Portfolio Management @Karvy

1.1 INTRODUCTIOTN AND MEANING

A portfolio is a collection of assets. The assets may be physical or financial like Shares,

Bonds, Debentures, preference Shares etc. The individual investor or a fund manager would not

like to put all his money in the shares of one company that would amount to great risk. He would

therefore, follow the age old maxim that one should not put all the eggs into one basket. By

doing so, he can achieve objective to maximize portfolio return and at the same time minimizing

the portfolio risk by diversification.

Portfolio management is the management of various financial assets which comprise the

portfolio.

Portfolio management is a decision – support system tat is designed with a view to meet

the multi-faced needs of investors.

According to Securities and Exchange Board of India Portfolio Management

is defined as

PORTFOLIO means the total holdings of securities belonging to any person.

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

a client, advises or directs or undertakes on behalf of the client (whether as a discretionary

portfolio manager to otherwise) the management or administration of a portfolio of securities or

the funds of the client.

DISCRETIONARY PORTFOLIO MANAGER means a portfolio manager who

exercises or may, under a contract relating to portfolio management exercises any degree of

discretion as to the investments or management of the portfolio of securities or the funds of the

client.

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1.2 FUNCTIONS OF PORTFOLIO MANAGEMENT:

To frame the investment strategy and select an investment mix to achieve the desired

investment objectives.

To provide a balanced portfolio which not only can hedge against the inflation but can

also optimize returns with the associated degree of risk

To make timely buying and selling of securities.

To maximize the after-tax return by investing in various tax saving investment

instruments.

IMPORTANCE OF PORTFOLIO MANAGEMENT:

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

institutions, mutual funds and other agencies are undertaking the task of investing money of

small investors, on their behalf.

Growth in the number and size of investible funds – a large part of household savings is

being directed towards financial assets.

Increased market volatility – risk and return parameters of financial assets are

continuously changing because of frequent changes in government’s industrial and fiscal

policies, economic uncertainty and instability.

Greater use of computers for processing mass of data.

Professionalization of the field and increasing use of analytical methods

(E.g. quantitative techniques) in the investment decision- making

Larger direct and indirect costs of errors or shortfalls in meeting portfolio objectives –

increased competition and greater scrutiny by investors.

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CHARCTERISTICS OF PORTFOLIO MANAGEMENT :

Individuals will benefit immensely by taking portfolio management services for the following reasons:

Whatever may be the status of the capital market, over the long period capital markets

have given an excellent return when compared to other forms of investment. The return from

bank deposits, units, etc, is much less than from the stock market.

The Indian Stock Markets are very complicated. Though there are thousands of

companies that are listed only a few hundred which have the necessary liquidity. Even among

these, only some have the growth prospects which are conducive for investment. It is impossible

for any individual wishing to invest and sit down and analyze all these intricacies of the market

unless he does nothing else.

Even if an investor is able to understand the intricacies of the market and separate chaff

from the grain the trading practices in India are so complicated that it is really a difficult task for

an investor to trade in all the major exchanges of India, look after his deliveries and payments.

This is further complicated by the volatile nature of our markets which demands constant

reshuffling of portfolios.

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1.3 STRUCTURE / PROCESS OF TYPICAL PORTFOLIO

MANAGEMENT:

In the small firm, the portfolio manager performs the job of security analyst.

In the case of medium and larger sized organizations, job function of portfolio manager and

security analyst are separate.

FIG: 1

RESEARCH(e.g. Security

analysis)

OPERATIONS(e.g. buying and selling of securities.

CLIENTS

PORTFOLIOMANAGERS

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Fig 1

TYPES OF PORTFOLIO MANAGEMENT

1. DISCRETIONARY PROTFOLIO MANAGEMENT SERVICE

(DPMS):

In this type of service, the client parts with him money in favour of the manager, who in return

handles all the paper work, makes all the decisions and gives a good return on the investment and

charges fees. In the Discretionary Portfolio Management Service, to maximize the yield, almost

all portfolio managers park the funds in the money market securities such as overnight market,

18 days treasury bills and 90 days commercial bills. Normally, the return of such investment

varies form 14 to 18 percent, depending on the call money rates prevailing at the time of

investment.

2. NON-DISCRETIONARY PROTFOLIO MANAGEMENT SERVICE

(NDPMS):

The manager functions as a counselor, but the investor is free to accept or reject the manager’s

advice, the paper work is also undertaken by the manager for a service charge. The manager

concentrates on stock market instruments with a portfolio tailor-made to the risk taking ability of

the investor.

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STEPS IN PORTFOLIO MANAGEMENT

Specification and qualification of investor objectives, constraints, and

Preferences in the form of an investment policy statement.

Determination and qualification of capital market expectations for the

Economy. Market sectors, industries and individual securities.

Allocation of assets and determination of appropriate portfolio strategies for

each asset class and selection of individual securities.

Performance measurement and evaluation to ensure attainment of investor

Objectives.

Rebalancing the portfolio when necessary by repeating the asset allocation,

Portfolio strategy and security selection.

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CRITERIA FOR PORTFOLIO DECISIONS

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

investors holdings. The emphasis shifts from individual assets selection to a more balanced

emphasis on diversification and risk-return interrelationships of individual assets within the

portfolio. Individual securities are important only to he extent they affect the aggregate portfolio.

In short, all decisions should focus on the impact which the decision will have on the aggregate

portfolio of all assets held.

Portfolio strategy should be mouded to the unique needs and characteristics of the

portfolio’s owner.

Diversification across securities will reduce a portfolio’s risk. If the risk and return are

lower than the desired level, leverages (borrowing) can be used to achieve the desired level.

Larger portfolio return comes only with larger portfolio risk. The most important

decision to make is the amount of risk which is acceptable.

The risk associated with a security type depends on when the investment will be

liquidated. Risk is reduced by selecting securities with a payoff close to when the portfolio is to

be liquidated.

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Competition for abnormal returns is extensive, so one has to be careful I evaluating the

risk and return from securities. Imbalances do not last long and one has to act fast to profit from

exceptional opportunities.

1.4 QUALITIES OF PORTFOLIO MANAGER

1. SOUND ENERAL KNOWLEDGE:

Portfolio management is an exciting and challenging job. He has to work in an extremely

uncertain and confliction environment. In the stock market every new piece of information

affects the value of the securities of different industries in a different way. He must be able to

judge and predict the effects of the information he gets. He must have sharp memory, alertness,

fast intuition and self-confidence to arrive at quick decisions.

2. ANALYTICAL ABILITY:

He must have his own theory to arrive at the intrinsic value of the security. An analysis

of the security’s values, company, etc, it is a continuous job of the portfolio manager. A good

analyst makes a good financial consultant. The analyst can know the strengths, weaknesses,

opportunities of the economy, industry and the company.

3. MARKETING SKILLS:

He must be food salesman. He has to convince the clients about the particular security.

He has to compete with the stock brokers in the stock market. In this context, the marketing

skills help him a lot.

4. EXPERIENCE:

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In the cyclical behavior of the stock market history is often repeated, therefore the

experience of the different phases helps to make rational decisions. The experience of the

different types of securities, clients, market trends, etc., makes a perfect professional manager.

1.5 PROCESS/BUILDING PORTFOLIO

Portfolio decisions for an individual investor are influenced by a wide variety of factors.

Individual differ greatly in their circumstances and therefore, a financial programme well suited

to one individual may be inappropriate for another. Ideally, an individual’s portfolio should be

tailor-made to fit one’s individual needs.

INVESTOR’S CHARACTERISTICS:

An analyst of an individual’s investment situation requires a study of personal characteristics

such as age, health conditions, personal habits; family responsibilities, business or professional

situation, and tax status, all of which affect the investor’s willingness t assume risk.

