Dps Security Analysis and Portfolio Management

T.Y.B.F.
SECURITY ANALYSIS & PORTFOLIO MANAGEMENT
SECURITY ANALYSIS: INTRODUCTION

MEANING OF SECURITY ANALYSIS
A security means a document that gives its owner a specific claim of ownership of a particular financial asset. Financial market provides facilities for buying and selling of financial claims and services. Thus, securities are the financial instruments which are bought and sold in the financial market for investment. The important financial instruments are shares, debentures, bonds etc. Other financial instruments are also known as securities such as treasury bills, mutual fund units, fixed deposits, insurance policies, post office savings etc. These securities are used by investors for their investment. Some of these securities are transferable while some of them are not transferable. Security analysis is about valuing the assets, debt, warrants, and equity of companies from the perspective of outside investors using publicly available information. The security analyst must have a thorough understanding of financial statements, which are an important source of this information. As such, the ability to value equity securities requires cross-disciplinary knowledge in both finance and financial accounting. While there is much overlap between the analytical tools used in security analysis and those used in corporate finance, security analysis tends to take the perspective of potential investors, whereas corporate finance tends to take an inside perspective such as that of a corporate financial manager.
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An updated look at security analysis and how to use it during tough financial times. Due to the current economic climate, individual investors are starting to take much more time and effort to really understand their investments. They've been investing on their own in record numbers, but many have no idea how to handle the current financial crisis.
HOW DO YOU USE SECURITY ANALYSIS

Security analysis is the analysis of tradable financial instruments called securities. These can be classified into debt securities, equities, or some hybrid of the two. More broadly, futures contracts and tradable credit derivatives are sometimes included. Security analysis is typically divided into fundamental analysis, which relies upon the examination of fundamental business factors such as financial statements, and technical analysis, which focuses upon price trends and momentum. Quantitative analysis may use indicators from both areas. The main goal of security analysis is to calculate a security's real value from analytical data. Just because a company's stock is rising or seems to be a great bargain, doesn't make it so. Analysts go behind the scenes to see how good a company really is relative to other companies. Security analysts go behind the scenes to see how good a company really is relative to other companies.
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Security analysis is also used to predict a security's future price movements. Knowledge of expected returns and true company value gives analysts a sound basis upon which to make their predictions. Many investments succeed or fail depending on whether a security is over- or undervalued. Investors can use security analysis to determine whether a security's market price is over or under its actual value. Investors buy undervalued securities at low prices and hold onto them in the hopes that someday the market will realize the company's value and increase the security's prices.
FUNCTIONS OF SECURITY ANALYSIS:

