3490 0.0606

WEIGHT OF A 0.1773 0.6000 -0.2418 0.4961 0.8797 0.8328 0.8096 -0.3373 0.4830 0.7549

WEIGHT OF B 0.8227 0.4000 1.2418 0.5039 0.1203 0.1672 0.1904 1.3373 0.5170 0.2451

1 Wa

S.NO 1 2 3 4 5 6 7 8 9 10

COMBINATION GE & Reliance ITC & Hero Honda Infosys & ITC ITC & GE ITC & Reliance Infosys & Reliance Reliance & Hero Honda Infosys & Hero Honda GE & Hero Honda Infosys & GE

PORTFOLIO RISK 27.11 23.38 30.43 34.60 35.46 48.52 56.07 76.17 89.26 107.13

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Formula:

Wp ! Wa 2 Wa 2  Wb 2 Wb 2  2.nab.Wa.Wb.WaWb

Where:
Wa ! S tan drard deviation of Securitiy a Wb ! S tan drad deviation of Security b Wa ! Weight of Security a Wb ! Weight of Security b nab ! Correlatio n Coeffient between ecutiry a & b Wp ! P rtf li Risk

PORTFOLIO RETURN:

S.NO 1 2 3 4 5 6 7 8 9 10

COMBINATION ITC & GE ITC & Hero Honda ITC & Reliance Infosys & ITC GE & Hero Honda Infosys & Hero Honda Infosys & GE Reliance & Hero Honda Infosys & Reliance GE & Reliance

PORTFOLIO RISK 8.96 11.23 11.99 12.58 33.50 39.35 39.50 40.95 42.74 46.60

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Formula: Rp = (Ra X Wa) + (Rb X Wb) Where: Ra = Average Return of Security a Rb = Average Return of Security b Wa = Weight of Security a Wb = Weight of Security b Rp = Portfolio Return

PORTFOLIO RISK & RETURN: S.NO 1 2 3 4 5 6 7 8 9 10 COMBINATION GE & Reliance ITC & Hero Honda Infosys & ITC ITC & GE ITC & Reliance Infosys & Reliance Reliance & Hero Honda Infosys & Hero Honda GE & Hero Honda Infosys & GE PORTFOLIO RISK 27.11 23.38 30.43 34.60 35.46 48.52 56.07 76.17 89.26 107.13 Portfolio Return 46.62 11.23 12.58 8.96 11.99 42.74 40.95 39.35 33.50 39.50

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PORTFOLIO SELECTION, REVISION & EVALUATION

PORTFOLIO SECTION: Portfolio analysis provides the input for next phase in portfolio management, which is portfolio selection. The proper goal of portfolio construction is to generate a portfolio that provides the highest returns at a given level of risk. The inputs from portfolio analysis can be used to identify the set of efficient portfolios. From this the optimal portfolio must be selected for investment. Harry Markowitz portfolio theory provides both the conceptual framework and analytical tools for determining the optimal portfolio in a disciplined and objective way.

So, out of the various combinations (related to five companies), the optimal portfolio is GE & Reliance, as this portfolio has minimum risk of 27.112% with maximum return of 46.63%. Hence, I can say that it is better to invest in these portfolios.

PORTFOLIO REVISION: Economy and financial markets are dynamic, change take place almost daily. As time passes securities which were once attractive may lease to be so. New securities with promise of high return and low risk may emerge. The investor now has to revise his portfolio in the light of developments in the market. This leads to purchase of some new securities and sale of some of the existing securities and their proportion in the portfolio changes as a result of the revision. The revision has to be scientifically and objectively so as to ensure the optimality of the revised portfolio, it important as portfolio analysis and selection.

PORTFOLIO EVALUATION: The objective of constructing a portfolio and revising I t periodically is to earn maximum returns with minimum risk. Portfolio evaluation is the process, which is concerned with assessing the performance of the portfolio over a selected period of time in terms of returns and risk. This involves quantities measurement of actual return realized. Alternative measures of performance evaluation have been developed by investor and portfolio managers for their use.
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It provides a mechanism for identifying weakness in the investment process and improving them. The portfolio management process is an on going process to portfolio construction, continues with portfolio revision and evaluation. The evaluation provides the necessary feedback for better designing of portfolio the next time and around. Superior performance is achieved thorough continual refinement of portfolio management skills.

