AUGUST 10, 2015

IAPM ASSIGNMENT 1
SUBMITTED TO DR. ULLAS RAO

BY ARPITA LODH
PGDM NO. 14025
 COMPANY CHOSEN: ABB, AXIS BANK, HUL, MPHASIS, JK TYRES
PORTFOLIO
ONE ASSET: HUL
TWO ASSET: HUL & MPHASIS
THREE ASSET: ABB, HUL, JK TYRES
FOUR ASSET: ABB, AXIS BANK, HUL, MPHASIS
FIVE ASSET: ABB, AXIS BANK, HUL, MPHASIS, JK TYRES

ONE ASSET PORTFOLIO

COMPANY
NAME RISK RETURN CV
ABB 1.622% 0.020% 82.1499
AXIS BANK 1.797% 0.044% 41.2351
HUL 1.485% 0.133% 11.1991
MPHASIS 1.507% 0.125% 12.0253
JK TYRES 2.614% -0.005% -515.06

RETURN
0.140%

0.120%

0.100%

0.080%
RETURN

0.060%
RETURN
0.040%

0.020%

0.000%
0.000% 0.500% 1.000% 1.500% 2.000% 2.500% 3.000%
-0.020%
RISK

As we can see that, the coefficient of variation is minimum in case of JK Tyres but the return
is also negative. So the owning the stock of J K Tyres is wont generate positive return. In the
case of HUL the Coefficient of variation is lowest among the other four and as we can see from
the risk return map HUL is generating maximum return. Between HUL & Mphasis, HUL is
better option even though the risk involved in Mphasis is lower but HUL is generating higher
return for almost the same level of risk.
b) Compute the Portfolio Return and Portfolio Risk for each of the above combinations
using the Markowitz model. Annualize the return and risk values. Compute the
Coefficient of Variance (CV) for each of the above combinations and draw valid
inferences.
DAILY
MARKOWITZ
APPROACH
RISK RETURN CV
One Asset
(HUL) 1.485% 0.133% 11.199064
Two Asset 1.139% 0.129% 8.8344737
Three Asset 1.347% 0.049% 27.757484
Four Asset 1.044% 0.080% 13.001283
Five Asset 1.133% 0.063% 17.911848

ANNUAL
MARKOWITZ
APPROACH
RISK RETURN CV
One Asset
(HUL) 28.17% 61.11% 0.4609
Two Asset(HUL
&Mphasis) 21.61% 59.03% 0.3662
Three Asset 25.56% 19.09% 1.3392
Four Asset 19.81% 33.51% 0.5912
Five Asset 21.49% 25.55% 0.8410

CALCULATION OF CORRELATION BETWEEN TWO STOCKS

CORRELATION
COEFFICIENT
STOCK
ABB & AXIS BANK 0.334640819
ABB & HUL 0.238721479
ABB & MPHASIS 0.153040704
ABB & J K Tyres 0.217270498
AXIS Bank & HUL 0.2989721
Axis bank & Mphasis 0.174924824
 Axis Bank & J K
Tyres 0.334604962
HUL & Mphasis 0.159888492
HUL & J K Tyres 0.191231976
Mphasis & J K Tyres 0.167355582

According to Markowitz, an efficient portfolio should be well diversified and the only it will
yield lower risk or CV in comparison to individual securities & the securities in the portfolio
should be inversely correlated. So that we can completely eliminate the risk. But in reality that
is not possible. However, from the above table we can see that HUL & Mphasis has the lowest
CV in comparison to all. While constructing the multiple security portfolio we can see two
asset generates the lowest level of CV followed by four asset portfolio. The return generated
by the two asset portfolio is also 51% which is more than four asset portfolio i.e. 33.51%. So
it is better to own two asset portfolio with a combination of HUL & Mphasis according to
Markowitz approach.
c) Put all the combinations of Portfolio on a Risk-Return map and drawn an efficient
frontier map. Using the efficient frontier map, suggest which among the available
portfolio combinations, in your view, represents as the most optimum combination. Why?

MARKOWITZ RISK-RETURN
0.140%

0.120%

0.100%

0.080%

0.060%

0.040%

0.020%

0.000%
0.000% 0.200% 0.400% 0.600% 0.800% 1.000% 1.200% 1.400% 1.600%

RETURN

When we add one more asset i.e. Mphasis to the one asset portfolio i.e HUL , we construct a
two asset portfolio, the risk has been decreased due to lower CV of Mphasis and the correlation
coefficient is also less positive in comparison to all other combinations. So the risk gets
diversified and the return is also maximum at that level of risk. When we construct three asset
portfolio (ABB, HUL, JK tyres) the risk has increased which is evident through CV and their
return is lowest due to higher CV of ABB and negative return generated by JK Tyres. When
we construct four stock and five stock portfolio, we see that risk and return are again positively
related. However four stock portfolio has lower CV and even the return generated is more than
five stock as JK tyres is included in five stock which generates negative return. As most of the
investors are risk averse in nature, it is better to own either a two asset portfolio or four asset
portfolio. There is no use of owning three asset portfolio as risk involved is maximum.
d) Compute the Portfolio Return and Portfolio Risk for each of the above combinations
using the Sharpe model. Annualize the return and risk values. Compute the Coefficient
of Variance (CV) for each of the above combinations and draw valid inferences.

DAILY

SHARPE'S APPROACH
RISK RETURN CV
One Asset
(HUL) 1.48% 0.13% 11.19906423
Two Asset 1.14% 0.13% 8.828718072
Three Asset 1.30% 0.05% 26.71693541
Four Asset 1.05% 0.08% 13.09179603
Five Asset 1.10% 0.06% 17.42652846

ANNUAL

SHARPE'S APPROACH
RISK RETURN CV
One Asset (HUL) 28.17% 61.11% 0.4609
Two Asset 21.60% 59.03% 0.3659
Three Asset 24.61% 19.09% 1.2890
Four Asset 19.95% 33.51% 0.5953
Five Asset 20.91% 25.55% 0.8182

SHARPE'S RISK-RETURN
0.14%

0.12%

0.10%
RETURN

0.08%

0.06%

0.04%

0.02%

0.00%
0.00% 0.20% 0.40% 0.60% 0.80% 1.00% 1.20% 1.40% 1.60%
RISK
RETURN

We can see that by adding stocks to the portfolio, the risk has been diversified. Diversification
benefit is mainly because of low correlation coefficient between stock returns. But adding more
& more portfolio the risk increases as the systematic risk increases even after diversification
which we can see in the case of three asset and five asset portfolio, where the risk involved also
increases. So, it is better to look at the relation of securities with the market index for which
we calculate beta. However Sharpe model also suggest to go for two asset portfolio as we can
see that the systematic risk for two asset is minimum and systematic risk for five asset is
maximum.
e) While the computed values of Portfolio Return and Portfolio Risk, largely, appear to
be the same; yet, the analysis rendered by Sharpes model appears to be more intuitive
and useful. In the light of this statement, offer your valid inferences in respect of the
analysis undertaken above.

PORTFOLIO SYSTEMATIC RISK

One Asset 4.59333E-05
Two Asset 3.6037E-05
Three asset 5.55425E-05
Four Asset 6.49503E-05
Five Asset 6.8167E-05

Even though the computed values of portfolio return and risk appear almost same, but Sharpe
approach doesnt emphasize on coefficient of variation. According to Markowitz more the
diversification, efficient the portfolio. But as we can see in five asset portfolio even after
diversification, the risk increases which may be due to certain factors that governs the market.
So only we calculated beta using regression approach to see the relationship of all securities
with market. It helps us to particularly identify the systematic as well unsystematic component
of risk involved. But since the differences noted in the values obtained under both approach is
very less, so an investor will be convinced that both approaches perform almost similar function
except that the risk are broken into systematic and unsystematic component. As we can see that
the systematic risk for two asset is minimum and systematic risk for five asset is maximum.