Sei sulla pagina 1di 74

Portfolio Management and Investment Decisions INTRODUCTION

Investment may be defined as an activity that commits funds in any financial form in the present with an expectation of receiving additional return in the future. The expectations bring with it a probability that the quantum of return may vary from a minimum to a maximum. This possibility of variation in the actual return is known as investment risk. Thus every investment involves a return and risk. Investment is an activity that is undertaken by those who have savings. Savings can be defined as the excess of income over expenditure. An investor earns/expects to earn additional monetary value from the mode of investment that could be in the form of financial assets. The three important characteristics of any financial asset are:

Return-the potential return possible from an asset. Risk-the variability in returns of the asset form the chances of its value going Liquidity-the ease with which an asset can be converted into cash. Investors tend to look at these three characteristics while deciding on their individual preference pattern of investments. Each financial asset will have a certain level of each of these characteristics.


Investment avenues

Portfolio Management and Investment Decisions There are a large number of investment avenues for savers in India. Some of them are marketable and liquid, while others are non-marketable. Some of them are highly risky while some others are almost risk less. Investment avenues can be broadly categorized under the following head. 1. Corporate securities 2. Equity shares. 3. Preference shares. 4. Debentures/Bonds. 5. Derivatives. 6. Others. Corporate Securities Joint stock companies in the private sector issue corporate securities. These include equity shares, preference shares, and debentures. Equity shares have variable dividend and hence belong to the high risk-high return category; preference shares and debentures have fixed returns with lower risk. The classification of corporate securities that can be chosen as investment avenues can be depicted as shown below:

Equity Shares

Preferenc e shares


Warrant s

Derivative s


Objective of the Study:


Portfolio Management and Investment Decisions

How to analyze securities How portfolio management is done. To study the investment pattern and its related risks & returns. To help the investors to choose wisely between alternative investment. To understand analyze and select the best portfolio.
To study financial assets.

To find out optimal portfolio, which gave optimal return at a minimize risk To see whether the portfolio risk is less than individual risk on whose basis

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

Portfolio Management and Investment Decisions DATA COLLECTION METHODS The data collection methods include both the primary and secondary collation methods. Primary Data method: This method includes the data collection from the personal discussion with the authorized clerks and members of the exchange. Secondary Data method: The secondary collection methods includes the lectures of the superintend of the department of market operations and so on., also the data collected from the news, magazines of the ISE and different books issues of this study

Limitation of the Study:

This study has been conducted purely to understand For study purpose 6 companies have been taken for Study is limited to portfolio consisting of 6 companies. Study is limited to period from 2008-2010. Data collection was strictly confined to secondary source. There was a constraint with regard to time allocated for the Study is limited to only first 3 steps of phases of portfolio Detailed study of the topic was not possible due to limited

portfolio management of financial assets.


No Primary data is associated with the project. research study, period of one and half month management. size of project.

Portfolio Management and Investment Decisions The availability of information in the form of annual reports

and price fluctuations of the companies was a big constraint to the study.

Research Methodology: Sources of Data Collection The Methodology adopted or employed in this study was on secondary data collection i.e., Companies Annual Reports. Information Form Internet Publication Information provided Stock Exchanges. Period of Study For different companies, financial data has been collected from the year 2005- 2006 to 2009-2010 Selection Companies Companies selected for analysis are:o ICICI o HDFC o CIPLA o RANBAXY o MAHENDRA AND MAHENDRA o BAJAJ AUTO

Portfolio Management and Investment Decisions

PORTFOLIO MANAGEMENT MEANING: A portfolio is a collection of assets. The assets may be physical or financial like Shares, Bonds, Debentures, Preference Shares, etc. The individual investor or a fund manager would not like to put all his money in the shares of one company that would amount to great risk. He would therefore, follow the age old maxim that one should not put all the eggs into one basket. By doing so, he can achieve objective to maximize portfolio return and at the same time minimizing the portfolio risk by diversification. 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. Evaluation. It deals specifically with Security Analysis, Portfolio Analysis, Selection and Revision & Portfolio Management is a complex process, which tires to make investment activity more rewarding & less risky. Portfolio management is the management of various financial assets which Portfolio management is a decision support system that is designed with a According to Securities and Exchange Board of India Portfolio Manager is

comprise the portfolio. view to meet the multi-faced needs of investors. defined as: portfolio means the total holdings of securities belonging to any person.

PORTFOLIO MANAGER means any person who pursuant to a contract or

arrangement with a client, advises or directs or undertakes on behalf of the client (whether as a discretionary portfolio manager or otherwise) the management or administration of a portfolio of securities or the funds of the client.

Portfolio Management and Investment Decisions

DISCRETIONARY PORTFOLIO MANAGER means a portfolio manager who

exercises or may, under a contract relating to portfolio management exercises any degree of discretion as to the investments or management of the portfolio of securities or the funds of the client. FUNCTIONS OF PORTFOLIO MANAGEMENT: To frame the investment strategy and select an investment mix to achieve the To provide a balanced portfolio which not only can hedge against the inflation To make timely buying and selling of securities To maximize the after-tax return by investing in various tax saving investment

desired investment objectives but can also optimize returns with the associated degree of risk

instruments. STRUCTURE / PROCESS OF TYPICAL PORTFOLIO MANAGEMENT: In the small firm, the portfolio manager performs the job of security analyst. In the case of medium and large sized organizations, job function of portfolio manager and security analyst are separate.

OPERATIONS RESEARCH (e.g. Security Analysis) PORTFOLIO MANAGERS (e.g. buying and selling of Securities)



Portfolio Management and Investment Decisions Individuals will benefit immensely by taking portfolio management services for the following reasons: Whatever may be the status of the capital market, over the long period capital

markets have given an excellent return when compared to other forms of investment. The return from bank deposits, units, etc., is much less than from the stock market. The Indian Stock Markets are very complicated. Though there are thousands of companies that are listed only a few hundred which have the necessary liquidity. Even among these, only some have the growth prospects which are conducive for investment. It is impossible for any individual wishing to invest and sit down and analyse all these intricacies of the market unless he does nothing else. Even if an investor is able to understand the intricacies of the market and separate chaff from the grain the trading practices in India are so complicated that it is really a difficult task for an investor to trade in all the major exchanges of India, look after his deliveries and payments. TYPES OF PORTFOLIO MANAGEMENT: 1. DISCRETIONARY PORTFOLIO MANAGEMENT SERVICE (DPMS): In this type of service, the client parts with his money in favour of the manager, who in return, handles all the paper work, makes all the decisions and gives a good return on the investment and charges fees. In the Discretionary Portfolio Management Service, to maximize the yield, almost all portfolio managers park the funds in the money market securities such as overnight market, 18 days treasury bills and 90 days commercial bills. Normally, the return of such investment varies from 14 to 18 percent, depending on the call money rates prevailing at the time of investment.