CALCULATION OF AVERAGE RETURNS OF COMPANIES

INFOSYS: Year Dividend Opening Share price (P0) 2925.00 8189.80 4094.55 3557.85 4040.30 Closing Share price (P1) 9676.00 4082.90 3735.45 4263.35 5037.90 D+(P1 P0) D+(P1P0)/P0*100 230.95 -50.02 -8.28 20.59 27.90 221.14

2004-05 2005-06 2006-07 2007-08 2008-09

4.50 10.00 20.00 27.00 129.50

6755.50 -4096.90 -339.10 732.50 1127.10 Total Return

Returns are calculated as below: Return of 01-02 = (D+P1-P0)/P0*100 = (4.5+9676.00-2925.00)/2925.00*100 = 230.95 Return of 02-03 = (D+P1-P0)/P0*100 = (10+4082.90-8189.80)/8189.80*100 = -50.02 Return of 03-04 = (D+P1-P0)/P0*100 = (20+3735.45-4094.55)/4095.55*100 = -8.28 Return of 04-05 = (D+P1-P0)/P0*100 = (27+4263.35-3557.85)/3557.85*100 = 20.59 Return of 05-06 = (D+P1-P0)/P0*100 = (129.5+5037.9-4040.3)/4040.3*100 = 27.90 Average Return = 221.14/5 = 44.23

47

ITC ( Indian Tobacco Corporation): Year Dividend Opening Share Price (PO) 963 787 814.85 705.05 629.50 Closing D+(PI PO) D+(PI PO) Share /PO*100 Price (PI) 715.00 -240.51 -24.28 814.40 37.77 4.80 696.65 -104.58 -12.83 632.85 -57.20 -08.11 1049.90 440.40 69.96 Total 28.84 Returns

2004-05 2005-06 2006-07 2007-08 2008-09

7.49 10.37 13.62 15.00 20.00

Returns are calculated as below: Return of 01-02 = (D+P1-P0)/P0*100 = (7.49+715-963)/963*100 = -24.98 Return of 02-03 = (D+P1-P0)/P0*100 = (10.37+814.4-787)/787*100 = 4.80 Return of 03-04 = (D+P1-P0)/P0*100 = (13.62+696.65-814.85)/814.85*100 = -12.83 Return of 04-05 = (D+P1-P0)/P0*100 = (15+632.85-705.05)/705.05*100 = -8.11 Return of 05-06 = (D+P1-P0)/P0*100 = (20+1049.90-629.5)/629.5*100 = 69.96 Average Return = 28.84/5 = 5.76

48

GE: Year Dividend Opening Share price (P0) 1622.00 4074.45 243.05 256.75 176.95 Closing Share price (P1) 4813.75 233.90 267.65 191.90 301.45 D+(P1 P0) D+(P1P0)/P0*100 196.92 -94.06 10.61 -24.09 72.65 162.03

2004-05 2005-06 2006-07 2007-08 2008-09

2.27 7.99 1.18 3.00 4.01

3194.02 -3832.56 25.78 -61.85 128.51 Total Return

Returns are calculated as below: Return of 01-02 = (D+P1-P0)/P0*100 = (2.27+4813.75-1922)/1922.00*100 = 196.92 Return of 02-03 = (D+P1-P0)/P0*100 = (7.99+233.9-4074.45)/ 4074.45*100 = -94.06 Return of 03-04 = (D+P1-P0)/P0*100 = (1.18+267.65-243.05)/ 243.05*100 = 10.61 Return of 04-05 = (D+P1-P0)/P0*100 = (3+191.9-256.75)/ 256.75*100 = -24.09 Return of 05-06 = (D+P1-P0)/P0*100 = (4.01+301.45-176.9)/ 176.9*100 = 72.65

Average Return = 162.03/5 = 32.40

49

RELIANCE: Year Dividend Opening Share price (P0) 130.40 325.90 389.45 300.95 276.45 Closing Share price (P1) 291.25 390.90 300.70 285.00 527.20 D+(P1 P0) D+(P1P0)/P0*100 126.15 21.25 -21.17 -3.64 92.60 215.19

