CHAPTER-I

INTRODUCTION

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INTRODUCTION

Portfolio management is the selection and management of all of an organisation’s projects,

Programmes and related business-as-usual activities taking into account resource

constraints. A portfolio is a group of projects and programmes carried out under the

sponsorship of an organisation. Portfolio can be managed at an organizational, programme

or functional level.

The process of managing the assets of a insurance policy or policy holder, including choosing

and monitoring appropriate investments and allocating funds accordingly. It has often been

said that portfolio management is not a science, but an art. Certainly, the human factor

manifesting in a portfolio manager’s ability to create outperformance bears out this truism.

Computer system can pick and run to some extent, portfolio which will provide a return

equal to an index, but the possibilities of higher fund outperformance (and under

performance) are presented by actively managed funds. With the more actively managed

funds, portfolio managers can demonstrate their experience and expertise in picking assets,

countries, sectors, and companies that will generate positive returns

If you own more than one security, you have an investment portfolio. You build the portfolio

by buying additional stocks, bonds, mutual funds, or other investments. Your goal is to

increase the portfolio’s value by selecting investments that you believe will go up in price.

According to modern portfolio theory, you can reduce your investment risk by creating a

diversified portfolio that includes enough different types, or classes, of securities so that at

least level some of them may produce strong returns in any economic climate.

In this study I had calculated risk and return for various portfolios. The portfolios are

constructed with securities from various areas. The analysis has been made based on the

risk and return calculated for portfolios.

The financial market is the driver of the economic growth and development of any

country. A sound financial market can take the country to the apex. Financial resources

were by allocating the resources through one of the ways such as portfolios, which are

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combinations of various securities. Portfolio analysis includes analyzing the range of possible

portfolios that can be constituted from a given set of securities.

A combination of securities with different risk-return characteristics will constitute the

portfolio of the investor. A portfolio is a combination of various assets and/or instruments of

investments. The portfolio is also built up out of the wealth or income of the investor over a

period of time with a view to suit his risk and return preferences to that of the portfolio that

he holds. The portfolio analysis as an analysis of the risk-return characteristics of individual

securities in the portfolio and changes that may take place in combination with securities

due to interactions among themselves and impact of each one of them on others.

As individuals are becoming more and more responsible for ensuring their own financial

future, portfolio or fund management has taken on an increasingly important role in banks

ranges of offerings to their clients. In addition, as interest rates have come down and the

stock market has gone up and come down again, clients have a choice of leaving their saving

in deposit accounts, or putting those savings in unit trusts or investment portfolio which

invest in equities and/or bonds. Investing in unit trusts or mutual funds is one way for

individuals and corporations alike to potentially enhance the returns on their savings.

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NEED FOR THE STUDY

The portfolio management deals with the process of selection securities from the number of

opportunities available with different expected returns and carrying different levels of risk

and the selection of securities is made with a view to provide the investors the maximum

yield for a given level of risk or ensure minimum risk for a level of return.

Portfolio management is a process encompassing many activities of investment in assets

and securities. It is a dynamics and flexible concept and involves regular and systematic

analysis, judgement and actions. The objectives of this service are to help the unknown

investors with the expertise of professionals in investment portfolio management. It

involves construction of a portfolio based upon the investor’s objectives, constraints,

preference for risk and return and liability. The portfolio is reviewed and adjusted from time

to time with the market conditions. The evaluation of portfolio is to be done in terms of

targets set for risk and return. The changes in portfolio are to be effected to meet the

changing conditions.

Portfolio construction refers to the allocation of surplus in hand among a variety of financial

assets open for investment. Portfolio theory concerns itself with the principles governing

such allocation. The modern view of investment is oriented towards the assembly of proper

combinations held together will give beneficial result if they are grouped in a manner to

secure higher return after taking into consideration the risk element.

The modern theory is 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 perspectives of combination of securities under constraints of risk and

return.

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OBJECTIVES OF THE STUDY:

To study the role of securities in Indian financial markets

To study the investment pattern and its related risks and returns.

To find out optimal portfolio, which gave optimal return at a minimize risk to the

investor.

To understand portfolio selection process.

To study the usefulness of efficient frontier technique in portfolio selection process.

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

portfolio are constituted.

To see whether the selected portfolio is yielding a satisfactory and constant return to

the investor.

To understand, analyze and select the best portfolio

To suggest measures for improvement of Port folio management of India Infoline

Limited, Visakhapatanam.

IMPORTANCE OF THE STUDY:

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A portfolio is a collection of investments held by an institution or a private

individual. In building up an investment portfolio a financial institution will typically

Conduct its own investment analysis, whilst a private individual may make use of the

services of a financial advisor or a financial institution which offers portfolio management

services. Holding a portfolio is part of an investment and risk-limiting strategy called

diversification. By owning several assets, certain types of risk (in particular specific risk) can

be reduced. The assets in the portfolio could include stocks, bonds, options, warrants, gold

certificates, real estate, futures contracts, production facilities, or any other item that is

expected to retain its value.

Portfolio management involves deciding what assets to include in the portfolio, given the

goals of the portfolio owner and changing economic conditions. Selection involves deciding

what assets to purchase, how many to purchase, when to purchase them, and what assets

to divest. These decisions always involve some sort of performance measurement most

typically expected return on the portfolio, and the risk associated with this return (i.e. the

standard deviation of the return). Typically the expected returns from portfolios, comprised

of different asset bundles are compared.

The unique goals and circumstances of the investor must also be considered. Some

investors are more risk averse than others. Mutual funds have developed particular

techniques to optimize their portfolio holdings.

Thus, portfolio management is all about strengths, weaknesses, opportunities and threats in

the choice of debt vs. Equity, domestic vs. International, growth vs. Safety and numerous

other trade-offs encountered in the attempt to maximize return at a given appetite for risk.

RESEARCH METHODOLOGY:

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Research design or research methodology is the procedure of collecting, analyzing and

interpreting the data to diagnose the problem and react to the opportunity in such a way

where the costs can be minimized and the desired level of accuracy can be achieved to

arrive at a particular conclusion.

The methodology used in the study for the completion of the project and the fulfilment of

the project objectives, is as follows:

Market prices of the companies have been taken for the years of different dates,

there by dividing the companies into 5 sectors.

A final portfolio is made at the end of the year to know the changes

(increase/decrease) in the portfolio at the end of the year.

SOURCES OF THE DATA:

Primary data: The primary data information is gathered from INDIA INFOLINE final

Polis by interviewing INDIA INFOLINE executives.

Secondary data:

The secondary data is collected from various books, magazines and from stock

Lists of various newspapers and INDIA INFOLINE as part of the training class

undertaken for project.

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LIMITATIONS OF THE STUDY:

This study has been conducted purely to understand portfolio management for

investors.

Construction of portfolio is restricted to two companies based on Markowitz

model.

Very few and randomly selected scripts/companies are analyzed from BSE

listings.

Detailed study of the topic was not possible due to limited size of the project.

There was a constraint with regard to time allocation for the research study i.e.

for a period of 45 days.

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CHAPTER-II

INDUSTRY PROFILE

Industry Overview

The securities market achieves one of the most important functions of

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channelling idle resources or from less productive resources to more productive

resources. Hence in the broader context the people who save and investors who

invest focus more towards the economy’s abilities to invest and save respectively. This

enhances savings and investments in the economy, the two pillars for economic growth. The

Indian Capital Market has come a long way in this process and with a strong regulator it has

been able to usher an era of a modern capital market regime. The past decade in many

ways has been remarkable for securities market in India. It has grown exponentially as

measured in terms of amount raised from the market, the number of listed stocks, market

capitalization, trading volumes and turnover on stock exchanges, and investor population.

The market has witnessed fundamental institutional changes resulting in drastic reduction in

transaction costs and significant improvements in efficiency, transparency and safety.

Capital Market is one of the significant aspects of every financial market. Hence it is

necessary to study its correct meaning. Broadly speaking the capital market is a market for

financial assets which have a long or indefinite maturity. Unlike money market instruments

the capital market instruments become nature for the period above one year. It is an

institutional arrangement to borrow and lend money for a longer period of time. It consists

of financial institutions like IDBI, ICICI, UTI, LIC, etc. These institutions play the role of

lenders in the capital market. Business units and corporate are the borrowers in the capital

market. Capital market involves various instruments which can be used for financial

transactions. Capital market provides long term debt and equity finance for the government

and the corporate sector. Capital market can be classified into primary and secondary

markets. The primary market is a market for new shares were as in the secondary market

the existing securities are traded. Capital market institutions provide rupee loans, foreign

exchange loans, consultancy services and underwriting.

Stock Exchange:

At the end of the June 1989, there were 18 recognized stock exchanges in India.

Among the 18 stock exchanges, the first organized stock exchange set up at

Bombay in 1857 is distinguished not only by its size but also it has been

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Recognized permanently, while the recognition for other markets is renewed every 5 years.

Stock markets are organized either as voluntary, non-profit making associations (Bombay,

Ahmadabad, Indore) or public limited companies (Calcutta, Delhi, Bangalore) or company

limited by guarantee (Madras, Hyderabad).In India, the growth of stock exchanges has been

linked to the growth of corporate Sector. Though a number of stock exchanges were set up

before independence but, there was no All India legislation to regulate they’re working.

Every stock Exchange followed its own methods of working. To rectify this situation, the

SECURITY CONTRACTS (REGULATIONS) ACT was passed in 1956.

A stock exchange, share market or bourse is a corporation or mutual organization

which provides facilities for stock brokers and traders, to trade company stock and other

securities. Stock exchanges also provide facilities for the issue and redemption of securities,

as well as, other financial instruments and capital events including the payment of income

and dividends. The securities trade on a stock exchange include: shares issued by

companies, unit trusts and other pooled investment products and bonds. To be able to

trade a security on a certain stock exchange, it has to be listed there. Usually there is a

central location at least for record keeping, but trade is less and less linked to such a

physical place, as modern markets are electronic networks, which gives those advantages of

speed and cost of transactions. Trade on an exchange is by members only. The initial

offering of stocks and bonds to investors is by definition done in the primary market and

subsequent trading is done in the secondary market. A stock exchange is often the most

important component of a stock market. Supply and demand in stock a market is driven by

various factors which, as in all free markets, affect the price of stocks (see stock valuation).

There is usually no compulsion to issue stock via the stock exchange itself, nor must

stock be subsequently traded on the exchanges. Such trading is said to be off exchange or

over-the-counter. This is the usual way that bonds are trade bonds are traded. Increasingly,

stock exchanges are part of a global market for securities.

The role of Stock Exchanges:

Stock exchanges have multiple roles in the economy, this may include the following:

Raising capital for businesses

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Mobilizing savings for investment

Facilitating company growth

Redistribution of wealth

Corporate governance

Creating investment opportunities for small investors

Government capital-raising for development projects

Barometer of the economy

Functioning of Stock Exchange:

Listing:

Listing of shares, on a stock exchange, means, such shares can be bought and sold, in

stock exchange.

A Company, which intends to issue shares, through prospectus, shall have to apply to one or

more stock exchanges, for getting its shares listed.

The detailed and elaborate procedure of getting the shares listed on a stock exchange is

monitored by SEBI. The SEBI, issues guidelines and notifications, from time to time, with

regard to listing of securities.

Once the shares are listed, they are divided into two categories:

1. GROUP “A” SHARES

2. GROUP “B” SHARES

GROUP “A” SHARES: are referred to as “Cleaned Securities” or “specified shares”. The

facility for carrying forward a transaction from one account period to another is available for

these shares. Group “A” shares represent companies, with huge amount of capital, and

equally a large scope for investment. These shares are frequently traded and command

higher price earnings multiples.

GROUP “B” SHARES: are referred to as, none cleaned securities or non-specified shares. For

these groups facility of carrying forward is not available.

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Whenever a share is moved from Group “B” to Group “An” its market price rises; likewise,

when a share is shifted from Group “A” to Group “B”, its market price declines. There are

some criteria and guide lines, laid down by stock exchange, for shifting stocks from the non-

specified list to the specified list.

Benefits of Stock Exchange:

The benefits of stock Exchanges can be studied under the following headings:

1. Advantages to the companies:

Ready markets for securities

Increase in price.

Increase in goodwill.

Agent between companies and the investors.

2. Advantages to the investors:

Safety of investment

Best use of capital

More collateral value.

Publication of price list of securities

Powerful hedge against inflation.

3. Advantages to the society:

Helpful in industrialization

Increase in rate of capital formation.

Savings are encouraged.

Incentive for efficiency.

Government can raised funds for imports projects. Provides a mirror to

reflect general economic conditions.

PRIMARY MARKET AND SECONDARY MARKET

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Primarily there are two types of stock markets – the primary market and the

secondary market. This is true for the Indian stock markets as well. Basically the primary

market is the place where the shares are issued for the first time. So when a company is

getting listed for the first time at the stock exchange and issuing shares – this process is

undertaken at the primary market. That means the process of initial public offering or IPO

and the debentures are controlled at the primary stock market. On the other hand the

secondary market is the stock market where existing stocks are bought and sold by the retail

investors through the brokers. It is the secondary market that controls the price of the

stocks. Generally when we speak about investing or trading at the stock market we mean

trading at the secondary stock market. It is the secondary market where we can invest and

trade in the stocks to get the profit from our stock market investment.

Now these are the broadcast classification of the stock markets that is true for any

country as well as India. But the Indian stock markets can be divided into further categories

depending on various aspects like the mode of operation and the diversification in services.

First of the two largest stock exchanges in India can be divided on the basis of operation.

While the Bombay stock exchange or BSE is a conventional stock exchange with a trading

floor and operating through mostly offline trades, the National Stock Exchange or NSE is a

completely online stock exchange and the first of its kind in the country. The trading is

carried out at the National Stock Exchange through the electronic limit order book of the

LOB. With the immense popularity of the process and online trading facility other exchanges

started to take up the online route including the BSE where you can trade online as well. But

the BSE is still having the offline trading facility that is carried out at the trading floor of the

exchange at its Dalal Street facility. Apart from these classification there also different types

of stock market in India and the classification is made on the type of instrument that is being

traded at the market. Both the Bombay Stock Exchange and the National Stock Exchange

have these types of stock markets.

MAJOR STOCK EXCHANGES:

The market or place, where securities, viz. Shares are exchange / traded or simply

where buying and selling takes place, is called stock exchange or stock market.

