An analysis of Portfolio Management

7/21/2019 An analysis of Portfolio Management

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CHAPTER-1

INTRODUCTION

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INTRODUCTION

Managing investments in equities requires time, knowledge, experience and constant

monitoring of stock markets. Portfolio management services (PMS) gives a helping hand to

people who need help to manage their investments. When we invest in PMS, ou own

individual securities unlike a mutual fund investor, who owns units of the entire fund. We have

the freedom and flexi!ilit to tailor our portfolio to address personal preferences and financial

goals. (PMS) is a method of investing used ! wealth investors and companies who want

exposure to a variet of products such as equities,fixed income, gold and structured products.

"he !usiness of portfolio management has never !een an eas one. #uggling the limited choices

at hand with the twin requirements of adequate safet and si$ea!le returns is a task fraught with

complexities. %iven the unpredicta!le nature of the share market, it requires solid experience

and strong research to make the right decision. &n the end it !oils down to making the right

move in the right direction at the right time. "hat's where the expert comes in. Portfolio

management service providers advise clients on !uing or selling shares, derivatives or other

tpe of securities. epending on the tpe of PMS, the manager can also !u or sell securities

on !ehalf of the clients. n entit needs to !e registered with the Securities and *xchange

+oard of &ndia as a portfolio manager. n investor individuall owns the securities in a PMS

portfolio, unlike a mutual fund where investors onl own units of the fund and not the actual

securities.

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&n this proect -Portfolio Management & !asicall studied the investment strategies and gains

through knowledge a!out various options availa!le to the investors. & studied various gains and

insights a!out the various investment strategies and how an ideal portfolio should !e

maintained so as to serve their needs and anticipated gains of investors.

ccordingl & have formulated the questionnaire as so to understand the pscholog of the

people and what are the various factors that inspire them to invest in different options availa!le.

/or ever investor that portfolio evaluation and construction is an important aspect. With the

help of evaluation of the portfolio an investor can check his risk and minimi$e or maximi$e

according to its risk appetite and returns that he want to make from the portfolio. Saving is an

important part of the econom of an nation. With savings invested in various options availa!le

to the people, the mone acts as the driver for growth of the countr. "hus a complete

understanding of factors which are related to investment decision including risk appetite and

liquidit requirements is required.

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CHAPTER-2

INDUSTRY PROFIE

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INDUSTRY PROFIE! STOC" MAR"ET

Stock market is a market where trading of compan stocks, other securities and derivatives

takes place. Stock exchanges are corporations or mutual organi$ations, which are speciali$ed in

trading stocks and securities. ll sorts of compan stocks are enrolled in the stock exchanges,

operating in a particular countr. Some of the stock markets in &ndia are listed !elow0 1

a. +angalore Stock *xchange

!. Mum!ai (+om!a) Stock *xchange

c. 2alcutta Stock *xchange

d. elhi Stock *xchange

e. Madras Stock *xchange

f. 3ational Stock *xchange

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Hi#tor$

&ndian Stock Markets are one of the oldest in sia. &ts histor dates !ack to nearl 455 ears

ago. "he earliest records of securit dealings in &ndia are meagre and o!scure. + 6785's

!usiness on corporate stocks and shares in +ank and 2otton presses took place in +om!a."hough the trading list was !roader in 6789, there were onl half a do$en !rokers recogni$ed

! !anks and merchants during 67:5 and 67;5. "he 67;5's witnessed a rapid development of

commercial enterprise and !rokerage !usiness attracted man men into the field and ! 67


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Str%&t%re an' #i(e of t)e mar*et#

"oda &ndia has two national exchanges, the +om!a Stock *xchange (+S*) and the 3ational

Stock *xchange (3S*). *ach has full electronic trading platforms with around 9:55

participating !roking outfits. /oreign !rokers account for 49 of these. "here are some 9


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+OM+AY STOC" E,CHANE .+SE/

T)e +om0a$ Sto&* E&)ange imite'

(/ormerl, the Stock *xchange, Mum!ai> popularl called

"he +om!a Stock *xchange, or +S*) is the oldest stock

exchange in sia. &t is also the !iggest stock exchange in

the world in terms of listed companies with :,755 listed

companies as of ugust 455A. &t is located at alal Street,

Mum!ai, &ndia. Gn 86 ecem!er 455A, the equit market

capitali$ation of the companies listed on the +S* was =SC6.A9 trillion, making it the largest stock exchange in South

sia and the tenth largest in the world. "he +om!a Stock

*xchange was esta!lished in 67A;. round :,755 &ndian

companies list on the stock exchange, and it has a

significant trading volume. "he +S* S*3S*J (SENSitive

indE,), also called the B+S* 85B, is a widel used market

index in &ndia and sia. "hough man other exchanges

exist, +S* and the 3ational Stock *xchange of &ndia

account for most of the trading in shares in &ndia. "he +S*

&ndex, S*3S*J, is &ndia's first stock market index that

enos an iconic stature, and is tracked worldwide. &t is an

index of 85 stocks representing 64 maor sectors. "he set

of companies which make up the index has !een changed

onl a few times in the last twent ears.

"hese companies account for around one1fifth of the market capitali$ation of the +S*. "he

S*3S*J is constructed on a 'free1float' methodolog, and is sensitive to market sentiments

and market realities. part from the S*3S*J, +S* offers 46 indices, including 64 sectoral

indices. +S* has entered into an index cooperation agreement with eutsche +Krse. "his

agreement has made S*3S*J and other +S* indices availa!le to investors in *urope and

merica. Moreover, +arclas %lo!al &nvestors (+%&), the glo!al leader in *"/s through its

iSharesL !rand, has created the 'iSharesL +S* S*3S*J &ndia "racker' which tracks the

S*3S*J. "he *"/ ena!les investors in ?ong ong to take an exposure to the &ndian equit

market.

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+SE al#o )a# a i'e range of #er3i&e# to em4oer in3e#tor# an' fa&ilitate #moot)

tran#a&tion#0

In3e#tor Ser3i&e#! "he epartment of &nvestor Services redresses grievances of

investors. +S* was the first exchange in the countr to provide an amount of @s.6

million towards the investor protection fund> it is an amount higher than that of an

exchange in the countr. +S* launched a nationwide &nvestor wareness Programme1

'Safe &nvesting in the Stock Market' under which 4


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"he 3ational Stock *xchange of &ndia Fimited has genesis in the report of the ?igh Powered

Stud %roup on *sta!lishment of 3ew Stock *xchanges, which recommended promotion of

a 3ational Stock *xchange ! financial institutions (/&s) to provide access to investors from

all across the countr on an equal footing. +ased on the recommendations, 3S* was

promoted ! leading /inancial &nstitutions at the !ehest

of the %overnment of &ndia and was incorporated in

3ovem!er 6994 as a taxpaing compan unlike other

Stock exchanges in the countr.

Gn its recognition as a stock exchange under the

Securities 2ontracts (@egulation) ct, 69;< in pril

6998, 3S* commenced operations in the Wholesale

e!t Market (WM) segment in #une 699:. "he

2apital Market (*quities) segment commenced

operations in 3ovem!er 699: and operations in

erivatives segment commenced in #une 4555. 3S*

is mutuall1owned ! a set of leading financial

institutions, !anks, insurance companies and other

financial intermediaries in &ndia !ut its ownership

and management operate as separate entities.

O%r ro%4

NNSCC1 3ational Securities 2learing 2orporation Ftd.

N NCC1 3ational 2ommodit 2learing Fimited

N NSETECH-3S* &nfo"ech Services Fimited

N IIS1 &ndia &ndex Services O Products Ftd.

N NSD1 3ational Securities epositor Ftd.

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CHAPTER-7

COMPANY PROFIE

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O8ER8IE5

/ounded in 699:, SM2 %roup is one of &ndias leading financial services and investment

solutions providers and has !een rated as &ndias +est *quit O +est 2urrenc +roker and

+roking house with the largest istri!ution 3etwork, (Source0 +S* &P/ and O+ *quit

+roking wards 4564, 4566 O 4565 and +loom!erg1="Q /inancial Feadership wards 4564

O 4566). !lend of extensive experience, diverse talent and client focus has made us achieve

this landmark. Gver the ears, SM2 has expanded its operations domesticall as well as

internationall. *xisting network includes regional offices at Mum!ai, olkata, 2hennai,

hmeda!ad, #aipur, ?dera!ad, +angalore plus a growing network of :8 !ranches O 4;55E

registered su!1!rokers and authori$ed persons spread across ;55E cities and towns in &ndia.

