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INTRODUCTION
PORTFOLIO MANAGEMENT
Administration of a pool of investments vehicles, selected on the basis of clearly
articulated investment objectives (such as asset protection, capital enhancement, income),
by an advisor or broker on behalf of a client.
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 one should not 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 that is designed with a view to
meet the multi-faced needs of investors.
Determining the mix of assets to hold in a portfolio is referred to as portfoliomanagement. A fundamental aspect of portfolio management is choosing assets which are
consistent with the portfolio holder's investment objectives and risk tolerance. The ultimate
goal of portfolio management is to achieve the optimum return for a given level of risk.
Investors must balance risk and performance in making portfolio management decisions.
Portfolio management strategies may be either active or passive. An investor who prefers
passive portfolio management will likely choose to invest in low cost index funds with the
goal of mirroring the market's performance. An investor who prefers active portfolio
management will choose managed funds which have the potential to outperform the
market. Investors are generally charged higher initial fees and annual management fees for
active portfolio management.
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NEED FOR THE STUDY :
1) To evaluate every transaction.` Whenever a security is brought or sold, we can attempt
to assets whether the decision was correct and profitable.
2) To evaluate the performance of a specific security in the portfolio to determine whether
it has been worthwhile to include it in our portfolio.
3) To evaluate the performance of portfolio as a whole during the period without
examining the performance of individual securities within the portfolio.
OBJECTIVES OF THE STUDY:
To study the investment pattern and its related risks & returns.
To find out optimal portfolio, which give optimal return at the 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 selected portfolios is yielding a satisfactory and constant return
to the investor.
To understand, analyze and select the best portfolio.
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SCOPE OF STUDY:
This study covers the Markowitz model. The study covers the calculations 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 include the
calculation of individual standard deviation of securities and ends at the calculation of
weights of individual securities involved in the portfolio. These percentage help in
allocating the funds available for investment based on risky portfolios.
In the present study cover through examination of procedures of decision
making portfolio management environment, selection of securities Weights of differentsecurities and Earning of Portfolio NIACL.
RESEARCH METHODOLOGY
The data collection methods include both the primary and secondary collection
methods.
PRIMARY COLLECTION METHODS:
This method includes the data collection from the personal discussion with the
authorized clerks and members of the exchange
SECONDARY COLLECTION METHODS:
The secondary collection of methods includes the lectures of the superintend of the
department of market operations and so on.., also the data collected from the news,
magazines of the ISE and different books issues of the study.
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LIMITATIONS OF THE STUDY
1. Constructions of portfolio is two companies based on Markowitz model
2. Very few and randomly selected scripts / companies are analyzed from BKF
listings.
3. Data collection was strictly confined to secondary source. No primary data is
associated with the project.
4. Detailed study of the topic was not possible due to limited size of the project.
5. There was a constraint with regard to time allocation for the research study i.e. for a
period of two months.
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INDUSTRY PROFILE
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$1.63 trillion as of December 2010, making it the 4th
largest stock exchange in Asia and the 8th largest in the world. The BSE has the largest
number of listed companies in the world. It has also been cited as one of the world's best
performing stock market.
As of December 2010, there are over 5,034 listed Indian companies and over 7700
scrips on the stock exchange, the Bombay Stock Exchange has a significant tradingvolume. The BSE SENSEX , also called the "BSE 30", is a widely used market index in
India and Asia. Though many other exchanges exist, BSE and the National Stock Exchange
of India account for the majority of the equity trading in India.
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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 4 Gujarati and 1 Parsi stockbroker would gather under banyan trees in
front of Mumbai's Town Hall. The location of these meetings changed many times, as the
number of brokers constantly increased. The group eventually moved to Dalal Street in
1874 and in 1875 became an official organization known as 'The Native Share & Stock
Brokers Association'. In 1956, the BSE became the first stock exchange to be recognized
by the Indian Government under the Securities Contracts Regulation Act. The Bombay
Stock Exchange developed the BSE Sensex in 1986, giving the BSE a means to measure
overall performance of the exchange. In 2000 the BSE used this index to open its
derivatives market, trading Sensex futures contracts. The development of Sensex options
along with equity derivatives followed in 2001 and 2002, expanding the BSE's trading
platform. Historically an open outcry floor trading 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-linetrading (BOLT) currently has a capacity of 8 million orders per day. The BSE has also
introduced the world's first centralized exchange-based internet trading system,
BSEWEBx.co.in to enable investors anywhere in the world to trade on the BSE platform.
The BSE is currently housed in Phiroze Jeejeebhoy Towers at Dalal Street, Fort area.