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Presently, the stock market in India consists of twenty three regional stock

exchanges and two national exchanges, namely, the National Stock Exchange (NSE) and

Over the Counter Exchange of India (OTC).

Twenty Largest Stock Exchanges by Market Capitalization as at 31st October 2012 (in

trillions of US dollars)

o NYSE Euro next

o NASDAQ OMX Group

o Landon Stock Exchange

o Tokyo stock Exchange

o Hong Kong stock Exchange

o Shanghai Stock Exchange

o TMX Group

o Deutsche Burse

o Australian Securities Exchange

o Bombay Stock Exchange

o National Stock Exchange of India

o SIX Swiss Exchange

o BM&F Bove spa

o Korea Exchange

o Shenzhen Stock Exchange

o BME Spanish Exchange

o JSE Limited

o Moscow Exchange

o Singapore Exchange

o Taiwan Stock

The Bombay Stock Exchange (BSE) is the largest Stock Exchange, in the country,

where maximum transactions, in terms of money and shares take place. The

other major stock exchanges are Calcutta, Madras and Delhi Stock Exchanges.

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Other one at Ahmadabad, Bangalore, Kanpur, Rajkot, Hyderabad, Cochin,

Bhubaneswar, Indore, Mangalore, Ludhiana, Patna, Coimbatore and Meerut.

The Bombay Stock Exchange (BSE):-

Is a stock exchange located on Dalal Street, Mumbai and is the oldest stock exchange

in Asia. The equity market capitalization of the companies listed on the BSE was US$1 trillion

as of December 2012, making it the 5th largest stock exchange in Asia and the 10 th largest in

the world. The BSE has the largest number of listed companies in the world.

As of march 2012 there are over 5,133 listed Indian companies and over 8,196 scrip’s

on the stock exchange, the Bombay stock exchange has a significant treading volume. The

BSE SENSEX , Also called “ BSE 30”, is a widely used market index in India & Asia .though

many other exchanges exist , BSE and the National stock exchange of India account for the

majority of equity trading in India while both have similar total market Capitalization (about

USD 1.6 Trillion ) , share volume in NSC is typically 2 times that of BSE.

Vision:

“Emerge as the premier India stock exchange by establishing global benchmarks”

HISTORY:

The Phiroze Jeejeebhoy towers house the Bombay Stock Exchange since 1980.

The Bombay Stock Exchange is the oldest exchange in Asia. It traces its history

to the 1850s, when four Gujarati and one Pars stock broker would gather under banyan

trees in front of Mumbai’s Town Hall. the location of these meetings exchanged many times,

as the number of brokers constantly incensed the group eventually moved Dalal Street in

1874 & in 1875 BSecame an official organization known as ‘the Native Share and Stock

brokers association in the 1956, the BSE became the first stock exchange to be organized by

the Indian government under the securities contract organization act. The Bombay stock

exchange developed the BSE SENSEX in 1986; giving the BSE a means to measure overall

performance of the exchange.

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In 2000 the BSE used this index to open its derivatives market trading SANSEX

futures contracts. The development of SENSEX options along with equity derivatives

followed in 2001 and 2012,expanding the BSE’s treading Platform Historically an open

outcry floor treading exchange , the Bombay stock exchange switched to an electronic

trading system in 1995.it took the exchange only fifty days to make this transition . This

automated screen –based trading platform called BSE on-line trading (BOLT) currently has a

capacity of 8 million orders per day. The BSE has also introduced the world’s first

centralized exchanged-Based internet trading system, BSEWEB.CO.IN in to unable investors

any wear in the world to tread on the BSE platform.

AWARDS

The World Council of Corporate Governance has awarded the Golden Peacock

Global CSR Award for BSE’s initiatives in Corporate Social Responsibility (CSR).

The Annual Reports and Accounts of BSE for the year ended March 31, 2006 and

March 31, 2007 have been awarded the ICAI awards for excellence in financial

reporting.

It has been cited as one of the Worlds’ best performing Stock Market by Reuters.

The Human Resource Management at BSE has won the Asia-pacific HRM awards

for its efforts In employer branding through talent management at work health

management at work and excellence in HR through technology.

National Stock Exchange (NSE):-

National Stock Exchange of India Ltd was started in 1992 with a paid-up equity of Rs.25

crores. The government recognized it in the same year and NSE started its Operations in

wholesale in Nov 1994. NSE is an India’s leading stock exchange covering various cities and

towns across the country. NSE was set up by leading institutions to provide a modern, fully

automated screen based trading system with national research. The exchange had brought

about unparallel transparency, speed and efficiency, safety and market integrity. It has

setup facilities that serve as a model for the securities industry in terms of systems,

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practices and procedures. NSE has played a catalytic role in reforming the Indian securities

market in terms Of micro structure, market practices and trading volumes.

Vision:

“To become the world’s leading direct selling company by generating more income for

distributors than any other company.”

The National Stock Exchange (NSE) is a stock exchange located at Mumbai, India, it

is the 11th stock exchange in the world by market capitalization and largest in India by daily

turnover and number of trades, for both equities and derivative trading, NSE has a market

capitalization of around US$985 billion and over 1,646 listings of December 2012. Though a

number of other exchanges exist, NSE and the Bombay Stock Exchange are the two most

significant stock exchanges in India and between them are responsible for the vast majority

of share transactions. Thaw NSE’s key index is the S&P CNX Nifty, known as the NSE NIFTY

(National stock Exchange Fifty), an index of fifty major stocks weighted by market

capitalization.

NSE is mutually owned by a set of leading financial institutions, banks, insurance

companies and other financial intermediaries in India but its ownership and management

operate as separate entities. There are at least 2 foreign investors NYSE Euro next and

Goldman Sachs who have taken a stake in the NSE. As of 2006, the NSE VSAT terminals,

2799 in total, cover more than 1500 cities across India. NSE is the third largest Stock

Exchange in the world in terms of the number of trades in equities. It is the second fastest

growing stock exchange in the world with a recorded growth of 16.6%.The National Stock

Exchange of India was set up by Government of India on the recommendation of Pherwani

Committee in 1991. Promoted by leading financial institutions essentially led by IDBI at the

behest of the Government of India, it was incorporated

in November 1992 as a tax-paying company. In April 1993, it was recognized as a stock

exchange under the securities contracts (Regulation) Act, 1956, NSE commenced operations

in the Wholesale Debt Market (WDM) segment in June 1994. The Capital market (Equities)

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segment of the NSE commenced operations in November 1994, while operations in the

Derivatives segment commenced in June 2000.

The logo of the NSE symbolizes a single nationwide securities trading facility

ensuring equal and fair access to investors, trading members and issuers all over

the country. The initials of the Exchange viz., N, S and E have been etched on the logo and

are distinctly visible. The logo symbolises use of state of the art

information technology and satellite connectivity to bring about the change within the

securities industry. The logo symbolizes vibrancy and unleashing of creative energy to

constantly bring about change through innovation.

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CHAPTER-III

COMPANY PROFILE

COMPANY HISTORY :-

India Info line Group

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The India Info line group, comprising the holding company, India Info line

Limited and its wholly-owned subsidiaries, straddle the entire financial services

Space with offerings ranging from Equity Research, Equities and Derivatives

Trading, Commodities Trading, Portfolio Management Services, Mutual

Funds, Life Insurance, Fixed deposits, Wealth Management, Asset Management, Loans,

Investment banking, Gold bonds and other small savings instruments to Loan products and

Investment banking. A multi-channel network in over 2,700 business locations across more

than 500 Cities across India, effectively covering all metros.

India Info line Ltd

India Info line Limited is listed on both the leading stock exchanges in India, viz. The Stock

Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) and is also a member of

both the exchanges. It is engaged in the businesses of Equities Broking services in the Cash

and Derivatives segments of the NSE as well as the Cash segment of the BSE. It is registered

with NSDL as well as CDSL as a Depository participant, providing a one-stop solution for

clients trading in the Equities market. It has recently launched its Investment banking and

Institutional Broking business.

IIFL is near you physically:

We are present in every nook and cranny of the country, with over 3,000 business locations

across 500 cities in India. You can reach us in a variety of ways, online, over the phone and

through our branches. All our offices are connected with the corporate office in Mumbai

with cutting edge networking technology. The group caters to a customer base of about a

million customers.

Our physical presence in key global markets includes subsidiaries in Colombo, Dubai,

New York Mauritius, London, Singapore and Hong Kong.

IIFL has received membership of the Colombo Stock Exchange becoming the first

foreign broker to enter Sri Lanka. IIFL owns and manages the website,

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www.indiainfoline.com, which is one of India’s leading online destinations for personal

finance, stock markets, economy and business. IIFL has been awarded the ‘Best Broker,

India’ by Finance Asia and the ‘Most improved brokerage, India’ in the Asia Moneypolls.

India Info line was also adjudged as ‘Fastest Growing Equity Broking House-Large firms’ by

Dun & Brad Street. A forerunner in the field of equity research, IIFL’s research is

acknowledged by none other than Forbes as ‘Best of the Web” and ‘… a must read for

investors in Asia’.

Our research is available not just over the Internet but also on international wire

services like Bloomberg, Thomson First Call and Internet Securities besides others where it is

amongst one of the most read Indian brokers.

IIFL is a listed company with a consolidated group net worth of about Rs.2,000

crores. The income and net profit during FY 2011-12 were Rs.14.7 and Rs.2.1 bn

respectively.

The Group has a consistent and uninterrupted track record of profits and dividends

since its listing in 2005. The company is listed on both Exchanges and also trades in the

derivatives segment.

1995

Commenced operations as an Equity Research firm

1997

Launched research products of leading Indian companies, key sectors and the economy

Client included leading Flls, banks and companies.

1999

Launched www.indiainfoline.com

2000

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Launched online trading through www.5paisa.com started distribution of life insurance

and mutual fund

2003

Launched proprietary trading platform Trader Terminal for retail customers

2004

Acquired commodities broking license

Launched Portfolio Management Service

2005

Maiden IPO and listed on NSE, BSE

2006

Acquired membership of DGCX

Commenced the lending business

2007

Commenced institutional equities business under IIFL

Formed Singapore subsidiary, IIFL (Asia) Pvt. Ltd.,

2008

Launched IIFL Wealth

Transitioned to insurance broking model

2009

Acquired registration for Housing Finance

SEBI in-principle approval for Mutual Fund

Obtained Venture Capital license

2010

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Received in-principle approval for membership of the Singapore Stock Exchange

Received membership of the Colombo Stock Exchange

2011

Launched IIFL Mutual Fund

Product & Services

We are a one-stop financial service shop, most respected for quality of its advice,

personalized service and cutting-edge technology.

We have a presence in:

Equities

Equities our core offering, gives us a leading market share in both retail and

institutional segments. Over a million retail customers rely on our research, as do leading

Flls and MFs that invest billions.

IIFL is a member of BSE and NSE registered with NSDL and CDSL as a depository

participant and provides broking services in the cash, derivatives and currency segments,

online and offline. IIFL is a dominant player in the retail as well as institutional segments of

the market. It recently became the first Indian broker to get a membership of the Colombo

Stock Exchange and is also the first Indian broker to have received an in-principle approval

for membership of the Singapore Stock Exchange. IIFL’s Trader Terminal, its proprietary

trading platform, is widely acknowledged as one of the best available for retail investors.

Investors opt for IIFL given its unique combination of superior Service, cutting-edge

proprietary Technology, Advice powered by world-acclaimed research and its over 2500

business locations across over 500 cities in India.

IIFL received the BQ1 broker grading (highest grading) from CISIL. The assigned

grading reflects an effective external interface, robust systems frame work and strong risk

24

management. The grading also reflects IIFL’s healthy regulatory compliance track record and

adequate credit risk profile.

IIFL’s analyst team won Zee Business ‘India’s best market analysts awards – 2009’ for

being the best in the Oil and Gas and commodities sectors and a finalist in the Banking and

IT sectors.

IIFL has rapidly emerged as one of the premier institutional equities houses in India

with a team of over 25 research analysts, a full-fledged sales and trading team coupled with

an experienced investment banking team.

The Institutional equities business conducted a very successful ‘Enterprising India’ global

Investors’ conference in Mumbai in March 2010, which was attended by funds with

aggregate AUM over US$5 trillion and CEOs and other executives representing corporate

with a ;combined market capitalization of over US$500 billion. The ‘Discover Sri Lanka’

global investors’ conference, held in Colombo in July 2010, was attended by more than 50

leading global and major local investors and 25 Sri Lankan corporate, along with senior

Government officials.

Commodities

IIFL offers commodities trading to its customers vide its membership of the MCX and the

NCDEX. Our domain knowledge and data based on in depth research of complex paradigms

of commodity kinetics, offers our customers a unique insight into behavioural patterns of

these markets. Our customers are ideally positioned to make informed investment decisions

with a high probability of success.

India Info line Commodities Ltd.,

143, MGR Road, Perungudi,

Chennai, Tamilanadu – 600 096.

Credit and finance

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Credit & Finance focuses on secured mortgages and consumer loans. Our high

quality loan book of over Rs.6,200 crores ($ 1.2bn) is backed by strong capital adequacy of

approximately 20%.

IIFL offers a wide array of secured loan products. Currently, secured loans (mortgage

loans, margin funding, and loans against shares) comprise 94% of the loan book. The

company has discontinued its unsecured products. It has robust credit processes and

collections mechanism resulting in overall NPAs of less than 1%. The Company has deployed

proprietary loan-processing software to enable stringent credit checks while ensuring fast

application processing. Recently the company has also launched Loans against Gold.

Insurance

Life Insurance, Pension and other Financial Products, an opening architecture

complete our product suite to help customers build a balanced portfolio.

IIFL entered the insurance distribution in 2000 as ICICI Prudential Life Insurance Co.

Ltd., corporate agent. Later, It became an Insurance broker in October 2008 in line with its

strategy to have an open architecture’ model. The company now distributes products of

major insurance companies through its subsidiary India Info line Insurance Brokers Ltd.,

Customers can choose from a wide bouquet of products from several insurance companies

including Max New York Life Insurance, MetLife, Reliance Life Insurance, Bajaj Allianz Life,

Birla Sun life, Life Insurance Corporation, Kotak Life Insurance and others.

Wealth Management Service

Private Wealth Management services cater to over 2500 families who have trusted

us with close to Rs.25,000 crores ($ 5bn) of assets for advice.