1. Descriptive Function: Limits itself to marshaling the important facts relating to an issue and presenting them in a coherent, readily intelligible manner.
The least imaginative type is what is presented by various securities manuals (Value line). Here the material is accepted in the form supplied by the company.
A more penetrating descriptive analysis is by various kinds of adjustments in order to bring the true operating results in the period covered and particularly in order to place the data of a number of companies on a fairly comparable plane. (LIFO vs. FIFO, non-recurring gains/losses, nonconsolidated subsidiaries, reserves)
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On a still higher level would include consideration of the changes in the companys position over a long period of years, also a detailed comparison with others in the same field, also projects of earning power on various assumptions as to future conditions.
2. The Selective Function: The analyst must be ready to pass judgment on the merits of securities and is expected to advice others on their sale, purchase, retention or exchange.
Graham says that the laymen belief that analyst should be able to give advice of this sort about any stock or bond issue at any time is incorrect. There are times and situations that are propitious for a sound analytical judgment; others which is poorly qualified to handle; many others for which his study and his conclusions may be better than nothing, but still of questionable value to the investor.
A proper analysis of common stock will take into account all the important points in the companys past record and present position, and it will apply informed judgment to the projection of future results.
The approach Graham suggests to select common stocks is to value the stock independently of its market price and to purchase it when it is available at a substantial discount to this value. This independent value is called Intrinsic Value or Central Value.
Intrinsic value is defined as that value which is justified by the facts e.g., assets, earnings, dividends, definite prospects.In the usual case the most important single factor determining value is now held to be the indicated average future earning power. IV would then be found by first estimating
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this earnings power, and then multiplying that estimate by an appropriate capitalization factor.
The multiplier takes into account a large number of valuation elements, such as the expected stability of earnings, the expected growth factor, the expected dividend policy all of which may be comprehended in the quality of the company and perhaps the assets behind the shares.
Graham says that experience affirms that the price and the independently ascertained value do tend to converge as time goes on.
The weakness of this method is lack of precision and un-dependable nature of any calculation of economic future.
A valuation may be very skillfully done in the light of all pertinent data and the soundest judgment of future probabilities; yet the market may delay adjusting itself to the indicated value for so long a period that new conditions may supervene and bring with them a new value. Thus even though the price ultimately converges with that new value, the old valuation may have proved undependable.
These limitations should be acknowledged by the analyst and must use good judgment in distinguishing between securities and situations that are better suited and those that are worse suited to value analysis. Its working assumption is that the past record affords at least a rough guide to the future. The more questionable this assumption, the less valuable is the analysis. Hence this technique is more useful when applied to a business of inherently stable character than to one subject to wide variations and more useful when carried on under fairly normal general conditions than in times of great uncertainty and radical change.
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There are three general areas in which value analysis will operate successfully
Inherently stable securities conservatively capitalized public utilities and strongly entrenched industrials. Cases of extreme disparity between price and indicated value. Here the analyst relies upon a large initial margin of safety to absorb and offset the uncertainties of the future. Here diversification is especially valuable. Comparative analysis to determine if one if preferable to the other.
There are two types of issues that do not lend themselves satisfactorily to the intrinsic value approach.
Those that are essentially speculative in character, meaning thereby that their apparent value is almost entirely dependent upon the vicissitudes of the future. Ex. Shares of high cost or marginal producers and those with speculative capital structure. The other type is the common stock of a strong enterprise that is considered to have unusually favorable prospects of continued growth. The difficulty for the analyst here is to place a sound arithmetical valuation on an optimistic outlook. 3. The Critical Function: The analyst must be highly critical of accounting methods. He must also concern himself with all corporate policies affecting the security owner, for the value may be largely dependent upon the acts of the management. In this category are included questions of capitalization setup, of dividend and expansion policies, of managerial competence and compensation, and even of continuing or liquidating an unprofitable business.
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INVESTMENT
MEANING OF INVESTMENT
The concept of investment has many meanings. Investment is the employment of funds with the aim of getting return on it. It is the commitment of funds which have been saved from current consumption with the hope that some benefits will receive in future. Thus it is a reward for waiting for money. Savings of the people are invested in assets depending on their risk and return. There are two concepts of investments: 1: Economic investment: The concept of economic investment means additions to the capital stock of the society. The capital stock of the society is the goods that are used in the production of other goods. The term investment implies the formation of new and productive capital in the form of new construction and producers durable instrument such as plant and machinery. Inventories are also included in this concept. 2: Financial investment: This is an allocation of monetary resources to assets that are expected to yield some gain or return over a period of time. It is a general or extended sense of term. It means an exchange of financial claims such as shares and bonds. Real estate, etc. Financial investment involves contract written on pieces of paper such as shares and debentures. The economic and financial concepts of investment are related to each other because investment is a part of the savings of individuals which flow into the capital market either directly or through institutions.
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INVESTMENT OBJECTIVES:
Investing is a wide spread practice and many have made their fortunes in the process. The starting point in this process is to determine the characteristics of the various investments and then matching them with individual needs and preferences. All personal investing is designed in order to achieve certain objectives. These objectives may be tangible or intangible objectives. These objectives can be classified as financial or personal objectives. Financial objectives are safety, profitability and liquidity. Personal objectives may be related to personal characteristics of individuals such as family commitments, status, consumption and provision for retirement etc. The objectives can be classified on the basis of the investors approach as follows: 1: Short term high priority objectives: Investors have a high priority towards achieving certain objectives in a short term time. For example a young couple will give a high priority to buy a house. Thus, investors will go for high priority objectives and invest their money accordingly. 2. Long term high priority objectives: Some investors look forward and invest on the basis of objectives of long term needs. They want to achieve financial independence in long period. For example, investing for retirement period or education of a child etc. Investors usually prefer a diversified approach while selecting different types of investments. 3. Low priority objectives: These objectives have low priority in investing. These objectives are not painful. After investing in high priority assets, investors can
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invest in these low priority assets. For example, provision for tour, domestic appliances.etc 4. Money making objectives: Investors put their surplus money in this kind of investment. Their objective is to maximize wealth. Usually the investors invest in shares of companies which provide capital appreciation apart from regular income from dividend. The basic objective of investment is to maximize yield and minimize risk. The other objectives are: (a) Stability of Income: An investor considers stability of income from his investment. He also considers the stability of purchasing power of income. (b) Capital Growth: Capital appreciation has become an important investment principle. Investors seek growth stocks which provide a very large capital appreciation by way of rights, bonus and appreciation in the market price of a share. (c) Liquidity: An investment is a liquid asset. It can be converted into cash with the help of stock exchange. Investment should be liquid as well as marketable. The portfolio should contain a planned proportion of high grade and readily saleable investment. (d) Safety: Safety means protection for investment against loss under reasonable variations.
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INVESTMENT ALTERNATIVES:
Wide varieties of investment avenues are now available in India. An investor can himself select the best avenue after studying the merits and demerits of different avenues. Even financial advertising, newspaper supplements on financial matters and investment journals offer guidance to investors in the selection of suitable investment avenues. The following indicates alternative avenues for investment: Various investment avenues: 1. National (postal) savings schemes 2. Real estate 3. PF & PPF 4. UTI mutual funds 5. GOI savings bonds 6. Shares and debentures 7. Gold and silver 8. Money market securities 9. LIC schemes 10. HDFC schemes 11. Public deposits 12. Bank deposits
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Investment avenues are the outlets of funds. There are variety of investment avenues or alternatives. Investors are free to select any one or more alternative avenues depending upon their needs. There are some avenues where tax benefits are available. Such schemes are called tax savings schemes of investment. The tax liability reduces when investment is made in such schemes. The schemes are decided by the government and announced along with the annual budget.
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BASIC CONCEPT
1. Introduction: Security Analysis stands for the proposition that a well-disciplined investor can determine a rough value for a company from all of its financial statements, make purchases when the market inevitably under-prices some of them, earn a satisfactory return, and never be in real danger of permanent loss.
2. Approach of Security Analysis: There are basically two main approaches of security analysis- Fundamental analysis and Technical analysis.
3. Fundamental Analysis: Fundamental analysis is based on the assumption that the share prices depend upon the future dividends expected by the shareholders. The present value of the future dividends can be calculated by discounting the cash flows at an appropriate discount rate and is known as the 'intrinsic value of the share'. The intrinsic value of a share, according to a fundamental analyst, depicts the true value of a share. A share that is priced below the intrinsic value must be bought, while a share quoted above the intrinsic value must be sold.
4. Models of Fundamental Analysis (a) Dividend Growth Model P(0) = D( 0 )( 1 + g ) / (k - g ) Where, P(0) = Price of Share D(0) = Current Dividend g= growth rate
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k= cost of equity
(b) Dividend Growth Model and the PE Multiple
P(0)= b E( 0 ) (1 + g) / (k - g ) Where, b = Dividend Pay-out fraction or ratio E(0)= Current EPS
5. Types of Fundamental Analysis: There are three types of fundamental analysisEconomic analysis, Industry analysis and Company analysis.
6. Economic Analysis: Macro- economic factors e. g. historical performance of the economy in the past/ present and expectations in future, growth of different sectors of the economy in future with signs of stagnation/degradation at present to be assessed while analyzing the overall economy. Trends in peoples income and expenditure reflect the growth of a particular industry/company in future. Consumption affects corporate profits, dividends and share prices in the market.
7.Factors Affecting Economic Analysis: Some of the economy wide factors are as under: (a) Growth Rates of National Income and Related Measures (b) Growth Rates of Industrial Sector (c) Inflation (d) Monsoon
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8.Techniques Used For Economic Analysis:
(i) Anticipatory Surveys: They help investors to form an opinion about the future state of the economy.
(ii) Barometer/Indicator Approach: Various indicators are used to find out how the economy shall perform in the future.
(iii) Economic Model Building Approach: In this approach, a precise and clear relationship between dependent and independent variables is determined.
9.Industry Analysis: An assessment regarding all the conditions and factors relating to demand of the particular product, cost structure of the industry and other economic and government constraints have to be done.
10. Factors Affecting Industry Analysis: The following factors may particularly be kept in mind while assessing the factors relating to an industry : (a) Product life cycle (b) Demand supply gap (c) Barriers to entry (d)Government attitude (e)State of competition in the Industry (f)Cost conditions and profitability (g)Technology and research
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11. Techniques Used For Industry Analysis (a) Regression Analysis: Investor diagnoses the factors determining the demand for output of the industry through product demand analysis. (b) Input Output Analysis: It reflects the flow of goods and services through the economy, intermediate steps in production process as goods proceed from raw material stage through final consumption.
12. Company Analysis: Economic and industry framework provides the investor with proper background against which shares of a particular company are purchased. This requires careful examination of the company's quantitative and qualitative fundamentals.
13. Techniques Used in Company Analysis Correlation & Regression Analysis: Simple regression is used when inter relationship covers two variables. For more than two variables, multiple regression analysis is followed. Trend Analysis: The relationship of one variable is tested over time using Regression analysis. It gives an insight to the historical behavior of the variable. Decision Tree Analysis: In decision tree analysis, the decision is taken sequentially with probabilities attached to each sequence. To obtain the probability of final outcome, various sequential decisions are given along with probabilities,then probabilities of each sequence is to be multiplied and then summed up.
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14. Technical Analysis: Technical analysis is a method of share price movements based on a study of price graphs or charts on the assumption that share price trends are repetitive, that since investor psychology follows a certain pattern, what is seen to have happened before is likely to be repeated.
15. Types of Charts (i) Bar Chart : In a bar chart, a vertical line (bar) represents the lowest to the highest pirice, with a short horizontal line protruding from the bar representing the closing price for the period.
(ii) Line Chart: In a line chart, lines are used to connect successive days prices. The closing price for each period is plotted as a point. These points are joined by a line to form the chart. The period may be a day, a week or a month. (iii) Point and Figure Chart: Point and Figure charts are more complex than line or bar charts. They are used to detect reversals in a trend.
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ANALYSIS
1. Investment Analysis:
An investor has to analyze the securities available for investment. Investment analysis means to make to comparative study of the type of industry, kind of security, fixed or variable securities. This helps to form beliefs regarding future behavior of prices and stocks, the expected return and risk associated with it. Investors need to definite ideas regarding a number of features such as liquidity, safety, income stability, capital appreciation, tax incentives and legality. All investment decisions are to be made on a scientific analysis. The securities listed on stock exchange are equities, preference shares, bonds and debentures. These securities are traded on the stock exchange. It gives the price for each security. Trading provides liquidity to these securities. Thus investment is promoted and savings flow into investment. The market reflects the economic and financial developments in the country. It also protects the interest of the investors and ensures safety and liquidity to their investment. The market is influenced by the flow of information and money. These flows and other environmental factors determine the prices of securities in stock market.
2. Fundamental Analysis:
Fundamental analysis is a method of finding out the future price of security which an investor wants to buy. The objective of fundamental analysis is to appraise the intrinsic value of a security. There is an intrinsic value for each security and it can be determined by making an analysis of the fundamental factors relating to
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the company, industry and economy. At any given point of time, the current market price of a security can be different from its intrinsic value due to the temporary market conditions. The fundamental analysis can determine the intrinsic value of a security by discounting the prospective dividend using the rate of return required by the investor as the discount rate. The prospective dividend or interest stream depends upon the economic and industrial environment in the country. The fundamental analysis is an attempt to estimate the real worth of a security by considering the earning potentials of a company. The earnings potential of a company depends on investment environmental factors such as growth of national economy, monetary policies, corporate laws, and taxation, social and political environment in the country. The real worth of security depends to a large extent, on the companys competitiveness, quality of management, operational efficiency, profitability, and capital structure and dividend policy. Thus the intrinsic value of a security is closely associated with the economic environment in
the country.
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3. Economic Analysis:
It is very important to assess the state of the economy for the purpose of making investments. If a recession is likely, or undergoing, the stock market is affected at certain times. On the other hand, if a strong economic expansion is undergoing, the stock market is also affected at certain times. This status of an economic activity has a major impact on overall stock market. Therefore, it is very important for the investors to assess the state of the economy and its impact on the stock market. The current state of national economy should be determined for the purpose of making investments. The analyst can collect the data or required information from different sources. Economic survey published by the government before budget every year, will be very much useful in this respect. Investment climate can be studied from GNP and its components. GNP stands from Gross National Product. It is the broadest measure of economic activity. It represents the aggregate amount of goods and services produced in the economy for a period of time. The analyst has also to study the Gross Domestic Product (GDP), Gross Domestic Savings and Gross Domestic Capital formation. These factors must be favorable at the time of making investments. The investor has to make analysis of the economy in order to determine his investment strategy. The important thing is to identify the trends in the economy and adjust his investments portfolio accordingly. A investor has to make his own economic forecasts. If the economy is expected to increase in real terms next year, the stock
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market should be expected to improve accordingly. Inflation and price increase are also important. A real growth of GNP without inflation is desirable. A deficit in trade and balance of payments position of the country depreciate the currency in foreign exchange markets and it will have negative impact on the economy and the stock market. An examination of interest rates, corporate profits, employment generation, housing, agriculture. And other economic variables will give investors an easy reference in interpreting and assessing the direction of the economy and stock market.
4. Industry Analysis:
Industry analysis is the study of industries which are on the upswing or growing. The ideal investment is the investment in the growing industry. There are certain industries which have been growing in India. The recent examples are of entertainment and computer software. The petrochemicals, bio-technology and capital goods industries are also growing. Investment in these industries will definitely gain in future. The investor should know the industry classification used in the economy. It is also necessary to know the characteristics, problems and practices in different in industries. There is also need to study those present and future developments, operating features, seasonal variations and competitiveness in order to establish the proper perspective. A careful analysis of growth of industries will help to select few industries for investment.
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In recent times growth of industries has been affected due to technological changes, competitive pressure, population, etc. The competitive position of industries is also affected due to high labor costs, change in social habits, government regulations and automation. An investor should select few industries that are in the expansion stage. Investment should not be made in the industries which are in the pioneering stage. Similarly industries that are in the stagnation stage or declining in economic importance should be avoided. Investors should select such industries which have developed a strong competition position. It is difficult to identify a good industry for investment.
5. Company Analysis:
The industry analysis helps to select few industries for investment in securities. There are many companies in an industry. For example, if an investor wants to invest in computer software industry, then he has to select few companies from that industry. There are thousands of listed companies from computer software industry. Therefore an investor has to select few companies for investment. A company analysis is a study of the variables which influence the futures price of a companys share. It is an assessment of companys competitive position, earning capacity and profitability. It is a method of finding out the intrinsic value of a companys share. This requires internal as well as external information of the company. Internal information consists of data and events of the company which is available from its financial statements. External information consists of
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demand, supply, from industry associations, chambers of commerce, government departments and stock exchange bulletins. The basic financial statements which are used as tools of company analysis are the income statement, the balance sheet and the statement of changes in financial position. While making company analysis, investors should carefully judge that these statements are correct, complete, consistent and comparable. The accuracy of the financial statements can be identified from the report of the auditors.
6. Ratio Analysis:
Ratio analysis is the systematic process of determining and interpreting the numerical relationship of various pairs of items derived from the financial statements of a business. Absolute figures of any aspect of business may not convey any tangible meaning. Hence it is one of the most important tools of financial statement analysis. It is the principal technique used in judging the condition disclosed by the financial statements. It is a process of computing, deterring, and presenting the relationship between items or groups in the financial conditions, efficiency and profitability of a firm. A ratio is simply a number expressed in terms of another. It is a statistical yardstick that provides a measure of the relationship between figures. The relationship can be expressed as a percent or as a quotient. An accounting ratio expresses the relationship between two figures or group of items in the financial statements. Ratio analysis is a useful tool of financial appraisal at macro
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level as well as micro levels. However their use depends on the user and the purposes. Certain ratios are useful at, micro level while others are useful at macro level.
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APPROACHES
APPROACHES TO SECURITY ANALYSIS
An investor is surrounded by many factors in his considerations to make investment. The investor has to try and form a strategy for making investment decisions. In other words he has to follow certain approach in making investment decision. Different investors may follow different approaches for different investments. Basically there are four approaches to investment decision making. These are as follows: 1. Fundamental approach: The basic talents of fundamental approach are as follows: (a) There is an intrinsic value for each stock and this value can be determined by a penetrating analysis of the fundamental; factors relating to the company, industry and economy. (b) At any given point of time due to temporary market disequilibrium, the current market price of a stock can be at variance with its intrinsic value. Therefore, superior returns can be earned by buying undervalued securities and selling overvalued securities. This approach focuses on certain basic factors relating to the economy and seeks to determine the optimum price of a security. The Fundamental approach suggests that every Stock has an intrinsic value which should be equal to the present value of the future Stream of income from that stock discounted at an appropriate risk related rate of Interest. Estimate of real
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worth of a stock is made by considering the earnings potential of firm which depends upon investment environment and factors relating to specific industry, competitiveness, quality of management. Operational efficiency, profitability, capital structure and dividend policy. Thus, security analysis is done to evaluate the current market value of particular security with the intrinsic or theoretical value. Decisions about buying and selling an individual security depend upon the conferred relative value. Sinc6 this approach is based on relevant facts, it gives true estimate of the value of a security and it is widely use in estimation of security prices 2. Technical approach: The technical approach involves plotting the price movement of the stock and drawing inferences from the price movement in the market. Many investors use technical approach because it gives the following advantages: (a) Objectivity: Once the technician has determined the particular rule to use in the technical strategy, making the actual investment decision becomes easy. (b) It is easy to learn and requires no specialized knowledge. (c) They have ready access to all the information they need. Thus they are concerned with market timing i.e. the question of when and not with the determination of a right price i.e. the question of what. They usually predict near term price movements. The basic assumption of this approach is that the price of a stock depends on supply and demand in the market place and has little relationship with its intrinsic value. All financial date and market information of a given security is reflected in the market price of a security. Therefore, an
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attempt is made through charts to identify price movement patterns which predict future movement of the security, The main tools used by technical analysis are: (1) The Dow Jones theory which asserts that stock prices demonstrate a pattern over four to five years and these patterns are mirrored by indices of stock prices. The theory employs two Dow Jones Averages - the industrial average and the transportation average. If industrial average is rising, then transport average should also rise. Simultaneous price movement is the maid prediction which may show bullish as well as bearish results (2) Chart Patterns are used along with Dow Jones Theory to predict the market movements. Various types of charts are used for this purpose. 3. Efficient market theory approach: The efficient market theory is based on efficiency of capital market. It believes that market is efficient and the information about individual stocks is available in the market. Thus portfolio analysts feel that market cannot be influenced by a single investor. They feel that there is risk involved in managing a portfolio. Therefore they try to diversify between different risk classes of securities. If they positive towards the market, they establish a portfolio of risk choice that have higher risk and return than the market. The modern portfolio management is based on the random walk model which means that successive price changes are independent.It is based on the assumption that in efficient capital markets prices of traded securities always fully reflect all publicly available information concerning those securities. For market efficiency there are three essential conditions:
(1) All available information is cost free to all market participants,