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BSE indices:
Bombay Stock Exchange:
The launch of SENSEX in 1986 was later followed up in January 1989 by
introduction of BSE National Index. It comprised 100 stocks listed at five major stock
exchanges in India - Mumbai, Calcutta, Delhi, Ahmadabad and Madras. The BSE National
Index was renamed BSE-100 Index from October 14, 1996 and since then, it is being
calculated taking into consideration only the prices of stocks listed at BSE. BSE launched
the dollar-linked version of BSE-100 index on May 22, 2006. BSE launched two new index
series on 27 May 1994: The 'BSE-200' and the 'DOLLEX-200'. BSE-500 Index and 5
sectoral indices were launched in 1999. In 2001, BSE launched BSE-PSU Index,
DOLLEX-30 and the country's first free-float based index - the BSE Index. Over the years,
BSE shifted all its indices to the free-float methodology (except BSE-PSU index). BSE
disseminates information on the Price-Earnings Ratio, the Price to Book Value Ratio and
the Dividend Yield Percentage on day-to-day basis of all its major indices. The values of
all BSE indices are updated on real time basis during market hours and displayed through
the BOLT system, BSE website and news wire agencies. All BSE Indices are reviewed
periodically by the BSE Index Committee. This Committee which comprises eminent
independent finance professionals frames the broad policy guidelines for the development
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and maintenance of all BSE indices. The BSE Index Cell carries out the day-to-day
maintenance of all indices and conducts research on development of new indices.
National Stock Exchange (NSE):
India. It is the 9th largest 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$1.59 trillion and over 1,552 listings
as of December 2010. 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. The 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%.
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Origins:
The National Stock Exchange of India was promoted by leading financial
institutions at the behest of the Government of India, and 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)
segment of the NSE commenced operations in November 1994, while operations in the
Derivatives segment commenced in June 2000.
Innovations:
. NSE has remained in the forefront of modernization of India's capital and financial
markets, and its pioneering efforts include:
Being the first national, anonymous, electronic limit order book (LOB) exchange to
trade securities in India. Since the success of the NSE, existent market and new
market structures have followed the "NSE" model.
Setting up the first clearing corporation "National Securities Clearing Corporation
Ltd." in India. NSCCL was a landmark in providing innovation on all spot equity
market (and later, derivatives market) trades in India.
Co-promoting and setting up of National Securities Depository Limited, first
depository in India
Setting up of S&P CNX Nifty.
NSE pioneered commencement of Internet Trading in February 2000, which led to
the wide popularization of the NSE in the broker community.
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Being the first exchange that, in 1996, proposed exchange traded derivatives,
particularly on an equity index, in India. After four years of policy and regulatory
debate and formulation, the NSE was permitted to start trading equity derivatives
Being the first and the only exchange to trade GOLD ETFs (exchange traded funds)
in India.
Markets:
Currently, NSE has the following major segments of the capital market:
Equity Futures and Options
Retail Debt Market
Wholesale Debt Market
Currency futures
Mutual funds
Stocks Lending & Borrowing
August 2008 Currency derivatives were introduced in India with the launch of
Currency Futures in USD INR by NSE. Currently it has also launched currency futures in
EURO, POUND & YEN. Interest Rate Futures was introduced for the first time in India by
NSE on 31 August 2009, exactly after one year of the launch of Currency Futures.
NSE became the first stock exchange to get approval for Interest rate futures as
recommended by SEBI-RBI committee, on 31 August 2009, a futures contract based on
7% 10 Year GOI bond (NOTIONAL) was launched with quarterly maturities.
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COMPANY PROFILE
Share khan, Indias leading stock broker is the retail arm of SSKI, an organization
with over eighty years of experience in the stock market with more than 290 share shop in
120 cities and big towns, and premier online trading destination www.sharekhan.com.
Share khan offers the trade execution facilities for cash as well derivatives, on BSE ANDNSE, depository services, commodities trading on the MCX (MULTI COMMODITY
EXCHANGE) and most important, investment advice tempered by eight years of broking
experience.
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Share khan provides the facility to trade in commodities through share khan
commodities Pvt. Ltd- a wholly owned subsidiary of its parent SSKI. Share khan is the
member of two major commodities exchange MCX AND NCDEX.
The main plus point of share khan is its research report. These research reports are
based on the fundamental and technical analysis, which is done in MUMBAI head office.
Share khan got the CNBC award for BEST RESEARCH TEAM in India for past 4 years.
Also share khan is the top stock broking companies in India. Other stock broking
companies dont have the strong research team to back-up their recommendations is about
80-90%.
SSKI (S.S.Kantilal Ishwarlal)
Apart from share khan, the SSKI group also comprises of institutional broking and
corporate finance, the institutional broking division caters to domestic and foreign
institutional investor, while the corporate finance division focuses on niche areas such as
infrastructure, telecom, and media. SSKI owns 5% in share khan and the balance
ownership is HSBC, first Caryl and Intel pacific. SSKI had been voted as the top domestic
brokerage house in the research category, twice by euro money and four times by Asia
money survey.
A Sharekhan outlet offers the following services:
1. Online BSE and NSE executions (through BOLT and NEAT terminals)
2. Free access to invest advice from share khans research team
3. Sharekhan value line (a fortnightly publication with reviews of
recommendation, stock to watch out for etc.