"he offer a diverse range of financial services which includes institutional and retail !rokerage

of equit, derivatives, commodities, currenc, online trading, depositor services, distri!utionof &PGs ,mutual funds, fixed deposits O !onds, dedicated desk for 3@&s and institutional

clients, insurance !roking(!oth life O general), clearing services, margin financing, investment

!anking, portfolio management, wealth advisor O research. "he have a workforce of more

than 4;55 emploees and over 45555 registered associatesI service providers serving the

financial needs of a large !ase of investors efficientl. "he are also amongst the first financial

firms in &ndia to expand operations in the lucrative gulf market, ! acquiring license for

!roking and clearing mem!er with (%2J).

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T)e SMC A'3antage!

Farge avenues of investment solutions and financial services under one roof

Personali$ed solution and attention offered to each investor

@esearch support and timel advice ! our high1tech research wing

n extensive network of !ranch offices

perfect !lend of latest technolog and rich experience

?onest, transparenc and fairness im!i!ed in our dealings

Providers of one of the !est trading platforms in terms of speed, convenience and riskmanagement to trade in 3S* (2ash, /OG, 2urrenc), +S*(2ash, /OG), 32*J, M2J,

3M2*, &2*J, 2*, =S*, 3S*F, 32*J SPG", M2J1SJ O %2J.

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SMC PROMOTERS

Mr6 SU+HASH CHANDRA AAR5A

?e is the 2hairman and irector of SM2 %lo!al Securities Fimited O 2o founder of the

SM2 %roup.

/ellow mem!er of the &nstitute of 2hartered ccountants in &ndia (&2&)

?e has an experience of more than 48 ears in stock !roking O capital market.

2hairman, 2apital Market 2ommittee of the ssociated 2ham!ers of 2ommerce and

&ndustr of &ndia (SSG2?M)

?e is a part of an expert group constituted ! Ministr of 2orporate ffairs to review the

existing 2ost ccounting rules and standards.

?e has activel participated in conferences and seminars on securities and commodities

market.

&t is through his leadership skills that SM2 received several accolades

?is effort have led to the diversification of group !usiness from stock !roking and ar!itrage

to commodit !roking, &PGs O mutual fund distri!ution, insurance products, merchant

!anking, wealth management O advisor services.

Mr6 MAHESH6 C6 UPTA

?e is the Qice 2hairman O Managing irector of SM2 %lo!al Securities Fimited O 2o

founder of the SM2 %roup.

/ellow mem!er of the &nstitute of 2hartered ccountants in &ndia (&2&)

?e has an experience of more than 48 ears in Securities Market.

?e has activel participated in conferences and seminars on securities and commodities

market.

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CORPORATE ETHOS

8ISION

"o !e a glo!al maor in providing complete investment solutions, with relentless focus on

investor care, through superior efficienc and complete transparenc.

8AUES

Passion0 ?elping people achieve financial goals.

&ntegrit0 +eing ethical !uilds trust.

@elationship0 Gne transaction, lifetime relationship.

&nnovation0 +eing ahead with @esearch and "echnolog.

"rustworth0 eeping promise ever time.

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SMC A44roa&)

CREDENTIAS

+e#t E9%it$ +ro*ing Ho%#e in In'ia (Source0 +S* &P/ 1 O+ *quit +roking

wards, 4564 O 4565)

+e#t E9%it$ +ro*ing )o%#e in Deri3ati3e Segment in In'ia (Source0 +S* &P/1O+

*quit +roking wards, 4564)

+e#t C%rren&$ +ro*er in In'ia (Source0 +loom!erg 1 ="Q /inancial Feadership

awards, 4564 O 4566)

+ro*ing Ho%#e it) t)e arge#t Di#tri0%tion Netor* in In'ia (Source0 +S* &P/1

O+ *quit +roking wards, 4564, 4566 O 4565)

+e#t E9%it$ Re#ear&) Anal$#t in IPO #egment an' +e#t Commo'it$ Re#ear&)

Anal$#t- 8ieer:# C)oi&e (Source0 Ree +usiness &ndia's +est Market nalst wards,

4564)

earning an' Talent Te&)nolog$ E&ellen&e Aar' 0$ Star Ne# HR an'

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ea'er#)i4 Aar'#; 2


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2orporate &nsurance +roker for Fife O %eneral &nsurance, @egistered with &@

istri!utor of &PGs O Mutual /unds, @egistered with M/&

Portfolio Management Services (PMS), @egistered with S*+&

3on1+anking /inancial 2ompan (3+/2), @egistered with @+&

PRODUCTS AND SER8ICES

S5OT ANAYSIS

S5OT anal$#i# is a structured planning method used to evaluate the Strengths, 5eaknesses,Opportunities, and Threats involved in a proect or in a !usiness venture. SWG" analsis can

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!e carried out for a product, place, industr or person. &t involves specifing the o!ective of

the !usiness venture or proect and identifing the internal and external factors that are

favoura!le and unfavoura!le to achieving that o!ective. Setting the o!ective should !e done

after the SWG" analsis has !een performed. "his would allow achieva!le goals or o!ectives

to !e set for the organi$ation.

Strengths0 characteristics of the !usiness that give it an advantage over others

5eaknesses0 are characteristics that place the team at a disadvantage relative to others

Opportunities0 elements that the proect could exploit to its advantage

Threats0 elements in the environment that could cause trou!le for the !usiness.

&dentification of SWG"s is important !ecause the can inform later steps in planning to achieve

the o!ective. /irst, the decision makers should consider whether the o!ective is attaina!le,

given the SWG"s. &f the o!ective is not attaina!le a different o!ective must !e selected and

the process repeated.

"he usefulness of SWG" analsis is not limited to profit1seeking organi$ations. SWG"

analsis ma !e used in an decision1making situation when a desired end1state (o!ective) has

!een defined. *xamples include0 non1profit organi$ations, governmental units, and individuals.

SWG" analsis ma also !e used in pre1crisis planning and preventive crisis management.

SWG" analsis ma also !e used in creating a recommendation during a via!ilit studIsurve.

S5OT Anal$#i#

Strengt)#

Wide range of innovative financial services

Strong P* arm.

State of art &." infrastructure

Strong international tie1ups

Workforce of over :555 emploees and over A;55 financial advisors

2ustomer !ase of over A million in over :;5 cities.

*mploees are highl empowered.

Strong communication network.

Management philosoph and commitment to maximi$e shareholders returns

=pgraded product design and development facilities to develop new products and aid

diversification.

Gngoing activities to support up gradation of operational performance and rise in

productivit

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"eam of talented and committed professionals availa!le to improve compans

performance weakness.

%ood co1operation !etween emploees.

3um!er 6 registrar and transfer agent in &ndia.

3um!er 6 dealer of investment products in &ndia

5ea*ne##

Fess penetration in &ndia in terms of client !ase

2ompetition from cheap agents and !rokerage firms

?igh emploee turnover.

O44ort%nit$

%rowing rural market

*arning =r!an Touth

*ducating people a!out the !enefits of investments to increase target audience

Farge amount of population wants to do investment !ut scared !ecause of less

knowledge

T)reat# Stringent *conomic measures ! %overnment and @+&

*ntr of foreign finance firms in &ndian Market

&ncreasing num!er of local plaers.

2onstant pressure to !e cost competitive to meet customer expectations.

@elentless pressure to maintain profita!ilit.

3ew @ules /rom the government (e.g. "axes)

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CHAPTER-@

ITERATURE RE8IE5

"he extensive review of literature is aimed at improving our understanding of

theoretical and practical concepts underpinning the process of proect

portfolio selection. uring the literature review, the main academic andpractical

areas pertinent to our research question have !een identified, examined, and

presentedinthenextsections0

a. @elevantdefinitions

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!. Strategiesforproectportfolioselection

c. ecisionmakingprocesssupportingproectportfolioselection

d. Proectcategori$ationfacilitatingproectportfolioselection

f. Proectportfolioselectionmodelsormethods

h. 2hallengesinproectportfolioselection

16 Rele3antDefinition#

Pro>e&tPortfolioSele&tionPro&e##

Proect portfolio selection has !ecome increasingl popular during the past

decade. More recent literature has !een dedicated to the su!ect. +oth

academics andpractitioners literature review reveals that selectingproectsand

optimi$ing theproectportfolio that!est align with the organi$ationsstrategic

priorities is the essential focus of proect portfolio selection (see literature

review). s explainedpreviousl, this dissertation focuses on theprocess of

proect portfolio selection as proect portfolio management orpartial element

of proect portfolio management. "herefore, the followingdefinition! PM&

(455e&t 4ortfolio management or 4ro>e&t 4ortfolio #ele&tion is formall

defined as a dnamic decisionprocess where! a!usinessslist of activeproects

is constantl updated, revised. &n thisprocess newproects are evaluated, selected

andprioriti$ed> existingproects ma !e accelerated, killed, or de1prioriti$ed

and resources areallocatedandreallocatedtoactiveproects(2ooperetal.,4556!).