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(2) No transaction costs, and
(3) All investors similarly view the implications of available information on current prices and distribution of future prices of each security.
It has been empirically proved that stock prices behave randomly under the above conditions. These conditions have been rendered unrealistic in the light of the actual experience because there is not only transaction cost involved but brokers have their own information base made available by processing compute fed date. Moreover, information is not costless and all investors do not take similar views.
Research studies devoted to test the EMT are put into three categories i.e.
(a) The week form theory,
(b) The semi-strong form, and
(c) The strong form.
(a) The Weak Form theory: This theory states that current security prices fully reflect information available in the market regarding historical events of the company Study of the historical sequence of prices, can neither assist the investment analysts or investors to abnormally enhance their investment neither return nor improve their ability to select stocks. It means that knowledge of past patterns of stock prices does not aid investors to make a better choice. Random
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Walk Theory is the offshoot of this test. Random walk Hypothesis: The Hypothesis presupposes that stock prices move randomly. No sure prediction can be made of future movement of stock prices on the basis of given prices at the end of one period. There is no relationship between today's price and tomorrow's price. Price movement is a random. The various statistical tests conducted in U.K. and U.S.A. on stock price have proved that the "extent of dependence between Successive price changes is negligible".
(b) Semi-strong form of Efficient Market Hypothesis: This hypothesis holds that security prices adjust rapidly to all publicly available information such as functional statements and reports and investment advisory reports, etc. All publicly available information, whether good or bad is fully reflected in security prices. The buyers and sellers will raise the price as soon as a favorable price of information is made available to the public; opposite will happen in case of unfavorable piece of information. The reaction is almost instantaneous, thus, printing to the greater efficiency of securities market. lt is to be noted that the semi-strong form of efficient market hypothesis includes that week form of efficient market hypothesis also because internal market information is a part of all publicly available information.
(c) The Strong Form test of the inside information and the Efficiency of the Market: This test is concerned with whether two sets of individuals - one having inside information about the company and the other uninformed could generate random effect in price movements. The strong form holds that the prices reflect
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all information that is known. It contemplates that even the corporate officials cannot, benefit from the inside information of the company.
The market is not only efficient but also perfect. Lt is to be noted that it includes both the weak form and semi-strong form of efficient market hypothesis. The findings are that very few and negligible people are in such a privileged position to have inside information and may make above-average gains but they do not affect the normal functioning of the market.
Efficient Market Hypothesis has put to challenge the fundamental and a technical analyst to the extent that random walk model is valid description of reality and the work of charists is of no real significance is stock price analysis. In practice, it has been observed that markets are not fully efficient in the semi-strong or strong sense. Inefficiencies and imperfections of certain kinds have been observed in the studies conducted so far to test the efficiency of the market. Thus, the scope of earning higher returns exists by using original, unconventional and innovative techniques of analysis. Also, the availability of inside information and its rational interpretation can lead to strategies for deriving superior returns.
4. Psychological Approach: The psychological approach is based on the assumption that the stock prices are guided by emotion, rather than reason. Thus, prices of stocks are believed to be influenced by the psychological mood of the investors. Technical analysis believes that stock market movement is 10 percent
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logical and 90 percent psychological. Therefore, most of their tools are designed to read the psychology of the market. If the stock market is dominated by Institutional or Foreign investors, operators on the wolf pack theory follow the leaders. When major money managers start to buy regardless of the reason, the price of the stock will go up. Similarly, political matters, natural calamities, declaration of war also affect the prices of securities due to different behavior of the investors or operators.
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INVESTMENT VALUATION RATIOS:
This analysis looks at a wide array of ratios that can be used by investors to estimate the attractiveness of a potential or existing investment and get an idea of its valuation. This ratio help the investors to value the firm (returns) in terms of bonus, dividend, Net Profit per share their face values free reserves etc. In short the return given or amount given to the shareholders or investors, shown by this ratio. 1. Dividend per Share or Dividend Yield:
Dividend Yield= Annual Dividend per Share Stock Price per Share
A stock's dividend yield is expressed as an annual percentage and is calculated as the company's annual cash dividend per share divided by the current price of the stock. The dividend yield is found in the stock quotes of dividend-paying companies. Investors should note that stock quotes record the per share dollar amount of a company's latest quarterly declared dividend. This quarterly dollar amount is annualized and compared to the current stock price to generate the per annum dividend yield, which represents an expected return.
2. Net Operating Profit per Share: Net Operating Profit per Share=Net Operating Profit after Tax (NOPAT) Total Share Capital
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It shows the net profit which investors will going to earn on each shares they held in the company 3. Bonus per Share: Bonus given by the company to their investor in the ratio of 1:1 or 1:2 means if it is 1:1 then they give same number of shares which already held by the share holder. The companies give bonus out of their free reserves built out of the genuine profits or share premium collected in cash only. Bonus per share increase the number of share for the investor and it automatically increase their amount and profit out of that company. Investor is consider this news i.e. declaration of bonus as the best news from the company. So, the company which gives more bonuses per share selected first by us and so on. 3.1 Profitability Ratios: 1. Gross Profit Margin The gross profit margin looks at cost of goods sold as a percentage of sales. This ratio looks at how well a company controls the cost of its inventory and the manufacturing of its products and subsequently passes on the costs to its customers. The larger the gross profit margin, the better for the company. The calculation is: Gross Profit/Net Sales Both terms of the equation come from the company's income statement.
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2. Operating Profit Margin Operating profit is also known as EBIT and is found on the company's income statement. EBIT is earnings before interest and taxes. The operating profit margin looks at EBIT as a percentage of sales. The operating profit margin ratio is a measure of overall operating efficiency, incorporating all of the expenses of ordinary, daily business activity. The calculation is: EBIT/Net Sales .Both terms of the equation come from the company's income statement. 3. Net Profit Margin When doing a simple profitability ratio analysis, net profit margin is the most often margin ratio used. The net profit margin shows how much of each sales dollar shows up as net income after all expenses are paid. For example, if the net profit margin is 5% that means that 5 cents of every dollar is profit. The net profit margin measures profitability after consideration of all expenses including taxes, interest, and depreciation. The calculation is: Net Income/Net Sales Both terms of the equation come from the income statement. 4. Return on Assets (also called Return on Investment) The Return on Assets ratio is an important profitability ratio because it measures the efficiency with which the company is managing its investment in assets and using them to generate profit. It measures the amount of profit earned relative to
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the firm's level of investment in total assets. The return on assets ratio is related to the asset management category of financial ratios. The calculation for the return on assets ratio : Net Income/Total Assets .Net Income is taken from the income statement and total assets is taken from the balance sheet. The higher the percentage, the better, because that means the company is doing a good job using its assets to generate sales.
5. Return on Capital Employed (ROCE):
Return on Capital Employed (ROCE) = Net Income Capital Employed
Capital Employed = Average Debt Liabilities + Average Shareholders Equity The return on capital employed (ROCE) ratio, expressed as a percentage, complements the return on equity (ROE) ratio by adding a company's debt liabilities, or funded debt, to equity to reflect a company's total "capital employed". This measure narrows the focus to gain a better understanding of a company's ability to generate returns from its available capital base. By comparing net income to the sum of a company's debt and equity capital, investors can get a clear picture of how the use of leverage impacts a company's profitability. Financial analysts consider the ROCE measurement to be a more comprehensive profitability indicator because it gauges management's ability to generate earnings from a company's total pool of capital.
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3.2 Liquidity and solvency Ratios:
Liquidity ratios attempt to measure a company's ability to pay off its short-term debt obligations. This is done by comparing a company's most liquid assets (or, those that can be easily converted to cash), its short-term liabilities. In general, the greater the coverage of liquid assets to short-term liabilities the better as it is a clear signal that a company can pay its debts that are coming due in the near future and still fund its ongoing operations. On the other hand, a company with a low coverage rate should raise a red flag for investors as it may be a sign that the company will have difficulty meeting running its operations, as well as meeting its obligations. The biggest difference between each ratio is the type of assets used in the calculation. While each ratio includes current assets, the more conservative ratios will exclude some current assets as they arent as easily converted to cash. The ratios that we'll look at are the current, quick and cash ratios and we will also go over the cash conversion cycle, which goes into how the company turns its inventory into cash. 1. Current Ratio: Current Ratio= Current Assets Current Liabilities The current ratio is a popular financial ratio used to test a company's liquidity (also referred to as its current or working capital position) by deriving the proportion of current assets available to cover current liabilities.
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The concept behind this ratio is to ascertain whether a company's short-term assets (cash, cash equivalents, marketable securities, receivables and inventory) are readily available to pay off its short-term liabilities (notes payable, current portion of term debt, payables, accrued expenses and taxes). In theory, the higher the current ratio, the better. 2. Quick ratio: The quick ratio - aka the quick assets ratio or the acid-test ratio - is a liquidity indicator that further refines the current ratio by measuring the amount of the most liquid current assets there are to cover current liabilities. The quick ratio is more conservative than the current ratio because it excludes inventory and other current assets, which are more difficult to turn into cash. Therefore, a higher ratio means a more liquid current position.
3. Debt equity ratio:
Debt Equity Ratio= debt equity ratio shows the relationship between long-term debts and shareholders funds. It is also known as External-Internal equity ratio. Debt Equity Ratio = Debt/Equity Where Debt (long term loans) include Debentures, Mortgage Loan, Bank Loan, Public Deposits, Loan from financial institution etc. Equity (Shareholders Funds) = Share Capital (Equity + Preference) + Reserves and Surplus Fictitious Assets
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This ratio is a measure of owners stock in the business. Proprietors are always keen to have more funds from borrowings because: (i) Their stake in the business is reduced and subsequently their risk too (ii) Interest on loans or borrowings is a deductible expenditure while computing taxable profits. Dividend on shares is not so allowed by Income Tax Authorities. The normally acceptable debt-equity ratio is 2:1. 4. Proprietary ratio: Proprietary Ratio establishes the relationship between proprietors funds and total tangible assets. This ratio is also termed as Net Worth to Total Assets or Equity-Assets Ratio. Proprietary Ratio = Proprietors Funds/Total Assets Where Proprietors Funds = Shareholders Funds = Share Capital (Equity + Preference) + Reserves and Surplus Fictitious Assets Total Assets include only Fixed Assets and Current Assets. Any intangible assets without any market value and fictitious assets are not included. This ratio indicates the general financial position of the business concern. This ratio has a particular importance for the creditors who can ascertain the proportion of shareholders funds in the total assets of the business. Higher the ratio, greater the satisfaction for creditors of all types.
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3.3 Debt coverage Ratios:
It shown the debt recovery every year by the company how much amount of debt is paid to creditors and banks and also received from the debtors are shown with the help of this ratio This ratio also indicates the debt of the company which is levied on the investors or the owner or the shareholder or three of all. Total Debt to Owners fund:
Total Debt to Owners fund= Total Debt Owners Fund
Owners fund = Total Assets - Current Liabilities - Long Term Loans
Total debt includes current liabilities and loans outstanding This ratio indicates the liabilities and outstanding on the share capital or share holders fund the more the ratio the less preference for investment is given by the share holders and portfolio manager. So, we give the preference to the less debt to owners fund ratio having company at prior than the other and so on. 3.4 Management Efficiency ratios: 1. Inventory turnover ratio: Inventory turnover illustrates how well a company manages its inventory level. If inventory turnover is too low, it suggest that a company may be over stocking or over building its inventory or it may be having issues selling products to customers. All else equal, higher inventories are better.
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Inventory turnover = cost of sales/ average inventory 2. Fixed Assets Turnover Ratio: Fixed assets turnover ratio establishes a relationship between net sales and net fixed assets. This ratio indicates how well the fixed assets are being utilized. Fixed Assets Turnover Ratio = Net Sales/Net Fixed Assets In case Net Sales are not given in the question cost of goods sold may also be used in place of net sales. Net fixed assets are considered cost less depreciation. This ratio expresses the number to times the fixed assets are being turned over in a stated period. It measures the efficiency with which fixed assets are employed. A high ratio means a high rate of efficiency of utilization of fixed asset and low ratio means improper use of the assets. 3. Stock Turnover Ratio: Stock turnover ratio is a ratio between cost of goods sold and average stock. This ratio is also known as stock velocity or inventory turnover ratio. Stock Turnover Ratio = Cost of Goods Sold/Average Stock Where Average Stock = [Opening Stock + Closing Stock]/2 Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses Closing Stock Stock is a most important component of working capital. This ratio provides guidelines to the management while framing stock policy. It measures how fast
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the stock is moving through the firm and generating sales. It helps to maintain a proper amount of stock to fulfill the requirements of the concern. A proper inventory turnover makes the business to earn a reasonable margin of profit. 4. Debtors Turnover Ratio: Debtors turnover ratio indicates the relation between net credit sales and average accounts receivables of the year. This ratio is also known as Debtors Velocity. Debtors Turnover Ratio = Net Credit Sales/Average Accounts Receivables Where Average Accounts Receivables = [Opening Debtors and B/R + Closing Debtors and B/R]/2 Credit Sales = Total Sales Cash Sales This ratio indicates the efficiency of the concern to collect the amount due from debtors. It determines the efficiency with which the trade debtors are managed. Higher the ratio, better it is as it proves that the debts are being collected very quickly. 3.5 Cash flow indicators ratio: This section of the financial ratio tutorial looks at cash flow indicators, which focus on the cash being generated in terms of how much is being generated and the safety net that it provides to the company. These ratios can give users another look at the financial health and performance of a company. At this point, we all know that profits are very important for a company. However, through the magic of accounting and non-cash-based transactions, companies
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that appear very profitable can actually be at a financial risk if they are generating little cash from these profits. For example, if a company makes a ton of sales on credit, they will look profitable but haven't actually received cash for the sales, which can hurt their financial health since they have obligations to pay. The ratios in this section use cash flow compared to other company metrics to determine how much cash they are generating from their sales, the amount of cash they are generating free and clear, and the amount of cash they have to cover obligations. We will look at the operating cash flow/sales ratio, free cash flow/operating cash flow ratio and cash flow coverage ratios. 1. Dividend Payout Ratio:
Dividend Payout Ratio= Total Dividend Payment/Net Profit
This ratio shows the yearly dividend paid by the company out of their net profit. With the help of this ratio we can get the idea how much company keep the profit for their own expansion and how much they give it to their shareholders. More the dividend payout it is better for the investors. They get the money physically after giving dividend. Although if company did not give dividend it is the amount of investors keep by them but yet not given to them and used for the company.
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2. Earnings retention ratio
It gives the percentage of a publicly-traded company's post-tax earnings that are not paid in dividends. Most earnings retained are re-invested into the company's operations. Tracking year-on-year earnings retention ratios is important to fundamental analysis to investigate whether a company is increasing or decreasing its rate of re-investment. The earnings retentions ratio is calculated thusly: Earning Retention Ratio= Net IncomeDividends/Net Income
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INTRODUCTION TO PORTFOLIO MANAGEMENT