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4. Daily research report and market review (High Noon , Eagle Eye)
5. Pre market report
6. Daily trading calls based on technical analysis
7. Cool trading products (Daring Derivatives, Trading Ring and Market Strategy)
8. Personalized advice
9. Live market information
10. Depository service: Demit and Remit transactions.
11. Derivative trading (future and options)
12. Internet-based trading: Speed Trade, Speed Trade Plus
COMPETITORS
The main competitors are India bull, HDFC securities, and ICICI to some extent,
KOTAK securities. But still share khan has too many positive points against competitors to
convert them into share khan customer.
THE MAJOR COMPITITORS OF SHARE KHAN
1. KOTAKSTEET.COM
2. INDIAINFOLINE.COM
3. INDIABULLS.COM
4. ICICIDIRECT.COM
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5. HDFCSEC.COM
HDFC securities Ltd is promoted by the HDFC Bank, HDFC and Chase Capital
Partners and their association .Pioneers in setting up Dial-a-share service with the largest
team of Tele-brokers.
CUSTOMERS
The Share khan customers are all those people who are interested in online as well as
off-line trading. The customers whom I approached are the following:
1. Private employee
2. Government employee
3. Business people
4. Students
5. Faculties of various colleges
6.
BASIC SERVICES
(Brief description about DP service)
1. Account Maintenance
2. Demit /Remit
3. Trades
4. Pledges
5. Corporate benefits
Account opening:
Opening a DP account with share khan
1. You can open Depository participants (DP) accounts through share khan branches
or through share khan franchisee center.
2. There is no fee for opening DP accounts with share khan. How ever,
deposit(Refundable) will be levied towards service which can be adjusted towards
billing charges
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All investors have to submit their proof of identity and proof of address along with the
prescribed account opening form.
1. Proof of identity: Your signature and photograph must be authenticated by an
existing Demit account holder with the same DP or by bank manager. Alternatively,
you can submit a copy of passport, voters ID card, Driving license or PAN card
with photograph.
2. Proof of address: you can submit a copy of passport, voter ID card, Driving
License, PAN card with photograph, ration card, or bank passbook as a proof of
address. You must remember to take original documents to the DP for verification.
3. Passport-size photograph.
DEMATERIALIZATION:
Dematerialization is the process by which an investor can get physical certificates
converted into electronic balances maintained in its accounts.
FEATURES:
Holding is only those securities that are admitted for dematerialized by NSDL can
be dematerialized.
Structure of holding in the securities should match with the account structure if the
depositary account .If the share are in the name of X and Y it cannot be dematerialized into
the account of either X and Y alone. Further, if share are in the name of X first and Y
second and the account is in the name of Y first and X second, then these shares cannot be
dematerialized in this accounts. The dematerialized you can pledge your share and the
money can be utilized to finance your personal needs, or you can make further investment.
Only those holding that are registered in the name of the accountant holder can bedematerialized.
REMATERIALIZATION:
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Rematerialization is the process by which a client can get his electronic holding
convertible into physical certificates. The client has to submit the dematerialization request
to the DP with whom he has an account. The DP enters the request in its system which
blocks the clients holding to that extent automatically. The DP releases the request to
NSDL and sends the request from to the Issuer/R&T Agent. The Issuer/R&T agent then
prints the certificates, dispatching the same to the client and simultaneously electronically
confirms the acceptance of the request to NSDL. There after, the clients blocked balances
are debited.
FEATURES:
1. A client can rematerialized his dematerialized holding at any point of time.
2. The dematerialized process is completed within 30days.
3. The securities sent for dematerialized cannot be traded.
TRADES
When an investor sells in a market trade i.e., through a broker, the flow of securities
happen as follows.
This statement of the trade happens on the investor giving his DP an instruction to
debit his account and credit the broker account for the quantity of shares and the broker is
turn giving his DP the instruction of delivering the share to the clearing corporation. Thus,
on the respective DPs executive the instruction the transfer of securities takes place.
Incase of market purchase, the securities come into the broker account from the
clearing corporation on payout, then the broker provides instructions to his DP to transfer
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stocks into the investor account. If the investor has not availed of automatic credit facility,
the he should provide a receipt instruction to his DP.
Incase of an off-market trade, securities move from the seller to the buyer on the
execution of respective instruction by the respective DPs.
Thus the flow of securities essentially depends upon the parties to the trade
providing the relevant instructions to the respective DPs at the appropriate time.
PLEDGE
Pledge enables you to obtain loans against you dematerialized shares. So you get
liquidity without having to sell your shares.
You can pledge your share and the money can be utilized to finance your personal needs,
or you can further investment.