2004-05 2005-06 2006-07 2007-08 2008-09

3.65 4.25 6.29 5.00 5.25

164.50 69.25 -82.46 -10.95 256.00 Total Return

Returns are calculated as below: Return of 01-02 = (D+P1-P0)/P0*100 = (3.65+291.25-130.40)/ 130.40*100 = 126.15 Return of 02-03 = (D+P1-P0)/P0*100 = (4.25+300.7-325.9)/ 325.9*100 = 21.25 Return of 03-04 = (D+P1-P0)/P0*100 = (6.29+300.7-389.45)/ 389.45*100 = -21.17 Return of 04-05 = (D+P1-P0)/P0*100 = (5+285-300.95)/ 300.95*100 = -3.64 Return of 05-06 = (D+P1-P0)/P0*100 = (5.25+527.20-276.45)/ 276.45*100 = 92.60

Average Return = 215.19/5 = 43.04

50

HERO HONDA: Year Dividend Opening Share price (P0) 875.25 1000.20 140.00 362.35 188.40 Closing Share price (P1) 920 140.35 333.70 196.40 438.45 D+(P1 P0) D+(P1P0)/P0*100 5.34 -85.66 150.50 -40.83 143.33 172.71

2004-05 2005-06 2006-07 2007-08 2008-09

2.00 3.00 17.00 18.00 20.00

46.25 -857.85 196.70 -148.95 268.05 Total Return

Returns are calculated as below: Return of 01-02 = (D+P1-P0)/P0*100 = (2+920-875.25)/ 875.25*100 = 5.34 Return of 02-03 = (D+P1-P0)/P0*100 = (3+140.35-1000.20)/ 1000.20*100 = -85.66 Return of 03-04 = (D+P1-P0)/P0*100 = (17+333.7-140)/ 140*100 = 150.50 Return of 04-05 = (D+P1-P0)/P0*100 = (19+196.40-362.35)/ 362.35*100 = -40.83 Return of 05-06 = (D+P1-P0)/P0*100 = (20+438.45-188.40)/ 188.40*100 = 143.33

Average Return = 172.71/5 = 34.542

51

CALCULATION OF STANDARD DEVIATIONS INFOSYS: Return (R) Avg. Rtn.  R  R R 2004-05 230.95 44.24 185.76 2005-06 -50.02 44.24 -94.26 2006-07 -8.28 44.24 -52.52 2007-08 20.59 44.24 -23.65 2008-09 27.90 44.24 -16.34 (R) = 221.14 ( R  R )2 Average Return = (R)/N = 221.14/5 = 44.24 Year ( R  R )2 34506.78 8884.95 2758.35 559.32 266.99 46976.39

Variance = 1/N 1 ( R  R )2 = 1/5 1 (46976.39) = 11744.10 Standard Deviation = 11744.10 = 108.37 ITC (Indian Tobacco Corporation): Return (R) Avg. Rtn.  R  R R 2004-05 -24.98 5.76 -30.74 2005-06 4.80 5.76 -0.96 2006-07 -12.83 5.76 -18.59 2007-08 -8.11 5.76 -13.87 2008-09 69.96 5.76 64.20 (R) = 28.84 ( R  R )2 Average Return = (R)/N = 28.84/5 = 5.76 Year ( R  R )2 944.95 0.92 345.59 192.38 4121.64 5605.48

Variance = 1/N 1 ( R  R )2 = 1/5 1 (5605.48) = 1401.37 Standard Deviation = 1401.37 = 37.43 GE: Return (R) Avg. Rtn.  R  R R 2004-05 196.92 32.40 164.52 2005-06 -94.06 32.40 -126.46 2006-07 10.61 32.40 -21.79 2007-08 -24.09 32.40 -56.49 2008-09 72.65 32.40 40.25 (R) = 162.03 ( R  R )2 Average Return = (R)/N = 162.03/5 = 32.40 Year ( R  R )2 27066.83 15992.13 474.80 3191.12 1620.06 48344.94

Variance = 1/N 1 ( R  R )2 = 1/5 1 (48344.94) = 12086.24 Standard Deviation = 12086.24 = 109.93