Portfolio Management and Investment Decisions 2. NON-DISCRETIONARY PORTFOLIO MANAGEMENT SERVICE (NDPMS): The manager functions as a counselor, but the investor is free to accept or reject the managers advice; the paper work is also undertaken by manager for a service charge. The manager concentrates on stock market instruments with a portfolio tailor-made to the risk taking ability of the investor. 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 investments journals in India. capital markets have become active. The Indian stock markets are steadily moving towards efficiency, with rapid computerization, increasing higher market transparency, better infrastructure, better customer service etc. The markets are mutual funds have been set up the country since1987. 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.



Portfolio Management and Investment Decisions Return from a venture is concerned with benefit from that venture.In the field of finance in general and security analysis in particular,the term return is almost invariably associated with a percentage, and not a mere amount. The return of investment refers to a particular period of time. Price change is the difference between the price at the end and the beginning of the period. In security analysis, we primarily concerned with returns from the investors prespective. 2. STANDARD DEVIATION Standard deviation is the most common quantitative measure of the risk of an asset. Unlike the range it considers every possible event and weight equal to its probability is assigned to each event. Standard deviation is a measure of dispersion around the expected or average mean value. In this method the deviations the deviations are squared making all values positive. Standard Deviation = (R-R)

N 3. INTER- ACTIVE RISK THROUGH COVARIANCE: Covariance of the securities will help in finding out the inter-active risk. When the covariance will be positive then the rates of return of securities move together either upwards or downwards. Alternatively it can also be said that the inter-active risk is positive. Secondly, covariance will be zero on two investments if the rates of return are independent. Holding two securities may reduce the portfolio risk too. The portfolio risk can be calculated with the help of the following formula: __ COVARIANCE = (RA-RA)(RB-RB) N


Portfolio Management and Investment Decisions 4. COEFFICIENT OF CORRELATION The coefficient of correlation is another measure designed to indicate the similarity or dissimilarity in the behaviour of two variables.

Correlation Coefficient (PAB) =



(Std. A) (Std. B)

IMPORTANCE OF PORTFOLIO MANAGEMENT: Emergence of institutional investing on behalf of individuals. A number of

financial institutions, mutual funds and other agencies are undertaking the task of investing money of small investors, on their behalf. Growth in the number and size of investible funds a large part of household savings is being directed towards financial assets.

Portfolio Management and Investment Decisions Increased market volatility risk and return parameters of financial assets are

continuously changing because of frequent changes in governments industrial and fiscal policies, economic uncertainty and instability. Greater use of computers for processing mass of data. Professionalization of the field and increasing use of analytical methods (e.g. Larger direct and indirect costs of errors or shortfalls in meeting portfolio

quantitative techniques) in the investment decision making objectives increased competition and greater scrutiny by investors. STEPS IN PORTFOLIO MANAGEMENT: Specification and qualification of investor objectives, constraints, and

preferences in the form of an investment policy statement. Determination and qualification of capital market expectations for the Allocation of assets and determination of appropriate portfolio strategies for Performance measurement and evaluation to ensure attainment of investor Monitoring portfolio factors and responding to changes in investor objectives, Rebalancing the portfolio when necessary by repeating the asset allocation, economy, market sectors, industries and individual securities. each asset class and selection of individual securities. objectives. constrains and / or capital market expectations. portfolio strategy and security selection.

CRITERIA FOR PORTFOLIO DECISIONS: In portfolio management emphasis is put on identifying the collective to a more balanced emphasis on diversification and risk-return

importance of all investors holdings. The emphasis shifts from individual assets selection interrelationships of individual assets within the portfolio. Individual securities are important only to the extent they affect the aggregate portfolio. In short, all

Portfolio Management and Investment Decisions decisions should focus on the impact which the decision will have on the aggregate portfolio of all the assets held. Portfolio strategy should be molded to the unique needs and characteristics of Diversification across securities will reduce a portfolios risk. If the risk and used to the portfolios owner. return are lower than the desired level, leverages (borrowing) can be achieve the desired level. Larger portfolio returns come only with larger portfolio risk. The most The risk associated with a security type depends on when the investment will important decision to make is the amount of risk which is acceptable. be liquidated. Risk is reduced by selecting securities with a payoff close to when the portfolio is to be liquidated.



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


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


Portfolio Management and Investment Decisions


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


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

PORTFOLIO BUILDING: Portfolio decisions for an individual investor are influenced by a wide variety of factors. Individuals differ greatly in their circumstances and therefore, a financial programme well suited to one individual may be inappropriate for another. Ideally, an individuals portfolio should be tailor-made to fit ones individual needs.

Investors Characteristics: An analysis of an individuals investment situation requires a study of personal characteristics such as age, health conditions, personal habits, family responsibilities, business or professional situation, and tax status, all of which affect the investors willingness to assume risk. RISK AND EXPECTED RETURN: There is a positive relationship between the amount of risk and the amount of expected return i.e., the greater the risk, the larger the expected return and larger the chances of substantial loss. One of the most difficult problems for an investor is to estimate the highest level of risk he is able to assume.


Portfolio Management and Investment Decisions

Risk is measured along the horizontal axis and increases from the left to right. Expected rate of return is measured on the vertical axis and rises from bottom The line from 0 to R (f) is called the rate of return or risk less investments The diagonal line form R (f) to E(r) illustrates the concept of expected rate of

to top. commonly associated with the yield on government securities. return increasing as level of risk increases.

TYPES OF RISKS:Risk consists of two components. They are 1. Systematic Risk 2. Un-systematic Risk 1. Systematic Risk: Systematic risk is caused by factors external to the particular company and uncontrollable by the company. The systematic risk affects the market as a whole. Factors affect the systematic risk are economic conditions political conditions sociological changes


Portfolio Management and Investment Decisions The systematic risk is unavoidable. Systematic risk is further sub-divided into three types. They are a) b) c) Market Risk Interest Rate Risk Purchasing Power Risk

a). Market Risk: One would notice that when the stock market surges up, most stocks post higher price. On the other hand, when the market falls sharply, most common stocks will drop. It is not uncommon to find stock prices falling from time to time while a companys earnings are rising and vice-versa. The price of stock may fluctuate widely within a short time even though earnings remain unchanged or relatively stable. b). Interest Rate Risk: Interest rate risk is the risk of loss of principal brought about the changes in the interest rate paid on new securities currently being issued. c). Purchasing Power Risk: The typical investor seeks an investment which will give him current income and / or capital appreciation in addition to his original investment.