CHARGES:
SERVICE SSKI CHARGES REMARKS
ACCOUNT OPENNING NILL
ACCOUNT CLOSING RS.100/-
DEMATERIALIZED RS.3/- PER CERTIFICATE OR RS.15/-PER REQUEST WHICH EVER ISHIGHER
INCLUDINGCOURIERCHARGES,
REMATERIALIZED RS.25/- PER CERTIFICATE OR 0.12%OF THE VALUE OF THE SECURITIESREQUESTED FOR REMATERALIZED,WHICH EVER IS HIGHER
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SETTLEMENT FEES-(BUY)
0.02% OR RS15/- PER TRANSACTIONWHICH EVER IS HIGHER
ONMARKETVALUE
SETTLEMENT FEES-(SALE)
0.04% OR RS.15/- PER TRANSACTIONWHICH EVER IS HIGHER
ON MARKETVALUE
CUSTODY FEE NIL
OFF MARKET-(BUY-INTER DP)-FROM OTHERDP
NIL
OFF MARKET (BUY-INTRA DP )-FROM
OTHER DP
0.02% OR RS15/- PER TRANSACTIONWHICH EVER IS HIGHER
ON MARKETVALUE
OFF MARKET (SALE) 0.04% OR RS.15/- PER TRANSACTIONWHICH EVER IS HIGHER
ON MATKETVALUE
ACCOUNTMAINTANANCE FEE
RS.75/- PER QUARTER
PLEDGE CREATION 0.02% OR RS.15/- PER TRANSACTIONWHICH EVER IS HIGHER
ON MARKETVALUE
PLEDGE CLOSURE 0.02% OR RS.15/- PER TRANSACTIONWHICH EVER IS HIGHER
ON MARKETVALUE
PLEDGE INVOCATION 0.03% OR RS.15/- PER TRANSACTIONWHICH EVER IS HIGHER
ON MARKETVALUE
LEND UP TP 3 MONTHS 0.04% AND ABOVR 3 MONTHS 0.06%
ON MARKETVALUE
FREEZ/ DE-FREEZINGOF ACCOUNT
RS.25/- PER REQUEST
DEPOSIT RS.500/- UPFRONT
NOTE:-
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1.Fee schedule based on existing NSDL charges; if NSDL revises its charges, SSKI
will reserve the right for changing its service charges.
2.Value of transaction/holding will be in accordance with NSDL formulae.
3.Any service not quoted above will be charged separately.
Transaction statement: - free of cost once every fortnight subject to a transaction having
taken place or once a quarter. Every extra statement shall be charged at RS.10/- if the
number of pages exceeds 10, then every additional page will be charged at the rate of
Rs.3/- per page
What are the benefits of depository system?
The benefits of participation in depository are
Immediate transfer of securities.
No stamp duty on transfer of securities.
Elimination of risk associated with physical certificates such as dad delivery,
fake securities, etc.,
Nomination facility.
Change in address recorded with DP gets registered with all companies in
which investor holds securities electronically eliminating the need to
correspond with each of them separately
Transmission of securities is done by DP eliminating correspondence with
companies.
Convenient method of consolidation of folios/accounts.
Holding investment in equity and debt instrument in a single account.
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REVIEW OF LITERATURE:
Portfolio Management
Portfolio management is all about strengths, weaknesses, opportunity, threats in the
choice of debt vs. equity, domestic vs. international vs. growth vs. safety, and numerous
other trades-offs encountered in the attempt to maximize return at a given appetite for risk.
A portfolio is a collection of securities. Since it is rarely desirable to invest the
entire funds of an individual or an institution in a single security, it is essential that every
security be view in portfolio context. Thus, it seems logical that the expected return on a
portfolio should depend on the expected return of each of the security contained in the
portfolio.
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Portfolio analysis considers the determination of future risk and return in holding
various blends of individual securities. Portfolio expected return is a weighted average of
the expected return of individual securities but portfolio variance, in short contrast, can be
something less than a weighted average of a security variance. As a result, an investor can
sometimes reduce portfolio risk by adding security will greater individual risk than any
other security in the portfolio. This is because risk depends greatly on the covariance
among returns of individual securities. Portfolios, which are combination of securities may
or may not take only aggregate characteristics of their individual parts
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 ingestible funds a large part of house hold
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 governments industrial and
fiscal policies, uncertainty and instability.
Greater of computer for processing mass of data.
Professionalization of the field and increasing use of analytical methods (e.g.
quantitative techniques) in the investment decision making
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Larger direct and indirect costs of errors shortfalls in meeting portfolio objectives
increased competition and greater security by investors.
PORTFOLIO MANAGER:
Portfolio manager means any person who pursuant to a contract or arrangement
with a client, advice or direct or undertakes on behalf of the client (whether as a
discretionary portfolio manager or otherwise) the management or administration of
securities are the funds of the client.
1. Discretionary Portfolio Manager:
A discretionary portfolio manager meansa portfolio manager who exercises or may,
under a contract relating to portfolio management, exercises any degree of discretion in
respect of the investments or management of the portfolio of securities or the funds of
the clients, as the case may be. He shall individually and independently manage the
funds of each client in accordance with the needs of the client in a manner which does
not resemble a mutual fund.
2. Non-Discretionary Portfolio Manager:A Non-Discretionary Portfolio Manager shall manage the funds of each client in
accordance with the directions of the client.
