Project On Portfolio Cunstrection

PORTFOLIO CUNSTRECTION
CHAPTER 1 INTRODUCTION Portfolio construction

The field of investment is traditionally divided into security analysis and portfolio management. The heart of security analysis is valuation of financial assets. Value in turn is the function of risk and return. These two concepts are in the study of investment .Investment can be defined as the commitment of funds to one or more assets that will be held over for some future time period. Portfolio Management Services (PMS) is an investment portfolio in stocks, fixed income, debt, cash, structured products and other individual securities, managed by a professional fund manager that can potentially be tailored to meet specific investment objectives. When you invest in PMS, you own individual securities unlike a mutual fund investor, who owns units of the entire fund. You have the freedom and flexibility to tailor your portfolio to address personal preferences and financial goals. Although portfolio managers may oversee hundreds of portfolio, your account may be unique.
Steps to Stock selection process Choosing Investments
Fundamental Analysis Interactive Charting Tool Stock Market Sectors Sector Rotation Growth vs. Value GARP
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Choosing Investments
Many new investors believe there is some secret strategy which will guarantee success, but unfortunately there is no such magic formula, and stock selection is just another important piece to help build your portfolio. With the wide array of investment solutions available, it can be challenging to know which investments are best suited to meet your needs. To simplify the selection process, many investors choose stocks based solely on performance. While performance is significant, other important factors should be considered as well.
Fundamental Analysis
Fundamental analysis, which some would argue is the most important step in investing, focuses on studying a companys financial statements. This method is also known as quantitative analysis and involves looking at revenue, expenses, assets, liabilities and all the other financial aspects of a company. Fundamental analysts and investors evaluate a security by attempting to measure a companys intrinsic value. After studying the economic, financial, qualitative and quantitative factors, an investor tries to figure out what the company is actually worth in order to determine what sort of position to take in that companys stock. For instance, if the fundamental investor determines that the stock is actually worth more than it is trading for, they would buy the stock because it appears to be under-priced, or in other words, the market has not fully realized and reflected the stocks actual worth. Alternatively, if after analyzing a stock, the investor determines that the stocks intrinsic value is actually less than its current market price, the investor would likely sell the stock.
Interactive Charting Tool

The advanced interactive chart tool can assist you in performing technical analysis. Results are presented in an easy-to-understand format that will help you identify historical trends or patterns.
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Stock Market Sectors
A sector refers to a group of stocks representing companies in a similar line of business or industry. All of the stocks on the S&P TSX can be broken down into 10 different categories (sectors) based on their line of business or industry.
Sector Rotation
Sector rotation is an investment strategy that consists of moving money from one industry sector to another in an attempt to beat the market. At different stages in an economy, an investor or portfolio manager may choose to shift investment assets from one investment sector to another, based on the current business cycle(since different sectors are stronger at different points in the business cycle).
Growth vs. Value

Growth and value investing are two very different investment strategies. Value investors look for stocks that are trading for less than their apparent worth. They are concerned with the present. However growth investors are much more focused on the future potential of a company, and are less focused on the present price. If a growth investor finds a stock that is trading for more than its intrinsic value, they believe that the companies' intrinsic worth will grow to exceed their current valuations.
GARP
If youve read through the Growth vs. Value investing section and find your own style is somewhere in between, then maybe GARP is the right solution for you. GARP stands for Growth at a Reasonable Price and is really a combination of value and growth investing. GARP investors are looking for a stock that is slightly under-valued with earnings growth potential. GARP investors do not necessarily abide by specific rations or valuation metrics to help them make stock selections. That being said, GARP investors usually do follow P/E valuations.
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PORTFOLIO: In todays financial market place, a well-maintained portfolio is vital to any investors success. As an individual investor, you need to know how to determine an asset allocation that best conforms to your personal investment goals and strategies. In other words, your portfolio should meet your portfolio should meet your future needs for capital and give you peace of mind. Investors can construct portfolio aligned to their goals and investment strategies by following a systematic approach. Here we go over some essential steps for taking such an approach. It is combination of all the securities, group of assets-such as stocks, bonds and mutual funds held by an investor. It is constructed in such a manner to meet the investors goals and objectives. The balanced portfolio is the one which gives maximum return with minimum risk. Diversification of investment helps to spread risk over many assets. A diversification of securities gives the assurance of obtaining the anticipated return on the portfolio, same securities may not perform as expected, but others may exceed the expectation and making the actual return of the portfolio reasonably close to the anticipated one. Keeping a portfolio of single security may lead to a greater likelihood of the actual return somewhat different from that of the expected return. To reduce their risk, investors tend to hold more than just a single stock or other asset. Each piece of the portfolio is divided up into specific assets such as bonds, equities, stock, mutual funds etc. A passive form portfolio management involves the matching of future cash flows with future liabilities.
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PORTFOLIO CONSTRUCTION:
Portfolio is a combination of securities such as stocks, bonds and money market instrument. The process of blending together the broad asset classes so as to obtain optimum return with minimum risk return is called Portfolio Construction. Portfolio management concerns the construction and maintenance of a collection of investment. It is investment of funds in different securities in which the total risk of the portfolio is minimized. It primarily involves reducing risks rather that increasing return. Return is obviously important through and the ultimate objective of portfolio manager is to achieve a chosen level of return by incurring the least possible risk. Investing in securities such as shares, debentures and bonds is profitable as well as exciting. It indeed it involves a great deal of risk. It is rare to find investors investing their entire savings in a single security. Instead they tend to invest in a group of securities. Such group of securities is called a Portfolio Creation of a Portfolio helps to reduce risks without sacrificing returns. The Portfolio should be constructed in such a way that it should give an investor maximum return with minimum risk. A good portfolio should have multiple objectives and achieve a sound balance among them. Any one objective should not be given undue important at the cost of others. OBJECTIVES: Safety of the Investment. Stable Current Returns. Appreciation in the value of capital. Marketability, liquidity.
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TYPES OF PORTFOLIOS
The different types of Portfolio which is carried by any Fund Manager to maximize profit and minimize losses are different as per their objectives. They are as follows:
Aggressive Portfolio:
Objective: Growth. This strategy might be appropriate for investors who seek high growth and who can tolerate wide fluctuations in market values, over the short term.
Growth Portfolio:
Objective: Growth. This strategy might be appropriate for investors who have a preference for growth and who can withstand significant fluctuations in market values.
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Balanced Portfolio:
Objective: Capital appreciation and income. This strategy might be appropriate for investors who want the potential for capital appreciation and some growth, and who can withstand moderate fluctuations in market values.
Conservative Portfolio:
Objective: Income and capital appreciation. This strategy may be appropriate for investors who want to preserve their capital and minimize fluctuations in market value.
Investment management solution in PMS can be provided in the following ways: i. ii. iii. Discretionary Non-Discretionary Advisory
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Discretionary: Under these services, the choice as well as the timings of the investment
decisions rest solely with the Portfolio Manager.
Non-Discretionary: Under these services, the portfolio manager only suggests the
investment ideas. The choice as well as the timings of the investment decisions rest solely with the Investor. However the execution of trade is done by the portfolio manager.
Advisory: Under these services, the portfolio manager only suggests the investment ideas.
The choice as well as the execution of the investment decisions rest solely with the Investor. Rule 2, clause (d) of the SEBI (portfolio managers) Rules, 1993 defines the term Portfolio as total holding of securities belonging to any person. The Portfolio Construction of rational investors wishes to maximize the returns on their funds for a given level of risk. All investments possess varying degrees of risk. Returns come in the form of income, such as interest or dividends, or through growth in capital values (i.e. capital gains). The portfolio construction process can be broadly characterized as comprising the following steps:
1. Setting objectives.
The first step in building a portfolio is to determine the main objectives of the fund given the constraints (i.e. tax and liquidity requirements) that may apply. Each investor has different objectives, time horizons and attitude towards risk. Pension funds have long-term obligations and, as a result, invest for the long term. Their objective may be to maximize total returns in excess of the inflation rate. A charity might wish to generate the highest level of income whilst maintaining the value of its capital received from bequests. An individual may have certain liabilities and wish to match them at a future date. Assessing a clients risk tolerance can be difficult. The concepts of efficient portfolios and diversification must also be considered when setting up the investment objectives.
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2. Defining Policy.
Once the objectives have been set, a suitable investment policy must be established. The standard procedure is for the money manager to ask clients to select their preferred mix of assets, for example equities and bonds, to provide an idea of the normal mix desired. Clients are then asked to specify limits or maximum and minimum amounts they will allow to be invested in the different assets available. The main asset classes are cash, equities, gilts/bonds and other debt instruments, derivatives, property and overseas assets. Alternative investments, such as private equity, are also growing in popularity, and will be discussed in a later chapter. Attaining the optimal asset mix over time is one of the key factors of successful investing.
3. Applying portfolio strategy.

At either end of the portfolio management spectrum of strategies are active and passive strategies. An active strategy involves predicting trends and changing expectations about the likely future performance of the various asset classes and actively dealing in and out of investments to seek a better performance. For example, if the manager expects interest rates to rise, bond prices are likely to fall and so bonds should be sold, unless this expectation is already factored into bond prices. At this stage, the active fund manager should also determine the style of the portfolio. A passive strategy usually involves buying securities to match a preselected market index. Alternatively; a portfolio can be set up to match the investors choice of tailor-made index. Passive strategies rely on diversification to reduce risk. Outperformance versus the chosen index is not expected. This strategy requires minimum input from the portfolio manager. In practice, many active funds are managed somewhere between the active and passive extremes, the core holdings of the fund being passively managed and the balance being actively managed.
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4. Asset selections.
Once the strategy is decided, the fund manager must select individual assets in which to invest. Usually a systematic procedure known as an investment process is established, which sets guidelines or criteria for asset selection. Active strategies require that the fund managers apply analytical skills and judgment for asset selection in order to identify undervalued assets and to try to generate superior performance.
5. Performance assessments.
In order to assess the success of the fund manager, the performance of the fund is periodically measured against a pre-agreed benchmark perhaps a suitable stock exchange index or against a group of similar portfolios (peer group comparison). The portfolio construction process is continuously iterative, reflecting changes internally and externally. For example, expected movements in exchange rates may make overseas investment more attractive, leading to changes in asset allocation. Or, if many large-scale investors simultaneously decide to switch from passive to more active strategies, pressure will be put on the fund managers to offer more active funds. Poor performance of a fund may lead to modifications in individual asset holdings or, as an extreme measure; the manager of the fund may be changed altogether.
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CHAPTER 2 REVIEW OF LITERATURE & RESEARCH DESIGN Introduction
In the booming world of economy, everyone wants to use their money to earn more money. People today are looking forward to invest in the Stock Market which at is one of the most preferable source and place of investment. But many of them though have a huge amount of money in hand at disposal, find it very difficult to invest due to lack of knowledge about the stock market. So, the study is done on the 20 stocks under nifty so as to construct an optimal portfolio for these investors. The need for the study includes: Understanding about the stock market and its trend and knowing the performance and fluctuations in the share prices by analysing the risk and return on securities. Constructing an optimal investment portfolio and helping the investors for investing in securities as per their needs and risk appetite. Providing investment advice as per their risk appetite and the long and short term financial requirements (which would need analysing products that suits for short term financial goal and long term as well)
For the research study, several literature works has been referred to. Very few of them have been mentioned here likePage 11
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Sharpe, William F.
(1966) suggested a measure for the evaluation of portfolio performance. Drawing on results obtained in the field of portfolio analysis, economist Jack L. Treynor has suggested a new predictor of mutual fund performance, one that differs from virtually all those used previously by incorporating the volatility of a fund's return in a simple yet meaningful manner.
Michael C. Jensen
(1967) derived a risk-adjusted measure of portfolio performance (Jensens alpha) that estimates how much a managers forecasting ability contributes to funds returns. As indicated by Statman (2000), the e SDAR of a fund portfolio is the excess return of the portfolio over the return of the benchmark index, where the portfolio is leveraged to have the benchmark indexs standard deviation.
S.Narayan Rao,
evaluated performance of Indian mutual funds in a bear market through relative performance index, risk-return analysis, Treynors ratio, Sharpes ratio, Sharpes measure , Jensens measure, and Fames measure.
K. Pendaraki
studied construction of mutual fund portfolios, developed a multi-criteria methodology and applied it to the Greek market of equity mutual funds. T h e methodology is based on the combination of discrete and continuous multi-criteria decision aid methods for mutual fund selection and composition. UTADIS multi-criteria decision aid methodises employed in order to develop mutual funds performance models. Goal programming model is employed to determine proportion of selected mutual funds in the final portfolios.
Zakri Y.Bello
(2005) matched a sample of socially responsible stock mutual funds matched to randomly select conventional funds of similar net assets to investigate differences in characteristics of assets held, degree of portfolio diversification and variable effects of diversification on investment performance. The study found that socially responsible funds do not differ
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significantly from conventional funds in terms of any of these attributes. Moreover, the effect of diversification on investment performance is not different between the two groups. Both groups underperformed the Domini 400 Social Index and S & P 500 during the study period.
Research Paper Number 120 Omega Portfolio Construction with Johnson Distributions Author: Alexander PASSOW - Gottex Fund Management and FAME Date: November 2004 This paper has now been published and is no longer available as a part of our Research Paper Series. The published text can be found with the following reference: Alexander Passow "Omega Portfolio Construction with Johnson Distributions" Risk, April 2005, vol. 18, Issue 4. Abstract: The omega risk-adjusted performance measure with Johnson distributions accounts comprehensively and non-discretionarily for the first potentially persistent moments including skewness and kurtosis. The Johnson-omega ratio thus overcomes the shortcomings of other measures and is inherently less sensitive to input data noise and to changes of the threshold than empirical omega. Alexander Passow derives an explicit representation of the Johnson-omega ratio that was successfully tested in a hedge fund portfolio optimization framework using both historical and forward-looking performances of individual indexes.
Statement of the problem:

The Indian Stock Market is very volatile and unpredictable in nature. The investors though have many fail to earn good returns and choose the securities with lesser risk, because of their ignorance and lack of knowledge about the stock market and its volatility.
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Scope of the Study:
The scope of study is limited to collecting the data published in the reports of the company and NSE website and theoretical frame work of the data with a view to suggest solutions to various problems relating to portfolio construction. The study includes study of only NSE NIFTY, not whole Equity markets. The other asset classes are also not included in preparation of portfolio. The study however covers information related to the Equity fund and the portfolio management and: Analysis of investors risk involved in the investment in various securities. Identification of the investors objectives, constraints and preferences. Development of strategies in tune with investment policy formulated. To reduce the future risk in advance. To earn maximum profit from the investment in the securities.
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Objectives of the Study:
Each research study has its own specific purpose. And the main objective of this project is basically to construct an optimal portfolio for the investors so as to put their idle money into an investment portfolio which would give in turn a good return to them with minimum risk involved. However the other objectives would consist: To learn about the Indian stock market and observe the market trend. To understand the investors need and their expected return on the investment. To ascertain the investors risk bearing capacity. To study the risk return volatility of the different products. To construct an optimal portfolio for the investors which would give an optimum return with least risk involved. To suggest measures for the customers in deciding and choosing the optimal securities by creating awareness about the performance and risk-return of various stocks.
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Hypothesis:
A hypothesis is a proposed explanation for a phenomenon. The term derives from the Greek, hyposthenia meaning "to put under" or "to suppose". H0 there is no option to get best return H1 there is an option to get best return
Research Design:
The project report is based on both primary and secondary data. However, though the primary data was a basis for the research to find out the investors need, their risk appetite and their expectation from the investment, the secondary data is given more importance for it was the source for constructing an optimal portfolio for the investors which is the main problem in the study. The Research design used for the study is Analytical or Exploratory Research Design for which the data used are the secondary data. However, to carry out this research on the secondary data, the basis was on the descriptive study done by use of primary data collected through the Questionnaire distributed to the investors.
Secondary data: Other materials like Reference books, Journals, magazine, internal guide
and External guide information.
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Plan of Analysis:
Firstly the portfolio is constructed on the basis of current budget. In this year budget more importance is given to the infrastructure , banks , cements, and which are supporting industries for infrastructure, so I have picked on those sector of about 50 companies and taking the one year traded price of those companies and indices of NSE calculated the returns, variances, standard deviation and beta and if there is an higher returns and higher standard deviation it is taken into aggressive and if there is an moderate risk and return it is taken in to moderate portfolio and if there is a low risk and good return it is putted in the conservative portfolio and then after grouping, calculate the cutoff point. on the basis of cut off point the weight age is given to each script and on that probability amount is divided and portfolio return and portfolio beta is calculated.
Limitation:
Stock market is always subject to market risk. Indian stock market is dominated by FIIs (Foreign Institutional Investors), so volatility is more and we cannot predict the market. Greed in people
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Tools and techniques of Analysis:
RETURNS:
Return is used to select scrips for portfolio which is calculated by using the previous one year data. Return on investment/asset for given period, say a year, consists of annual income (dividend) receivable plus change in market price.
Rate of Return = Todays price-yesterdays price *100 Yesterdays price
STANDARD DEVIATION:
Standard deviation has been used as a proxy measure for risk of a security. It measures the fluctuations around mean returns. It equals to the positive square root of variance. The smaller the standard deviation, the lower is the risk of the investment.
Standard deviation
= =
Where, X = Return of the scrips. X = Mean or the average of the returns. N = Number of Days.
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BETA:
The market, or systematic, risk can be measured by comparing the return on an investment with the return on the market in general, or an average stock; the resulting measure is called the beta coefficient, and is identified using the Greek symbol . It gives an indication of the degree of movement in returns associated with an investment relative to the market, which contains only systematic risk. The beta for market portfolio is equal to one by definition.
= Where, X = Index return. Y= Stock return. N = Number of Days.
( )
BETA:
Beta is the slope of the characteristics regression line. The beta value describes relationship between the stocks return and the index returns.
Beta = +1
One percent change in market index causes exactly one percent change in the stock return indicates that the stock moves in tandem in market.
Beta = +0.5
One percent changes in market index causes exactly 0.5 percent changes in the stock return. The stock is less volatile compared to the market.
Beta = +2
One percent changes in market index causes exactly 2 percent changes in the stock return. The stock is more volatile. When there is a decline in the market return, the stock return with beta of 2 would give a negative return of 20 percent. The stocks with more than 1 beta value are considered to be risky.
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SYSTEMATIC RISK AND UNSYSTEMATIC RISK
SYSTEMATIC RISK:Systematic risk refers to that portion of total risk which arises on account of factors that affect the price of all the securities in the general .Economic, political and sociological changes are the principal sources of the systematic risk. these factors have a bearing on the performance of companies and thereby on their share prices. The individual security prices tend to move together with the changes in the market. For example, when the economy is moving towards a recession, the corporate profits will decline and the share prices of almost all the companies may decline. Systematic risk cannot be reduced through diversification.Sys risk=beta square*market variance. Sys risk is subdivided is to 3 types Market risk Interest risk Purchasing power risk
UNSYSTEMATIC RISK:Unsystematic risk refers to that portion of total risk which arises on account of factor that affects the prices of the securities of a specific company. It is unique and peculiar to a specific firm or industry. It is also known as unique risk. Unsystematic risk come from managerial inefficiency, change in consumer preferences, technological changes etc. Two subdivisions are 1. Business risk 2. Financial risk
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Business Risk
Business risk is that portion of the unsystematic risk caused by the operating environment of the business. Business risk arises from the inability of a firm to maintain its competitive edge and the growth or stability of (fie earnings. Variation that occurs in the operating environment is reflected on the operating income and expected dividends. The variation in the expected operating income indicates the business risk. For example take Abc and xyz companies. In Abc company, operating income could grow as much as IS per cent and as low as 7 per cent. In xyz Company, the operating income can be either 12 per cent or 9 per cent. When both the companies are compared, Abc Companys business risk is higher because of its high variability in operating income compared to xyz Company. Thus, business risk is concerned with the difference between revenue and earnings before interest and tax. Business risk can be divided into external business risk and internal business risk.
Internal Business Risk