Man scholars andpractitioners (e.g. e O Pennpacker, 6999> Sommer,6999>

2ooper et al., 4556a) claim that decision1making, prioriti$ation and

reprioriti$ation, strategic alignment and realignment, allocation and reallocation of

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resources are the ongoing processes of proect portfolio management. PM

(455 adding that proects and

programs are known asportfoliocomponent

26Strategie#forPro>e&tPortfolioSele&tion

2616 5)ati#arig)t4ro>e&t4ortfolio

ddressing the vital question which proects are worth of time, cost and

investmentperformanceH is strategic to an organi$ations in their selectionand

management of proect portfolio. +oth academic researchers and

practitioners highlight the importance of proect selection and prioriti$ation

process inproectportfolio management (2ooper et al., 699Aa, 699A!, 6997>

rcher O %hasem$hadeh, 6999> e O Penn packer, 6999> Sommer, 6999>

rtto et al., 455:> Morris O #amieson, 455:> PM&, 455


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Fiterature in Proect Portfolio Management increasingl discussed the

requirements that a proect portfolio must meet in order to achieve the

corporate strateg. ll literature (%hasema$adeh et al, 6999> Sommer, 6999>

@Udulescu6 O @Udulescu, 4556> 2ooper et al., 4556!> Telin, 455;> +etter O

%lover, 455 and PM&, 455


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"hrough literature review, it is evidentl argued that PPM is a -!ridge!etween

strateg and operation and ena!les organi$ations to transform the organi$ations

vision into realities or successfull implement their corporatestrategies (Morris O

#amieson, 455:> and e, 455


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captured in proect portfolio selection. "his sstemic approach is understood as

harmon involvement of three main factors, namel people or decision makers>

selection tools, techniques, and models> and selection process or framework

(rcher and %hasem$adeh, 4555 and 2ooper et al., 4555, 4556a, 4556!). "hese

are discussed in details in sections 4.8, 4. and

fullparticipation of decision agents or actors (rcher and %hasem$adeh, 4555 and

2ooperetal.,4555,4556a).

Fig%reB!T)ePro&e##ofMa*ingDe&i#ion

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Source0=llman(455 and added that these processes include periodic reviews of all

proects in the total portfolio> making %oIill decisions on individual

proects, developing a newproduct strateg and making strategic decision on

resource allocation. Supporting this discussion, =llman (455 *nglund O %raham, 6999> and Meredith O

Mantel1#r, 4555). epending on the tpes, si$es and structures of !usiness

organi$ations, decision agents are ke individuals or teams of certain management

mem!ers.

/or example, in the conceptual framework for the field of entrepreneurship

research, Shane and Qenkataraman (4555) laid emphasis on the influence of

individuals on the existing, discover and exploitation of entrepreneurial

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opportunities. ecisions to exploit theseentrepreneurial opportunities are made

! individuals with differences inconsiderations taken into expected value, costs

of resources and opportunit costs> perception> risk1!earing willingness> and

optimism.

Gn the contrar to individual decision making, there often exist inevita!le

conflicts in teamdecisionmakingdue toawidediversitof teammem!erssocial,

culturalandeducational!ackground> knowledge, skills and experiences> andpower

and relationship within the organi$ation. mason (699


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managerssharefordetailedanalsis,preparationandpresentationoffacts and figures

in theprocessof selectingproects.%ardinerand2arden (455:)claim that the

selection and nurturing process should !e more advantageousl done when this

process can get the involvement andparticipation of people at lower levels

especiall in large and matureorgani$ations./urthermore,theinterestingresultsof

stud done ! +lomquist O MVller (455e&tCategori(ationFa&ilitatingPro>e&tPortfolioSele&tion

&tisadvisa!letoselecttheright!alanceandmixofproectstomaximi$ethevalueof

theportfolio inrespectofscope,scarce resources,andcontri!ution tothe short1term

and long1term development strateg of the organi$ations(2ooper et al., 699Aa,

699A!> rcher O %hasem$adeh, 6999> 2hien, 4554> and PM&, 455


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@elevantl,tlantic%lo!al(455A)introducedthefollowingcategories0

+a#e'on&om4etiti3ea'3antage;4ro>e&t#are&ategori(e'!

a. Ta&ti&al0deliveringcompetitiveadvantagetoda,

!. A'mini#trati3e0 delivering concurrentl promised service levelsand

supportingexistingstrategicproects,

c. Strategi&0deliveringcompetitiveadvantageinthefuture

d. Inno3ation0 smaller and experimentalproects deliveringpossi!lecompetitive

advantagetomorrow

e. F%t%re3i#ion0contingentuponstrategicandinnovationproects

+a#e'onle3elofim4ortan&e;4ro>e&t#are&ategori(e'!

a. mi##ion-&riti&al0essentialtosuccessfuldeliver

!. )ig)l$-'e#ira0le0important!utnotessential

c. 'e#ira0le0proectsthatdonot!elongtothetwoa!ove

Gn the contrar, some other authors propose a categori$ation sstem for

organi$ations to review and redesign their proect categori$ation sstem. /or

instance, upon reviewing the sstempresented! Shenhar and Widerman(699


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categor, one of which servesproectselectionandprioriti$ation.

6 Pro>e&tPortfolioSele&tionMet)o'#an'Mo'el#

Selection tools and techniques are used to facilitate evaluating qualitative and

quantitative indicators of an individualproect or a set ofproects, whoseresults

are consulted ! the selection team for their decision making on proect

portfolio selection. Selection tools and techniques are grouped into methods or

approaches such as financial methods (e.g.3et Present Qalue 13PQ, &nternal @ate

of @eturn X &@@), strategic approaches (e.g. strategic !uckets) or the are

integrated into models which are often categori$ed into 4main tpes0 numeric and

nonnumeric such as scoring models (e.g. weighted factor scoring model) or

checklists (e.g. Tes I 3o questions) (*vans OSouder, 6997> Meredith O Mantel1

#r,4555 and2ooperetal,4556a>"alor,455 and their

disadvantages are no explicit consideration of risks, repetition of entire process

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when adding or deleting new proects, difficult in use when involving a large

num!er ofproects for comparison>and incapa!ilit to identif reall goodproects.

"hese tools and techniques are then integrated into theirproectportfolio selection

frameworkasfollows01

Ta0le7! Sele&tionTool#Integrate'int)eSele&tionFrameor*

Sele&tion#tage PotentialTool#Met)o'ologie#

Pre1screening

Manuallappliedcriteria,strategicfocus,champion,

feasi!ilitstud

&ndividual proec

analsis

ecision trees, uncertaint estimates, 3PQ, @G&,

@esource@equestestimates,dhoctechniques(e.g.

profiles)

Screening Portfolio

selection

?P, 2onstrained Gptimi$ation, Scoring Models,

Sensitivenalsis

Portfolioadustment

Matrix displas, sensitivit analsis, proect

managementtechniques,datacollection

So%r&e!A'a4te'fromAr&)er?)a#em(a'e).1/

&n addition, %raves and @inguest (4558) contri!uted considera!le literaturereview

on models and methods for proect selection inclusive of two main streams0

traditional management science stream and financial modeling stream. "he

authorspresented the limitations and their suggested solutions of the models and

methods that are related to mathematicalprogramming (e.g.goal programming or

multi1o!ectiveprogramming with!inar or integer

varia!les)> decision theor (e.g. static or stochastic conditions for decisionsmade

at one time or several times on selecting proects to form a newportfolio or

adding newproects to an existingportfolio)> and finance (e.g.linerornon1linear

optimi$ationofportfolio

2ooper et al. (4556!) evidentl discussed the popularit and dominance

(dominating decisionprocess) of tools, techniques, methods and models forproect

selection and portfolio management. "he results of their surve interestingl

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show that first,organi$ations tend to usedifferent com!inationsof tools, techniques,

methods and models instead of an one alone to!etterselect and manage their

proect portfolio (e.g. com!ination of financialmethods and strategic approach)>

second, though financial methods arepopularl used, the produce poorest

performing portfolios> and finall, organi$ations with the !est performance

portfoliosrelonstrategicapproachrather than financialmethods.

&n the interest of ensuring time, cost, scope and qualit of an investmentproect>

the tools, techniques, methods, and models reviewed in this sectionare concerned

with financial analsis, strategic fit analsis and risk analsis. Fefle O Morgan

(6997) and @ad O Fevin (455 e O Pennnpacker, 6999>

2ooper et al., 4556!> and@ad O Fevin, 455


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discounted cash flow, etc.) as well as financial ratios (e.g. Productivit &ndex).

"hus, these models rel on availa!le, relia!le financial data, which might not

alwas!e the case inorganisations(2ooperetal.4556).