A portfolio manager, by the virtue of his knowledge, background and
experience is expected to study the various avenues available for profitable investment
and advise his client to enable the latter to maximize the return on his investment and at
the same time safeguard the funds invested.
FUNCTIONS OF PORTFOLIO MANGERS:
They study economic environment affecting the capital market and clients
investment.
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They study securities market and evaluate price trend of shares and securities in
which investment is to be made.
They maintain complete and updated financial performance data of Blue-Chip and
other companies.
They keep a track on latest policies and guidelines of Government of India, RBI
and Stock Exchanges.
They study problems of industry affecting securities market and the attitude of
investors.
They study the financial behaviour of development financial institutions and other
players in the capital market to find out sentiments in the capital market.
They counsel the prospective investors on share market and suggest investments in
certain assured securities.
They carry out investments in securities or sale or purchase of securities on behalf of
the clients to attain maximum return at lesser risk.
ADVANTAGES
In the portfolio we can find many advantages which can make us to run our
business in most efficient manner. Of these some of them are described below:
1. Maximize the expected rate of return subject to the risk exposure being held within a
certain limit. (The risk tolerance level)
2. Minimize the risk exposure, without sacrificing a certain rate of return. (The target
rate of return)
3. To increase the value of the principal amount through capital appreciation.
4. To protect the principal amount invested from the risk of loss.
5. To provide a steady stream of income through regular interest/dividend payments.
When we are purchasing any security or bond of the company, they give higher return
rather than banks or financial institutions. When any person invests his money in any bank
they give low return.
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For example: - S.B.I provides 9% return on investment, rather than companys securities
provide higher return on investment
PORTFOLIO ANALYSISVarious 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
Traditional approach
Modern approach
TRADITIONAL APPROACH:
Traditional approach was based on the fact risk could be measured on each
individual security through the process of finding out the standard deviation and the
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
in to account the individual need 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
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b) Selecting of securities to be include in the portfolio.
MODERN APPORACH:
Modern approach theory was brought out by Markowitz and sharp. It is 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 selecting the portfolio. It does not deal with the
individual needs.
MARKOWITZ MODEL:
Markowitz model is a theoretical framework for analysis of risk and return and
their relationship. He used statistical analysis for the measurement of risk and mathematical
programming for selection of assets in a portfolio in an efficient manner. Markowitz
approach determines for the investor the efficient set of portfolio through three important
variables i.e.
Return
Standard deviation
Co-efficient of correlation
Markowitz model is also called as an Full Covariance Model Through this model
the investor can find out the trade off between risk and return, between the limits of zero
and infinity. According to this theory, the effects of one security purchase over the security
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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 companies stock.
Markowitz had given up the single portfolio and introduced diversification. The
single stock portfolio would be preferable if the investor is perfectly certain that his
expectation of higher return would turn out to real. In the world of uncertainty, most of risk
adverse investors would like to join Markowitz rather than keeping a single stock, because
diversification reduces the risk.
ASSUMPTIONS:
1. Investors behave rationally.
2. All investors have the same expected single period investment horizon.
3. All investors before making any investment have a common goal.
4. Investors know all the information about the market situation.
5. Investor free access to fair and correct information on the return and risk.
6. Investors are risk averse and choose higher return to lower level of risk.
7. The investor can reduce his risk if he adds investment to his portfolio.
8. The markets are efficient and they absorb information to his portfolio.
9. Investors make their decision only on the basis of the expected returns, standard
deviation and covariance of all pairs of securities.
10. 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 treasure
bills or Government securities.
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
ca so optimize returns with the associated degree of risk.
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To make timely buying and selling of securities
To maximize the after-tax return by investing in various tax saving investment instruments,
EVALUATION OF PORTFOLIO:
Portfolio manager evaluates his portfolio 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 lat stage of investment process. There are number of situations in
which an evaluation becomes necessary and important.
I. Self valuation: An individual done. This is a part of the process of refining his
skills and improving his performance over a period of time.
II. Evaluation of manager: A mutual fund or similar organization might want to
evaluate its managers. A mutual fund may have several managers each running
a separate fund or sub-fund. It is often necessary to compare the performance of
these managers.
PROCESS OF TYPICAL PORTFOLIO MANAGEMENT
The process of portfolio management is a complex activity. It is divided into seven
broad phases.
1. Specification of investment, objective and constraints
2. Asset mix
3. Formation of portfolio strategy
4. Selection of securities
5. Portfolio execution
6. Portfolio revision
7. Performance evaluation
1. SPECIFICATION OF INVESTMENT, OBJECTIVE AND CONSTRAINTS
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The first step in the portfolio management is to be specifying the investment policies
which summarize the objective, constraints and preference of the investor.
The objectives of investor policy may be expressed as follows
Return requirement
Risk tolerance
Constraints and preferences
Liquidity
Investment
Horizon
Taxes
Regulation
Unique circumstance
2. SELECTION OF ASSET MIX
Based on your objective and constraints you have to specify your asset allocation.