52

RELIANCE: Year 2004-05 2005-06 2006-07 2007-08 2008-09 (R) = Return (R) Avg. Rtn.  R 126.15 43.40 21.25 43.40 -21.17 43.40 -3.64 43.40 92.60 43.40 215.19
RR

83.11 -21.79 -64.21 -46.68 49.56 ( R  R )2

( R  R )2 6907.27 474.80 4112.92 2179.02 2456.19 16130.20

Average Return = (R)/N = 215.19/5 = 43.04 Variance = 1/N 1 ( R  R )2 = 1/5 1 (16130.20) = 4032.50 Standard Deviation =
4032.50 = 63.50

HERO HONDA: Year 2004-05 2005-06 2006-07 2007-08 2008-09 (R) = Return (R) Avg. Rtn.  R 5.34 34.54 -85.66 34.54 150.50 34.54 -40.8 34.54 143.33 34.54 172.71
RR

-29.20 -120.20 115.96 -75.34 108.79 ( R  R )2

( R  R )2 852.64 14448.04 13446.72 5676.12 11835.26 46258.78

Average Return = (R)/N = 172.71/5 = 34.54 Variance = 1/N 1 ( R  R )2 = 1/5 1 (46258.78) = 11564.70 Standard Deviation = 11564.70 = 107.53

53

CALCULATION OF CORRELATIONS
1. Year 2004-05 2005-06 2006-07 2007-08 2008-09 CORRELATION BETWEEN INFOSYS & ITC
RA  RA RB  RB