S&oringMo'el#an'C)e&*li#t#0=nlike themodelsdescri!edpreviousl,scoring

modelsandcheckliststpicall rel on su!ective assessments of varia!les instead

of factual financial data. ?ence, domain knowledge is required to assess the

portfolio on a variet of these characteristics, which can !e ver useful and

efficientintheearlphasesofportfolioanalsis(2ooperetal.4556).

Pro0a0ili#ti& Finan&ial Mo'el#! "hese models rel on facts again similar to

the models in the firstcategor.?owever, thesemodels, towhich!elong,among

others, Monte 2arlo simulation, decision tree analsis and optionspricing theor,

includethenotionofuncertaintandrisk(2ooperetal.4556).

+e)a3io%ral A44roa&)e#! "hese models comprised ! this categor can !e

utilised to achieve a consensus amongst a group ofparticipants. "his categor

includes models such as the Modified elphiMethod, for example (2ooperetal.

4556).

Mat)emati&al O4timi#ation Pro&e'%re#! "hese models aim at finding the

optimal set ofportfolioelements in order to maximise a certain o!ective (e.g.

profit), which is su!ect to a set of resource constraints. "he contain diverse

mathematical approaches !ased on game theor, pro!a!ilit theor and

mathematicalprogramming(2ooperetal.4556).

De&i#ion S%44ort S$#tem#0 Mathematical Gptimisation Procedures do not allow

the decision maker to get involved during the process of finding a solution.

ecision Support Sstems tr to!e more flexi!le in this regard. - SS is

essentiall a mathematical model that allows management intervention(2ooper

etal.4556).

Ma44ing A44roa&)e#0 "his categor comprises models that consider certain

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performance indicators simultaneousl in order to visualise the current status of

theportfolio. ?ere!,amatrixorplotcan!ecreated."heapproachdeveloped!

the+oston2onsulting%roup(+2%)ispro!a!lthemostpopularone (?enderson

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CHAPTER-

PORTFOIO MANAEMENT

INTRODUCTION

Portfolio Management refers to the science of anal$ing the strengths, weaknesses,

opportunities and threats for performing wide range of activities related to the ones portfolio

for maximi$ing the return at a given risk. &t helps in making selection of e!t Qs *quit,

%rowth Qs Safet and various other tradeoffs.

Maor tasks involved with Portfolio Management are as follows.

"aking decisions a!out investment mix and polic

Matching investments to o!ectives

sset allocation for individuals and institution

+alancing risk against performance

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"here are !asicall two tpes of portfolio management in case

of mutual and exchange1traded funds including passive and active.

Passive management involves tracking of the market index or index investing. ctive management involves active management of a funds portfolio ! manager or

team of managers who take research !ased investment decisions and decisions on

individual holdings.

Portfolio! &n terms of mutual fund industr, a portfolio is !uilt ! !uing additional !onds,

mutual funds, stocks, or other investments. &f a person owns more than one securit, he has an

investment portfolio. "he main target of the portfolio owner is to increase value of portfolio !

selecting investments that ield good returns. s per the modern portfolio theor, a diversified

portfolio is one, which includes different tpes or classes of securities and reduces the

investment risk. &t is !ecause an one of the securit ma ield strong returns in an economic

climate.

Fa&t# a0o%t Portfolio

"here are man investment vehicles in a portfolio.

+uilding a portfolio involves making wide range of decisions regarding !uing or

selling of stocks, !onds, or other financial instruments. lso, one needs to make

decision regarding the quantit and timing of the !u and sell.

Portfolio Management is goal1driven and target oriented.

"here are inherent risks involved in the managing a portfolio.

A44li&ation# of Portfolio Management

&t involves management of complete group or su!set of software applications in a portfolio.

"hese applications are considered as investments as the involve development (or acquisition)

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costs and maintenance costs. "he decisions regarding making investments in modifing the

existing application or purchasing new software applications make up an important part of

application portfolio management.

6. Pro'%&t Portfolio Management! "he product portfolio management involves grouping

of maor products that are developed and sold ! !usinesses into (logical) portfolios.

"hese products are organi$ed according to maor line1of !usiness or !usiness segment.

"he management team activel manages the product portfolios ! taking decisions

regarding the development of new products, modifing existing products or

discontinues an other products.4. Pro>e&t Portfolio Management! &t is also referred as an initiative portfolio

management where initiative portfolio involves a defined !eginning and end> precise

and limited collection of desired results or work products> and management team for

executing the initiative and utili$ing the resources.

O+ECTI8ES OF PMS

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+ENEFITS OF PMS

Tran#4aren&$!t most times the rationale !ehind our investments is a matter of concern.

With PMS our Portfolio Managers will alwas keep ou apprised of the reason !ehind

investment decisions, plus ou are alwas kept up1to1date on the allocation and distri!ution

of our funds.

S&ientifi& In3e#tment De&i#ion#! PMS provides a scientific and disciplined !asis for

investing. +esides, ou have the flexi!ilit of making investment decisions after speaking

to our @esearch "eam.

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earn )ile $o% earn!"he 2onsultative &nvestment pproach of PMS gives ou an

opportunit to learn the nuances, understand the rationale and details !ehind ever

investment decision.

E4erti#e!"raditional investment options do not provide a team of dedicated investment

consultants. PMS will provide ou exclusive access to the @esearch esk and their

Proprietar @esearch @eports. n experienced team of portfolio managers ensure our

portfolio is tracked, monitored, and optimi$ed at all times.

DISAD8ANTAES OF PMS

PMS does not disclose the portfolio as much as M/s.

"here have also !eenY cases where PMS Managers have misused the mone.

TYPES OF PMS

PMS can !e !roadl categori$ed under the following tpes 1

6. Di#&retionar$ PMSX Where the investment is at discretion of the fund manager O client

has no intervention in the investment process.

4. Non-Di#&retionar$ or A'3i#or$ PMSX =nder this service, the portfolio manager onl

suggests the investment ideas. "he choice as well as the timings of the investment decisions

rest solel with the investor. ?owever the execution of the trade is done ! the portfolio

manager.

TYPES OF IN8ESTMENT STRATEIES

Aggre##i3e In3e#tment Strateg$0 &f the aim of the investor is capital growth, then he needs to

place higher percentage of his assets in equities rather than in safer de!t securities.

Defen#i3e In3e#tment Strateg$0 low riskIlow return investment portfolio amongst old age

people.

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+alan&e' In3e#tment Strateg$0 2om!ines the merits and demerits of !oth ggressive and

efensive investment strateg.

FEES IN A PMS

Portfolio management services either have a fixed, profit1sharing or h!rid fee structure. &n a

fixed1fee structure, the manager charges a set fee ever quarter or on the corpus. &t is levied

irrespective of the returns generated ! a portfolio. "hen, there is the profit1sharing model,

where the fee paid ! an investor is a percentage of profits. "his is usuall a large chunk,

around 4514;D of profits. h!rid model com!ines !oth, although charges are less.

Ho to Sele&t an O4timal Portfolio

n optimal stock portfolio refers to a stock portfolio that incorporates the stocks configured in

such a manner that the ield the optimal return statisticall possi!le at a given level of risk

accepted ! an investor. "he modern portfolio theor stresses on the optimal portfolio concept

! assuming that the investors tr to minimi$e risk o!sessivel while looking for the highest

return possi!le. s per this theor, investors should make rational decisions for achieving

maximum returns at their accepta!le level of risk. "he working of the optimal portfolio can !e

easil understood ! looking at the chart !elow. "he optimal1risk portfolio is generall found in

the middle of the curve. &f one goes further higher up the curve, it will mean taking more riskproportionatel for achieving lower incremental return. Similarl if one goes at lower end of

the curve, it will mean low riskIlow return.

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Ho to 0%il' a Profita0le Portfolio

Portfolio management is !asicall an approach of !alancing risks and rewards. &nvestors should

keep the following tips in mind while deciding a!out the right portfolio !lend.

oal#! Tou should !e clear a!out our goals as an investor. "he o!ective of the

portfolio management should !e clear if one wants to accumulate wealth ! goodreturns or to hold on his investments.

Ri#* Toleran&e! s an investor one should know how to handle the fluctuations of ever

changing volatile market. &t is important to know the was for tolerating the risks and

su!sequent rise and fall of net worth. &f ou are not capa!le of handling the pressure of

sharp decline in the values of tour investments then ou should tr to invest in more

sta!le fundsIstocks.

"no $o%r in3e#tment#! &t is recommended to invest in the stocksIfunds of the

!usinesses and industries that ou are aware of. Tou should know the activities of the

companies and procure knowledge a!out the sector ou are investing in. "his wa ou

would !e a!le to know if the compan will continue to !e successful. "he performance

of the specific !usiness or industr cannot !e easil predicted with certaint.

5)en to +%$Sell! &n order to succeed in the stock markets, it is ver important to

know when to !u or when to sell. Tou should do ever purchase with a purpose, and

constantl re1assess that purpose as per the prevailing market and other conditions.