2. Un-systematic Risk: Un-systematic risk is unique and peculiar to a firm or an industry. The nature and mode of raising finance and paying back the loans, involve the risk element. Financial leverage of the companies that is debt-equity portion of the companies

Portfolio Management and Investment Decisions differs from each other. All these factors Factors affect the un-systematic risk and contribute a portion in the total variability of the return. Managerial inefficiently Technological change in the production process Availability of raw materials Changes in the consumer preference Labour problems The nature and magnitude of the above mentioned factors differ from industry to industry and company to company. They have to be analyzed separately for each industry and firm. Un-systematic risk can be broadly classified into: a) Business Risk b) Financial Risk


Business Risk:

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

i). Internal Business Risk Internal business risk is associated with the operational efficiency of the firm. The operational efficiency differs from company to company. The efficiency of operation is reflected on the companys achievement of its pre-set goals and the fulfillment of the promises to its investors. ii).External Business Risk

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

It refers to the variability of the income to the equity capital due to the debt capital. Financial risk in a company is associated with the capital structure of the company. Capital structure of the company consists of equity funds and borrowed funds. PORTFOLIO ANALYSIS: Various groups of securities when held together behave in a different manner and give interest payments and dividends also, which are different to the analysis of individual securities. A combination of securities held together will give a beneficial result if they are grouped in a manner to secure higher return after taking into consideration the risk element. SELECTION OF PORTFOLIO: The selection of portfolio depends on the various objectives of the investor. The selection of portfolio under different objectives are dealt subsequently. Objectives and asset mix: if the main objective is getting adequate amount of current income, sixty per cent of the invenstment is made on debts and 40 per cent on equities. The proportions of investments on debt and equity differ according to the individuals preferences. Growth of income and asset mix: Here the investor requires a certain percentage of growth in the income received from his investment. The debt portion of the portfolio may consist of 60 to 100 percent equities and 0 to 40 percent debt instrument. The debt portion of the portfolio may consist of concession regarding tax exemption. Appreciation of principal amount is given third priority. For example

Portfolio Management and Investment Decisions computer software, hardware and non-conventional energy producing company shares provides good possibility of growth in dividend. Capital appreciation and asset mix: Capital appreciation means that the valu of the original investment increases over the years. Investment in real estates like land and house may provide a faster rate of capital appreciation but they lack liquidity. In the capital market, the values of the shares are much higher than their original issue prices. Safety of principal and asset mix: Usually, the risk averse investors are very particular about the stability of principal. According to the life cycle theory, people in the third stage of life also give more importance to the safety of the principal. All the investors have this objective in their mind. No one like to lose his money invested in different assets. Risk and return analysis: The traditional approach to portfolio building has some basic assumptions. First, the individual prefers larger to smaller returns from securities. To achieve this goal, the investor has to take more risk. The ability to achieve higher returns is dependent upon his ability to judge risk and his ability to take specific risks. Diversification: Once the asset mix is determined and the risk and return are analyzed, the final step is the diversification of portfolio. Financial risk can be minimized by commitments to top-quality bonds, but these securities offer poor resistance to inflation. Stocks provide better inflation protection than bonds but are more vulnerable to financial risks. PORTFOLIO CONSTRUCTION: Portfolio is a combination of securities such as stocks, bonds and money market instruments. The process of blending together the broad asset so as to obtain optimum return with minimum risk is called portfolio construction. Diversification of investments helps to spread risk over many assets.

Portfolio Management and Investment Decisions diversification of securities gives the assurance of obtaining the anticipated return on the portfolio.

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

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

Portfolio Management and Investment Decisions In the modern approach, the final step is asset allocation process that is to choose the portfolio that meets he requirement of the investor. The risk taker i.e. who are willing to accept a higher probability of risk for getting the expected return would choose high risk portfolio. Investor with lower tolerance for risk would choose low level risk portfolio. The risk neutral investor would choose the medium level risk portfolio. MARKOWITZ MODEL: Harry Markowitz opened new vistas to modern portfolio selection by publishing an article in the journal of Finance in March 1952. His publication indicated the importance of correlation among the different stocks reruns in the construction of a stock portfolio. Most people agree that holding two stocks is less risky than holding one stock. For example, holding stocks from textile, banking, and electronic companies is better than investing all the money on the textile companys stock. help of risk and return relationship. Markowitz model is a theoretical framework for analysis of risk and return and their relationships. He used statistical analysis for the measurement of risk and mathematical programming for selection of assets in a portfolio in an efficient manner. Markowitz approach determines for the investor the efficient set of portfolio through three important variables i.e. Return Standard deviation Co-efficient of correlation Markowitz model is also called as an Full Covariance Model. Through this model the investor can find out the efficient set of portfolio by finding out the trade off between risk and return, between the limits of zero and infinity. According to this theory, the effects of one security purchase over the effects of the other security

But building up

the optimal portfolio is very difficult. Markowitz provides an answer to it with the

Portfolio Management and Investment Decisions purchase are taken into consideration and then the results are evaluated. Most people agree that holding two stocks is less risky than holding one stock. For example, holding stocks from textile, banking and electronic companies is better than investing all the money on the textile companys stock. Markowitz had given up the single stock portfolio and introduced diversification. The single stock portfolio would be preferable if the investor is perfectly certain that his expectation of highest return would turn out to be real. In the world of uncertainty, most of the risk adverse investors would like to join Markowitz rather than keeping a single stock, because diversification reduces the risk. ASSUMPTIONS: All investors would like to earn the maximum rate of return that they can Investors base their investment decisions on the expected return and standard The investor assumes that greater or larger the return that he achieves on his

achieve from their investments. deviation of returns from a possible investment. investments, the higher the risk factor surrounds him. On the contrary when risks are low the return can also be expected to be low. An investor should be able to get higher return for each level of risk by The investor can lend or borrow any amount of funds at the riskless rate of determining the efficient set of securities. interest. The riskless rate of interest is the rate of interest offered for the treasury bills or Government securities.

There is no personal income tax & transaction cost i.e. no cost involved in

buying and selling of stocks.