  RA RB  RB RA 
-5710.26 90.50 976.35 328.03 -1049.03 -5364.41

185.70 -94.26 -52.52 -23.65 -16.34

-30.74 -0.96 -18.59 -13.87 64.20

  RA RB  RB RA  

COVARIANCE (COVab) = 1/n-1 RA  RA RB  RB = 1/5-1(-5364.41) = -1341.10

Wa ! 108 .37 Wb ! 37 .43

Correlation Coefficient (n ~ab) = COVab/ Wa.Wb = -1341.10/108.37*37.43 = -0.3306

2.CORRELATION BETWEEN INFOSYS & GE

Year 2004-05 2005-06 2006-07 2007-08 2008-09
RA  RA RB  RB

  RA RB  RB RA 
30561.24 11920.12 1144.41 1335.99 -657.69 44304.37

185.70 -94.26 -52.52 -23.65 -16.34

164.52 -126.46 -21.79 -56.49 40.25 RA  RA RB  RB

COVARIANCE (COVab) = 1/n-1 RA  RA RB  RB = 1/5-1(44304.37) = 11076.02

Wa ! 108 .37 Wb ! 109 .93

Correlation Coefficient (n ~ab) = COVab/ Wa.Wb = 11076.02/108.37*109.93 = 0.9297

54

3.CORRELATION BETWEEN INFOSYS & RELIANCE

Year 2004-05 2005-06 2006-07 2007-08 2008-09
RA  RA RB  RB

  RA RB  RB RA 
15438.51 2053.93 3372.31 1103.98 -809.81 21158.92

185.70 -94.26 -52.52 -23.65 -16.34

83.11 -21.79 -64.21 -46.68 49.56 RA  RA RB  RB

COVARIANCE (COVab) = 1/n-1 RA  RA RB  RB = 1/5-1(21158.92) = 5289.73

Wa ! 108 .37 Wb ! 63 .50

Correlation Coefficient (n ~ab) = COVab/ Wa.Wb = 5289.73/108.37*63.50 = 0.7686

4.CORRELATION BETWEEN INFOSYS & HERO HONDA

Year 2004-05 2005-06 2006-07 2007-08 2008-09
RA  RA RB  RB

  RA RB  RB RA 
-5424.19 11330.05 -6090.22 1781.80 -1777.63 -180.20

185.70 -94.26 -52.52 -23.65 -16.34

-29.2 -120.2 115.96 -75.34 108.79 RA  RA RB  RB

COVARIANCE (COVab) = 1/n-1 RA  RA RB  RB = 1/5-1(-180.20) = -45.05

Wa ! 108 .37 Wb ! 107 .53

Correlation Coefficient (n ~ab) = COVab/ Wa.Wb = -45.05/108.37*107.53 = -0.0039

55

5.CORRELATION BETWEEN ITC & GE

Year 2004-05 2005-06 2006-07 2007-08 2008-09
RA  RA RB  RB

  RA RB  RB RA 
-5057.34 121.40 405.08 783.52 2584.05 -1163.29

-30.74 -0.96 -18.59 -13.87 64.20

164.52 -126.46 -21.79 -56.49 40.25 RA  RA RB  RB

COVARIANCE (COVab) = 1/n-1 RA  RA RB  RB = 1/5-1(-1163.29) = -290.82

Wa ! 37 .43 Wb ! 109 .93

Correlation Coefficient (n ~ab) = COVab/ Wa.Wb = -290.82/37.43*109.93= -0.0706

6.CORRELATION BETWEEN ITC & RELIANCE

Year 2004-05 2005-06 2006-07 2007-08 2008-09
RA  RA RB  RB

  RA RB  RB RA 
-2554.80 20.92 1193.66 647.45 3181.75 2488.98

-30.74 -0.96 -18.59 -13.87 64.20

83.11 -21.79 -64.21 -46.68 49.56 RA  RA RB  RB

COVARIANCE (COVab) = 1/n-1 RA  RA RB  RB = 1/5-1(2488.98) = 622.25

Wa ! 37 .43 Wb ! 63 .50

Correlation Coefficient (n ~ab) = COVab/ Wa.Wb = 622.25/37.43*63.50= 0.2618

56

7.CORRELATION BETWEEN ITC & HERO HONDA

Year 2004-05 2005-06 2006-07 2007-08 2008-09
RA  RA RB  RB

  RA RB  RB RA 
897.61 115.39 -2155.70 1044.97 6984.32 -6886.60

-30.74 -0.96 -18.59 -13.87 64.20

-29.2 -120.2 115.96 -75.34 108.79 RA  RA RB  RB

COVARIANCE (COVab) = 1/n-1 RA  RA RB  RB = 1/5-1(-6886.60) = -1721.65

Wa ! 37 .43 Wb ! 107 .53

Correlation Coefficient (n ~ab) = COVab/ Wa.Wb = -1721.65/37.43*107.53= -0.4278

8.CORRELATION BETWEEN GE & RELIANCE

Year 2004-05 2005-06 2006-07 2007-08 2008-09
RA  RA RB  RB

  RA RB  RB RA 
13673.26 2755.56 1399.14 2336.95 1944.79 22459.70

164.52 -126.46 -21.79 -56.49 40.25

83.11 -21.79 -64.21 -46.68 49.56 RA  RA RB  RB

COVARIANCE (COVab) = 1/n-1 RA  RA RB  RB = 1/5-1(22459.70) = 5614.93

Wa ! 109 .93 Wb ! 63 .50

Correlation Coefficient (n ~ab) = COVab/ Wa.Wb = 5614.93/109.93*63.50= 0.8100

57

9.CORRELATION BETWEEN GE & HERO HONDA

Year 2004-05 2005-06 2006-07 2007-08 2008-09
RA  RA RB  RB

  RA RB  RB RA 
-4803.98 15200.50 -2526.77 4255.96 4378.80 16504.50

164.52 -126.46 -21.79 -56.49 40.25

-29.2 -120.2 115.96 -75.34 108.79 RA  RA RB  RB

COVARIANCE (COVab) = 1/n-1 RA  RA RB  RB = 1/5-1(16504.50) = 4126.12

Wa ! 109 .93 Wb ! 107 .53

Correlation Coefficient (n ~ab) = COVab/ Wa.Wb = 4126.12.93/109.93*107.53 = 0.3490

10.CORRELATION BETWEEN RELIANCE & HERO HONDA

Year 2004-05 2005-06 2006-07 2007-08 2008-09
RA  RA RB  RB

  RA RB  RB RA 
-2426.81 2619.16 -7445.79 3516.87 5391.63 1655.06

83.11 -21.79 -64.21 -46.68 49.56

-29.2 -120.2 115.96 -75.34 108.79 RA  RA RB  RB

COVARIANCE (COVab) = 1/n-1 RA  RA RB  RB = 1/5-1(1655.06) = 413.76

Wa ! 63 .50 Wb ! 107 .53

Correlation Coefficient (n ~ab) = COVab/ Wa.Wb = 413.76/63.50*107.53 = 0.0606.