Investing in securities such as shares, debentures, and bonds is profitable as well as exciting. It is indeed rewarding, but involves a great deal of risk and calls for scientific knowledge as well artistic skill. In such investments both rationale and emotional responses are involved. Investing in financial securities is now considered to be one of the best avenues for investing one savings while it is acknowledged to be one of the best avenues for investing one saving while it is acknowledged to be one of the most risky avenues of investment. 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 a group of securities is called portfolio. Creation of a portfolio helps to reduce risk, without sacrificing returns. Portfolio management deals with the analysis of individual securities as well as with the theory and practice of optimally combining securities into portfolios. An investor who understands the fundamental principles and analytical aspects of portfolio management has a better chance of success.
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WHAT IS PORTFOLIO:
A portfolio is a collection of securities. Since it is rarely desirable to invest the entire funds of an individual or an institution in a single security, it is essential that every security be viewed in a portfolio context. A set or combination of securities held by investor. A portfolio comprising of different types of securities and assets. As the investors acquire different sets of assets of financial nature, such as gold, silver, real estate, buildings, insurance policies, post office certificates, NSC etc., they are making a provision for future. The risk of each of such investments is to be understood before hand. Normally the average householder keeps most of his income in cash or bank deposits and assumes that they are safe and least risky. Little does he realize that they also carry a risk with them the fear of loss or actual loss or theft and loss of real value of these assets through the rise price or inflation in the economy? Cash carries no interest or income and bank deposits carry a nominal rate of 4% on savings deposits, no interest on current account and a maximum of 9% on term deposits of one year. The liquidity on fixed deposits is poor as one has to wait for the period to maturity or take loan on such amount but at a loss of income due to penal rate. Generally risk averters invest only in banks, Post office and UTI and Mutual funds. Gold, silver real estate and chit funds are the other avenues of investment for average Householder, of middle and lower income groups. If the investor desired to have a real rate of return which is substantially higher than the inflation rate he has to invest in relatively more risky areas of investment like shares and debenture of companies or bonds of Government and semi-Government agencies or deposits with companies and firms. Investment in Chit funds, Company deposits, and in private limited
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companies has a highest risk. But the basic principle is that the higher the risk, the higher is the return and the investor should have a clear perception of the elements of risk and return when he makes investments. Risk Return analysis is thus essential for the investment and portfolio management.
BASICS OF PORTFOLIO MANAGEMENT IN INDIA

In India, Portfolio Management is still in its infancy. Barring a few Indian banks, and foreign banks and UTI, no other agency had professional portfolio management until 1987. After the setting up of public sector mutual funds, since 1987, professional portfolio management, backed by competent research staff became the order of the day. After the success of the mutual funds in portfolio management, a number of brokers and Investment consultants some of whom are professionally qualified have become portfolio managers. They have managed the funds of the client on both discretionary and non-discretionary basis. It was found that many of them, including mutual funds have guaranteed a minimum return or capital appreciation and adopted all kinds of incentives that are now prohibited by SEBI.
The recent CBI probe into the operations of many market dealers has revealed the unscrupulous practices by banks, dealers and brokers in their portfolio operations. The SEBI has then imposed stricter rules, which included their registration, a code of conduct and minimum infrastructure, experience and expertise etc. it is no longer possible for any unemployed youth, or retired person
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or self-styled consultant to engage in portfolio management without the SEBIs license. The guidelines of SEBI are in the direction of making portfolio management a responsible professional service to be rendered by the experts in the field.
EVOLUTION OF PORTFOLIO MANAGEMENT