Mea#%ring Ret%rn on In3e#tment .ROI/! "he performance of the portfolio is

measured ! the return on investment (@G&). "he individuals can successfull formulate

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a logical mone1management strateg ! knowing the pro!a!ilit of returns received !

each dollar invested.@G& Z (%ains X 2ost)I2ost"he @G& can change depending on the improvement or worsening of the market

conditions. &t also depends on the kind of assets or securities held ! the investor. &n

general, the higher potential @G& involves higher risk and vice versa.

Mea#%ring Ri#*! "he risk tolerance of the person determines the pace of hisIher

returns. "he risks and rewards are in essence interrelated to each other where tolerance

of the risks tends to influence or even dictate the rewards. n investor whose goal is to

maintain hisIher current assets instead of growing them, heIshe will keep onl safe and

secure investments in the portfolio.

Di3er#ifi&ation of t)e 4ortfolio! "he diversification of the portfolio is required to

minimi$e the risks and maximi$es the returns in the long term. &t is preferred to

diversif our portfolio however> one should take care to avoid over1diversifing. "he

diversified portfolio led to smoothing of peak1and1valle pricing effects caused ! the

fluctuations in the normal market and in surviving long term market downturns. "he

over diversification can !ecome counterproductive so it needs to !e avoided.

A3oi'ing t)e gam0ling! s an investor, one should avoid portfolio that relies on high1

risk, high1return investments. &t is !ecause> the higher speculative investment can lead

to conditions where investor ma require selling his holdings prematurel at a loss dueto liquidit crisis and expected returns wont materiali$e.

Sto&* Portfolio Management

stock portfolio management refers to the management of investment decisions for a stock

portfolio and it is usuall performed ! stock management professional due to its complex

nature. "he stock portfoliomanagers are the experts in the field of stocks and well suited formaking decisions for those who want to manage their own investment.

Sto&* Portfolio Management Softare

"here are man stock portfolio management softwares availa!le that are designed for effective

implementation of the portfolio strategies ! using the availa!le resources. Some of the popular

stock portfolio management softwares are mentioned !elow.

Portfolio Manager

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6. Portfolio Manager is !asicall a personal stock portfolio management sstem that ena!les the

traders to track the sold and !ought stocks along with an related dividends ! investing

minimal time and effort. "raders can maintain a complete stock trading diar without need to

update a spreadsheet continuall. "his information is of utmost importance for improving the

trading strateg.

4. "raders can view the performance of their portfolio antime throughout the ear. "raders can

have the knowledge of their current status of their portfolio ! anal$ing the statistics on open

trades as well as historical trades.

8. With portfolio managers, traders can generate eas to use reports without an hassle and

paperwork. &t also allows them to make savings ! avoiding the accountant fees.

A'3antage# of Portfolio Manager

&. *as to use wi$ards that allows quick and simplified data entr

&&. uto or manual stock price update and management of multiple Portfolios

&&&. *nsures data securit as the portfolio is stored on individuals P2 onl.

&Q. "racking of all the stock transactions and related dividends

Q. *na!les the traders to sell shares for gaining maximum tax !enefits

Q&. /acilit of optional accounts that allows the traders to track total used and availa!le funds

Q&&. &ncorporates the information regarding the trading plan like disaster stops targets etc.

Q&&&. llows the traders to maintain "rade diar for storing an extra information

&J. %enerates quick and easil availa!le reports.

PERSONA STOC" MONITOR

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Personal Stock Monitor is !asicall a portfolio management sstem ! 2olla!&nvest(sm) and

&ntegrated "rading. &t allows the traders to manage all of their investment accounts, holdings

and watch lists in one place. "raders can work together with their friends in real time. &t also

allows the traders to do tracking, trading and research more opportunities quickl. &nvestors can

make quick and !etter decisions ! easil availa!le analsis.

Per#onal Sto&* Monitor 4ro3i'e# folloing 0enefit# for t)e in3e#tor#6

&. 3ew stock screener support

&&. Portfolio management and reports

&&&. Script extensions and customi$ation

&Q. "echnical analsis with custom indicators

Q. =p1to1the1minute news and research

Q&. Streaming real1time quotes and charts

Q&&. *as chart and portfolio sharing

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Q&&&. @eceive trade confirmations

&J. lerts, including email and SMS

IN8ESTAR

&nvestar is a Stock Portfolio Management Software that offers wide range of !enefits for

anone who likes to invest in &ndian Stock Market including Portfolio Managers, +roker,

2hartered ccountant, "echnical nalst, Short1"ermIFong1"erm "rader, a "rader, student,

and an other individual &nvestor.

+enefit# for Tra'er#

"raders can get new Stock &deas dail and anal$e the fundamentals for selecting the

stocks for investing.

"raders can make correct decisions a!out !uing or selling ! anal$ing the "echnical

aspects. *na!les the traders to import transactions effortlessl from the !roker and continuousl

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"raders can utili$e the portfolio technical view for keeping track of the technical

pictures of all the Portfolio ?oldings.

"raders can improve hisIher !uIsell timings with the help from portfolio +usISells on

the 2hart.

"raders can utili$e effective Mone Management principles ! appling Portfolio lerts

and Stop Fosses.

MODERN PORTFOIO THEORY

=nderstanding the risk !ehaviour of asset and their pricing in the market is critical to various

investment decisions, !e it related to financial assets or real assets. "his understanding is

mostl developed through the analsis and generali$ation of the !ehaviour of individual

investors in the market under certain assumptions. "he two !uilding !locks of this analsis and

generali$ation are0

(&) theor a!out the risk1return characteristics of assets in a portfolio (portfolio theor)

(&&) generali$ation a!out the preferences of investors !uing and selling risk assets

(equili!rium models).

+oth these aspects are discussed in detail in this chapter, where our aim is to provide a !rief

overview of how finance theor treats stocks (and other assets) individuall, and at a portfolio

level. We first examine the modern approach to understanding portfolio management using the

trade1off !etween risk and return and then look at some equili!rium asset1pricing models. Such

models help us understand the theoretical underpinning and (hopefull predict) the dnamic

movement of asset prices.

DI8ERSIFICATION AND PORTFOIO RIS"S

"he age1old wisdom a!out not putting -all our eggs in one !asket applies ver much in the

case of portfolios. Portfolio risk (generall defined as the standard deviation of returns) is not

the weighted average of the risk (standard deviation) of individual assets in the portfolio. "his

gives rise to opportunities to eliminate the risk of assets, at least partl, ! com!ining risk

assets in a portfolio. "o give an example, consider a hpothetical portfolio with sa, ten stocks.

*ach of these stocks has a risk profile, a simple and widel used indicator of which is the

standard deviation of its returns. &ntuitivel, the overall risk of the portfolio simpl ought to !e

an aggregation of individual portfolio risks, in other words, portfolio risk simpl ought to !e a

weighted average of individual stock risks. Gur assertion here is that the risk of the portfolio is

usuall much lower. WhH s we shall see in the discussion here, this is largel due to the

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interrelationships that exist !etween stock price movements. "hese so1called covariances

!etween stocks, could !e positive, negative, or $ero. n example of two &" services stocks,

reacting favoura!l to a depreciation in the domestic currenc[as their export reali$ations

would rise in the domestic currenc[is one of positive covariance. &f however, we compare

one &" services compan with another from the metals space, sa steel, which has high foreign

de!t, then a drop in the share price of the steel compan (as the falling rupee would increase the

de!t1service paments of the steel firm) and rise in share price of the &" services compan,

would provide an example of negative covariance. &t follows that we would expect to have $ero

covariance !etween stocks whose movements are not related.

THREE OAS IN PORTFOIO MANAEMENT

"here are three common denominators across !usinesses when it comes to portfolio

Management0 three macro or high level goals the goal ou wish to emphasi$e most will in turn

influence our choice of portfolio methods. "hese three !road or macro goals are0

oal G 1! Maimi(ing t)e 8al%e of t)e Portfolio

variet of methods can !e used to achieve this goal, ranging from financial models through to

scoring models. *ach has its strengths and weaknesses. "he end result of each method is a

rank1ordered or prioriti$ed list of -%o and -?old proects, with the proects at the top of the

list scoring highest in terms of achieving the desired o!ectives0 the value in terms of that

o!ective is thus maximi$ed.

Net Pre#ent 8al%e .NP8/0 "he simplest approach is merel to calculate the 3PQ of each

proect on a spreadsheet> and then rank all proects according to their 3PQ. "he %o proects are

at the top of the list continuing adding proects down the list until ou run out of resources.Fogicall this method should maximi$e the 3PQ of our portfolio. dditionall, each proect

team usuall determines the 3PQ for their proect as part of their !usiness case or capital

appropriations request X so oure using a num!er thats alread availa!le. /ine in theor....

!ut0 "he 3PQ method ignores pro!a!ilities and risk> it assumes that financial proections are

accurate (the usuall are not\)> it assumes that onl financial goals are important X for

example, that strategic considerations are irrelevant> and it fails to deal with constrained

resources X the desire to maximi$e the value for a limited resource commitment, or getting the

most !ang for the limited !uck. final o!ection is more su!tle0 the fact that 3PQ assumes an

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all1or1nothing investment decision, whereas in new product proects, the decision process is an

incremental.

E4e&te' Commer&ial 8al%e .EC8/0 "his method seeks to maximi$e the value or commercial

worth of our portfolio, su!ect to certain !udget constraints, and introduces the notion of risks

and pro!a!ilities. "he *2Q method determines the value or commercial worth of each proect

to the corporation, namel its expected commercial value. "he calculation of the *2Q is !ased

on a decision tree analsis, considers the future stream of earnings from the proect, the

pro!a!ilities of !oth commercial success and technical success, along with !oth

commerciali$ation costs and development costs.

"his *2Q model has a num!er of attractive features0 it recogni$es that the %oIill decision

process is an incremental one (the notion of purchasing options)> all monetar amounts are

discounted to toda (not ust to launch date), there! appropriatel penali$ing proects that are

ears awa from launch> and it deals with the issue of constrained resources, and attempts to

maximi$e the value of the portfolio in light of this constraint. "he maor weakness of the

method is the dependenc on extensive financial and other quantitative data. ccurate estimates

must !e availa!le for all proects future stream of earnings> for their commerciali$ation (and

capital) expenditures> for their development costs> and for pro!a!ilities of success X estimates

that are often unrelia!le, or at !est, simpl not availa!le earl in the life of a proect. second

weakness is that the method does not look at the !alance of the portfolio X at whether the

portfolio has the right !alance !etween high and low risk proects, or across markets and

technologies. third weakness is that the method considers onl a single financial criterion for

maximi$ation.

Pro'%&ti3it$ In'e .PI/0 "he productivit index is similar to the *2Q method descri!ed

a!ove, and shares man of *2Qs strengths and weaknesses. "he P& tries to maximi$e the

financial value of the portfolio for a given resource constraint.

"he Productivit &ndex is the following ratio0

P& Z *2Q Y PtsI @O

?ere, the definition of expected commercial value is different than that used a!ove. &n the

Productivit &ndex, the expected commercial value (*2Q) is a pro!a!ilit1adusted 3PQ. More

specificall, it is the pro!a!ilit1weighted stream of cash flows from the proect, discounted to

the present, and assuming technical success, less remaining @O costs. "here are various was

to adust the 3PQ for risks or pro!a!ilities0 via emploing a risk adusted discount rate used> or

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! appling pro!a!ilities to uncertain estimates in calculating the 3PQ> or via Monte 2arlo

simulation to determine 3PQ.

"his risk1adusted 3PQ is then multiplied ! Pts, the pro!a!ilit of technical success, and

divided ! @O, the @O expenditure remaining to !e spent on the proect (note that @O

funds alread spent on the proect are sunk costs and hence are not relevant to the prioriti$ation

decision). Proects are rank ordered according to this productivit index in order to arrive at the

preferred portfolio, with proects at the !ottom of the list placed on hold.

SCORIN MODES AS PORTFOIO TOOS

Scoring models have long !een used for making %oIill decisions at gates. +ut the also have

applica!ilit for proect prioriti$ation and portfolio management. Proects are scored on each of

a num!er of criteria ! management. "pical main criteria include0

Strategic alignment

Product advantage

Market attractiveness

!ilit to leverage core competencies

"echnical feasi!ilit

@eward vs. risk.

"he Proect ttractiveness Score is the weighted addition of the item ratings, and !ecomes the

!asis for developing a rank ordered list of proects (using the six criteria listed a!ove> proects

are ranked until there are no more resources, in this case measured ! /"* people).

Scoring models generall are praised in spite of their limited popularit. @esearch into proect

selection methods reveals that scoring models produce a strategicall aligned portfolio and one

that reflects the !usinesss spending priorities> and the ield effective and efficient decisions,

and result in a portfolio of high value proects

oal G 2! A +alan&e' Portfolio

"he second maor goal is a !alanced portfolio X a !alanced set of development proects in terms

of a num!er of ke parameters. "he analog is that of an investment fund, where the fund

manager seeks !alance in terms of high risk versus !lue chip stocks> and !alance acrossindustries, in order to arrive at an optimum investment portfolio.

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Qisual charts are favoured in order to displa !alance in new product proect portfolios. "hese

visual representations include portfolio maps or !u!!le diagrams X an adaptation of the four

quadrant +2% (star> cash cow> dog> wildcat) diagrams which have seen service since the 69A5s

as strateg models X as well as more traditional pie charts and histograms.

casual review of portfolio !u!!le diagrams will lead some to o!serve that -these new models

are nothing more than the old strateg !u!!le diagrams of the A5s\ 3ot so. @ecall that the

+2% strateg model, and others like it (such as the McinseI%* model), plot !usiness units

on a market attractiveness versus !usiness position grid. 3ote that the unit of analsis is the

S+= X an existing !usiness, whose performance, strengths and weaknesses are all known. +

contrast, todas new product portfolio !u!!le diagrams, while the ma appear similar, plot

individual new product proects X future !usinesses or what might !e.

Tra'itional C)art# for Portfolio Management

"here are numerous parameters, dimensions or varia!les across which one might wish to seek a

!alance of proects. s a result, there are an endless variet of histograms and pie charts which

help to portra portfolio !alance. Some examples0

"iming a ke issue in the quest for !alance. Gne does not wish to invest strictl in short

term proects, nor totall in long term ones. nother timing goal is for a stead stream

of new product launches spread out over the ears X constant -new news, and no

sudden log1am of product launches all in one ear. histogram captures the issue of

timing and portras the distri!ution of resources to specific proects according to ears

of launch.

nother timing issue is cash flow. ?ere the desire is to !alance ones proects in such a

wa that cash inflows are reasona!l !alanced with cash outflows in the !usiness. Some

companies produce a timing histogram which portras the total cash flow per ear from

all proects in the portfolio over the next few ears (not shown). proect tpe is et another vital concern. What is our spending on genuine new

products versus product renewals (improvements and replacements), or product

extensions, or product maintenance, or cost reductions and process improvementsH nd

what should it !eH Pie charts effectivel capture the spending split across proect tpes X

actual versus desired splits. Markets, products and technologies provide another set of

dimensions across which managers seek !alance. "he question faced is0 do ou have the

appropriate split in @O spending across our various product linesH Gr across themarkets or market segments in which ou operateH Gr across the technologies ou

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possesH Pie charts are again appropriate for capturing and displaing this tpe of data.

oal G 7! +%il'ing Strateg$ into t)e Portfolio

Strateg and new product resource allocation must !e intimatel connected. Strateg !ecomes

real when ou start spending mone. =ntil one !egins allocating resources to specific activities

X for example, to specific development proects X strateg is ust words in a strateg document.

"he mission, vision and strateg of the !usiness is made operational through the decisions it

makes on where to spend mone. /or example, if a !usinesss strategic mission is to -grow via

leading edge product development, then this must !e reflected in the mix of new product

proects underwa X proects that will lead to growth (rather than simpl to defend) and

products that reall are innovative. Similarl, if the strateg is to focus on certain markets,

products or technolog tpes, then the maorit of proects and spending should !e focused on

such markets, products or technologies.

in*ing Strateg$ to t)e Portfolio! A44roa&)e#

"wo !road issues arise in the desire to achieve strategic alignment in the portfolio of proects0

Strategic fit0 "he first is0 are all our proects consistent with our !usinesss

strategH /or example, if ou have defined certain technologies or markets as ke

areas to focus on, do our proects fit into these areas X are the in !ounds or out of

!oundsH

Spending !reakdown0 "he second is0 does the !reakdown of our spending reflect

our strategic prioritiesH &n short, when ou add up the areas where ou are

spending mone, are these totall consistent with our stated strategH

"here are two was to incorporate the goal of strategic alignment0

&. +ottom up X !uilding strategic criteria into proect selection tools0 here strategic fit is

achieved simpl ! including numerous strategic criteria into the %oIill and

prioriti$ation tools> and

&. "op1down X Strategic +uckets method0 this !egins with the !usinesss strateg and then52


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moves to setting aside funds X envelopes or !uckets of moneX destined for different

tpes of proects

+ottom U4 Strategi& Criteria +%ilt into Pro>e&t Sele&tion Tool#0 3ot onl are scoring

models effective was to maximi$e the value of the portfolio, the can also !e used to ensure

strategic fit. Gne of the multiple o!ectives considered in a scoring model, along with

profita!ilit or likelihood of success, can !e to maximi$e strategic fit, simpl ! !uilding into

the scoring model a num!er of strategic questions. &n the scoring model displaed, two maor

factors out of five are strategic> and of the 69 criteria used to prioriti$e proects, six, or almost

one1third, deal with strategic issues. "hus, proects which fit the !usinesss strateg and !oast

strategic leverage are likel to rise to the top of the list. &ndeed, it is inconceiva!le how an -off

strateg proects could make the active proect list at all0 this scoring model naturall weeds

them out.