WHY WE NEED TO GO FOR PORTFOLIO ? It is believed that holding two securities is less risky than by having only one investment in a persons portfolio. When two stocks are taken on a portfolio and if

Portfolio Management and Investment Decisions they have negative correlation then risk can be completely reduced because the gain on one can offset the loss on the other. This can be shown with the help of following example: CAPITAL ASSET PRICING MODEL (CAPM): Markowitz, William Sharpe, John Lintner and Jan Mossin provided the basic structure for the Capital Asset Pricing Model. It is a model of linear general equilibrium return. In the CAPM theory, the required rate return of an asset is having a linear relationship with assets beta value i.e. undiversifiable or systematic risk (i.e. market related risk) because non market risk can be eliminated by diversification and systematic risk measured by beta. Therefore, the relationship between an assets return and its systematic risk can be expressed by the CAPM, which is also called the Security Market Line. Lending and borrowing:- Here, it is assumed that the investor could borrow or lend any amount of money at riskless rate of interest. When this opportunity is given to the investors, they can mix risk free assets with the risky assets in a portfolio to obtain a desired rate of risk-return combination. Rp = Portfolio return Xf = The proportion of funds invested in risk free assets 1- Xf = The proportion of funds invested in risky assets Rf = Risk free rate of return Rm = Return on risky assets The expected return on the combination of risky and risk free combination is Rp= Rf Xf+ Rm(1- Xf)


Portfolio Management and Investment Decisions Formula can be used to calculate the expected returns for different situtions, like mixing riskless assets with risky assets, investing only in the risky asset and mixing the borrowing with risky assets. THE CONCEPT: According to CAPM, all investors hold only the market portfolio and risk less securities. The market portfolio is a portfolio comprised of all stocks in the market. Each asset is held in proportion to its market value to the total value of all risky assets. For example, if Reliance Industry share represents 15% of all risky assets, then the market portfolio of the individual investor contains 15% of Satyam Industry shares. At this stage, the investor has the ability to borrow or lend any amount of money at the risk less rate of interest. Eg.: assume that borrowing and lending rate to be 12.5% and the return from the risky assets to be 20%. There is a trade off between the expected return and risk. If an investor invests in risk free assets and risky assets, his risk may be less than what he invests in the risky asset alone. But if he borrows to invest in risky assets, his risk would increase more than he invests his own money in the risky assets. When he borrows to invest, we call it financial leverage. If he invests 50% in risk free assets and 50% in risky assets, his expected return of the portfolio would be

Rp= Rf Xf+ Rm(1- Xf) = (12.5 x 0.5) + 20 (1-0.5) = 6.25 + 10


Portfolio Management and Investment Decisions = 16.25% if there is a zero investment in risk free asset and 100% in risky asset, the return is Rp= Rf Xf+ Rm(1- Xf) = 0 + 20% = 20% if -0.5 in risk free asset and 1.5 in risky asset, the return is Rp= Rf Xf+ Rm(1- Xf) = (12.5 x -0.5) + 20 (1.5) = -6.25+ 30 = 23.75%

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

Portfolio Management and Investment Decisions


Self Valuation: An individual may want to evaluate how well he has done.

This is a part of the process of refining his skills and improving his performance over a period of time.

Evaluation of Managers: A mutual fund or similar organization might want

to evaluate its managers. A mutual fund may have several managers each running a separate fund or sub-fund. It is often necessary to compare the performance of these managers.

Evaluation of Mutual Funds: An investor may want to evaluate the various

mutual funds operating in the country to decide which, if any, of these should be chosen for investment. A similar need arises in the case of individuals or organizations who engage external agencies for portfolio advisory services.

Evaluation of Groups: Academics or researchers may want to evaluate the

performance of a whole group of investors and compare it with another group of investors who use different techniques or who have different skills or access to different information.

NEED FOR EVALUATION OF PORTFOLIO: We can try to evaluate every transaction. Whenever a security is brought or We can try to evaluate the performance of a specific security in the portfolio to

sold, we can attempt to assess whether the decision was correct and profitable. determine whether it has been worthwhile to include it in our portfolio.


Portfolio Management and Investment Decisions We can try to evaluate the performance of portfolio as a whole during the

period without examining the performance of individual securities within the portfolio. NEED & IMPORTANCE: Portfolio management has emerged as a separate academic discipline in India. Portfolio theory that deals with the rational investment decision-making process has now become an integral part of financial literature. Investing in securities such as shares, debentures & bonds is profitable well as exciting. It is indeed rewarding but involves a great deal of risk & need artistic skill. Investing in financial securities is now considered to be one of the most risky avenues of investment. It is rare to find investors investing their entire savings in a single security. Instead, they tend to invest in a group of securities. Such group of securities is called as PORTFOLIO. Creation of portfolio helps to reduce risk without sacrificing returns. portfolios. The modern theory is of the view that by diversification, risk can be reduced. The investor can make diversification either by having a large number of shares of companies in different regions, in different industries or those producing different types of product lines. Modern theory believes in the perspective of combinations of securities under constraints of risk and return. PORTFOLIO REVISION: The portfolio which is once selected has to be continuously reviewed over a period of time and then revised depending on the objectives of the investor. The care taken in construction of portfolio should be extended to the review and revision of the portfolio. Fluctuations that occur in the equity prices cause substantial gain or loss to the investors. Portfolio management deals with the analysis of individual securities as well as with the theory & practice of optimally combining securities into


Portfolio Management and Investment Decisions The investor should have competence and skill in the revision of the portfolio. The portfolio management process needs frequent changes in the composition of stocks and bonds. In securities, the type of securities to be held should be revised according to the portfolio policy. An investor purchases stock according to his objectives and return risk framework. The prices of stock that he purchases fluctuate, each stock having its own cycle of fluctuations. These price fluctuations may be related to economic activity in a country or due to other changed circumstances in the market. If an investor is able to forecast these changes by developing a framework for the future through careful analysis of the behavior and movement of stock prices is in a position to make higher profit than if he was to simply buy securities and hold them through the process of diversification. Mechanical methods are adopted to earn better profit through proper timing. The investor uses formula plans to help him in making decisions for the future by exploiting the fluctuations in prices. FORMULA PLANS: The formula plans provide the basic rules and regulations for the purchase and sale of securities. The amount to be spent on the different types of securities is fixed. The amount may be fixed either in constant or variable ratio. This depends on the investors attitude towards risk and return. The commonly used formula plans are i. ii. iii. iv. Average Rupee Plan Constant Rupee Plan Constant Ratio Plan Variable Ratio Plan

ADVANTAGES: Basic rules and regulations for the purchase and sale of securities are


Portfolio Management and Investment Decisions The rules and regulations are rigid and help to overcome human emotion. The investor can earn higher profits by adopting the plans. A course of action is formulated according to the investors objectives. It controls the buying and selling of securities by the investor. It is useful for taking decisions on the timing of investments.

DISADVANTAGES: The formula plan does not help the selection of the security. The selection of

the security has to be done either on the basis of the fundamental or technical analysis. It is strict and not flexible with the inherent problem of adjustment. The formula plans should be applied for long periods, otherwise the Even if the investor adopts the formula plan, he needs forecasting. Market

transaction cost may be high. forecasting helps him to identify the best stocks.


MEANING :Investment is the employment of funds with the aim of achieving additional income or growth in value. The essential quality of an investment is that involves waiting for a reward. It involves the commitment of resources, which have been saved or put away from current consumption in the hope that some benefits will accrue in future.


Portfolio Management and Investment Decisions Investment is the allocation of monetary resources to assets that are expected to yield some minor positive return over a given period of time. These assets & investments in this from are called Financial Investment. NATURE: An individual investor postpones current consumption only in response to a rate of return which must be suitably adjusted for inflation and risk. This basic postulate, in fact, unfolds the nature of investment decision. Cash has opportunity cost and when you decide to invest it you are deprived of this opportunity to earn a return on that cash and also when the general price level raises the purchasing power of cash. This explains the reason why individuals require a real rate of return on their investments. The basis investment decision would be a trade-off between risk and return.