58

CALCULATION OF PORTFOLIO WEIGHTS: FORMULA:

Xa ! WbWb  nab.Wa / Wa 2  Wb 2  2nab.Wa.Wb
Xb = 1 Xa

1. CALCULATION OF WEIGHT OF INFOSYS & ITC Where, Xa = INFOSYS, Xb = ITC Xa = 37.43(37.43 (-0.3306)108.37)/108.372+37.432-(2*0.3306*108.37*37.43) = 2742.01/15467.08 = 0.1733 Xb = 1 Xa = 1 0.1733 = 0.8277 Xa = 17.33%, Xb = 82.27%

2. CALCULATION OF WEIGHT OF INFOSYS & GE Where, Xa = INFOSYS, Xb = GE Xa = 109.93(109.93 (-0.9297)108.37)/108.372+109.932-(2*-0.9297*108.37*109.93) = 1008.98/1677.42 = 0.60 Xb = 1 Xa = 1 0.60 = 0.40 Xa = 60%, Xb = 40% 3. CALCULATION OF WEIGHT OF INFOSYS & RELIANCE Where, Xa = INFOSYS, Xb = RELIANCE Xa = 63.50(63.50 (-0.7686)108.37)/108.372+63.502-(2*0.7686*108.37*63.50) = -1256.8671/5198.0728 = -0.2418 Xb = 1 Xa = 1 0.2418 = 1.2418 Xa = -24.18%, Xb = 124.18% 4. CALCULATION OF WEIGHT OF INFOSYS & HERO HONDA Where, Xa = INFOSYS, Xb = HERO HONDA
59

Xa = 107.53(107.53(-0.0039)108.37)/108.372+107.532 (2*0.0039*108.37*107.53) = 11608.15/23397.64 = 0.4961 Xb = 1 Xa = 1 0.4961 = 0.5039 Xa = 49.61%, Xb = 50.39%

5. CALCULATION OF WEIGHT OF ITC & GE Where, Xa = ITC, Xb = GE Xa = 109.93(109.93(-0.0706)37.43)/37.432+109.932 (2*-0.0706*37.43*109.93) = 12375.1013/14066.6026 = 0.8797 Xb = 1 Xa = 1 0.8797 = 0.1203 Xa = 87.97%, Xb = 12.03%

6. CALCULATION OF WEIGHT OF ITC & RELIANCE Where, Xa = ITC, Xb = RELIANCE Xa = 63.50(63.50(0.2618)37.43)/37.432+63.502 (2*0.2618*37.43*63.50) = 3410.0025/4094.6383= 0.8328 Xb = 1 Xa = 1 0.8328= 0.1672 Xa = 83.28%, Xb = 16.72% 7. CALCULATION OF WEIGHT OF ITC & HERO HONDA Where, Xa = ITC, Xb = HEOR HONDA Xa = 107.53(107.53(-0.4278)37.43)/37.432+107.532 (2*- 0.4278*37.43*107.53) = 13284.25/16407.36 = 0.8096 Xb = 1 Xa = 1 0.8096 = 0.1904 Xa = 80.96%, Xb = 19.04%

60

8. CALCULATION OF WEIGHT OF GE & RELIANCE Where, Xa = GE, Xb = RELIANCE Xa = 63.50(63.50(-0.81)109.93)/109.932+63.502 (2*-0.81*109.93*63.50) = -1621.9996/4808.3558 = -0.3373 Xb = 1 Xa = 1 (-0.3373) = 1.3373 Xa = -33.73%, Xb = 133.73% 9. CALCULATION OF WEIGHT OF GE & HERO HONDA Where, Xa = GE, Xb = HERO HONDA Xa = 107.53(107.53(0.3490)109.93)/109.932+107.532 (2*0.3490*109.93*107.53) = 11148.71/14767.38 = 0.7549 Xb = 1 Xa = 1 (0.7549) = 0.2451 Xa = 75.49%, Xb = 24.51% 10. CALCULATION OF WEIGHT OF RELIANCE & HERO HONDA Where, Xa = RELIANCE, Xb = HERO HONDA Xa = 107.53(107.53(0.0606)63.50)/63.502+107.532 (2*0.0606*63.50*107.53) = 11158.71/14767.38= 0.7549 Xb = 1 Xa = 1 0.7549 = 0.2451 Xa = 75.49%, Xb = 24.51% CALCULATION OF PORTFOLIO RISK: FORMULA:

Wp ! Wa 2 Wa 2  ab2 Wb2  2 ab.Wa.WaWb

Where

Wa = Standard Deviation of Security a

Wb = Standard Deviation of Security b

Wa = Weight of Security a

61

Wb = Weight of Security b nab = Correlation Coefficient between Security a & b

Wp = Portfolio Risk

1. INFOSYS & ITC

Wa ! 108 .37, Wb ! 37 .43 , Wa = 0.1773, Wb = 0.8227, nab = -0.3306

Wp = 108.372*0.17732+37.432*0.82272 + 2(-0.3306*108.37*37.43*0.1773*0.8227)
!

926 .21 ! 30 .4338

2. INFOSYS & GE
Wa ! 108.37, Wb ! 109.93 , Wa = 0.60, Wb = 0.40, nab = 0.9297

Wp = 108.372 * 0.602 + 109.932 * 0.402 + 2(0.9297*108.37*109.93*0.60*0.40)

! 11477 .69 ! 107 .1340

3. INFOSYS & RELIANCE

Wa ! 108.37, Wb ! 63.50 , Wa = -0.2418, Wb = 1.2418, nab = 0.7686

Wp = 108.372 * 0.24182 + 63.502 * 1.24182 + 2(0.7686*63.50*-0.2418*1.2418)

!

235 .060 ! 48 .5289

4. INFOSYS & HERO HONDA Wa ! 108.37, Wb ! 107.53 , Wa = 0.4961, Wb = 0.5039, nab = -0.0039
Wp = 108.372*0.49612+107.532*0.50392+2(-0.0039*108.37*107.53*0.4961*0.5039)
!

5803 .25 ! 76 .17

5. ITC & GE
Wa ! 37.43, Wb ! 109.93 , Wa = 0.8797, Wb = 0.1203, nab = -0.0706

Wp = 37.432*0.87972+109.932*0.12032+2(-0.0706*37.43*109.93*0.8797*0.1203)
! 1197 .6028 ! 34 .6064

62

6. ITC & RELIANCE

Wa ! 37.43, Wb ! 63.50 , Wa = 0.8328, Wb = 0.1672, nab = 0.2618
2 2 2 2 Wp = 37.43 *0.8328 +63.50 *0.1672 +2(0.2618*37.43*63.50*0.8328*0.1672)

! 1257 .68 ! 35 .4639

7. ITC & HERO HONDA

Wa ! 37.43, Wb ! 107.53 , Wa = 0.8096, Wb = 0.1904, nab = -0.4278

Wp = 37.432*0.80962+107.532*0.19042+2(-0.4278*37.43*107.53*0.8096*0.1904)
!

805 .94 ! 28 .38

8. GE & RELIANCE
Wa ! 109.93, Wb ! 63.50 , Wa = -0.3373, Wb = 1.3373, nab = 0.81

Wp = 109.932*-0.33732+63.502*1.33732+2(0.81*109.93*63.50*-0.3373*1.3373)
!

735 .339 ! 27 .1172

9. GE & HERO HONDA

Wa ! 109.93, Wb ! 107.53 , Wa = 0.4830, Wb = 0.5170, nab = 0.3490

Wp = 109.932*0.48302+107.532*0.51702+2(0.3490*109.93*107.53*0.4830*0.5170)
!

7968 .01 ! 89 .26

10. RELIANCE & HERO HONDA Wa ! 63.50, Wb ! 107.53 , Wa = 0.7549, Wb = 0.2451, nab = 0.0606 Wp = 63.502*0.75492+107.532*0.24512+2(0.0606*63.50*107.53*0.7549*0.2451)
!