IIFL offers private wealth advisory services to high-net-worth individual (HNI) and

corporate clients under the IIFL Private Wealth’ brand. IIFL Private Wealth is managed by a

qualified team of MBAs from IIMs and premier institutes with relevant industry experience.

The team advises clients across asset classes like sovereign and quasi-sovereign debt,

26

corporate and collateralized debt, direct equity, ETCs and mutual funds, third party PMS

derivative strategies, real estate and private equity. It has developed innovative products

structured on the fixed

Income side.

It also has tied up with interactive Brokers LLC to strengthen its execution platform

and provide investors with a global investment platform.

Investment Banking

Investment Banking Services are for corporate looking to raise capital. Our forte is

Equity Capital Markets, where we have executed several marquee transactions.

IIFL’s investment banking division was launched in 2006. The business leverages

upon its strength of research and placement capabilities of the institutional and retail sales

teams. Our experienced investment banking team possesses the skill-set to manage all kinds

of investment banking transactions. Our close interaction with investors as well as corporate

helps us understands and offer tailor-made solutions to fulfil requirements. The Company

possesses strong placement capabilities across institutional. HNI and retail investors. This

makes it possible for the team to place large issues with marquee investors.

In Fy10, the team advised and managed more than 10 transactions including

four IPOs and four Qualified Institutions placements.

IIFL Mutual Fund made an impressive beginning in FY12, with lowest charge Nifty

ETF. Other products include Fixed Maturity Plans.

IIFL Vision, Mission & Top Management:

Vision

“To become the Most Respected Company in the financial services space”

Mission

27

“To become a full-fledged financial services company known for its quality of advice,

personalized services, and cutting edge technology”

Top Management Team:-

Mr.Nirmal Jain (Chairman)

Nirmal Jain, MBA (IIM, Ahmadabad) and a Chartered and Cost Accountant,

Founded India’s leading financial services company India Info line Ltd. In 1995, providing

globally acclaimed financial services in equities and commodities broking, life insurance and

mutual funds distribution, among others. Mr. Jain began his career in 1989 with Hindustan

Lever’s commodity export business, contributing tremendously to its growth. He was also

associated with Inquire-Indian Equity Research, which he co-founded in 1994 to set new

standards in equity research in India.

Mr.R.Venkataraman (Managing Director)

R Venkataraman, co-promoter and Executive Director of India Info line Ltd., is a

B.Tech (Electronics and Electrical Communications Engineering, IIT Kharagpur) and an MBA

(IIM Bangalore). He joined the India Info line board in July 1999. He previously held senior

managerial positions in ICICI Limited, including ICICI Securities Limited, their investment

banking joint venture with J P Morgan of USA and with BZW and Taib Capital Corporation

Limited. He was also Assistant Vice President with G E Capital Services India Limited in their

private equity division, possessing a varied experience of more than 16 years in the financial

slices sector.

The Independent Directors:-

Mr.NileshVikamsey

Mr.KrantiSinha

Mr.A.K.Purwar

Mr.SunilKaul

28

CHAPTER-III

REVIEW OF LITERATURE

29

INTRODUCTION:

A portfolio is a collection of investments held by an institution or a private

individual. In building up an investment portfolio a financial institution will typically conduct

its own investment analysis, whilst a private individual may make use of the services of a

financial advisor or a financial institution which offers portfolio management services.

Holding a portfolio is part of an investment and risk-limiting strategy called diversification.

By owning several assets, certain types of risk (in particular specific risk) can be reduced.

The assets in the portfolio could include stocks, bonds, options, warranty, gold certificates,

real estate futures contracts, production facilities, or any other item that is expected to

retain its value.

Portfolio management involves deciding what assets to include in the portfolio, given

the goal of the portfolio owner and charging economic conditions. Selection involves

deciding what assets to purchase, how many to purchase, when to purchase them, and

what assets to divest. These decisions always involve some sort of performance

measurement, most typically expected return on the portfolio, and the risk associated with

this return (i.e the standard deviation of the return). Typically the expected returns from

portfolios, comprised of different asset bundles are compared.

The unique goals and circumstances of the investor must also be considered. Some

investors are some risk averse than others. Mutual funds have developed particular

techniques to optimize their portfolio holdings.

Thus , portfolio management is all about strengths, weakness, opportunities and

threats in the choice of debt vs. Equity, domestic vs. International, growth vs. Safety and

numerous other trade-offs encountered in the attempt to maximize return at a given

appetite for risk.

Aspects of portfolio Management:

Basically portfolio management involves

A proper investment decision making of what to buy and sell

30

Proper money management in terms of investment in a basket of assets so as to

satisfy the asset preference on investors.

Reduce the risk and increase returns.

OBJECTIVES OF PORTFOLIO MANAGEMENT:

The basic objective of portfolio management is to maximize yield and minimize risk. The

other ancillary objectives are as per needs of investors, namely:

Regular income or stable return

Appreciation of capital

Marketability and liquidity

Safety of investment

Minimizing of tax liability.

NEED FOR PORTFOLIO MANAGEMENT:

The portfolio Management deals with the process of selection securities from the number of

opportunities available with different expected returns and carrying different levels of risk

and the selection of securities is made with a view to provide the investors the maximum

yield for a given level of risk or ensure minimum risk for a level of return.

Portfolio Management is a process encompassing many activities of investment in assets

and securities. It is a dynamics and flexible concept and involves regular and systematic

analysis, judgement and actions. The objectives of this service are to help the unknown

investors with the expertise of professionals in investment portfolio Management. It

involves construction of a portfolio based upon the investor’s objectives, constrains,

preference for risk and return and liability. The portfolio is reviewed and adjusted from time

31

to time with the market conditions. The evaluation of portfolio is to be done in terms of

targets set for risk and return. The changes in portfolio are to be effected to meet the

changing conditions.

Portfolio Construction refers to the allocation of surplus funds in hand among a variety of

financial assets open for investment. Portfolio theory concerns itself with the principles

governing such allocation. The modern view of investment is oriented towards the assembly

of proper combinations held together will give beneficial result if they are grouped in a

manner to secure higher return after taking into consideration the risk element.

The modern theory is 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 perspectives of combination of securities under constraints of risk and

return.

ELEMENTS:

Portfolio Management is an on-going process involving the following basic tasks.

Identification of the investor objective, constrains and preference which help

formulated the invest policy.

Strategies are to be developed and implemented in tune and invest policy

formulated. This will help the selection of asset classes and securities in each

class depending upon their risk-return attributes.

Review and monitoring of the performance of the portfolio by continuous

overview of the market conditions, company’s performance and investor’s

circumstances.

32

Finally, the evaluation of portfolio for the results to compare with the targets

and needed adjustments have to be made in the portfolio to the emerging

conditions and to make up for any shortfalls in achievements (targets).

Schematic diagram of stages in portfolio management:

Process of Portfolio Management:

33

Specification and quantification of investor objectives, constraints, and

Monitoring investor related input factors

Portfolio policies and strategies

Capital market expectations

Relevant economic, social, political sector and security considerations.

Portfolio construction and revision asset allocation, portfolio optimization, security selection, implementation and execution

Monitoring economic and market input factors

Attainment of investor objectives

Performance

The Portfolio program and asset Management program both follow a disciplined process to

establish and monitor an optimal investment mix. This six-stage process helps ensure that

the investments match investor’s unique needs, both now and in the future.

1: IDENTIFY GOALS AND OBJECTIVES:

When will you need the money from your investments? What are you saving your money

for? With the assistance of financial advisor, the Investment will guide through a series of

questions to help identify the goals and objectives for the investments.

2: DETERMINE OPTIMAL INVESTMENT MIX:

34

Once the profile questionnaire is completed, investor’s optimal investment mix or assets

allocation will be determined. An asset allocation represents the mix of investments (cash,

fixed income and equities) that match individual risk and return needs.

This step represents one of the most important decisions in your profile construction, as

asset allocation has been found to be the major determinant of long-term portfolio

performance.

3: CREATE A CUSTOMIZED INVESTMENT POLICY STATEMENT:

When the optimal investment mix is determined, the next step is to formalize our goals and

objectives in order to utilize them as a benchmark to monitor progress and future updates.

4: SELECT INVESTMENTS:

The customized portfolio is created using an allocation of select QFM Fund is designed to

satisfy the requirements of a specific asset class, and is selected in the necessary proportion

to match the optimal mix.

5: MONITOR PROGRESS:

Building an optimal investment mix is only part of the process. It is equally important to

maintain the optimal mix when varying market conditions cause investment mix to drift

away from its target. To ensure that mix of asset classes stays in line with investor’s unique

needs, the portfolio will be monitored and rebalanced back to the optimal investment mix.

6: REASSESS NEEDS AND GOALS:

Just as market shifts, so do the goals and objectives of investors. With the flexibility of the

Portfolio program and Asset management Program, when the investor’s needs or other life

circumstances change, the portfolio has the flexibility to accommodate such changes.

RISK:

35

Risk refers to the probability that the return and therefore the value of an asset or security

may have alternative outcomes. Risk is the uncertainty (today) surrounding the eventual

outcome of an event which will occur in the future. Risk is uncertainty of the income/capital

appreciation or loss of both. All investments are risky. The higher the risk taken, the higher

is the return. But proper management of risk involves the right choice of investments whose

risks are compensation.

RETURN:

Return-yield or return differs from the nature of instruments, maturity period and the

creditor or debtor nature of the instrument and a host of other factors. The most important

factor influencing return is risk return is measured by taking the price income plus the price

change.

PORTFOLIO RISK:

Risk on portfolio is different from the risk on individual securities. This risk is reflected by in

the variability of the returns from zero to infinity. The expected return depends on

probability of the return and their weighted contribution to the risk of the portfolio.

RETURN ON PORTFOLIO:

Each security in a portfolio contribution returns in the proportion of its investment in

security. Thus the portfolio of expected returns, from each of the securities with weights

representing the proportionate share of security in the total investments.

RISK-RETURN RELATIONSHIP:

The risk/return relationship is a fundamental concept in not only financial analysis, but in

every aspect of life. If decisions are to lead to benefit maximization, it is necessary that

individuals/institutions consider the combined influence on expected (future) return or

36

benefit as well as on risk/cost. The requirement that expected return/benefit be

commensurate with risk/cost is known as the “risk/return trade-off” in finance.

All investments have some risks. An investment in shares of companies has its own risks or

uncertainty. These risks arise out of variability or returns or yields and uncertainty of

appreciation or depreciation of share prices, loss of liquidity etc. And the overtime can be

represented by the variance of the returns. Normally, higher the risk that the investors take,

the higher is the return.

Y E(r)

R

E

T

U R(f)

R

N X

R I S K

TYPES OF RISKS:

Risk consists of two components. They are

1. Systematic Risk

2. Un-systematic Risk

37

1. SYSTEMATIC RISK:

Systematic risk refers to that portion of total variability in return caused by factors affecting

the prices of all securities. Economic, Political and sociological changes are sources of

systematic risk. Their effect is to cause prices of nearly all individual common stocks and/or

all individual bonds to move together in the same manner.

1. Market Risk:

Variability in return on most common stocks that are due to basic sweeping changes in

investor expectations is referred to as market risk. Market risk is caused by investor

reaction to tangible as well as intangible events.

2. Interest rate-Risk:

Interest – rate risk refers to the uncertainty of future market values and of the size of

future income, caused by fluctuations in the general level of interest rates.

3. Purchasing-Power Risk:

Purchasing power risk is the uncertainty of the purchasing power of the amounts to be

received. In more events everyday terms, purchasing power risk to the impact of or

deflation on an investment.

2. UNSYSTEMATIC RISK:

Unsystematic risk is the portion of total risk that is unique to a firm or industry.

Factors such as management capability, consumer preferences, and labour strikes cause

systematic variability of return in a firm. Unsystematic factors are largely independent of

factors affecting securities markets in general. Because these factors affected one firm, they

must be examined for each firm.

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Unsystematic risk that portion of risk that is unique or peculiar to a firm or an industry,

above and beyond that affecting securities market in general. Factors such as management

capability, consumer preferences, and labour strikes can cause unsystematic variability of

return for a company’s stock.

1. Business Risk: Business risk is a function of the operating conditions faced by a firm

and the variability these conditions inject into operating income and expected

dividends.

Business risk can be divided into two broad categories

a. Internal Business Risk

b. External Business Risk

a. Internal business risk is associated with the operational efficiency of the firm. The

operational efficiency differs from company to company. The efficiency of

operation is reflected on the company’s achievement of its pre-set goals and the

fulfilment of the promises to its investors.

b. 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 pressure on the firm. The external factors are social and regulatory factors,

monetary and fiscal policies of the government within which a firm or an industry

operates.

2. Financial Risk:

Financial risk is associated with the way in which a company finances its activities.

Financial risk is avoided risk to the extent that management has the freedom to decide to

borrow or not to borrow funds. A firm with no debit financing has no financial risk.

39

MARKOWITZ MODEL

THE MEAN VARIANCE CRITERION:

Dr. Harry M. Markowitz is credited with developing the first modern portfolio analysis

model in order to arrange for the optimum allocation of assets with in portfolio. To reach

these objectives, Markowitz generated portfolio with in a reward risk context. In essence,

Markowitz model is a theoretical framework for the analysis of risk return choices.

Decisions are based on the concept of efficient portfolios.

Markowitz model is a theoretical framework for the analysis of risk, return choices

and this approach determines an efficient set of portfolio return through three important

variable that is,

o Return

o Standard Deviation

o Coefficient of correlation

Markowitz model is also called as a “Full Covariance Model”. Through this model the

investor can find out the efficient set of portfolio by finding out the trade off between risk

and return, between the limits of zero and infinity. According to this theory, the effect of

one security purchase over the effects of the other security purchase is taken into

consideration and then the results are evaluated. 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.

A portfolio is efficient when it is expected to yield the highest return for the level of risk

accepted or, alternatively the smallest portfolio risk for a specified level of expected return

level chosen, and asset are substituted until the portfolio combination expected returns, set

of efficient portfolio is generated.

Assumptions: The Markowitz model is based on several assumptions regarding investor

behaviour:

40

1. Investors consider each investment alternative as being represented by a probability

distribution of expected returns over some holding period.

2. Investors maximize one period-expected utility and possess utility curve, which

demonstrates diminishing marginal utility of wealth.

3. Individuals estimate risk on the basis of variability of expected return.

4. Investors base decisions solely on expected return and variance of returns only.

5. For a given risk level, investors prefer high returns to lower returns.

Similarly for a given level of expected return, investors prefer less risk to more risk.

Under these assumptions, a single asset or portfolio of assets is considered to be

“efficient” if no other asset or portfolio of assets higher expected return with the

same expected return.

THE SPECIFIC MODEL:

In developing this model, Markowitz first disposed of the investor behaviour rule

that the investor should maximize expected return. This rule implies non-diversified single

security analysis portfolio with the highest expected return is the most desirable portfolio.

Only by buying that single security portfolio would obviously be preferable if the investor

were perfectly certain that this highest expected return would turn out to be the actual

return. However, under real world conditions of uncertainty, most risk adverse investors

join with Markowitz it in discarding the role of calling for maximizing the expected returns.

As an alternative, Markowitz offer the “expected returns/variance” rule.

Markowitz has shown the effect of diversification by regarding the risk of securities.

According to him, the security with the covariance, which is either negative or low amongst

them, is the best manner to reduce risk. Markowitz has been able to show that securities,

which have, less than positive correlation will reduce risk without, in any way, bringing the

return down. According to his research study a low correlation level between securities in

the portfolio will show less risk. According to him, investing in a large number of securities

is not the right method of investment. It is the right kind of security that brings the

maximum results.

Henry Markowitz has given the following formula for a two-security portfolio and three

security portfolios.

41

□□=√(x1)2(□1)2+(x2)2(□2)2+2(x1)(x2)(r12)(□1)(□2)

□□=√(x1)2(□1)2+(x2)2(□2)2+(x3)2(□3)2+2(x1)(x2)(r12)(□1)(□2)+2(x1)(x3)(r13)(□1)(□2)+ 2(x2)(x3)(r23)(□2)

(□3)

p□= Standard deviation of the portfolio return

X1=proportion of the portfolio invested in security 1

X2=proportion of the portfolio invested in security 2

X3=proportion of the portfolio invested in security 3

□1 =standard deviation of the return on security 1

□2= standard deviation of the return on security 2

□3= standard deviation of the return on security 3

r 12= Coefficient of correlation between the returns on securities 1 and 2

r 13= Coefficient of correlation between the returns on securities 1 and 3

r 23= Coefficient of correlation between the returns on securities 2 and 3

CAPITAL ASSET PRICING MODEL: (CAPM)

The CAPM is a model for pricing an individual security (asset) or a portfolio. For

individual security perspective, the security market line (SML) is used and its relation to

expected return and systematic risk (beta) to show how the market must price individual

securities in relation to their security risk class. The SML enables us to calculate the reward-

to-risk ratio for any security in relation to that of the overall market. Therefore, when the

expected rate of return for any security is deflated by its beta coefficient, the reward-to-risk

ratio for any individual security in the market is equal to the market reward-to-risk ratio,

thus:

Individual security’s / beta = Market’s securities (portfolio)

Reward-to-risk ratio Reward –to-risk ratio

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The Security Market Line, seen here in a graph, describes a relation between the beta and

the assets expected rate of return

The market reward-to-risk ratio is effectively the market risk premium and by rearranging

the above equation and solving for E (Ri), we obtain the Capital Asset Pricing Model (CAPM).

Where:

Is the expected return on the capital asset

Is the risk-free rate of interest

(The beta coefficient) the sensitivity of the asset returns to market returns, or also.

Is the expected return of the market

Is sometimes known as the market premium or risk premium (the different between the

expected market rate of return and the risk-free rate of return).

Beta measures the volatility of the security, relative to the asset class. The equation is

saying that investors require higher levels of expected returns to compensate them for

higher expected risk. We can think of the formula as predicting a security’s behaviour as a

function of beta:

CAPM says that if we know a security’s beta then we know the value of r that

investors expect it to have.

Assumptions of CAPM:

All investors have rational expectations.

There are no arbitrage opportunities.

Returns are distributed normally.

Fixed quantity of assets.

Perfectly efficient capital markets.

Investors are solely concerned with level and uncertainty of future wealth

Separation of financial and production sectors. Thus, production plans are fixed.

Risk-free rates exist with limitless borrowing capacity and universal access.

The Risk-free borrowing and lending rates are equal.

No inflation and no change in the level of interest rate exist.

43

Perfect information, hence all investors have the same expectations about security

returns for any given time period.

Shortcomings Of CAPM:

The model assumes that asset returns are (jointly) normally distributed random

variables. It is however frequently observed that returns in equity and other markets

are not normally distributed.

The model assumes that the variance of returns is an adequate measurement of risk.

The model does not appear to adequately explain the variation in stock returns.

The model assumes those given a certain expected return investors will prefer lower

risk (lower variance) to higher risk and conversely given a certain level of risk will

prefer higher returns to lower ones.

The model assumes that all investors have access to the same information and agree

about the risk and expected return of all assets. (Homogeneous expectations

assumption)

The model assumes that there are no taxes or transaction costs.

The market portfolio consists of all assets in all markets, where each asset is

weighted by its market capitalization. This assumes no preference between markets

and assets for individual investors, and that investors choose assets solely as a

function of their risk-return profile. It also assumes that all assets are infinitely

divisible as to the amount which may be held or transacted.

The market portfolio should in theory include all types of assets that are held by

anyone as an investment (including works of art, real estate, human capital….)

Unfortunately, it has been shown that this substitution is not innocuous and can lead to

false inferences as to the validity of the CAPM, and it has been said that due to the

observability of the true market portfolio, the CAPM might not be empirically testable.

The efficient frontier:

The CAPM assumes that the risk-return profile of a portfolio can be optimized – an optimal

portfolio displays the lowest possible level of risk for its level of return. Additionally, since

44

each additional asset introduced into a portfolio further diversifies the portfolio, the optimal

portfolio must comprise every asset, with each asset value-weighted to achieve the above.

All such optimal portfolios, i.e., one for each level of return, comprise the efficient frontier.

A line created from the risk-reward graph, comprised of optimal portfolios.

The optimal portfolios plotted along the curve have the highest expected return possible

for the given amount of risk.

Because the unsystematic risk is diversifiable, the total risk of a portfolio can be viewed as

beta.

Note 1: The expected market rate of return is usually measured by looking at the arithmetic

average of historical risk free rates of return and not the current risk free rate of return.

Measuring the Expected Return and Standard Deviation of a Portfolio

The expected return on a portfolio is the weighted average of the returns of individual

assets, where each asset’s weight is determined by its weight in the portfolio.

The formula is:

E (Rp) = [WaXE(Ra)] + [WaXE(Ra)]

Where

E= is stands for expected

Rp= Return on the portfolio

Wa= Weight of asset n where n my stand for asset a, b…..etc

Ra= Return on asset n where n may stand for asset a, b…..etc

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The portfolio standard deviation(σp) measure the risk associated with the expected return of

the portfolio.

The formula is σp=√Wa2σ2+ Wa

2σ2+2WaWbrabσaσb

The term rab represents the correlation between the returns of investments a and b. The

correlation coefficient, r, will always reduce the portfolio standard deviation as long as it is

less than +1.00.

Portfolio diversification:

Diversification occurs when different assets make up a portfolio. The benefit of

diversification is risk reduction; the extent of this benefit depends upon how the returns of

various assets behave over time. The market rewards diversification. We can lower risk

without sacrificing expected return, and/or we can increase expected return without having

to assume more risk. Diversifying among different kinds of assets is called asset allocation.

The diversification can either be vertical or horizontal.

In vertical diversification a portfolio can have scripts of different companies within the same

industry. In horizontal diversification one can have different scripts chosen from different

industries.

An important way to reduce the risk of investing is to diversify your investments.

Diversification is akin to “not putting all your eggs in one basket.”

For example: If portfolio only consisted of stocks of technology companies, it would likely

face a substantial loss in value if a major event adversely affected the technology industry.

There are different ways to diversify a portfolio whose holdings are concentrated in one

industry. We can invest in the stocks of companies belonging to other industry groups. We

can allocate our portfolio among different categories of stocks, such as growth, value, or

income stocks. We can include bonds and cash investments in our asset-allocation

decisions. We can also diversify by investing in foreign stocks and bonds.

46

Diversification requires us to invest in securities whose investment returns do not

move together. In other words, the investment returns have a low correlation. The

correlation coefficient is used to measure the degree to which returns of two securities are

related as we increase the number of securities in our portfolio, we reach a point where

likely diversified as much as reasonably possible. Diversification should neither be too

much or too less. It should be adequate according to the size of the portfolio.

The Efficient Frontier and Portfolio Diversification

y

Average Efficient Frontier

Annual

Rate of

return

Standard deviation

The graph on the shows how volatility increases the risk of loss of principal, and how this

risk worsens as the time horizon shrinks. So all other things being equal, volatility is

minimized in the portfolio.

If we graph the return rates and standard deviations for a collection of securities, and for all

portfolios we can get by allocating among them. Markowitz showed that we get a region

bounded by an upward-sloping curve, which he called the efficient frontier.

It’s clear that for any given value of standard deviation, we would like to choose a portfolio

that gives you the greatest possible rate of return; so we always want a portfolio that lies up

along the efficient frontier, rather than lower down, in the interior of the region. This is the

first important property of the efficient frontier: it’s where the best portfolios are.

47

50/50 Mix of securities 1 and 2

Security 2

Security 1

The second important property of the efficient frontier is that it’s curved, not straight.

If we take a 50/50 allocation between two securities, assuming that the year-to-year

performance of these two securities is not perfectly in sync – that is, assuming that the great

years and the lousy years for Security I don’t correspond perfectly to the great years and

lousy years for Security 2, but that their cycles are at least a little off – then the standard

deviation of the 50/50 allocation will be less that the average of the standard deviations of

the two securities separately. Graphically, this stretches the possible allocations to the left

of the straight line joining the two securities.

THE FOUR PILLARS OF DIVERSIFICATION:

a. The yield provided by an investment in portfolio of assets will be closer to the

Mean Yield than an investment in a single asset.

b. When the yields are independent – most yields will be concentrated around the

Mean.

c. When all yields react similarly – the portfolio’s variance will equal the variance of

its underlying assets.

d. If the yields are dependent – the portfolio’s variance will be equal to or less than

the lowest.

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Market portfolio:

The efficient frontier is a collection of portfolios, each one optimal for a given amount of

risk. A quantity known as the Sharpe ratio represents a measure of the amount of additional

return (above the risk-free rate) a portfolio provides compared to the risk it carries. The

portfolio on the efficient frontier with the highest Sharpe Ratio is known as the market

portfolio, or sometimes the super-efficient portfolio.

This portfolio has the property that any combination of it and the risk-free asset will

produce a return that is above the efficient frontier – offering a larger return for a given

amount of risk than a portfolio of risky assets on the frontier would.

MARKET PORTFOLIO

EFFICIENT FRONTIER

RISK-FREE ASSET

PORTFOLIO PERFORMANCE EVALUATION:

A 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.

Evaluation has to take into account:

Rate of returns, or excess return over risk free rate.

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Level of risk both systematic (beta) and unsystematic and residual risks through

proper diversification.

Some of the models used to evaluate portfolio performance are:

o Sharpe’s ratio

o Treynor’s ratio

o Jensen’s alpha

Sharpe’s Ratio:

A ratio developed by Nobel Laureate William F. Sharpe to measure risk-adjusted

performance. It is calculated by subtracting the risk-free rate from the rate of return for a

portfolio and dividing the result by the standard deviation of the portfolio returns.

The Sharpe ratio tells us whether the returns of a portfolio are due to smart investment

decisions or a result of excess risk. This measurement is very useful because although one

portfolio or fund can reap higher returns than its peers, it is only a good investment if those

higher returns do not come with too much additional risk. The greater a portfolio’s Sharpe

ratio, the better its risk-adjusted performance has been.

Treynor’s ratio:

The Treynor ratio is a measurement of the returns earned in excess of that which could

have been earned on a risk less investment.

The Treynor ratio is also called reward-to-volatility ratio. It relates excess return over the

risk-free rate to the additional risk taken; however systematic risk instead of total risk is

used. The higher the Treynor ratio, the better is the performance under analysis.

Treynor’s ratio = (Average Return of the Portfolio – Average Return of the Risk-Free Rate)

/Beta of the Portfolio

Like the Share ratio, the treynor ratio (T) does not quantify the value added, if any, of active

portfolio management. It is a ranking criterion only. A ranking of portfolios based on the

50

Treynor Ratio is only useful if the portfolios under consideration are sub-portfolios of a

broader, fully diversified portfolio. If this is not the case, portfolios with identical systematic

risk, but different total risk, will be rated the same.

Jensen’s alpha:

An alternative method of ranking portfolio management is Jensen’s alpha, which quantifies

the added return as the excess return above the security market line in the capital asset

pricing model. Jensen’s alpha (or Jensen’s Performance Index) is used to determine the

excess return of a stock, other security, or portfolio over the security’s required rate of

return as determined by the Capital Asset Pricing Model.

This model is used to adjust for the level of beta risk, so that riskier securities are expected

to have higher returns. The measure was first used in the evaluation of mutual fund

managers by Michael Jeans in the 1970’s.

To calculate alpha, the following inputs are needed:

The realized return (on the portfolio),

The market return,

The risk-free rate of return, and

The beta of the portfolio.

Rjt-Rft=αj+βj(RMt-Rft)

Where

Rjt = average return on portfolio j for period of‘t’

Rft = risk free rate of return for period of‘t’

αj=intercept that measures the forecasting ability to the manager

βj=systematic risk measure

RMt=average return on the market portfolio ‘t’

51

Portfolio management in India:

In India, portfolio management is still in its infancy. Barring a few Indian banks, and foreign

banks and UTI, no other agency had professional portfolio management until 1987. After the

setting up of public sector Mutual Funds, since 1987, professional portfolio management,

backed by competent research staff became the order of the day. After the success of

mutual funds in portfolio management, a number of brokers and investment consultants

some of whom are also professionally qualified have become portfolio managers. They have

managed the funds of clients on both discretionary and non-discretionary basis.

The recent CBI probe into the operations of many market dealers has revealed the

unscrupulous practices by banks, dealers has revealed the unscrupulous practices by banks,

dealers and brokers in their portfolio operations. The SEBI has then imposed stricter rules,

which included their registration, code of conduct and minimum infrastructure, experience

and expertise etc.

The guidelines of SEBI are in the direction of making portfolio management a responsible

professional service to be rendered by experts in the field.

