PORTFOLIO MANAGMENT

CHAPTER-I INTRODUCTION

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INTRODUCTION:
The financial market is the driver of the economic growth and development of any country. A sound financial market can take the country to the apex. Financial resources were by allocating the resources through one of the ways such as portfolios, which are combinations of various securities. In simple words it is a basket of investments or asset held by an individual or a corporate body. Portfolio analysis includes analyzing the range of possible portfolios that can be constituted from a given set of securities. A combination of securities with different risk- return characteristics will constitute the portfolio of the investor. A portfolio is a combination of various assets and/or instruments of investments. The portfolio is also built up out of the wealth or income of the investor over a period of time with a view to suit his risk and return preferences to that of the portfolio that he holds. The portfolio analysis is an analysis of the riskreturn characteristics of individual securities in the portfolio and changes that may take place in combination with other securities due to interactions among themselves and impact of each one of them on others.

Aspects of portfolio management:

Basically portfolio management involves A proper investment decision making of what to buy & sell Proper money management in terms of investment in a basket of assets so as to satisfy the asset preferences of investors. Reduce the risk and increase returns. The basic objective of Portfolio Management is to maximize yield and minimize risk. The other ancillary objectives are as per needs of investors, namely: Regular income or stable return Appreciation of capital Marketability and liquidity Safety of investment Minimizing of tax liability.

PORTFOLIO MANAGMENT Portfolio management services helps investors to make a wise choice between alternative investments with pit any post trading hassles this service renders optimum returns to the investors by proper selection of continuous change of one plan to another plane with in the same scheme, any portfolio management must specify the objectives like maximum returns, and risk capital appreciation, safety etc in their offer.

RESEARCH METHODOLOGY:
Research design or research methodology is the procedure of collecting, analyzing and interpreting the data to diagnose the problem and react to the opportunity in such a way where the costs can be minimized and the desired level of accuracy can be achieved to arrive at a particular conclusion. The methodology used in the study for the completion of the project and the fulfillment of the project objectives, is as follows: Market prices of the companies have been taken for the years of different dates, there by dividing the companies into 5 sectors. A final portfolio is made at the end of the year to know the changes (increase/decrease) in the portfolio at the end of the year.

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OBJECTIVES OF THE STUDY:

To study the role of securities in Indian financial markets To study the investment pattern and its related risks & returns. To find out optimal portfolio, which gave optimal return at a minimize risk to the investor. To understand portfolio selection process. To study the usefulness of efficient frontier technique in portfolio selection process. To see whether the portfolio risk is less than individual risk on whose basis the 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 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 securities and ends at the calculation of weights of individual securities involves in the portfolio. These percentages help in allocating the funds available based on risky portfolios.

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NEED FOR THE STUDY:

The Portfolio Management deals with the process of selection securities from the number of opportunities available with different expected returns and carrying different levels of risk and the selection of securities is made with a view to provide the investors the maximum yield for a given level of risk or ensure minimum risk for a level of return. Portfolio Management is a process encompassing many activities of investment in assets and securities. It is a dynamics and flexible concept and involves regular and systematic analysis, judgment and actions. The objectives of this service are to help the unknown investors with the expertise of professionals in investment Portfolio Management. It involves construction of a portfolio based upon the investors objectives, constrains, preferences for risk and return and liability.

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Limitations of the study:

This study has been conducted purely to understand Portfolio Management investors. Construction of Portfolio is restricted to two companies based on Markowitz Very few and randomly selected scripts / companies are analyzed from BSE Detailed study of the topic was not possible due to limited size of the There was a constraint with regard to time allocation for the research study

for

model. listings. project. i.e. for a period of 45 days.

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CHAPTER-II
INDUSTRY PROFILE COMPANYPROFILE

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INDUSTRY PROFILE
The Indian financial system can be varied through subject to understand. Broadly, the Indian Financial System can be categorized into the following systems, which are having the following priorities in the respective field. Financial markets: Capital Markets. Money Markets. Commodity Markets. Bill Markets. Financial Institutions: Banks Financial Institutions. Financial services: Brokerage Services. Distribution Network Incidence Advisors

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STOCK EXCHANGES IN INDIA

At the end of the June 1989, there were 18 recognized stock exchanges in India. Among the 18 stock exchanges, the first organized stock exchange set up at Bombay in 1857 is distinguished not only by its size but also it has been recognized permanently, while the recognition for other markets is renewed every 5 years. Stock markets are organized either as voluntary, non-profit making associations (Bombay, Ahmadabad, Indore) or public limited companies (Calcutta, Delhi, Bangalore) or company limited by guarantee (Madras, Hyderabad). In India, the growth of stock exchanges has been linked to the growth of corporate sector. Though a number of stock exchanges were set up before independence but, there was no All India legislation to regulate their working. Every stock exchange followed its own methods of working. To rectify this situation, the SECURITY CONTRACTS (REGULATIONS) ACT was passed in 1956. In 1965, 22 separate provincial stock exchanges were merged into 3 regional stock exchanges and in 1973 these, in turn, were combined to form the National Stock Exchange (NSE) under the title of the stock exchange that has trading floors in many former provincial center. At present, there are 23 stock exchanges in our country. The over-the counter exchange of India began its operations in 1992. Since 1995, trading in securities is screen based (on-line).

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Bombay Stock Exchange Limited is the oldest stock exchange in Asia with a rich heritage. Popularly known as "BSE", it was established as "The Native Share & Stock Brokers Association" in 1875. It is the first stock exchange in the country to obtain permanent recognition in 1956 from the Government of India under the Securities Contracts (Regulation) Act, 1956.The Exchange's pivotal and pre-eminent role in the development of the Indian capital market is widely recognized and its index, SENSEX, is tracked worldwide. Earlier an Association of Persons (AOP), the Exchange is now a demutualised and corporatized entity incorporated under the provisions of the Companies Act, 1956, pursuant to the BSE (Corporatization and Demutualization) Scheme, 2005 notified by the Securities and Exchange Board of India (SEBI). With demutualization, the trading rights and ownership rights have been de-linked effectively addressing concerns regarding perceived and real conflicts of interest. The Exchange is professionally managed under the overall direction of the Board of Directors. The Board comprises eminent professionals, representatives of Trading Members and the Managing Director of the Exchange. The Board is inclusive and is designed to benefit from the participation of market intermediaries. In terms of organization structure, the Board formulates larger policy issues and exercises over-all control. The committees constituted by the Board are broad-based. The day-to-day operations of the Exchange are managed by the Managing Director and a management team of professionals. The Exchange has a nation-wide reach with a presence in 417 cities and towns of India. The systems and processes of the Exchange are designed to safeguard market integrity and enhance transparency in operations. During the year 2004-2005, the trading volumes on the Exchange showed robust growth. The Exchange provides an efficient and transparent market for trading in equity, debt instruments and derivatives. The BSE's On Line Trading System (BOLT) is a proprietary system of the Exchange and is BS 7799-2-2002 certified. The Surveillance and clearing & settlement functions of the Exchange are ISO 9001:2000 certified 11

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The National Stock Exchange of India Limited has genesis in the report of the High Powered Study Group on Establishment of New Stock Exchanges, which recommended promotion of a National Stock Exchange by financial institutions (FIs) to provide access to investors from all across the country on an equal footing. Based on the recommendations, NSE 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 unlike other stock exchanges in the country. On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital Market (Equities) segment commenced operations in November 1994 and operations in Derivatives segment commenced in June 2000. Our Mission NSE's mission is setting the agenda for change in the securities markets in India. The NSE was set-up with the main objectives of: Establishing a nation-wide trading facility for equities, debt instruments and hybrids, Ensuring equal access to investors all over the country through an appropriate communication network, Providing a fair, efficient and transparent securities market to investors using electronic trading systems, Enabling shorter settlement cycles and book entry settlement systems, and meeting the current international standards of securities markets.