3144 .45 ! 56 .07

63

Calculation of Portfolio Return: Rp = (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 Rp = Portfolio Return Portfolios Ra INFOSYS & ITC INFOSYS & GE INFOSYS & RELIANCE INFOSYS & HERO HONDA ITC & GE ITC & RELIANCE ITC & HERO HONDA GE & RELIANCE GE & HERO HONDA RELIANCE & HERO HONDA 44.24 44.24 44.24 44.24 5.76 5.76 5.76 32.40 32.40 43.04 Wa 0.1733 0.60 0.2418 0.4961 0.8797 0.8328 0.8096 0.3373 0.4830 0.7549 Rb 5.76 32.40 43.04 34.54 32.40 43.04 34.54 43.04 34.54 34.54 Wb 0.8227 0.40 1.2418 0.5039 0.1203 0.1672 0.1904 1.3373 0.5170 0.2451 Rp= (Ra*Wa)+(Rb*Wb) 12.5825 39.5040 40.7498 39.35 8.9648 11.9932 11.23 46.62 33.50 40.95

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FINDINGS:
1. A business that has a high return on equity is more likely to be one that is capable of generating cash internally. For the most part, the higher a companys return on equity compared to its industry, the better. 2. The above chat indicates that, in the year 2008 the return on equity of Hero Honda (3.37) and GE (5.79) are having higher ROE when we comparing the other companies like Infosys (0.91), ITC (0.48), and, Reliance (0.42) having very low returns. 3. A company that boasts a higher gross profit margin than its competitors and industry is more efficient. Investors tend to pay more for businesses that have higher efficiency ratings than their competitors, as these businesses should be able to make a decent profit as long as overhead costs are controlled [overhead refers to rent, utilities, etc.]. 4. The above chart explains that Infosys, GE, ITC companies are getting higher returns where as Reliance and Hero Honda are getting minimum returns when comparing the other securities. 5. A higher debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense.

6. Generally, a Debt-Equity ratio of 1:1 is considered satisfactory ratio. Infosys and GE are having better the ratio, ITC and Reliance are having low ratio than the other companies in this group. 7. The EPS of Infosys in 2008 is 87.86, Hero Honda 48.64, GE 38.21, ITC 5.95, and Reliance 65.08, in these companies the Infosys having the good EPS.

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SUGGESTIONS:
Before investing in shares, and should look at type of shares, you want to but and the way in which you want to deal on the stock market. Three main routes for investing in shares: y y y Invest your capital in a single company Invest your capital in a number of different companies, a portfolio of shares. Invest indirectly and spread your risk through collective investment such as investment trust and unit trust. Investing in Shares Public companies issues share, which allow investors to buy a part of a particular company share ownership entitles you to part of the company profits if dividends are paid. Shares may be classified in a range from conservative to speculative. Blue chip is often used to describe the highest quality and shares as they are shares in companies with a proven track record, producing profits in good times and bad. They usually set the level of the market. All shares are affected by share market fluctuation. Individual share prices also vary based on supply and demand from sellers and buyers.

Information about shares listed on the stock exchange is printed largely daily in newspapers. You can buy and sell shares listed on the stock exchange through a stockbroker. When you buy a lot of shares, you receive a CHESS statement of holdings from the company, showing the number of shares you own and the date you bought them.

As a share holder you have to say in the companys future through voting rights, you will be kept informed about the company, through its annual reports and other correspondence.

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CONCLUSION:
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 investment
From the study of Derivatives at Karvy it is clear that derivatives play a vital role in the International financial market. Derivative emerged as a hedging instrument but it is used for speculation and arbitration too. It does not focus any individual. Hence individual investors are affecting due to the arbitration and speculation as the risk is transferred. There exchange should have arbitration and investor grievances redressed mechanism operative from all parts of the region. Hence Karvy - The Securities provide a wonderful service to the individual investors too by providing services like advisory services.

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BIBLIOGRAPHY
Books Referred 1. Mutual Funds in India Marketing Strategies and Investment Practices 2nd Edition By H.Sadhak 2. How Portfolio frame- Work By Albert J. Fredman, Russ Wiles 97th Edition. 3. Investment Manageent By V.AAvadhani 4. Indian securitys market A Guide for Industry Professionals & Intelligent Investors By Sundar Sankaran

Data for the study obtained by browsing following sites

www.Amfiindia.com www.networth.com www.Indiamart.com wwwIndiainfoline.com www.Mutualfunds.com

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