PORTFOLIO ANALYSIS:

Portfolio analysis includes portfolio construction, selection of securities, revision of portfolio

evaluation and monitoring the performance of the portfolio. All these are part of subject of

portfolio management which is a dynamic concept. Individual securities have risk-return

characteristics of their own. Portfolios, which are combinations of securities may or may

not take on the aggregate characteristics of their individual’s parts.

Portfolio analysis considers the determination of future risk and return in holding

various blends of individual securities. As we know that expected return from individual

securities carries some degree of risk. 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

52

will give a beneficial result if they are grouped in manner to secure higher return after taking

into consideration the risk element.

There are two approaches in construction of the portfolio of securities. They are

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 for 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. Determining the objectives of the portfolio

b. 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.

53

CHAPTER-V

DATA ANALYSIS AND INTERPRETATION

54

CONSTRUCTION OF THE STUDY

The purpose of the study is to find out at what percentage of investment

should be invested between two companies on the basis of risk and return of each security

in comparison. These percentages help in allocating the funds available for investment in

risky portfolios.

IMPLEMENTATION OF STUDY

For implementing the study, TEN securities or stocks constituting the NIFTY

Market are selected of one month closing share movement prices data from NSE Market

Tracker dated from 12 May-June 02-2013 to .Those are

BHARATHI AIRTEL

BHEL

INFOSYS

ITC Limited

NTPC

ONGC

RANBAXY

SAIL

SBI

TATA MOTORS

In order to know the risk & return of the stock or security, we use the different formulae

which are given below.

METHODOLOGY OF STUDY

For implementing the study, of securities or stocks consisting the nifty market are selected

of one month opening and closing share movement price date from NSE on date.

55

R = ClosingPrice−PreviousClosing Price

PreviousClosingPrice ×100

To know the average (R) the following formula has been used

Average (R’) = ∑ Rn

The next step is to know the risk of the stock or security; the following formula is given

below.

Std.dev = √Variancen

Variance = 1n−1∑ (R−R' )2

t=1

Where

(R-R’) = squares of different between sample and mean.

n = number of sample observations.

After that, the correlation of the securities is calculated by using the following formula;

Corrélation Coefficient (rAB) = CovABσ Aσ B

Co-variance (COVAB) = 1n∑ (RA−R 'A )(RB¿−R 'B)

t=1¿

Where,

(RA-R’A) (RB-R’B) = combined deviations of A&B.

(σ A) (σ B) = Standard Deviations of A&B

COVAB = Covariance between A&B

n= no of observations.

56

The next step would be the construction of the optimal portfolio on the basis of what

percentage of investment should be invested when two securities and stocks are combined

ie, calculations of assets portfolio weights by using minimum equation, which is given below

W A = σB(σ B−r AB σ A)

σ A2 +σB

2 −2 r AB σBσ B

W B=1−W A

Where W A = proportion of investment in A

W B= proportion of investment in B

The next and final step is to calculate the portfolio risk (combined risk) that shows how

much is reduced by combining two stocks or securities by using this formula.

FORMULA:

σ P = √σ A2 W A2 +σ B

2W B2 +2 rABσ A σBW AW B

Where,

σ P = Portfolio Risk

σ A = Standard Deviation of security A

WA = Proportion of investment in security B

σ B = Standard Deviation of security of B

WB = proportion of investment in security B

r AB = Co-relation Coefficient between securities A&B.

57

4.1 MOVEMENT OF PRICES OF BHARATHI AIRTEL

Symbol

Date

SHARE

Prev

Close

Close

Price Return Avg. Diff D2

BHARTIARTL 16/05/13 345.6 345.35 -0.07234 0.208515 -0.28086 0.078882

BHARTIARTL 17/05/13 345.35 348.85 1.013465 0.208515 0.80495 0.647945

BHARTIARTL 18/05/13 348.85 347.65 -0.34399 0.208515 -0.55251 0.305267

BHARTIARTL 19/05/13 347.65 338.45 -2.64634 0.208515 -2.85486 8.150226

BHARTIARTL 20/05/13 338.45 331 -2.20121 0.208515 -2.40973 5.806799

BHARTIARTL 23/05/13 331 332.05 0.317221 0.208515 0.108706 0.011817

BHARTIARTL 24/05/13 332.05 335.15 0.933594 0.208515 0.725079 0.52574

BHARTIARTL 25/05/13 335.15 339.70 1.357601 0.208515 1.149086 1.320399

BHARTIARTL 27/05/13 339.70 344.30 1.354136 0.208515 1.145621 1.312447

BHARTIARTL 30/05/13 344.30 335.00 -2.70113 0.208515 -2.90965 8.466063

BHARTIARTL 01/06/13 335.00 332.85 -0.64179 0.208515 -0.85031 0.723027

BHARTIARTL 02/06/13 332.85 343.25 3.124531 0.208515 2.916016 8.503149

BHARTIARTL 03/06/13 343.25 343.30 0.014567 0.208515 -0.19395 0.037617

BHARTIARTL 06/06/13 343.30 348.60 1.543839 0.208515 1.335324 1.78309

BHARTIARTL 07/06/13 348.60 341.90 -1.92197 0.208515 -2.13049 4.538988

BHARTIARTL 09/06/13 341.90 342.35 0.131617 0.208515 -0.0769 0.005914

BHARTIARTL 11/06/13 342.35 354.00 3.40295 0.208515 3.194435 10.20441

BHARTIARTL 13/06/13 354.00 357.45 0.974576 0.208515 0.766061 0.586849

58

BHARTIARTL 14/06/13 357.45 358.80 0.377675 0.208515 0.16916 0.028615

BHARTIARTL 15/06/13 358.80 359.35 0.153289 0.208515 -0.05523 0.00305

0.208515 53.0402

Calculation of Risk:

Risk = √∑ D2

n−1 = √∑ 53.0402

20−1

=1.6708

4.1. Graphical Representation of Bharathi Airtel

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

-4

-3

-2

-1

0

1

2

3

4

Return

Interpretation:

The above table shows the daily returns of BHARATHI AIRTEL for the month of

DEC2010.

The average Return is 0.208515 and Risk is 1.6708.

The Highest price for the month was on 15-06-2013 i.e., 359.35 and the lowest price

was on 20-05-2013 i.e., 331.

59

4.2. MOVEMENT OF SHARE PRICES OF BHEL

Symbol Date

Prev

Close

Close

Price Return Avg Diff D2

BHEL 16/05/13 2212.55 2238.65 1.179634 0.2931 0.886534 0.785943

BHEL 17/05/13 2238.65 2239.85 0.053604 0.2931 -0.2395 0.057358

BHEL 18/05/13 2239.85 2239.75 -0.00446 0.2931 -0.29756 0.088545

BHEL 19/05/13 2239.75 2226.80 -0.57819 0.2931 -0.87129 0.759145

BHEL 20/05/13 2226.80 2287.80 2.739357 0.2931 2.446257 5.984173

BHEL 23/05/13 2287.80 2340.30 2.294781 0.2931 2.001681 4.006727

BHEL 24/05/13 2340.30 2333.85 -0.27561 0.2931 -0.56871 0.323426

BHEL 25/05/13 2333.85 2318.00 -0.67914 0.2931 -0.97224 0.945242

BHEL 27/05/13 2318.00 2308.90 -0.39258 0.2931 -0.68568 0.470157

BHEL 30/05/13 2308.90 2314.00 0.220884 0.2931 -0.07222 0.005215

BHEL 01/06/13 2314.00 2322.85 0.382455 0.2931 0.089355 0.007984

BHEL 02/06/13 2322.85 2323.90 0.045203 0.2931 -0.2479 0.061453

BHEL 03/06/13 2323.90 2303.55 -0.87568 0.2931 -1.16878 1.366054

BHEL 06/06/13 2303.55 2285.95 -0.76404 0.2931 -1.05714 1.117541

BHEL 07/06/13 2285.95 2291.40 0.238413 0.2931 -0.05469 0.002991

BHEL 09/06/13 2291.40 2296.95 0.24221 0.2931 -0.05089 0.00259

BHEL 11/06/13 2296.95 2304.550.330874

0.29310.037774 0.001427

BHEL 13/06/13 2304.55 2337.60 1.434119 0.2931 1.141019 1.301925

60

BHEL 14/06/13 2337.60 2323.70 -0.59463 0.2931 -0.88773 0.788059

BHEL 15/06/13 2323.70 2343.80 0.865 0.2931 0.5719 0.327069

0.2931 18.4030

Calculation of Risk:

Risk =√∑ D2

n−1 =√ 18.4030

20−1

=0.9842

4.2. Graphical Representation of BHEL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

3

Return

61

Interpretation:

The above table shows the daily returns of BHARATH HEAVY ELECTRONICS LIMITED

for the month of DEC2010.

The average Return is 0.2931 and Risk is 0.9842.

The Highest price for the month was on 15/06/13 i.e., 2343.80 and the lowest price

was on 19/05/13 i.e., 2226.80.

62

4.3.Statement showing covariance of BHARATIARTL and BHEL

Date

Retur

n R1 D1 D12 Date

Retu

rn R2 D2 D22 D1D2

16/05/13

-0.07

0.2

0 -0.28 0.07

6/12/12

1.17

0.29

0.88 0.78 -0.25

17/05/13

1.013

0.2

0 0.80 0.64

7/12/12

0.05

0.29 -

0.23 0.05 -0.19

18/05/13

-0.34

0.2

0 -0.55 0.30

8/12/12

-0.04

0.29 -

0.29 0.08 0.16

19/05/13

-2.64

0.2

0 -2.85 8.15

9/12/12

-0.57

0.29 -

0.87 0.75 2.49

20/05/13

-2.20

0.2

0 -2.40 5.80

10/12/12

2.73

0.29

2.44 5.98 -5.89

23/05/13

0.31

0.2

0 0.10 0.01

13/12/12

2.29

0.29

2 4 0.22

24/05/13

0.93

0.2

0 0.72 0.52

14/12/12

-0.27

0.29 -

0.56 0.32 -0.41

25/05/13

1.35

0.2

0 1.14 1.32

15/12/12

-0.67

0.29 -

0.97 0.94 -1.12

27/05/13

1.35

0.2

0 1.14 1.31

16/12/12

-0.39

0.29 -

0.68 0.47 -0.78

30/05/13

-2.70

0.2

0 -2.90 8.46

20/12/12

0.22

0.29 -

0.07

0.00

5 0.21

01/06/13

-0.64

0.2

0 -0.85 0.72

21/12/12

0.38

0.29

0.08

0.00

7 -0.07

02/06/13

3.12

0.2

0 2.91 8.50

22/12/12

0.04

0.29 -

0.24 0.06 -0.72

03/06/13

0.01

0.2

0 -0.19 0.03

23/12/12

-0.87

0.29 -

1.16 1.36 0.22

06/06/13

1.54

0.2

0 1.33 1.78

24/12/12

-0.76

0.29 -

1.05 1.11 -1.41

63

07/06/13

-1.92

0.2

0 -2.13 4.53

27/12/12

0.23

0.29 -

0.05

0.00

2 0.11

09/06/13

0.13

0.2

0 -0.07

0.00

5

28/12/12

0.24

0.29 -

0.05

0.00

2 0.003

11/06/13

3.40

0.2

0 3.19 10.2

29/12/12

0.33

0.29

0.03

0.00

1 0.12

13/06/13

0.97

0.2

0 0.76 0.58

30/12/12

1.4

0.29

1.14 1.30 0.87

14/06/13

0.37

0.2

0 0.16

0.02

8

31/12/12

-0.59

0.29

-0.8 0.78 -0.15

15/06/13

0.15

0.2

0 -0.05

0.00

3

3/1/13 0.86

5

0.29

0.57 0.32 -0.03

53.4 18.4

030

-6.61

Calculation of Correlation Coefficient:

Correlation Coefficient of BHARATHI AIRTEL and BHEL = r1, 2

= ∑ D1D2

D22

=−6.61718.4030

= - 0.35

Construction of Portfolio:

Average return of AIRTEL= R1 = 0.2085

Average return of BHEL = R2 = 0.2931

Risk of AIRTEL= σ1 =1.67

64

Risk of BHEL = σ2 =0.98

Weight of AIRTEL = W1 = 0.5

Weight of BHEL= W2 = 0.5

PORTFOLIO RETURN = W1 R1+ W2 R2

= (0.5) (0.2085) + (0.5) (0.2931)

=0.10425+0.14655

=0.2508

PORTFOLIO RISK = √W 12σ1

2+W 22σ2

2+2W 1W 2σ 1σ 2r1,2

√(0.52)(1.672)+(0.52)(0.982)+2(0.5)(0.5)(1.67)(0.98)(−0.35)

=√0.70+0.24−0.28

=1.898

65

4.4. MOVEMENT OF SHARE PRICES OF INFOSYS

Symbol Date

Prev

Close

Close

Price Return Avg Diff D2

INFOSYSTCH 16/05/13 3125 3143.4 0.5888 0.5119 0.0769 0.005914

INFOSYSTCH 17/05/13 3143.4 3178.6 1.119807 0.5119 0.607907 0.36955

INFOSYSTCH 18/05/13 3178.6 3131.75 -1.47392 0.5119 -1.98582 3.943478

INFOSYSTCH 19/05/13 3131.75 3,151.45 0.629041 0.5119 0.117141 0.013722

INFOSYSTCH 20/05/13 3,151.45 3144.25 -0.22847 0.5119 -0.74037 0.548142

INFOSYSTCH 23/05/13 3144.25 3145.30 0.033394 0.5119 -0.47851 0.228968

INFOSYSTCH 24/05/13 3145.30 3158.65 0.424443 0.5119 -0.08746 0.007649

INFOSYSTCH 25/05/13 3158.65 3203.45 1.418327 0.5119 0.906427 0.821611

INFOSYSTCH 27/05/13 3203.45 3293.30 2.804789 0.5119 2.292889 5.257338

INFOSYSTCH 30/05/13 3293.30 3349.95 1.720159 0.5119 1.208259 1.45989

INFOSYSTCH 01/06/13 3349.95 3329.25 -0.61792 0.5119 -1.12982 1.276492

INFOSYSTCH 02/06/13 3329.25 3332.50 0.09762 0.5119 -0.41428 0.171628

INFOSYSTCH 03/06/13 3332.50 3367.9 1.062266 0.5119 0.550366 0.302902

INFOSYSTCH 06/06/13 3367.9 3370.15 0.066807 0.5119 -0.44509 0.198108

INFOSYSTCH 07/06/13 3370.15 3376.90 0.200288 0.5119 -0.31161 0.097102

INFOSYSTCH 09/06/13 3376.90 3382.65 0.170275 0.5119 -0.34163 0.116708

INFOSYSTCH 11/06/13 3382.65 3404.90 0.657768 0.5119 0.145868 0.021278

INFOSYSTCH 13/06/13 3404.90 3446.95 1.234985 0.5119 0.723085 0.522852

66

INFOSYSTCH 14/06/13 3446.95 3442.75 -0.12185 0.5119 -0.63375 0.401635

INFOSYSTCH 15/06/13 3442.75 3458.35 0.453126 0.5119 -0.05877 0.003454

0.5119 15.7684

Calculation of Risk:

Risk =√∑ D2

n−1 =√ 15.7684

20−1

=0.9109

4.3. Graphical Representation Infosys

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

-2

-1

0

1

2

3

4

Return

Interpretation:

67

The above table shows the daily returns of INFOSYS for the month of DEC2010.

The average Return is 0.5119 and Risk is 0.9109.

The Highest price for the month was on 15/06/13i.e., 3458.35and the lowest price

was on 18/05/13 i.e., 3131.75.

4.5. MOVEMENT OF SHARE PRICES OF ITC Limited

68

Symbol Date Prev Close

Close

Price Return Avg Diff D2

ITC 16/05/13 171.3 169.05 -1.31349 0.105867 -1.41935 2.014561

ITC 17/05/13 169.05 168.2 -0.50281 0.105867 -0.60868 0.370488

ITC 18/05/13 168.2 166.75 -0.86207 0.105867 -0.96794 0.9369

ITC 19/05/13 166.75 167.30 0.329835 0.105867 0.223968 0.050162

ITC 20/05/13 167.30 170.30 1.793186 0.105867 1.687319 2.847044

ITC 23/05/13 170.30 167.15 -1.84968 0.105867 -1.95554 3.824153

ITC 24/05/13 167.15 168.40 0.747831 0.105867 0.641964 0.412118

ITC 25/05/13 168.40 167.00 -0.83135 0.105867 -0.93722 0.878383

ITC 27/05/13 167.00 168.05 0.628743 0.105867 0.522875 0.273399

ITC 30/05/13 168.05 166.95 -0.65457 0.105867 -0.76043 0.57826

ITC 01/06/13 166.95 167.15 0.119796 0.105867 0.013929 0.000194

ITC 02/06/13 167.15 167.40 0.149566 0.105867 0.043699 0.00191

ITC 03/06/13 167.40 166.90 -0.29869 0.105867 -0.40455 0.163663

ITC 06/06/13 166.90 169.90 1.797484 0.105867 1.691616 2.861566

ITC 07/06/13 169.90 169.75 -0.08829 0.105867 -0.19415 0.037696

ITC 09/06/13 169.75 171.20 0.854197 0.105867 0.74833 0.559998

ITC 11/06/13 171.20 174.20 1.752336 0.105867 1.646469 2.710866

ITC 13/06/13 174.20 174.55 0.200918 0.105867 0.095051 0.009035

ITC 14/06/13 174.55 174.65 0.05729 0.105867 -0.04858 0.00236

ITC 15/06/13 174.65 174.80 0.085886 0.105867 -0.01998 0.000399

69

0.105867 18.5331

Calculation of Risk:

Risk = √∑ D2

n−1 = √ 18.5331

20−1

=0.9876

4.4. Graphical Representation of ITC limited

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

-2.5

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

Return

Interpretation:

The above table shows the daily returns of ITC LIMITED for the month of DEC2010.

The average Return is 0.105867 and Risk is 0.9876.

The Highest price for the month was on 15/06/13i.e., 174.80 and the lowest price

was on 18/05/13 i.e., 166.75.

4.6. Statement showing covariance of INFOSYS and ITC

Date Return R1 D1 D12 Date Return R2 D2 D2

2 D1D2

70

16/05/13 0.59 0.51 0.08 0.005 6/12/12 -1.31 0.10 -1.42 2.01 -0.10915

17/05/13 1.12 0.51 0.60 0.37 7/12/12 -0.50 0.10 -0.61 0.37 -0.37002

18/05/13 -1.47 0.51 -1.98 3.94 8/12/12 -0.86 0.10 -0.97 0.93 1.922155

19/05/13 0.63 0.51 0.12 0.013 9/12/12 0.33 0.10 0.22 0.05 0.026236

20/05/13 -0.23 0.51 -0.74 0.55 10/12/12 1.79 0.10 1.69 2.88 -1.24924

23/05/130.033

0.51-0.48 0.23

13/12/12-1.85

0.10-1.96 3.82 0.935745

24/05/13 0.42 0.51 -0.08 0.007 14/12/12 0.75 0.10 0.64 0.41 -0.05615

25/05/13 1.42 0.51 0.91 0.82 15/12/12 -0.83 0.10 -0.94 0.88 -0.84952

27/05/13 2.80 0.51 2.29 5.26 16/12/12 0.63 0.10 0.52 0.27 1.198894

30/05/13 1.72 0.51 1.21 1.46 20/12/12 -0.65 0.10 -0.76 0.58 -0.9188

01/06/13 -0.62 0.51 -1.13 1.28 21/12/12 0.12 0.10 0.013 0.000194 -0.01574

02/06/13 0.098 0.51 -0.41 0.17 22/12/12 0.15 0.10 0.043 0.00191 -0.0181

03/06/13 1.06 0.51 0.55 0.30 23/12/12 -0.30 0.10 -0.404 0.16 -0.22265

06/06/13 0.07 0.51 -0.45 0.2 24/12/12 1.79 0.10 1.69 2.86 -0.75292

07/06/13 0.20 0.51 -0.31 0.1 27/12/12 -0.089 0.10 -0.19 0.037 0.060499

09/06/13 0.17 0.51 -0.34 0.12 28/12/12 0.85 0.10 0.75 0.56 -0.25565

11/06/13 0.66 0.51 0.14 0.02 29/12/12 1.75 0.10 1.64 2.71 0.240167

13/06/13 1.23 0.51 0.72 0.52 30/12/12 0.20 0.10 0.095 0.009 0.06873

14/06/13 -0.12 0.51 -0.63 0.40 31/12/12 0.056 0.10 -0.048 0.002 0.030788

15/06/13 0.45 0.51 -0.06 0.003 03/01/13 0.08 0.10 -0.019 0.0003 0.001174

71

18.5404 -0.3595

Calculation of Correlation Coefficient:

Correlation Coefficient of INFOSYS and ITC = r1,2

= ∑ D1D2

D22

= - 0.3595

18.5404

= - 0.02

Construction of Portfolio:

Average return of INFOSYS = R1 = 0.5119

Average return of ITC =R2 = 0.105867

Risk of INFOSYS = σ1 =0.9109

Risk of ITC = σ2 =0.9876

Weight of INFOSYS = W1 = 0.5

Weight of ITC = W2 = 0.5

PORTFOLIO RETURN = W1 R1+ W2 R2

= (0.5)(0.5119) + (0.5)(0..105867)

= 0.25595+0.0529335

=0.3088835

PORTFOLIO RISK = √W 12σ1

2+W 22σ2

2+2W 1W 2σ 1σ 2r1,2

72

√(0.52)(0.922)+(0.52)(0.992)+2(0.5)(0.5)(0.92)(0.99)(0.02)

= √0.21+0.25+0.0091

= 0.47

4.7. MOVEMENT OF SHARE PRICES OF NTPC

Symbol Date Prev Close

Close

Price Return Avg Diff D2

NTPC

16/05/1

3

185.15 187.05

1.026195 0.3574

0.66879

5

0.44728

7

NTPC

17/05/1

3

187.05 191.60

2.432505

0.3574 2.07510

5

4.30605

9

NTPC

18/05/1

3

191.60 190.95

-0.33925

0.3574

-0.69665

0.48531

9

NTPC

19/05/1

3

190.95 187.90

-1.59728

0.3574

-1.95468

3.82076

1

NTPC

20/05/1

3

187.90 192.40

2.394891

0.3574 2.03749

1

4.15136

9

NTPC

23/05/1

3

192.40 196.45

2.10499

0.3574

1.74759

3.05406

9

NTPC

24/05/1

3

196.45 199.50

1.552558

0.3574 1.19515

8

1.42840

2

NTPC

25/05/1

3

199.50 196.95

-1.2782

0.3574

-1.6356

2.67517

3

NTPC

27/05/1

3

196.95 197.95

0.507743

0.3574 0.15034

3

0.02260

3

73

NTPC

30/05/1

3

197.95 192.90

-2.55115

0.3574

-2.90855

8.45965

9

NTPC

01/06/1

3

192.90 191.85

-0.54432

0.3574

-0.90172

0.81310

5

NTPC

02/06/1

3

191.85 192.80

0.495179

0.3574 0.13777

9

0.01898

3

NTPC

03/06/1

3

192.80 195.75

1.530083

0.3574 1.17268

3

1.37518

5

NTPC

06/06/1

3

195.75 198.25

1.277139

0.3574 0.91973

9 0.84592

NTPC

07/06/1

3

198.25 197.00

-0.63052

0.3574

-0.98792 0.97598

NTPC

09/06/1

3

197.00 196.50

-0.25381

0.3574

-0.61121

0.37357

4

NTPC

11/06/1

3

196.50 197.90

0.712468

0.3574 0.35506

8

0.12607

3

NTPC

13/06/1

3

197.90 202.25

2.19808

0.3574

1.84068

3.38810

2

NTPC

14/06/1

3

202.25 200.65

-0.7911

0.3574

-1.1485

1.31905

3

NTPC

15/06/1

3 200.65

198.45

-1.09644

0.3574

-1.45384

2.11364

1

0.3574 40.20

Calculation of Risk:

74

Risk = √∑ D2

n−1 =√ 40.20

20−1

= 1.4545

4.5. Graphical Representation of NTPC

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

-3

-2

-1

0

1

2

3

Return

Interpretation:

The above table shows the daily returns of NTPC for the month of DEC2010.

The average Return is 0.3574 and Risk is 1.4545.

The Highest price for the month was on 13/06/13i.e., 202.25 and the lowest price

was on 16/05/13i.e., 187.05.

75

4.8. MOVEMENT OF SHARE PRICES OF ONGC

Symbol Date

Prev

Close

Close

Price Return Avg Diff D2

ONGC

16/05/13 1319.6 1320.5 0.06820

2 -0.09979

0.16799

2

0.02822

1

ONGC 17/05/13 1320.5 1337.95 1.32146

9 -0.09979

1.42125

9

2.01997

8

ONGC 18/05/13 1337.95 1345.3 0.54934

8 -0.09979

0.64913

8 0.42138

ONGC 19/05/13 1345.3 1321.60

-1.76169 -0.09979 -1.6619

2.76190

8

76

ONGC 20/05/13 1321.60 1322.00 0.03026

6 -0.09979

0.13005

6

0.01691

5

ONGC 23/05/13 1322.00 1328.10 0.46142

2 -0.09979

0.56121

2

0.31495

9

ONGC 24/05/13 1328.10 1331.90 0.28612

3 -0.09979

0.38591

3

0.14892

9

ONGC 25/05/13 1331.90 1323.75

-0.61191 -0.09979 -0.51212

0.26226

5

ONGC 27/05/13 1323.75 1304.00

-1.49197 -0.09979 -1.39218

1.93817

5

ONGC 30/05/13 1304.00 1304.45 0.03450

9 -0.09979

0.13429

9

0.01803

6

ONGC 01/06/13 1304.45 1301.00

-0.26448 -0.09979 -0.16469

0.02712

3

ONGC 02/06/13 1301.00 1305.20 0.32282

9 -0.09979

0.42261

9

0.17860

6

ONGC 03/06/13 1305.20 1300.25

-0.37925 -0.09979 -0.27946

0.07809

9

ONGC 06/06/13 1300.25 1294.75

-0.423 -0.09979 -0.32321

0.10446

2

ONGC 07/06/13 1294.75 1299.55 0.37072

8 -0.09979

0.47051

8

0.22138

7

ONGC 09/06/13 1299.55 1289.90

-0.74256 -0.09979 -0.64277

0.41315

9

ONGC 11/06/13 1289.90 1303.35 1.04271

6 -0.09979

1.14250

6

1.30532

1

77

ONGC 13/06/13 1303.35 1294.60

-0.67135 -0.09979 -0.57156

0.32667

7

ONGC 14/06/13 1294.60 1288.20

-0.49436 -0.09979 -0.39457

0.15568

6

ONGC 15/06/13 1288.20 1292.80 0.35708

7 -0.09979

0.45687

7

0.20873

7

-0.09979 10.95

Calculation of Risk:

Risk = √∑ D2

n−1 =√ 10.95

20−1

=0.759

4.6. Graphical Representation of ONGC

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

-2

-1.5

-1

-0.5

0

0.5

1

1.5

Return

Interpretation:

78

The above table shows the daily returns of ONGC for the month of DEC2010.

The average Return is -0.09979 and Risk is 0.759.

The Highest price for the month was on 18/05/13 i.e., 1345.3 and the lowest price

was on 14/06/13 i.e., 1288.2.

4.9. Statement showing covariance of NTPC and ONGC

Date

Retu

rn R1 D1 D12 Date Return R2 D2 D2

2 D1D2

16/05/13

1.02

0.35

0.66 0.44

6/12/12

0.07

-

0.09 0.16 0.02 0.11

17/05/13

2.43

0.35

2.07 4.30

7/12/12

1.32

-

0.09 1.42 2.01 2.94

18/05/13

-0.33

0.35 -

0.69 0.48

8/12/12

0.55

-

0.09 0.64 0.42

-

0.45

19/05/13

-1.59

0.35 -

1.95 3.82

9/12/12

-1.77

-

0.09

-

1.66 2.76 3.24

20/05/13

2.39

0.35

2.03 4.15

10/12/12

0.03

-

0.09 0.13 0.016 0.26

23/05/13

2.10

0.35

1.74 3.05

13/12/12

0.46

-

0.09 0.56 0.31 0.98

24/05/13

1.55

0.35

1.19 1.42

14/12/12

0.29

-

0.09 0.38 0.15 0.46

25/05/13

-1.27

0.35 -

1.63 2.67

15/12/12

-0.61

-

0.09

-

0.51 0.26 0.83

27/05/13

0.50

0.35

0.15 0.02

16/12/12

-1.49

-

0.09

-

1.39 1.94 -0.2

30/05/13

-2.55

0.35 -

2.90 8.45

20/12/12

0.03

-

0.09 0.13 0.02

-

0.39

01/06/13

-0.54

0.35

-0.0 0.81

21/12/12

-0.26

-

0.09

-

0.16 0.03 0.14

02/06/13

0.49

0.35

0.13 0.01

22/12/12

0.32

-

0.09 0.42 0.18 0.05

79

03/06/13

1.53

0.35

1.17 1.37

23/12/12

-0.37

-

0.09

-

0.28 0.07

-

0.32

06/06/13

1.27

0.35

0.91 0.84

24/12/12

-0.42

-

0.09

-

0.32 0.10

-

0.29

07/06/13

-0.63

0.35 -

0.98 0.97

27/12/12

0.37

-

0.09 0.47 0.22

-

0.46

09/06/13

-0.25

0.35 -

0.61 0.37

28/12/12

-0.74

-

0.09

-

0.64 0.41 0.39

11/06/13

0.71

0.35

0.35 0.12

29/12/12

1.04

-

0.09 1.14 1.30 0.40

13/06/13

2.19

0.35

1.84 3.38

30/12/12

-0.67

-

0.09

-

0.57 0.32

-

1.05

14/06/13

-0.79

0.35 -

1.14 1.31

31/12/12

-0.49

-

0.09

-

0.39 0.15 0.45

15/06/13

-1.09

0.35 -

1.45 2.11

03/01/13

0.35

-

0.09 0.45 0.20

-

0.66

0.35 40.20 -1.995 10.95 6.4

Calculation of Correlation Coefficient:

Correlation Coefficient of NTPC and ONGC = r1, 2

= ∑ D1D2

D22

=6.454810.95

= 0.5894

Construction of Portfolio:

80

Average return of NTPC = R1 = 0.3574

Average return of ONGC = R2 = -0.09979

Risk of NTPC = σ1 = 1.4545

Risk of ONGC = σ2 = 0.759

Weight of NTPC = W1 = 0.5

Weight of ONGC = W2 = 0.5

PORTFOLIO RETURN = W 1 R1 + W 2 R2

= (0.5) (0.3574) + (0.5) (-0.09979)

= 0.1787-0.049895

= 1.10675

PORTFOLIO RISK = √W 12σ1

2+W 22σ2

2+2W 1W 2σ 1σ 2r1,2

√(0.52)(1.45452)+(0.52)(0.7592)+2(0.5)(0.5)(1.4545)(0.759)(0.5894)

=√0.53+0.14+0.33

= 0.99

81

4.10. MOVEMENT OF SHARE PRICES OF RANBAXY

Symbol Date

Prev

Close

Close

Price Return Avg Diff D2

RANBAXY

16/05/1

3

574.15 568.1

5 -1.045 0.247 -1.29241 1.670336

RANBAXY 17/05/1

3

568.15 560.1

5 -1.408 0.247 -1.65547 2.740583

RANBAXY 18/05/1

3

560.15 567.7

1.347 0.247 1.100461 1.211015

RANBAXY 19/05/1

3

567.7 546.9

5 -3.65 0.247 -3.90249 15.22944

RANBAXY 20/05/1

3

546.95 553.7

0 1.234 0.247 0.986725 0.973626

RANBAXY 23/05/1

3

553.70 545.7

0 -1.444 0.247 -1.69222 2.8636

RANBAXY 24/05/1

3

545.70 561.5

5 2.904 0.247 2.657134 7.060364

RANBAXY 25/05/1

3

561.55 550.9

0 -1.89 0.247 -2.14393 4.596428

RANBAXY 27/05/1

3

550.90 547.0

0 -0.707 0.247 -0.95532 0.912644

RANBAXY 30/05/1

3

547.00 539.8

5 -1.307 0.247 -1.55452 2.416537

82

RANBAXY 01/06/1

3

539.85 559.1

0 3.565 0.247 3.318414 11.01187

RANBAXY 02/06/1

3

559.10 570.5

5 2.047 0.247 1.800542 3.241953

RANBAXY 03/06/1

3

570.55 570.7

0 0.026 0.247 -0.2211 0.048886

RANBAXY 06/06/1

3

570.70 573.2

5 0.44 0.247 0.199428 0.039771

RANBAXY 07/06/1

3

573.25 574.8

5 0.27 0.247 0.031719 0.001006

RANBAXY 09/06/1

3

574.85 589.9

5 2.62 0.247 2.37938 5.661451

RANBAXY 11/06/1

3

589.95 589.2

5 -0.11 0.247 -0.36605 0.13399

RANBAXY 13/06/1

3

589.25 590.4

0 0.19 0.247 -0.05223 0.002728

RANBAXY 14/06/1

3

590.40 598.6

5 1.397 0.247 1.149966 1.322422

RANBAXY 15/06/1

3

598.65 601.4

0 0.459 0.247 0.211975 0.044933

0.247 61.18

Calculation of Risk:

Risk =√∑ D2

n−1 =√ 61.18

20−1

= 1.79

83

4.7. Graphical Representation of RANBXY

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

-5

-4

-3

-2

-1

0

1

2

3

4

Return

Interpretation:

The above table shows the daily returns of RANBAXY for the month of DEC2010.

The average Return is 0.247 and Risk is 1.79.

The Highest price for the month was on 15/06/13 i.e., 601.40 and the lowest price

was on 30/05/13 i.e., 538.95.

4.11. MOVEMENT OF SHARE PRICES OF SAIL

Symbol Date Prev Close

Close

Price Return Avg Diff D2

SAIL 16/05/13 182.80 184.05 0.683807 0.17 0.513807 0.263998

SAIL 17/05/13 184.05 183.4 -0.35316 0.17 -0.52316 0.273702

SAIL 18/05/13 183.4 178.05 -2.91712 0.17 -3.08712 9.530316

SAIL 19/05/13 178.05 174.20 -2.16231 0.17 -2.33231 5.439688

SAIL 20/05/13 174.20 176.50 1.320321 0.17 1.150321 1.323239

84

SAIL 23/05/13 176.50 180.65 2.351275 0.17 2.181275 4.75796

SAIL 24/05/13 180.65 182.25 0.885691 0.17 0.715691 0.512213

SAIL 25/05/13 182.25 178.50 -2.05761 0.17 -2.22761 4.96226

SAIL 27/05/13 178.50 188.25 5.462185 0.17 5.292185 28.00722

SAIL 30/05/13 188.25 192.10 2.045153 0.17 1.875153 3.516198

SAIL 01/06/13 192.10 194.85 1.431546 0.17 1.261546 1.591498

SAIL 02/06/13 194.85 195.30 0.230947 0.17 0.060947 0.003715

SAIL 03/06/13 195.30 186.20 -4.6595 0.17 -4.8295 23.32405

SAIL 06/06/13 186.20 184.80 -0.75188 0.17 -0.92188 0.849862

SAIL 07/06/13 184.80 177.35 -4.03139 0.17 -4.20139 17.65164

SAIL 09/06/13 177.35 176.70 -0.36651 0.17 -0.53651 0.28784

SAIL 11/06/13 176.70 180.15 1.952462 0.17 1.782462 3.17717

SAIL 13/06/13 180.15 181.25 0.610602 0.17 0.440602 0.19413

SAIL 14/06/13 181.25 182.50 0.689655 0.17 0.519655 0.270041

SAIL 15/06/13 182.50 187.95 2.986301 0.17 2.816301 7.931553

0.17 113.86

Calculation of Risk:

Risk =√∑ D2

n−1 =√ 113.86

20−1

= 2.45

4.8. Graphical Representation of SAIL

85

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

-6

-4

-2

0

2

4

6

8

Return

Return

Interpretation:

The above table shows the daily returns of SAIL for the month of DEC2010.

The average Return is 0.17 and Risk is 2.45.

The Highest price for the month was on 02/06/13 i.e., 195.3 and the lowest price

was on 19/05/13 i.e., 174.2.

4.12. Statement showing covariance of Ranbaxy and SAIL

Date return R1 D1 D12 Date Return R2 D2 D2

2 D1D2

16/05/13 -1.04 0.24

7

-1.29 1.67 6/12/12 0.68 0.17 0.513 0.26 -0.6

17/05/13 -1.40 0.24

7

-1.65 2.74 7/12/12 -0.35 0.17 -0.52 0.27 0.8

18/05/13 1.34 0.24

7

1.100 1.21 8/12/12 -2.92 0.17 -3.08 9.53 -3.3

19/05/13 -3.65 0.24

7

-3.90 15.22 9/12/12 -2.16 0.17 -2.33 5.43 9.1

20/05/13 1.23 0.24 0.98 0.97 10/1/2/12 1.32 0.17 1.15 1.32 1.1

86

7

23/05/13 -1.44 0.24

7

-1.69 2.86 13/12/12 2.35 0.17 2.18 4.75 -3.6

24/05/13 2.90 0.24

7

2.65 7.06 14/12/12 0.88 0.17 0.71 0.51 1.9

25/05/13 -1.89 0.24

7

-2.14 4.59 15/12/12 -2.05 0.17 -2.22 4.96 4.7

27/05/13 -0.70 0.24

7

-0.95 0.91 16/12/12 5.46 0.17 5.29 28.00 -5.0

30/05/13 -1.30 0.24

7

-1.55 2.41 20/12/12 2.04 0.17 1.87 3.51 -2.9

01/06/13 3.56 0.24

7

3.31 11.01 21/12/12 1.43 0.17 1.26 1.591 4.1

02/06/13 2.047 0.24

7

1.80 3.24 22/12/12 0.23 0.17 0.06 0.003 0.1

03/06/13 0.02 0.24

7

-0.22 0.048 23/12/12 -4.65 0.17 -4.82 23.32 1

06/06/13 0.44 0.24

7

0.19 0.039 24/12/12 -0.75 0.17 -0.92 0.849 -0.1

07/06/13 0.27 0.24

7

0.032 0.001 27/12/12 -4.03 0.17 -4.20 17.65 -0.1

09/06/13 2.62 0.24

7

2.38 5.66 28/12/12 -0.36 0.17 -0.53 0.28 -1.2

11/06/13 -0.11 0.24

7

-0.36 0.13 29/12/12 1.95 0.17 1.78 3.17 -0.6

13/06/13 0.19 0.24

7

-0.05 0.0027 30/12/12 0.6 0.17 0.44 0.19 -0.02

14/06/13 1.39 0.24

7

1.14 1.32 31/12/12 0.68 0.17 0.51 0.27 0.5

15/06/13 0.45 0.24

7

0.21 0.044 03/01/13 2.98 0.17 2.81 7.93 0.5

87

Calculation of Correlation Coefficient:

Correlation Coefficient of RANBAXY and SAIL = r1, 2

= ∑ D1D 2

D22

=6.35

113.79

= 0.0558

Construction of Portfolio:

Average return of RANBAXY = R1 = 0.247

Average return of SAIL = R2 = 0.17

Risk of SAIL = σ1 = 2.45

Risk of RANBAXY = σ2 = 1.79

Weight of RANBAXY= W1 = 0.5

Weight of SAIL = W2 = 0.5

PORTFOLIO RETURN = W1 R1+ W2 R2

= (0.5) (O.247) + (0.5) (0.17)

= (0.1235) + (0.085)

=0.2085

PORTFOLIO RISK = √W 12σ1

2+W 22σ2

2+2W 1W 2σ 1σ 2r1,2

√(0.52)(2.452)+(0.52)(1.792)+2(0.5)(0.5)(2.45)(1.79)(0.0558)

= √1.5+0.80+0.122

88

= 2.422

4.13. MOVEMENT OF SHARE PRICES OF SBI

Symbol Date

Prev

Close

Close

Price Return Avg Diff D2

SBI 16/05/13 3070.75 2952.35 -3.85574 -0.40 -3.45574 11.94214

SBI 17/05/13 2952.35 2864.50 -2.9756 -0.40 -2.5756 6.633715

SBI 18/05/13 2864.50 2805 -2.07715 -0.40 -1.67715 2.812832

SBI 19/05/13 2805 2,686.90 -4.21034 -0.40 -3.81034 14.51869

SBI 20/05/13 2,686.90 2732.45 1.695262 -0.40 2.095262 4.390123

SBI 23/05/13 2732.45 2744.85 0.453805 -0.40 0.853805 0.728983

SBI 24/05/13 2744.85 2792.70 1.743265 -0.40 2.143265 4.593585

SBI 25/05/13 2792.70 2698.05 -3.38919 -0.40 -2.98919 8.935257

SBI 27/05/13 2698.05 2762.95 2.405441 -0.40 2.805441 7.870499

SBI 30/05/13 2762.95 2700.45 -2.26207 -0.40 -1.86207 3.467305

SBI 01/06/13 2700.45 2743.75 1.603436 -0.40 2.003436 4.013756

SBI 02/06/13 2743.75 2744.95 0.043736 -0.40 0.443736 0.196902

SBI 03/06/13 2744.95 2746.25 0.04736 -0.40 0.44736 0.200131

SBI 06/06/13 2746.25 2755.35 0.331361 -0.40 0.731361 0.534889

89

SBI 07/06/13 2755.35 2751.20 -0.15062 -0.40 0.24938 0.06219

SBI 09/06/13 2751.20 2728.50 -0.82509 -0.40 -0.42509 0.180702

SBI 11/06/13 2728.50 2755.2 0.97856 -0.40 1.37856 1.900428

SBI 13/06/13 2755.2 2749.65 -0.20144 -0.40 0.19856 0.039426

SBI 14/06/13 2749.65 2811.9 2.26392 -0.40 2.66392 7.09649

SBI 15/06/13 2811.90 2822.1 0.362744 -0.40 0.762744 0.581778

-0.40 80.69

Calculation of Risk:

Risk = √∑ D2

n−1 =√ 80.69

20−1

=7.85

4.9. Graphical Representation of SBI

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

-5

-4

-3

-2

-1

0

1

2

3

Return

Return

Interpretation:

90

The above table shows the daily returns of SBI for the month of DEC2010.

The average Return is -0.40 and Risk is 7.85.

The Highest price for the month was on 16/05/13 i.e., 2952.35. and the lowest price

was on 19/05/13 i.e., 2686.9.

4.14. MOVEMENT OF SHARE PRICES OF TATA MOTORS

Symbol Date

Prev

Close

Close

Price Return Avg Diff D2

TATAMOTORS

16/05/1

3

1314.7 1357.8 3.27831

4 -0.005

3.28331

4 10.78015

TATAMOTORS

17/05/1

3

1357.85 1335.4

-1.65335 -0.005 -1.64835 2.717055

TATAMOTORS

18/05/1

3

1335.4 1336.1 0.05241

9 -0.005

0.05741

9 0.003297

TATAMOTORS

19/05/1

3

1336.1 1273.8

-4.66282 -0.005 -4.65782 21.69533

TATAMOTORS

20/05/1

3

1273.85 1247.6

-2.06068 -0.005 -2.05568 4.225829

TATAMOTORS

23/05/1

3

1247.60 1277.2 2.37255

5 -0.005

2.37755

5 5.652769

TATAMOTORS

24/05/1

3

1277.20 1305.9 2.24710

3 -0.005

2.25210

3 5.071968

TATAMOTORS

25/05/1

3

1305.95 1322.9 1.29790

6 -0.005

1.30290

6 1.697563

TATAMOTORS

27/05/1

3

1322.90 1347 1.82175

5 -0.005

1.82675

5 3.337035

91

TATAMOTORS

30/05/1

3

1347.00 1351 0.29695

6 -0.005

0.30195

6 0.091178

TATAMOTORS

01/06/1

3

1351.00 1350

-0.07402 -0.005 -0.06902 0.004764

TATAMOTORS

02/06/1

3

1350.00 1365.1 1.11851

9 -0.005

1.12351

9 1.262294

TATAMOTORS

03/06/1

3

1365.15 1352.7

-0.91199 -0.005 -0.90699 0.822627

TATAMOTORS

06/06/1

3

1352.75 1306.1

-3.44853 -0.005 -3.44353 11.8579

TATAMOTORS

07/06/1

3

1306.15 1301.1

-0.38663 -0.005 -0.38163 0.145643

TATAMOTORS

09/06/1

3

1301.10 1268.9

-2.47483 -0.005 -2.46983 6.100055

TATAMOTORS

11/06/1

3

1268.90 1273.8 0.38616

1 -0.005

0.39116

1 0.153007

TATAMOTORS

13/06/1

3

1273.85 1300.1 2.06068

2 -0.005

2.06568

2 4.267043

TATAMOTORS

14/06/1

3

1300.15 1308.3 0.62685

1 -0.005

0.63185

1 0.399235

TATAMOTORS

15/06/1

3

1308.35 1308.4 0.00382

2 -0.005

0.00882

2 0.000078

-0.005 80.28482

Calculation of Risk.

92

Risk = √∑ D2

n−1 =√ 80.28

20−1

=2.055

4.10. Graphical Representation of TATA MOTORS

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

-6

-5

-4

-3

-2

-1

0

1

2

3

4

Return

Return

Interpretation:

The above table shows the daily returns of TATA MOTORS for the month of

DEC2010.

The average Return is -0.005 and Risk is 2.055.

The Highest price for the month was on 02/06/13 i.e., 1365.1 and the lowest price

was on 20/05/13 i.e., 1247.6.

4.15. Statement showing covariance of SBI and TATAMOTORS

Date Return R1 D1 D12 Date return R2 D2 D2

2 D1D2

16/05/13

-3.85 -0.40 -3.45 11.94

6/12/12

3.27

-

0.005 3.28 10.78 -11.3

17/05/13 -2.97 -0.40 -2.58 6.63 7/12/12 -1.65 - -1.65 2.72 4.2

93

0.005

18/05/13

-2.07

-0.4

0 -1.68 2.81

8/12/12

0.05

-

0.005 0.057 0.003 -0.09

19/05/13

-4.21 -0.40 -3.81 14.52

9/12/12

-4.66

-

0.005 -4.65 21.69 17.7

20/05/13

1.69 -0.40 2.09 4.39

10/12/12

-2.06

-

0.005 -2.05 4.22 -4.3

23/05/13

0.45 -0.40 0.85 0.73

13/12/12

2.37

-

0.005 2.37 5.65 2.02

24/05/13

1.74 -0.40 2.14 4.59

14/12/12

2.24

-

0.005 2.25 5.07 4.8

25/05/13

-3.39 -0.40 -2.99 8.94

15/12/12

1.29

-

0.005 1.30 1.69 -3.8

27/05/13

2.4 -0.40 2.80 7.87

16/12/12

1.82

-

0.005 1.82 3.34 5.1

30/05/13

-2.26 -0.40 -1.86 3.47

20/12/12

0.29

-

0.005 0.30 0.09 -0.5

01/06/13

1.6 -0.40

2.00

3 4.01

21/12/12

-0.07

-

0.005 -0.06 0.004 -0.1

02/06/13

0.04 -0.40 0.44 0.19

22/12/12

1.11

-

0.005 1.12 1.26 0.4

03/06/13

0.04 -0.40 0.44 0.2

23/12/12

-0.91

-

0.005 -0.9 0.82 -0.4

06/06/13 0.33 -0.40 0.73 0.53 24/12/12 -3.44 - -3.4 11.86 -2.5

94

0.005

07/06/13

-0.15 -0.40 0.24 0.06

27/12/12

-0.38

-

0.005 -0.38 0.15 -0.09

09/06/13

-0.82 -0.40 -0.42 0.18

28/12/12

-2.47

-

0.005 -2.46 6.1

1.04

9

11/06/13

0.98 -0.40 1.37 1.9

29/12/12

0.38

-

0.005 0.39 0.15 0.53

13/06/13

-0.20 -0.40 0.19 0.04

30/12/12

2.06

-

0.005 2.06 4.27 0.41

14/06/13

2.26 -0.40 2.66 7.09

31/12/12

0.62

-

0.005 0.63 0.39 1.68

15/06/13

0.362 -0.40 0.76 0.58

03/01/12

0.003

-

0.005 0.008 0.007

0.00

6

-0.40 80.69 -0.005 80.25

14.7

9

Calculation of Correlation Coefficient:

Correlation Coefficient of SBI and TATA MOTORS = r1, 2

= ∑ D1D 2

D22

=14.7980.25

=0.18

Construction of Portfolio:

95

Average return of SBI = R1 = -0.4

Average return of TATA MOTORS = R2 = -0.005

Risk of SBI = σ1 = 7.85

Risk of TATA MOTORS = σ2 = 2.055

Weight of SBI= W1 = 0.5

Weight of TATA MOTORS = W2 = 0.5

PORTFOLIO RETURN = W1 R1+ W2 R2

= (0.5)(-0.4)+(0.5)(-0.005)

= (-0.2) + (-0.0025)

= -0.2025

PORTFOLIO RISK = √W 12σ1

2+W 22σ2

2+2W 1W 2σ 1σ 2r1,2

√(0.52)(7.852)+(0.52)(2.0552)+2(0.5)(0.5)(7.85)(2.055)(0.18)

=√15.4+1.05+1.45

= 4.27

4.16. Statement showing Portfolios Return and Risk

S.No. Portfolio's Return Risk

1 BHARATHI AIRTEL and BHEL 0.2508 1.898

2 INFOSYS and ITC 0.3088 0.47

3 NTPC and ONGC 1.10675 0.99

96

4 RANBAXY and SAIL 0.2085 2.422

5 SBI and TATA MOTORS -0.2025 4.27

4.17. Graphical Representation of Return

1 2 3 4 5-0.4-0.2

00.20.40.60.8

11.2

Return

4.18. Graphical Representation of Risk

1 2 3 4 50

1

2

3

4

Risk

CHAPTER-VI97

FINDINGS,SUMMARY AND SUGGESTIONS

SUMMARY:

The present study titled “PORTFOLIO MANAGEMENT “ consists of 6 chapters which

includes Introduction, Industry profile, company profile, review of literature, data analysis

and interpretation, findings ,suggestion and summary.

The first chapter consists of Introduction talks about Portfolio management meaning,

significance, need, objectives, importance, research methodology and limitations.

The second chapter consists of industry profile talks industry overview, stock exchange,

history of stock exchange, role of stock exchange, major stock exchanges,fuctions of stock

exchange

98

The third chapter consists of company profile talks about the vision, the management,

privacy policy.

The fourth chapter consists of Theoretical Framework talks about process of portfolio

management, risk-return relationship, markowitzs model, CAPM, portfolio diversification,

portfolio performance evaluation, portfolio analysis.

The fifth chapter consists of Data analysis and interpretation talks about the purpose of the

study is to find out at what percentage of investment should be invested between two

companies on the basis of risk and return of each security in comparison. These percentages

help in allocating the funds available for investment in risky portfolios.

The sixth chapter consists of findings, summary and suggestions .

FINDINGS:

The present project has been under taken to study the process of portfolio

construction and how to manage it. During the study the following facts have been

identified.

PORTFOLIO 1: This consists of BHARATHI AIRTEL and BHEL

99

The Average Return of BHARATHI AIRTEL is 0.208515

The Risk of BHARATHI AIRTEL is 1.6708

The Average Return of BHEL is 0.2931

The Risk of BHEL is 0.9842

The Coefficient of Correlation between BHARATHI AIRTEL and BHEL is 0.35

By Constructing a Portfolio with equal weights the Return is 0.2508 and the Risk is 1.898

PORTFOLIO 2: This consists of INFOSYS and ITC.

The Average Return of INFOSYS is 0.5119

The Risk of INFOSYS is 0.9109

The Average Return of ITC is 0.105867

The Risk of ITC is 0.9876

The Coefficient of Correlation between INFOSYS and ITC is 0.02

By Constructing a Portfolio with equal weights the Return is 0.94925 and the Risk is 0.47

PORTFOLIO 3: This consists of NTPC and ONGC

The Average Return of NTPC is 0.3574

The Risk of NTPC is 1.4545

The Average Return of ONGC is -0.09979

The Risk of ONGC is 0.759

The Coefficient of Correlation between NTPC and ONGC is 0.5894

By Constructing a Portfolio with equal weights the Return is 1.10675 and the Risk is 0.99

PORTFOLIO 4: This consists of RANBAXY and SAIL.

100

The Average Return of RANBAXY is 0.247

The Risk of RANBAXY is 1.79

The Average Return of SAIL is 0.17

The Risk of SAIL is 2.45

The Coefficient of Correlation between RANBAXY and SAIL is 0.0558

By Constructing a Portfolio with equal weights the Return is 0.2085 and the Risk is

2.422

PORTFOLIO 5: This consists of SBI and TATA MOTORS.

The Average Return of SBI is -0.40

The Risk of SBI is 7.85

The Average Return of TATA MOTORS is -0.005

The Risk of TATA MOTORS is 2.055

The Coefficient of Correlation between SBI and TATA MOTORS is 2.5596

By Constructing a Portfolio with equal weights the Return is -0.82 and Risk is 3.56

SUGGESTIONS:

Correlation is an important element while constructing the portfolio.

If the correlation is high, we can’t reduce the risk level for getting optimum return

level.

Before going to portfolio construction one should check the constraint i.e. the

correlation coefficient is less than the ratio of smaller Standard Deviation to largest

Standard Deviation, then the combination of two securities provides a lesser

Standard Deviation of return than when either of the security is taken alone.

Investor should go for effective investment rather than random investment by using

portfolio weight formula to gain maximum return among these combinations.

101

Return is based on the scripts average return and its weights. So select the scripts

which will give higher average return with lower risk level among different scripts.

The risk level is one of important factor in determination of portfolio. The risk

affected by co-variance, standard deviation, correlation of two securities.

Choosing the securities, which are having negative correlation or lower correlation,

will give maximum return with the optimal risk level.

It is suggested to the investor that before going to investment, he should conduct

the fundamental analysis i.e. economic analysis, industry and company analysis.

It is suggested that a portfolio should be constructed to meet the investor’s goals

and objectives. The objective of every investor is to select portfolio that gives

optimal return with low risk.

It is suggested that the investor with low risk profile should choose low level risk

portfolio and the risk neutral investor should choose medium level risk portfolio.

It is suggested that the investor should have the knowledge about economy,

industry, and company and market structure. Efficient market theory states that the

share price fluctuations are random and do not follow any regular pattern.

It is suggested that each portfolio should be designed to achieve a predefined

business objectives.

It is suggested that each portfolio project need to be assessed in terms of business

value and adherence to portfolio selection strategy.

It is suggested that the investor can use the project evaluation process available ion

portfolio management systems to evaluate the project at various stages of the

project life cycle.

It is suggested that the investor should go for an appropriate diversification towards

reducing the risk. Diversification of investments helps to spread risk in many

securities.

It is suggested to the investor that he should keep in his mind that the market

psychology may be affected by tangible events or fictions.

It is suggested to the investor that management of portfolio is a dynamic activity of

evaluating and the revising the portfolio in terms of its objectives.

It is suggested to the investor that portfolio helps in spreading the risk in many

securities. Thus the risk is reduced. The basic principle is that if a portfolio holds

102

several assets or securities that may include cash and bank, Even if one goes bad the

other will provide protection from loss.

It is suggested that the diversification should neither be to large or to low. It should

be an adequate diversification according to the size of the portfolio.

After the Analysis and Findings we can suggest the investors to invest in

portfolios by using Markowitz method. This can be as follows.

Take the Securities whose returns are more but risk is less.

Study the correlation coefficient of those securities selected with more returns and

less risks.

If the correlation coefficient is negative, they are best for constructing portfolios.

Now after the Analysis and Findings we have the best portfolios as follows.

INFOSYS and ITC Return is 0.94925and Risk is 0.47

NTPC and ONGC Return is 1.10675 and Risk is 0.99.

BHARATHI AIRTEL and BHEL Return is 0.2508 and Risk is 1.898.

103

BIBLIOGRAPHY

BIBLIOGRAPHY

Books Referred:

Donald E. Fischer, Ronald J. Jordan, SAPM, 1999, Sixth Edition, Portfolio Analysis,

page no: 559-588 & CAPM, page no: 636-648

Punithavathy Pandian, Security Analysis & Portfolio Management, 2007, Portfolio

Markowitz Model, page no: 329-349 & CAPM, page no: 379-387.

Prasanna Chandra, Investment Analysis & Portfolio Management, 2006, Second

edition, Efficient Frontier, page no: 251-259

Websites:

104

www.investopedia.com

www.capitalmarket.com

www.bse.com

www.nse.com

www.utvi.com

Business Magazines:

Business world-2012

Outlook Money-2012

105