OBJECTIVES: The first basic objectives of investment are the return on it or yields. The yields are higher, the higher is he risk taken by investors. The risk less return is the bank deposit rate. Here the risk least as funds are safe and returns are certain. Secondly, each investor has his own asset preferences and choice of investments. Thus, some risk adverse operators put their funds in bank or post office deposits or certificates with co-operatives and Pusss. Some invest in real estate, land and building while others etc., Thirdly, every investor aims at providing for minimum comforts of house furniture, vehicles, consumer durables and other household requirements. After satisfying these minimum needs, he plans for his income, savings in insurance pension and provident is subordinated to the needs of the investor. Lastly, after satisfying all the needs and requirements, the rest of the savings would be invested in financial assets, which will give him future income and capital appreciation so as to improve his future standard of living. These may be in stock or capital market investment.


Portfolio Management and Investment Decisions QUALITIES FOR SUCCESSFULINVESTING :

Contrary Thinking Patience Composure Flexibility Openness

GUIDELINES FOR INVESTMENT DECISION : These are 10 commandments of investing, which should serve as basic guidelines for al investors. They are as follows : Accord top priority to a residential house. Integrate life insurance in your investment plan. Choose a risk posture consistent with your stage in investor life cycle. Tiptoe through the world precious objects. Avail of tax shelters. Adopt a suitable formula plan. Select fixed income instruments judiciously. Focus on fundamentals, but keep an eye on technical. Diversify moderately. Periodically review and revise the portfolio.


Portfolio Management and Investment Decisions


ORGANIZATION ON INDIAN STOCK EXCHANGES The recognized stock exchanges in India vary from voluntary non-profit making organizations(Bombay, Ahmedabad , Indore) to Joint stock Companies Limited by shares (Calcutta, Delhi, Bangalore) and companies limited by guarantee (Madras & Hyderabad). There is a broad uniformity in the organization of stock exchanges, since the Article of Association defining the constitution of the recognized stock

Portfolio Management and Investment Decisions exchanges is approved by the central government. BSE was the first Stock Exchange to get permanent recognisation followed by Calcutta, Delhi, Madras, Ahmedabad, Hyderabad, Indore and Bangalore. The other exchanges were official recognisation will renew for another term. As per the present guidelines, the proposed region in which the stock exchange is to be set up must be industrially developed with a sizeable number of industrial units and should be able to attract at least 50 companies independently.


Important Factors affecting to the Prices in the Stock Market are 1. Monetary Policy 2. Inflation 3. FII (Foreign institutional investors) 4. Political Influence 5. Company Announcements 6. SEBI Regulation 7. Annual Budget


Portfolio Management and Investment Decisions

Introduction Companies History in India In 1999, three IIT-Delhi alumni Sameer Gehlaut, Rajiv Rattan and Saurabh Mittal acquired Orbis,a Delhi based stock broking company. Young entrepreneur Sameer Gehlaut established Indiabulls in 2000, after acquiring orbis Securities, a stock brokerage company in Delhi. The group started its operations from a small office near Hauz Khas bus terminal in Delhi.The office had a tin roof and two computers. The idea of leveraging technology for trading stocks led to the creation of Indiabulls Incorporated on 10th January 2000, it was converted into a public limited company on 27th February 2004. Its original idea of leveraging technology bore fruit when Indiabulls was accorded permission to conduct online trading on Indian stock exchanges. The company had achieved the distinction of becoming only the second brokerage firm in India to be granted this consent. The challenges facing it

Portfolio Management and Investment Decisions were immense not least of all the mind set of investors who were called to make the big leap from traditional stock trading to a completely online interface. Having overcome this resistance, the company later expanded its service portfolio to include equity, F&O, wholesale debt, mutual fund distribution and equity research. In 2003/04, Indiabulls ventured into insurance distribution and commodity trading. It successfully floated its IPO in September 2004 and in the same year entered the consumer finance segment. Real estate, the new sunrise industry, was the next frontier for Indiabulls. In 2004/05, it entered this sector. But it wasnt just real estate that was booming.

Opportunities were opening up in retail and infrastructure as well. To cement its position in the Indian business and industry firmament, Indiabulls acquired Pyramid Retail In 2007 and marked its presence in the power sector by launching Indiabulls Power.

Indiabulls Group has five separately listed companies with subsidiaries which contributed in enhancing scope and profile of the business.


Portfolio Management and Investment Decisions

Indiabulls is Indias leading Financial, Real Estate and Power Company with a wide presence throughout India. They ensure convenience and reliability in all their products and services. Indiabulls has over 640 branches all over India. The customers of Indiabulls are more than 4,50,000 which covers from a wide range of financial services and products from securities, derivatives trading, depositary services, research & advisory services, consumer secured & unsecured credit, loan against shares and mortgage & housing finance. The

Portfolio Management and Investment Decisions company employs around 4000 Relationship managers who help the clients to satisfy their customized financial goals. Indiabulls Financial Services Ltd is listed on the National Stock Exchange (NSE), Bombay Stock Exchange (BSE) and Luxembourg Stock Exchange. The market capitalization of Indiabulls is around USD 3496 million (june 2010). Consolidated net worth of the group is around Rs.4500 cr (30 june 2010). Some of the large shareholders of Indiabulls are the largest financial institutions of the world such as Fidelity Funds, Goldman Sachs, Merrill Lynch, Morgan Stanley and Farallon Capital.

Products offered Equities and Derivatives

Offers purchase and sale of securities (stock, bonds, debentures etc.) Broker assisted trade execution Automated online investing Access to all IPO's

Portfolio Management and Investment Decisions Equity Analysis

Helps to build ideal portfolio Satisfies need by rating stocks based on facts-based measures Free of cost for all securities clients

Depository Services

Depository participant with NSDL and CDSL Helps in trading and settlement of dematerialized shares Performs clearing services for all securities transactions Offers platform to execute trade and settle transactions

Milestones Achieved

Developed one of the first internet trading platforms in India Amongst the first to develop in-house real-time CTCL (computer to computer link) with NSE Introduction of integrated accounts with automatic gateways to client bank accounts Development of products such as Power Indiabulls for high volume traders Indiabulls Signature Account for self-directed investors Indiabulls Group Professional Network for information and trading service

Brand Values

Indiabulls is amongst the largest non-banking financial services companies in India and enjoys strong brand recognition and customer acceptance.

