A

SUMMER INTERNSHIP PROJECT REPORT

ON
“RISK & RETURN IN INDIAN STOCK MARKET"

Submitted in Partial Fulfillment of the requirements for the

Award of the degree of
Master of Business Administration
From
University Of Kota, Kota, Rajasthan
2008-2010

Performed at
India Infoline Limited, Kota, Rajasthan

Guided By: Submitted

By:
Mr. Pramod Vijay Ashish vijay
Enrolment No.
8/18773
 Declaration

I hereby declare that I have taken up a project on “RISK &RETURN

IN INDIAN STOCK MARKET ” and this report is submitted to the
Department of Commerce & Management, University of Kota, for the
partial fulfillment of the continuous evaluation of the internal
assessment of Summer Internship Report MBA year 2008-2010.

The report is a record of original project work done by me for the

purpose of studying the Stock Market Functionalities and investment
Patterns from 6th Aug, 2009 to 30th Sep, 2009. at India Infoline Ltd.,
Kota Branch under the guidance of Mr. Pramod Vijay. This report has
never been submitted else for award of any degree or diploma.

ASHISH VIJAY
Date:
Place: Kota
 ACKNOWLEDGEMENT

It plunge me in exhilaration in taking privilege in expressing our

heart felt appreciation to Ms Shabnam Bano, Branch Manager, India
Infoline, Kota Branch, for her admirable and valuable guidance, keen
interest, encouragement and constructive suggestions during the course
of the project.

I would like to express our gratitude to Mr. Pramod Vijay, Sr.

Relationship Manager, India Infoline, Kota for providing us an
opportunity to take this project work & under whose supervision &
guidance whole of the project has got its shape.
I would also like to express thanks to Mr. Prateek Saxena and Ms
Garima Arora, India Infoline Limited, who was closely associated with
the project right from the beginning.

I consider my proud privilege to express deep sense of

gratefulness to Dr. K.C. Goyal, Head of Department, Department of
commerce and Management, University Of Kota, who is the strength
and an encouragement behind me.

My sincere appreciation also go to those clients, investors and

persons in India Infoline Ltd. who altruistically revealed important
information regarding the Indian stock market and how they trade and
invest with the intense help of their respective relationship managers
and investment guides.

I am very grateful to my parents, family members and friends for

their enthusiastic support.

Last but not least; report was completed successfully because of

the grace of the Almighty God.

ASHISH VIJAY
 EXECUTIVE SUMMARY

The project which is taken by me with the help of my Faculty and

industry Guide mainly focused on Indian Stock Market. The main focus
of my project is to gain knowledge about the core areas in which stock
market works and what are the trends and investment patterns available
in it.

Working with India Infoline Limited I really had a learning

experience basically related with the stock market the how various
components like, equities, stocks, IPOs, derivatives (Future and
options), Commodities and the Mutual Funds. These all are important
aspects of stock market. Other thing which has I learned that the stock
market is divided into two segments Primary market & Secondary
market. In the Primary market those companies who are unlisted and
who want capital from the public they issue their shares for the first time
in the market which is called Primary Market .Secondary market
includes Equity shares, Right issues, Bonus shares, Preference shares,
Cumulative Preference Shares, Cumulative Convertible Preference
Shares, Bonds. The share market which I had seen the guidance of my
Industry Guide is the most volatile market.

So, the whole project was directed towards how the stock markets
work in India and what are the core areas of functioning of the stock
market in order to maximum out of the minimum so that the profile of
mine and the project topic should match and more and more learning
can be done from them.
CONTENTS

CHAPTER 1- INTRODUCTION

 Need of the study

 Objectives
 Scope

CHAPTER 2- PROFILE OF INDIAINFOLINE LIMITED

2.1 bu
CHAPTER 6- CONCLUSION, SUGGESTION AND
LIMITATION OF THE STUDY

BIBLIOGRAPHY

 WEBSITES
 ANNEXURE
 CHECKLIST
 ABBREVIATIONS
INTRODUCTION TO INVESTMENT

Investment may be defined as an activity that commits funds in any

financial form in the present with an expectation of receiving additional
return in the future. The expectations bring with it a probability that the
quantum of return may vary from a minimum to a maximum. This
possibility of variation in the actual return is known as investment risk.
Thus every investment involves a return and risk.

Investment is an activity that is undertaken by those who have

savings. Savings can be defined as the excess of income over
expenditure. An investor earns/expects to earn additional monetary
value from the mode of investment that could be in the form of financial
assets.
The three important characteristics of any financial asset are:

• Return-the potential return possible from an asset.

• Risk-the variability in returns of the asset form the chances of its
value going down/up.
• Liquidity-the ease with which an asset can be converted into cash.

Investors tend to look at these three characteristics while deciding on

their individual preference pattern of investments. Each financial asset
will have a certain level of each of these characteristics.
NEED OF THE STUDY

We believe that our investors are better served by a disciplined

investment approach, which combines an understanding of the goals and
objectives of the investor with a fine tuned strategy backed by research.

 Stock specific selection procedure based on fundamental research

for making sound investment decisions.
 Focus on minimizing investment risk by following rigorous
valuation disciplines.
 Capital preservation.
 Selling discipline and use of Derivatives to control volatility.
 Overall to enhance absolute return for investors.

The need of the study is to identify the different types of investment

alternatives available in the market and analyze their risk and return.

OBJECTIVES OF THE STUDY

Before starting a project, we should keep in mind the clear objective of
the project because in the absence of the objective one can’t reach the
conclusion or the end result of the project. Research objective answer
the question “Why this study is being conducted”
For every problem there is a research. As all the research is based on
some objective, our research has also some objectives which are as
follows:

 To identify and study the demand and supply scenario.

 To determine and understand dynamics of stock exchange and

different Investment alternative.

Primary Objective

 To identify and analyze the portfolio management strategies in

Indian Sock market.

 To measure customers preference towards dealing in derivative

market segment

 The perception held by investors about the financial derivatives

 Giving conclusion and recommendation.

Secondary Objective
 To study which class mostly invest in stock market

 Evaluate the various investment opportunities for investors

 To study the behavior of investor during the market fluctuations

Scope of the study
 To know the lack of awareness about stock market amongst
most of people.

 To know the awareness about the portfolio investment.

 To know problem faced by people in online trading because of
lack of knowledge about computers and internet.

 To know the information regarding tax and many other

transactions cost from customers.

 To know how investing money in stock market for short period

is risky. But if investment is made judiciously it gives good
returns.
 To Identify the volatile stock market is more then other
country
CORPORATE PROFILE

COMPANY STRUCTURE

India Infoline Limited is listed on both the leading stock exchanges in

India, viz. the Stock Exchange, Mumbai (BSE) and the National Stock
Exchange (NSE) and is also a member of both the exchanges. It is
engaged in the businesses of Equities broking, Wealth Advisory
Services and Portfolio Management Services. It offers broking services
in the Cash and Derivatives segments of the NSE as well as the Cash
segment of the BSE. It is registered with NSDL as well as CDSL as a
depository participant, providing a one-stop solution for clients trading
in the equities market. It has recently launched its Investment banking
and Institutional Broking business.

INDIA INFOLINE GROUP

The India Infoline group, comprising the holding company, India

Infoline Limited and its wholly-owned subsidiaries, straddle the entire
financial services space with offerings ranging from Equity research,
Equities and derivatives trading, Commodities trading, Portfolio
Management Services, Mutual Funds, Life Insurance, Fixed deposits,
GoI bonds and other small savings instruments to loan products and
Investment banking. India Infoline also owns and manages the websites
www.indiainfoline.com and www.5paisa.com
The company has a network of 976 business locations (branches and
sub-brokers) spread across 365 cities and towns. It has more than
800,000 customers.

INDIA INFOLINE LTD

India Infoline Limited is listed on both the leading stock exchanges in

India, viz. the Stock Exchange, Mumbai (BSE) and the National Stock
Exchange (NSE) and is also a member of both the exchanges. It is
engaged in the businesses of Equities broking, Wealth Advisory
Services and Portfolio Management Services. It offers broking services
in the Cash and Derivatives segments of the NSE as well as the Cash
segment of the BSE. It is registered with NSDL as well as CDSL as a
depository participant, providing a one-stop solution for clients trading
in the equities market. It has recently launched its Investment banking
and Institutional Broking business.
A SEBI authorized Portfolio Manager; it offers Portfolio Management
Services to clients. These services are offered to clients as different
schemes, which are based on differing investment strategies made to
reflect the varied risk-return preferences of clients.

INDIA INFOLINE MEDIA AND RESEARCH SERVICES

LIMITED.

The content services represent a strong support that drives the broking,
commodities, mutual fund and portfolio management services
businesses. Revenue generation is through the sale of content to
financial and media houses, Indian as well as global.
It undertakes equities research which is acknowledged by none other
than Forbes as 'Best of the Web' and '…a must read for investors in
Asia'. India Infoline's research is available not just over the internet but
also on international wire services like Bloomberg (Code: IILL),
Thomson First Call and Internet Securities where India Infoline is
amongst the most read Indian brokers.

INDIA INFOLINE COMMODITIES LIMITED.

India Infoline Commodities Pvt Limited is engaged in the business of

commodities broking. Our experience in securities broking empowered
us with the requisite skills and technologies to allow us offer
commodities broking as a contra-cyclical alternative to equities broking.
We enjoy memberships with the MCX and NCDEX, two leading Indian
commodities exchanges, and recently acquired membership of DGCX.
We have a multi-channel delivery model, making it among the select
few to offer online as well as offline trading facilities.

INDIA INFOLINE MARKETING & SERVICES

India Infoline Marketing and Services Limited is the holding company

of India Infoline Insurance Services Limited and India Infoline
Insurance Brokers Limited.

(a) India Infoline Insurance Services Limited is a registered Corporate

Agent with the Insurance Regulatory and Development Authority
(IRDA). It is the largest Corporate Agent for ICICI Prudential Life
Insurance Co Limited, which is India's largest private Life Insurance
Company. India Infoline was the first corporate agent to get licensed by
IRDA in early 2001.
(b) India Infoline Insurance Brokers Limited India Infoline Insurance
Brokers Limited is a newly formed subsidiary which will carry out the
business of Insurance broking. We have applied to IRDA for the
insurance broking licence and the clearance for the same is awaited.
Post the grant of license, we propose to also commence the general
insurance distribution business.
INDIA INFOLINE INVESTMENT SERVICES LIMITED

Consolidated shareholdings of all the subsidiary companies engaged in

loans and financing activities under one subsidiary. Recently, Orient
Global, a Singapore-based investment institution invested USD 76.7
million for a 22.5% stake in India Infoline Investment Services. This
will help focused expansion and capital raising in the said subsidiaries
for various lending businesses like loans against securities, SME
financing, distribution of retail loan products, consumer finance
business and housing finance business. India Infoline Investment
Services Private Limited consists of the following step-down
subsidiaries.