To4 Don Strategi& A44roa&) Strategi& +%&*et# Mo'el0 While strategic fit can !e

achieved via a scoring model, a top down approach is the onl method designed to ensure that

the eventual portfolio of proects trul reflects the stated strateg for the !usiness0 that where

the mone is spent mirrors the !usinesss strateg. "he Strategic +uckets model operates fromthe simple principle that implementing strateg equates to spending mone on specific proects.

"hus, setting portfolio requirements reall means -setting spending targets. "he method

!egins with the !usinesss strateg, and requires the senior management of the !usiness to make

forced choices along each of several dimensions X choices a!out how the wish to allocate their

scarce mone resources. "his ena!les the creation of -envelopes of mone or -!uckets.

*xisting proects are categori$ed into !uckets> then one determines whether actual spending is

consistent with desired spending for each !ucket. /inall proects are prioriti$ed within !uckets

to arrive at the ultimate portfolio of proects X one that mirrors managements strateg for the

!usiness. Sounds simple, !ut the details are a little more complex0 Senior management first

develops the vision and strateg for the !usiness. "his includes defining strategic goals and the

general plan of attack to achieve these goals X a fairl standard !usiness strateg exercise.

3ext, the make forced choices across ke strategic dimensions. "hat is, !ased on this strateg,

the management of the !usiness allocates @O and new product marketing resources across

categories on each dimension. Some common dimensions are0

Strategic goals0 Management is required to split resources across the specified strategic

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goals. /or example, what percent should !e spent on efending the +aseH Gn

iversifingH Gn *xtending the +aseH and so on.

Product lines0 @esources are split across product lines0 e.g., how much to spend on

Product Fine H Gn Product Fine +H Gn 2H plot of product line locations on the

product life ccle curve is used to help determine this split.

Proect tpe0 What percent of resources should go to new product developmentsH "o

maintenance1tpe proectsH "o process improvementsH "o fundamental researchH etc.

/amiliarit Matrix0 What should !e the split of resources to different tpes of markets

and to different technolog tpes in terms of their familiarit to the !usinessH Tou can

use the -familiarit matrix proposed ! @o!erts X technolog newness versus market

newness X to help split resources.

%eograph0 What proportion of resources should !e spent on proects aimed largel at

3orth mericaH t Fatin mericaH t *uropeH t the PacificH Gr at glo!alH

THE SI, STEPS OF PORTFOIO MANAEMENT

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/ormulate aninvestment

strateg

?ave a game

plan for portfoliorevision

*valuate

Performance

Protect portfolio when

appropriate

earn the !asics

principles offinance

Set portfolioo!ective

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5)at 'oe# Ca4ital A##et Pri&ing Mo'el .CAPM/ mean

"he model was introduced ! #ack "renor (69


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A##%m4tion# of CAPM

ll &nvestors0

6) im to maximi$e economic utilit

4) re rational and risk free

8) re price takers, i.e., the cannot influences prices.

:) 2an lend and !orrow unlimited under the risk free rate of interest.

;) "rade without transaction or taxation costs.


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AN IDEA ? A +AANCED PORTFOIO

n ideal portfolio depends upon a num!er of factors such as our countr of residence and

investment, our investment time hori$on and our propensit for reading market news and

keeping up 1to1date on our holdings. &nvestors diversif their capital into man different

investment vehicles for the primar reason of minimi$ing their risk exposure. Speciall,

diversification allows investors to reduce their exposure to what is referred to as unsstematic

risk, which can !e said to !e the risk associated with a particular compan or industr.

&nvestors are una!le to diversif awa sstematic risk, such as the risk of an economic

recession dragging down the entire stock market, !ut academic research has shown that a well

diversified equit portfolio can effectivel reduce unsstematic risk to near1 $ero levels,

While Still maintaining the same expected return level a portfolio with excess risk would

have.

&n other words, while investors must accept greater sstematic risk for potentiall higher

returns (known as the risk1returned trade1off), the generall do not eno increased returnpotential for !earing unsstematic risk. "he more equities ou hold in our portfolio, the

lower our unsstematic risk exposure. portfolio of 65 stocks, particularl those of various

sectors or industries, is much less risk than a portfolio of two. Gf course the transaction cost

of holding more stocks can add up, so it is generall optimal to hold the minimum num!er of

stocks necessar to effective remove their unsstematic risk exposure. What is this num!erH

"here is no consensus answer, !ut there is a reasona!l certain range.

Predominant research in the area was conducted prior to the revolution of online investing

(When commission O transaction costs were ver much higher), and most research papers put

the num!er in the 45185 range. More recent research suggest that investors taking advantage

of the low transaction cost afforded ! online !rokers can !est optimi$e their portfolio !

holding closer to ;5 stocks, !ut again there is no consensus. eep in mind that these assertion

are !ased on past, historical data of the overall stock market, and therefore does not guarantee

that the market will exhi!it the same characteristics during the next 45 rs as it did in the past

45 rs.

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s a general rule of "hum!, however, most investors hold 6;145 stocks at the ver least in

their portfolio.

"he ta!le !elow gives a general guide to the plans that are appropriate fordifferent life stages

ife #tage Primar$ Nee' ife In#%ran&e

Pro'%&t

Yo%ng an' Single sset creation Wealth 2reation Plan

Yo%ng an' %#t sset creation O Wealth creation andMarrie' Protection mortgage protection

plansMarrie' it) *i'# 2hildrens education, *ducation insurance,

sset creation and Mortgage protection O

protection wealth creation plans

Mi''le age' it) Planning for retirement @etirement solution O

gron %4 *i'# O asset protection mortgage protection

A&ro## all life- #tage# ?ealth plans ?ealth &nsurance

Ho to ma*e a##et allo&ation or* for $o%

dding diversit to our portfolio, or asset allocation, helps ou to control risk and meet

our financial goals. Tou ma not reali$e it, !ut ou pro!a!l alread practice asset

allocation. "hats what oure doing if ou !u !onds when interest rate seems high, or ou

sell stocks when the equit market feels risk.

+ut while we ma practice a rudimentar form of asset allocation, most of us dont get all

we can form the approach. sset allocation can help investor to control risk, to match a

portfolio with specific financial goals, to increase the predicta!ilit of returns and more.

"he Principles !ehind asset allocation are simple0

/irst, histor shows that not all classes of assets move up and down at the same time.

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Gne ear, Stocks of large companies ma generate the !est returns, while in another it

will !e government !onds or even a !ank certificate of deposit. ?istor also tells us that some asset classes are far more valua!le than others. "he

ma go from !ig gains one ear to !ig losses the next, while the performance of less

volatile counterparts remains within a much narrower range.

Ho to 'etermine $o%r i'eal A##et Allo&ation

/iguring out our ideal asset allocation is ver personal thing, and there is no right answer.

When determining our asset allocation, the two most important factors are our risk

tolerance level and our investment time hori$on.

@isk tolerance level is our willingness to !ear the risk potentiall losing some or all

of our mone in exchange for higher potential returns. /or example, an aggressive

investor, or one with a high risk tolerance, is more likel to risk losing mone on order

to get !etter result. &ts important to !e truthful to ourself when considering our risk

tolerance level !ecause the last thing ou want to do is prematurel sell our

investment in a panic.

&nvestment time hori$on is the expected num!er of months or ears ou will !e

investing for retirement that is 8; ears awa, ou would afford to take more risk

!ecause ou can ride out the down periods. Gn the other hand, ou want less risk if

ou are a retiree or if ou are saving for a short1 term goal.

+alan&ing Ri#* an' Rear'

Gne wa to help ou determine our ideal asset allocation is to first look at how much ou

need to have and how soon. lso, ou need to determine if could afford to wait a few more

ears if ou dont achieve our goal within the target deadline. For eam4le, Fet us assume

ou need to save @s 65, 55,555 for a down pamentin ; rs, and can afford to save @s 64,555

a month for the next


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return of ;D in < ears.

26 &ncrease our monthl contri!ution. /or example ou save @s. 65, 55, 55 ! adding

@s. 6;, 555 per month to an investment portfolio that has a com!ined average annual

return of ;D in ; ears.

3ow that ou understand what portfolio rate of return need to !e at, ou could more

realisticall decided our asset allocation. /or example> if ou are shooting for a ;D rate of

return, ou could construct a conservative portfolio. ?owever, if ou are shooting for a 64D

rate of return, ou will have to !e more aggressive.

M%t%al F%n'# 3# Portfolio Management Ser3i&e#

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M%t%al F%n'#

Pool mone from large num!er of investors

Stocks owned ! the fund in its name

=se management expertise to provide returns as per the common investment polic 2an !e close1ended and open1ended

2lose1ended0 /und matures after prescri!ed period

Gpen1ended0 /und has infinite lifetime (theoreticall)

Portfolio Management Ser3i&e#

Gne to one agreement !etween investors and Portfolio Manager

2ustomi$ed portfolio as per the risk profile of investors and hence accordinglindividuali$ed investment decisions

+ank account and stocks are held under investors name

2an !e sold at market value at an time

@egular report on investor portfolio value is provided to investors

*xpertise of Portfolio Manager (fundamental and technical) in making investment

decision

M%t%al F%n'# PMS

2ommon polic and strateg for all

the investors under one scheme

2ustomi$ed polic and strateg for

each investor62


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Gne1si$e1fits1all philosoph Match individual risk appetite with

investments decisions

3o sa in investment decisions Will have sa in investments

through agreed &nvestment Polic

Statement

"ransactions usuall in huge

volumes

"ransaction volume depends on

client portfolio si$e (usuall far less

than of M/s)

Prices of the securities are affected

! the huge volume of !uIsell

Prices more or less remain the same

%overnment has !enefited M/s

with capital gain tax waiver in their

transactions

&ndividual capital gain tax are not

waived

?owever, capital gains at the sell of

the units are taxed

3o further taxation

"ailored and !eneficial for small

investors

ppropriate for active investors

willing to make fairl large

investments and hence need

customi$ed services=suall trade in market at !elow1

3Q values

ont trade as M/s

Market price of units is !elow the

value of underling asset

Market Qalue of investment (while

selling) is same as the value of

underling asset

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CHAPTER-

RESEARCH METHODOOY

RESEARCH O+ECTI8ES!

"o compare performance of different stocks in a Portfolio.

"o compare the return of a portfolio using different investment was.

"o develop a new investment wa in portfolios.

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"o compare the different portfolios !eing maintained.

"ools and techniques are used for the stock selection and to manage the risk and

return on the portfolio.

Maor things to !e considered are the sector preference for the selection of the

stock !ecause diversification should !e into different sectors so as to maximi$e the

return and taking advantage of whole econom related environment and news. Stock selection will !e !ased on the /undamental analsis and +eta for the stock

selection. Portfolio !eta will !e calculated to measure the effect of diversification !

comparing it with !eta of individual stocks. 2apital sset Pricing Model will !e used vis1]1vis to manage the risk and

selection of stock as well. Standard deviation will !e calculated for estimating the historical volatilit of a

stock. 2orrelation is calculated to measure how two securities move in relation to each

other.

SCOPE OF STUDY

Portfolio Management is a process encompassing man activities of investment in assets and

securities. &t is a dnamic and flexi!le concept and involves regular and sstematic analsis,

udgment and action. "he o!ective of this service is to help the unknown and investors with

the expertise of professional in investment portfolio management. &t involves construction of

a portfolio !ased upon the investors o!ectives, constraints preferences for risk and returns

and tax lia!ilit. "he portfolio is reviewed and adusted from time to time in tune with the

market conditions. "he evolution of portfolio is to !e done in terms of targets set for risksand returns. "he changes in the Portfolio are to !e effected to meet the changing condition.

Portfolio construction refers to the allocation of surplus fund in hand among a variet of

financial asset open for investment. Portfolio theor concerns itself with the principles

governing such allocation. "he modern view of investment is oriented more go towards the

assem!l of proper com!ination of individual securities to form investment portfolio.

com!ination of securities held together will give a !eneficial result if the grouped in a

manner to secure higher returns after taking into consideration the risk elements.

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"he modern theor is the view that ! diversification risk can !e reduced. iversification can

!e made ! the investors either ! having a large num!ers of shares of companies in different

regions, in different industries or those producing different tpes of product lines. Modern

theor !elieves in the perspective of com!ination of securities under constraints of risk and

returns

AREA OF STUDY

"he investors have the stock markets to invest and it offers a lot of various securities to invest

into, the investor with the help of an effective portfolio mix will !e a!le to diversif his

investment and thus will maximi$e the returns on his investment and minimi$e the risk of the

investment. "he need of the stud is to have an investment and portfolio com!ination which

will effectivel and efficientl manage the investment of the investors for a !etter return and

lower risk. "he main o!ective of investment portfolio management is to maximi$e the

returns from the investment and to minimi$e the risk involved in investment. Moreover, risk

in price or inflation erodes the value of mone and hence investment must provide a

protection against inflation. Portfolio management services helps investors to make a wise

choice !etween alternative investment with pit an post trading hassles this service renders

optimum returns ! proper selection of continues change of one plan to another plane with

the same scheme, an portfolio management must specif the o!ectives like maximum

returns, and risk capital appreciation, safet etc. in their offer.

RESEARCH DESIN! *xplorator

DATA COECTION

Sto&* Sele&tion &riteria! &n this proect & have taken stocks from five different sectors that

are &", Steel, "elecom, +anking and Pharmaceuticals.

In'i3i'%al Sto&* Anal$#i#

"he /irst important step is the analsis of &ndividual stocks wherein & have taken into

account five different stocks from five different industries

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M focus in this part of the analsis was not ust on the stocks of a particular sector

!ut rather it was also on the optimum diversification of m Portfolio so that in an

market conditions m Portfolio would give good returns.

&n order to anal$e the effect of diversification of m portfolio & have collected dail

closing prices of the shares of the following five industries for a period ranging from

6st#ul to 86st#ul.

SECTOR COMPANY

?eav *lectricals +?*F

+anking &2&2& +ank

Pharmaceuticals Sun Pharma

"elecom +harti irtel

&" Wipro

MEASURES OF ANAYSIS

CACUATION OF +ETA ? STANDARD DE8IATION OF INDI8IDUA STOC"S!

"he 0eta is a measure of a stocks price volatilit in relation to the rest of the market. &n other

words it explains how does the stocks price move relative to the overall market.

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"he num!er is calculated using regression analsis. "he whole market, which for this purpose

is considered the 3&/"T ;5, is assigned a !eta of 6. "here is no single index used to calculate

!eta, although the 3&/"T ;5 is pro!a!l the most common prox for the market as a whole.

Stocks that have a !eta greater than 6 have greater price volatilit than the overall

market and are more risk.

Stocks with a !eta of 6 fluctuate in price at the same rate as the market.

Stocks with a !eta of less than 6 have less price volatilit than the market and are less

risk.

"he 0etaof a 4ortfolio is the weighted sum of the individual asset !etas, according to the

proportions of the investments in the portfolio.

Portfolio !eta descri!es relativevolatilit of an individual securities portfolio, taken as a

whole, as measured ! the individualstock!etas of the securities making it up.

Stan'ar' 'e3iationis a statistical measurement that sheds light on historical volatilit. /or

example, a volatile stock will have a high standard deviation while the deviation of a sta!le

!lue chip stock will !e lower. large dispersion tells us how much the return on the fund is

deviating from the expected normal returns.

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http://www.nasdaq.com/investing/glossary/b/betahttp://www.nasdaq.com/investing/glossary/p/portfoliohttp://www.nasdaq.com/investing/glossary/v/volatilityhttp://www.nasdaq.com/investing/glossary/s/securityhttp://www.nasdaq.com/investing/glossary/p/portfoliohttp://www.nasdaq.com/investing/glossary/s/stockhttp://www.nasdaq.com/investing/glossary/b/betahttp://www.nasdaq.com/investing/glossary/b/betahttp://www.nasdaq.com/investing/glossary/p/portfoliohttp://www.nasdaq.com/investing/glossary/v/volatilityhttp://www.nasdaq.com/investing/glossary/s/securityhttp://www.nasdaq.com/investing/glossary/p/portfoliohttp://www.nasdaq.com/investing/glossary/s/stockhttp://www.nasdaq.com/investing/glossary/b/beta


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CHAPTER-J

DATA ANAYSIS OF A PORTFOIO

USIN 8ARIOUS MODES

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STOC" 1! +)arat Hea3$ Ele&tri&al# imite'

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Sto&*2! ICICI +AN"

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Sto&* 7!

SUN PHARMA

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Sto&*@! +HARTI AIRTE

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Sto&*! 5IPRO

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+ETA OF THE PORTFOIO

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E,PECTED RETURN USIN CAPM MODE

3o matter how much we diversif our investments, its impossi!le to get rid

An analysis of Portfolio Management

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