The company attributes its dominant position in the brokerage industry to the preferential status it enjoys with investors Coupled with its forays into various

Portfolio Management and Investment Decisions segments; the Group believes that the bulk of its brand story is yet to be written. Indeed, when a case study on Indias youngest brands which have had a profound impact on the economy is crafted, Indiabulls will feature prominently in it.

The Board of Directors Following is the list of our Board Members as on November 4, 2009

Mr. Sameer Gehlaut Mr. Gagan Banga Mr. Rajiv Rattan Mr. Shamsher Singh Ms. Aishwarya Katoch Mr. Karan Singh Mr. Prem Prakash Mird Mr. Saurabh K Mittal Mr. Amit Jain THINGS The Team:

Chairman & CEO Executive Director CEO Director Director Director Director Executive Director Company Secretary

Indiabulls Securities Ltd, main strength lies in its formidable team. This team comprising highly qualified and experienced personnel has been responsible for the overall management of the company and has provided direction in diverse areas of business strategy, operating management, regulatory reporting, human resources development and product development.


Portfolio Management and Investment Decisions

Senior Vice President Yuv Raj Singh Branch Manager Regional Senior Sales Manager Manager Dashmeet Singh Sujeet Roy Chowdary

Support System Vishal Local Compliance Officer Dealer Chary Badri Nath Sujeet Roy Chowdary

Sales Function RM/SRM Subrot Satish Kumar

Back Office

Executive Ifran Khan

ARM Raja


Portfolio Management and Investment Decisions

Reasons to choose Indiabulls Securities Ltd: The Indiabulls Financial Services stock is the best performing stock in the MSCI Index the global benchmark for equity investments A person who bought Indiabulls shares in the IPO at Rs. 19 (US$ 0.48) in September 2004 has been rewarded almost 100 times in three and a half years a feat unparalleled in the history of Indian capital markets Indiabulls Real Estate Limited partnered Farallon Capital Management LLC of the US to bring the first Foreign Direct Investment into real estate

Reasons why investing with Indiabulls Securities Limited is smarter Customization: Formulates investment plans based on customer


individual requirements 2) Expertise: Brings within customer reach, about institutional expertise and companies valuable understanding of the financial markets 3) One-stop shop: Caters to all customers investment needs under one roof. 4) Trust: Enjoys the pedigree of Indiabulls Securities Ltd and share its expertise in financial services. 5) Personalized service: Helps customer through the entire investment process, step by step, with innovative and efficient services.

Portfolio Management and Investment Decisions 6) Unbiased & Objective advice: We partner you in your investment process, with our team of expert investment advisors.




Beginning price(Rs)

Ending price(Rs)

Dividend(R s)

2006 2007 2008 2009 2010

141.45 297.90 375.00 587.70 892.00

295.45 371.35 585.05 891.5 1238.7

7.50 7.50 8.50 8.50 10.00


Dividend+( Price Changes) Beginning Price

* 100

Price Changes = Ending Price-Beginning Price

Return (2006)

7.50+(295.45-141.45) * 100 141.45



= 7.50+(371.35-297.90) *100 = 27.17% 297.90


8.50+(585.05-375) 375




8.50+(891.5-587.70) *100


Portfolio Management and Investment Decisions 587.70 Return(2010) = 10.00+(1238.7-892)*100 892 INTERPRETATION: ICICI has highest returns 114.17% in the year 2006 ICICI has lowest returns 27.17% in the year 2007 =39.98%



Beginning Price

Ending price

Dividend Return= Dividend+ (Ending PriceBeginning price) * 100

2006 2007 2008 2009 2010

358.5 645.9 771 1195 1630

645.55 769.05 1207 1626.9 2877.75

3 3.50 4.50 5.50 7.00

Beginning Price Return(2006) = 3+(645.55-358.5)*100 = 80.9% 358.5 Return(2007) = 3.50+(769.05-645.9)*100 = 19.60% 645.9 Return(2008) = 4.50+(1207-771)*100 = 57.13% 771 Return(2009) = 5.50+(1626.9-1195)*100 1195.9

= 36.6%

Portfolio Management and Investment Decisions Return(2010) = 7.00+(2877.75-1630) *100 1630 INTERPRETATION: HDFC has highest returns 80.9% in the year 2006 HDFC has lowest returns 19.60% in the year 2007 = 76.97%



Beginning price(Rs)

Ending price(Rs)

Dividend(R s)

2006 2007 2008 2009 2010

898.00 1334.00 320.00 447.95 251.5

1371.05 317.8 448 251.35 212.65

10.00 3.00 3.50 2.00 2.00

Return=Dividend+(Ending Price-Beginning price) * 100 Beginning Price Return(2006) = 10.00+(1371.05-898.00)*100 = 898.00 Return(2007) = 3.00+(317.8-1334.00) *100 1334 Return(2008) = 3.50+(448-320.00) 320
* 100


= -75.95%


Portfolio Management and Investment Decisions Return(2009) = 2.00+(251.35-447.95) 447.95 Return(2010) = 2.00+(212.65-251.5) 251.5
* 100

* 100

= -43.44%

= -14.67%

INTERPRETATION: CIPLA has highest returns 53.79% in the year 2006 CIPLA has lowest returns -75.95% in the year 2007



Beginning price(Rs)

Ending price(Rs)

Dividend(R s)

2006 2007 2008 2009 2010

598.45 1109.00 1268 363 391

1095.25 1251.15 362.75 391.8 425.5

15.00 17.00 14.50 8.50 8.50

Return=Dividend+(Ending Price-Beginning price) * 100


Portfolio Management and Investment Decisions Beginning Price


= 15.00+(1095.25-598.45) 598.45

* 100



= 17.00+(1251.15-1109.00) 1109

* 100



14.50+(362.75-1268.00) 1268.00

* 100



8.50+(391.8-363) *100 363



8.50+(425.5-391.00) *100 391.00


INTERPRETATION: RANBAXY has highest returns 88.52% in the year 2006 RANBAXY has lowest returns -70.24% in the year 2008



Beginning price(Rs)

Ending price(Rs)

Dividend(R s)

2006 2007 2008

113.45 392.55 547.10

388.8 545.45 511.6


5.50 9.00 13.00

Portfolio Management and Investment Decisions 2009 2010 514.80 913.00 908.45 861.95 10.00 11.50

Return=Dividend+(Ending Price-Beginning price) * 100 Beginning Price Return(2006) = 5.50+(388.8-113.45) * 100 = 247.55% 113.45 Return(2007) = 9.00+(545.45-392.55)*100 = 41.24% 392.55 Return(2008) = 13.00+(511.6-547.10) 547.10 Return(2009) = 10.00+(908.45-514.80)*100 514.50 Return(2010) = 11.50+(861.95-913.00) *100 913.00 INTERPRETATION: MAHENDRA has highest returns 247.55% in the year 2006 MAHENDRA has lowest returns -4.33% in the year 2010 = -4.33% = 78.41%