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PORT FOLIO 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 share s 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 that is designed with a view to meet the multi-faced needs of investors. According to Securities and Exchange Board of India Portfolio Manager is defined as: portfolio means the total holdings of securities belonging to any person. PERSONS INVOLVED IN PORTFOLIO MANAGEMENT: INVESTOR Are the people who are interested in investments their funds? PORTFOLIO MANAGER means any person who pursuant to a contract or arrangement with a client, advises or directs or undertakes on behalf of the client (whether as a discretionary portfolio manager or otherwise) the management or administration of a portfolio of securities or the funds of the client 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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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. STRUCTURE / PROCESS OF TYPICAL PORTFOLIO MANAGEMENT In the small firm, the portfolio manager performs the job of security analyst. In the case of medium and large sized organizations, job function of portfolio manager and security analyst are separate. CHARACTERISTICS 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 Indian Stock Markets are very complicated. Though there are thousands of companies that are listed only a few hundred which have.

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PORTFOLIO MANAGMENT FUNDAMENTAL ANALYSIS A method of evaluating a security that entails attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors. A Fundamental analysts attempt to study everything that can effect the securitys value, including macroeconomic factors (like the overall economy and industry conditions) and company-specific factors (like financial condition and management) The end goal of performing fundamental analysis is to produce a value that an investor can compare with the security's current price, with the aim of figuring out what sort of position to take with that security (under priced = buy, overpriced = sell or short). Fundamental analysis is about using real data to evaluate a security's value. Although most analysts use fundamental analysis to value stocks, this method of valuation can be used for just about any type of security. For example, an investor can perform fundamental analysis on a bond's value by looking at economic factors, such as interest rates and the overall state of the economy, and information about the bond issuer, such as potential changes in credit ratings. For assessing stocks, this method uses revenues, earnings, future growth, return on equity, profit margins and other data to determine a company's underlying value and potential for future growth. In terms of stocks, fundamental analysis focuses on the financial statements of the company being evaluated Fundamental Analysis: How Does It Work? Fundamental analysis is carried out with the aim of predicting the future performance of a company. It is based on the theory that the market price of a security tends to move towards its 'real value' or 'intrinsic value.' Thus, the intrinsic value of a security being higher than the securitys market value represents a time to buy. If the value of the security is lower than its market price, investors should sell it.

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PORTFOLIO MANAGMENT The steps involved in fundamental analysis are: Macroeconomic analysis, which involves considering currencies, commodities and indices. Industry sector analysis, which involves the analysis of companies that are a part of the sector. Situational analysis of a company. Financial analysis of the company. Valuation

The valuation of any security is done through the discounted cash flow (DCF) model, which takes into consideration: a) Dividends received by investors b) Earnings or cash flows of a company c) Debt, which is calculated by using the debt to equity ratio and the current ratio (current assets/current liabilities) Fundamental Analysis: Benefits Fundamental analysis helps in: Identifying the intrinsic value of a security. Identifying long-term investment opportunities, since it involves real-time data.

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PORTFOLIO MANAGMENT Fundamental Analysis: Drawbacks The drawbacks of fundamental analysis are:

Too many economic indicators and extensive macroeconomic data can confuse novice investors.

The same set of information on macroeconomic indicators can have varied effects on the same currencies at different times.

COMPANY PROFILE

SHAREKHAN SHARE KHAN, a professionally managed Investment advisory services company, developed in the year 1985 by three young entrepreneurs with an intension to Minimization of Risk and Maximization of Return in the field of Indian Capital markets by extensive research work. As a sub member of NSE, BSE, MCX, NCDEX, NSDL and CDSL, which are pioneers in the respective operations, SHARE KHAN is having more than 500 branches in all over India. 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 280 share shops 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 as derivatives, on BSE and NSE depository services, commodities trading on the MCX( Multi Commodity Exchange of India Ltd) and NCDEX(National Commodity and Derivative Exchange) and most importantly, investment advice tempered by eighty years of broking experience.

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PORTFOLIO MANAGMENT 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 commodity exchanges MCX and NCDEX. If you experience our language, presentation style, content or for that matter the online trading facility, you'll find a common thread; one that helps you make informed decisions and simplifies investing in stocks. The common thread of empowerment is what Sharekhan's all about! Sharekhan is also about focus. Sharekhan does not claim expertise in too many things. Sharekhan's expertise lies in stocks and that's what he talks about with authority. So when he says that investing in stocks should not be confused with trading in stocks or a portfolio-based strategy is better than betting on a single horse, it is something that is spoken with years of focused learning and experience in the stock markets. And these beliefs are reflected in everything Sharekhan does for you! To sum up, Sharekhan brings to you a user- friendly online trading facility, coupled with a wealth of content that will help you stalk the right shares. Those of you who feel comfortable dealing with a human being and would rather visit a brick-and-mortar outlet than talk to a PC, you'd be glad to know that Sharekhan offers you the facility to visit (or talk to) any of our share shops across the country. In fact Sharekhan runs India's largest chain of share shops with over 800 hundred outlets in more than 300 cities! What's a share shop? How do you locate a share shop in your city? Hit this link to find out.

Sripal Sravanthi Kanthilal Iswarlal (SSKI)

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 investors, while the corporate finance division focuses on niche areas such as infrastructure, telecom and media. SSKI owns 56% in Share khan and the balance ownership is HSBC, First Caryl and Intel Pacific, SSKI has been voted as the 18

PORTFOLIO MANAGMENT top domestic brokerage house in the research category, twice by Euro money survey and four times by Asia money survey. SHARE KHAN is on par with the investor expectations in providing professional services, namely Online Trading in Equity, Commodities and F&O Framing of Derivative strategies Depository Services (D-MAT) Initial Public Offers (IPO) and Book Buildings Distribution of Mutual Funds Portfolio Management Service (PMS) etc., through its member Corporate training for executives on NCFM (National Stock Exchange Certificate in Financial Markets)

SHARE KHAN IS IN MARKET BECAUSE OF:

Investor care is of paramount importance at SHARE KHAN SHARE KHAN offers large avenues of investment solutions for all classes of investors under one roof. SHARE KHAN Experience is one of prized possession. SHARE KHAN has an experience of more than 20 years wherein grown phenomenally. One of the most competitive brokerage structure Hassle free trading experience. Timely advice along with research support to the clients through SMS and Emails on Equities, Derivatives, Commodities, IPOs and Mutual Funds. VALUE FOR INVESTORS TRUST INTEGRITY AND HONESTY

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SHARE KHAN APPROACH:

UN BIASED INVESTMENT ADVISORY PERSONALIZED ATTENTION RESEARCH BASED ADVISORY SERVICES Share khan won the award by the vote of consumers around the country, as part of Indias largest consumer study covers 7000 respondents 21 products and services across 21 major cities. The study, initiated by Awaaz Indias first dedicated Consumer Channel and member of the worldwide CNBC Network, and AC Nielsen ORG Marg, was aimed at understanding the brand preferences of the consumers and to decipher what are the most important loyalty criteria for the consume in each vertical. In order to select the award recipient, spontaneous responses, rather than prompted responses were garnered, with an intention to glean unbiased preferences. Opinions were garnered from owners of each of the categories, to get experiential responses, which are likely to be more realistic and grounded in nature. Further, preference also indicates future intensions of repeated purchases. The reasons behind the preferences for brands were unveiled by examining the following: Tangible features of product/service Softer, intangible features like imagery, equity driving preference Tactical measures such as promotional/pricing schemes.

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SHARE KHAN is honored as the Most Preferred Stock Broking Brand in India. Our focus has always been to demystify the stock market and empower the investors to take informed decisions, said Jaideep Arora, Director, Share khan. The Award increases Share khans responsibility to persistently delight our customers with userfriendly trading experience and we shall continue our focus to evolve business strategies that keep us aligned with our customers needs. VISION: To become successful investment advisors by developing the strategies that are implement able and leads to provide better returns than Bench mark portfolios.

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CHAPTER III THEORETICAL ASPECTS OF THE STUDY

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STRESS MANAGEMENT INTRODUCTION: Review 1:

I trust this book will become a reference for project portfolio management. I have had the pleasure of working with the authors, and their enthusiasm and desire to share their experience stands out. The book tells the whole story from concept, justification and implementation, through to benefit realization and on-going improvements. It is incisive in its delivery, tells common truths and contains a wealth of experience. The journey it leads you on is worthy of any company that wants to get the best from its people through engagement, responsibility and informed decision making. Source: Steve Lewis, IT Planning, Friends Provident

Review 2:
Whether you think you have a good project control process or no project control process, this book will open your eyes. The book tells you everything you need to know about introducing Project Portfolio Management, and how to go about it. It lays out PPM in such a way that the reader will not know how they can do without it. It is structured in a way that helps you understand the amount of the process you would need to introduce to suit your company. But the question is whether you or your executives have got the commitment to introduce it, because it does need commitment. Source: Paul Hillman, Head of Program me Office, Virgin Mobile

Review 3:
As businesses have become increasingly project-driven, they have become only too aware of how badly served they are by the tools and processes available to manage those core activities. Project portfolio management delivers vital business-wide 23

PORTFOLIO MANAGMENT visibility, discipline, accountability and a high degree of automation to the whole process of bringing projects in on time, within budget and to specification all with the aim of fulfilling business objectives. It also provides a structure for deciding where projects fit on the go/kill/hold/fix decision-matrix. The authors of this book all seasoned PPM executives who can draw on the lessons from implementations at scores of major organizations provide an illuminating and comprehensive account of why PPM should be a critical part of every modern business. They offer a comprehensive account of how the establishment of just such a structured, integrated environment is a prerequisite for managing a co-dependent portfolio of projects, from their inception, funding and resource allocation through to the reporting of their status and the extent to which they deliver business benefits. Source: Kenny MacIver, Editor, Information Age

Review 4:
Project Portfolio Management identifies projects as the future of organizations. To remain competitive and stay in business organizations must change. Change is enacted through programmers and projects. If you do not ensure a continuous link between the business strategy and each program me or project, or do not mobilize and empower your resources to deliver them, you will not succeed. This book comprehensively covers not only why portfolio management is so important, but the theory, the structure and the practicalities of employing it. A very readable manual for the portfolio management practitioner. Source: John Dyson, Project Director, GlaxoSmithKline

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PORTFOLIO INVESTMENT PROCESS

A major thesis of investment in the need to consider individual investment as components of an overall investment plan. Without plan. Without limiting the range of instruments covered, it is convenient to call individual investments securities and the totality the portfolio. The basic problem of portfolio management is to establish an investment goal or objective and then decide how best to reach that goal with the securities available. This has been stated as an attempt by the investor to obtain the maximum return with minimum risk, the portfolio investment process. Planning 1. Investor conditions 2. Market conditions 3. Investment/speculative policies 4. Statement of investment policy 5. Strategic asset allocation. Implementation 1. Rebalance strategic asset allocation 2. Tactical asset allocation 3. Security selection Monitoring 1. Evaluate statement of investment policy 2. Evaluate investment performance. Holding a portfolio is part of an investment and risk-limiting strategy called diversification. By owning several assets, certain types of risk (in particular specific risk) can be reduced. The assets in the portfolio could include stocks, bonds, options, warrants, gold certificates, real estate, futures contracts, production facilities, or any other item that is expected to retain its value. Thus, portfolio management is all about strengths, weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety 25

PORTFOLIO MANAGMENT and numerous other trade-offs encountered in the attempt to maximize return at a given appetite for risk. Process of portfolio management: The Portfolio Program and Asset Management Program both follow a disciplined process to establish and monitor an optimal investment mix. This six-stage process helps ensure that the investments match investors unique needs, both now and in the future.

1. IDENTIFY GOALS AND OBJECTIVES: When will you need the money from your investments? What are you saving your money for? With the assistance of financial advisor, the Investment Profile Questionnaire will guide through a series of questions to help identify the goalsand objectives for the investments. 2. DETERMINE OPTIMAL INVESTMENT MIX: This step represents one of the most important decisions in your portfolio construction, as asset allocation has been found to be the major determinant of long-term portfolio performance. 3. CREATE A CUSTOMIZED INVESTMENT POLICY STATEMENT When the optimal investment mix is determined, the next step is to formalize our goals and objectives in order to utilize them as a benchmark to monitor progress and future updates. 26

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4. SELECT INVESTMENTS The customized portfolio is created using an allocation of select QFM Funds. Each QFM Fund is designed to satisfy the requirements of a specific asset class, and is selected in the necessary proportion to match the optimal investment mix. 5 MONITOR PROGRESS Building an optimal investment mix is only part of the process. It is equally important to maintain the optimal mix when varying market conditions cause investment mix to drift away from its target. 6. REASSESS NEEDS AND GOALS With the flexibility of the Portfolio Program and Asset Management Program, when the investors needs or other life circumstances change,. RISK: Risk refers to the probability that the return and therefore the value of an asset or security may have alternative outcomes. Risk is the uncertainty (today) surrounding the eventual outcome of an event which will occur in the future. Risk is uncertainty of the income/capital appreciation or loss of both. All investments are risky. RETURN: Return-yield or return differs from the nature of instruments, maturity period and the creditor or debtor nature of the instrument and a host of other factors. PORTFOLIO RISK: Risk on portfolio is different from the risk on individual securities. This risk is reflected by in the variability of the returns from zero to infinity. The expected return depends on probability of the returns and their weighted contribution to the risk of the portfolio. RETURN ON PORTFOLIO: Each security in a portfolio contributes returns in the proportion of its investment in security. Thus the portfolio of expected returns, from each of the securities with weights representing the proportionate share of security in the total investments.

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RISK RETURN RELATIONSHIP:

The risk/return relationship is a fundamental concept in not only financial analysis, but in every aspect of life. If decisions are to lead to benefit maximization. The requirement that expected return/benefit be commensurate with risk/cost is known as the "risk/return trade-off" in finance. ELEMENTS OF PORTFOLIO Portfolio Management is an on-going process involving the following basic tasks. Identification of the investors objective, constrains and preferences which help formulated the invest policy. Review and monitoring of the performance of the portfolio by continuous overview of the market conditions, companys performance and investors circumstances. Finally, the evaluation of portfolio for the results to compare with the targets and needed adjustments have to be made in the portfolio to the emerging conditions and to make up for any shortfalls in achievements (targets). TYPES OF RISKS: risk consists of two components. They are 1. 2. Systematic Risk Un-systematic Risk

1. SYSTEMATIC RISK: Systematic risk refers to that portion of total variability in return caused by factors affecting the prices of all securities. Economic, Political and sociological changes are sources of systematic risk. Their effect is to cause prices of nearly all individual common stocks and/or all individual bonds to move together in the same manner.

. Market Risk:
Variability in return on most common stocks that are due to basic sweeping changes in investor expectations is referred to as market risk. Market risk is caused by investor reaction to tangible as well as intangible events. 28

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. Interest rate-Risk:
Interest rate risk refers to the uncertainty of future market values and of the size of future income, caused by fluctuations in the general level of interest rates.

. Purchasing-Power Risk:
Purchasing power risk is the uncertainty of the purchasing power of the amounts to be received. In more events everyday terms, purchasing power risk refers to the impact of or deflation on an investment. 2. UNSYSTEMATIC RISK: Unsystematic risk is the portion of total risk that is unique to a firm or industry. Factors such as management capability, consumer preferences, and labor strikes Cause systematic variability of return in a firm. i. Business Risk: Business risk is a function of the operating conditions faced by a firm and the variability these conditions inject into operating income and expected dividends. Business risk can be divided into two broad categories a. Internal Business Risk b. External Business Risk. a. Internal business risk is associated with the operational efficiency of the firm. The operational efficiency differs from company to company. The efficiency of operation is reflected on the companys achievement of its pre-set goals and the fulfillment of the promises to its investors. b. External business risk is the result of operating conditions imposed on the firm by circumstances beyond its control. The external environments in which it operates exert some pressure on the firm.. ii. Financial Risk: Financial risk is associated with the way in which a company finances its activities. Financial risk is avoided risk to the extent that management has the freedom to decide to borrow or not to borrow funds. A firm with no debit financing has no financial risk.

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PORTFOLIO ANALYSIS (CONSTRUCTION & SELECTION): The portfolio analysis begins where the security analysis ends and this fact has important consequences for investors. Portfolios, which are combinations of securities, may or may not take on the aggregate characteristics of their individual parts. Portfolio analysis considers the determination of future risk and return in holding various blends of individual securities. Portfolio expected return of individual securities but portfolio variance, in sharp contrast, can be something less than a weighted average of security variances. as a result an investor can sometimes reduce portfolio risk by adding another security with greater individual risk than any other security in the portfolio.

PORTFOLIO AND SECURITY ANALYSIS:

A portfolio is a collection of securities. Since it is rarely desirable to invest the entire funds of individual or an institution in a single security, it is essential that every security be viewed in a portfolio context, thus it seems logical that the expected return of portfolio should depend on the expected return of each of the security contained in the portfolio. It also seems logical that the amounts invested in each security should be important. There are two approaches in construction of the portfolio of securities. Are Traditional approach Modern approach

TRADITIONAL APPROACH: Traditional approach was based on the fact that risk could be measured on each individual security through the process of finding out the standard deviation and that security should be chosen where the deviation was the lowest. It takes into account the individual needs such as housing, life insurance and pension plans. Traditional approach basically deals with two major decisions. They are i. ii. Determining the objectives of the portfolio Selection of securities to be included in the portfolio

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MODERN APPROACH: Modern approach theory was brought out by Markowitz and Sharpe. It is the combination of securities to get the most efficient portfolio. Combination of securities can be made in many ways. Markowitz developed the theory of diversification through scientific reasoning and method. Modern portfolio theory believes in the maximization of return through a combination of securities. The modern approach discusses the relationship between different securities and then draws inter-relationships of risks between them.

MARKOWITZ MODEL
Dr. Harry M. Markowitz is credited with developing the first modern portfolio analysis model in order to arrange for the optimum allocation of assets with in portfolio. To reach these objectives, Markowitz generated portfolio with in a reward risk context. In essence, Markowitz model is a theoretical framework for the analysis of risk return choices. Decisions are based on the concept of efficient portfolios. Markowitz model is a theoretical framework for the analysis of risk, return choices and this approach determines an efficient set of portfolio return through three important variable that is, Return Standard Deviation Coefficient of correlation

Markowitz model is also called as a Full Covariance Model. Through this model the investor can find out the efficient set of portfolio by finding out the trade off between risk and return, between the limits of zero and infinity. According to this theory, the effect of one security purchase over the effects of the other security purchase is taken into consideration and then the results are evaluated.

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Assumptions:
The Markowitz model is based on several assumptions regarding investor behavior: 1. Investors consider each investment alternative as being represented by a probability distribution of expected returns over some holding period. 2. Investors maximize one period-expected utility and possess utility curve, which demonstrates diminishing marginal utility of wealth. 3. Individuals estimate risk on the basis of variability of expected return. 4. Investors base decisions solely on expected return and variance of return only. 5. For a given risk level, investors prefer high returns to lower returns. Similarly for a given level of expected return, investors prefer less risk to more risk.

THE SPECIFIC MODE

In developing this model, Markowitz first disposed of the investor behavior rule that the investor should maximize expected return.. However, under real world conditions of uncertainty, most risk adverse investors join with Markowitz in discarding the role of calling for maximizing the expected returns. As an alternative, Markowitz offers the expected returns/variance rule. Henry Markowitz has given the following formula for a two-security portfolio and three security portfolios. = (x1)2 (1)2 + (X2)2 (2)2 + 2(X1)(X2)(r12)(1) (2) = (x1)2(1)2+(X2)2(2)2 + (X3)2(3)2 +2(X1)(X2)(r12)(1) (2)+ 2(X1)(X3)(r13)(1) (3)+ 2(X2)(X3)(r23)(2) (3)
p =

Standard deviation of the portfolio return

X1= proportion of the portfolio invested in security 1 X2= proportion of the portfolio invested in security 2 X3= proportion of the portfolio invested in security 3 1= standard deviation of the return on security 1 2= standard deviation of the return on security 2 32

PORTFOLIO MANAGMENT 3= standard deviation of the return on security 3 r12= coefficient of correlation between the returns on securities 1 and 2 r13= coefficient of correlation between the returns on securities 1 and 3 r23= coefficient of correlation between the returns on securities 2 and 3 PORTFOLIO DIVERSIFICATION: There are different ways to diversify a portfolio whose holdings are concentrated in one industry. We can invest in the stocks of companies belonging to other industry groups. We can allocate our portfolio among different categories of stocks, such as growth, value, or income stocks. We can include bonds and cash investments in our asset-allocation decisions. We can also diversify by investing in foreign stocks and bonds. Diversification requires us to invest in securities whose investment returns do not move together. In other words, the investment returns have a low correlation. The Efficient Frontier and Portfolio Diversification

33

PORTFOLIO MANAGMENT The graph on the shows how volatility increases the risk of loss of principal, and how this risk worsens as the time horizon shrinks. So all other things being equal, volatility is minimized in the portfolio. If we graph the return rates and standard deviations for a collection of securities, and for all portfolios we can get by allocating among them. Markowitz showed that we get a region bounded by an upward-sloping curve, which he called the efficient frontier

The second important property of the efficient frontier is that it's curved, not straight. If we take a 50/50 allocation between two securities, assuming that the year-to-year performance of these two securities is not perfectly in sync -- that is, assuming that the great years and the lousy years for Security 1 don't correspond perfectly to the great years and lousy years for Security 2, but that their cycles are at least a little off -- then the standard deviation of the 50/50 allocation will be less than the average of the standard deviations of the two securities separately. Graphically, this stretches the possible allocations to the left of the straight line joining the two securities.

34

PORTFOLIO MANAGMENT THE FOUR PILLARS OF DIVERSIFICATION: The yield provided by an investment in a portfolio of assets will be closer to the Mean Yield than an investment in a single asset. When the yields are independent - most yields will be concentrated around the Mean. When all yields react similarly - the portfolio's variance will equal the variance of its underlying assets. If the yields are dependent - the portfolio's variance will be equal to or less than the lowest.

Market portfolio:
The efficient frontier is a collection of portfolios, each one optimal for a given amount of risk. A quantity known as the Sharpe ratio represents a measure of the amount of additional return (above the risk-free rate) a portfolio provides compared to the risk it carries. The portfolio on the efficient frontier with the highest Sharpe Ratio is known as the market portfolio, or sometimes the super-efficient portfolio. This portfolio has the property that any combination of it and the risk-free asset will produce a return that is above the efficient frontier - offering a larger return for a given amount of risk than a portfolio of risky assets on the frontier would.

35

PORTFOLIO MANAGMENT

PORTFOLIO PERFORMANCE EVALUATION: A Portfolio manager evaluates his portfolio performance and identifies the sources of strengths and weakness. The evaluation of the portfolio provides a feed back about the performance to evolve better management strategy. Even though evaluation of portfolio performance is considered to be the last stage of investment process, it is a continuous process. Evaluation has to take into account: Rate of returns, or excess return over risk free rate. Level of risk both systematic (beta) and unsystematic and residual risks through proper diversification. Some of the models used to evaluate portfolio performance are: Sharpes ratio Treynors ratio Jensens alpha

36

PORTFOLIO MANAGMENT

Sharpes ratio:
A ratio developed by Nobel Laureate William F. Sharpe to measure risk-adjusted performance. It is calculated by subtracting the risk-free rate from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns.

The Sharpe ratio tells us whether the returns of a portfolio are due to smart investment decisions or a result of excess risk. This measurement is very useful because although one portfolio or fund can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been. Treynors ratio: The Treynor ratio is a measurement of the returns earned in excess of that which could have been earned on a risk less investment. The Treynor ratio is also called reward-to-volatility ratio. It relates excess return over the risk-free rate to the additional risk taken; Treynors ratio = (Average Return of the Portfolio - Average Return of the Risk-Free Rate) / Beta of the Portfolio Jensens alpha: An alternative method of ranking portfolio management is Jensen's alpha, which quantifies the added return as the excess return above the security market line in the capital asset pricing model. Jensen's alpha (or Jensen's Performance Index) is used to determine the excess return of a stock, other security, or portfolio over the

37

PORTFOLIO MANAGMENT security's required rate of return as determined by the Capital Asset Pricing Model. To calculate alpha, the following inputs are needed: The realized return (on the portfolio), The market return, The risk-free rate of return, and The beta of the portfolio.

Rjt - Rft = j + j (RMt - Rft) Where Rjt = average return on portfolio j for period oft Rft = risk free rate of return for period oft j = intercept that measures the forecasting ability to the manager j = systematic risk measure

38

PORTFOLIO MANAGMENT

CHAPTER- IV DATA ANALYSIS & INTERPRETATION

39

PORTFOLIO MANAGMENT

ANALYSIS & INTERPRETATION

CALCULATION OF AVERAGE RETURN OF COMPANIES: Average Return = (R)/N

WIPRO:
Opening share price (Po)
1,233.45 1,361.20 670.95 559.7 516

Year
2007-2008 2008-2009 2009-2010 2010-2011 2011-2012

Closing Share price (P1)

1361.2 2,012 559.7 559.4 233.4

(P1)-(Po) (P1)-(Po)/Po*100
127.75 650.8 -111.25 -0.3 -282.6 10.36 47.87 -16.58 -0.05 -54.77

TOTAL RETURN

-13.17

Average Return = -13.17/5 = -2.63

ITC LTD:
Opening share Price (Po)
628.25 1043.10 1342.05 195.15 217.60

Year
2007-2008 2008-2009 2009-2010 2010-2011 2011-2012

Closing Share price (P1)

1043.10 1342.05 2932 151.15 171.70

(P1)-(Po) (P1)-(Po)/Po*100
414.85 298.95 1589.95 -44 -45.9 66.03 28.66 118.47 -22.55 -21.09

TOTAL RETURN

169.52

Average Return = 169.52/5 =33.90

40

PORTFOLIO MANAGMENT

DR.REDDY LABORATORIES:
Opening share Price (Po)
916.30 974.30 739.15 1421.4 725.15

Year
2007-2008 2008-2009 2009-2010 2010-2011 2011-2012

Closing Share price (P1)

974.35 739.15 1421.4 1456.55 468.65

(P1)-(Po) (P1)-(Po)/Po*100
58.2 23.52 682.25 35.15 -256.5 6.33 -24.14 92.30 2.47 -35.37

TOTAL RETURN

41.59

Average Return = 41.59/5 = 8.31

ACC:
Opening share Price (Po)
138.50 254.65 360.55 782.20 1028.35

Year
2007-2008 2008-2009 2009-2010 2010-2011 2011-2012

Closing Share price (P1)

254.65 360.55 782.20 735.25 480.15

(P1)-(Po) (P1)-(Po)/Po*100
116.15 105.9 421.61 -46.95 -548.2 83.86 41.58 116.95 -6.00 -53.30

TOTAL RETURN

183.09

Average Return = 183.09/5 = 36.61

41

PORTFOLIO MANAGMENT

BHARAT HEAVY ELECTRICAL LTD:

Opening share Price (Po)
223.15 604.35 766.40 2241.95 2583.6

Year
2007-2008 2008-2009 2009-2010 2010-2011 2011-2012

Closing Share price (P1)

604.35 766.40 2241.95 2261.35 1362.6

(P1)-(Po) (P1)-(Po)/Po*100
38.12 162.05 1475.55 19.4 -12.21 170.83 26.81 192.53 0.87 -47.25

TOTAL RETURN

343.79

Average Return = 343.79/5 = 68.76

HEROHONDA AUTOMOBILES LTD:

Year
2007-2008 2008-2009 2009-2010 2010-2011 2011-2012

Opening share Price (Po)

188.20 490.60 548.00 890.45 698.45

Closing Share price (P1)

490.60 548.00 890.45 688.75 803.65

(P1)-(Po) (P1)-(Po)/Po*100
302.40 57.40 342.45 -20.17 105.2 160.68 11.70 62.50 -22.65 15.06

TOTAL RETURN

227.29

Average Return = 227.29/5 = 45.45

42

PORTFOLIO MANAGMENT

1. FIGUER OF AVERAGE RETURN Company name

WIPRO ITC DR.REDDY ACC BHEL HEROHONDA

Average return
-2.634 33.90 8.31 36.61 68.76 45.45

70 60 50 40 30 20 10 0 -10 Average return

WIPRO ITC DR.REDDY ACC BHEL HEROHONDA

43

PORTFOLIO MANAGMENT

CALCULATION OF STANDARD DEVIATION:

Standard Deviation = Variance

_
Variance= 1/n-1 (R-R)

ITC LTD:
Return (R)
66.03 28.66 118.47 -22.55 -21.09

Year
2007-2008 2008-2009 2009-2010 2010-2011 2011-2012

Avg. Return (R)

33.90 33.90 33.90 33.90 33.90

(R-R)
32.13 -5.24 84.57 -56.45 -54.99

(R-R)
1032 27 7152 3187 3024

TOTAL

14,422

_
Variance = 1/n-1 (R-R) = 1/5(14422) = 2884. Standard Deviation = Variance =2884.4 = 53.70

Interpretation: The risk involved in individual securities can be measured by standard deviation or variance. The variance of ITC ltd is 2884 and standard deviation is 53.70. If standard deviation is high it is risky.

44

PORTFOLIO MANAGMENT

ACC:
Return (R)
83.86 41.58 116.95 -6.00 -53.30

Year
2007-2008 2008-2009 2009-2010 2010-2011 2011-2012

Avg. Return (R)

36.61 36.61 36.61 36.61 36.61

(R-R)
47.25 4.97 80.34 -42.61 -89.91

(R-R)
2233 25 6454 1816 8084

TOTAL

18612

_
Variance = 1/n-1 (R-R) = 1/5(18612) = 3722.4 Standard Deviation = 3722.4 = 61.01

Interpretation:
The variance of ACC ltd is 3722.4 and standard deviation is 61.01. The standard deviation is more than standard deviation of ITC.So ACC is better than ITC.

45

PORTFOLIO MANAGMENT

Year
2007-2008 2008-2009 2009-2010 2010-2011 2011-2012

Return (R)
10.36 47.87 -16.58 -0.05 -54.77

Avg. Return (R)

-2.63 -2.63 -2.63 -2.63 -2.63

(R-R)
12.99 50.5 -13.95 2.58 -52.14

(R-R)
169 2550 195 7 2719

TOTAL

5640

WIPRO

Variance = 1/n-1 (R-R) = 1/5(5640) =1128 Standard Deviation = 1128 = 33.58

Interpretation: The variance of WIPRO is 1128 and standard deviation is 33.58. If we compare WIPRO with ITC ltd. The standard deviation of an ACC is more than that of WIPRO. Thus ACC is better than WIPRO.

46

PORTFOLIO MANAGMENT

BHARAT HEAVY ELECTRICAL LTD:

Return (R)
170.83 26.81 192.53 0.87 -47.25

Year
2007-2008 2008-2009 2009-2010 2010-2011 2011-2012

Avg. Return (R)

68.76 68.76 68.76 68.76 68.76

(R-R)
102.07 -41.95 123.77 -67.89 -116.01

(R-R)
10418 1760 15319 4609 13458

TOTAL

45,564

_
Variance = 1/n-1 (R-R) = 1/5(45564) = 9112.8 Standard Deviation = 9112.8 = 95.46

Interpretation: The variance of BHEL ltd is 9112.8 and standard deviation is 95.46. The standard deviation is more than standard deviation of WIPRO. So BHEL is better than WIPRO.

47

PORTFOLIO MANAGMENT

HEROHONDA AUTOMOBILES LTD:

Return (R) 160.68 11.70 62.50 -22.65 15.06 Avg. Return (R) 45.45 45.45 45.45 45.45 45.45 TOTAL _ Variance = 1/n-1 (R-R) = 1/5(20270) = 4054 Standard Deviation = 4054 = 63.67

Year
2007-2008 2008-2009 2009-2010 2010-2011 2011-2012

(R-R) 115.23 -33.75 17.05 -68.1 -30.39

(R-R) 1327 1139 291 4638 924 20270

Interpretation:
The variance of HEROHONDA is 4054 and standard deviation is 63.67. The standard deviation is more than standard deviation of ACC.Because it has high standard deviation and as a result high returns.

48

PORTFOLIO MANAGMENT

DR.REDDY LABORATORIES:
Return (R) 6.33 -24.14 92.30 2.47 -35.37 Avg. Return (R) 8.31 8.31 8.31 8.31 8.31 TOTAL

Year
2007-2008 2008-2009 2009-2010 2010-2011 2011-2012

(R-R) -1.98 -32.45 83.98 -5.84 -43.68

(R-R) 4 1054 7053 34 1909 10,054

_
Variance = 1/n-1 (R-R) = 1/5(10,054) = 2010.8 Standard Deviation = 2010.8 = 44.84 Interpretation: The standard deviation of DR.REDDYs laboratories is 44.84. The variance is 2010.8 the standard deviation is more than of WIPRO. So as the standard deviation is more, the return on investment will also be high.

49

PORTFOLIO MANAGMENT

2. FIGUEROF STANDARD DEVIATION:

Company name ITC ACC WIPRO BHEL HEROHONDA DR.REDDY STD. DEVIATIONS 53.70 61.01 33.58 95.46 63.67 44.84

50

PORTFOLIO MANAGMENT

COVARIANCE:
When two securities are combined we need to consider their interactive risk or covariance. If the rates of return of two securities move together, we say their interactive risk covariance risk or covariance is positive. If rates of return are independent covariance is zero. Inverse movement results in covariance that is negative. Covariance (COVab) = 1/n (RA-RA) (RB-RB)

CORRELATION OF CO EFFICIENT:
Correlation of co efficient indicates the similarity or dissimilarity in the behavior of X1 and X2 stocks. It shows, how much X and Y vary together as a proportion of their combined individual variation measured but standard deviation one and standard deviation two.

Correlation of co efficient = COVab/a*b

1 1 ACC (RA) & ITC(RB):

51

PORTFOLIO MANAGMENT

_
Year 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 (RA-RA) 47.25 4.97 80.34 -42261 -89.91

_
(RB-RB) 32.31 -5.24 84.57 -56.645 -54.99

_
1527 -26 6794 2405 4944

(RA-RA) (RB-RB)

TOTAL

15644

Covariance (COVab) = 1/5 (15644) = 3128.8 Correlation of co efficient = COVab/a*b a= 61.01; b = 53.70 = 3128.8/ (61.01) (53.70) = 0.9

Interpretation:
The correlation of co-efficient of ACC and ITC is 0.95. if the securities are positively correlated both the securities are similar and move in the same direction. So in order to reduce the risk, securities must move in opposite direction that is they are negatively correlated.

2) ACC (RA) & WIPRO (RB):

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PORTFOLIO MANAGMENT

Year
2007-2008 2008-2009 2009-2010 2010-2011 2011-2012

(RA-RA)
47.25 4.97 80.34 -42261 -89.91

(RB-RB)
12.99 50.5 -13.95 2.58 -52.14

(RA-RA) (RB-RB)
613.77 251 -1120.7 -109.9 4687.9

TOTAL

4322.07

Covariance (COVab) = 1/5(4322.07) = 864.41 Correlation of co efficient = COVab/a*b a= 61.01; b= 33.58 =864.41/ (61.01)(33.58) = 0.42

Interpretation:
The coefficient of correlation between ACC and WIPRO is 0.42. Thus they are positively correlated. Thus it is better to go for other alternative.

3) WIPRO (RA) & DR.REDDY (RB):

53

PORTFOLIO MANAGMENT

Year
2007-2008 2008-2009 2009-2010 2010-2011 2011-2012

(RA-RA)
12.99 50.5 -13.95 2.58 -52.14

(RB-RB)
-1.98 -32.45 83.98 -5.84 -43.68

(RA-RA) (RB-RB)
-25.72 -1638.72 -1171.54 -15.08 2277.89

TOTAL

-573.17

Covariance (COVab) = 1/5(-573.17) = -114.63 Correlation of co efficient = COVab/a*b a= 33.58; b= 44.84 = -114.63/33.58*44.84 = -0.09

Interpretation:
The coefficient of correlation between WIPRO and DR.REDDY is -0.09. There is negative correlation and both securities move in the opposite direction.

54

PORTFOLIO MANAGMENT 4) ITC (RA) & BHEL (RB):

Year
2007-2008 2008-2009 2009-2010 2010-2011 2011-2012

(RA-RA)
32.31 -5.24 84.57 -56.645 -54.99

(RB-RB)
102.07 -41.95 123.77 -67.89 -116.01

(RA-RA) (RB-RB)
3279.50 219.84 10467.22 3832.39 6379.38

TOTAL

24178.3

Covariance (COVab) = 1/5(24178.3) = 4835.66 Correlation of co efficient = COVab/a*b a=53.70; b= 95.4 = 4835.66/ (53.70)*(95.46) = 0.94

Interpretation:
The covariance of ITC and BHEL is 4835.66 and co-efficient of correlation is 0.94. Thus there is a positive correlation. It shows that two securities move in the same direction. So it is better to go for other alternative.

55

PORTFOLIO MANAGMENT

5) ACC (RA) & BHEL (RB):

Year
2007-2008 2008-2009 2009-2010 2010-2011 2011-2012

(RA-RA)
47.25 4.97 80.34 -42261 -89.91

(RB-RB)
102.07 -41.95 123.77 -67.89 -116.01

(RA-RA) (RB-RB)
4822.80 -208.49 9943.68 2892.79 10430.45

TOTAL

27881.23

Covariance (COVab) = 1/5(27881.23) = 5576.24 Correlation of co efficient = COVab/a*b a= (61.01); b= (95.46) = 5576.24/(61.01)*(95.46) = 0.95

Interpretation:
The coefficient of correlation between ACC and WIPRO is 0.42. Thus they are positively correlated. Thus it is better to go for other alternative.

56

PORTFOLIO MANAGMENT

3. FIGURE OF CORRELATION COEFFICIANT

Company Name ACC AND ITC ACC AND WIPRO WIPRO AND DR.REDDY ITC AND BHEL ACC AND BHEL Correlation C0-efficient 0.95 0.42 -0.09 0.94 0.95

1 0.8
ACC AND ITC

0.6
ACC AND WIPRO

0.4 0.2 0 -0.2 Correlation C0 efficient

WIPRO AND DR.REDDY ITC AND BHEL ACC AND BHEL

57

PORTFOLIO MANAGMENT

CALCULATION OF PORTFOLIO WEIGHTS: FORMULA:

Wa = b [b-(nab*a)] a + b - 2nab*a*b Wb = 1 Wa CALCULATION OF WEIGHTS OF ACC & OTHER COMPANIES:

1 1 ACC (a) & ITC(b):

a = 61.01 b = 53.70 rab = 0.95

Wa =

53.70 [53.70-(0.95*61.01)] (61.01) + (53.70) 2(0.95) * 61.01*53.70

Wa = 0.6 Wb = 1- Wa Wb = 1-(0.6) = 0.4

58

PORTFOLIO MANAGMENT

1 1 ACC(a) & WIPRO(b):

a = 61.01 b = 33.58 rab = 0.4 Wa = 33.58 [33.58-(0.42*61.01)] (61.01) + (33.58) 2(0.42) * 61.01*33.58

Wa =

267.2 3128.7

Wa = 0.08 Wb = 1- Wa Wb = 1-0.08 = 0.9

1 1 ACC(a) & BHEL (b):

a = 61.01 b = 95.46 rab = 0.95

Wa =

95.46 [95.46-(0.95*61.01)] (61.01) + (95.46) 2(0.95) * 61.01*95.46

Wa = 3580.7 1769 59

PORTFOLIO MANAGMENT

Wa = 2.02

Wb = 1- Wa

Wb = 1- 2.02 = -1.02

1 1 ACC(a) & HERO HONDA(b):

a = 61.01 b = 63.67 rab = 0.63

Wa =

63.67 [63.67-(0.63*61.01)] (61.01) + (63.67) 2(0.63) * 61.01*63.67

Wa = 1607 2881.39 Wa = 0.55 Wb = 1- Wa Wb = 1- 0.55 = 0.45

60

PORTFOLIO MANAGMENT

1 1 ACC(a) & DR.REDDY(b):

a = 61.01 b = 44.84 rab = 0.77

Wa =

44.84 [44.84-(0.77*61.01)] (61.01) + (44.84) 2(0.77) * 61.01*44.84

Wa = 95.50 1629.1 Wa = 0.05 Wb = 1- Wa Wb = 1- (0.05) = 0.95

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PORTFOLIO MANAGMENT

4. FIGURE OF PORTFOLIO WEIGHTS:

1) ACC & OTHER COMPANIES:

COMPANY NAME ACC & ITC ACC & WIPRO ACC & BHEL ACC & HEROHONDA ACC & DR.REDDY

PORTFOLIO WEIGHTS -0.59 0.08 2.02 0.55 -0.05

62

PORTFOLIO MANAGMENT

CALCULATION OF WEIGHTS OF ITC & OTHER COMPANIES:

1) ITC(a) & WIPRO(b): a = 53.70 b = 33.58 rab = 0.42

Wa =

33.58 [33.58-(0.18*53.70)] (53.70) + (33.58) 2(0.18) * 53.70*33.58

Wa = 803.23 3362.14 Wa = 0.23 Wb = 1- Wa Wb = 1-0.23 = 0.77

2) ITC(a) & BHEL(b): a = 53.70 b = 95.46 rab = 0.94

Wa =

95.46 [95.46-(0.94*53.70)] (53.70) + (95.46) 2(0.94) * 53.70*95.46

63

PORTFOLIO MANAGMENT Wa = 4294.74 2359.05 Wa = 1.82 Wb = 1- Wa Wb = 1- 1.82 = -0.82

3) ITC (a) & HERO HONDA (b):

a = 53.70 b = 63.67 rab = 0.63

Wa =

63.67 [63.67-(0.63*53.70)] (53.70) + (63.67) 2(0.63) * 53.70*63.67

Wa = 1899.91 2629.53 Wa = 0.72

Wb = 1- Wa

Wb = 1- 0.72 = 0.28

64

PORTFOLIO MANAGMENT

4) ITC (a) & DR.REDDY (b):

a = 53.70 b = 44.84 rab = 0.82

Wa =

44.84 [44.84-(0.82* 53.70)] (53.70) + (44.84) 2(0.82) * 53.70*44.84

Wa = -95.50 1629.1 Wa = 0.03

Wb = 1- Wa

Wb = 1- (0.03) = 0.9

5. FIGURE OF ITC&OTHER COMPANIES:

COMPANY NAME

PORTFOLIO WEIGHTS

ITC & WIPRO ITC & BHEL ITC & HERO HONDA ITC & DR.REDDY

0.23 1.82 65 0.72 0.03

PORTFOLIO MANAGMENT

CALCULATION OF WEIGHTS OF WIPRO& OTHER COMPANIES: 1) WIPRO(a) & BHEL(b): a = 33.58 b = 95.46 rab = 0.20

Wa =

95.46 [95.46-(0.20*33.58)] (33.58) + (95.46) 2(0.20) * 33.58*95.46

Wa = 4294.74 Wa = 0.94 Wb = 1- Wa Wb = 1- 0.94 = 0.06 66

PORTFOLIO MANAGMENT

2) WIPRO(a) & HERO HONDA(b): a = 33.58 b = 63.67 rab = 0.09

Wa =

63.67 [63.67-(0.09*33.58)] (33.58) + (63.67) 2(0.09) * 33.58*63.67

Wa = 0.80 Wb = 1- Wa Wb = 1- 0.80 = 0.20

3)

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

a = 33.58 b = 44.84 rab = 0.09 Wa = 44.84 [44.84-(0.09*33.58)]

(33.58) + (44.84) 2(0.09) * 33.58*44.84 Wa = 2416.04 Wa = 0.67 Wb = 1- Wa Wb = 1- 0.67= 0.33

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PORTFOLIO MANAGMENT

6. FIGURE OF WIPRO & OTHER COMPANIES:

PORTFOLIO COMPANY NAME WEIGHTS

WIPRO&BHEL

0.94

WIPRO&HEROHONDA 0.80 WIPRO&DR.REDDY 0.67

68

PORTFOLIO MANAGMENT CALCULATION OF WEIGHTS OF BHEL& OTHER COMPANIES:

1) BHEL (a) & HERO HONDA (b):

a = 95.46 b = 63.67 rab = 0.77

Wa =

63.67 [63.67-(0.77*95.46)] (95.46) + (63.67) 2(0.77) * 95.46*63.67

Wa = -625.87 3806.47 Wa = -0.16 Wb = 1- Wa Wb = 1- (-0.16) = 1.16

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

a = 95.46 b = 44.84 rab = 0.79

Wa =

44.84 [44.84-(0.79*95.46)] (95.46) + (44.84) 2(0.79) * 95.46* 44.84

Wa = -1370.75 4360.17 69

PORTFOLIO MANAGMENT Wa = -0.31

Wb = 1- Wa

Wb = 1- (-0.31) = 1.31

7. FIGURE OF BHEL & OTHER COMPANIES:

PORTFOLIO COMPANY NAME WEIGHTS

BHEL HONDA BHEL

&

HERO -0.16 & -0.31

DR.REDDY

70

PORTFOLIO MANAGMENT

CALCULATION OF WEIGHTS OF HERO HONDA & OTHER COMPANIES: 1) HEROHONDA (a) & DR.REDDY (b):
a = 63.67 b = 44.84 rab = 0.28 Wa = 44.84 [44.84-(0.28*63.67)] (63.67) + (44.84) 2(0.28) * 63.67* 44.84 Wa = 12111.57 4465.72 Wa = 0.27 Wb = 1- Wa Wb = 1- (0.27) = 0.73

71

PORTFOLIO MANAGMENT

8. FIGURE OF HEROHONDA & DR.REDDY:

COMPANY NAME PORTFOLIO WEIGHTS

HEROHONDA & DR.REDDY

0.27

72

PORTFOLIO MANAGMENT

CALCULATION OF PORTFOLIO RISK:

RP =

a*Wa + b * Wb + 2nab * a* b*Wa*Wb

OF PORTFOLIO RISK OF WIPRO & OTHER

CALCULATION COMPANIES:

1) WIPRO(a) & ITC(b):

a = 33.58 b = 53.70 Wa = 2/3 Wa = 1/3 Nab = 0.18 RP = (33.58) *(2/3) + (53.70) *(1/3) +2(33.58) (53.7)*0.18*2/3*1/3 = 936.74 = 31.04

Interpretation:
The standard deviation of WIPRO is 33.58 and ITC is 53.70. So as the standard deviation of ITC is more than of WIPRO, it is more risky.

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2) BHEL (a) & HEROHONDA (b): a = 95.46 b = 63.67 Wa = 2/3 Wa = 1/3 Nab = 0.77 RP
=

(95.46) *(2/3) + (63.67) *(1/3) +2(95.46)( 63.67)*0.77*2/3*1/3

= 81.18

Interpretation:
The standard deviation of BHEL is 95.46 and HEROHONDA is 63.67. As the standard Deviation of BHEL is higher than the HEROHONDA so the risk in BHEL is more.

3) WIPRO(a) & DR.REDDY(b): a = 33.58 b = 44.84 74

PORTFOLIO MANAGMENT Wa = 2/3 Wa = 1/3 Nab = -0.09

RP = (33.58)*(2/3)+ (44.84)*(1/3)+2(33.58) (44.84)* -0.09*2/3*1/3 = 665.21 = 25.79

Interpretation:
The standard deviations of WIPRO and DR.REDDY are 33.58 and 44.84. the risk in WIPRO is comparatively low than DR.REDDY.. 4) ITC (a) & BHEL (b): a = 53.70 b = 95.46 Wa = 1/3 Wa = 2/3 Nab = 0.94

RP = (53.70)*(1/3) + (95.46)*(2/3) + 2(53.70) (95.46)*0.94*1/3*2/3 = 6535.47 = 80.84

Interpretation:

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PORTFOLIO MANAGMENT The standard deviation of ITC is 53.70 and BHEL is 95.46. The risk involved in BHEL is more than ITC.

5) ACC (a) & BHEL (b): a = 61.01 b = 95.46 Wa = 2/3 Wa = 1/3 Nab = 0.95

RP = (61.01)*(2/3) + (95.46)*(1/3) + 2(61.01) (95.46)*0.95*2/3*1/3 = 5109.86 = 71.48

Interpretation:
The standard deviation of ACC is61.01 and BHEL is 95.46. The risk involved in BHEL is more than ACC.

9. FIGURE OF PORTFOLIO RISK

Company Name WIPRO AND ITC 81.18 BHEL AND HERO HONDA 25.79 WIPRO AND DR.REDDY 80.84 76 PORTFOLIO RISK 31.04

PORTFOLIO MANAGMENT ITC AND BHEL 71..48 ACC AND BHEL

90 80 70 60 50 40 30 20 10 0 PORTFOLIO RISK

WIPRO AND ITC BHEL AND HERO HONDA WIPRO AND DR.REDDY ITC AND BHEL ACC AND BHEL

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RETURN OF PORTFOLIO: 1) ACC & WIPRO:

RP =WACC * RACC + WWIPRO * RWIPRO = (0.08) (36.61) + (0.92) (-2.63) = 0.51 2) ACC & HEROHONDA: RP =WACC * RACC + W H.H * RH.H
= (0.55)

(36.31) + (0.45) (45.45)

= 40.58 3) ITC& WIPRO: RP =WITC * RITC + WWIPRO * RWIPRO = (0.23) (33.90) + (0.77) (-2.63) = 5.77 4) ITC& HEROHONDA: RP =WITC * RITC + WH.H * RH.H = (0.72) (33.90) + (0.28) (45.45) = 37.12 5) ITC & DR.REDDY: RP =WITC * Ritc + WDR.REDDY* RDR.REDDY = (0.03) (33.90) + (0.97) (8.31) = 9.07 6) WIPRO& BHEL: RP = WWIPRO * RWIPRO +WBHEL * RBHEL = (0.94) (-2.63) + (0.06) (68.76) 78

PORTFOLIO MANAGMENT = 1.65 7) WIPRO& HERO HONDA: = (0.80) (-2.63) + (0.20) (45.45) = 6.99 8) HEROHONDA & DR.REDDY: RP =WH.H * RH.H + WDR.REDDY* RDR.REDDY = (0.27) (45.45) + (0.73) (8.31)

10. FIGURE OF RETURN OF PORTFOLIO:

COMPANY NAME RETURN OF PORTFOLIO (RP)

ACC & WIPRO ACC & HEROHONDA ITC & WIPRO ITC & HEROHONDA ITC & DR.REDDY WIPRO & BHEL WIPRO & HREOHONDA WIPRO & DR.REDDY HEROHONDA& DR.REDDY

0.51 4.58 5.77 37.12 9.07 1.65 6.99 18.33 0.98

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CHAPTER-V FINDINGS SUGGESTIONS CONCLUSIONS

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FINDING S & SUGGESTIONS:

Portfolio is a combination of securities such as securities stocks bonds & money be included in the portfolio. If the investor prefers to have high liquidity then funds should be invested in high quality short term debt maturity issues. The investor should plan his cash drain & the need for net cash inflows during the investment period. Investor having low risk appetite should prefer Bond portfolios. Investor having high risk appetite high risk can invest in Equity portfolios. Investor wishes capital appreciation. He can invest in real estates like lands & House may provide a faster rate of C.A but they lack liquidity. Market instrument. The investor must be very careful while selecting the securities that are to

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CONCLUSIONS
Diversion reduces the unsystematic risk component of the portfolio. The level of the risk exposure is measured with the help of S.D of the returns. The risk would be nil or the standard deviation would be zero if the two securities have perfect negative correlation. Risk cannot be reduced if the securities have perfect correlation. Coefficient of correlation indicates similarly dissimilarity in the behavior of X1 & X2 stocks. Some portfolio is attractive because they give more return for the same level of risk or same return with lesser level of risk. By skillful balancing of the investment proportions in different securities the portfolio risk can be brought down to zero. The change in the portfolio proportion can change the portfolio risk.

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PORTFOLIO MANAGMENT It is assumed that individual investor estimates risk on the basis of variability of returns. Investors decision is solely based on the expected return & variance of returns

BIBLIOGRAPHY Books referred:

Security analysis and portfolio management by V.A. Avadhani Security analysis and portfolio management by Fischer & Jordan Investment decisions by V.K. Bhalla Security analysis & portfolio management by Robbins.

Websites: www.sharekhan.com www.investopedia.com www.capitalmarket.com www.icicidirect.com www.bse.com www.nse.com

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