(a) India Infoline Distribution Company Limited (distribution of retail

loan products)

(b) Moneyline Credit Limited (consumer finance)

(c) India Infoline Housing Finance Limited (housing finance)

IIFL (ASIA) PTE LIMITED

IIFL (Asia) Pte Limited is wholly owned subsidiary which has been
incorporated in Singapore to pursue financial sector activities in other
Asian markets. Further to obtaining the necessary regulatory approvals,
the company has been initially capitalized at 1 million Singapore
dollars.
PRODUCTS AND SERVICES

India Infoline is a one-stop financial services shop, most respected for

quality of its advice, personalized service and cutting-edge technology.
It provide a bouquet of products to its customer such as-

EQUITIES

India Infoline provided the prospect of researched investing to its

clients, which was hitherto restricted only to the institutions. Research
for the retail investor did not exist prior to India Infoline leveraged
technology to bring the convenience of trading to the investor’s location
of preference (residence or office) through computerized access. India
Infoline made it possible for clients to view transaction costs and ledger
updates in real time. Over the last five years, India Infoline sharpened its
competitive edge through the following initiatives:

MULTI-CHANNEL DELIVERY MODEL

The Company is among the few financial intermediaries in India to offer

a complement of online and offline broking. The Company’s network of
branches also allows customers to place orders on phone or visit our
branches for trading.

INTEGRATED MIDDLE AND BACK OFFICE

The customer can trade on the BSE and NSE, in the cash as well as the
derivatives segment all through the available multiple options of
Internet, phone or branch presence.

MULTIPLE-TRADING OPTIONS

The Company harnessed technology to offer services at among the

lowest rates in the business membership: The Company widened client
reach in trading on the domestic and international exchanges.

TECHNOLOGY
The Company provides a prudent mix of proprietary and outsourced
technologies, which facilitate business growth without a corresponding
increase in costs.

CONTENT

The Company has leveraged its research capability to provide regular

updates and investment picks across the short and long-term.

SERVICE

Clients can access the customer service team through various media like
toll-free lines, emails and Internet- messenger chat for instant query
resolution. The Company’s customer service executives proactively
contact customers to inform them of key changes and initiatives taken
by the Company. Business World rated the Company’s customer service
as ‘Best’ in their survey of online trading sites carried out in December
2003.

KEY FEATURES

• Membership on the Bombay Stock Exchange Limited (BSE ) and

the National Stock Exchange (NSE)

• Registered with the NSDL as well as CDSL as a depository

participant, providing a one-stop solution for clients trading in the
equities market

• Broking services in cash and derivative segments, online as well as

offline.

• Presence across 350 cities and towns with a network of over 850
business locations Equity client base of over 500,000 clients

• Provision of free and world-class research to all clients

PMS (PORTFOLIO MANAGEMENT SERVICE)

Our Portfolio Management Service is a product wherein an equity

investment portfolio is created to suit the investment objectives of a
client. We at India Infoline invest your resources into stocks from
different sectors, depending on your risk-return profile. This service is
particularly advisable for investors who cannot afford to give time or
don't have that expertise for day-to-day management of their equity
portfolio.

RESEARCH

Sound investment decisions depend upon reliable fundamental data and

stock selection techniques. India Infoline Equity Research is proud of its
reputation for, and we want you to find the facts that you need. Equity
investment professionals routinely use our research and models as
integral tools in their work. They choose Ford Equity Research when
they can clear your doubts.

COMMODITIES

India Infoline’s extension into commodities trading reconciles its

strategic intent to emerge as a one-stop solutions financial intermediary.
Its experience in securities broking has empowered it with requisite
skills and technologies. The Company’s commodities business provides
a contra-cyclical alternative to equities broking. The Company was
among the first to offer the facility of commodities trading in India’s
young commodities market (the MCX commenced operations only in
2003). Average monthly turnover on the commodity exchanges
increased from Rs 0.34 bn to Rs 20.02 bn. The commodities market has
several products with different and non-correlated cycles. On the whole,
the business is fairly insulated against cyclical gyrations in the business.

MORTGAGES
During the year under review, India Infoline acquired a 75% stake in
Moneytree Consultancy Services to mark its foray into the business of
mortgages and other loan products distribution. The business is still in
the investing phase and at the time of the acquisition was present only in
the cities of Mumbai and Pune. The Company brings on board expertise
in the loans business coupled with existing relationships across a
number of principals in the mortgage and personal loans businesses.
India Infoline now has plans to roll the business out across its pan-
Indian network to provide it with a truly national scale in operations.

HOME LOANS and PERSONAL LOANS

Loan against residential and commercial property

Expert recommendations
Easy documentation
Quick processing and disbursal
No guarantor requirement

ONLINE INVESTMENT

India Infoline has made investing in Mutual funds and primary market
so effortless. All have to do is register with us and that’s all. No
paperwork no queues and No registration charges.

INVEST IN MUTUAL FUNDS

India Infoline offers a host of mutual fund choices under one roof,
backed by in-depth research and advice from research house and tools
configured as investor friendly.

APPLY IN INITIAL PUBLIC OFFERS (IPO)

Client could also invest in Initial Public Offers (IPO’s) online without
going through the hassles of filling ANY application form/ paperwork.

STOCK MESSAGING SERVICE (SMS)

Stay connected to the market remotely. The trader of today, you are
constantly on the move. But how to stay connected to the market while
on the move? Simple, subscribe to India Infoline's Stock Messaging
Service and get Market on the Mobile of client! There are three
products under

SMS Service:

 Market on the move.

 Best of the lot.

 VAS (Value Added Service)

INSURANCE

An entry into this segment helped complete the client’s product basket;
concurrently, it graduated the Company into a one-stop retail financial
solutions provider. To ensure maximum reach to customers across India,
we have employed a multi pronged approach and reach out to customers
via our Network, Direct and Affiliate channels. Following the opening
of the sector in 1999-2000, a number of private sector insurance service
providers commenced operations aggressively and helped grow the
market.

The Company’s entry into the insurance sector derisked the Company
from a predominant dependence on broking and equity-linked revenues.
The annuity based income generated from insurance intermediation
result in solid core revenues across the tenure of the policy.

WEALTH MANGEMENT SERVICE

Imagine a financial firm with the heart and soul of a two-person

organization. A world-leading wealth management company that sits
down with you to understand your needs and goals. We offer you a
dedicated group for giving you the most personal attention at every
level.
NEWSLETTERS

The Daily Market Strategy is your morning dose on the health of the
markets. Five intra-day ideas, unless the markets are really choppy
coupled with a brief on the global markets and any other cues, which
could impact the market. Occasionally an investment idea from the
research team and a crisp round up of the previous day's top stories.
That's not all. As a subscriber to the Daily Market Strategy, you even
get research reports of India Infoline research team on a priority basis.

The India Infoline Weekly Newsletter is your flashback for the week
gone by. A weekly outlook coupled with the best of the web stories
from India Infoline and links to important investment ideas, Leader
Speak and features is delivered in your inbox every Friday evening.
 BUSINESS & OPERATIONS

BUSINESS
Over a period of time RSL has recorded a healthy growth rate both in
business volumes and profitability as it is one of the major players in
this line of business. The business thrust has been mainly in the
development of business from Financial Institutions, Mutual Funds and
Corporate.

OPERATIONS

The operations of the company are broadly organized along the

following functions.

Research & Analysis

This group is focused on doing daily stock picks and periodical scrip
segment specific research. They provide the best of analysis in the
industry and are valued by both our Institutional and Retail clientele.

Marketing
This group is focused on tracking potential business opportunities and
converting them into business relationships. Evaluating the needs of the
clients and tailoring products to meet their specific requirements helps
the company to build lasting relationships
Dealing

Enabling the clients to procure the best rates on their transactions is the
core function of this group.

Back Office

This group ensures timely deliveries of securities traded, liaison with

stock exchange authorities on operational matters, statutory compliance,
handling tasks like pay-in, pay-out, etc. This section is fully automated
to enable the staff to focus on the technicalities of securities trading and
is manned by professionals having long experience in the field

INFRASTRUCTURE

Offices

The company has offices located at prime locations in Mumbai, New

Delhi, Kolkata and Chennai. The offices are centrally located to cater to
the requirements of institutional and corporate clients and retails clients,
and for ease of operations due to proximity to stock exchanges and
banks.

Communications
The company has its disposal, an efficient network of advance
communication system and intend to install CRM facility, besides this it
is implementing interactive client information dissemination system
which enables clients to view their latest client information on web. It
has an installed multiple WAN to interconnect the branches to
communicate on real time basis.
The company is equipped with most advanced systems to facilitate
smooth functioning of operations. It has installed its major application
on IBM machines and uses latest state of art financial software.
 MANAGEMENT TEAM

Mr. Nirmal Jain

Chairman & Managing
Director
India Infoline Ltd.
Nirmal Jain, MBA (IIM, Ahmedabad) and a Chartered and Cost
Accountant, founded India’s leading financial services company India
Infoline Ltd. in 1995, providing globally acclaimed financial services
in equities and commodities broking, life insurance and mutual funds
distribution, among others. Mr. Jain began his career in 1989 with
Hindustan Lever’s commodity export business, contributing
tremendously to its growth. He was also associated with Inquire-Indian
Equity Research, which he co-founded in 1994 to set new standards in
equity research in India.
Mr. R Venkataraman
Executive Director
India Infoline Ltd.
R Venkataraman, co-promoter and Executive Director of India Infoline
Ltd., is a B. Tech (Electronics and Electrical Communications
Engineering, IIT Kharagpur) and an MBA (IIM Bangalore). He joined
the India Infoline board in July 1999. He previously held senior
managerial positions in ICICI Limited, including ICICI Securities
Limited, their investment banking joint venture with J P Morgan of
USA and with BZW and Taib Capital Corporation Limited. He was
also Assistant Vice President with G E Capital Services India Limited
in their private equity division, possessing a varied experience of more
than 16 years in the financial services sector.

The Board of Directors

Apart from Mr. Nirmal Jain and Mr. R Venkataraman, the Board of
Directors of India Infoline Ltd. comprises:

Mr Nilesh Vikamsey
Independent Director
India Infoline Ltd.

Mr. Vikamsey, Board member since February 2005 - a practising

Chartered Accountant and partner (Khimji Kunverji & Co., Chartered
Accountants), a member firm of HLB International, headed the audit
department till 1990 and thereafter also handles financial services,
consultancy, investigations, mergers and acquisitions, valuations etc;
an ICAI study group member for Proposed Accounting Standard —
30 on Financial Instruments Recognition and Management, Finance
Committee of The Chamber of Tax Consultants (CTC), Law Review,
Reforms and Rationalization Committee and Infotainment and Media
Committee of Indian Merchants’ Chamber (IMC) and Insurance
Committee and Legal Affairs Committee of Bombay Chamber of
Commerce and Industry (BCCI). Mr. Vikamsey is a director of
Miloni Consultants Private Limited, HLB Technologies (Mumbai)
Private Limited and Chairman of HLB India.
Mr Sat Pal Khattar
Non Executive Director
India Infoline Ltd.
Mr Sat Pal Khattar, - Board member since April 2001 - Presidential
Council of Minority Rights member, Chairman of the Board of Trustee
of Singapore Business Federation, is also a life trustee of SINDA, a
non profit body, helping the under-privileged Indians in Singapore. He
joined the India Infoline board in April 2001. Mr Khattar is a Director
of public and private companies in Singapore, India and Hong Kong;
Chairman of Guocoland Limited listed in Singapore and its parent
Guoco Group Ltd listed in Hong Kong, a leading property company of
Singapore, China and Malaysia. A Board member of India Infoline Ltd,
Gateway Distriparks Ltd — both listed — and a number of other
companies he is also the Chairman of the Khattar Holding Group of
Companies with investments in Singapore, India, UK and across the
world.
Mr Kranti Sinha
Independent Director
India Infoline Ltd.
Mr. Kranti Sinha — Board member since January 2005 — completed
his masters from the Agra University and started his career as a Class I
officer with Life Insurance Corporation of India. He served as the
Director and Chief Executive of LIC Housing Finance Limited from
August 1998 to December 2002 and concurrently as the Managing
Director of LICHFL Care Homes (a wholly owned subsidiary of LIC
Housing Finance Limited). He retired from the permanent cadre of the
Executive Director of LIC; served as the Deputy President of the
Governing Council of Insurance Institute of India and as a member of
the Governing Council of National Insurance Academy, Pune apart
from various other such bodies. Mr. Sinha is also on the Board of
Directors of Hindustan Motors Limited, Larsen & Toubro Limited,
LICHFL Care Homes Limited, Gremach Infrastructure Equipments
and Projects Limited and Cinemax (India) Limited.

Mr Arun K. Purvar
Independent Director
India Infoline Ltd.

Mr. A.K. Purvar – Board member since March 2008 – completed his
Masters degree in commerce from Allahabad University in 1966 and a
diploma in Business Administration in 1967. Mr. Purwar joined the
State Bank of India as a probationary officer in 1968, where he held
several important and critical positions in retail, corporate and
international banking, covering almost the entire range of commercial
banking operations in his illustrious career. He also played a key role in
co-coordinating the work for the Bank's entry into the field of
insurance. After retiring from the Bank at end May 2006, Mr. Purwar is
 now working as Member of Board of Governors of IIM-Lucknow,
joined IIM–Indore as a visiting professor, joined as a Hon.-Professor in
NMIMS and he is also a member of Advisory Board for Institute of
Indian Economic Studies (IIES), Waseda University, Tokyo, Japan. He
has now taken over as Chairman of IndiaVenture Advisors Pvt. Ltd., as
well as IL & FS Renewable Energy Limited. He is also working as
Independent Director in leading companies in Telecom, Steel, Textiles,
Autoparts, Engineering and Consultancy.

Shabnam Bano
Branch Manager, Kota
Branch
India Infoline Ltd.

Ms. Shabnam Bano, Branch Manager India Infoline Limited, Kota Branch. She
started her career from ICICI Personal Loans DST as a Sales Executive, After that she joined
India Bulls Securities Ltd. As Assistant Relationship Manager. In Jan 2007, she join India Infoline
Ltd. as Relationship Manager. Then she promoted as Branch Manager for Kota Branch of India
Infoline Ltd. She had diploma in Civil Engineering, and MBA in Finance. She is an excellent
Team Manager for her team. She is Mentor and guide in this project.

Pramod Vijay
Senior Relationship Manager,
India Infoline Ltd. Kota

Mr. Pramod Vijay Sr. Relation Manager, working at Kota Branch of

India Infoline Ltd. He join India Infoline as Marketing Executive in the
year of 2006. After joining he continuously upgrade himself and got
promoted to the designation of Sr. Relation Manager. He got his
graduation from MDS University, Ajmer with flying colors. He always
ready to lend a hand to his colleagues and team members. He provides
excellent guidance in the accomplishment of the project report.

COMPETITIVE ADVANTAGES
OF INDIA INFOLINE LTD.
Participant on the country’s premier exchange: INDIA INFOLINE
LTD. is a member of the country’s premier stock exchange – The
National Stock Exchange of India (NSE).

Clearing membership on Capital & Derivatives segments: It has

clearing memberships on both the Capital Market and Derivatives
segment of the exchange. We are also authorized to trade the retail debt
market.

Depository Participants with NSDL & CDSL: We are depository

participants with the country’s premier depository service - National
Securities Depository Limited (NSDL), as well as with the only other
depository with a countrywide reach - Central Depository Services
Limited (CDSL).

Leading private sector bank as partner: Our banking partner is

HDFC Bank, ICICI Bank, Citi Bank, Bank of Baroda – The foremost
private sector bank in the country, which has the most technologically
advanced infrastructure in the country, with Internet banking allowing
access to information 24 X 7.

Bloomberg Information Services: The world’s two best information

services are Bloomberg LP and Reuters. These are prohibitively
expensive for all but mutual funds and financial institutions to own
terminals of, and subscribe to. We however have two connections to the
Bloomberg Information Service, the premier service, both in Delhi and
Mumbai, and these provide us information ahead of the general public,
and at par with the financial institutions.
Access to breaking news from across the globe, and across asset classes,
and superior research and analysis capabilities.

Prime Office Locations: We have prime office locations in the nation’s

political capital and the business capital – Delhi and Mumbai, in the
heart of the city.

Research Capabilities: We have a dedicated team of analysts in our

Bombay office – They provide fundamental analysis of stocks and
markets, which are fundamentally strong, and provide above market
returns to investors, but over a slightly longer time frame – Typically 6
months and above.

Technical Analysis: A daily technical newsletter is published by our in-

house technical analyst, who is a recognized leading practitioner of the
science. He has a success rate of over 73%. He tracks the progress of the
calls on a real-time basis, and advises of any change in the profit points
or stop loss levels.
. All Services under one roof: India has moved to a T+2 settlement
system, where all trades and settled on a rolling basis. However
this gives the clients no time to arrange deliveries to their broker,
through a separate depository participant. INDIA INFOLINE LTD.,
being a trading-clearing member, as well as a depository participant,
allows seamless transfer of securities under the same roof, with
minimum delay, and constant monitoring

INDIA INFOLINE LTD. PORTFOLIO MANAGEMENT

SERVICE

India Infoline Ltd. offers PMS to address varying investment

preferences. As a focused service, PMS pays attention to details, and
portfolios are customized to suit the unique requirements of investment.
RISK

risk is a concept that denotes a potential negative impact to an asset or

some characteristic of value that may arise from some present process or
future event. In everyday usage, risk is often used synonymously with
the probability of a known loss. Risk is uncertainty of the income /
capital appreciation or loss of the both.

The total risk of an individual security comprises two components, the

market related risk called systematic risk also known as undiversifiable
risk and the unique risk of that particular security called unsystematic
risk or diversifiable risk.

Types of risk

Systematic risk (market) Unsystematic risk

(company risk)
Examples: Examples:

• Interest rate risk • Labor troubles

• Market risk • Liquidity problems
• Inflation risk • Raw materials risks
• Demand • Financial risks
• Government • Management
policy problems

• International
factors
CONCEPT OF RISK

The dictionary meaning of risk is “the possibility of loss or injury,the

degree or probability of such loss”. In investment analysis risk
means variability of possible returns associated with an
investment.in other words ,risk refers to the chance that the actual
return from an investment will differ from the expected return.

Risk and uncertainty

Risk and uncertainty are used interchangeably but they differ in

perception.risk and uncertainty go together.risk is a situation where
probabilities can be assingned to an event on the basis of facts and
figure available regarding the decision, while uncertainty is a
situation where either facts and figures are not available,or the
probabilities can not be assigned.

RISK

SYSTAMATIC RISK UNSYSTAMATIC RISK

MARET RISK BUSINESS RISK

FINANCIAL RISK

INTEREST RATE RISK

INTERNAL
EXTERNAL

INFLATION RISK
SYSTAMATIC RISK

Systematic risk refers to that portion of variation in return caused by

factors that affect the price of all securities.the systematic risk can not
be eliminated by diversification of portfolio.

UNSYSTAMATIC RISK

Unsystematic risk refers to that portion of the risk which is caused due
to factors unique or related to a firm or industry.the unsystematic risk
can be eliminated or reduced by diversification of portfolio.

METHODOLOGY OF THE STUDY

Primary Data:
The data provided by the firm was been analyzes by using
Markowitz model determines an efficient asset of portfolio return
i.e.,
1. Return
2. Standard deviation
3. Coefficient of correlation
Secondary Data:

The data that is used in this project is of secondary nature.

The data is to be collected from secondary sources such as various
websites, journals, newspapers, books, etc., the analysis used in this
project has been done using selective technical tools. In Equity market,
risk is analyzed and trading decisions are taken on basis of technical
analysis.It is collecting share prices of selected companies for a period
of five years.

PERIOD OF THE STUDY:

The study of Equity value and portfolio management for a period
of five years (2003-2007).

LIMITATIONS:
• The companies are selected on the basis of the performance
• Expand or contract the size of the portfolio reflect the changes in
investor risk disposition.

SOURCE :
NCE, The standards set by NSE in terms of market practices and
technologies have become industry benchmarks and are being emulated
by other market participants. NSE is more than a mere market
facilitator. It's that force which is guiding the industry towards new
horizons and greater opportunities.
TOOLS & TECHNIQUES:

The following statistical techniques were used for measuring the

performance of the company’s funds.

1. Rate of Return (ROR)

N2-N1
 ROR =
N1
Where, N1 is Close period at period1

N2 is Close period at period

2. Standard Deviation (SD)

Σ [R-AVG(R)]
SD =
N
Where, R is rate of return

N is total number of

months

3. Beta
n Σxy – Σx * Σy
Beta =
n Σx2 – (Σx)2
4. Alpha

Alpha = Avg (y) – (beta*Avg (x))

5. Coefficient of Correlation

n Σxy – Σx * Σy
Coefficient of Correlation =
[(n Σy2 – (Σy) 2) (n Σx2 – (Σx) 2)]
½

6. Coefficient of Correlation

Coefficient of determination = (Coefficient of Correlation) 2

Dealing with Risk and Uncertainty

The future always brings surprises. Sometimes, the surprises are nice,
but often they are unpleasant. Many people want ways to protect
themselves from the unpleasant surprises. They are willing to

pay for protection against risk and uncertainty.1

Where some people consider risk a problem, others see it as an

opportunity. A speculator is one who takes risks in the hope of making
a profit, usually by trying to forecast future prices and betting his money
that he is correct. If a speculator expects the price of gold to be higher in
a year than it is now, he can buy gold and wait. If he is right, he will
make a profit on his action, while if he is wrong, he will lose.

The speculator is widely regarded as someone who contributes nothing

positive to the economy because he produces nothing. However, by
buying when prices are low and selling when they are high, the
successful speculator transfers goods from low-valued uses to high-
valued ones, which is a useful task. He also smoothes price fluctuations
because his purchases increases prices when they are low, and his sales
when prices are high helps keep prices from going even higher.2

The development of futures markets allows anyone who wants to be a

speculator to become one. In a futures market, agreements to buy and
sell at a future date are made, with the price set when the agreement is
made. There are futures markets for most major agricultural
commodities. Farmers use them to fix the price of their crop long before
harvest and millers and owners of feedlots use them to lock in the price
they will pay for grain in the coming year. In fixing these prices with a
futures contract, farmers and buyers of grain reduce the risk they take by
hedging. They are able to reduce their risk because speculators are
willing to take risk. Without speculators, a futures market could not
function properly. The benefits that speculators provide others are not
part of their intentions, an example of the unintended consequences in
which economists delight.

A person involved in speculation is not engaged in arbitrage, he is not a

middleman, nor is he an entrepreneur. Arbitrage is buying in a market
where prices are low and simultaneously selling in a market in which
they are high. There is no risk involved in pure arbitrage. Arbitrage
tends to equalize prices in various markets.

A middleman is part of a distribution or marketing network. Though

frequently disparaged, the fact that sellers are willing to use middlemen
indicates that they do perform a useful service. Middlemen generally try
to keep risk to a minimum.

The entrepreneur deals in risk, but unlike the speculator who reduces the
risk of those who do not want to bear it, the entrepreneur's risk is of his
own making. The entrepreneur is the creative element in a market
economy. His presence makes the system dynamic and ever-changing.
Although the abstract theory of the exchange economy is a static theory,
emphasizing equilibrium, real-world market economies are always
changing. The entrepreneur, the innovator, is a source of change. He
creates new products, develops new managerial techniques, introduces
new ways of producing products, and finds new resources. His role can
be understood if one looks at Darwin's view of the biological world, in
which a species that finds a previously unoccupied ecological niche (or
that better exploits one that is already occupied) prospers.

The entrepreneur is searching for unoccupied economic niches,

opportunities to make a profit. The search is risky and usually ends in
failure. But when it is successful, it can change the lives of all of us (just
as when a new species evolves in nature, it can change the lives of all
previously existing organisms). Most large corporations are the results
of entrepreneurial effort, though they may no longer be performing
much of the entrepreneurial function. Schumpeter who stressed the
importance of the entrepreneur more than anyone before or since,
suggested that there were no permanent triumphs in the search of
entrepreneurs. In a process that he called "creative destruction," he
suggested that all economic niches would eventually be eliminated by
further discoveries of other entrepreneurs.

Another way to deal with risk is with insurance.

MEASURING EXPECTED RETURN AND RISK

Risk premiums
Investor assume risk so that they are rewarded in the form of higher
return. Hence

Equity Risk Premium: equity stocks as a class and the risk free rate
represented commonly by the return on treasury bills.

Bond Origin Premium: This is the difference between the return on

long term government bonds and the return on treasury bills.

Bond Default Premium: This is the difference between the return on

long term scorporate bonds (which have some probability of default)
and the return on long term government bonds (which are free from
default risk) .

SECURITY ANALYSIS AND VALUATIONS

1. FUNDAMENTAL ANALYSIS
A method of evaluating a security by attempting to measure its intrinsic
value by examining related economic, financial and other qualitative
and quantitative factors. Fundamental analysts attempt to study
everything that can affect the security's value, including macroeconomic
factors (like the overall economy and industry conditions) and
individually specific factors (like the financial condition and
management of companies).
The end goal of performing fundamental analysis is to produce a value
that an investor can compare with the security's current price in hopes of
figuring out what sort of position to take with that security (under priced
= buy, overpriced = sell or short).
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 a the company being
evaluated.
The biggest part of fundamental analysis involves delving into the
financial statements. Also known as quantitative analysis, this involves
looking at revenue, expenses, assets, liabilities and all the other financial
aspects of a company. Fundamental analysts look at this information to
gain insight on a company's future performance. A good part of this
tutorial will be spent learning about the balance sheet, income statement,
cash flow statement and how they all fit together.
When talking about stocks, fundamental analysis is a technique that
attempts to determine a security’s value by focusing on underlying
factors that affect a company's actual business and its future prospects.
On a broader scope, you can perform fundamental analysis on industries
or the economy as a whole. The term simply refers to the analysis of the
economic well-being of a financial entity as opposed to only its price
movements.

Why fundamental analysis :

• Is the company’s revenue growing?

• Is it actually making a profit?
• Is it in a strong-enough position to beat out its competitors in the
future?
• Is it able to repay its debts?
• Is management trying to "cook the books"?

Fundamentals: Quantitative and Qualitative

The various fundamental factors can be grouped into two categories:
quantitative and qualitative. The financial meaning of these terms isn’t
all that different from their regular definitions.
Qualitative – It is related to or based on the quality or character of
something, often as opposed to its size or quantity.
These are the less tangible factors surrounding a business - things such
as the quality of a company’s board members and key executives, its
brand-name recognition, patents or proprietary technology

Quantitative – Quantitative fundamentals are numeric, measurable

characteristics about a business. It’s easy to see how the biggest source
of quantitative data is the financial statements. You can measure
revenue, profit, assets and more with great precision.

QUALITATIVE FACTORS :
The Industry
Each industry has differences in terms of its customer base, market
share among firms, industry-wide growth, competition, regulation and
business cycles. Learning about how the industry works will give an
investor a deeper understanding of a company's financial health.
Customers
Some companies serve only a handful of customers, while others serve
millions. In general, it's a red flag (a negative) if a business relies on a
small number of customers for a large portion of its sales because the
loss of each customer could dramatically affect revenues.
Market Share
Understanding a company's present market share can tell volumes about
the company's business. The fact that a company possesses an 85%
market share tells you that it is the largest player in its market by far.
Furthermore, this could also suggest that the company possesses some
sort of "economic moat," in other words, a competitive barrier serving
to protect its current and future earnings, along with its market share.
Market share is important because of economies of scale. When the firm
is bigger than the rest of its rivals, it is in a better position to absorb the
high fixed costs of a capital-intensive industry.
Industry Growth
One way of examining a company's growth potential is to first examine
whether the amount of customers in the overall market will grow. This
is crucial because without new customers, a company has to steal
market share in order to grow.
In some markets, there is zero or negative growth, a factor demanding
careful consideration.
Competition
Simply looking at the number of competitors goes a long way in
understanding the competitive landscape for a company. Industries that
have limited barriers to entry and a large number of competing firms
create a difficult operating environment for firms. One of the biggest
risks within a highly competitive industry is pricing power. This refers
to the ability of a supplier to increase prices and pass those costs on to
customers. Companies operating in industries with few alternatives have
the ability to pass on costs to their customers.
A great example of this is Wal-Mart. They are so dominant in the
retailing business, that Wal-Mart practically sets the price for any of the
suppliers wanting to do business with them. If you want to sell to Wal-
Mart, you have little, if any, pricing power.

Regulation
Certain industries are heavily regulated due to the importance or
severity of the industry's products and/or services. As important as some
of these regulations are to the public, they can drastically affect the
attractiveness of a company for investment purposes.

GDP
The monetary value of all the finished goods and services produced
within a country's borders in a specific time period, though GDP is
usually calculated on an annual basis. It includes all of private and
public consumption, government outlays, investments and exports less
imports that occur within a defined territory.
GDP = C + G + I + NX
where:
"C" is equal to all private consumption, or consumer spending, in a
nation's economy
"G" is the sum of government spending
"I" is the sum of all the country's businesses spending on capital
"NX" is the nation's total net exports, calculated as total exports minus
total imports. (NX = Exports - Imports)

Inflation:
The rate at which the general level of prices for goods and services is
rising, and, subsequently, purchasing power is falling. As the inflation
rises, every dollar will buy a smaller percentage of a good. For example,
if the inflation rate is 2%, then a $1 pack of gum will cost $1.02 in a
year.

Most countries' central banks will try to sustain an inflation rate of 2-

3%.

QUANTITATIVE FACTORS :

Financial Statements
Financial statements are the medium by which a company discloses
information concerning its financial performance. Followers
of fundamental analysis use the quantitative information gleaned from
financial statements to make investment decisions. Before we jump into
the specifics of the three most important financial statements - income
statements, balance sheets and cash flow statements - we will briefly
introduce each financial statement's specific function, along with where
they can be found.
The Balance Sheet
The balance sheet represents a record of a company's assets, liabilities
and equity at a particular point in time. The balance sheet is named by
the fact that a business's financial structure balances in the following
manner:

Assets = Liabilities +
Shareholders' Equity

Assets represent the resources that the business owns or controls at a

given point in time. This includes items such as cash, inventory,
machinery and buildings. The other side of the equation represents the
total value of the financing the company has used to acquire those
assets. Financing comes as a result of liabilities or equity. Liabilities
represent debt (which of course must be paid back), while equity
represents the total value of money that the owners have contributed to
the business - including retained earnings, which is the profit made in
previous years.

The Income Statement

While the balance sheet takes a snapshot approach in examining a
business, the income statement measures a company's performance over
a specific time frame. Technically, you could have a balance sheet for a
month or even a day, but you'll only see public companies report
quarterly and annually.
The income statement presents information about revenues, expenses
and profit that was generated as a result of the business' operations for
that period.
Statement of Cash Flows
The statement of cash flows represents a record of a business' cash
inflows and outflows over a period of time. Typically, a statement of
cash flows focuses on the following cash-related activities:

• Operating Cash Flow (OCF): Cash generated from day-to-day

business operations
• Cash from investing (CFI): Cash used for investing in assets,
as well as the proceeds from the sale of other businesses,
equipment or long-term assets
• Cash from financing (CFF): Cash paid or received from the
issuing and borrowing of funds

The cash flow statement is important because it's very difficult for a
business to manipulate its cash situation. There is plenty that aggressive
accountants can do to manipulate earnings, but it's tough to fake cash in
the bank. For this reason some investors use the cash flow statement as a
more conservative measure of a company's performance.

Balance Sheet's Main Three

Assets, liability and equity are the three main components of the balance
sheet. Carefully analyzed, they can tell investors a lot about a company's
fundamentals.
Assets

There are two main types of assets: current assets and non-current
assets. Current assets are likely to be used up or converted into cash
within one business cycle - usually treated as twelve months. Three very
important current asset items found on the balance sheet are: cash,
inventories and accounts receivables.
Investors normally are attracted to companies with plenty of cash on
their balance sheets. After all, cash offers protection against tough
times, and it also gives companies more options for future growth.
Growing cash reserves often signal strong company performance.
Indeed, it shows that cash is accumulating so quickly that management
doesn't have time to figure out how to make use of it

Liabilities
There are current liabilities and non-current liabilities. Current liabilities
are obligations the firm must pay within a year, such as payments owing
to suppliers. Non-current liabilities, meanwhile, represent what the
company owes in a year or more time. Typically, non-current liabilities
represent bank and bondholder debt.
You usually want to see a manageable amount of debt. When debt levels
are falling, that's a good sign. Generally speaking, if a company has
more assets than liabilities, then it is in decent condition. By contrast, a
company with a large amount of liabilities relative to assets ought to be
examined with more diligence. Having too much debt relative to cash
flows required to pay for interest and debt repayments is one way a
company can go bankrupt.

Equity

Equity represents what shareholders own, so it is often called

shareholder's equity. As described above, equity is equal to total assets
minus total liabilities.

Equity = Total Assets – Total

Liabilities

The two important equity items are paid-in capital and retained
earnings. Paid-in capital is the amount of money shareholders paid for
their shares when the stock was first offered to the public. It basically
represents how much money the firm received when it sold its shares. In
other words, retained earnings are a tally of the money the company has
chosen to reinvest in the business rather than pay to shareholders.
Investors should look closely at how a company puts retained capital to
use and how a company generates a return on it.
Most of the information about debt can be found on the balance sheet -
but some assets and debt obligations are not disclosed there. For starters,
companies often possess hard-to-measure intangible assets. Corporate
intellectual property (items such as patents, trademarks, copyrights and
business methodologies), goodwill and brand recognition are all
common assets in today's marketplace. But they are not listed on
company's balance sheets.
There is also off-balance sheet debt to be aware of. This is form of
financing in which large capital expenditures are kept off of a
company's balance sheet through various classification methods.
Companies will often use off-balance-sheet financing to keep the debt
levels low. Ther some fundamental ratios to analysis the investment.
Some of them are follows.

Profitability Ratios:

A class of financial metrics that are used to assess a business's ability to

generate earnings as compared to its expenses and other relevant costs
incurred during a specific period of time. For most of these ratios,
having a higher value relative to a competitor's ratio or the same ratio
from a previous period is indicative that the company is doing well.

ratio of profitability calculated as net income divided by revenues, or net

profits divided by sales. It measures how much out of every dollar of
sales a company actually keeps in earnings.

Profit margin
Profit margin is very useful when comparing companies in similar
industries. A higher profit margin indicates a more profitable company
that has better control over its costs compared to its competitors. Profit
margin is displayed as a percentage; a 20% profit margin, for example,
means the company has a net income of $0.20 for each dollar of sales.
 Looking at the earnings of a company often doesn't tell the entire
story. Increased earnings are good, but an increase does not mean that
the profit margin of a company is improving. For instance, if a company
has costs that have increased at a greater rate than sales, it leads to a
lower profit margin. This is an indication that costs need to be under
better control.

Price-Earnings Ratio - P/E Ratio

A valuation ratio of a company's current share price compared to its per-
share earnings.

Calculated as:

For example, if a company is currently trading at rs.43 a share and

earnings over the last 12 months were Rs.1.95 per share, the P/E ratio
for the stock would be 22.05 (Rs.43/ Rs 1.95).
EPS is usually from the last four quarters (trailing P/E), but sometimes it
can be taken from the estimates of earnings expected in the next four
quarters (projected or forward P/E). A third variation uses the sum of
the last two actual quarters and the estimates of the next two quarters.
It would not be useful for investors using the P/E ratio as a basis for
their investment to compare the P/E of a technology company (high
P/E) to a utility company (low P/E) as each industry has much different
growth prospects.
The P/E is sometimes referred to as the "multiple", because it shows
how much investors are willing to pay per dollar of earnings. If a
company were currently trading at a multiple (P/E) of 20, the
interpretation is that an investor is willing to pay Rs. 20 for Rs 1 of
current earnings

Return on Equity – ROE

A measure of a corporation's profitability that reveals how much profit a

company generates with the money shareholders have invested.

Calculated as:

The ROE is useful for comparing the profitability of a company to that

of other firms in the same industry.

There are several variations on the formula that investors may use:
1. Investors wishing to see the return on common equity may modify the
formula above by subtracting preferred dividends from net income and
subtracting preferred equity from shareholders' equity, giving the
following: return on common equity (ROCE) = net income - preferred
dividends / common equity.
2. Return on equity may also be calculated by dividing net income by
average shareholders' equity. Average shareholders' equity is calculated
by adding the shareholders' equity at the beginning of a period to the
shareholders' equity at period's end and dividing the result by two.
Earnings per Share – EPS
The portion of a company's profit allocated to each outstanding share of
common stock. EPS serves as an indicator of a company's profitability.

Calculated as:

In the EPS calculation, it is more accurate to use a weighted average

number of shares outstanding over the reporting term, because
the number of shares outstanding can change over time

For example, assume that a company has a net income of rs.25 million.
If the company pays out $1 million in preferred dividends and has 10
million shares for half of the year and 15 million shares for the other
half, the EPS would be or example, assume that a company has a net
income of rs.25 million. If the company pays out or example, assume
that a company has a net income of rs.25 million. If the company pays
out rs.1 million in preferred dividends and has 10 million shares for half
of the year and 15 million shares for the other half, the EPS would be
rs.1.92 (24/12.5). First, the rs.1 million is deducted from the net income
to get rs.24 million, then a weighted average is taken to find the number
of shares outstanding (0.5 x 10M+ 0.5 x 15M = 12.5M).

An important aspect of EPS that's often ignored is the capital that is

required to generate the earnings (net income) in the calculation.

LIQUIDITY RATIO

A class of financial metrics that is used to determine a company's ability

to pay off its short-terms debts obligations. Generally, the higher the
value of the ratio, the larger the margin of safety that the company
possesses to cover short-term debts.

Common liquidity ratios include the current ratio, the quick ratio and
the operating cash flow ratio. Different analysts consider different assets
to be relevant in calculating liquidity. Some analysts will calculate only
the sum of cash and equivalents divided by current liabilities
because they feel that they are the most liquid assets, and would be the
most likely to be used to cover short-term debts in an emergency.

Current ratio
A liquidity ratios are that measures a company's ability to pay short-
term obligations.

Calculated as:

The higher the current ratio, the more capable the company is of paying
its obligations. A ratio under 1 suggests that the
company would be unable to pay off its obligations if they came due at
that point. While this shows the company is not in good financial health,
it does not necessarily mean that it will go bankrupt - as there are many
ways to access financing - but it is definitely not a good sign.

Other ratio:

Stockholders' Equity Ratio

Stockholders' Equity Ratio = Stockholders' Equity

Total Assets

Relative financial strength and long-run liquidity are approximated with

this calculation. A low ratio points to trouble, while a high ratio suggests
you will have less difficulty meeting fixed interest charges and maturing
debt obligations.

Total Debt to Net Worth

Total Debt to Net Worth Ratio = Current + Deferred Debt

 Tangible Net Worth

Rarely should your business's total liabilities exceed its tangible net
worth. If it does, creditors assume more risk than stockholders. A
business handicapped with heavy interest charges will likely lose out to
its better financed competitors.

Portfolio Management

Portfolio (finance)

In finance, a portfolio is a collection of investments held by an

institution or a private individual. In building up an investment portfolio
a financial institution will typically conduct its own investment analysis,
whilst a private individual may make use of the services of a financial
advisor or a financial institution which offers portfolio management
services. Holding a portfolio is part of an investment and risk-limiting
strategy called diversification. By owning several assets, certain types of
risk (in particular specific risk) can be reduced. The assets in the
portfolio could include stocks, bonds, options, warrants, gold
certificates, real estate, futures contracts, production facilities, or any
other item that is expected to retain its value.

Management

Portfolio management involves deciding what assets to include in the

portfolio, given the goals of the portfolio owner and changing economic
conditions. Selection involves deciding what assets to purchase, how
many to purchase, when to purchase them, and what assets to divest.
These decisions always involve some sort of performance measurement,
most typically expected return on the portfolio, and the risk associated
with this return (i.e. the standard deviation of the return). Typically the
expected return from portfolios comprised of different asset bundles are
compared. The unique goals and circumstances of the investor must also
be considered. Some investors are more risk averse than other

Some of the financial models used in the process of Valuation, stock

selection, and management of portfolios include:

• Maximizing return, given an acceptable level of risk.

• Modern portfolio theory—a model proposed by Harry Markowitz
among others.
• The single-index model of portfolio variance.
• Capital asset pricing model.
• Arbitrage pricing theory.
• The Jensen Index.
• The Sharpe Diagonal (or Index) model

RETURN

The return is the motivating force and the principle reward in the
investment process.

EXPECTED RETURN
The expected return is the return which the invester anticipates to earn
over some future period.

REALISED RETURN
The realized return is the return which was actuaiiy earned in the form
of dividend,interest, and capital gain due toprice changes.

REQUIRED RATE OF RETURN

It is the return the market deems appropriate for a given level of risk.

TOTAL RETURN
The total return from a securities comprises of two components the
periodic cash receipts or income plus change in the price of the
securities.
Portfolio returns can be calculated either in absolute manner or in
relative manner. Absolute return calculation is very straight forward,
where return is calculated by considering total investment and total final
value. Time duration and cash flow in portfolio doesn't influence final
return.

To calculate more accurate return of your investments you have to use

complicated statistical models like Internal rate of return or Modified
Internal Rate of Return. The only problem with these models are that,
they are very complicated and very difficult to compute by pen and
paper. You need to have scientific calculator or some software. Both of
these model consider all cash flow(Money In/Money Out) and provide
more accurate returns than absolute return. Time is a major factor in
these models.

Market Portfolio
A market portfolio is a portfolio consisting of a weighted sum of every
asset in the market, with weights in the proportions that they exist in the
market (with the necessary assumption that these assets are infinitely
divisible).

Richard Roll's critique (1977) states that this is only a theoretical

concept, as to create a market portfolio for investment purposes in
practice would necessarily include every single possible available asset,
including real estate, precious metals, stamp collections, jewelry, and
anything with any worth, as the theoretical market being referred to
would be the world market. As a result, proxies for the market (such as
the FTSE100 in the UK or the S&P500 in the US) are used in practice
by investors. Roll's critique states that these proxies cannot provide an
accurate representation of the entire market.

The concept of a market portfolio plays an important role in many

financial theories and models, including the Capital asset pricing model
where it is the only fund in which investors need to invest, to be
supplemented only by a risk-free asset (depending upon each investor's
attitude towards risk).

Capital Asset Pricing Model - CAPM

A model that describes the relationship between risk and expected return
and that is used in the pricing of risky securities.

Assumptions of CAPM

• All investors have rational expectations.

• There are no arbitrage opportunities.
• Returns are distributed normally.
• Fixed quantity of assets.
• Perfectly efficient capital markets.
• Investors are solely concerned with level and uncertainty of future
wealth
• Separation of financial and production sectors.
• Thus, production plans are fixed.
• Risk-free rates exist with limitless borrowing capacity and
universal access.
• The Risk-free borrowing and lending rates are equal.
• No inflation and no change in the level of interest rate exists.
• Perfect information, hence all investors have the same
expectations about security
returns for any given time period.