That is you have to decide how much of your portfolio has to be invested in each of the
following asset categories.
Cash
Bonds
Stocks
Real estates
Precious metals
3. FORMATION OF PORTFOLIO STRATEGY
After you have chosen a certain asset mix you have to formulate an appropriate
portfolio strategy.
Two broad choices are available in this respect
An active portfolio strategy
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Passive portfolio strategy
An active portfolio strategy
An active portfolio strategy is followed by most investment professionals and
aggressive investors who strive to earn superior return after adjustment for risk.
The four principle factors of an active strategy
1) Market timing
2) Sector rotation
3) Security selection
4) Use of a specified concept
The active strategy is based on the promise that the capital market is characterized
by inefficiency which can be exploited by resorting to market timing or sector or security
selection or use of a specialized concept or some combination of these sectors.
Passive strategy
The passive strategy rests on the tenant that the capital market is fairly efficient
with respect to the available information. It involves the following two guidelines:
a) Create a well diversified portfolio at a predetermined level of risk.
b) Hold the portfolio relatively unchanged overtimes, unless it becomes inadequate
diversified or inconsistency with the investors risk return preference.
4. SELECTION OF SECURITIES
While selecting bonds we have to carefully evaluate the following factors
YTM risk of default
Tax shield
Liquidity
Three broad approaches are employed for the selection of equity shares.
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Technical analysis
Fundamental analysis
Random selection
5. PORTFOLIO EXECUTION
The next step is to implement the buying and selling of specified securities in
given amount. It is an important practical step that has a significant bearing an investment
results.
6. PORTFOLIO REVISION
Irrespective of how well you have constructed a portfolio, it soon tends to become
inefficient and hence needs to be monitored and revised periodically.
As Robert D. A molt says portfolios do not manage them nor can they.
Whether the age unaltered with each passing day, portfolio that we carefully created
yesterday becomes very less than optimal today.
Portfolio rebalancing
Portfolio upgrading
7. PORTFOLIO PERFORMANCE EVALUATION
Rate of return
Risk
Variability
Beta
TYPES OF PORTFOLIO MANAGEMNT
1. DISCREATIONARY PORTFOLIO MANAGEMENT SERVICE (DPMS)
In this type of services, the client parts with his money in favor of the
manager, who is 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
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managers parks the funds in the money market securities such as overnight market,
18 days treasury bills and 90 days treasury bills. Normally, the return of such
investment varies from 14 to 18 percent, depending on the call money rates
prevailing at the time of investment.
2. NON-DISCREATIONARY PORTFOLIO MANAGEMNT
SERVICE (NDPMS)
The manager functions as a counselor, but the investor if free to accept or
reject the managers advice. The paper work is also undertaken by manager for a
service charge. The manager concentrates on stock market instruments with
portfolio tailor-made to the risk taking ability of the investor.
CRITERIA FOR PORTFOLIO DECISION
1. Portfolio management emphasis is put on identifying the collective importance of
all investors holding. The emphasis shifts from individual assets selection to a
more balanced emphasis on diversification and risk-return interrelationship of
individual assets within the portfolio. Individual securities are important only to the
extent they affect the aggregate portfolio. In short, all decisions should focus on the
impact which decision will have effect on the aggregate portfolio of all assets held.
2. Portfolio strategy should be molded to the unique needs and characteristics of the
portfolios owner.
3. Diversification across securities will reduce a portfolios risk. Is the risk and return
are lower than the desired level; leverages (borrowing) can be used to achieve thedesired level.
4. Large portfolio returns come only with larger portfolio risk. The most important
decision to make is the amount of risk which is acceptable.
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5. The risk associated with a security type depends on when the investment will be
liquidated; risk is reduced by selecting securities with payoff close to when the
portfolio is to be liquated.
6. Completion for abnormal return is extensive, so one has to be careful in evaluating
the risk and return from securities. Imbalance do not last long and one has to act
fast to profit exceptional opportunities.
RISK AND EXPECTED RETURN
There is a positive relationship between the amount of risk and the amount of
expected return i.e., the greater the risk, the larger the expected return and larger the
chances of substantial loss. One of the most difficult problems for an investor is to estimate
the highest level of risk he is able to assume.
THE EFFECTS OF COMBINING TWO SECURITIES
It is believed that holding two securities is less risky than by having only one
investment in a persons portfolio. When two stocks are taken on a portfolio and if they
have negative correlation then risk can be completely reduced because the gain on one can
offset the loss on the other.
INTER-ACTIVE RISK THROUGH COVARIANCECovariance of the securities will help in finding out the inter-active risk. When the
covariance will be positive then the rate of return of securities move together either
upwards or downwards. Alternatively it can also say that the inter-active risk is positive.
Secondly, covariance will be zero on two investments if the rates of return are independent.