STAGE IN THE LIFE CYCLE:

One of the most important factors affecting the individual’s investment objective is his stage in

the life cycle. A young person may put greater emphasis on growth and lesser emphasis on

liquidity. He can afford to wait for realization of capital gains as his time horizon is large.

FAMILY RESPONSIBILITIES:

The investor’s marital status and his responsibilities towards other members of the family can

have a large impact on his investment needs and goals.

INVESTOR’S EXPERIENCE:

The success of portfolio depends upon the investor’s knowledge and experience in financial

matters. If an investor has an aptitude for financial affairs, he may wish to be more aggressive in

his investments.

ATTITUDE TOWARDS RISK:

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A person’s psychological make-up and financial position dictate his ability to assume the risk.

Different kinds of securities have different kinds of risks. The higher the risk, the greater the

opportunity for higher gain or loss

LIQUIDITY NEEDS:

Liquidity needs vary considerably among individual investors. Investors with regular income

from other sources may not worry much about instantaneously liquidity, but individuals who

depend heavily upon investment for meeting their general or specific needs, must plan portfolio

to match their liquidity needs. Liquidity can be obtained in two ways

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

b) By requiring that bonds and equities purchased be highly marketable.

TAX CONSIDERATIONS:

Since different individuals, depending upon their incomes, are subjected to different marginal

rates of taxes, tax considerations become most important factor in individual’s portfolio strategy.

There are differing tax treatments for investment in various kinds of assets.

TIME HORIZON:

In investment planning, time horizons become an important consideration. It is highly

variable from individual to individual. Individuals in their young age have ling time horizon for

planning, they can smooth out and absorb the ups and downs of risky combination.

0020Individuals who are old have smaller time horizon, they generally tend to avoid volatile

portfolios.

INDIVIDUAL’S FINANCIAL OBJECTIVES:

In the initial stages, the primary objectives of an individual could be to accumulate wealth via

regular monthly savings and have an investment programme to achieve long term capital gains.

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SAFETY OF PRINCIPAL:

The protection of the rupee value of the investment is of prime importance to most

investors. The original investment can be recovered only if the security can be readily sold in the

market without much loss of value.

ASSURANCE OF INCOME:

Different investors have different current income needs. If an individual is dependent of

its investment income for current consumption then income received now in the form of dividend

and interest payments become primary objective.

INVESTMENT RISK:

All investment decisions revolve around the trade-off between risk and return. All

rational investors want a substantial return from their investment. An ability to understand,

measure and properly mange investment risk is fundamental to any intelligent investor or a

speculator. Frequently, the risk associated with security investment is ignored and only the

rewards are emphasized. An investor who does not fully appreciate the risks in security

investments will find it difficult to obtain continuing positive results.

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RISK AND EXPECTED RETURN

There is a positive relationship between the amount of risk and the amount of expected return

i.e., the greater the risk, the larger

Y

E(r)

RETURN

R (f)

X RISK FIG: 2

Risk is measured along the horizontal axis and increases from the left to right.

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Expected rate of return is measured on the vertical axis and rises from bottom to top.

The line from 0 to R (f) is called the rate of return or risk less investments commonly

associated with the yield on government securities.

The diagonal line from R (f) to E (r) illustrates the concept of expected rate or return

increasing as level of risk increases.

TYPES OF RISKS

Risk consists of two components. They are

1. Systematic Risk.

2. Unsystematic Risk.

I. SYSTEMATIC RISK:

Systematic risk is caused by factors external to the particular company and uncontrollable

by the company. The systematic risk affects the market as a whole.

Factors affect the systematic risk are:

Economic Conditions.

Political Conditions.

Sociological Changes.

The systematic risk is unavoidable. Systematic risk is further sub-divided into three types. They

are:

1. Market Risk.

2. Interest Rate Risk.

3. Purchasing Power Risk.

1. MARKET RISK:

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One would notice that when the stock market surges up, most stocks post higher price.

On the other hand, when the market falls sharply, most common stocks will drop. It is no

uncommon to find stock prices falling from time to me while a company’s earnings are raising

and vice-versa. The price of stock may fluctuate widely within a short time even though

earnings remain unchanged or relatively stable.

2. INTEREST RATE RISK:

Interest rate risk is the risk/loss of principal brought about the changes in the interest rate

paid on new securities currently being issued.

s. PURCHASING POWER RISK:

The typical investor seeks an investment which will give him current income and capital

appreciation in addition to his original investment.

II. UN-SYSTEMATIC RISK:

Un-systematic risk is unique and peculiar to a firm or an industry. The nature and mode

of raising finance and paying back the loans, involve the risk element. Financial leverage of the

companies that is debt-equity portion of the companies differs from each other. All these factors

affect the un-systematic risk and contribute a portion in the total variability of the return.

Managerial inefficiency

Technological change in the production process.

Availability of raw materials.

Changes in the consumer preference.

Labor problems.

The nature and magnitude of the above mentioned factors differ from industry to industry

and company to company. They have to be analyzed separately for each industry and firm. Un-

systematic risk can be broadly classified into:

a. Business Risk.

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b. Financial Risk.

(a) Business Risk:

Business risk is that portion of the unsystematic risk caused by the operating environment

of the business. Business risk arises from the inability of a firm to maintain its competitive edge

and growth or stability of the earnings. The volatility in stock prices due to factors intrinsic to

the company itself is known as Business risk is concerned with the difference between revenue

and earnings before interest and tax. Business risk can be divided into

Internal Business Risk.

i. External Business Risk.

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

operational efficiency differs from company to company. The efficiency of operation is reflected

on the company’s achievement of its pre-set goals and the fulfillment of the promises to its

investors.

ii. External business risk is the result of operating conditions imposed on the firm by

circumstances beyond its control. The external environments in which it operates exert some

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

policies of the government, business cycle and the general economics environment within which

a firm or an industry operates.

(b) Financial Risk:

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It refers to the variability of the income to the equity capital due to the debt capital.

Financial risk in a company is associated with the capital structure of the company consists of

equity funds and borrowed funds.

PORTFOLIO ANALYSIS

Various groups of securities when held together behave in a different manner and give

interest payments and dividends also, which are different to the analysis of individual securities.

A combination of securities held together will give a beneficial result if they are grouped in a

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

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

They are:

o Traditional approach

o Modern approach

TRADITIONAL APPROACH:

Traditional approach was based on the fact that risk could be measured on each

individual security through the process of finding out the standard deviation and that security

should be chosen where the deviation was the lowest. Traditional approach believes that the

market is inefficient and the fundamental analyst can take advantage of the situation. Traditional

approach is a comprehensive financial plan for the individual. It takes into account the

individual needs such as housing, life insurance and pension plans.

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Traditional approach basically deals with two major decisions.

They are

Determining the objectives of the portfolio

Selection of securities to be included in the portfolio.

MODERN APPROACH:

Modern approach theory was brought out by Markowitz and Sharpe. It is the

combination of securities to get the most efficient portfolio. Combination of securities can be

made in many ways. Markowitz developed the theory of diversification through scientific

reasoning and method. Modern portfolio theory believes in the maximization of return through a

combination of securities. The modern approach discusses the relationship between different

securities and then draws interrelationship of risks between

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

with the individual needs.

1.6 THEORIES OF PORTFOLIO MANAGEMENT

2.5 MARKOWITZ MODEL

Markowitz model is a theoretical framework for analysis of risk and return and their

relationships. He used statistical analysis for the measurement of risk and mathematical

programming for selection of assets in a portfolio in an efficient manner. Markowitz approach

determines for the investor the efficient set of portfolio through three important variables i.e.

o Return

o Standard deviation

o Co-efficient of correlation

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

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

return, between the limits of zero ad infinity. According to this theory, the effects of one security

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purchase over the effects of the other security purchase are taken into consideration and then the

results are evaluated. Most people agree that holding two stocks is less risky than holding one

stock. For example, holding stocks from textile, banking and electronic companies is better than

investing all the money on the textile company’s stock.