100 = -4.11%



Beginning price(Rs)

Ending price(Rs)

Dividend(R s)





Portfolio Management and Investment Decisions 2007 2008 2009 2010 1125.05 1149.00 2016.00 2648.65 1131.2 2001.1 2619.15 2627.9 25.00 25.00 40.00 40.00

Return=Dividend+(Ending Price-Beginning price) * 100 Beginning Price Return(2006) = 14.00+(1136.3 -502) * 100 = 502 Return(2007) =25.00+(1131.2-1125.05) *100= 2.77% 1125.05 Return(2008)) = 25.00+(2001.1-1149.00) * 100 = 76.34% 1149.00 Return(2009) = 40.00+(2619.15-2016.00) 2016.00 Return(2010) = 40.00+(2627.9-2648.65) 2648.65 * 100 = 0.726%


100 = 31.9%

INTERPRETATION BAJAJ AUTO has highest returns 129.14% in the year 2006 BAJAJ AUTO has lowest returns 0.726% in the year 2010


Portfolio Management and Investment Decisions

CONSOLIDATED STATEMENT OF RETURNS OF SECURITIES Note: All the returns shown below are in % YEAR 2006 2007 2008 2009 2010 ICICI 144.17 27.17 58.28 53.13 39.98 HDFC 80.9 19.6 57.13 36.6 76.97 CIPLA 53.79 -75.95 41.09 -43.44 -14.67 RANBAX Y 85.52 14.35 -70.24 10.27 10.99 M&M 247.55 41.24 -4.11 78.41 -4.3 BAJAJ AUTO 129.14 2.77 76.34 31.9 0.726

1) In the year 2006 all securities have yielded highest returns. 2) Reason for highest return is because of capital appreciation. 3) cipla has given bonus in the year 2007 that is the reason for depreciation in itz value 4)Ranbaxy has quoted least returns in the year 2008 because its patent has been rejected in US. 5) Mahendra and Mahendra & bajaj auto have recorded least returns in the year 2010 because of the increase in operating expenses due to the rise in inflation. Banks also have increased interest rates which esulted in decrease of sales hence the profitability also decreases.



Portfolio Management and Investment Decisions

_ Year Return (R) 114.7 27.17 58.28 53.13 39.98 293.26 _ Average (R) = R N R

_ R-R

_ ( R-R )2

2006 2007 2008 2009 2010

58.652 58.652 58.652 58.652 58.652

56.048 -31.482 -0.372 -5.522 -18.672

3141.4 991.11 0.138384 30.492 348.64 4511.7

= 293.26 = 58.652 5 _

Variance =

(R-R) N

Standard Deviation = =

Variance (4511.7) 5 = 30.03


_ Year Return (R) R

_ R-R

_ ( R-R )2


Portfolio Management and Investment Decisions

2006 2007 2008 2009 2010

80.9 19.60 57.13 36.6 76.97 271.2 _

54.24 54.24 54.24 54.24 54.24

26.66 -34.64 2.89 -17.64 22.73

710.75 1199.92 8.3521 311.16 516.65 2476.8

Average (R) = R = 271.2 = 54.24 N 5

Variance = (R-R) n Standard Deviation = = Variance (2476.8) 5 = 22.25








Portfolio Management and Investment Decisions 2007 -75.95 -7.836 -68.114 4639.5
















-39.18 _ Average (R) = R = N -39.18 = -7.836 5 _ Variance = (R-R)2 n Standard Deviation = = Variance (12145.02) 5 = 49.28

12145.0 2



Portfolio Management and Investment Decisions

_ Year Return (R) R

_ R-R

_ ( R-R )2 _ Average (R) = R = 50.89 = 10.18 N _ 5

2006 2007 2008 2009 2010

85.52 14.35 -70.24 10.27 10.99 50.89

10.18 10.18 10.18 10.18 10.18

75.34 4.17 -80.42 0.09 0.81

5676.11 17.39 6467.37 0.0081 0.6561 12161.5

Variance = (R-R)

N Standard Deviation = Variance

(12161.5) 5 = 49.31


2006 2007

71.758 71.758

175.79 -30.52

30902.8 931.47

Portfolio Management and Investment Decisions 2008 2009 2010 -4.11 78.41 -4.3 358.79 __ Average (R) = R n = 358.79 5 __ Variance = (R-R )2 n Standard Deviation = Variance =71.758 71.758 71.758 71.758 -75.868 6.652 -76.058 5755.95 44.25 5784.82 43419.3

(43419.3) 5 = 93.18


_ Year Return (R) 129.14 2.77 76.34 31.9 R

_ R-R

_ ( R-R )2

2006 2007 2008 2009

48.175 48.175 48.175 48.175


80.965 -45.405 28.165 -16.275

6555.3 2061.6 793.3 264.9

Portfolio Management and Investment Decisions 2010 0.726 240.876 __ Average(R)= R = 240.876 N __ Variance = (R-R) N Standard Deviation = Variance 5 = 48.175 48.175 -47.449 2251.4 11926.5

(11926.5) 5 = 48.83






__ RB-RB 56.048 -31.482 -0.372 -5.522 -18.672




(RA-RA ) (RB-RB) 1494.24 1090.5 -1.075 97.41 -424.4 2256.675

2006 2007 2008 2009 2010

26.66 -34.64 2.89 -17.64 22.73

Portfolio Management and Investment Decisions Co-variance (COVAB ) = (RA-RA) (RB-RB) n Co-variance (COVAB )=1/5 (2256.675) =451.335 Correlation Coefficient (PAB) = COV AB (Std. A) (Std. B) = 451.335 (22.25) (38.13) = 0.675




DEVIATION OF RANBAXY __ RB-RB 75.34 4.17 -80.42 0.09 0.81




(RA-RA ) (RB-RB) 4642.9 -284.03 -3934.62 -3.204 -5.519 415.52

2006 2007 2008 2009 2010

61.625 -68.114 48.926 -35.604 -6.814

__ Co-variance(COVAB )= (RA-RA) (RB-RB)



Portfolio Management and Investment Decisions N

Co-variance(COVAB )=1/5 415.52 = 83.104

Correlation Coefficient (PAB) =

COV AB (Std. A) (Std. B)


(49.28)(49.31) =0.034


DEVIATIONOF Year BAJAJ __ RA-RA 2006 2007 2008 2009 2010 80.965 -45.405 28.165 -16.275 -47.449



__ RB-RB 175.79 -30.52 -75.868 6.652 -76.058



(RA-RA ) (RB-RB) 14232.84 1385.76 -2136.82 -108.26 3608.87 16982.39 __



Portfolio Management and Investment Decisions Co-variance(COVAB )= (RA-RA) (RB-RB) N

Co-variance(COVAB )=1/5 (16982.39) = 3396.478

Correlation Coefficient (PAB) =

COV AB (Std. A) (Std. B)