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Holding two securities may reduce the portfolio risk too. The portfolio risk can be
calculated with the help of the following formula:
PORTFOLIO AGE RELATIONSHIP
Your age will help you to determine what a good mix /portfolio is
AGE PORTFOLIO
Below 30
80% in stocks or mutual funds
10% in cash10% in fixed income
30 t0 40
70% in stocks or mutual funds10% in cash20% in fixed income
40 to 50
60% in stocks or mutual funds10% in cash30% in fixed income
50 to 60
50% in stocks or mutual funds
10% in cash40% in fixed income
Above 60
40% in stocks or mutual funds10% in cash50% in fixed income
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It is important to always have some equities in your portfolio (or equity funds) no
matter what your age. If inflation roars back, this will be the portion of your investments
that protects you from the damage, not your fixed income.
Also, the fixed income of your portfolio should be diversified. If you buy bonds and
debentures directly or if you invest in FDs, then make sure you have at least five different
maturities to spread out the interest rate risk.
CALCULATION OF YEARLY RETURN OF INDIVIDUAL COMPANIES:
1. AVERAGE RETURN OF BANK OF BARODA:
YEAR OPENINGPRICE (PO)
CLOSINGPRICE (PI)
PI-PO [PI-PO/PO]*100
2007
374.85 584.7
209.85 55.982
2008
586.25 890.4
304.15 51.88
2009
889 1232.4
343.4 38.627
2010
1235 448.35
-786.65 -63.696
2011
455 875.70
420.7 92.461
TOTAL RETURNS 175.254
ReturnsAverage Return =
No. of Years
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= 175.254/5
= 35.05
2. AVERAGE RETURN OF INFOSYS
YEAR
OPENING
PRICE
(PO)
CLOSING
PRICE
(PI)
PI-PO[PI-PO/PO]*100
2007 2099 2996.75897.75 42.77
2008 3000 2240.5-759.5 -25.317
2009 2242 1768.4-473.6 -21.124
2010 1758 1117.85-640.15 -36.414
2011 1125 26061481 131.644
TOTAL RETURNS 133.807
ReturnsAverage Return =
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No. of Years
= 133.807/5
= 26.76
3. AVERAGE RETURN OF RELIANCE
YEAR
OPENING
PRICE (PO)
CLOSING
PRICE (PI)PO-PI [PI-
PO/PO]*100
2007 520.05 889.65
369.6 71.07
2008 893.45 1270.35
376.9 42.184
2009 1252.55 2881.05
1628.5 130.014
2010 2950 1230
-1720 -58.305
2011 1240.05 1089.40
150.65 -12.149
TOTAL RETURNS 172.814
ReturnsAverage Return =
No. of Years
= 172.814/5
= 34.56
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4. AVERAGE RETURN OF HCL
YEAROPENING
PRICE
CLOSING
PRICE
PO-PI [PI-PO/PO]*100
2007 753 463.45-289.55 -38.453
2008 464 604.55140.55 30.29
2009 607.9 525.6 -82.3 -13.5
2010 522 233.55-288.45 -55.25
2011 236 679.40443.4 187.88
TOTAL RETURNS 110.92
ReturnsAverage Return =
No. of Years
= 110.92/5
= 22.1
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2) CALCULATION OF STANDARDARD DEVIATION
1. BANK OF BARODA:
Year Return (R)Average
Return (R )(R - R ) (R - R )
2
2007
55.98235.05 20.932 438.148
2008
51.8835.05 16.83 283.248
2009
38.627 .35.05 3.577 12.794
2010
-63.69635.05 98.746 9750.772
2011
92.46135.05 57.411 3296.022
13780.984
= 13780.984/5
= 2756.1968
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Standard Deviation = Variance
= 2756.1968
= 52.50
2. INFOSYS:
Year Return (R)Average
Return (R )(R - R ) (R - R )
2
200742.77 26.76 16.01 256.320
2008-25.317 26.76 52.077 2712.013
2009-21.124 26.76 47.886 2292.973
2010-36.414 26.76 63.174 3990.954
2011
131.644 26.76 104.884 11000.653
20252.913
= 20252.913/5
= 4050.5826
Standard Deviation = Variance
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= 20252.913
= 142.312
3. RELIANCE:
Year Return (R)Average
Return (R )(R - R ) (R - R )
2
200771.07 34.56 36.51 1332.980
200842.184 34.56 7.624 58.125
2009130.014 34.56 95.456 9111.657
2010
.-58.305 34.56 -92.865 8623.908
2011-12.149 34.56 -46.709 2181.730
21308.4
= 21308.4/5
= 4261.68
Standard Deviation = Variance
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= 4261.68
= 65.281
4. HCL:
Year Return (R)Average
Return (R )(R - R ) (R - R )
2
2007
-38.453 22.1 60.553 3666.665
200830.29 22.1 8.19 67.076
2009-13.5 22.1 -35.638 1270.067
2010-55.25 22.1 77.359 5984.414
2011187.88 22.1 165.781 27483.339
38471.531
= 38471.531/5
= 7694.306
Standard Deviation = Variance
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= 7694.306
= 87.717
.
TABLE 4.6
CALCULATION OF COVARIANCE & CORRELATION OF DIFFERENT
PORTFOLIOS
1. BOB (RA) AND INFOSYS (RB)
Year (RA - RA ) (RB-RB ) (RA - RA )(RB-RB )
200720.93 24.46 511.94
2008 16.83 -43.62 -734.12
20093.57 -39.43 -140.76
2010-98.74 -54.72 5403.05
201157.41 113.33 6506.27
11546.38
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Covariance of BOB & Infosys = (RA - RA )(RB- RB )/N
= 11546.38/5
= 2309.27
Correlation Coefficient = COV ab/b
a = 52.50
b = 142.312
= 2309.27/52.50*142.312
= 2309.27/7471.38
= 0.30
Covariance Correlation coefficient
2309.27 0.30
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TABLE 4.7
2. RELIANCE INDUSTIRES Ltd (RA). & HCL (RB)
YEAR (RA - RA ) (RB-RB ) (RA - RA )(RB-RB )
200736.51 -60.64 -2213.96
20087.62 8.1 61.72
2009 95.44 -35.69 -3406.25
2010-92.86 -77.44 7191.07
2011-46.7 165.69 -7737.72
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-6105.14
Covariance of Reliance & HCL = (RA - RA )(RB-RB )/N
= -6105.14/5
= -1221.02
Correlation Coefficient = COV ab/b
a = 65.281
b = 87.717
= -1221.02/65.281*87.717
= -1221.02/5726.253477
= -0.21
Covariance Correlation coefficient
-1221.02 -0.21
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TABLE 4.8
3. BOB (RA) & RELIANCE INDUSTIRES Ltd. (RB)
YEAR (RA - RA ) (RB-RB ) (RA - RA )(RB-RB )
200720.93 36.51 764.15
200816.83 7.62 128.24
20093.57 95.44 340.72
2010
-98.74 -92.86 9168.99
201157.41 -46.7 -2681.04
7721.06
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Covariance of BOB & Reliance = (RA - RA )(RB-RB )/N
= 7721.06/5
= 1544.21
Correlation Coefficient = COV ab/b
a = 52.50
b = 65.281
= 1544.21/52.50*65.281
= 1544.21/3427.2525
= 0.45
Covariance Correlation coefficient
1544.21 0.45
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TABLE 4.9
4. BOB (RA) & HCL (RB)
YEAR (RA - RA ) (RB-RB ) (RA - RA )(RB-RB )
200720.93 -60.64 -1269.19
200816.83 8.1 136.32
20093.57 -35.69 -127.41
2010-98.74 -77.44 7646.42
201157.41 165.69 9512.26
15898.4
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Covariance of BOB & HCL = (RA - RA )(RB-RB )/N
= 15898.4/5
= 3179.68
Correlation Coefficient = COV ab/b
a = 52.50
b = 87.717
= 3179.68/52.50*87.717= 3179.68/4605.1425
= 0.69
Covariance Correlation coefficient
3179.68 0.69
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TABLE 4.10
5. INFOSYS (RA) AND RELIANCE (RB)
YEAR (RA - RA ) (RB-RB ) (RA - RA )(RB-RB )
200724.46 36.51 893.03
2008-43.62 7.62 -332.38
2009-39.43 95.44 -3763.19
2010-54.72 -92.86 5081.29
2011113.33 -46.7 -5292.51
-3413.76
Covariance of Infosys & Reliance = (RA - RA )(RB-RB )/N
= -3413.76/5
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.
= - 682.75
Correlation Coefficient = COV ab/b
a = 142.312b = 65.281
= -682.75/142.312*65.281
= -682.75/9290.269672= -0.073
Covariance Correlation coefficient
-682.75 -0.073
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TABLE - 4.11
6. INFOSYS (RA) AND HCL (RB)
YEAR (RA - RA ) (RB-RB ) (RA - RA )(RB-RB )
200724.46 -60.64 -1483.25
2008-43.62 8.1 -353.32
2009-39.43 -35.69 1407.25
2010-54.72 -77.44 4237.51
2011113.33 165.69 18777.64
22585.83
Covariance of Infosys & HCL = (RA - RA )(RB-RB )/N
= 22585.83/5
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= 4517.16
Correlation Coefficient = COV ab/b
a = 142.312
b = 87.717
= 4517.16/142.312*87.717
= 4517.16/12483.181704
= 0.36
TABLE - 4.12
Covariance Correlation coefficient
4517.16 0.36
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REPORT OF YEARLY COVARIANCE AND CORRELATION OF BOB, INFOSYS,
RELIANCE AND HCL COMPANIES
Companies Covariance Correlation
BOBa and INFOSYSb 2309.27 0.30
BOBa and RELIANCEb 1544.21 0.45
BOBa and HCLb 3179.68 0.69
INFOSYSa andRELIANCEb -682.75 -0.073
INFOSYSa and HCLb 4517.16 0.36
RELIANCEa and HCLb -1221.02 -0.21