Markowitz had given up the single stock portfolio and introduced diversification. The

single stock portfolio would be preferable if the investor is perfectly certain that his expectation

of highest return would turn out to be real. In the world of uncertainty, most of the risk averse

investors would like to join Markowitz rather than keeping a single stock, because diversification

reduces the risk.

ASSUMPTIONS:

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

their investment.

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

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

of risk because investors are risk-averse.

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

return from a possible investment.

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

o The investor assumes that greater or larger the return that he achieves on his investments,

the higher the risk factor surrounds him. On the contrary when risks are low the return can also

be expected to be low.

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

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

“By determining the efficient set of securities”

SHARPE’S PERFORMANCE MEASURE

Since the Sharpe ratio was derived in 1966 by William Sharpe, it has been one of the most

referenced risk/return measures used in finance, and much of this popularity can be attributed to its

simplicity. The ratio's credibility was boosted further when Professor Sharpe won a Nobel Memorial Prize

in Economic Sciences in 1990 for his work on the capital asset pricing model (CAPM).

Sp = Risk premium

Total risk

= r p – r f

σ p

Where rp = realized return on the portfolio

rf = risk-free rate of return

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σ p = standard deviation of returns for portfolio

Therefore, Sharpe assumes that the portfolio under consideration is the whole or

substantially the whole of the investor’s total portfolio. This means that, if there are any

unsystematic risks still left in the portfolio and this cannot be eliminated.

TREYNOR’S PERFORMANCE MEASURE

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

reward to volatility ratio. It is concerned with systematic risk (or beta) and therefore it is the

relationship between rewards or risk premium for calculating Treynor index may be stated as

follows:

T p = Risk premium

Portfolios β

= r p – r f

βp

Where rp = realized return on the portfolio

rf = risk-free rate of return

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βp = Standard deviation of return for portfolio

Therefore, Treynor assumes that the portfolio under consideration is itself only a part of

the investor’s total portfolio. The investor can therefore, eliminate any unsystematic risk by

ensuring that his total portfolio is well diversified.

CAPITAL ASSETS PRICING MODEL (CAPM)

Markowitz, William Sharpe, John Lintner and Jan Mossin provided the basic structure of

Capital Asset Pricing Model. It is a model of linear general equilibrium return. In the CAPM

theory, the required rate of returns of an asset is having a linear relationship with asset’s beta

value i.e., no diversifiable or systematic risk (i.e., market related risk) because non market risk

can be eliminated by diversification and systematic risk measured by beta. Therefore, the

relationship between an assets return and its systematic risk can be expressed by the CAPM,

which is also called the Security Market Line.

Rp = Rf Xf + Rm(1-Xf)

Rp = Portfolio return

Xf = The proportion of funds invested in risk free assets

1-Xf = The proportion of funds invested in risky assets

Rf = Risk free rate of return

Rm = Return on risky assets

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Formula can be used to calculate the expected returns for different situations, like mixing

risk less assets with risky assets, investing only in the risky asset and mixing the borrowing with

risky assets.

THE CONCEPT:

According to CAPM, all investors hold only the market portfolio and risk less securities.

The market portfolio is a portfolio comprised of all stocks in the market. Each asset is held in

proportion to its market value to the total value of all risky assets.

For example, is Satyam Industry Share represents 15% of all risky assets, then the market

portfolio of the individual investor contain 15% of Satyam Industry shares. At this stage, the

investor has the ability to borrow or lend any amount of money at the risk less of interest.

ASSUMPTIONS:

o An individual seller or buyer cannot affect the price of a stock. This assumption is the

basic assumption of the perfectly competitive market.

o Investors make their decisions only on the basis of the expected return, standard deviation

and covariance of all pairs of securities.

o Investors are assumed to have homogenous expectations during the decision-making

period.

o The investor can lend or borrow any amount of funds at the risk less rate of interest. The

risk less rate of interest is the rate of interest offered for the treasury bills of Government

Securities.

o Investors are risk-averse, so when given, a choice between two otherwise identical

portfolios, they will choose the one with the lower standard deviation.

o Individual assets are infinitely divisible, meaning that an investor can buy a fraction of a

share if he or she so desires.

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o There is a risk free rate at which an investor may either lend (i.e., invest) money or

borrow money.

o There is no transaction cost i.e., no cost involved in buying and selling of stocks.

o There is no personal income tax. Hence, the investor is indifferent to the form of return

either capital gain or dividend.

EVALUATION OF PORTFOLIO

Portfolio manager evaluates his portfolio performance and identifies the sources of

strengths and weakness. The evaluation of the portfolio provides a feed back about the

performance to evolve better management strategy. Even though evaluation of portfolio

performance is considered to be the last stage of investment process, it is a continuous process.

There are number of situations in which an evaluation becomes necessary and important.

1. Self Valuation:

An individual may want to evaluate how well he has done. This is a part of the process

of refining his skills and improving his performance over a period of time.

2. Evaluation of Managers:

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A mutual fund or similar organization might want to evaluate its managers. A mutual

fund may have several managers each manager will run a separate fund or sun-fund. It is often

necessary to compare the performance of these managers.

3. Evaluation of Mutual Funds:

An investor may want to evaluate the various mutual funds operating in the country to

decide which, if any of these should be chosen for investment. A similar need arises in the case

of individual or organizations who engage external agencies for portfolio advisory services.

4. Evaluation of Groups:

Academics or researchers may want to evaluate the performance of a whole group of

investors and compare it with another group of investors who use different techniques or who

have different skills or access to different information.

NNEED FOR EVALUATION OF PORTFOLIO

We can try to evaluate every transaction. Whenever a security is brought or sold, we can

attempt to assess whether the decision was correct and profitable.

We can try to evaluate the performance of a specific security in the portfolio to determine

whether it has been worthwhile to include it in out portfolio.

We can try to evaluate the performance of portfolio as a whole during the period without

examining the performance of individual securities within the portfolio.

PORTFOLIO REVISION

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The portfolio which is once selected has to be continuously reviewed over a period of

time and then revised depending on the objectives of the investor. The care taken in construction

of portfolio should be extended to the review and revision of the portfolio. Fluctuations that

occur in the equity prices cause substantial gain or loss to the investors.

The investor should have competence and skill in the revision of the portfolio. The

portfolio management process needs frequent changes in the composition of stocks and bonds.

In securities, the type of securities to be held should be revised according to the portfolio policy.

An investor purchases stock according to his objectives and return risk framework. The

prices of stock that he purchases fluctuate, each stock having its own cycle of fluctuations.

These price fluctuations may be related to economic activity in a country or due to other changed

circumstances in the market.

If an investor is able to forecast these changes by developing a framework for the future

through careful analysis of the behavior and movement of stock prices is in a position to make

higher profit than if he was to supply buy securities and hold them through the process of

diversification. Mechanical methods are adopted to earn better profit through proper timing. The

investor uses formula plans to help him in making decisions for the future by exploiting the

fluctuations in prices.

HISTORY OF STOCK EXCHANGES IN INDIA

The origin of the stock exchange in India can be traced back to the later half of19th

century .After the American civil war (1860-61) due to the share mania of the public the number

of broker dealing in shares increased. The broker organized an informal association in Mumbai

named “the native stock and share brokers association” in 1875.

Increased activity in trade and commerce during the first world war and second world resulted in

an increase in stock trading. The growth of stock exchanges suffered asset back the end of world

war. Worldwide depression affected them. Most of stock exchange in the early stages had a

sddpecu;lative nature of workinfg without technical strength. After independence, government

took keen interest to regulate the speculative nature of stock exchange working. In that direction,

securities and contract government to regulation act 1956. was passed. This gave powers to

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central government to regulate the stock exchanges. Further to develop secondary market in the

country, stock exchanges were estavblished in different centers like Chennai, delhi, nagpur,

kanpur, Hyderabad, and bnaglore. The SER Act recognized the stock exchanges in Mumbai,

Chennai, delhi, Hyderabad, Ahemadabad, and indoor. The banglore stock exchange was

recognized in 1963. at present there are 23 stock exchanges.