The general idea behind CAPM is that investors need to be compensated

in two ways: time value of money and risk. The time value of money is
represented by the risk-free (rf) rate in the formula and compensates the
investors for placing money in any investment over a period of time.
The other half of the formula represents risk and calculates the amount
of compensation the investor needs for taking on additional risk. This is
calculated by taking a risk measure (beta) that compares the returns of
the asset to the market over a period of time and to the market premium.
Using the CAPM model and the following assumptions, we can
compute the expected return of a stock: if the risk-free rate is 3%, the
beta (risk measure) of the stock is 2 and the expected market return over
the period is 10%, the stock is expected to return 17%(3%+2(10%-
3%)).capital asset pricing model

Fig.3.7: risk free rate of return

The Security Market Line, seen here in a graph, describes a relation
between the beta and the asset's expected rate of return.
The Capital Asset Pricing Model (CAPM) is used in finance to
determine a theoretically appropriate required rate of return (and thus
the price if expected cash flows can be estimated) of an asset, if that
asset is to be added to an already well-diversified portfolio, given that
asset's non-diversifiable risk. The CAPM formula takes into account the
asset's sensitivity to non-diversifiable risk (also known as systematic
risk or market risk), in a number often referred to as beta (β) in the
financial industry, as well as the expected return of the market and the
expected return of a theoretical risk-free asset.

The model was introduced by Jack Treynor, William Sharpe, John

Lintner and Jan Mossin independently, building on the earlier work of
Harry Markowitz on diversification and modern portfolio theory. Sharpe
received the Nobel Memorial Prize in Economics (jointly with Harry
Markowitz and Merton Miller) for this contribution to

The formula

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

portfolio. For individual security perspective, we made use of the
security market line (SML) and its relation to expected return and
systematic risk (beta) to show how the market must price individual
securities in relation to their security risk class. The SML enables us to
calculate the reward-to-risk ratio for any security in relation to that of
the overall market. Therefore, when the expected rate of return for any
security is deflated by its beta coefficient, the reward-to-risk ratio for
any individual security in the market is equal to the market reward-to-
risk ratio, thus:

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

Reward-to-risk ratio =

The market reward-to-risk ratio is effectively the market risk premium

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

Where:

• is the expected return on the capital asset

• is the risk-free rate of interest
• (the beta coefficient) the sensitivity of the asset returns to

market returns, or also,

• is the expected return of the market
• is sometimes known as the market premium or risk
premium (the difference between the expected market rate of
return and the risk-free rate of return). Note 1: the expected market
rate of return is usually measured by looking at the arithmetic
average of the historical returns on a market portfolio (i.e. S&P
500). Note 2: the risk free rate of return used for determining the
risk premium is usually the arithmetic average of historical risk
free rates of return and not the current risk free rate of return. An
estimation of the CAPM and the Security Market Line (purple) for
 the Dow Jones Industrial Average over the last 3 years for monthly
data.

Asset pricing

Once the expected return, E(Ri), is calculated using CAPM, the future
cash flows of the asset can be discounted to their present value using
this rate (E(Ri)), to establish the correct price for the asset.

In theory, therefore, an asset is correctly priced when its observed price

is the same as its value calculated using the CAPM derived discount
rate. If the observed price is higher than the valuation, then the asset is
overvalued (and undervalued when the observed price is below the
CAPM valuation).

Alternatively, one can "solve for the discount rate" for the observed
price given a particular valuation model and compare that discount rate
with the CAPM rate. If the discount rate in the model is lower than the
CAPM rate then the asset is overvalued (and undervalued for a too high
discount rate).

\Asset-specific required return

The CAPM returns the asset-appropriate required return or discount rate

- i.e. the rate at which future cash flows produced by the asset should be
discounted given that asset's relative riskiness. Betas exceeding one
signify more than average "riskiness"; betas below one indicate lower
than average. Thus a more risky stock will have a higher beta and will
be discounted at a higher rate; less sensitive stocks will have lower betas
and be discounted at a lower rate. The CAPM is consistent with
intuition - investors (should) require a higher return for holding a more
risky asset.

Since beta reflects asset-specific sensitivity to non-diversifiable, i.e.

market risk, the market as a whole, by definition, has a beta of one.
Stock market indices are frequently used as local proxies for the market
- and in that case (by definition) have a beta of one. An investor in a
large, diversified portfolio (such as a mutual fund) therefore expects
performance in line with the market.

Risk and diversification

Investors purchase financial assets such as shares of stock because they

desire to increase their wealth, i.e., earn a positive rate of return on their
investments. The future, however, is uncertain; investors do not know
what rate of return their investments will realize.

In finance, we assume that individuals base their decisions on what they

expect to happen and their assessment of how likely it is that what
actually occurs will be close to what they expected to happen. When
evaluating potential investments in financial assets, these two
dimensions of the decision making process are called expected return
and risk.

The concepts presented in this paper include the development of

measures of expected return and risk on an indivdual financial asset and
on a portfolio of financial assets, the principle of diversification, and the
Captial Asset Pricing Model (CAPM).

Expected Return

The future is uncertain. Investors do not know with certainty whether

the economy will be growing rapidly or be in recession. As such, they
do not know what rate of return their investments will yield. Therefore,
they base their decisions on their expectations concerning the future.

The expected rate of return on a stock represents the mean of a

probability distribution of possible future returns on the stock. The table
below provides a probability distribution for the returns on stocks A and
B.

Table3.1:return probability chart

Return on Return on
State Probability
Stock A Stock B
1 20% 5% 50%
2 30% 10% 30%
3 30% 15% 10%
3 20% 20% -10%

In this probability distribution, there are four possible states of the world
one period into the future. For example, state 1 may correspond to a
recession. A probability is assigned to each state. The probability
reflects how likely it is that the state will occur. The sum of the
probabilities must equal 100%, indicating that something must happen.
The last two columns present the returns or outcomes for stocks A and
B that will occur in the four states.

Given a probability distribution of returns, the expected return can be

calculated using the following equation:

where

• E[R] = the expected return on the stock,

• N = the number of states,
• pi = the probability of state i, and
• Ri = the return on the stock in state i.
 Expected Return on Stocks A and B
Stock A

Stock B

So we see that Stock B offers a higher expected return than Stock A.

However, that is only part of the story; we haven't yet considered risk.

Measures of Risk - Variance and Standard Deviation

Risk reflects the chance that the actual return on an investment may be
very different than the expected return. One way to measure risk is to
calculate the variance and standard deviation of the distribution of
returns.

Consider the probability distribution for the returns on stocks A and B

provided below.

Return on Return on
State Probability
Stock A Stock B
1 20% 5% 50%
2 30% 10% 30%
3 30% 15% 10%
3 20% 20% -10%
 Table3.2: Return probability chart

The expected returns on stocks A and B were calculated on the

Expected Return page. The expected return on Stock A was found to be
12.5% and the expected return on Stock B was found to be 20%.

Given an asset's expected return, its variance can be calculated using the
following equation:

where

• N = the number of states,

• pi = the probability of state i,
• Ri = the return on the stock in state i, and
• E[R] = the expected return on the stock.

The standard deviation is calculated as the positive square root of the

variance.

Variance and Standard Deviation on Stocks A and B

Note: E[RA] = 12.5% and E[RB] = 20%

Stock A

Stock B

Although Stock B offers a higher expected return than Stock A, it also

is riskier since its variance and standard deviation are greater than Stock
A's. This, however, is only part of the picture because most investors
choose to hold securities as part of a diversified portfolio..

Portfolio Risk and Return

Most investors do not hold stocks in isolation. Instead, they choose to

hold a portfolio of several stocks. When this is the case, a portion of an
individual stock's risk can be eliminated, i.e., diversified away. This
principle is presented on the Diversification page. First, the computation
of the expected return, variance, and standard deviation of a portfolio
must be illustrated.

Once again, we will be using the probability distribution for the returns
on stocks A and B.

Return on Return on
State Probability
Stock A Stock B
1 20% 5% 50%
2 30% 10% 30%
3 30% 15% 10%
3 20% 20% -10%

Table3.3:Return probability chart

From the Expected Return and Measures of Risk pages we know that
the expected return on Stock A is 12.5%, the expected return on Stock B
is 20%, the variance on Stock A is .00263, the variance on Stock B is .
04200, the standard deviation on Stock S is 5.12%, and the standard
deviation on Stock B is 20.49%.

Portfolio Expected Return

The Expected Return on a Portfolio is computed as the weighted

average of the expected returns on the stocks which comprise the
portfolio. The weights reflect the proportion of the portfolio invested in
the stocks. This can be expressed as follows:
where

• E[Rp] = the expected return on the portfolio,

• N = the number of stocks in the portfolio,
• wi = the proportion of the portfolio invested in stock i, and
• E[Ri] = the expected return on stock i.

For a portfolio consisting of two assets, the above equation can be

expressed as

Expected Return on a Portfolio of

Stocks A and B
Note: E[RA] = 12.5% and E[RB] = 20%

Portfolio consisting of 50% Stock A

and 50% Stock B

Portfolio consisting of 75% Stock A

and 25% Stock B

Portfolio Variance and Standard Deviation

The variance/standard deviation of a portfolio reflects not only the

variance/standard deviation of the stocks that make up the portfolio but
also how the returns on the stocks which comprise the portfolio vary
together. Two measures of how the returns on a pair of stocks vary
together are the covariance and the correlation coefficient.

The Covariance between the returns on two stocks can be calculated

using the following equation:
where

• s12 = the covariance between the returns on stocks 1 and 2,

• N = the number of states,
• pi = the probability of state i,
• R1i = the return on stock 1 in state i,
• E[R1] = the expected return on stock 1,
• R2i = the return on stock 2 in state i, and
• E[R2] = the expected return on stock 2.

The Correlation Coefficient between the returns on two stocks can be

calculated using the following equation:

where

• r12 = the correlation coefficient between the returns on stocks 1 and

2,
• s12 = the covariance between the returns on stocks 1 and 2,
• s1 = the standard deviation on stock 1, and
• s2 = the standard deviation on stock 2.

Covariance and Correlation Coefficent between the

Returns on Stocks A and B
Note: E[RA] = 12.5%, E[RB] = 20%, sA = 5.12%, and sB =
20.49%.

Using either the correlation coefficient or the covariance, the Variance

on a Two-Asset Portfolio can be calculated as follows:
The standard deviation on the portfolio equals the positive square root
of the the variance.

Variance and Standard Deviation on a Portfolio of Stocks

A and B
Note: E[RA] = 12.5%, E[RB] = 20%, sA = 5.12%, sB =
20.49%, and rAB = -1.

Portfolio consisting of 50% Stock A and 50% Stock B

Portfolio consisting of 75% Stock A and 25% Stock B

Notice that the portfolio formed by investing 75% in Stock A and 25%
in Stock B has a lower variance and standard deviation than either
Stocks A or B and the portfolio has a higher expected return than Stock
A. This is the essence of Diversification, by forming portfolios some of
the risk inherent in the individual stocks can be eliminated.

RISK RETURN TRADE OFF

The risk/return tradeoff could easily be called the "ability-to-sleep-at-

night test." While some people can handle the equivalent of financial
skydiving without batting an eye, others are terrified to climb the
financial ladder without a secure harness. Deciding what amount of risk
you can take while remaining comfortable with your investments is very
important.
In the investing world, the dictionary definition of risk is the chance that
an investment's actual return will be different than expected.
Technically, this is measured in statistics by standard deviation. Risk
means you have the possibility of losing some, or even all, of our
original investment. Low levels of uncertainty (low risk) are associated
with low potential returns. High levels of uncertainty (high risk) are
associated with high potential returns.

The risk/return tradeoff is the balance between the desire for the lowest
possible risk and the highest possible return. This is demonstrated
graphically in the chart below. A higher standard deviation means a
higher risk and higher possible return.

Fig.3.8: risk return trade off

Diversification

A portfolio formed from risky securities can have a lower standard

deviation than either of the individual securities. The benefits of
diversification, i.e., the reduction in risk, depends upon the correlation
coefficient (or covariance) between the returns on the securities
comprising the portfolio.
Consider stocks C and D. Stock C has an expected return of 8% and a
standard deviation of 10%. Stock D has an expected return of 16% and a
standard deviation of 20%. The concept of diversification will be
illustrated by forming portfolios of stocks C and D under three different
assumptions regarding the correlation coefficient between the returns on
stocks C and D.

Correlation Coefficient = 1

The table below provides the expected return and standard deviation for
portfolios formed from stocks C and D under the assumption that the
correlation coefficient between their returns equals

Table3.4 expected return

Portfolio Portfolio
Weight of
Expected Standard
Stock C
Return Deviation
100% 8% 10%
 90% 8.8% 11%
80% 9.6% 12%
70% 10.4% 13%
60% 11.2% 14%
50% 12% 15%
40% 12.8% 16%
30% 13.6% 17%
20% 14.4% 18%
10% 15.2% 19%
0% 16% 20%

Fig3.9 expected return graph

When the correlation coefficient between the returns on two securities is

equal to +1 the returns are said to be perfectly positively correlated. As
can be seen from the table and the plot of the opportunity set, when the
returns on two securities are perfectly positively correlated, none of the
risk of the individual stocks can be eliminated by diversification. In this
case, forming a portfolio of stocks C and D simply provides additional
risk/return choices for investors.

Correlation Coefficient = -1 The table below provides the expected

return and standard deviation for portfolios formed from stocks C
and D under the assumption that the correlation coefficient
between their returns equals -1.

Table3.5 Expected Return on stock

Portfolio Portfolio
Weight of
Expected Standard
Stock C
Return Deviation
100% 8% 10%
90% 8.8% 7%
80% 9.6% 4%
70% 10.4% 1%
66.67% 10.67% 0%
60% 11.2% 2%
50% 12% 5%
40% 12.8% 8%
30% 13.6% 11%
20% 14.4% 14%
10% 15.2% 17%
0% 16% 20%
 Fig3.10: expected return graph

When the correlation coefficient between the returns on two securities is

equal to -1 the returns are said to be perfectly negatively correlated or
perfectly inversely correlated. When this is the case, all risk can be
eliminated by investing a positive amount in the two stocks. This is
shown in the table above when the weight of Stock C is 66.67%.

Shortcomings of CAPM

The model assumes that asset returns are (jointly) normally

distributed random variables. It is however frequently observed that
returns in equity and other markets are not normally distributed. As a
result, large swings (3 to 6 standard deviations from the mean) occur
in the market more frequently than the normal distribution
assumption would expect.

The model assumes that the variance of returns is an adequate

measurement of risk. This might be justified under the assumption of
normally distributed returns, but for general return distributions other
 risk measures (like coherent risk measures) will likely reflect the
investors' preferences more adequately.

The model does not appear to adequately explain the variation in

stock returns. Empirical studies show that low beta stocks may offer
higher returns than the model would predict. Some data to this effect
was presented as early as a 1969 conference in Buffalo, New York in
a paper by Fischer Black, Michael Jensen, and Myron Scholes. Either
that fact is itself rational (which saves the efficient markets
hypothesis but makes CAPM wrong), or it is irrational (which saves
CAPM, but makes EMH wrong – indeed, this possibility makes
volatility arbitrage a strategy for reliably beating the market).

The model assumes that given a certain expected return investors will
prefer lower risk (lower variance) to higher risk and conversely given a
certain level of risk will prefer higher returns to lower ones. It does not
allow for investors who will accept lower returns for higher risk. Casino
gamblers clearly pay for risk, and it is possible that some stock traders
will pay for risk as well.

The model assumes that all investors have access to the same
information and agree about the risk and expected return of all assets.
(Homogeneous expectations assumption)

The model assumes that there are no taxes or transaction costs, although
this assumption may be relaxed with more complicated versions of the
model.
The market portfolio consists of all assets in all markets, where each
asset is weighted by its market capitalization. This assumes no
preference between markets and assets for individual investors, and that
investors choose assets solely as a function of their risk-return profile. It
also assumes that all assets are infinitely divisible as to the amount
which may be held or transacted.

The market portfolio should in theory include all types of assets that are
held by anyone as an investment (including works of art, real estate,
human capital...) In practice, such a market portfolio is unobservable
and people usually substitute a stock index as a proxy for the true
market portfolio. Unfortunately, it has been shown that this substitution
is not innocuous and can lead to false inferences as to the validity of the
CAPM, and it has been said that due to the in absorbability of the true
market portfolio, the CAPM might not be empirically testable. This was
presented in greater depth in a paper by Richard Roll in 1977, and is
generally referred to as Roll's Critique. Theories such as the Arbitrage
Pricing Theory (APT) have since been formulated to circumvent this
problem. Because CAPM prices a stock in terms of all stocks and bonds,
it is really an arbitrage pricing model which throws no light on how a
firm's beta gets determined.

Modern Portfolio Theory - MPT

A theory on how risk-averse investors can construct portfolios to

optimize or maximize expected return based on a given level of market
risk, emphasizing that risk is an inherent part of higher reward.

Investopedia Says:

According to the theory, it's possible to construct an "efficient frontier"

of optimal portfolios offering the maximum possible expected return for
a given level of risk. This theory was pioneered by Harry Markowitz in
his paper "Portfolio Selection," published in 1952.
There are four basic steps involved in portfolio construction:
-Security valuation
-Asset allocation
-Portfolio optimization
-Performance measurement

Capital Market Line - CML

A line used in the capital asset pricing model to illustrate the rates of
return for efficient portfolios depending on the risk-free rate of return
and the level of risk (standard deviation) for a particular portfolio.

fig3.11: determination of market port folio

Investopedia Says:
The CML is derived by drawing a tangent line from the intercept point
on the efficient frontier to the point where the expected return equals the
risk-free rate of return.

The CML is considered to be superior to the efficient frontier since it

takes into account the inclusion of a risk-free asset in the portfolio. The
capital asset pricing model (CAPM) demonstrates that the market
portfolio is essentially the efficient frontier. This is achieved visually
through the security market line (SML).

Security Market Line - SML

The line that graphs the systematic, or market, risk versus return of the
whole market at a certain time and shows all risky marketable securities.

The SML essentially graphs the results from the capital asset pricing
model (CAPM) formula. The X-axis represents the risk (beta), and the
Y-axis represents the expected return. The market risk premium is
determined from the slope of the SML.

It is a useful tool in determining if an asset being considered for a

portfolio offers a reasonable expected return for risk. Individual
securities are plotted on the SML graph. If the security's risk versus
expected return is plotted above the SML, it is undervalued since the
investor can expect a greater return for the inherent risk. And a security
plotted below the SML is overvalued since the investor would be
accepting less return for the amount of risk assumed.

Optimal portfolio theory

On proportionately more risk for a lower incremental return. On the

other end, low risk/low return portfolios are pointless because you can
achieve a similar return by The optimal portfolio concept falls under the
modern portfolio theory. The theory assumes (among other things) that
investors fanatically try to minimize risk while striving for the highest
return possible. The theory states that investors will act rationally,
always making decisions aimed at maximizing their return for their
acceptable level of risk.

The optimal portfolio was used in 1952 by Harry Markowitz, and it

shows us that it is possible for different portfolios to have varying levels
of risk and return. Each investor must decide how much risk they can
handle and than allocate (or diversify) their portfolio according to this
decision.

The chart below illustrates how the optimal portfolio works. The
optimal-risk portfolio is usually determined to be somewhere in the
middle of the curve because as you go higher up the curve, you take
investing in risk-free assets, like government securities.

fig3.12: optimal portfolio strategy

You can choose how much volatility you are willing to bear in your
portfolio by picking any other point that falls on the efficient frontier.
This will give you the maximum return for the amount of risk you wish
to accept. Optimizing your portfolio is not something you can calculate
in your head. There are computer programs that are dedicated to
determining optimal portfolios by estimating hundreds (and sometimes
thousands) of different expected returns for each given amount of risk.
Diversification

An investor can reduce portfolio risk simply by holding instruments

which are not perfectly correlated. In other words, investors can reduce
their exposure to individual asset risk by holding a diversified portfolio
of assets. Diversification will allow for the same portfolio return with
reduced risk.
If all the assets of a portfolio have a correlation of 1, i.e., perfect
correlation, the portfolio volatility (standard deviation) will be equal to
the weighted sum of the individual asset volatilities. Hence the portfolio
variance will be equal to the square of the total weighted sum of the
individual asset volatilities.

If all the assets have a correlation of 0, i.e., perfectly uncorrelated, the

portfolio variance is the sum of the individual asset weights squared
times the individual asset variance (and volatility is the square root of
this sum).

If correlation is less than zero, i.e., the assets are inversely correlated,
the portfolio variance and hence volatility will be less than if the
correlation is 0. The lowest possible portfolio variance, and hence
volatility, occurs when all the assets have a correlation of −1, i.e.,
perfect inverse correlation.

Capital allocation line

The capital allocation line (CAL) is the line of expected return plotted
against risk (standard deviation) that connects all portfolios that can be
formed using a risky asset and a riskless asset. It can be proven that it is
a straight line and that it has the following equation

CAL: E( rc ) = rf +σc [E(rp)- rf]/ σ p

In formula P is the risky portfolio, F is the riskless portfolio, C is the

combination of P & F.

Applications to Project Portfolios and Other "Non-Financial" Assets

Some experts apply MPT to portfolios of projects and other assets

besides financial instruments. When MPT is applied outside of
traditional financial portfolios, some differences between the different
types of portfolios must be considered.

1. The assets in financial portfolios are, for practical purposes,

continuously divisible while portfolios of projects like new
software development are "lumpy". For example, while we can
compute that the optimal portfolio position for 3 stocks is, say,
 44%, 35%, 21%, the optimal position for an IT portfolio may not
allow us to simply change the amount spent on a project. IT
projects might be all or nothing or, at least, have logical units that
cannot be separated. A portfolio optimization method would have
to take the discrete nature of some IT projects into account.
2. The assets of financial portfolios are liquid can be assessed or re-
assessed at any point in time while opportunities for new projects
may be limited and may appear in limited windows of time and
projects that have already been initiated cannot be abandoned
without the loss of the sunk costs (i.e., there is little or no
recovery/salvage value of a half-complete IT project).

Neither of these necessarily eliminate the possibility of using MPT and

such portfolios. They simply indicate the need to run the optimization
with an additional set of mathematically-expressed constraints that
would not normally apply to financial portfolios.

Furthermore, some of the simplest elements of MPT are applicable to

virtually any kind of portfolio. The concept of capturing the risk
tolerance of an investor by documenting how much risk is acceptable
for a given return could be and is applied to a variety of decision
analysis problems. MPT, however, uses historical variance as a measure
of risk and portfolios of assets like IT projects don't usually have an
"historical variance" for a new piece of software. In this case, the MPT
investment boundary can be expressed in more general terms like
"chance of an ROI less than cost of capital" or "chance of losing more
than half of the investment". When risk is put in terms of uncertainty
about forecasts and possible losses then the concept is perfectly
transferable to any type of investment.

Some tools applied in portfolio management

Jensen's Alpha

In finance, Jensen's alpha (or Jensen's Performance Index) is used to

determine the excess return of a stock, other security, or portfolio over
the security's required rate of return as determined by the Capital Asset
Pricing Model. This model is used to adjust for the level of beta risk, so
that riskier securities are expected to have higher returns. The measure
was first used in the evaluation of mutual fund managers by Michael
Jensen in the 1970's.

To calculate alpha, the following inputs are needed:

• the realized return (on the portfolio),

• the market return,
• the risk-free rate of return, and
• the beta of the portfolio.

Jensen's alpha = Portfolio Return - (Risk Free Rate + Portfolio Beta

* (Market Return - Risk Free Rate)

Alpha is still widely used to evaluate mutual fund and portfolio manager
performance, often in conjunction with the Sharpe ratio and the Treynor
ratio.

Treynor ratio

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

that which could have been earned on a riskless investment (i.e.
Treasury Bill) (per each unit of market risk assumed).

The Trey nor ratio (sometimes called reward-to-volatility ratio) relates

excess return over the risk-free rate to the additional risk taken; however
systematic risk instead of total risk is used. The higher the Treynor
ratio, the better the performance under analysis.

T = ( rp - rf)/ ß

Where:

T= Treynor

rp= Portfolio return

rf = Risk free return

ß = Portfolio beta
Like the Sharpe ratio, the Treynor ratio (T) does not quantify the value
added, if any, of active portfolio management. It is a ranking criterion
only. A ranking of portfolios based on the Treynor Ratio is only useful
if the portfolios under consideration are sub-portfolios of a broader,
fully diversified portfolio. If this is not the case, portfolios with identical
systematic risk, but different total risk, will be rated the same. But the
portfolio with a higher total risk is less diversified and therefore has a
higher unsystematic risk which is not priced in the market.

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.

Sharpe ratio

The Sharpe ratio or Sharpe index or Sharpe measure or reward-to-

variability ratio is a measure of the excess return (or Risk Premium)
per unit of risk in an investment asset or a trading strategy. Since its
revision made by the original author in 1994, it is defined as :

S = E[R-Rf ] / σ = E[ R- Rf ]/√ var[ R- Rf ]

where R is the asset return, Rf is the return on a benchmark asset, such

as the risk free rate of return, E[R − Rf] is the expected value of the
excess of the asset return over the benchmark return, and σ is the
standard deviation of the excess return (Sharpe 1994).

Note, if Rf is a constant risk free return throughout the period,

√ var[R-Rf] = √ var[R]

Sharpe's 1994 revision acknowledged that the risk free rate changes
with time. Prior to this revision the definition was S = (E[R]-Rf) / σ
assuming a constant Rf.

The Sharpe ratio is used to characterize how well the return of an asset
compensates the investor for the risk taken. When comparing two assets
each with the expected return E[R] against the same benchmark with
return Rf, the asset with the higher Sharpe ratio gives more return for the
same risk. Investors are often advised to pick investments with high
Sharpe ratios.

Sharpe ratios, along with Treynor ratios and Jensen's alphas, are often
used to rank the performance of portfolio or mutual fund managers.

This ratio was developed by William Forsyth Sharpe in 1966. Sharpe

originally called it the "reward-to-variability" ratio in before it began
being called the Sharpe Ratio by later academics and financial
professionals. Recently, the (original) Sharpe ratio has often been
challenged with regard to its appropriateness as a fund performance
measure during evaluation periods of declining markets (Scholz 2007).
EPILOGUE

SWOT ANALYSIS
CONCLUSION
RECOMMENDATIONS

SWOT ANALYSIS

Strengths Weakness
1) Provides the most 1) Focuses more on developing
important resource i.e. is countries.
finance. 2) Hampering the progress due to
2) Contributes to the anytime withdrawal.
economic growth of the 3) Provides only short term
country. opportunities.
3) Balances the balance of 4) Provides more returns than in
payment position. domestic countries.
5) Develops relationship between two
countries.
Opportunities Threats
1) Better infrastructure. 1) Anytime withdrawal of investments.
2) Exploitation of 2) Investments made in Foreign
resources to the countries poses threat to the Indian
maximum. companies.
3) Better technology 3) Increased returns.
available.
STRENGTHS:

1. Provides most important resource i.e. finance: To start any

business and to make the idea to be actually implemented it needs
finance. The FIIs brings the inflow of money into the country. Many
projects that require funding is done with the help of FIIs. Today in
this world, the Finance is the only resource, which has the capability
to be easily transferred from one place to another, and hence
providing as a base for business opportunities .Free flow of capital is
conducive to both the total world welfare and to the welfare of each
individual.

2. Contributes to the economic growth of the country: When FIIs

enters the domestic country they bring in the money and acts as the
facilitator of the business development. As money comes into the
country, it provides various benefits to the leading sectors and
ultimately results into the development of various sectors. E.g. in
India I.T sector is the most booming sector and has shown the signs
of improvement thus attracting the FIIs.

3. Balances the balance of payments: In the initial phase of economic

development, the under developing countries need much larger
imports. As a result, the balance of payment position generally turns
adverse. This creates gap between earnings and foreign exchange.
The foreign capital presents short run solution to the problem. So in
order to balance the Balance of Payment Foreign Investment is
needed.
4. Provides more returns than in domestic countries: FIIs provide
more returns to the investors as compared to the domestic country.
This is one of the most important strength of FIIs. The main reason is
 that the countries in which th Foreign Institutional Investors invest
their money, provides more opportunities and many benefits. So
investors invest in foreign countries rather than in the domestic
countries.

5. Develops relationship between two countries: Due to FIIs the

investors from different countries come into picture and various
people also come into the contact with each other. This develops a
sense of relationship between different people and develops a nice
intra-cultural atmosphere.

WEAKNESSES:

1. Focuses more on developing countries: The main weakness

of foreign institutional investments is that they provide opportunities
to only the developing and developed countries. The Foreign
institutional investors focuses on the developing countries rather than
on the underdeveloped countries and because of this the under
developed countries remain underdeveloped. So this drawback of the
FIIs should be improved upon by making their investments in the
under developed countries.

2. Hampering the progress due to anytime withdrawal: The

FIIs do not provide any guarantee i.e. the Foreign institutional
investors can anytime withdraw their money when they want to so
this makes the nature of the FIIs unpredictable and ultimately
hampering the progress of the economy of that country. The very
good example of this is the mass withdrawal of the FIIs in the far
eastern countries like Malaysia, Indonesia etc in 1996-97.

3. Provides only the short term opportunities: FIIs provide only

the short term opportunities i.e. they do not provide the long term
opportunities as they are very much supple in nature and there by
limiting its scope to short term opportunities. As far as the market
seems to be good the FIIs are attracted and after that they are not
predictable. So FIIs are bound to provide only the short term
opportunities.
OPPORTUNITIES:

1. Better infrastructure: Better infrastructure is available only when

there is adequate finance available and this comes with the help of
FIIs. Infrastructure covers many dimensions, ranging from roads,
ports, railways and telecommunication systems to institutional
development (e.g. accounting, legal services, etc.) studies in china
reveal the extent of transport facilities and the proximity to major
ports as having a positive significant effect on the location of FII
within the country. Poor infrastructure can be developed with the
help of the foreign investment. Foreign investors also point potential
for attracting significant FII if host country government permits more
substantial foreign participation in the infrastructure sector.

2. Exploitation of resources to the maximum: The major resources

i.e. manpower,material and machines can be utilized to its fullest
so as to get the maximum benefit out of it. Through FIIs, the
reserves or the resources that are untapped because of the lack of
funds can be exploited. Potential areas for exploration ventures
include gold, diamonds, copper, lead zinc, cobalt silver, tin etc.
There is also scope for setting up manufacturing units for value
added products.

3. Better technology available: Technology is the main aspect on

which the growth of the country is determined. Developing
countries has a very low level of technology. Their technology is
not up to the standards and they lack in modern technology.
Developing countries possess a strong urge for industrialization to
develop their economies and to wriggle out of the low-level
equilibrium trap in which they are caught. This raises the necessity
for importing technologies from advanced countries. Such
technology usually comes with foreign capital.

THREATS:
1. Anytime withdrawal of investments: The FIIs are more flexible
in nature i.e. unlike FDI they are not guaranteed. Foreign Institutional
Investors can withdraw at any time they want. Foreign Direct
Investment is for a fixed period and the investments could not be
withdrawn until a specified period. The recent example was the net
outflows of the money from the stock market that affected the whole
economy and its consequences are very much appalling resulting into
posing threats to the economy.

2. Investments made in Foreign Companies poses threat to

Indian companies: Many MNCs have their set up in India and these
MNCs provide a stiff competition to the domestic industries. The
Foreign Institutional Investors invest their money in these MNCs and
they are equipped with the latest technology to provide products at
cheaper rates. Moreover, the Indian laborers are opposing the use of
modern technology as the company downsizes the number of workers
that substitutes the modern technology.

3. Increased returns results in outflow of money: Increased returns

can pose a threat to the domestic country as the money flows out of
the country and this may affect the economy of the domestic country.
The returns that the Foreign Institutional Investors are getting are
very much high and this returns they take to their home country and
this leads to the outflow of money from domestic country to the
foreign country.
 References & Bibliography

Books:

1. NCFM- Derivatives market module

2. Richard I. Levin, David S. Rubin, Statistics For
Management; Prentice Halt Publication, 7th edition 2006
3. Schindler & Kooper, Research Methods In Business;
PearsonEducation Publication, 6h edition 2007
Websites:-

www.nseindia.com/
http://www.bseindia.com/
http://www.indiainfoline.com/
http://www.moneycontrol.com/
http://google.com/finance
http://www.bseindia.com/
www.derivativesindia.com/
www.capitalmarket.com/
www.wikipedia.com/
http://www.equitypandit.com/
www.bloomberg.com/