= 3396.478 (48.83) (93.18)

= 0.746


Portfolio Management and Investment Decisions COMPANY STANDARD DEVIATION ( % ) 30.03 22.25 49.28 49.31 93.18 48.83






Portfolio Management and Investment Decisions ICICI HDFC CIPLA RANBAXY M&M BAJAJ 58.65 54.24 ( 7.38 ) 10.18 71.75 48.17



0.675 0.034


Portfolio Management and Investment Decisions BAJAJAUTO&MAHINDRA 0.746




(Std.b) (std.a)


(std.a )(std.b)

+ (std.b)

-2 pab (std.a) (std.b)


Portfolio Management and Investment Decisions X = 1X




Std.a Std.b

= =

22.25 30.03



(30.03) (22.25)

(0.675) (22.25 )(30.03)


+ (30.03)

- 2 (0.675) (22.25) (30.03)







Portfolio Management and Investment Decisions

(Std.b) (std.a)


(std.a )(std.b)

+ (std.b)

-2 pab (std.a) (std.b)





Std.a Std.b

= =

49.28 49.317



(49.317) (49.28)

(0.034) (49.28) (49.317) + (49.317)


- 2 (0.034) (49.28) (49.317)

= = =

1X 0.5 0.5





Portfolio Management and Investment Decisions Formula:

(Std.b) (std.a)


(std.a )(std.b)

+ (std.b)

-2 pab (std.a) (std.b)




MAHENDRA BAJAJ AUTO 93.18 48.53 0.756

X Std.a Std.b p

= = = =


0.756(93.18) (48.53)

(93.18)2 + (48.53)2 - 2 (0.756)(93.18)(48.53) X


2355.160-3418.65 8682.51+2355.16-(6837.30)

-1063.49 4200.37.67


= =

-0.25 1X


= -0.25 = 1.25


Portfolio Management and Investment Decisions


(RP) __ __


( Rp)=(Ra)(Xa) + (Rb) (Xb)


Rp=Ra (Xa) + Rb (Xb) 58.652(0.09) + 54.24(0.91) =5.278 + 49.358 =54.67 CALCULATION OF PORTFOLIO RETURN BETWEEN CIPLA AND RANBAXY __ __

Rp=Ra (Xa) + Rb (Xb) -7.836(0.5) + 10.18 (0.5) = -3.916 + 5.09 =1.174


Rp=Ra (Xa) + (Rb) (Xb) 71.75(-0.25) + 48.17 (1.25) = -17.93 + 60.21 65

Portfolio Management and Investment Decisions

= 42.28






X1=0.09 ; X2=0.91 ; 1=30.03; 2=22.25; r12=0.675

= (0.09)^2(30.03)^2+(0.91)^2(22.25)^2+2(0.09) (0.91)(0.675*30.03*22.25)



491.141 = 22.16


Portfolio Management and Investment Decisions


X1=0.5; X2=0.5 ; 1=49.28; 2=49.317; r12=0.034

= (0.5)^2(49.28)^2+(0.5)^2(49.317)^2+2(0.5)(0.5) (0.034*49.28*49.37)





= 35.44



Portfolio Management and Investment Decisions X1=1.25; X2= -0.25 ; 1=93.18.; 2=48.83; r12=0.756

= (0.25)^2(93.18)^2+(1.25)^2(48.83)^2+2(-0.25)(1.25) (0.756*93.18*48.83)

= (0.0625)(8682.51)+(1.5625)(2384.36)+2(-0.25) (1.25)0.756(93.18)(48.83)







Portfolio Management and Investment Decisions


22.16 35.44 46.02

Two Portfolios

Correlati on Coefficie nt






0.675 0.034 0.746

0.09 0.5 ( 0.25 )

0.91 0.5 1.25

54.67 1.17 42.27

22.16 35.44 46.02



Portfolio Management and Investment Decisions

The calculated average return of ICICI and HDFC is 58.652% and 54.24%respectively The calculated S.D(risk) of ICICI and HDFC is 30.03% and 22.25% The portfolio weights of two companies are 0.91 and 0.09 which are calculate from S.Ds of this companies Here the principle of high risk securities get high return has be been proved .because ICICI is having good returns and high risk compared wth HDFC. The company ICICI and HDFC are having good portfolio combination having the portfolio return of 54.62% and the portfolio risk of 22.16 and co-relation valued at 0.675

The average returns of

CLIPA & RANBAXY and -7.832% and 10.18% equal 0.5 and 0.5

respectively and S.Ds are 49.28 and 49.317 The portfolio weights of these two companies are respectively correlation is 0.034 The portfolio return are 1.174% and portfolio risk 35.44% which is not favorable figure from investor point of view

MAHENDRA & BAJAJ AUTO The average returns of MAHENDRA & BAJAJ AUTO is 71.758 and

48.175% respectively and S.Ds are 93.18 and 48.83


Portfolio Management and Investment Decisions

The portfolio weights of these two companies are equal -0.25 and 1.25

which indicates all the portfolio funds should be invested in MAHENDRA

Co-relation coefficient is 0.746 The portfolio return are 42.28% and portfolio risk 46.33% though the risk

is high but the combination is having good return


When investor wants to invest in MAHENDRA&MAHENDRA is better option for him because its having high average return 71.75% On the whole the simple investment principle of high risk securities with yield of high returns has been proved in is study And from portfolio point of view AUTOMOBILE company of M&M and BAJAJAUTO is getting optimal portfolio returns of 77.65% which is very high compared to other combinations If the investor wants to get optimal return with less risk the portfolio combination of ICICI & HDFC is better alternative for them because its calculated portfolio return is 54.62% and the portfolio risk is 22.16%


In case of perfectly correlated securities or stocks, the risk can be reduced

to a

minimum point.


Portfolio Management and Investment Decisions In case of negatively correlative securities the risk can be reduced to a zero.(which is companys risk) but the market risk prevails the same for the security or stock in the portfolio.
Positive correlation means both the securities

are moving in the same

direction i.e., either upward or downward. Whereas negative correlation means, the securities are moving in opposite direction, Which is more portfolio.


Select your investment an economic grounds public knowledge.


Portfolio Management and Investment Decisions

The investor must select the right advisory body which is has sand knowledge about the product which they are offer risk.

Professionalized portfolio advisory services are the most important

feature of many investors. So that investment detailed analysis which will be helpful for reducing any kind of risk overcoming on the securities.

Investing on the saved many in single securities it should be invested in well diversified portfolio. So that if yield many returns with max risk.

If the investing wants to set more returns to has to take max risk.



Portfolio Management and Investment Decisions

Website 4. www. 5. 6. 7. Newspapers& magazine 8. NEWS PAPERS. ECONOMIC TIME, FINANCIAL EXPRESS.ETC