The setting up of national stock exchange (NSE) and OTCEI (Over the counter exchange of

india) with screen based trading facility resulted in more stock exchanges turning towards the

computer based trading. Bombay stock exchange (BSE) introduced the screen based trading

system in 1995, which is known as BOLT (Bombay on-line terading system).

Madras stock exchange introduced Automated Network trding System (MANTRA) on October

7th 1996. apart from Bombay stock exchange , (BSE), Delhi, Pune , Bangalore, Kolkata, and

Ahmedabad Stock exchanges have introduced screen based trading.

DEFINITION OF STOCK EXCHANGE

:

“Stock exchange means any body or individual whether

incorporarted or not, constituted for the purpose of assisting, regulating or controlling the

business of buying, selling or dealing in securities.”

NEED FOR STOCK EXCHANGE:

As the business and industry expanded and economy became

more complex in nature, a need for permanent finance arose. Entrepreneurs require money for

long-term needs, where as investors demand liquidity. The solution to this problem gave way for

the origin of “Stock Exchange”, which is a ready market for investment and liquidity.

FUNCTIONS OF STOCK EXCHANGE:

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Maintains active trading: Shares are traded on the stock

exchanges, enabling the investors to buy and sell securities. The prices may vary from

transaction. A continuous trading increases the liquidity or marketability of the shares traded on

the stock exchanges.

Fixation of prices: prices are determined by the transition that flow from investors

demand and the supplies preference. Usually the trade’s prices are named known to the public.

This helps the investors to make better decisions

ENSURES SAFE AND FAIR DEALINGS:

The rules, regulations and byelaws of the stock exchanges provide a measure of

safety to the investor’s it get a fair deal. Aids in financing the industry. Continuous market for

shares provides a favorable climate for rising capital. The negotiability and transferability of the

securities help the companies to raise long term funds. Investor willing to subscribe the initial

pubic offerings (IOP).This stimulates the capital formation.

DISSEMINATION OF INFORMATION:

Stock exchange provide information through their various publics their publish the

share prices traded on their basis along with the volume traded. Directory of corporate

information is useful for the investor’s assessment regarding the corporate. Handbooks and

pamphlets provide information regarding of the stock exchanges.

PERFORMANCE INDUCERS:

The prices of stocks reflects the performance of the traded companies this makes the

corporate more the with its public image tries to maintain good performance.

SELF-REGULATING ORGANIZATION:

The stock exchange monitors the integrity of the member brokers listed companies and clients

continuous internal audit safeguards the investor’s against unfair practices it settles the disputes

between member brokers investors and brokers..

INSTRUMENT TRADEED IN THE STOCK EXCHANGE:

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The securities in which individual investors are allowed ti trade in the exchange are

as follows

1. Equity shares

2. Preference shares.

3. Convertible&party convertible debentures

4. Government securities.

STOCK EXCHANGE IN INDIA:

S.No NAME OF THE STOCK EXCHANGE YEAR

1 BOMBAY Stock Exchange 1875

2 Hyderabad Stock Exchange 1943

3 Ahmedabad share & Stock Exchange 1957

4 Calcutta Stock Exchange association Limited 1957

5 Delhi Stock Exchange Association Limited 1957

6 Madras Stock Exchange Association Limited 1957

7 Indoor Stock Brokers Association 1958

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8 Banglore Stock Exchange 1963

9 Cochin Stock Exchange 1978

10 Pine Stock Exchange Limited 1982

11 U.P Stock Exchange Association Limited 1982

12 Ludhiana Stock Exchange Association Limited 1983

13 Jaipur Stock Exchange Limited 1984

14 Gauhathi Stock Exchange Limited 1984

15 Mangalore Stock Exchange Limited 1985

16 Mabhad Stock Exchange Limited, Patna 1986

17 Bhuvaneswar Stock Exchange Limited 1989

18 Over the counter exchange of India, Bombay 1989

19 Saurashtra Kutch Stock Exchange Limited 1990

20 Vadodara Stock Exchange Limited 1991

21 Coimbatore Stock Exchange Limited 1991

22 Meerut Stock Exchange Limited 1991

23 National Stock Exchange Limited 1992

24 Integrarted Stock Exchange 1999

STOCK EXCHANGE IN WORLD:

S.No COUNTRY INDEX

1 Russia Moscow Times

2 Argentina Merval

3 Thailand SET

4 Pakistan Karachi 100

5 Indonesia Jak comp

30

6 US

NASDAQ

7 Czech Republic PX50

8 Mexico IPC

9 Brazil Bovespa

10 Japan Nikkei 225

11 Malaysia KISE COMP

12 China Shanahai comp

13 Singapore Straits Times

14 South Korea Seoul COMP

15 Spain Madrid General

16 US S&P 500

17 India SENSEX

18 US Dow jones

19 Germany Dax

20 Hong Kong Hang seng

21 Canada S & P TSX COMPOSITE

22 India NIFTY

23 UK FISE 100

24 Australia All Ordinates

25 France CAC 40

31

COMPANY PROFILE

COMPANY PROFILE

OVERVIEW:

KARVY, is a premier integrated financial services provider, and ranked among the

top five in the country in all its business segments, services over 16 million individual investors

in various capacities, and provides investor services to over 392 corporate, comprising the who

is who of Corporate India

32

KARVY covers the entire spectrum of financial services such as Stock broking, Depository

Participants, Distribution of financial products like mutual funds, bonds, fixed deposit, Merchant

Banking & Corporate Finance, Insurance Broking, Commodities Broking, Personal Finance

Advisory Services, placement of equity, IPO’s, among others. Karvy has a professional

management team and ranks among the best in technology, operations, and more importantly, in

research of various industrial segments.

KARVY ALLIANCES:

Karvy Computer share Private Limited is a 50:50 joint venture of Karvy Consultants Limited and

Computer share Limited, Australia. Computer share Limited is world's largest -- and only global

-- share registry, and a leading financial market services provider to the global securities

industry.

The joint venture with Computer share, reckoned as the largest registrar in the world, servicing

over 60 million shareholder accounts for over 7,000 corporations across eleven countries spread

across five continents. Computer share manages more than 70 million shareholder accounts for

over 13,000 corporations around the world.

Karvy Computer share Private Limited, today, is India's largest Registrar and Share Transfer

Agent servicing over 300 corporate and mutual funds and 16 million investors.

BOARD OF DIRECTORS:

1. C. Parthasarathy Chairman & Managing Director

2. M. Yugandhar Managing Director

3. M. S. Ramakrishna Executive Director

33

MANAGEMENT TEAM:

1. K. Sridhar

2. V. Mahesh

3. V. Ganesh

4. S. Gopichand

5. J. Ramaswamy

6. M. S. Manohar

7. S. Ganapathy Subramanian

ACHIEVEMENTS:

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

India's No. 1 Registrar & Securities Transfer Agents Among the top 3 Depository Participants Largest Network of Branches & Business Associates ISO 9002 certified operations by DNV Among top 10 Investment bankers Largest Distributor of Financial Products Adjudged as one of the top 50 IT uses in India by MIS Asia

Full Fledged IT driven operations

QUALITY POLICY:

To achieve and retain leadership, Karvy shall aim for complete customer satisfaction, by

combining its human and technological resources, to provide superior quality financial services.

In the process, Karvy will strive to exceed Customer's expectations.

QUALITY OBJECTIVES:

As Per the Quality Policy, Karvy will:

34

Build in-house processes that will ensure transparent and harmonious relationships with

its clients and investors to provide high quality of services.

Establish a partner relationship with its investor service agents and vendors that will help

in keeping up its commitments to the customers.

Provide high quality of work life for all its employees and equip them with adequate

knowledge & skills so as to respond to customer's needs.

Continue to uphold the values of honesty & integrity and strive to establish unparalleled

standards in business ethics.

Use state-of-the art information technology in developing new and innovative financial

products and services to meet the changing needs of investors and clients.

Strive to be a reliable source of value-added financial products and services and

constantly guide the individuals and institutions in making a judicious choice of same.

Strive to keep all stake-holders (shareholders, clients, investors, employees, suppliers and

regulatory authorities) proud and satisfied.

.

KARVY GROUP OF COMPANIES:

1. KARVY CONSULTANTS LIMITED.

As the flagship company of the Karvy Group, Karvy Consultants Limited has always

remained at the helm of organizational affairs, pioneering business policies, work ethic and

channels of progress.

Having emerged as a leader in the registry business, the first of the businesses that we ventured

into, we have now transferred this business into a joint venture with Computer share Limited of

35

Australia, the world’s largest registrar. With the advent of depositories in the Indian capital

market and the relationships that we have created in the registry business, we believe that we

were best positioned to venture into this activity as a Depository Participant. We were one of the

early entrants registered as Depository Participant with NSDL (National Securities Depository

Limited), the first Depository in the country and then with CDSL (Central Depository Services

Limited). Today, we service over 6 lakhs customer accounts in this business spread across over

250 cities/towns in India and are ranked amongst the largest Depository Participants in the

country. With a growing secondary market presence, we have transferred this business to Karvy

Stock Broking Limited (KSBL), our associate and a member of NSE, BSE and HSE.

2. KARVY STOCK BROKING LIMITED:

Member - National Stock Exchange (NSE), The Bombay Stock Exchange (BSE), and The

Hyderabad Stock Exchange (HSE).Karvy Stock Broking Limited, one of the cornerstones of the

Karvy edifice, flows freely towards attaining diverse goals of the customer through varied

services. Creating a plethora of opportunities for the customer by opening up investment vistas

backed by research-based advisory services. Here, growth knows no limits and success

recognizes no boundaries. Helping the customer create waves in his portfolio and empowering

36

the investor completely is the ultimate goal.

It is an undisputed fact that the stock market is unpredictable and yet enjoys a high success rate

as a wealth management and wealth accumulation option. The difference between

unpredictability and a safety anchor in the market is provided by in-depth knowledge of market

functioning and changing trends, planning with foresight and choosing one & rescue’s options

with care. This is what we provide in our Stock Broking services.

We offer services that are beyond just a medium for buying and selling stocks and shares.

Instead we provide services which are multi dimensional and multi-focused in their scope. There

are several advantages in utilizing our Stock Broking services, which are the reasons why it is

one of the best in the country.

3. DISTRIBUTION OF FINANCIAL PRODUCTS:

The paradigm shift from pure selling to knowledge based selling drives the business today.

With our wide portfolio offerings, we occupy all segments in the retail financial services

industry.

37

A 1600 team of highly qualified and dedicated professionals drawn from the best of academic

and professional backgrounds are committed to maintaining high levels of client service

delivery. This has propelled us to a position among the top distributors for equity and debt issues

with an estimated market share of 15% in terms of applications mobilized, besides being

established as the leading procurer in all public issues.

To further tap the immense growth potential in the capital markets we enhanced the scope of our

retail brand, Karvy – the Finapolis, thereby providing planning and advisory services to the mass

affluent. Here we understand the customer needs and lifestyle in the context of present earnings

and provide adequate advisory services that will necessarily help in creating wealth. Judicious

planning that is customized to meet the future needs of the customer deliver a service that is

exemplary. The market-savvy and the ignorant investors, both find this service very satisfactory.

The edge that we have over competition is our portfolio of our monthly magazine, Finapolis,

provides up-dated market information on market trends, investment options, opinions etc. Thus

empowering the investor to base every financial move on rational thought and prudent analysis

and embark on the path to wealth creation.

4. KARVY INVESTOR SERVICES LIMITED:

Recognized as a leading merchant banker in the country, we are registered with SEBI as a

Category I merchant banker. This reputation was built by capitalizing on opportunities in

corporate consolidations, mergers and acquisitions and corporate restructuring, which have

earned us the reputation of a merchant banker. Raising resources for corporate or Government

Undertaking successfully over the past two decades have given us the confidence to renew our

focus in this sector.

38

Our quality professional team and our work-oriented dedication have propelled us to offer value-

added corporate financial services and act as a professional navigator for long term growth of our

clients, who include leading corporate, State Governments, foreign institutional investors, public

and private sector companies and banks, in Indian and global markets.

We have also emerged as a trailblazer in the arena of relationships, both at the customer and

trade levels because of our unshakable integrity, seamless service and innovative solutions that

are tuned to meet varied needs. Our team of committed industry specialists, having extensive

experience in capital markets, further nurtures this relationship.

Our financial advice and assistance in restructuring, divestitures, acquisitions, de-mergers, spin-

offs, joint ventures, privatization and takeover defense mechanisms have elevated our

relationship with the client to one based on unshakable trust and confidence.

5. KARVY COMPUTERSHARE PVT LIMITED:

We have traversed wide spaces to tie up with the world’s largest transfer agent, the leading

Australian company, Computer share Limited. The company that services more than 75 million

shareholders across 7000 corporate clients and makes its presence felt in over 12 countries across

5 continents has entered into a 50-50 joint venture with us.

With our management team completely transferred to this new entity, we will aim to enrich the

financial services industry than before. The future holds new arenas of client servicing and

39

contemporary and relevant technologies as we are geared to deliver better value and foster bigger

investments in the business. The worldwide network of Computer share will hold us in good

stead as we expect to adopt international standards in addition to leveraging the best of

technologies from around the world.

Excellence has to be the order of the day when two companies with such similar ideologies of

growth, vision and competence, get together.

6. KARVY GLOBAL SERVICES LIMITED:

The specialist Business Process Outsourcing unit of the Karvy Group. The legacy of

expertise and experience in financial services of the Karvy Group serves us well as we enter the

global arena with the confidence of being able to deliver and deliver well.

40

Here we offer several delivery models on the understanding that business needs are unique and

therefore only a customized service could possibly fit the bill. Our service matrix has

permutations and combinations that create several options to choose from.

Be it in re-engineering and managing processes or delivering new efficiencies, our service meets

up to the most stringent of international standards. Our outsourcing models are designed for the

global customer and are backed by sound corporate and operations philosophies, and domain

expertise. Providing productivity improvements, operational cost control, cost savings, improved

accountability and a whole gamut of other advantages

We operate in the core market segments that have emerging requirements for specialized

services. Our wide vertical market coverage includes Banking, Financial and Insurance Services

(BFIS), Retail and Merchandising, Leisure and Entertainment, Energy and Utility and

Healthcare.

7.KARVY COMTRADE LIMITED:

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

of reliability and profitability. We have made commodities trading, an essentially age-old

practice, into a sophisticated and scientific investment option.

41

Here we enable trade in all goods and products of agricultural and mineral origin that include

lucrative commodities like gold and silver and popular items like oil, pulses and cotton through a

well-systematized trading platform.

Our technological and infrastructural strengths and especially our street-smart skills make us an

ideal broker. Our service matrix is holistic with a gamut of advantages, the first and foremost

being our legacy of human resources, technology and infrastructure that comes from being part

of the Karvy Group.

Our wide national network, spanning the length and breadth of India, further supports these

advantages. Regular trading workshops and seminars are conducted to hone trading strategies to

perfection. Every move made is a calculated one, based on reliable research that is converted into

valuable information through daily, weekly and monthly newsletters, calls and intraday alerts.

Further, personalized service is provided here by a dedicated team committed to giving hassle-

free service while the brokerage rates offered are extremely competitive.

8. Karvy Insurance Broking Limited :

At Karvy Insurance Broking Limited., we provide both life and non-life insurance

products to retail individuals, high net-worth clients and corporate. With the opening up of the

insurance sector and with a large number of private players in the business, we are in a position

42

to provide tailor made policies for different segments of customers. In our journey to emerge as a

personal finance advisor, we will be better positioned to leverage our relationships with the

product providers and place the requirements of our customers appropriately with the product

providers. With Indian markets seeing a sea change, both in terms of investment pattern and

attitude of investors, insurance is no more seen as only a tax saving product but also as an

investment product. By setting up a separate entity, we would be positioned to provide the best

of the products available in this business to our customers.

Our wide national network, spanning the length and breadth of India, further supports these

advantages. Further, personalized service is provided here by a dedicated team committed in

giving hassle-free service to the clients.

9. KARVY REALTY & SERVICES (INDIA) LIMITED:

KARVY Realty & Services (India) Limited (KRSIL) is engaged in the business of real estate

and property services offering value added property services and offers individuals and

establishments a myriad of options across investments, financing and advisory services in the

43

realty sector.

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

Realty Byte !!!

Promoted by the KARVY Group of companies, India’s largest integrated financial services

company. KARVY Realty & Services India Limited carries forward its legacy of trust and

excellence in investor and customer services delivered with a passion for services and the highest

level of quality that align with global standards.

KARVY Realty & Services (India) Limited welcomes you to take a reality check on realty

options that you can be rest assured of and of course profit from.

442

2.1 IMPORTANCE AND NEED OF THE STUDY

45

Portfolio management has emerged as a separate academic discipline in India. Portfolio

theory that deals with the rational investment decision-making process has now become an

integral part of financial literature.

Investing in securities such as shares, debentures & bonds is profitable

Well as exciting. It is indeed rewarding but involves a great deal of risk & need artistic skill.

Investing in financial securities is now considered to be one of the most risky avenues of

investment. It is rare to find investors investing their entire savings in a single security. Instead

they tend to invest in a group of securities. Such group of securities is called as PORTFOLIO.

Creation of portfolio helps to reduce risk without sacrificing returns. Portfolio management

deals with the analysis of individual securities as well as with the theory & practice of optimally

combining securities into portfolios.

The modern theory is of the view that by diversification risk can be reduced. The

investor can make diversification either by having a large number of shares of companies in

different regions. In different industries or those producing different types of product lines

Modern theory believes in the perspective of combinations of securities under constraints of risk

and return.

46

2.2 OBJECTIVES OF THE STUDY

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

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

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

are constituted.

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

To understand, analyze and select the best portfolio.

SCOPE OF THE STUDY

This study covers the Markowitz model. The study covers the calculation of correlations

between the different securities in order to find out at what percentage funds should be invested

among the companies in the portfolio. Also the study includes the calculation of individual

Standard Deviation of securities and ends at the calculation of weights of individual securities

involved in the portfolio. These percentages help in allocating the funds available for investment

based on risky portfolios.

47

2.3 METHODOLOGY

Data was also gathered from Primary and Secondary sources like the books and internet sites of

the various companies. The data from the internet sites was collected in the month of May 2010

so there might be some modification of the data presently.

Primary data collected from Organizations official sites.

Secondary data collected from different books.

LIMITATIONS OF THE STUDY

The time duration of the project will be of 45 days..

The project work done at Hyderabad Branch.

48

CALCULATION OF AVERAGE RETURNS OF COMPANIES

AVERAGE RETURN = Σ(R)/N

DR. REDDY LABORATRIES LTD

YearOpening Share Price (PO)

Closing Share Price (P1-P0) (P1-P0)/P0*100

2005-2006 1158.75 1090.95 -67.80 -5.85

2006-2007 1096.1 916.3 -179.80 -16.4

2007-2008 914.95 974.35 59.40 6.49

2008-2009 979.65 739.15 -240.50 -24.55

2009-2010 743.50 1421.4 677.90 91.18

Total Returns 50.87

Average Return = 50.87/5 =10.174

HINDUSTAN UNILEVER LIMITED (HULL):



2005-2006 222.20 225.15 2.95 1.33

2006-2007 227.25 148.35 -78.90 -34.72

2007-2008 149.15 154.40 5.26 3.52

2008-2009 154.80 131.95 -22.85 -14.76

2009-2010 132.20 272.00 139.80 105.75

Total Returns 61.12

Average Return = 61.12/5 = 12.22

50

BHARAT HEAVY ELECTRICALS LTD



2005-2006 128.65 169.00 40.35 31.36

2006-2007 180.80 223.15 42.35 23.42

2007-2008 223.65 604.35 380.70 170.22

2008-2009 637.05 766.40 129.35 20.30

2009-2010 801.65 2241.95 1440.30 179.67

Total Returns 424.98

Average Return = 424.98/5 = 84.992

BAJAJ AUTOMOBILES LIMITED;



2005-2006 249.80 462.80 213.00 85.27

2006-2007 467.65 480.00 12.35 2.64

2007-2008 480.20 910.85 430.35 89.68

2008-2009 914.20 1082.10 167.90 18.37

2009-2010 1089.35 2746.25 1656.90 152.10


Average Return = 348.06/5 = 69.60

51

PORTFOLIO CONSTRUCTION AND ANALYSIS

Portfolio analysis believes in the maximization of return through a combination of securities.

The modern portfolio theory discusses the relationship between different securities and then

draws inter-relationship or risks between them. It is not necessary to achieve success only by

trying to get all securities of minimum risk. The theory states that by combining a security of

low risk with another security of high risk, success can be achieved by an investor in making a

choice of investment outlets.

.1 AVERAGE RETURNS OF THE COMPANIES:

Formula: _AVERAGE RETURN (R) = Σ(R)/N

Where Σ(R) = Total Return

N = No. of years

Analysis

S.NO NAME OF THE COMPANYAVERAGE RETURN

1 DR.Reddy Lab.Ltd. 10.174

2 Hindustan Unilever Ltd. 12.22

3 Bharat Heavy Electronics Ltd. 84.992

4 Bajaj Automobiles Ltd. 69.6

52

Average return of BHEL is high and Dr. Reddy’s Lab is low at 10.174 and Hindustan Unilever

Ltd is also have least performance as 12.22 average return

CALCULATION OF STANDARD DEVIATION;

Standard Deviation = Variance _Variance = 1/n-1 (R-R)2

DR.REDDY

Year Returns Avg.__Return( R)

__(R-R)

__(R_R)2

2005-2006 -5.85 10.174 -16.02 256.77

2006-2007 -16.40 10.174 -26.57 706.18

2007-2008 6.49 10.174 -3.68 13.57

2008-2009 -24.55 10.174 -34.72 1205.76

2009-2010 91.18 10.174 81.01 6561.97

Total Returns 8744.25 _ Variance =1/n-1 (R_R)2 =1/5-1(8744.25) = 2186.06

Standard Deviation = Variance = 2186.06 = 46.75

HULL:


__(R-R)

__(R_R)2

2005-2006 1.33 12.2200 -10.89 118.59

2006-2007 -34.72 12.2200 -46.94 2203.36

2007-2008 3.52 12.2200 -8.70 75.69

2008-2009 -14.76 12.2200 -26.98 727.92

2009-2010 105.75 12.2200 93.53 8747.86

Total Returns 11873.46Variance =1/n-1 (R_R)2 =1/5-1(11873.43) = 2968.35


53


__(R-R)

__(R_R)2

2005-2006 31.36 84.99 -53.63 2876.39

2006-2007 23.42 84.99 -61.57 3791.11

2007-2008 170.22 84.99 85.23 7263.81

2008-2009 20.30 84.99 -64.69 4185.05

2009-2010 179.67 84.99 94.68 8963.92

Total Returns 27080.28BHEL:

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


BAJAJ:


__(R-R)

__(R_R)2

2005-2006 85.27 69.60 15.67 245.55

2006-2007 2.64 69.60 -66.96 4483.64

2007-2008 89.68 69.60 20.08 403.21

2008-2009 18.37 69.60 -51.23 2624.51

2009-2010 152.10 69.60 82.50 6806.25


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


54

STANDARD DEVIATION OF COMPANIES:

Formula:

Standard deviation = Variance

_Variance = 1/n-1 (R-R)2

S.NO NAME OF THE COMPANYAVERAGE RETURN

1 DR.Reddy Lab.Ltd. 46.75

2 Hindustan Unilever Ltd. 54.48

3 Bharat Heavy Electronics Ltd. 82.28

4 Bajaj Automobiles Ltd. 60.33

Based on the above calculations Standard Deviation of BHEL is high and DR.Reddy Lab Ltd. Is

a low & other company having medium standard deviations?

55

STANDARD DEVIATION

0

10

20

30

40

50

60

70

80

90

DR.ReddyLab.Ltd.

HindustanUnilever Ltd.

Bharat HeavyElectronics

Ltd.

BajajAutomobiles

Ltd.

Analysis Standard deviation is the indication at risk associated with a security it shows

uncertainty of return from a security from above analysis BHEL have high Standard deviation and it has practical to get good return Dr. Reddy’s Lab has 46.75 is low risky.

56

CALCULATION OF CORRELATION:

__ __Covariance (COV ab) = 1/n-1 (RA-RA) (RB-RB)

Correlation Coefficient = COV ab/σa*σb

1. DR.REDDY & OTHER COMPANIES:

i. DR.REDDY (RA) HULL;

Year __(RA-RA)

__(RB-RB)

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

2005-2006 -16.02 -10.89 174.50

2006-2007 -26.57 -46.94 1247.38

2007-2008 -3.68 -8.70 32.05

2008-2009 -34.72 -26.98 936.85

2009-2010 81.01 93.53 7576.49


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


σa = 46.75; σb = 54.48

= 2491.82/ (46.75) (54.48) = 0.978

57

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

Year __(RA-RA)

__(RB-RB)

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

2005-2006 -16.02 -53.632 859.40

2006-2007 -26.57 -61.572 1636.21

2007-2008 -3.68 85.228 -313.98

2008-2009 -34.72 -64.692 2246.37

2009-2010 81.01 94.678 7669.49

Total Returns 12097.49Covariance (COV ab) =1-5-1(12097.48) = 3024.37


σa = 46.75; σb = 82.28

= 3024.37/ (46.75) (82.28) = 0.786

iii. DR.REDDY (RA) & BAJAJ (RB):

Year __(RA-RA)

__(RB-RB)

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

2005-2006 -16.02 15.670 -251.10

2006-2007 -26.57 -66.960 1779.40

2007-2008 -3.68 20.080 -73.97

2008-2009 -34.72 -51.230 1778.91

2009-2010 81.01 82.500 6683.00




σa = 46.75; σb = 60.33

= 2479.05/ (46.75) (60.33) = .878

58

2. HULL & OTHER COMPANIES:

i. HULL (RA) & BHEL (RB):

Year __(RA-RA)

__(RB-RB)

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

2005-2006 -10.89 -53.632 584.05

2006-2007 -46.94 -61.572 2890.19

2007-2008 -8.70 85.228 -741.48

2008-2009 -26.98 -64.692 1745.39

2009-2010 93.53 94.678 8855.23




σa = 54.48; σb = 82.28

= 3333.345/ (54.48) (82.28) = 0.743

ii. HULL (RA) & BAJAJ (RB):

Year __(RA-RA)

__(RB-RB)

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

2005-2006 -10.89 15.670 -170.65

2006-2007 -46.94 -66.960 3143.10

2007-2008 -8.70 20.080 -174.70

2008-2009 -26.98 -51.230 1382.19

2009-2010 93.53 82.500 7716.23


59



σa = 54.48; σb = 60.33

= 2974.04/ (54.48) (60.33) = 0.90

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

Year __(RA-RA)

__(RB-RB)

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

2005-2006 -53.632 15.670 -840.41

2006-2007 -61.572 -66.960 4122.86

2007-2008 85.228 20.080 1711.38

2008-2009 -64.692 -51.230 3314.17

2009-2010 94.678 82.500 7810.94




σa = 82.28; σb = 60.33

= 4029.73/ (82.28) (60.33) = 0.811

60

CALCULATION OF PORTFOLIO WEIGHTS:

Formula:

Wa = σb [σb - (nab*σa)]

σa2 + σb2 – 2nab*σa*σb

Wb = 1 – Wa

I. DR.REDDY & OTHER COMPANIES:

a) DR.REDDY (a) & HULL (b); σa = 46.75,

σb = 54.48 ,

nab = 0.978

Wa = 54.48 [54.48-(0.978*46.75)]

(46.75)2 + (54.48)2 – 2(0.978)*(46.75)*(54.48)

Wa = 476.70

171.82Wa = 2.77

Wb = 1-Wa

Wb = 1-2.77 = -1.77

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

σa = 46.75,

σb = 82.28 ,

nab = 0.786

61

Wa = 82.28 [82.28 – (0.786*46.75)]

(46.75)2 + (82.28) 2 – 2(0.786)*(46.75)*(82.28)

Wa = 3746.20

2908.72

Wa = 1.28

Wb = 1-WA

Wb = 1-1.28 = -0.28

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

σa = 46.75,

σb = 60.33 ,

nab = 0.878

Wa = 60.33 [60.33 – (0.878*46.75)]

(46.75)2 + (60.33) 2 – 2(0.878)*(46.75)*(60.33)

Wa = 1163.16

872.59

Wa = 1.33

Wb = 1-WA

Wb = 1-1.33 = -0.3

62

II. HULL & OTHER COMPANIES:

a) HULL (a) & BHEL (b):

σa = 54.48,

σb = 82.28 ,

nab = 0.743

Wa = 82.28 [82.28 – (0.743*54.48)]

(54.48)2 + (82.28) 2 – 2(0.743)*(54.48)*(82.28)

Wa = 3439.30

3276.90

Wa = 1.04

Wb = 1-WA

Wb = 1-1.04 = -0.04

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

σa = 54.48,

σb = 60.33 ,

nab = 0.90

Wa = 60.33 [60.33 – (0.90*54.48)]

(54.48)2 + (60.33) 2 – 2(0.90)*(54.48)*(60.33)

Wa = 681.60

691.57

Wa = 0.98

Wb = 1-WA

Wb = 1-0.98 = 0.02

63

III. CALCULATION OF WEIGHTS OF BHEL (a) & BAJAJAUTO (b):

σa = 82.28,

σb = 60.33 ,

nab = 0.811

Wa = 60.33 [60.33 – (0.811*82.28)]

(82.28)2 + (60.33) 2 – 2(0.811)*(82.28)*(60.33)

Wa = -385.50

2358.16

Wa = -0.16

Wb = 1-WA

Wb = 1-(-1.16) = 1.16

64

3.3 CORRELATION COEFFICIENT BETWEEN THE SECURITIES

Formula: __ __ Covariance (COV ab) =1/n-1 (RA-RA) (RB-RB)


Where

R = Return_R = Average Return

SECURITY DR.REDDY HULL BHELBAJAJ AUTO

DR.REDDY 1 0.978 0.786 0.879

HULL 1 0.743 0.9

BHEL 1 0.811BAJAJ AUTO 1

PORTFOLIO WEIGHTS:

Formula:

Wa = σb [σb - (nab*σa)]

σa2 + σb2 – 2nab*σa*σb

Wb = 1 – Wa

S.No. PORTFOLIO (A&B) CORRELATION WEIGHT OF A WEIGHT OF B

1 DR.REDDY & HULL 0.978 2.77 -1.77

2 DR.REDDY & BHEL 0.786 1.28 -0.28

3 DR.REDDY & BAJAJ AUTO 0.878 1.33 -0.33

4 HULL & BHEL 0.743 0.104 -0.04

5 HULL & BAJAJ AUTO 0.90 0.98 0.02

6 BHEL & BAJAJ AUTO 0.811 -0.16 1.16

65

Analysis

Correlation of coefficient is the indication of divertible risk

If correlation coefficient is positively high or positive value it is indication that we cant reduce

the risk by portfolio diversification if correlation coefficient is negative or negatively correlated

securities in the portfolio we can reduce or eliminate the risk by diversification

Portfolio HULL and BAJAJ and portfolio BHEL and Baja auto are positive correlated securities

so it is negative advised to set this to portfolio.

66

3.4 CALCULATION OF PORTFOLIO RISK

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

I. DR.REDDY & OTHER COMPANIES:

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

σa = 82.28,

σb = 60.33 ,

Wa = 2.77

Wb = -1.77

nab = 0.978

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

= 1627.96 = 40.34

ii. DR.REDDY (a) & BHEL (b);

σa = 46.75,

σb = 82.28 ,

WA = 1.28

Wb = -0.28

Nab = 0.786

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

= 1923.33 = 43.85

67

iii. DR.REDDY (a) & BAJAJAUTO (b);

σa = 46.75,

σb = 60.33,

Wa = 1.33

Wb = -0.33

nab = 0.878

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

= 2036.83 = 45.13

II. HULL & OTHER COMPANIES:

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

σa = 54.48,

σb = 82.28,

Wa = 1.04

Wb = -0.04

nab = 0.743

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

= 2939.24 = 54.21

68

ii. HULL (a) & BAJAJAUTO (b):

σa = 54.48,

σb = 60.33,

Wa = 0.98

Wb = -0.02

nab = 0.90

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

= 2966.74 = 54.46

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

σa = 82.28,

σb = 60.33,

Wa = -0.16

Wb = 1.16

nab = 0.811

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

= 3552.07 = 59.59

69

3.4 PORTFOLIO RISK:

S.No. COMBINATION PROTFOLIO RISK

1 DR.REDDY & HULL 40.34

2 DR.REDDY & BHEL 43.85

3 DR.REDDY & BAJAJ AUTO 45.13

4 HULL & BHEL 54.21

5 HULL & BAJAJ AUTO 54.46

6 BHEL & BAJAJ AUTO 59.59

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

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

70

PORTFOLIO RISK

010203040506070

DR

.RE

DD

Y&

HU

LL

DR

.RE

DD

Y&

BH

EL

DR

.RE

DD

Y&

BA

JAJ

AU

TO

HU

LL &

BH

EL

HU

LL &

BA

JAJ

AU

TO

BH

EL

&B

AJA

JA

UT

O

ANALYSIS:

It is proved fact that portfolio is lower than individual risks at assets of portfolio we absurd from

the calculations in that risk of portfolio.

NAME PORTFILIORETURN

DR.REDDY&BHEL 43.85

DR.REDDY&HULL 40.43

DR.REDDY7BAJAJ AUTO 45.13

HULL&BHEL 54.21

HULL&BAJAJAUTO 54.46

BHEL&BAJAJAUTO 59.59

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

71

3.5 CALCULATION OF PORTFOLIO RETURNS:

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

Ra = Average Return of Security a

Rb = Average Return of Security b

Wa = weight of Security a

Wb = weight of Security b

PR = Portfolio Return

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

DR.REDDY & HULL 10.174 2.77 12.22 -1.77 6.55

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

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

HULL & BHEL 12.22 1.04 84.992 -0.04 9.31

HULL & BAJAJAUTO 12.22 0.98 69.6 0.02 13.37

BHEL & BAJAJAUTO 84.992 -0.16 69.6 1.16 67.14

72

3.5 PORTFOLIO RETURN:

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

Where,Ra = Average Return of Security a

Rb = Average Return of Security b

Wa = weight of Security a

Wb = weight of Security b

PR = Portfolio Return

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

1 DR.REDDY & HULL 6.55

2 DR.REDDY & BHEL -10.78

3 DR.REDDY & BAJAJ AUTO -9.44

4 HULL & BHEL 9.31

5 HULL & BAJAJ AUTO 13.37

6 BHEL & BAJAJ AUTO 67.14

73

PORTFOLIO RETURN

-20

0

20

40

60

80

1 2 3 4 5 6

Portfolio Return

ANALYSIS:

It is proved fact that portfolio is lower than individual risks at assets of portfolio we absurd from

the calculations in that risk of portfolio.

NAME PORTFILIORETURN

DR.REDDY&BHEL -10.78

DR.REDDY&HULL 6. 55

DR.REDDY7BAJAJ AUTO -9.44

HULL&BHEL 9.31

HULL&BAJAJAUTO 13.37

BHEL&BAJAJAUTO 67.14

74

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

3.6 PORTFOLIO RISK & RETURN:

S.No. COMBINATION PORTFOLIO RISK PORTFOLIO RETURN

1 DR.REDDY & HULL 40.34 6.55

2 DR.REDDY & BHEL 43.85 -10.78

3 DR.REDDY & BAJAJ AUTO 45.13 -9.44

4 HULL & BHEL 54.21 9.31

5 HULL & BAJAJ AUTO 54.46 13.37

6 BHEL & BAJAJ AUTO 59.59 67.14

PORTFOLIO RISK-RETURN

-20

0

20

40

60

80

1 2 3 4 5 6

RISK RETURN

75

ANALYSIS:

As we absorbed portfolio 6 BHEL& BAJAJAUTO has the risk level of 59.59 and

return from that security is 67.14. So by analysis correlation between the assets we should put

our money into securities.

76

FINDINGS:

As far as the average returns of the selected companies are concerned, Bharat Heavy

Electrical Limited is performing well in isolation where as Dr. Reddy’s Lab .Ltd. is performing

very poor.

As far as the standard Deviation of the selected companies are concerned, Bharat Heavy

Electrical Limited is very high, where as Dr. Reddy’s Lab, Ltd, is giving less risk than other

companies. This means that the higher the risk the higher the return.

As far as the correlation co-efficient is concerned the study selects only negatively

correlated scrips as suggested by Markowitz. The combination of securities with ITC is

negatively correlated.

As far as Portfolio Risk & Return are concerned the combination of securities of BHEL

& Bajaj Auto is giving more return and meanwhile the risk involved in that security is also more.

78

SUGGESTIONS:

.

I suggest to investors to go for portfolio investment. Instead at having single asset

investment.

Among the analyses combinations at portfolio BHEL&BAJAJAUTO is suitable for

investment

Choose negatively correlated assets ti reduce the risk by diversification complete and

diversity investment by different sector.

Choose portfolio by having concern a but your investment objectives and risk

tolerance.

79

CONCLUSIONS:

Before investing in shares you should look at the type of shares you want to buy and the way in

which you want to deal on the stock market. The main routes for investing in shares are;

.

Invest your capital in a number of different companies( a portfolio of shares)

Invest indirectly and spread your risk through collectively investments

80

BIBLIOGRAPHY

TEXT BOOKS:

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

2. V. Avadhani : Investment Management

3. S. Kevin : Portfolio Management

4. Prasanna Chandra : Investment Analysis & Portfolio Management

ARTICLES:

1. KARVY FINANCIAL POLICIES

WEBSITES:

1. www.nseindia.com

2. www.bseindia.com

3. www.google.com

4. www.valueresearchonline.com

5. www.moneycontrol.com

6. www.wikipedia.com

7. www.investropedia.com

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

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http://www.investropedia.com/

http://www.wikipedia.com/

http://www.moneycontrol.com/

http://www.valueresearchonline.com/

http://www.google.com/

http://www.bseindia.com/

http://www.nseindia.com/

Portfolio Management @Karvy

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