Portfolio management is essentially a systematic method of maintaining ones investment efficiently. Many factors have contributed to the existence and development of the concept. In the early years of the century analyst used financial statements to find the value of the securities. The first to be analyzed using this was Railroad Securities of the USA. A booklet entitled The Anatomy of the Railroad was published by Thomas F. Wood lock in 1900. As the time progressed this method became very important in the investment field, although most of the writers adopted different ways to publish there data. They generally advocated the use of different ratios for this purpose. John Moody in his book.The Art of wall Street Investing, strongly supported the use of financial ratios to know the worth of the investment. The proposed type of analysis later on became the common size analysis. The other major method adopted was the study of stock price movement with the help of price charts. This method later on was known as Technical Analysis. It evolved during1900-1902 when Charles H. Dow, the founder of the Dow Jones and Co. presented his view in the series of editorials in the Wall Street Journal in USA. The advocates of technical analysis believed that stock prices movement is
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ordered and systematic and the definite pattern could be identified. There investment strategy was build around the identification of the trend and pattern in the stock price movement.
Another prominent author who supported the technical analysis was Ralph N. Elliot who published a book in the year 1938 titled The Wave Principle. After analyzing 75 years data of share price, he concluded that the market movement was quite orderly and followed a pattern of waves. His theory is known as Elliot Wave Theory. According to J.C. Francis the development of investment management can be traced chronologically through three different phases. First phase is known as Speculative Phase. Investment was not a wide spread activity, buta cake of few rich people. The process is speculative in nature. Investment management was an art and needed skills. Price manipulation was resorted to by the investors. During this time period pools and corners were used for manipulation. The result of this was the stock exchange crash in the year 1929. Finally the daring speculative ventures of investors were declared illegal in the US by the Securities Act of 1934.Second phase began in the year 1930. The phase was of professionalism. After coming up of the Securities Act, the investment industry began the process of upgrading its ethics, establishing standard practices and generating a good public image. As a result the investments market became safer place to invest and the people in different income group started investing. Investors began to analyze the security before investing. During this period the research work of Benjamin Graham and David L. Dood was widely publicized and publicly acclaimed. They published a book Security Analysis in 1934, which was highly sought after. There research work was considered first work in the field of
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security analysis and acted as the base for further study. They are considered as pioneers of security analysis as a discipline. Third phase was known as the scientific phase. The foundation of modern portfolio theory was laid by Markowitz.
His pioneering work on portfolio management was described in his article in the Journal of Finance in the year 1952 and subsequent books published later on. He tried to quantify the risk. He showed how the risk can be minimized through proper diversification of investment which required the creation of the portfolio. He provided technical tools for the analysis and selection of optimal portfolio. For his work he won the Noble Prize for Economics in the year 1990.The work of Markowitz was extended by the William Sharpe, John Linter and JanMossin through the development of the Capital Asset Pricing Model (CAPM). If we talk of the present the last two phases of Professionalism and Scientific Analysis are currently advancing simultaneously with investment in various financial instruments becoming safer, with proper knowledge to each and every investor
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NEED FOR PORTFOLIO MANAGEMENT:

Portfolio management is a process encompassing many activities of investment in assets and securities. It is a dynamic and flexible concept and involves regular and systematic analysis judgment and action. The objective of this service is to help the unknown and investors with the expertise of professionals in investment portfolio management. It involves construction of a portfolio based upon the investors objectives, constraints, preferences for risk and returns and tax liability. The portfolio is reviewed and adjusted from time to time in tune with the market conditions. The evaluation of portfolio is to be done in terms of targets set for risk and returns. The changes in the portfolio are to be effected to meet the changing condition. Portfolio construction refers to the allocation of surplus funds in hand among a variety of financial assets open for investment. Portfolio theory concerns itself with the principles governing such allocation. The modern view of investment is oriented more go towards the assembly of proper combination of individual securities to form investment portfolio. A combination of securities held together will give a beneficial result if they grouped in a manner to secure higher returns after taking into consideration the risk elements. The modern theory is the view that by diversification risk can be reduced. Diversification can be made by the investor either by having a large number of shares of companies in different regions, in different industries or those producing different types of product lines. Modern theory believes in the perspective of combination of securities under constraints of risk and returns.
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SCOPE OF PORTFOLIO MANAGEMENT:

Portfolio management is an art of putting money in fairly safe, quite profitable and reasonably in liquid form. An investors attempt to find the best combination of risk and return is the first and usually the foremost goal. In choosing among different investment opportunities the following Aspects risk management should be considered: a) The selection of a level or risk and return that reflects the investors tolerance for risk and desire for return, i.e. personal preferences. b) The management of investment alternatives to expand the set of opportunities available at the investors acceptable risk level. The very risk-averse investor might choose to invest in mutual funds. The more risk-tolerant investor might choose shares, if they offer higher returns. Portfolio management in India is still in its infancy. An investor has to choose a portfolio according to his preferences. The first preference normally goes to the necessities and comforts like purchasing a house or domestic appliances. His second preference goes to some contractual obligations such as life insurance or provident funds. The third preference goes to make a provision for savings required for making day to day payments. The next preference goes to short term investments such as UTI units and post office deposits which provide easy liquidity. The last choice goes to investment in company shares and debentures. There are number of choices and decisions to be taken on the basis of the attributes of risk, return and tax benefits from these shares and debentures. The final decision is taken on the basis of alternatives, attributes and investor preferences.
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For most investors it is not possible to choose between managing ones own portfolio. They can hire a professional manager to do it. The professional managers provide a variety of services including diversification, active portfolio management, liquid securities and performance of duties associated with keeping track of investors money.
Objective of Portfolio Management

The objective of portfolio management is to invest in securities is securities in such a way that one maximizes ones returns and minimizes risks in order to achieve ones investment objective.
A good portfolio should have multiple objectives and achieve a sound balance among them. Any one objective should not be given undue importance at the cost of others. Presented below are some important objectives of portfolio management.
1. Stable Current Return: - Once investment safety is guaranteed, the portfolio should yield a steady current income. The current returns should at least match the opportunity cost of the funds of the investor. What we are referring to here current income by way of interest of dividends, not capital gains.
2. Marketability: - A good portfolio consists of investment, which can be marketed without difficulty. If there are too many unlisted or inactive shares in
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your portfolio, you will face problems in encasing them, and switching from one investment to another. It is desirable to invest in companies listed on major stock exchanges, which are actively traded.
3. Tax Planning: - Since taxation is an important variable in total planning, a good portfolio should enable its owner to enjoy a favorable tax shelter. The portfolio should be developed considering not only income tax, but capital gains tax, and gift tax, as well. What a good portfolio aims at is tax planning, not tax evasion or tax avoidance.
4. Appreciation in the value of capital: A good portfolio should appreciate in value in order to protect the investor from any erosion in purchasing power due to inflation. In other words, a balanced portfolio must consist of certain investments, which end to appreciate in real value after adjusting for inflation
5. Liquidity: The portfolio should ensure that there are enough funds available at short notice to take care of the investors liquidity requirements. It is desirable to keep a line of credit from a bank for use in case it becomes necessary to participate in right issues, or for any other personal needs.
6. Safety of the investment: The first important objective of a portfolio, no matter who owns it, is to ensure that the investment is absolutely safe. Other considerations like income, growth, etc., only come into the picture after the safety of your investment is ensured. Investment safety or minimization of risks is one of the important objectives of portfolio management. There are many types
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of risks, which are associated with investment in equity stocks, including super stocks. Bear in mind that there is no such thing as a zero risk investment. Moreover, relatively low risk investment gives correspondingly lower returns. You can try and minimize the overall risk or bring it to an acceptable level by developing a balanced and efficient portfolio. A good portfolio of growth stocks satisfies the entire objectives outline above.
ADVANTAGES OF PORTFOLIO MANAGEMENT:

Individuals will benefits immensely by taking portfolio management services for the following reason: 1. Whatever may be the status of the capital market; over the long period capital markets have given an excellent return when compared to other forms of investment. The return from bank deposits, units etc., is much less than from stock market. 2. The Indian stock markets are very complicated. Though there are thousands of companies that are listed only a few hundred, which have the necessary liquidity. It is impossible for any individual whishing to invest and sit down and analyses all these intricacies of the market unless he does nothing else 3. Even if an investor is able to visualize the market, it is difficult to investor to trade in all the major exchanges of India, look after his deliveries and payments. This is further complicated by the volatile nature of our markets, which demands constant reshuffling of portfolio
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4. FACTORS AFFECTING THE INVESTOR PORTFOLIO

There may be many reasons why the portfolio of an investor may have to be changed. The portfolio manager always remains alert and sensitive to the changes in the requirements of the investor. The following are the some factors affecting the investor, which make it necessary to change the portfolio composition. Change in Wealth According to the utility theory, the risk taking ability of the investor increases with increase in wealth. It says that people can afford to take more risk as they grow rich and benefit from its reward. But, in practice, while they can afford, they may not be willing. As people get rich, they become more concerned about losing the newly got riches than getting richer. So they may become conservative and vary risk- averse. The fund manager should observe the changes in the attitude of the investor towards risk and try to understand them in proper perspective. If the investor turns to be conservative after making huge gains, the portfolio manager should modify the portfolio accordingly. 1. Change in the Time Horizon As time passes, some events take place that may have an impact on the time horizon of the investor. Births, deaths, marriages, and divorces all have their own impact on the investment horizon. There are, of course, many other important events in the persons life that may force a change in the investment horizon. The happening or the non-happening of the events will naturally have its effect. For example, a person may have planned for an early retirement,
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considering his delicate health. But, after turning 55 years of age, if his health improves, he may not take retirement. 2. Change in Liquidity Needs Investors very often ask the portfolio manager to keep enough scope in the portfolio to get some cash as and they want. This forces portfolio manager to increase the weight of liquid investments in the asset mix. Due to this, the amounts available for investment in the fixed income or growth securities that actually help in achieving the goal of the investor get reduced. That is, the money taken out today from the portfolio means that the amount and the return that would have been earned on it are no longer available for achievement of the investors goals. 3. Changes in Taxes It is said that there are only two things certain in this world- death and taxes. The only uncertainties regarding them relate to the date, time, place and mode. Portfolio manager have to constantly look out for changes in the tax structure and make suitable changes in the portfolio composition. The rate of tax under long- term capital gains is usually lower than the rate applicable for income. If there is a change in the minimum holding period for long-term capital gains, it may lead to revision. The specifics of the planning depend on the nature of the investments 4. Others There can be many of other reasons for which clients may ask for a change in the asset mix in the portfolio. For example, there may be change in the return available on the investments that have to be compulsorily made with the government say, in the form of provident fund.
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This may call for a change in the return required from the other investments.
SEBI Guidelines to Portfolio Management:

SEBI has issued detailed guidelines for portfolio management services. The guidelines have been made to protect the interest of investors. The salient features of these guidelines are given here under;
1) The nature of portfolio management services shall be investment consultant. 2) The portfolio manager shall not guarantee any return to his clients. 3) Clients funds will be kept in separate bank account. 4) The portfolio manager shall acts as trustee of clients funds. 5) The portfolio manager can invest in money or capital market. 6) Purchase and sale of securities will be at prevailing market price.
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TYPES OF PORTFOLIO MANAGEMENT:

The two types of portfolio management services are available o the investors:
Discretionary portfolio Management
Non-discretionary portfolio management
1.The Discretionary portfolio management services (DPMS): In this type of services, the client parts with his money in favor of manager, who in return, handles all the paper work, makes all the decisions and gives a good return on the investment and for this he charges a certain fees. In this discretionary PMS, to maximize the yield, almost all portfolio managers parks the funds in the money market securities such as overnight market, 182 days treasury bills and 90 days commercial bills. Normally, return on such investment varies from 14 to 18 per cent, depending on the call money rates prevailing at the time of investment. 2. The Non-discretionary portfolio management services: The manager function as a counselor, but the investor is free to accept or reject the managers advice; the manager for a services charge also undertakes the paper work. The manager concentrates on stock market instruments with a portfolio tailor made to the risk taking ability of the investor.
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STEPS IN PORTFOLIO MANAGEMENT

Performance Evaluation Portfolio Revision
Portfolio Execution
Steps Selection of Asset mix
Identification Of Objectives
Portfolio Strategy
1) IDENTIFICATION OF THE OBJECTIVES

The starting point in this process is to determine the characteristics of the various investments and then matching them with the individuals need and preferences
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All the personal investing is designed in order to achieve certain objectives. These objectives may be tangible such as buying a car, house etc. and intangible objectives such as social status, security etc. Similarly, these objectives may be classified as financial or personal objectives. Financial objectives are safety, profitability and liquidity. Personal or individual objectives may be related to personal characteristics of individuals such as family commitments, status, depends, educational requirements, income, consumption and provision for retirement etc. 2) FORMULATION OF PORTFOLIO STRATEGY The aspect of Portfolio Management is the most important element of proper portfolio investment and speculation. While planning, a careful review should be conducted about the financial situation and current capital market conditions. This will suggest a set of investment and speculation policies to be followed. The statement of investment policies includes the portfolio objectives, strategies and constraints. Strategy means plan or policy to be followed while investing in different types of assets. There are different investment strategies
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They require changes as time passes, investors wealth changes, security price change, investors knowledge expands. Therefore, the optional strategic asset allocation also changes. The strategic asset allocation policy would call for broad diversification through an indexed holding of virtually all securities in the asset class.
3) SELECTION OF ASSET MIX

The most important decision in portfolio management is selection of asset mix. It means spreading out portfolio investment into different asset classes like bonds, stocks, mutual funds etc. In other words selection of asset mix means investing in different kinds of assets and reduces risk and volatility and maximizes returns in investment portfolio. Selection of asset mix refers to the percentage to the invested in various security classes. The security classes are simply the type of securities as under: money market instrument fixed income security equity shares real estate investment international securities
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Once the objective of the portfolio is determined the securities to be included in the portfolio must be selected. Normally the portfolio is selected from a list of high-quality bonds that the portfolio manager has at hand. The portfolio manager has to decide the goals before selecting the common stock. The goal may be to achieve pure growth, growth with some income or income only. Once the goal has been selected, the portfolio manager can select the common stocks.
4) PORTFOLIO EXECUTION:
The process of portfolio management involves a logical set of steps common to any decision, plan, implementation and monitor. Applying this process to actual portfolios can be complex. However, many portfolio managers engage in the speculative transactions in the belief that such transactions will generate excess risk-adjusted returns. Such speculative transactions are usually classified as timing or selection decisions. Timing decisions over or under weight various asset classes, industries or economic sectors from the strategic asset allocation.
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Such timing decisions are known as tactical asset allocation and selection decision deals with securities within a given asset class, industry group or economic sector. The investor has to begin with periodically adjusting the asset mix to the desired mix, which is known as strategic asset allocation. Then the investor or portfolio manager can make any tactical asset allocation or security selection decision.
5) PORTFOLIO REVISION
Portfolio management would be an incomplete exercise without periodic review. The portfolio, which is once selected, has to be continuously reviewed over a period of time and if necessary revised depending on the objectives of investor. Thus, portfolio revision means changing the asset allocation of a portfolio. Investment portfolio management involves maintaining proper combination of securities, which comprise the investors portfolio in a manner that they give maximum return with minimum risk. For this purpose, investor should have continuous review and scrutiny of his investment portfolio. Whenever adverse conditions develop, he can dispose of the securities, which are not worth.
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However, the frequency of review depends upon the size of the portfolio, the sum involved, the kind of securities held and the time available to the investor. The review should include a careful examination of investment objectives, targets for portfolio performance, actual results obtained and analysis of reason for variations. The review should be followed by suitable and timely action. There are techniques of portfolio revision. Investors buy stock according to their objectives and return-risk framework. These fluctuations may be related to economic activity or due to other factors. Ideally investors should buy when prices are low and sell when prices rise to levels higher than their normal fluctuations. The investor should decide how often the portfolio should be revised. If revision occurs to often, transaction and analysis costs may be high
6) PORTFOLIO PERFORMANCE EVALUATION:

Portfolio management involves maintaining a proper combination of securities, which comprise the investors portfolio in a manner that they give maximum return with minimum risk. The investor should have continues review and scrutiny of his investment portfolio.
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These rates of return should be based on the market value of the assets of the fund. Complete evaluation of the portfolio performance must include examining a measure of the degree of risk taken by the fund. A portfolio manager, by evaluating his own performance can identify sources of strength or weakness. It can be viewed as a feedback and control mechanism that can make the investment management process more effective. The first task in performance evaluation is to determine whether past performance was good or poor. Then the second task is to determine whether such performance was due to skill or luck. Good performance in the past may have resulted from the actions of a highly skilled portfolio manager. The performance of portfolio should be measured periodically, preferably once in a month or a quarter. The performance of an individual stock should be compared with the overall performance of the market.
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PORTFOLIO MANAGEMENT THEORIES

Risk Aversion
Risk aversion is an investor's general desire to avoid participation in risky behavior or, in this case, risky investments. Investors typically wish to maximize their return with the least amount of risk possible. When faced with two investment opportunities with similar returns, good investor will always choose the investment with the least risk as there is no benefit to choosing a higher level of risk unless there is also an increased level of return.
Insurance is a great example of investors' risk aversion. Given the potential for a car accident, an investor would rather pay for insurance and minimize the risk of a huge outlay in the event of an accident.
I.
Markowitz Portfolio Theory

Harry Markowitz developed the portfolio model. This model includes not only expected return, but also includes the level of risk for a particular return. Markowitz assumed the following about an individual's investment behavior:
Given the same level of expected return, an investor will choose the investment with the lowest amount of risk.
Investors measure risk in terms of an investment's variance or standard deviation.
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For each investment, the investor can quantify the investment's expected return and the probability of those returns over a specified time horizon.
Investors seek to maximize their utility. Investors make decision based on an investment's risk and return, therefore, an investor's utility curve is based on risk and return.
II.
The Efficient Frontier

Markowitz' work on an individual's investment behavior is important not only when looking at individual investment, but also in the context of a portfolio. The risk of a portfolio takes into account each investment's risk and return as well as the investment's correlation with the other investments in the portfolio. A portfolio is considered efficient if it gives the investor a higher expected return with the same or lower level of risk as compared to another investment. The efficient frontier is simply a plot of those efficient portfolios, as illustrated below.
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Figure 17.2: Efficient Frontier
While an efficient frontier illustrates each of the efficient portfolios relative to risk and return levels, each of the efficient portfolios may not be appropriate for every investor. Recall that when creating an investment policy, return and risk were the key objectives. An investor's risk profile is illustrated with indifference curves. The optimal portfolio, then, is the point on the efficient frontier that is tangential to the investor's highest indifference curve. See our article: A Guide to Portfolio Construction, for some essential steps when taking a systematic approach to constructing a portfolio.
III.
The Capital Market Line
The Market Portfolio and the CML As seen previously, adjusting for the risk of an asset using the risk-free rate, an investor can easily alter his risk profile. Keeping that in mind, in the
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context of the capital market line (CML), the market portfolio consists of the combination of all risky assets and the risk-free asset, using market value of the assets to determine the weights. The CML line is derived by the CAPM, solving for expected return at various levels of risk.
Markowitz idea of the efficient frontier, however, did not take into account the risk-free asset. The CML does and, as such, the frontier is extended to the risk-free rate as illustrated below:
Systematic and Unsystematic Risk Total risk to a stock not only is a function of the risk inherent within the stock itself, but is also a function of the risk in the overall market. Systematic risk is the risk associated with the market. When analyzing the risk of an investment, the systematic risk is the risk that cannot be diversified away.
Unsystematic risk is the risk inherent to a stock. This risk is the aspect of total risk that can be diversified away when building a portfolio.
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When building a portfolio, a key concept is to gain the greatest return with the least amount of risk. However, it is important to note, that additional return is not guaranteed for an increased level of risk. With risk, reward can come, but losses can be magnified as well. IV. The Capital Asset Pricing Model (CAPM)
The capital asset pricing model (CAPM) is a model that calculates expected return based on expected rate of return on the market, the risk-free rate and the beta coefficient of the stock.
Example: CAPM model Determine the expected return on Newcos stock using the capital asset pricing model. Newcos beta is 1.2. Assume the expected return on the market is 12% and the risk-free rate is 4%.
Answer: E(R) = 4% + 1.2(12% - 4%) = 13.6%.
Using the capital asset pricing model, the expected return on Newcos stock is 13.6%.
Basic Assumptions required for CAPM
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1. All investors seek an optimum portfolio on the efficient frontier so as to maximize the utility of their wealth, rather than to maximize the wealth itself. Also, the utility of wealth decreases as the level of wealth increases. 2. Information is FREELY & Simultaneously Available to All Investors. Thus, Rational Expectations hold. 3. Investor Expectations are Homogenous. They all have the same expectations regarding the expected return and risk of all assets. 4. All Investors have an Identical TIME HORIZON (to have 1 unique risk free rate) 5. Capital Markets are in Equilibrium so that all assets are properly priced with respect to their risks. 6. Investors can borrow, as well as invest, at the risk free rate. 7. There are NO Taxes, Transactions costs, or restrictions on Short Sales. 8. Total Asset Quantity is FIXED and all assets are fully marketable and divisible. (Can ignore liquidity).
V. The Security Market Line (SML) Similar to the CML, the SML is derived from the CAPM, solving for expected return. However, the level of risk used is the Beta, the slope of the SML. The SML is illustrated below:
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VI.
Arbitrage Pricing Theory
Arbitrage pricing theory (APT) is a valuation model. Compared to CAPM, it uses fewer assumptions but is harder to use. The basis of arbitrage pricing theory is the idea that the price of a security is driven by a number of factors. These can be divided into two groups: macro factors, and company specific factors. The name of the theory comes from the fact that this division, together with the no arbitrage assumption can be used to derive the following formula: r = rf + 1f1 + 2f2 + 3f3 + Where r is the expected return on the security, rf is the risk free rate, Each f is a separate factor and each is a measure of the relationship between the security price and that factor. This is a recognizably similar formula to CAPM.
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The difference between CAPM and arbitrage pricing theory is that CAPM has a single non-company factor and a single beta, whereas arbitrage pricing theory separates out non-company factors into as many as proves necessary. Each of these requires a separate beta. The beta of each factor is the sensitivity of the price of the security to that factor. Arbitrage pricing theory does not rely on measuring the performance of the market. Instead, APT directly relates the price of the security to the fundamental factors driving it. The problem with this is that the theory in itself provides no indication of what these factors are, so they need to be empirically determined. Obvious factors include economic growth and interest rates. For companies in some sectors other factors are obviously relevant as well - such as consumer spending for retailers. The potentially large number of factors means more betas to be calculated. There is also no guarantee that all the relevant factors have been identified. This added complexity is the reason arbitrage pricing theory is far less widely used than CAPM. VII. Beta Beta is a measure of performance of a particular share or class of shares in relation to the general movement of the market. If a share has a beta of 1, its rise and fall corresponds exactly with the market. With a beta of 2, its rise or fall is double i.e. when the market rises by 10 percent, it rises by 20 percent and when market falls by 10 percent, it falls by 20 percent.
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i = COV(Ri Rm)/2m
Example: Beta Assume the covariance between Newcos stock and the market is 0.001 and the variance of the market is 0.0008. What is the beta of Newcos stock?
Answer:
BNewco = 0.001/0.0008 = 1.25
Newcos beta is 1.25.
Determining Whether a Security is Under-, Over- or Properly Valued As discussed, the SML line can be derived using CAPM, solving for the expected return using beta as the measure of risk. Given that interpretation and a beta value for a specific security, we can then determine the expected return of the security with the CAPM. Then, using the expected return for a security derived from the CAPM, an investor can determine whether a security is undervalued, overvalued or properly valued.
Example: Calculate the expected return on a security and evaluate whether the security is undervalued, overvalued or properly valued. An investor anticipates Newcos security will reach $30 by the end of one year. Newcos beta is 1.3. Assume the return on the market is expected to be 16% and the risk-free rate is 4%. Calculate the expected return of Newcos stock in one
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year and determine whether the stock is undervalued, overvalued or properly valued with a current value of $25.
Answer:
E(R)Newco = 4% + 1.3(16% - 4%) = 20%
Given the expected return of Newcos stock using CAPM is 20% and the investor anticipates a 20% return, the security would be properly valued.
If the expected return using the CAPM is higher than the investors required return, the security is undervalued and the investor should buy it.
If the expected return using the CAPM is lower than the investors required return, the security is overvalued and should be sold.
The Characteristic Line The characteristic line is line that occurs when an individual asset or portfolio is regressed to the market. The beta is the slope coefficient for the characteristic line and is thus the measure of systematic risk for the asset or portfolio. Recall, a beta is the measure of a stocks sensitivity of returns to changes in the market. It is a measure of systematic risk.
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Portfolio Performance Measure:

Treynor Portfolio Performance Measure (aka: reward to volatility ratio)
This measure was developed by Jack Treynor in 1965. Treynor (helped developed CAPM) argues that, using the characteristic line, one can determine the relationship between a security and the market. Deviations from the characteristic line (unique returns) should cancel out if you have a fully diversified portfolio. Treynor's Composite Performance Measure: He was interested in a performance measure that would apply to ALL investors regardless of their risk preferences. He argued that investors would prefer a CML with a higher slope (as it would place them on a higher utility curve). The slope of this portfolio possibility line is:
Demonstration of Comparative Treynor Measures: Assume that you are an administrator of a large pension fund (i.e. Terry Teague of Boeing) and you are trying to decide whether to renew your contracts with your three money managers. You must measure how they have performed. Assume you have the following results for each individual's performance: Investment Manager Average annual Rate of Return Z 0.12 0.90
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Beta
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B Y
0.16 0.18
1.05 1.2
You can calculate the T values for each investment manager: Tm TZ TB TY (0.14-0.08)/1.00=0.06 (0.12-0.08)/0.90=0.044 (0.16-0.08)/1.05=0.076 (0.18-0.08)/1.20=0.083
These results show that Z did not even "beat-the-market." Y had the best performance, and both B and Y beat the market. [To find required return, the line is: .08 + .06(Beta).
Sharpe Portfolio Performance Measure (aka: reward to variability ratio)

This measure was developed in 1966. It is as follows:
It is VERY similar to Treynor's measure, except it uses the total risk of the portfolio rather than just the systematic risk. The Sharpe measure calculates the risk premium earned per unit of total risk. In theory, the S measure compares portfolios on the CML, whereas the T measure compares portfolios on the SML.
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Demonstration of Comparative Sharpe Measures: Sample returns and SDs for four portfolios (and the calculated Sharpe Index) are given below:
Portfolio B O P Market
Avg. Annual RofR 0.13 0.17 0.16 0.14
SD of return 0.18 0.22 0.23 0.20
Sharpe measure 0.278 0.409 0.348 0.300
Thus, portfolio O did the best, and B failed to beat the market. We could draw the CML given this information: CML=.08 + (0.30) SD
Jenson Portfolio Performance Measure (aka differential return measure) This measure (as are all the previous measures) is based on the CAPM: We can express the expectations formula (the above formula) in terms of realized rates of return by adding an error term to reflect the difference between E (Rj) vs actual Rj:
By subtracting the risk free rate from both sides, we get:
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Using this format, one would not expect an intercept in the regression. However, if we had superior portfolio managers who were actively seeking out undervalued securities, they could earn a higher risk-adjusted return than those implied in the model. So, if we examined returns of superior portfolios, they would have a significant positive intercept. An inferior manager would have a significant negative intercept. A manager that was not clearly superior or inferior would have a statistically insignificant intercept. We would test the constant, or intercept, in the following regression:
This constant term would tell us how much of the return is attributable to the manager's ability to derive above-average returns adjusted for risk.
Risk - Return Relationship

Risk - Return Relationship:-The entire scenario of security analysis is built on two concepts of security: Return and risk. The risk and return constitute the framework for taking investment decision. Return from equity comprises dividend and capital appreciation. To earn return on investment, that is, to earn dividend and to get capital appreciation, investment has to be made for some period which in turn implies passage of time. Dealing with the return to be achieved requires estimated of the return on investment over the time period. Risk denotes deviation of actual return from the estimated return. This deviation of actual return from expected return may be on either side both above and below the
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expected return. However, investors are more concerned with the downside risk. The risk in holding security deviation of return deviation of dividend and capital appreciation from the expected return may arise due to internal and external forces. That part of the risk which is internal that in unique and related to the firm and industry is called unsystematic risk. That part of the risk which is external and which affects all securities and is broad in its effect is called systematic risk. The fact that investors do not hold a single security which they consider most profitable is enough to say that they are not only interested in the maximization of return, but also minimization of risks. Unsystematic risk is eliminated through holding more diversified securities. Systematic risk is also known as non-diversifiable risk as this can not be eliminated through more securities and is also called market risk. Therefore, diversification leads to risk reduction but only to the minimum level of market risk. The investors increase their required return as perceived uncertainty increases. The rate of return differs substantially among alternative investments, and because the required return on specific investments change over time, the factors that influence the required rate of return must be considered. Following chart-A represent the relationship between risk and return. The slop of the market line indicates the return per unit of risk required by all investors highly risk-averse investors would have a steeper line, and Yields on apparently similar may differ. Difference in price, and therefore yield, reflect the markets assessment of the issuing companys standing and of the risk elements in the particular stocks. A high yield in relation to the market in general shows an above average risk element. Chart A Relationship between risk and return
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High Rate of Return Low Risk Slope indicates required return per unit of risk Risk free return RISK Chart-B Risk Return relationship: DIFFERENT STOCKS Average Risk Risk Market Line
Market line
Rate of Return Risk Premium
Ordinary shares Preference shares Subordinate loan stock Unsecured loan Debenture with floating charge Mortgage loan
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Degree of risk
1. Rate of Market Line Return Risk Premium Ordinary shares Preference shares Subordinate loan stock Unsecured loan Debenture with floating charge Mortgage loan Government (i.e. risk free) stock Degree of risk Source: Financial Management, By Ravi M. Kishore, Page No: 1145-46 Given the composite market line prevailing at a point of time, investors would select investments that are consistent with their risk preference. Some will consider low risk investments, while others prefer high risk investments. The construction of a best portfolio will depend upon a careful security analysis. The portfolio management always thinks about the return and rewards of different financial assets which are fully involved with systematic and unsystematic risk. The portfolio management is mainly concentrated on the stock behaviour in the market. Selection of a particular scrip or financial asset is the responsibility of a security analyst. But the portfolio managers obligation is to know best returns to the portfolio owner with a combination of different kinds of financial assets. Portfolio analysis indicates the determination of future risk and return in holding a different set of individual securities. The portfolio analysis contains the important elements as presented below; 1. Return on portfolio 2. Risk of a portfolio
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Return on Portfolio:-The portfolio value is highly influenced by return of individual securities. Each security in a portfolio contributes return in the proportion of its investment is security. Thus, the portfolio value may increase and the targeted goals can be achieved. The return on portfolio is the weighted average of the expected returns, from each security with a proportionate weight of the different securities in the total investment. The return on portfolio depends upon the selection of financial asset which was made according to the investors perception. The efficiency of a portfolio is highly influenced by a number of factors, i.e. investors objective, investors risk presumption, safety of investment, capital appreciation, liquidity of financial asset, hedging, time horizon set out by investor, constraints regarding diversification by the investor etc.
The data of the following table reveals the calculation of 4portfolios return and risk Security Proportion of funds invested in each security (Weights) A B C D 35% 30% 20% 15% 100% Expected Return on Each Security 13% 18% 23% 15% Contribution of each security to return 4.55 5.40 4.60 2.25 16.8
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The above portfolio yield 16.8% return on an average of 4 kinds of securities. 2. The portfolio risk can be calculated by using the measure such as standard deviation and variance. These can be calculated by applying the following formula; Standard deviation = (x-x1) Variance = (x-x1) 2 = x2 x = is the expected return on security A x1= is the mean or the weighted average return on the security A So, the co-efficient of variance = (/x1) x 100 The following table will explain the calculation of standard deviation for a given portfolio. Security 1 2 3 Return 7% 11% 15% Probability 0.30 0.55 0.15
(1) Return (2)
Probability (3)
Weighted Return (2 x 3)
Return deviation from mean
Weighted deviations squared