Internal business risk is associated with the operational efficiency of the firm. The operational efficiency differs from company to company. The efficiency of operation is reflected on the company's achievement of its pre-set goals and the fulfilment of the promises to its investors.
(1) Fluctuations in the sales the sales level has to be maintained. It is common in business to
lose customers abruptly because of competition. Loss of customers will lead to a loss in operational income. Hence, the company has to build a wide customer base through various distribution channels. Diversified sales force may help to tide over this problem. Big corporate bodies have long chain of distribution channel. Small firms often lack this diversified customer base.
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(2) Research and development (R&D) Sometimes the product may go out of style or become obsolescent. It is the management, who has to overcome the problem of obsolescence by concentrating on the in-house research and development program. For example, if Maruti Udyog has to survive the competition, it has to keep its Research and Development section active and introduce consumer oriented technological changes in the automobile sector. This is often carried out by introducing sleekness, seating comfort and break efficiency in their automobiles. New products have to be produced to replace the old one. Short sighted cutting of R and D budget would reduce the operational efficiency of any firm.
(3) Personnel management The personnel management of the company also contributes to
the operational efficiency of the firm. Frequent strikes and lock outs result in loss of production and high fixed capital cost. The labor productivity also would suffer. The risk of labor management is present in all the firms. It is up to the company to solve the problems at the table level and provide adequate incentives to encourage the increase in labor productivity. Encouragement given to the laborers at the floor level would boost morale of the labor force and leads to higher productivity and less wastage of raw materials and time. (4) Fixed cost The cost components also generate internal risk if the fixed cost is higher in the cost component. During the period of recession or low demand for product, the company cannot reduce the fixed cost. At the same time in the boom period also the fixed factor cannot vary immediately. Thus, the high fixed cost component in a firm would become a burden to the firm. The fixed cost component has to be kept always in a reasonable size, so that it may not affect the profitability of the company. (5) Single product The internal business risk is higher in the case of firm producing a single product. The fall in the demand for a single product would be fatal for the firm. Further, some products are more vulnerable to the business cycle while some products resist and grow against the tide. Hence, the company has to diversify the products if it has to face the competition and the business cycle successfully. Take for instance, Hindustan Lever Ltd., which is producing a wide range of consumer cosmetics is thriving successfully in the business. Even in diversification, diversifying the product in the unknown path of the company may lead to an internal risk. Unwieldy diversification is as dangerous as producing a single good.
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External Risk External risk is the result of operating conditions imposed on the firm by circumstances beyond its control. The external environments in which it operates exert some pressure on the firm. The external factors are social and regulatory factors, monetary and fiscal policies of the government, business cycle and the general economic environment within which a firm or an industry operates. A government policy that favors a particular industry could result in the rise in the stock price of the particular industry. For instance, the Indian sugar and fertilizer industry depend much on external factors. 1. Social and regulatory factors Harsh regulatory climate and legislation against the environmental degradation may impair the profitability of the industry. Price control, volume control, import/export control and environment control reduce the profitability of the firm. This risk is more in industries related to public utility sectors such as telecom, banking and transportation. The governments' tariff policy of the telecom sector has a direct bearing on its earnings. Likewise, the interest rates and the directions given in the lending policies affect the profitability of the banks. CESC has not been able to increase its power tariff due to the stiff resistance by the West Bengal government. The Pollution Control Board has asked to close most of the tanneries in Tamil Nadu, which has affected the leather industry. 2. Political risk Political risk arises out of the change in the government policy. With a change in the ruling party, the policy also changes. When Sri. Manmohan Singh was the finance minister, liberalization policy was introduced. During the Bharathiya Janata government, even though efforts are taken to augment the foreign investment, more stress is given to Swadeshi. Political risk arises mainly in the case of foreign investment. The host government may change its rules and regulations regarding the foreign investment. From the past, an example can be cited. In 1977, the government decided that the multinationals must dilute their equity and share their growth with the Indian investors. This forced many multinationals to liquidate their holdings in the Indian companies.
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3. Business cycle The fluctuations of the business cycle lead to fluctuations in the earnings of the company. Recession in the economy leads to a drop in the output of many industries. Steel and white consumer goods industries tend to move in tandem with the business cycle. During the boom period, there would be hectic demand for steel products and white consumer goods. But at the same time, they would be hit much during the recession period. At present, the information technology industry has resisted the business cycle and moved counter cyclically during the recession period. The effects of the business cycle vary from one company to another. Sometimes, companies with inadequate capital and consumer base may be forced to close down. In some other case, there may be a fall in the profit and the growth rate may decline. This risk factor is external to the corporate bodies and they may not be able to control it.
Financial Risk
It refers to the variability of the income to the equity capital due to the debt capital. Financial risk in a company is associated with the capital structure of the company. Capital structure of the company consists of equity funds and borrowed funds. The presence of debt and preference capital results in a commitment of paying interest or pre fixed rate of dividend. The residual income alone would be available to the equity holders. The interest payment affects the payments that are due to the equity investors. The debt financing increases the variability of the returns to the common stock holders and affects their expectations regarding the return. The use of debt with the owned funds to increase the return to the shareholders is known as financial leverage. Debt financing enables the corporate to have funds at a low cost and financial leverage to the shareholders. As long as the earnings of a company are higher than the cost of borrowed funds, shareholders' earnings are increased. At the same time when the earnings are low, it may lead to bankruptcy to equity holders.
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The financial risk considers the difference between EBIT and EBT (earnings before tax). The business risk causes the variations between revenue and EBIT. The payment of interest affects the eventual earnings of the company stock. Thus, volatility in the rates of return on the stock is magnified by the borrowed money. The variations in income caused by .the borrowed funds in highly levered firms are greater compared to the companies with lowleverage. The financial leverage or financial risk is an avoidable risk because it is the management who has to decide, how much to be funded with the equity capital and borrowed capital
MINIMISING RISK EXPOSURE

Every investor wants to guard himself from the risk. This can be done by understanding the nature of the risk and careful planning. The following paragraphs give an agenda for protecting the investors from the different types of risks, Market Risk Protection 1. The investor has to study the price behavior of the stock. Usually history repeats itself even though it is not in perfect form. The stock that shows a growth pattern may continue to do so for some more periods. The Indian stock market expects the growth pattern to continue for some more time in information technology stock and depressing conditions to continue in the textile related stock. Some stocks may be cyclical stocks. It is better to avoid such type of stocks. 2. The standard deviation and beta indicate the volatility of the stock. The standard deviation and beta are available for the stocks 'that are included in the indices. The National Stock Exchange News bulletin provides this information. Looking at the beta values, the investor can gauge the risk factor and make wise decision according to his risk tolerance. 3. Further, the investor should be prepared to hold the stock for a period of time to reap the benefits of the rising trends in the market. He should be careful in the timings of the purchase and sale of the stock. He should purchase it at the lower level and should exit at a higher level
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Protection against Interest Rate Risk
1. Often suggested solution for this is to hold the investment to maturity. If he sells it in the middle due to fall in the interest rate, the capital invested would experience a heavy loss. 2. The investors can also buy treasury bills and bonds of short maturity. The portfolio manager can invest in the treasury bills and the money can be reinvested in the market to suit the prevailing interest rate.
Protection against Inflation

1. The general opinion is that the bonds or debentures with fixed return cannot solve the problem. If the bond yield is 13 to 15 per cent with low risk factor, they would provide hedge against the inflation. 2. Another way to avoid the risk is to have investment in short term securities and to avoid long term investment. The rising consumer price index may wipe off the real rate of interest in the long term. 3. Investment diversification can also solve this problem to a certain extent. The investor has to diversify his investment in real estates, precious metals, arts and antiques along with the investment in securities. One cannot assure that different types of investments would provide a perfect hedge against inflation. It can rninimise the loss due to the fall in the purchasing power.
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Protection against Business and Financial Risk
1. To guard against the business risk, the investor has to analyze the strength and weakness of the industry to which the company belongs. If weakness of the industry is too much of government interference in the way of rules and regulations, it is better to avoid it. 2. Analyzing the profitability trend of the company is essential. The calculation of standard deviation would yield the variability of the return. If there is inconsistency in the earnings, it is better to avoid it. The investor has to choose a stock consistent track record. 3. The financial risk should be minimized by analyzing the capital structure of the company. If the debt equity ratio is higher, the investor should have a sense of caution. Along with the capital structure analysis, he should also take into account of the interest payment. In a boom period, the investor can select a highly levered company but not in a recession.
RISK MEASUREMENT
Understanding the nature of the risk is not adequate unless the investor or analyst is capable of expressing it in some quantitative terms. Expressing the risk of a stock in quantitative terms makes it comparable with other stocks. Measurements cannot be assured of cent per cent accuracy because risk is caused by numerous factors such as social, political, economic and managerial efficiency. Measurement provides an approximate quantification of risk. The statistical tool often used to measure and used as a proxy for risk is the standard deviation.
Standard Deviation
It is a measure of the values of the variables around its mean or it is the square root of the sum of the squared deviations from the mean divided by the number of observances. The arithmetic mean of the returns may be same for two companies but the returns may vary widely.
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INDUSTRY PROFILE The stock market
With over 20 million shareholders, India has the third largest investor base in the world after the USA and Japan. Over 9,000 companies are listed on the stock exchanges, which are serviced by approximately 7,500 stockbrokers. The Indian capital market is significant in terms of the degree of development, volume of trading and its tremendous growth potential. There are 23 recognized stock exchanges in India, including the Over the Counter Exchange of India (OTCEI) for small and new companies and the National Stock Exchange (NSE) which was set up as a model exchange to provide nation-wide services to investors. NSE, which in the recent past has accounted for the largest trading volumes, has a fully automated screen based system that operates in the wholesale debt market segment as well as the capital market segment. India's market capitalization was amongst the highest among the emerging markets. Total market capitalization of the BSE as on July 31, 1997 was Rs 5,573.07 billion growing by 18 percent over a period of twelve months and as of August 2005 was over $500 billion (about Rs 22 lakh crores).A stock exchange in India operates with due recognition from the government under the securities and contracts (Regulations) Act, 1956. The member brokers are essentially the middlemen, who transact in securities on behalf of the public for a commission or on their own behalf. The stock market is typically governed by a board consisting of directors, a majority of whom are elected by the member brokers. The other members of board are nominated by the government. Government nominees include representatives of the Ministry of finance, as well as some public representative, who are expected to safeguard the interest on investors in the functioning of exchanges. The board is headed by a president, who is an elected member, usually nominated by the government, from among the elected members. The Executive Director, who is appointed by the stock exchange with government approval, is the operational chief of the stock exchange are carried out in accordance with the rules and regulations governing its functioning. India stock exchanges
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The working of stock exchanges in India started in 1875. BSE is the oldest stock market in India. The history of India stock trading starts with 318 persons taking membership in Native share and Stock Brokers Association, which we know by the name Bombay Stock Exchange or BSE in short. In 1965, BSE got permanent recognition from the Government of India. BSE and NSE represent themselves as synonyms of India stock market. The history of India stock market is almost the same as the history of BSE.
BSE-Bombay Stock Exchange SENSEX - THE BAROMETER OF INDIAN CAPITAL MARKETS The Bombay Stock Exchange, is the oldest stock exchange in Asia, was established in 1875 as the Native Share and Stock Brokers Association at Dalal Street in Mumbai. In 1956, the BSE obtained recognition from the Government of India- the first stock exchange to do so under the Securities Contracts (Regulation) Act, 1956. The Sensex, first compiled in 1986, is a Market Capitalization- Weighted Index of 30 component stocks representing a sample of large and financially sound companies. The BSESensex is the benchmark index of the Indian capital markets. The 30 stock sensitive index or Sensex was first compiled in 1986. The Sensex is compiled based on the performance of the stocks of 30 financially sound benchmark companies. In 1990 the BSE crossed the 1000 mark for the first time. It crossed 2000, 3000 and 4000 figures in 1992. The reason for such huge surge in the stock market was the liberal financial policies announced by the then financial minister Pranab mukarje. Sensex crossed the 5000 mark in 1999 and the 6000 mark in 2000. The 7000 mark was crossed in June and the 8000 in September likewise it almost reached 14500 in the month of January 2007. Many Foreign institutional investors (FII) are investing in Indian, markets on a large scale. The BSE Sensex comprises these 30 stocks: ACC, Bajaj Auto, Bharti Tele, BHEL, Cipla, Dr Reddys, Gujarat Ambuja, Grasim, HDFC, HDFC Bank, Hero Honda, Hindalco, HLL, ICICI Bank, Infosys, ITC, L&T, Maruti, NTPC, ONGC, Ranbaxy, Reliance, Reliance Energy, Satyam, SBI, Tata Motors, Tata Power, TCS and Wipro. Heres a timeline on the rise of the SENSEX through Indian stock market history
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National stock exchange Based on the recommendations by High Powered Study Group on established on New Stock Exchanges, NSE was promoted by leading Financial Institutions at the behest of the Government of India and was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country. On its recognition as a stock exchange under the securities contracts (Regulation) Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt market (WDM) segment in June 1994. The capital market (Equities) segment commenced operations in November 1994 and operations in Derivatives segment commenced in June 2000. NIFTY: The Nifty is relatively a new comer in the Indian market. S&P CNX Nifty is a 50 stock index accounting for 23 sectors of the economy. It is used for purposes such as benchmarking fund portfolios, index based derivatives and index funds. The base period selected for Nifty is the close of prices on November 3, 1995, which marked the completion of one-year of operations of NSEs capital market segment. The base value of index was set at 1000. S&P CNX Nifty is owned and managed by India Index Services and Products Ltd. (IISL), which is a joint venture between NSE and CRISIL. IISL is a specialized company focused upon the index as a core product. IISL have a consulting and licensing agreement with Standard & Poors (S&P), who are world leaders in index services. ral requirements under the Companies Act have been dispensed with. Two depositories, viz., NSDL and CDSL, have come up to provide instantaneous electronic transfer of securities. Players (investors) in securities market Individual investors Institutional investors FIIs Mutual fund investor
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COMPANY PROFILE BACKGROUND OF THE COMPANY
HISTORY OF INDIA INFOLINE LTD
We were originally incorporated on October 18, 1995 as Probity Research and Services Private Limited at Mumbai under the Companies Act, 1956 with Registration No. 11 93797. We commenced our operations as an independent provider of information, analysis and research covering Indian businesses, financial markets and economy, to institutional customers. We became a public limited company on April 28, 2000 and the name of the Company was changed to Probity Research and Services Limited. The name of the Company was changed to India Infoline.com Limited on May 23, 2000 and later to India Infoline Limited on March 23, 2001.
In 1999, we identified the potential of the Internet to cater to a mass retail segment and transformed our business model from providing information services to institutional customers to retail customers. Hence we launched our Internet portal, www.indiainfoline.com in May 1999 and started providing news and market information, independent research, interviews with business leaders and other specialized features.
In May 2000, the name of our Company was changed to India Infoline.com Limited to reflect the transformation of our business. Over a period of time, we have emerged as one of the leading business and financial information services provider in India.
In the year 2000, we leveraged our position as a provider of financial information and analysis by diversifying into transactional services, primarily for online trading in shares and securities and online as well as offline distribution of personal financial products, like mutual funds and RBI Bonds. These activities were carried on by our wholly owned subsidiaries.
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Our broking services was launched under the brand name of 5paisa.com through our subsidiary, India Infoline Securities Private Limited and www.5paisa.com, the e-broking
portal, was launched for online trading in July 2000. It combined competitive brokerage rates and research, supported by Internet technology Besides investment advice from an experienced team of research analysts, we also offer real time stock quotes, market news and price charts with multiple tools for technical analysis.
Acquisition of Agri Marketing Services Limited (Agri)
In March 2000, we acquired 100% of the equity shares of Agri Marketing Services Limited, from their owners in exchange for the issuance of 508,482 of our equity shares. Agri was a direct selling agent of personal financial products including mutual funds,
fixed deposits, corporate bonds and post-office instruments. At the time of our acquisition, Agri operated 32 branches in South and West India serving more than 30,000 customers with a staff of, approximately 180 employees. After the acquisition, we changed the company name to India Infoline.com Distribution Company Limited.
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History & Milestones
2011 Launched IIFL Mutual Fund. 2010 Received in-principle approval for membership of the Singapore Stock Exchange Received membership of the Colombo Stock Exchange 2009 Acquired registration for Housing Finance SEBI in-principle approval for Mutual Fund Obtained Venture Capital license 2008 Launched IIFL Wealth Transitioned to insurance broking model 2007 Commenced institutional equities business under IIFL Formed Singapore subsidiary, IIFL (Asia) Pte Ltd 2006 Acquired membership of DGCX Commenced the lending business
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2005 Maiden IPO and listed on NSE, BSE 2004 Acquired commodities broking license Launched Portfolio Management Service 2003 Launched proprietary trading platform Trader Terminal for retail customers 2000 Launched online trading through www.5paisa.com Started distribution of life insurance and mutual fund 1999 Launched www.indiainfoline.com
1997 Launched research products of leading Indian companies, key sectors and the economy Client included leading FIIs, banks and companies. 1995 Commenced operations as an Equity Research firm
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VISION, MISSION & QUALITY POLICY VISION
To be the most respected company in the financial service space. To be the leading investment intermediary for transaction through both online and offline medium. To be the premier provider of investment advisory and financial planning services in India.
Share holders
Growth at above industry rate with de-risking High ROCE, ROE
General public
Corporate governance Transparency
Customers
Employees
Cutting edge technology High service standards
Skill development by investments in training Empowerment and conducive
work environment
MISSION
One stop shop for all financial requirements.
QUALITY POLICY
Excellence is all about the quality of work. We strive for delivery that is 100% error free and yet at lightning speed. Excellence deals with the quality of work.
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CHAPTER 4 DATA ANALYSIS AND INTERPRETATION THE MARKOWITZ MODEL
Harry Markowitz opened new vistas to modern portfolio selection in March 1952. His report indicated the importance of correlation among the different stocks' returns in the construction of a stock portfolio. Markowitz also showed that for a given level of expected return in a group of securities, one security dominates the other. To find out this, the knowledge of the correlation coefficients between all possible securities combinations is required. After this, numerous investment firms and portfolio managers developed "Markowitz algorithms" to minimize portfolio variance i.e. risk. Even today the term Markowitz diversification is used to refer to the portfolio construction accomplished with the help of security covariance. (MPT) proposes how rational investors will use diversification to optimize their portfolios, and how a risky asset should be priced. The basic concepts of the theory are Markowitz diversification, the efficient frontier, capital asset pricing model, the alpha and beta coefficients, the Capital Market Line and the Securities Market Line. MPT models an asset's return as a random variable, and models a portfolio as a weighted combination of assets; the return of a portfolio is thus the weighted combination of the assets' returns. Moreover, a portfolio's return is a random variable, and consequently has an expected value and a variance. Risk, in this model, is the standard deviation of the portfolio's return.
RISK AND REWARD

The model assumes that investors are risk averse. This means that given two assets that offer the same expected return, investors will prefer the less risky one. Thus, an investor will take on increased risk only if compensated by higher expected returns. Conversely, an investor who wants higher returns must accept more risk. The exact trade-off will differ by investor based on individual risk
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aversion characteristics. The implication is that a rational investor will not invest in a portfolio if a second portfolio exists with a more favorable risk-return profile - i.e. if for that level of risk an alternative portfolio exists which has better expected returns
MEAN AND VARIANCE

It is further assumed that investor's risk / reward preference can be described via a quadratic utility function. The effect of this assumption is that only the expected return and the volatility (i.e. mean return and standard deviation) matter to the investor. The investor is indifferent to other characteristics of the distribution of returns, such as its skew. Note that the theory uses a historical parameter, volatility, as a proxy for risk, while return is an expectation on the future. Under the model:
Portfolio return is the proportion-weighted combination of the constituent assets' returns.
Portfolio volatility is a function of the correlation of the component assets. The change in volatility is non-linear as the weighting of the component assets changes.
In general:
Expected return:
Where R is return.
Portfolio variance:
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Portfolio volatility:
For a two asset portfolio:
Portfolio return:
Portfolio variance:
For a three asset portfolio, the variance is:
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. For diversification to work the component assets must not be perfectly correlated, i.e. correlation coefficient not equal to 1.
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.
In this formula P is the risky portfolio, F is the riskless portfolio and C is a combination of portfolios P and F.
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THE EFFICIENT FRONTIER
EFFICIENT FRONTIER
Every possible asset combination can be plotted in risk-return space, and the collection of all such possible portfolios defines a region in this space. The line along the upper edge of this region is known as the efficient frontier (sometimes the Markowitz frontier). Combinations along this line represent portfolios for which there is lowest risk for a given level of return. Conversely, for a given amount of risk, the portfolio lying on the efficient frontier represents the combination offering the best possible return. Mathematically the Efficient Frontier is the intersection of the Set of Portfolios with Minimum Variance and the Set of Portfolios with Maximum Return. The efficient frontier is illustrated above, with return p on the y axis, and risk p on the x axis; an alternative illustration from the diagram in the CAPM article is at right. The efficient frontier will be convex this is because the risk-return characteristics of a portfolio change in a non-linear fashion as its component weightings are changed. (As described above, portfolio risk is a function of the correlation of the component assets, and thus changes in a non-linear fashion as the weighting of component assets changes.) The region above the frontier is unachievable by holding risky assets alone. No portfolios can be constructed corresponding to the points in this region. Points below the frontier are suboptimal. A rational investor will hold a portfolio only on the frontier.
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THE RISK-FREE ASSET
The risk-free asset is the (hypothetical) asset, which pays a risk-free rate - it is usually proxied by an investment in short-dated Government securities. The risk-free asset has zero variance in returns (hence is risk-free); it is also uncorrelated with any other asset (by definition: since its variance is zero). As a result, when it is combined with any other asset, or portfolio of assets, the change in return and also in risk is linear. Because both risk and return change linearly as the risk-free asset is introduced into a portfolio, this combination will plot a straight line in risk-return space. The line starts at 100% in cash and weight of the risky portfolio = 0 (i.e. intercepting the return axis at the riskfree rate) and goes through the portfolio in question where cash holding = 0 and portfolio weight = 1. Using the formulae for a two asset portfolio as above:
Return is the weighted average of the risk free asset, f, and the risky portfolio, p, and is therefore linear: Return =
Since the asset is risk free, portfolio standard deviation is simply a function of the weight of the risky portfolio in the position. This relationship is linear.
Standard deviation =
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PORTFOLIO LEVERAGE
An investor can add leverage to the portfolio by borrowing the risk-free asset. The addition of the risk-free asset allows for a position in the region above the efficient frontier. Thus, by combining a risk-free asset with risky assets, it is possible to construct portfolios whose riskreturn profiles are superior to those on the efficient frontier
An investor holding a portfolio of risky assets, with a holding in cash, has a positive risk-free weighting (a de-leveraged portfolio). The return and standard deviation will be lower than the portfolio alone, but since the efficient frontier is convex, this combination will sit above the efficient frontier i.e. offering a higher return for the same risk as the point below it on the frontier.
The investor who borrows money to fund his/her purchase of the risky assets has a negative risk-free weighting -i.e. a leveraged portfolio. Here the return is geared to the risky portfolio. This combination will again
offer a return superior to those on the frontier.
THE MARKET PORTFOLIO

The efficient frontier is a collection of portfolios, each one optimal for a given amount of risk. A quantity known as the Sharpe ratio represents a measure of the amount of additional return (above the risk-free rate) a portfolio provides compared to the risk it carries. The portfolio on the efficient frontier with the highest Sharpe Ratio is known as the market portfolio, or sometimes the super-efficient portfolio; it is the tangency-portfolio in the above diagram. This portfolio has the property that any combination of it and the risk-free asset will produce a return that is above the efficient frontier - offering a larger return for a given amount of risk than a portfolio of risky assets on the frontier would.
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CAPITAL MARKET LINE
When the market portfolio is combined with the risk-free asset, the result is the Capital Market Line. All points along the CML have superior risk-return profiles to any portfolio on the efficient frontier. (The market portfolio with zero cash weighting is on the efficient frontier; additions of cash or leverage with the risk-free asset in combination with the market portfolio are on the Capital Market Line. All of these portfolios represent the highest Sharpe ratios possible.) The CML is illustrated above, with return p on the y axis, and risk p on the x axis. One can prove that the CML is the optimal CAL and that its equation is:
Capital market line
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ASSET PRICING
A rational investor would not invest in an asset which does not improve the risk-return characteristics of his existing portfolio. Since a rational investor would hold the market portfolio, the asset in question will be added to the market portfolio. MPT derives the required return for a correctly priced asset in this context.
SYSTEMATIC RISK AND SPECIFIC RISK

Specific risk is the risk associated with individual assets - within a portfolio these risks can be reduced through diversification (specific risks "cancel out"). Systematic risk, or market risk, refers to the risk common to all securities - except for selling short as noted below, systematic risk cannot be diversified away (within one market). Within the market portfolio, asset specific risk will be diversified away to the extent possible. Systematic risk is therefore equated with the risk (standard deviation) of the market portfolio. Since a security will be purchased only if it improves the risk / return characteristics of the market portfolio, the risk of a security will be the risk it adds to the market portfolio. In this context, the volatility of the asset, and its correlation with the market portfolio, is historically observed and is therefore a given (there are several approaches to asset pricing that attempt to price assets by modelling the stochastic properties of the moments of assets' returns - these are broadly referred to as conditional asset pricing models). The (maximum) price paid for any particular asset (and hence the return it will generate) should also be determined based on its relationship with the market portfolio. Systematic risks within one market can be managed through a strategy of using both long and short positions within one portfolio, creating a "market neutral" portfolio.
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SECURITY CHARACTERISTIC LINE
The Security Characteristic Line (SCL) represents the relationship between the market return (rM) and the return of a given asset i (ri) at a given time t. In general, it is reasonable to assume that the SCL is a straight line and can be illustrated as a statistical equation:
Where i is called the asset's alpha coefficient and i the asset's beta coefficient.
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PORTFOLIO CUNSTRECTION CAPITAL ASSET PRICING MODEL

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 () 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 field of financial economics.
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SECURITIES MARKET LINE
The relationship between Beta & required return is plotted on the securities market line (SML) which shows expected return as a function of . The intercept is the riskfree rate available for the market, while the slope is . The Securities
market line can be regarded as representing a single-factor model of the asset price, where Beta is exposure to changes in value of the Market. The equation of the SML is thus:
SECURITY MARKET LINE
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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 rewardto-risk ratio for any security in relation to the overall markets. 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 securitys Reward-to-risk ratio = Markets 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
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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.
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).
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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

The risk of a portfolio comprises systemic risk and specific risk which is also known as idiosyncratic risk. Systemic risk refers to the risk common to all securities - i.e. market risk. Specific risk is the risk associated with individual assets. Specific risk can be diversified away to smaller levels by including a greater number of assets in the portfolio. (Specific risks "average out"); systematic risk (within one market) cannot. Depending on the market, a portfolio of approximately 30-40 securities in developed markets such as UK or US (more in case of developing markets because of higher asset volatilities) will render the portfolio sufficiently diversified to limit exposure to systemic risk only. A rational investor should not take on any diversifiable risk, as only non-diversifiable risks are rewarded within the scope of this model. Therefore, the required return on an asset, that is, the return that compensates for risk taken, must be linked to its riskiness in a portfolio context - i.e. its contribution to overall portfolio riskiness - as opposed to its "stand alone riskiness." In the CAPM context, portfolio risk is represented by higher variance i.e. less predictability. In other words the beta of the portfolio is the defining factor in rewarding the systemic exposure taken by an investor.
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THE EFFICIENT FRONTIER
EFFICIENT FRONTIER
The CAPM assumes that the risk-return profile of a portfolio can be optimized - an optimal portfolio displays the lowest possible level of risk for its level of return. Additionally, since each additional asset introduced into a portfolio further diversifies the portfolio, the optimal portfolio must comprise every asset, (assuming no trading costs) with each asset valueweighted to achieve the above (assuming that any asset is infinitely divisible). All such optimal portfolios, i.e., one for each level of return, comprise the efficient frontier. Because the unsystemic risk is diversifiable, the total risk of a portfolio can be viewed as beta.
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THE MARKET PORTFOLIO

An investor might choose to invest a proportion of his or her wealth in a portfolio of risky assets with the remainder in cash - earning interest at the risk free rate (or indeed may borrow money to fund his or her purchase of risky assets in which case there is a negative cash weighting). Here, the ratio of risky assets to risk free asset determines overall return - this relationship is clearly linear. It is thus possible to achieve a particular return in one of two ways: 1. By investing all of one's wealth in a risky portfolio, 2. Or by investing a proportion in a risky portfolio and the remainder in cash (either borrowed or invested). For a given level of return, however, only one of these portfolios will be optimal (in the sense of lowest risk). Since the risk free asset is, by definition, uncorrelated with any other asset, option 2 will generally have the lower variance and hence be the more efficient of the two.This relationship also holds for portfolios along the efficient frontier: a higher return portfolio plus cash is more efficient than a lower return portfolio alone for that lower level of return. For a given risk free rate, there is only one optimal portfolio which can be combined with cash to achieve the lowest level of risk for any possible return. This is the market portfolio.
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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. 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.
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THE SHARPE INDEX MODEL

The Markowitz model is adequate and conceptually sound in analyzing the risk and return of the portfolio. The problem with Markowitz model is that a number of co-variances have to be estimated. If a financial institution buys 150 stocks, it has to estimate 11,175 i.e. (N2 -N) 12 correlation co-efficient. Sharpe has developed a simplified model to analyze the portfolio. He assumed that the return of a security is linearly related to a single index like the market index. Strictly speaking, the market index should consist of all the securities trading on the exchange. In the absence of it, a popular index can be treated as a surrogate for the market index. For example, even though BSE-Sensex, BSE-I00, and NSE- 50 do not use all the scrips' prices to construct their indices, they can be used as surrogates. This would dispense the need for calculating hundreds of covariance. Any movement in security prices could be understood with the help of index movement. Further, it needs 3N + 2 bits of information compared to (N [N + 3] / 2) bit of information needed in the Markowitz analysis.
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SINGLE INDEX MODEL
Casual observation of the stock prices over a period of time reveals that most of the stock prices move with the market index. When the Sensex increases, stock prices also tend to increase and vice-versa. This indicates that some underlying factors affect the market index as well as the stock prices. Stock prices are related to the market index and this relationship could be used to estimate the return on stock. Towards this purpose, the following equation can be used Ri = ai + Rm i + ei Where Ri = expected return on security i ai = Intercept of the straight line or alpha co-efficient
i = slope of straight line or beta co-efficient the rate of return on market index ei = error term. According to the equation, the return of a' stock can be divided into two components, the return due to the market and the return independent of the market. indicates the sensitiveness of the stock return to the changes in the market return. For example of 1.5 means that the stock return is expected to increase by 1.5% when the market index return increases by 1 % and vice-versa. Likewise, of 0.5 expresses that the individual stock return would change by 0.5 per cent when there is a change of 1 percent in the market return. of 1 indicates that the market return and the security return are moving in tandem. The estimates of and are obtained from regression analysis. The mean return is Ri = ai + Rm i + ei The variance of security return = i2 m2 + ei2 The covariance of return between securities is ij + i j m2
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The single index model is based on the assumption that stocks vary together because of the common movement in the stock market and there are no effects beyond the market (i.e. any fundamental factor effects) that account the stocks co-movement. The expected return, standard deviation and co-variance of the single index model represent the joint movement of securities. The variance of the security has two components namely, systematic risk or market risk and unsystematic risk or unique risk. The variance explained by the index is referred to systematic risk. The unexplained variance is called residual variance or unsystematic risk.
Systematic risk = * variance of market index. Unsystematic risk = Total variance - Systematic risk. Thus, the total risk = Systematic risk + Unsystematic risk. From this, the portfolio variance can be derived p2 = [ (xi i )2 m2 ] + [ xi2 ei2 ] 2 = variance of portfolio 2p = expected variance of index e2mi = variation in security's return not related to the market index xi = the portion of stock i in the' portfolio Likewise expected return on the portfolio also can be estimated. For each security ai and i should be estimated. Rp = xi (ai +i Rm) Portfolio return is the weighted average of the estimated return for each security in the portfolio. The weights are the respective stocks' proportions in the portfolio. A portfolio's alpha value is a weighted average of the alpha values for its component
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securities using the proportion of the investment in a security as weight. p = xi ai i - Value of the alpha for the portfolio xi - Proportion of the investment on security i
i - Value of alpha for security i N - The number of securities in the portfolio Similarly, a portfolio's beta value is the weighted average of the beta values of its component stocks using relative share of them in the portfolio as weights. p = xi i p is the portfolio beta.
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CORNER PORTFOLIO
The entry or exit of a new stock in the portfolio generates a series of comer portfolio. In an one stock portfolio, it itself is the comer portfolio. In a two stock portfolio, the minimum attainable risk (variance) and the lowest return would be the corner portfolio. As the number of stocks increases in a portfolio, the corner portfolio would be the one with lowest return and risk combination.
CORNER PORTFOLIO
R 6 9 14 A 0 15
In the diagram, AB line shows the risk-return combinations of several portfolios. Each number indicates the number of stocks in the portfolio. When the number of stock increases, the risk and return decline. Tracing down the AB line shows the corner portfolio. An efficient frontier may have one or two security portfolio at the low or high extremes, if the percentages of allocation to stocks are free to take any value.
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SHARPE'S OPTIMAL PORTFOLIO
Sharpe had provided a model for the selection of appropriate securities in a portfolio. The selection of any stock is directly related to its excess return-beta ratio. Ri-Rf /i Where, Ri = the expected return on stock i Rf = the return on a riskless asset i = the expected change in the rate of return on stock i associated with one unit change in the market return The excess return is the difference between the expected return on the stock and the riskless rate of interest such as the rate offered on the government security or treasury bill. The excess return to beta ratio measures the additional return on a security (excess of the riskless asset return) per unit of systematic risk or non diversifiable risk. This ratio provides a relationship between potential risk and reward. Ranking of the stocks are done on the basis of their excess return to beta. Portfolio managers would like to include stocks with higher ratios. The selection of the
stocks depends on a unique cut-off rate such that all stocks with higher ratios of Ri-Rf /i are included and the stocks with lower ratios are left off. The cut-off point is denoted by C*. The steps for finding out the stocks to be included in the optimal portfolio are 1. Find out the "excess return to beta" ratio for each stock under consideration. 2. Rank them from the highest to the lowest. 3. Proceed to calculate C for all the stocks according to the ranked order using the following formula.
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( Ri-Rf ) i / ei2 Ci = 1+m2 i / ei2
Where, m2 = variance of the market index ei2 = variance of a stock's movement that is not associated with the movement of market index i.e. stock's unsystematic risk. 4. The cumulated values of Ci start declining after a particular Ci and that point is taken as the cut-off point and that stock ratio is the Jut-off ratio C.
CONSTRUCTION OF THE OPTIMAL PORTFOLIO

After determining the securities to be selected, the portfolio manager should find out how much should be invested in each security. The percentage of funds to be invested in each security can be estimated as follows Xi = zi / zi zi = i / ei2 [Ri-Rf /i - C ] The first expression indicates the weights on each security and they sum up to one. The second shows the relative investment in each security. The residual variance or the unsystematic risk has a role in determining the amount to be invested in each security.
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OPTIMUM PORTFOLIO WITH SHORT SALES

The procedure used to calculate the optimal portfolio when short sales are allowed is, more or less similar to the procedure adopted for no short sales, except the cut-off point concept. At first, the stocks have to be ranked by excess return to beta. Here, all the stocks are added to the portfolio. They are either held long or short. All the stocks affect the cut-off point. The Z value has to be calculated for each stock. If the Z value is positive, the stock will be held long and if negative, it will be sold short. Stocks which are having excess return to beta above C* are held long as in the case of the portfolio without short sales. Stocks with an excess return to beta below C*are sold short.
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Table No 4.1 COMPANY TAKEN FOR CONSTRUCTION OF PORTFOLIO AND ANALYSIS
Company Name Industry AUTOMOBILES - 2 AND 3 WHEELERS AUTOMOBILES - 2 AND 3 WHEELERS AUTOMOBILES - 4 WHEELERS AUTOMOBILES - 4 WHEELERS AUTOMOBILES - 4 WHEELERS BANKS BANKS BANKS BANKS CEMENT AND CEMENT PRODUCTS CIGARETTES COMPUTERS SOFTWARE COMPUTERS SOFTWARE Symbol BAJAJ AUTO HERO HONDA EQ INE158A01026 EQ INE118A01012 Series ISIN
Bajaj Auto Ltd.
Hero Honda Motors Ltd.
Mahindra & Mahindra Ltd.
M&M
EQ
INE101A01018
Maruti Suzuki
MARUTI TATA MOTORS HDFCBANK ICICIBANK PNB SBIN
EQ
INE585B01010
Tata Motors Ltd. HDFC Bank Ltd. ICICI Bank Ltd. Punjab National Bank State Bank of India
EQ EQ EQ EQ EQ
INE155A01014 INE040A01018 INE090A01013 INE160A01014 INE062A01012
ACC Ltd. I T C Ltd. Tata Consultancy Services Ltd.
ACC ITC
EQ EQ
INE012A01025 INE154A01025 INE467B01029
TCS
EQ
Wipro Ltd. Housing Development Finance Corporation Ltd.
WIPRO
EQ
INE075A01022
FINANCE - HOUSING GAS
HDFC GAIL
EQ EQ
INE001A01028 INE129A01019
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GAIL (India) Ltd. Oil & Natural Gas Cipla Ltd. Ranbaxy Laboratories Ltd. Sun Pharmaceutical Industries Ltd. Reliance Capital Limited
OIL PHARMACEUTICALS PHARMACEUTICALS
ONGC CIPLA RANBAXY
EQ EQ EQ
INE213A01011 INE059A01026 INE015A01028
PHARMACEUTICALS INVESTMENT POWER
SUNPHARMA
RELCAPITAL
EQ EQ EQ
INE044A01028 INE036A01015
INE752E01010
Power grid Co. Ltd. Bharat Petroleum Corporation Ltd. Jindal Steel & Power Limited Unitech LTD Bharti Airtel Limited
POWERGRID
REFINERIES
BPCL
EQ
INE029A01011
STEEL AND POWER CEMENT
JINDALSTEEL UNITECH BHARTIARTL
EQ EQ EQ EQ EQ EQ EQ EQ
INE749A01030 INE694A01020 INE397D01024 INE079A01024
Ambuja cement Asian Paints Limited
CEMENT PAINT
AMBUJACEM ASIANPAINT

INE021A01018 INE238A01026 INE271C01023 INE208A01029
Axis bank DLF LTD Ashok Leyland
BANK CONSTRUCTION TRUCK
AXISBANK DLF ASHOKLEY
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Table No 4.2
CALCULATION OF BETA, STOCK RETURN AND VARIANCE ON THE INDEX

Security ACC Airtel Ambuja cement Ashok leyland Asain paints Axis bank Bajaj automobile Bharath petrolium Cipla DL F GAIL HDFC FINANCE HDFC BANK HERO ITC ICICI Jindel Steel M&M Maruthi suzki ONGC Power corporation Mean return 9.127457 12.794072 Excess return 1.127457 4.794072 Beta 0.83824705 0.85932947 Systematic 1.9095599 2.0068209 Variance 12.8895 5.62837 Unsystematic 10.979912 3.6215539 EReturn to Beta 1.345017552 5.578852046
8.557377
0.557377
0.78910677
1.6922353
5.13163
3.4393988
0.706339141
8.205128 62.5825 12.496909
0.205128 54.5825 4.496909
1.05686474 0.66571817 0.65897328
3.0354846 1.204398 1.1801163
9.28395 6.40431 4.77773
6.2484632 5.1999072 3.5976183
0.194091061 81.99040165 6.824114274
40.079064
32.079064
0.56071826
0.8544342
4.12908
3.2746475
57.210664
3.261688 17.230392 13.880052 4.809069
-4.738312 9.230392 5.880052 -3.190931
0.88541513 0.62681964 0.89411309 0.93223687
2.1305076 1.0677618 2.1725717 2.3617926
6.15566 4.42146 5.37279 6.26334
4.0251507 3.3537022 3.2002195 3.9015435
-5.35151462 14.72575431 6.576407432 -3.42287579
14.049333 11.253846 2.326647 11.210287 0.27924 109.97843 5.71044 9.805746 13.92034
6.049333 3.253846 -5.673353 3.210287 -7.72076 101.97843 -2.28956 1.805746 5.92034
0.88265078 0.86202995 0.57493511 0.79922971 0.77557656 0.80434166 1.05597228 0.8492515 0.91507774
2.1172251 2.0194538 0.8983113 1.735931 1.6347019 1.7582083 3.0303602 1.9600261 2.2756486
5.88243 5.14963 4.31893 168.472 4.01327 4.54513 9.59052 8.36737 5.27775
3.7652056 3.1301721 3.4206151 166.7358 2.3785677 2.7869262 6.5601557 6.4073419 3.0021009
6.853597303 3.774632191 -9.86781443 4.016726299 -9.95486509 126.7849666 -2.16820085 2.126279434 6.469767236
0.133206
-7.866794
0.90976881
2.2493203
8.49422
6.2448973
-8.64702538
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punjab bank Ranbaxy Relince capital SBI Sun pharmacitical Tata motors TCS Unitech L T D Wiprow 4.37691 0.05694 -3.62309 -7.94306 0.92260715 1.04926146 2.3132514 2.991966 5.33702 6.78366 3.0237669 3.7916891 -3.9270127 -7.57014364
16.5255 4.758064
8.5255 -3.241936
0.91634519 0.69797932
2.2819568 1.3239583
20.4853 5.14347
18.203353 3.8195099
9.30380833 -4.64474506
6.441225 0.23294 16.39145 18.33562 0.351776
-1.558775 -7.76706 8.39145 10.33562 -7.648224
1.29555784 1.06949787 1.46849392 0.87861215 0.69784953
4.561449 3.108487 5.8604844 2.0978944 1.323466
9.77002 5.37278 11.2101 5.70787 53.6606
5.2085727 2.2642938 5.3496242 3.6099783 52.337178
-1.20316898 -7.26234266 5.714323956 11.76357507 -10.9597037
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Table No 4.3 Ranking of the security
Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Security Jindel LTD Asain paints Bajaj automobile Cipla Unitech Relince capital HDFC (finance) AXIS bank DLF ltd ONGC ltd TCS Airtel ITC HDFC( bank) Maruthi suzuki ACC Ambuja cement Ashok leyland Sun pharmacitical M&M GAIL Punajab national bank Excess return to beta 126.7849666 81.990040 57.210664 14.75575431 11.76357507 9.30380833 6.853597303 6.824114274 6.576407432 6.469767236 5.714323956 5.578852046 4.016726299 3.774632191 2.126279434 1.345017552 0.706339141 0.194091061 -1.203168978 -2.168200849 -3.422875786 -3.9270127
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23 24 25 26 27 28 29 30 SBI Bharath petroleum Ranbaxy Tata motors Power corporation Hero ICICI Wipro -4.64474506 -5.351514622 -7.570143638 -7.262342659 -8.647025383 -9.867814433 -9.954865088 -10.95970367
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Table No 4.3 Establishing cut off rate
Security ER*Bet /Unsy ER*Bet/ Unsy +ER* Bet/ Unsy /SD nifty unsy /unsy)/SD nifty 0.000974 0.022634 ER*Bet/ Unsy +ER* Bet/Unsy) Beta) 2 /Unsy (Beta)2 /Unsy +(beta)2/ ((beta)2/un sy+ (beta)2 1+((beta)2 /unsy +(beta)2/ unsy) /SD nifty 1.983439 3.124528 349565.2 2451.884 Ci
ACC Airtel Ambuja cement Ashok leyland Asain paints Axis bank Bajaj automobile Bharath petrolium Cipla DL F GAIL HDFC FINANCE HDFC BANK HERO ITC ICICI Jindel Steel M&M Maruthi suzki ONGC Power corporation
0.086074 0.267525
1.190083311 1.314401528
285.9534 42.22084
118.9205 15.50779
0.05164539 0.112540369
0.258674 0.190698 0.144343 0.206516
0.934614049 3.00723152 0.473424643 0.454527805
33.57092 147.7796 53.43764 27.30198
18.88452 19.2903 70.34233 37.81609
0.146380606 0.045106513 0.164800273 0.225451497
0.019571 0.010546 0.003475 0.009343
1.651589 12.71375 0.414656 0.416351
1603.186 42139.92 7279.65 1328.148
0.193055
0.238269263
18.27477
56.74793
0.360303016
0.00684
0.127667
636.5529
0.248007 0.210726 0.315002 0.269395
1.481415801 0.372099942 1.540490567 1.820515238
52.88017 22.40384 37.05624 54.91079
16.72552 39.85025 11.16145 13.42295
0.096926468 0.269252332 0.108899502 0.085931522
0.018882 0.009511 0.035588 0.024273
3.790525 0.291218 4.456007 5.707312
4148.887 876.471 1604.061 4118.474
0.264302 0.310495 0.189502 0.005404 0.367628 0.325398 0.181484 0.149437 0.343663
1.463001792 1.331001799 0.263368938 0.983503032 0.872143439 1.008907769 2.997086639 1.253818038 1.690134206
47.12199 33.49311 20.47331 54114.89 17.84546 24.55851 160.1393 109.7469 34.94791
15.13912 12.11059 56.09388 28561.45 10.94526 12.55512 20.99215 42.75946 9.374603
0.102064833 0.122233535 0.327640281 0.004346508 0.193759538 0.159068028 0.043738487 0.077508485 0.105839069
0.0223 0.033533 0.006625 2.67E-07 0.048827 0.036329 0.009231 0.00464 0.045167
3.788514 3.380978 0.152329 1.222863 1.654756 2.063876 12.4358 2.417373 5.487921
3091.419 1329.437 813.9024 1.99E+11 318.7551 682.0241 51995.79 29657.67 1307.738
0.16425
1.651252158
116.3239
32.12442
0.066531191
0.006336
4.07656
30313.98
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punjab bank Ranbaxy Relince capital SBI Sun pharmacitical Tata motors TCS Unitech L T D Wiprow 0.344008 0.311997 0.056755 0.206032 1.746451335 2.921622595 1.699517488 0.572083529 35.88831 65.05331 823.6491 33.05183 9.240395 8.803844 219.416 34.34031 0.102962347 0.062629589 0.027192556 0.186667879 0.045495 0.03808 0.000318 0.009691 5.835076 14.55444 3.547181 0.631429 1377.68 4991.127 4398328 1951.043
0.280439 0.532534 0.309492 0.274405 0.015033
6.790729732 3.153616773 11.20928305 1.436408757 0.571658113
158.9133 31.36181 212.2729 43.63805 4724.079
7.493726 3.857652 5.350018 14.34501 4912.808
0.028523422 0.076111765 0.019348916 0.106155396 0.017899105
0.032567 0.145527 0.044414 0.024547 4.94E-06
66.76562 22.06502 179.2958 3.713031 0.480127
33135.48 679.6194 53573.6 2553.576 5.46E+08
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Table No 4.5 ARRIVING AT OPTIMAL PORTFOLIO
Security CI Zi Rank
-26686.99312 ACC 349565.1642
-15739.80822
-581.4764606 Airtel 2451.88354
-342.9508875
-367.4937956 Ambuja cement 1603.186319
-216.7453575
-7127.36318 Ashok leyland 42139.91844
-4203.670644
-931.7603839 Asain paints 7279.649568
-549.5459785
-242.9625052 Axis bank 1328.147635
-143.2976439
CF Bajaj automobile 636.5529496
-108.6527362
-64.08264965
{Zi= Bharath petrolium 4148.887215
-36046.70218
Cipla
876.4710022
DL F
1604.06116
GAIL
4118.473748
H D F C FINANCE
3091.419182
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HDFC BANK 1329.436596
HERO
813.9024274
ITC
1.99389E+11
ICICI
318.7550705
Jindel Steel
682.0241039
M&M
51995.78612
Maruthi suzki
29657.66853
ONGC
1307.737677
Power corporation
30313.9801
punjab bank
1377.680179
Ranbaxy
4991.127176
Relince capital
4398327.702
SBI
1951.043001
Sun pharmacitical
33135.48293
Tata motors
679.6194026
TCS
53573.60359
Unitech L T D
2553.576103
Wiprow
546252822.5
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CHAPTER 5 FINDINGS SUGGESTIONSV AND CONCLUSION FINDINGS
BETA OF SECURITIES ACC Airtel Ambuja cement Ashok Leyland Asain paints Axis bank Bajaj automobile 0.83824705 0.85932947 0.78910677 1.05686474 0.66571817 0.65897328 0.56071826
RETURN OF THE SECURITIES ACC Airtel Ambuja cement Ashok Leyland Asain paints Axis bank Bajaj automobile 9.127457 12.794072 8.557377 8.205128 62.5825 12.496909 40.079064
EXCESS RETURN TO THE BETA ACC Airtel Ambuja cement Ashok Leyland Asain paints Axis bank Bajaj automobile 1.345017552 5.578852046 0.706339141 0.194091061 81.99040165 6.824114274 57.210664
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RANKING OF THE SECURITIES Jindel LTD Asain paints Bajaj automobile Cipla Unitech Relince capital HDFC (finance)
CUT OFF RATE Jindel LTD Asain paints Bajaj automobile Cipla Unitech Relince capital HDFC (finance) 682.0241 7279.65 636.5529 876.471 2553.576 43983.28 3091.419
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PORTFOLIO CUNSTRECTION SUGGESTIONS

The investor should include these securities in his portfolio
Jindel LTD Asain paints Bajaj automobile Cipla Unitech Relince capital HDFC (finance)
CONCLUSION
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It is thus concluded that the investors can invest after a good analysis of each stocks in the market especially with reference to the risk involved in the respective stocks. The investors in order to earn the maximum return with a minimum risk involved, the optimal portfolio can be easily constructed and based on which one invested would be most profitable as well as safe. The market has to be thoroughly studied and the portfolio management has to be done efficiently with regular evaluation and revision of the portfolio to have the best returns of the investment made. In view, portfolio construction should have been on equity. Suppose IIFL Capital and Commodities invest into equities definitely they can expect good return as well as they could provide more return for their client. Equity shares and bonds have given a new direction to the flow of personal saving and enable small and medium investors in remote rural and semi urban areas to reap the benefits if the stock market investment. Equity shares are thus playing a very important development role in allocation of scares resources in the emerging economy.
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PORTFOLIO CUNSTRECTION

CHAPTER 1 INTRODUCTION Portfolio construction

Steps to Stock selection process Choosing Investments

Interactive Charting Tool

Growth vs. Value

3. Applying portfolio strategy.

Statement of the problem:

Rate of Return = Todays price-yesterdays price *100 Yesterdays price

= Where, X = Index return. Y= Stock return. N = Number of Days.

Internal Business Risk

MINIMISING RISK EXPOSURE

Protection against Inflation

Acquisition of Agri Marketing Services Limited (Agri)

Cutting edge technology High service standards

Skill development by investments in training Empowerment and conducive

RISK AND REWARD

MEAN AND VARIANCE

Portfolio return is the proportion-weighted combination of the constituent assets' returns.

For a two asset portfolio:

For a three asset portfolio, the variance is:

CAPITAL ALLOCATION LINE

offer a return superior to those on the frontier.

THE MARKET PORTFOLIO

Capital market line

SYSTEMATIC RISK AND SPECIFIC RISK

PORTFOLIO CUNSTRECTION CAPITAL ASSET PRICING MODEL

SECURITY MARKET LINE

is the expected return of the market

RISK AND DIVERSIFICATION

THE EFFICIENT FRONTIER

THE MARKET PORTFOLIO

THE SHARPE INDEX MODEL

CONSTRUCTION OF THE OPTIMAL PORTFOLIO

OPTIMUM PORTFOLIO WITH SHORT SALES

Bajaj Auto Ltd.

Hero Honda Motors Ltd.

Mahindra & Mahindra Ltd.

MARUTI TATA MOTORS HDFCBANK ICICIBANK PNB SBIN

INE155A01014 INE040A01018 INE090A01013 INE160A01014 INE062A01012

ACC Ltd. I T C Ltd. Tata Consultancy Services Ltd.

INE012A01025 INE154A01025 INE467B01029

Wipro Ltd. Housing Development Finance Corporation Ltd.

FINANCE - HOUSING GAS

OIL PHARMACEUTICALS PHARMACEUTICALS

ONGC CIPLA RANBAXY

INE213A01011 INE059A01026 INE015A01028

PHARMACEUTICALS INVESTMENT POWER

STEEL AND POWER CEMENT

JINDALSTEEL UNITECH BHARTIARTL

INE749A01030 INE694A01020 INE397D01024 INE079A01024

Ambuja cement Asian Paints Limited

INE021A01018 INE238A01026 INE271C01023 INE208A01029

Axis bank DLF LTD Ashok Leyland

BANK CONSTRUCTION TRUCK

AXISBANK DLF ASHOKLEY

CALCULATION OF BETA, STOCK RETURN AND VARIANCE ON THE INDEX

8.205128 62.5825 12.496909

0.205128 54.5825 4.496909

1.05686474 0.66571817 0.65897328

3.0354846 1.204398 1.1801163

9.28395 6.40431 4.77773

6.2484632 5.1999072 3.5976183

0.194091061 81.99040165 6.824114274