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1 2 3 -
7% 11% 15% -
0.30 0.55 0.15 1.00
0.021 0.061 0.022 0.103
-0.033 0.007 0.047 -
0.001 0.001 0.002 0.004
Average expected return 0.103 or 10.3 (mean) The return deviation can be obtained as follows: For security 1 = (0.07 0.103) = -0.033 For security 2 = (0.11 0.103) = 0.007 For security 3 = (0.15 0.103) = 0.047 2 = 0.004 = 2 = 0.004 = 0.063 0r 6.3% The co-efficient of variance = (/x1) * 100 = 6.3 / 10.3 = 61%. Risk on Portfolio:Risk is the most important element in portfolio management. Risk is reflected in the variability of the returns from Zero to infinity. The risk on a portfolio is different from the risk on individual securities. The expected return of a portfolio depends on the probability of the returns and their weighted contribution to the risk. This is the essence of risk. Risk means, the probability of
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various possible bad outcomes from a constructed portfolio. The measurement of risk in portfolio involves (a) Finding of average absolute deviation. (b) Standard deviation. These elements can be explained with following illustrations: The probability of each of the return of a portfolio is given below. Calculate the absolute deviations for the given portfolio. Event 1 2 3 4 Return 0.20 0.25 0.30 0.25 Probability -10 22 27 12
Estimation of absolute deviation:Event Return (2) Probability (3) Absolute Return (2 x 3)=(4) 1 2 3 0.20 0.25 0.30 -10 22 27 -2.0 +5.5 +8.1 Probability deviation (5) -24.6 7.4 12.4 (X)Absolute deviations (5)x(2)=(6) 4.92 1.85 3.72
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4 Total
40.45
12
+3.0 +14.6
-2.6
0.65 11.14%
Probability deviation can be calculated as follows;10 - 14.6 = -24.6 22 - 14.6 = +7.4 27 - 14.6 = +12.4 12 - 14.6 = -2.6 The measure of absolute deviation is 11.14 %
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DIVERSIFICATION
Risk Reduce through Diversification:- The process of combining securities in a portfolio is known as diversification. The aim of diversification is to reduce total risk without sacrificing portfolio return. To understand the mechanism and power of diversification, it is necessary to consider the impact of covariance or correlation on portfolio risk more closely. We shall examine three cases: (1) when security returns are perfectly positively correlated, (2) when security returns are perfectly negatively correlated and (3) when security returns are not correlated. Diversification means, investment of funds in more than one risky asset with the basic objective of risk reduction. The lay man can make good returns on his investment by making use of technique of diversification.
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Different Type of Investment in India and Risk Return Associated With It:1. Life Insurance Policy:- In India the life insurance corporation offers different types of policies tailor made to suit the varied age group in society. The Whole Life Policies, Limited Payment Life Policy, Convertible Whole Life Assurance Policy, Endowment Assurance Policy, Jeevan Mitra, The Special Endowment Plan with Profits, Jeevan Saathi, The New Money Back Plan, Marriage Endowment, Childrens Differed Endowment Assurance Policy, Jeevan Dhara have gained immense popularity among all classes of people. In LIC there is some scheme have eligible for exemption from tax under section 80C of the Income Tax Act, 1961. Risk associated with Insurance Corporation is as follow: High RIS Moderate K Low Low Moderate High RETURN
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2. Bank Deposits:- Commercial Bank has been extending deposits facilities to the public and has been the Indian investors greatest investment opportunity. The various schemes offered by commercial Banks are in the categories of saving accounts. Fixed Deposits, recurring deposits, monthly re-payment plan, cash certificates, childrens deposits schemes and retirement plans. The saving account offers an interest rate of 4% per annum. One fixed deposits the banks give a rate of 6.5% per annum. High RIS Moderate K Low Low Moderate High RETURN
3. Provident Funds:- Many employers offer recognized provident Fund schemes for the benefit of their employees. In general employees are obliged to contribute a minimum of 8.33% of their salary every month to the PPF, however, they may in certain cases contribute up to a maximum of 30% of their salary, Whatever, may be the employees contribution, the employers contribution is generally restricted to 8.33% only. Employees
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own contribution can be claimed as a deduction form his total income under section 80C of income Tax Act. The interest on Provident Funds is now10 % per annum. The prime benefit of the provident fund is the facility of loan up to 755 of the sum contributed. High RIS Moderate K Low Low Moderate High RETURN The SBI and its subsidiaries operate the public provident funds schemes. It is a 15 year scheme. A minimum sum of Rs. 100/- has to be deposited every year in this fund; the maximum amount which can be deposited in this fund, is Rs.20,000/- in one year. The rate of interest on the PPF is 12% per annum. The PPF scheme offers both income Tax and Wealth Tax benefits. The deposits made every year qualify for deduction under section 80C and the interest is completely tax free, in addition, loans can also be taken after one year from the close of the year in which the account was opened.
4. Equity Shares: - The investment in equity share has a number of positive aspect associated with it. These are Capital Appreciation as a hedge against
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inflation, bonus shares, Right shares, voting rights, marketability, annual dividends and fringe benefits etc. Income tax and wealth tax benefits are also available to investment in equity share, 50% of the contribution made by investors in shares of new companies qualifies for deduction under section 80CC. No deduction is available in under section 80CCAwith effect from 1993-94 except rebate of Section 88. High RIS Moderate K Low Low Moderate High RETURN
5. Government Bonds:- The government bond, there is two categories of these bonds, namely, tax-free and taxable. The tax-free bonds are 9 to 10% bonds issued for Rs.1000; interest compounded half-yearly and payable half-yearly. They have a maturity period of 7 to 10 years with the facility for buy-back sometimes provided to small investors up to certain limits. The taxable bonds yield 13% or above, compounded half-yearly and payable half-yearly. They have normally a face value of Rs.1000/- and have buy-back facilities similar to taxable bonds. Income from these bonds is tax exempt
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up to Rs.12, 000/- under section 80L. High RIS Moderate K Low Low Moderate High RETURN
6. Fixed Deposits with Companies:-Fixed Deposits are invited from the public by different private sector companies. Their major selling point is the high rates of interest, which they offer. Some of these companies offer even up to 16% return per annum on deposits; the risk element is high in fixed deposits since they are absolutely unsecured. In addition, there are no tax benefits, an example, may be cited of a well known company. Orkay Silk Mills, The Company delayed the payment of quarterly interest by two months and the matured amount has not been returned to the depositors. High RIS Moderate K Low Low Moderate High RETURN
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7. Debentures :- A debenture is just a loan bond. Debenture holders are lenders but not owners of the company. They dont enjoy any voting rights. Usually Debentures are of the face value of Rs.100/- each. They carry a fixed rate of interest. The ruling rate in the market for debentures is 10% to 14%. There are no income tax or wealth tax benefits for an investment in Debenture. High RIS Moderate K Low Low Moderate High RETURN
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CONCLUSION
People with high income invest more in stock markets. As the age group increases people analyze a stock before investing Businessman and professional are keener to invest in stock market. 60% of people invest more than 20% of their income. The investment objective of investor is to gain income as well as
appreciation.
Very few follow security analysis as it uses real data to evaluate a security's
value.
Majority of people either invest on recommendation from their friends,

broker, relatives or follow brand name. People who have appropriate knowledge of security analysis follow it.
It is important to understand that equity shares are not recommended for all investors. If you are past sixty, and dependent on your savings for a living, I would strongly advise you not to buy and hold equity shares only but also in other securities which gives a regular income in periodic intervals. The stock markets are by nature volatile and unpredictable. In such cases, one should never put all eggs in one basket. On the other hand, if you are young and resilient enough to take risks, the stock market can be quite interesting and rewarding. # If any investor do not have sufficient time and knowledge then he should take services of well known portfolio manager. # Review performance of your portfolio manager periodically.
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If someone wants to make portfolio for himself then remember following Commandments: 1. Do not speculate. 2. Do not invest in new issues without proper research. 3. Do not put all your eggs in one basket. 4. Limit the number of scrips in your portfolio. 5. Invest for the long term. 6. Invest in fundamentally strong companies. 7. Disinvest before a company becomes fundamentally weak. 8. Do not marry your stocks. 9. Set a limit to your greed.
Investing in portfolio of carefully selected stocks with an excellent track record can be quite safe in the long run. If you are below fifty, you can build a fortune with an equity stock are even better than gold.
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REFRENCES
BOOKS: SECURITY ANALYSIS BY BENJAMIN GRAHAM, DAVID DODD.(SECOND AND SIXTH EDITION). SECURITY ANALYSIS AND PORTFOLIO MANGEMENT BY SUDHINDRA BHAT. Portfolio Management-P.K.Bandgar Portfolio management therories and practice-Sajjan Singh Banwait WEBSITES: http://www.investorwords.com/security_analysis.html http://www.investopedia.com/terms/securityanalyst. http://en.wikipedia.org/Value_investing http://www.discoverit.org/security_analyst.aspx http://dictionary.reference.com/browse/security+analyst http://www.amazon.com/Security-Analysis-PrinciplesBenjamin-Graham/dp/007141228X http://en.wikipedia.org/wiki/Portfolio_management http://www.sebi.gov.in/faq/faqpms.html http://www.icicidirect.com/personalfinance/achievingGoalPo rtfolio.aspx

Dps Security Analysis and Portfolio Management

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T.Y.B.F.

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

SECURITY ANALYSIS: INTRODUCTION

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

HOW DO YOU USE SECURITY ANALYSIS

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

FUNCTIONS OF SECURITY ANALYSIS:

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

(b) Dividend Growth Model and the PE Multiple

P(0)= b E( 0 ) (1 + g) / (k - g ) Where, b = Dividend Pay-out fraction or ratio E(0)= Current EPS

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

8.Techniques Used For Economic Analysis:

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

(1) All available information is cost free to all market participants,

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

(2) No transaction costs, and

(a) The week form theory,

(b) The semi-strong form, and

(c) The strong form.

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

INVESTMENT VALUATION RATIOS:

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

5. Return on Capital Employed (ROCE):

Return on Capital Employed (ROCE) = Net Income Capital Employed

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

3.2 Liquidity and solvency Ratios:

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

3. Debt equity ratio:

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

3.3 Debt coverage Ratios:

Total Debt to Owners fund= Total Debt Owners Fund

Owners fund = Total Assets - Current Liabilities - Long Term Loans

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

Dividend Payout Ratio= Total Dividend Payment/Net Profit

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT