CONSTRUCTION OF OPTIMAL PORTFOLIO

USING SHARPE'S MODEL

By

MUTHURAJ J G
IV Semester, MBA

Reg. No: 17MB0082

Under the Guidance of:

Dr.AMULYA.M. BE.,MBA.,Ph.d.,

Project report submitted to the University of Mysore in partial

fulfillment of the requirements of IV Semester MBA Degree
Examinations - 2019

B.N. Bahadur Institute of Management Sciences,

University of Mysore, Manasagangotri,
Mysore - 570006.

1
 UNIVERSITY OF MYSORE

B.N. BAHADUR INSTITUTE OF MANAGEMENT SCIENCES

MANASAGANGOTHRI

MYSORE - 570 006

CERTIFICATE

This is to certify that Mr . MUTHURAJ J G Student of IV Semester

MBA course has prepared this project report entitled "OPTIMAL

PORTFOLIO CONSTRUCTION USING SHARPE’S SINGLE

INDEX MODEL" in partial fulfillment of the requirements of MBA

degree examinations of 2019.

Place : Mysuru Prof. Dr. R.MAHESH

(CHAIRMAN)
Date: B.N. Bahadur Institute of Management
Sciences,
Mysuru.

2
B.N.BAHADUR INSTITUTE OF MANAGEMENT SCIENCES
UNIVERSITY OF MYSURU, MANASAGANGOTRI,
MYSURU- 570006

GUIDE’S CERTIFICATE

This project report entitled "OPTIMAL PORTFOLIO

CONSTRUCTION USING SHARPE’S SINGLE INDEX MODEL"

is prepared by Mr .MUTHURAJ J G claiming it to be original work by

the candidate. My guidance is on the framework of this project only. This

report is submitted to the University of Mysore in partial fulfillment of

the requirements IV semester MBA degree examination, 2019.

Palce: Mysuru Prof . Dr .AMULYA M

Date : (Project Guide)

3
B.N.BAHADUR INSTITUTE OF MANAGEMENT SCIENCES
UNIVERSITY OF MYSORE, MANASAGANGOTRI,
MYSURU- 570006

DECLARATION

I MUTHURAJ J G, student of IV semester MBA, B.N.Bahadur institute

of Management Sciences, hereby declare that, this project report

"CONSTRUCTION OF OPTIMAL PORTFOLIO USING

SHARPE'S MODEL" is prepared by me under the guidance of Prof

Dr.AMULYA M, in partial fulfillment of the requirements of IV semester

MBA degree examinations of 2019.

I further declare that the project report has not been submitted earlier to

any Institute / university for any degree or diploma.

Place : Mysuru (MUTHURAJ J G)

Date : Reg. No: 17MB0082

4
 ACKNOWLEDGEMENT

I would like to acknowledge with pleasure, the contribution, guidance and

assistance that I received from many in preparing this project report. It is

because of their willingness to sacrifice their precious time, energy and

resources that the successful completion of this project report has been

possible.

I would like to thank Prof. Dr R MAHESH, Chairman & professor,

B.N. Bahadur institute of Management Sciences, University of Mysore,

without whose guidance and inspiration this project report would not

have been completed.

I am indeed thankfull to DR.AMULYA M, B.N Bahadur institute of

Management Sciences, university of mysore, for her constructive back up

support and guidance and helping me to proceed with my project report

Place : Mysuru (MUTHURAJ J G)

Date : Reg. No: 17MB0082

5
 TABLE OF CONTENT

SI. No Title Page No

Introduction

• Statement of problem

• Objective of the study

Chapter - 1 7-10
• Scope of the study

• Methodology

• Limitation of the study

Chapter - 2 Literature review 11-59

Chapter – 3 Data Analysis & Interpretation 60-79

Chapter – 4 Summary of Findings 80-82

Chapter - 5 Conclusion & Suggestions 83-86

Bibliography 87

6
 CHAPTER -1

INTRODUCTION

7
 CHAPTER-1

1.INTRODUCION

This chapter provides research study on "construction of optimal portfolio".

Using the Sharpe's single index model.

The term portfolio refers to any collection of financial assets such as stock,
bonds, and Cash. Portfolios may be held by individual investors and/or managed by
financial professionals, hedge funds, banks and other financial institutions. It is a
generally accepted principle that a portfolio is designed according to the investor's
risk tolerance, time frame and investment objectives. The monetary value of each
asset may influence the risk/reward ratio of the portfolio and is referred to as the asset
allocation of the portfolio. When determining a proper asset allocation one aims at
maximizing the expected return and minimizing the risk.

1.1Statement of the problem:

The statement of the problem under this project is concerned with assessing
the performance the portfolio over a selected period of 4 years considering all sensex
index companies in terms of returns and risk. This involves quantitative measurement
of actual return and the risk born by the portfolio over the period of investment.

The portion in which the securities be invested to obtain optimum return is

also calculated and represented by randomly selecting pharmaceutical companies of
sensex index.This research is undertaken to gain insight about optimal portfolio using
"Sharpe's single index model".

1.2 NEED FOR THESTUDY

Every investor undergoes confusion while selecting securities for his portfolio. He
also faces dilemma while deciding about the proportion of investment to be made in
each security. To help investors get out of such chaotic situation the sharpe”s single
index model may be used to construct an optimal portfolio.this helps the investor to
find a portfolio that best suits his needs. The presents study is undertaken to prove that
by applying this model an individual can construct a portfolio with maximum return
for a givenlevel of risk

8
1.3 Research objectives:
 To examine how risky a stock is if the stock is held in a well-diversified
portfolio.
 To analyze by calculating the reward (return) to risk ratio for all individual
securities.
 To find out the volatility in returns of companies.
 To construct the optimal portfolio of 6 companies of pharmaceutical sector
using Sharpe's single index model.

1.4 Methodology:

 Data sources:

Secondary data

 Data are collected from various sources like company website and company
report.

 Four years data will be collected for the years 2013-14 to 2016-17.

 Analysis is made on sharpe's single index model

 The companies selected for the analysis are WELCURE DRUGS,

BIOCON LIMITED, ALEMBIC LTD, COMBAT DRUGS, CIPLA and
UNICHEM.

 Analysis:

i. Types of analysis:

Analyzing the risk and return of 6 selected companies of

pharmaceutical sectors using Sharpe's single Index model.

ii. Technical tool to be used:

Here the tools used in terms of formulas of Sharpe's model method.

9
1.5 Scope of the study:

• Selections of the companies are restricted to sensex index only.

• Of the 6 companies of the index, the companies are chosen and analyzed
based on their performances in the past 4 years.

• No other factors other than the share price movements, index movements,
Rate of return of the government securities and beta values for the past 4
years are taken for analysis.

1.6 Limitations of the study:

• Only 4 years data has been taken for the construction of optimal portfolio.

• The data collected is basically confined to secondary sources.

• Controlling risk and avoiding losses completely cannot be guaranteed.

• Time is the major limitation.

• The portfolio is constructed purely on the basis of Sharpe's model which

basically considers the stock price movements and doesn't take into
consideration company specific factors, industry specific factors and
economic specific factors.

1.7 Key terms Used:

• Risk free rate = Fixed deposit rate of post office.

• Variance = variance of the security has 2 components namely, systematic risk

or market risk & unsystematic risk or unique risk. The variance explained by
the index is called as systematic risk. The unexplained variance is
unsystematic risk or residual variance.

10
 Chapter -2
LITERATURE REVIEW

11
 2.1 INDUSTRY PROFILE

2.1.1 HISTORY OF STOCK EXCHANGE

The first organised stock exchange in India was started in 1875 at

Bombay and it is stated to be the oldest in Asia. In 1894 the Ahmedabad Stock
Exchange was started to facilitate dealings in the shares of textile mills there. The
Calcutta stock exchange was started in 1908 to provide a market for shares of
plantations and jute mills. The Bombay Stock Exchange (BSE) is an Indian stock
exchange located at Dalal Street, Kala Ghoda, Mumbai (formerly Bombay),
Maharashtra, India. Established in 1875, the BSE is Asia’s first stock exchange. It
claims to be the world's fastest stock exchange, with a median trade speed of 6
microseconds.[3] The BSE is the world's 11th largest stock exchange with an overall
market capitalization of $1.43 Trillion as of March, 2016.[4] More than 5500
companies are publicly listed on the BSE. Unlike countries like the United States
where 70% of the GDP is derived from larger companies and the corporate sector, the
corporate sector in India accounts for only 12-14% of the national GDP. Of these, as
of November 2016, there are only 7,800 listed companies of which only 4000 trade on
the stock exchanges at BSE and NSE. Hence the stocks trading at the BSE and NSE
account for only about 4% of the Indian economy.

2.1.2 Trading pattern of the Indian stock market

Trading in Indian stock exchanges is limited to listed securities of public

limited companies, they are broadly divided into two categories, that is, specified
securities (forward list) and non-specified securities (cash list). Equity shares of
dividend paying, growth-oriented companies with a paid-up capital of minimum
Rs.50 million and a market capitalization of minimum Rs.100 million and having
above 20,000 shareholders are, usually, put in the specified group and the balance in
non-specified group.

Two types of transactions can be carried out on the Indian stock exchanges, that is, a.
spot delivery transactions "for delivery and payment within the time or on the date
stipulated when entering into the contract which shall not be in excess of 14 days
following the date of the contract": and b. forward transactions "delivery and payment
can be extended by further period of 14 days each so that the in general period does

12
not go beyond 90 days from the date of the contract". The latter is permitted only in
the case of particular shares. The brokers who carry over the outstanding pay carry
over charges which are generally determined by the rates of interest prevailing.

A member broker in an Indian stock exchange can act as an mediator, buy and sell
securities for his clients on a commission basis and also can act as a trader or dealer as
a principal, purchase and sell securities on his own account and risk.

Plain and simple, a "stock" is a share in the ownership of a company. A stock

represents a claim on the company's assets and earnings. As you acquire more stocks,
your ownership stake in the company becomes greater.

(Note: Sometimes different words like shares, equity, stocks etc. are used. All
these words mean the same thing.)

A Share market or Stock market is a private or public market for the trading of
company stock and derivatives of company stock at an agreed price; these are
securities listed on a stock exchange as well as those only traded privately.

The stocks are listed and traded on stock exchanges which are entities a
corporation or mutual organization specialized in the business of bringing buyers and
sellers of the organizations to a listing of stocks and securities together.

Stock market is known as the cradle of capitalism. It is a place where

companies come to raise their share capital and investors go to invest their surplus
funds. Stock market essentially discharges the functions of "the invisible hand" that
channels investment into the most productive ventures so as to optimize the overall
productivity of the economy.

Stock Market is a place where financial instruments like shares, debentures,

commercial papers, bonds etc are bought and sold. Stock markets are popularly
known as stock exchanges. There are many popular stock markets in the world.
NASDQ, Tokyo Stock Exchange, London Stock Exchange are the most popular of the
lot. There are many participants in a stock market. Investors, Speculators, Arbitrators,
Traders are different type of participants of a Stock.

13
 Share Trading are done in three ways:-

(a) Offline Share Trading

(b) Online Share Trading

(c) Open Outcry Trading

(a) Offline Share Trading

In this form of trading the customer either goes to the share broker's place and
sits before the share trading terminal and asks the dealer to place orders in his
account. Or rings the share broker, asks the share quotes and other relevant in
formations, and accordingly places orders over the phone.

(b) Online Share Trading

The client could avail the share market and could place his order on his own
from any he wants, provided he has a computer with an Internet connection.

Online Share Trading is becoming the order of the day in share trading. Now-
a-days could hardly see a person going to the stock exchange floor and placing his
order. Electronic media has played an important role in flourishing the share market.
In case 0-1’ online share trading an investor could place his order from his own house
if he has internet connection.

There are two types of trading that can be done through online share trading

(a) Intra-day Trading

(b) Delivery Trading -day Trading

(a) Intra-day Trading

They enter and exit out of the market like the thief in the night. Traders
continuously fane a watch on the market during the trading hours and the moment
they see any opportunity arising they pounce on it for scalping the profit out. This
type of trading generally is risky in nature. They buy and sell stocks during the same
day.

14
(a) Intraday Traders are of two types :-

i. Scalp Traders

ii. Momentum Traders

I.) Scalp Traders

Investors who perform many trades per day for scalping out small profits out
of the bidask spread from each trade are known as scalp traders.

II) Momentum Traders

Investors who pounce on those stocks which move significantly in one

direction and book desired profit are called momentum traders. They do this within a
day.

(b) Delivery trading

The investor buys the share for holding purposes. The brokerage charges are a
bit more than the intraday ones. Delivery Traders are:

i. Technical Traders

ii. Fundamental Traders

iii. Swing Traders

15
I.) Technical Traders

They believe that buying/selling signals are present within the graphs and
charts of the stock.

II.) Fundamental 'Traders

perform trade on the basis of study of fact-sheets of the company like

historical profit graph, balance sheet, anticipated earnings reports, stock splits,
mergers and acquisitions, etc.

III.) Swing Traders

are basically fundamental traders who take delivery of trades for a span of
short period generally more than one day. In this electronic form of trading, the shares
are not in the physical ham for their inconvenience to handle. So, they are now
converted to dematerialized form. So, one investor does not have to worry about the
safety of the physical shares because they bought shares get transferred to the
respective D-mat account. Thus, online share trading has helped the investors a lot as
it is hassle-free and time efficient.

For the intraday traders the brokerage costing is minuscule in comparison to

the delivery trades.

(c) Open Outcry Trading

Here, the investors put their orders through the brokers and these share brokers
in turn place and execute orders on behalf of them on the floor of the exchange. These
brokers gather in a particular place on the trading floor known as Trading Post. There
is a person called as the Specialist present in the trading post who does the matching
of the buy and sell orders. This type of auction method is called Open Outcry Method.

16
2.1.3 DEFINITION OF STOCK EXCHANGE:

"Stock exchange means anybody or individuals whether incorporated or not,

constituted for the purpose of assisting, regulating or controlling the business of
buying, selling or dealing in securities."

It is an association of member brokers for the purpose of self-regulation and

protecting the interests of its members.

It can operate only, if it is recognized by the Government under the securities

contracts (regulation) Act, 1956. The recognition is granted under section 3 of the Act
by the central government, Ministry of Finance.

2.1.4 NATURE & FUNCTIONS OF STOCK EXCHANGE

There is an extraordinary amount of ignorance and of prejudice born out of

ignorance with regard to nature and functions of Stock Exchange. As economic
development proceeds, the scope for acquisition and ownership of capital by private
individuals also grow. Along with it, the opportunity for Stock Exchange to render the
service of stimulating private savings and challenging such savings into productive
investment exists on a vastly great scale. These are services, which the Stock
Exchange alone can render efficiently.

The Stock Exchanges in India have an important role to play in the building of
a real shareholders democracy. To protect the interest of the investing public, the
authorities of the Stock Exchanges have been increasingly subjecting not only its
members to a high degree of discipline but also those who use its facilities-Joint Stock
Companies and other bodies in whose stocks and shares it deals.

The activities of the Stock Exchange are governed by a recognized code of

conduct apart from statutory regulations. Investors both actual and potential are
provided, through the daily Stock Exchange quotations. The job of the Stock
Exchange and its members is to satisfy the need of market for investments to bring the
buyers and sellers of investments together and to make the 'Exchange' of Stock
between them as simple and fair as possible.

17
2.1.5 NEED FOR A STOCK EXCHANGE

As the business and industry expanded and economy became more complex in
nature, a used for permanent finance arose. Entrepreneurs require money for long
term needs, whereas investors demand liquidity. The solution to this problem gave
way for the origin of . ‘stock exchange', which is a ready market for investment and
liquidity.

As per the Securities Contract Act, 1956, "STOCK EXCHANGE" means

anybody of individuals whether incorporated or not constituted for the purpose of
regulating or controlling the business of buying, selling or dealing in securities".

2.1.6 BY-LAWS

Besides the above act, the securities contracts (regulation) rules were also
made in 1957 to regulate certain matters of trading on the stock exchanges. There are
also by-laws of exchanges, which are concerned with the following subjects.

Opening / closing of the stock exchanges, timing of trading, regulation of

blank transfers, regulation of badla or carryover business, control of the settlement
and other activities of the stock exchange, fixation of margins, fixation of market
prices or making up prices, regulation of taravani business (jobbing), etc., regulation
of brokers trading, Brokerage charges, trading rules on the exchange, arbitration and
settlement of disputes, Settlement and clearing of the trading etc.

2.1.7. REGULATION OF STOCK EXCHANGE:

The securities contracts (regulation) act is the basis for operations of the stock
exchanges in India. No exchange can operate legally without the government
permission or recognition. Stock exchanges are given monopoly in certain areas under
section 19 of the above Act to ensure that the control and regulation are facilitated.
Recognition can be granted to a stock exchange provided certain conditions are
satisfied and the necessary information is supplied to the government. Recognitions
can also be withdrawn, if necessary. Where there are no stock exchanges, the

18
government can license some of the brokers to perform the functions of a stock
exchange in its absence.

2.1.8 Securities Contracts (Regulation) Act, 1956:

SC(R)A aims at preventing undesirable transactions in securities by regulating

the business of dealing therein by providing for certain other matters connected
therewith. This is the principal Act, which governs the trading of securities in India.

The term "securities" has been defined In the SC(R) A. As per Section 2(h),
the 'Securities' include:

 Shares, scripts, stocks, bonds, debentures, debenture stock or other marketable

securities of a like nature in or of any incorporated company or other body
corporate

 Derivative

 Units or any other instrument issued by any collective investment scheme to

the investors in such schemes.

 Government securities

 Such other instruments as may be declared by the Central Government to be

securities.

 Rights or interests in securities.

2.1.9 Securities and exchange board of India (SEBI)

Securities and Exchange Board of India (SEBI) setup as an autonomous

regulatory authority by the Government of India in 1988 "to protect the interests of
investors in securities and to promote the development of, and to regulate the
securities market and for matters connected therewith or incidental thereto". It is
empowered by two acts namely the SEBI Act, 1992 and the securities contract
(regulation) Act, 1956 to perform the function of protecting investor's rights and
regulating the capital markers.

Securities and Exchange Board of India (SEBI) regulatory reach has been
extended to more areas and there is a considerable change in the capital market.

19
SEBI's annual report for 1997-98 has stated that throughout its six-year existence as a
statutory body, it has sought to balance the twin objectives of investor protection and
market development. It has formulated new rules and crafted regulations to foster
development.

Monitoring and surveillance was put in place in the Stock Exchanges in 1996-
97 and strengthened in 1997-98.

SEBI was set up as an autonomous regulatory authority by the government of

India in 1988’ to protect the interests of investors in securities and to promote the
development of, and to regulate the securities market and for matters connected
therewith or incidental Thereto. It is empowered by two acts namely the SEBI Act,
1992 and the securities contract (regulation) Act. 1956 to perform the function of
protecting investor's rights and regulating the capital markets.

2.1.10 Objectives of SEBI

The promulgation of the SEBI ordinance in the parliament gave statutory

status to, SEBI in 1992. According to the preamble of the SEBI, the three main
objectives are:-

• To protect the interests of the investors in securities

• To promote the development of securities market.

• To regulate the securities market.

2.1.11 Powers of SEBI

SEBI has been vested with the following powers:

 To approve by-laws of stock exchanges,

 To require the stock exchange to amend their by-laws.

 Inspect the books of accounts and call for periodical returns from recognized
stock exchanges.

 Inspect the books of accounts of financial intermediaries.

 Compel certain companies to list their shares in one or more stock exchanges.

20
  Levy fees and other charges on the intermediaries for performing its functions.
Grant license to any person for the purpose of dealing in certain areas.

 Delegate powers exercisable by it.

 Prosecute and judge directly the violation of certain provisions of the

companies Act.

 Power to impose monetary penalties.

2.2 PORTFOLIO MANAGEMENT

2.2.1 Concept of Portfolio:

Portfolio is the collection of financial or real assets such as equity shares,

debentures, bonds. treasury bills and property etc. portfolio is a combination of assets
or it consists of collection of securities. These holdings are the result of individual
preferences, decisions of the holders regarding risk, return and a host of other
considerations.

2.2.2 Portfolio management

An investor considering investment in securities is faced with the problem of

choosing. From among a large number of securities. His choice depends upon the risk
return characteristics of individual securities. He would attempt to choose the most
desirable securities and like to allocate his funds over his group of securities. Again he
is faced with the problem of deciding which securities to hold and how much to invest
in each.

The investor faces an infinite number of possible portfolio or group of

securities. The risk and return characteristics of portfolios differ from those of
individual securities combining to form a portfolio. The investor tries to choose the
optimal portfolio taking into consideration the risk-return characteristics of all
possible portfolios.

As the economic and financial environment keeps the changing the risk return
characteristics of individual securities as well as portfolio also change. An investor
invests his funds in a portfolio expecting to get a good return with less risk to bear.

21
 Portfolio management concerns the construction & maintenance of a
collection of investment. It is investment of funds in different securities in which the
total risk of the portfolio is minimized while expecting maximum return from it. It
primarily involves reducing risk rather that increasing return. Return is obviously
important though, and the ultimate objective of portfolio manager is to achieve a
chosen level of return by incurring the least possible risk.

2.2.3 FEATURES OF PORTFOLIO MANAGEMENT

The objective of portfolio management is to invest in securities in such a way

that one maximizes one's return and minimizes risks in order to achieve one's
investment objective.

1) Safety of the investment:

The first important objective investment safety or minimization of risks is of

the important objective of portfolio management. There are many types of risks.
Which are associated with investment in equity stocks, including super stock. There is
no such thing called Zero-risk investment. Moreover relatively low-risk investment
gives corresponding lower returns.

2) Stable current returns:

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 is current income by of interest or
dividends, not .capital gains.

22
3)Appreciation in the value of capital:

A good portfolio should appreciate in value in order to protect the investor

from erosion in purchasing power due to inflation. In other words, a balance portfolio
must consist if certain investment, which tends to appreciate in real value after
adjusting for inflation.

4) Marketability:

A good portfolio consists of investment, which can be marketed without

difficulty. If there are too many unlisted or inactive share in your portfolio, you will
face problems in enchasing them, and switching from one investment to another. It is
desirable to invest in companies listed on major stock exchanges, which are actively
traded.

5) Liquidity:

The portfolio should ensure that there are enough funds available at the short
notice to take of the investor's liquidity requirements.

7) Tax Planning

Since taxation is an important variable in total planning, a good portfolio

should let its owner enjoy favorable tax shelter. The portfolio should be developed
considering income tax, but capital gains, gift tax too. What a good portfolio aims at
is tax planning, not tax evasion or tax avoidance.

2.2.4 Functions of Portfolio Manager

The main functions of portfolio manager are

1) Advisory role:

He advises new investments, review of existing ones, identification of

objectives, recommending high yield securities etc,

23
2) Conducting Market and Economic Surveys:

There is essential for recommending high yielding securities, they have to

study the current physical properties, budget proposals, industrial policies etc,. Further
portfolio manager should take into account the credit policy, industrial growth,
foreign exchange position, changes in corporate laws etc,.

3) Financial Analysis

He should evaluate the financial statements of a company in order to

understand their net worth, future earnings, prospects and strengths.

4) Study of Stock Market

He should see the trends of at various stock exchanges and analyze scripts, so
that he is able to identify the right securities for investments.

5) Study of Industry

To know its future prospects, technological changes etc,. Required for

investment proposals he should also foresee the problems of the industry.

6) Decide the type of Portfolio

Keeping in the mind the objectives of a portfolio, the portfolio manager have
to decide whether the portfolio should comprise equity, preference shares, debentures
convertible, non-convertible or partly convertible, money market securities etc,, or a
mix of more than one type.

A good portfolio manager should ensure that

• There is optimum mix of portfolios i.e. securities.

• To strike a balance between the cost of funds and the average return on
investments

• Balance is struck as between the fixed income portfolios and dividend

bearing securities

• Portfolios of various industries are diversified ./ To decide the type of

investment

24
 • Portfolios are reviewed periodically for better management and returns ./
Any right or bonus prospects in a company are taken into account

• Better tax planning is there

• Liquidity assets are maintained ./ Transaction cost are minimized

2.2.5 PORTFOLIO MANAGEMENT PROCESS:

Portfolio management IS a complex activity, which may be broken down into

the following steps:

1. Specification of investment Objectives and Constraints:-

The first step in the portfolio management process is to specify one's

investment objectives and constraints. The commonly stated investment goals are:

a) Income

b) Growth

c) Stability

The constraints arising from liquidity, time horizon, tax and special
circumstances must be identified.

2. Choice of Asset mix:

The most important decision in portfolio management is the asset mix

decision. Very broadly, this is concerned with the proportions of 'stocks' and 'bonds' in
the portfolio.

3. Formulation of Portfolio Strategy:

Once a certain asset mix is chosen, an appropriate portfolio strategy has to be

hammered out. Two broad choices are available an active portfolio strategy or a
passive portfolio strategy. An active portfolio strategy strives to earn superior risk
adjusted returns by resorting to market timing, or sector rotation, or security selection,
or some combination of these. A passive portfolio strategy, on the other hand, involves
holding a broadly diversified portfolio and maintaining a pre-determined level of risk
exposure.

25
4. Selection of Securities:

Generally, investors pursue an active stance with respect to security selection.

For stock selection, investors commonly go by fundamental analysis and / or technical
analysis. The factors that are considered in selecting bonds are yield to maturity, credit
rating, term to maturity, tax shelter and liquidity.

5. Portfolio Execution:

This is the phase of portfolio management which is concerned with

implementing the portfolio plan by buying and / or selling specified securities in
given amounts.

6. Portfolio Revision.

The value of a portfolio as well as its composition - the relative proportions of

stock and bond components - may change as stocks and bonds fluctuate. In response
to such changes, periodic rebalancing of the portfolio is required. This primarily
involves a shift from stocks to bonds or vice versa. In addition, it may call for sector
rotation as well as security switches.

7. Performance Evaluation:

The performance of a portfolio should be evaluated periodically. The key

dimensions portfolio performance evaluation are risk and return and the key issue is
whether the portfolio return is commensurate with its risk exposure. .

2.2.6 A PORTFOLIO MANAGEMENT HAS BEEN CHARACTERIZED

Portfolio theory forms the basis for portfolio management. Portfolio

management deals with the selection of securities and their continuous shifting in the
portfolio to optimize returns to suit the objectives of an investor. This, however,
requires financial expertise in selecting the Strategic Financial Management right mix
of securities in changing market conditions to get the best out of the stock market. In
India, as well as in a number of Western countries, portfolio management service has
assumed the role of a specialized service now-a-days and a number of professional
merchant bankers compete aggressively to provide the best to high net-worth clients,
who have little time to manage their investments. The idea is catching on with the
boom in the capital market and an increasing number of people are . inclined to make

26
profits out of their hard-earned savings. A portfolio theory guides investors about the
method of selecting securities that will provide the highest expected rate of return for
any given degree of risk or that will expose the investor to a degree of risk for a given
expected rate of return. Portfolio theory can be discussed under the following heads.

• Tradition portfolio theory

• Modern portfolio theory

Tradition portfolio theory

The traditional approach to portfolio management concerns itself with the

investor, definition of portfolio objectives, investment strategy, diversification and
selection of individual investment as detailed below:

1 .Investor's study includes an insight into his -

(a) Age, health, responsibilities, other assets, portfolio needs;

(b) Need for income, capital maintenance, liquidity;

(c) Attitude towards risk; and

(d) Taxation status;

2. Portfolio objectives are defined with reference to maximizing the investors' wealth
which is subject to risk. The higher the level of risk had borne, the more the
expected returns.

3 .Investment strategies cover examining a number of aspects including:

(a) Balancing fixed interest securities against equities

(b) Balancing high dividend payout companies against high earning

growth companies as required by investor;

(c) Finding the income of the growth portfolio.

(d) Balancing income tax payable against capital gains tax.

(e) Balancing transaction cost against capital gains from rapid switching.

27
 (f) Retaining some liquidity to seize upon. Bargains.

4. Diversification reduces volatility of returns and risks and thus adequate equity
diversification is sought. Balancing of equities against fixed interest bearing
securities is also sought.

5. Selection of individual investments is made on the basis of the following principles:

• Methods for selecting sound investments by calculating the true or intrinsic

value of a share

• And comparing that value with the current market value (i.e. by following the
fundamental analysis) or trying to predict future share prices from past price
movements (i.e., following the technical Expert advice is sought besides
study of published accounts to predict intrinsic value.) Inside information is
sought and relied upon to move to diversified growth companies, switch
quickly to winners than loser companies.

Modern portfolio theory

This theory suggests that the traditional approach to portfolio analysis,

selection and management may yield less than optimal result that a more scientific
approach is needed based on estimates of risk and return of the portfolio and attitudes
of the investor towards a risk return trade off steaming from the analysis of the
individual securities.

In this regard India after government policy of liberalization has unleashed

foreign market forces. Forces that have a direct impact on the capital markets. An
individual investor can't easily monitor these complex variables in the securities
market because of lack of time, information and know-how. That is when investors
look in to alternative investment options. Once such option is mutual funds. But in the
recent times investor has lost faith in this type investment and has turned towards
portfolio investment. With portfolio investment gaining popularity it has emphasized
on having a proper portfolio theory to meet the needs of the investor and operate in
the capital market using through scientific analysis and backed by dependable market
investigations to minimize risk and maximize returns.

The scientific analysis of risk and return is modern portfolio theory and
Markowitz laid the foundation of this theory in 1951. He began with the simple

28
observation that since almost all investors invests in several securities rather that in
just one, there must be some benefit from investing in a portfolio of several securities.

2.2.7 OPTIMAL PORTFOLIO CONSTRUCTION

Portfolio is a combination of securities such as stocks, bonds and money

market instruments. The process of blending together the board asset classes so as to
obtain optimum return with minimum risk is called portfolio construction.
Diversification of investments helps to spread risk over many assets. A diversification
of securities gives the assurance of obtaining the anticipated return on portfolio in a
diversified portfolio, some securities may not perform as expected, but others may
exceed the expectation and making the actual return of the reasonably close of
anticipated one.

Keeping a portfolio of single security may lead to a greater likelihood of the

actual return somewhat different from other expected return. Hence it is a common
practice to diversify securities in the portfolio. Keeping this fact in mind the author
has tried to construct portfolio with diversification of investments in all sectors.

The steps to be followed in constructing optimal portfolio:

1) Determination of objectives.

2) Selection of securities based on the objectives.

3) Choose a suitable approach and construction portfolio.

4) Apply the approach and construct the portfolio.

5) Assessment of risk and return.

Various methods of constructing optimal portfolio.

SOme of the famous methods for constructing optimal portfolio are:

1. Markowitz Model.

2. Sharpe's Single Index Model.

3. Treynor's & Black Model.

29
2.2.8 MARKOWITZ MODEL

Harry M. Markowitz is credited with introducing new concept of risk

measurement and their application to the selection of portfolios. He started with the
idea of risk aversion of investors and their desire to maximize expected return with
the least risk. Markowitz used mathematical programming and statistical analysis in
order to arrange for the optimum allocation of assets within portfolio. To reach this
objective, Markowitz generated portfolios within a reward-risk context. In other
words, he considered the variance in the expected returns from investments and their
relationship to each other in constructing portfolio. In essence, Markowitz's model is a
theoretical framework for the analysis of risk return choices. Decisions are based on
the concept of efficient portfolios.

A portfolio is efficient when it is expected to yield the highest return for the
level of risk accepted or, alternatively, the smallest portfolio risk or a specified level
of expected return. To build an efficient portfolio an expected return level is chosen,
and assets are substituted until the portfolio combination with the smallest variance at
the return level is found. As this process is repeated for other expected returns, set of
efficient portfolios is generated.

Assumptions

The Markowitz model is based on several assumptions regarding investor

behavior:

i) Investors consider each investment alternative as being represented by a

probability distribution of expected returns over some holding period.

ii) Investors maximize one period-expected utility and possess utility curve,
which demonstrates diminishing marginal utility of wealth.

iii) Individuals estimate risk on the basis of the variability of expected returns.

iv) Investors base decisions solely on expected return and variance (or standard
deviation) of returns only.

v) For a given risk level, investors prefer high returns to lower returns. Similarly,
for a given level of expected return, investor prefer less risk to more risk.

30
 Under these assumptions, a single asset or portfolio of assets is considered to
be “efficient" if no other asset or portfolio of assets offers higher expected return with
the same (or lower) risk or lower risk with the same (or higher) expected return.

2.2.9 MARKOWITZ DIVERSIFICATION

Markowitz postulated that diversification should not only aim at reducing the
risk of a security by reducing its variability or standard deviation but by reducing the
covariance or interactive risk of two or more securities in a portfolio.

As by combination of different securities, it is theoretically possible to have a

range of risk varying from zero to infinity. Markowitz theory of portfolio
diversification attached importance to standard deviation to reduce it to zero, if
possible.

2.2.10 SHARPE'S SINGLE INDEX MODEL:

Sharpe had provided a model for the selection of appropriate securities in a

portfolio. The selection of any stock is directly related to its excess return beta ratio.
The excess return is the difference between the expected return on the stock and the
risk less rate of interest such as offered on government securities or Treasury bill. The
excess return to beta ratio measure the additional return on a security per unit of
systematic risk or non diversifiable risk. This ratio provides a relationship between
potential risk and return. Ranking of the stocks are done on the basis of their excess
return to beta. Portfolio managers would like to as all stocks with higher ratios. The
selection of stocks depends on unique cut-off rate such as all stocks with higher
rations of (Ri-Rf)/Bi are included and the stocks with lower rank are let-off. The cut-
off point is denoted by C*. The stocks ranked above C* have high excess return to
beta than the cut-off point Ci and are included in the optimal portfolio.

ASSUMPTIONS OF SIM

The Sharpe's Single Index Model is based on the following assumptions:

• The expectations of all investors are homogeneous in nature.

• A uniform holding period is used in estimating risk and return for each
security.

31
 • The price movements of a security is not only dependent upon the nature of
thee other securities. They are also dependent on the general business and
economic Conditions. The indices, to which the returns of each security are
correlated, are likely to be some securities' market proxy.

• The random disturbance terms V has an expected value zero (0) and a finite
Variance. It is not correlated with the return on market portfolio (Rm) as well
as with the error term (e*) for any other securities.

CONSTRUCTION OF AN OPTIMAL PORTFOLIO USING

SINGLE INDEX MODEL:

Generally, most of the stock prices over a period of time move with the market
index. Fund managers do selection of securities based on the management efficiency
and security analysis which is done considering various parameters like the turnover
of company, its profit margin, DPS, EPS, return on investment and the like.

The rate of return of the stocks included in portfolio, using daily closing prices
of each company is computed using the formula:

Ri = (Pt - Po)
Po

Where,

Pt= current year price

Po = previous year price.

• The rate of return of the Sensex index may be computed using daily closing points
as under:
Ri = (Pt - Po)
Po

Where,

Pt= current year price

Po = previous year price.

 Beta evaluate the risk.

32
    ( Rm Rm)( Ri Ri )
( Rm  Rm ) 2

Where,

= beta

Rm=return of market index

Rm = mean of market index

Ri = return of individual stock

Ri = mean of individual stock

 excess return to Beta is computed using following formula:

Ri - Rf


The securities are ranked according to this ratio.

 The variance of the index movement is computed as under:

2   ( Rm  Rm)
N 1

 The variance of the Stock price movement is computed as under:

2   ( Ri  Ri) 2

N 1

 The systematic and unsystematic risks are computed as under:

Systematic risk = 2m2

Unsystematic risk = ei2 - Systematic risk

 Ci values for all the slocks according to the ranked order i.s computed using
the following formula;

33
 m  ( Ri  Rf ) i
Ci 
ei 2
i 2
1  m  2
2

ei

ei2 = unsystematic risk

 = beta value of individual security .

m = market index risk

Ri-Rf=excess return

 Xi and Zi are to be determined to know how much funds needs to be invested

in each security using the following formula;

Zi
Xi 
 Zi

Where,

Xi = proportion of investment

i  Ri  R f  
Z =
i
2    C *
ei  i  
ei2 = unsystematic risk

= beta value of individual security

Ri-Rf = excess return

C* = cut off point

MERITS OF SHARPE'S SINGLE INDEX MODEL

The following are the merits of SIM: ,

a. The model is simple to understand and easy to apply.

34
 b. If one has 'n' securities at his disposal, it requires only (3n+2) estimates but
Markowitz's model requires n(n-l)/2 estimates,

c. It provides an estimate of security's return as well as of the index value.

d. It greatly helps in obtaining the following inputs required for applying the
Markowitz's model:

i.) The expected return on each security,

ii.) The variance of return on each security.

iii.) The covariance of return between each pair of securities

LIMITATIONS OF SIM.

• The Single Index Model proposed by William Sharpe does not consider
uncertainty in the market-as time progresses; instead the model optimizes for
a single point in time.
• This model assumes that security prices move together only because of
common co-movement with the market. But there are influences beyond the
general business and market conditions, like industry-oriented factors that
also influence movement of securities together.

2.2.11 TREYNOR'S & BLACK MODEL:

In Finance the Treynor's—Black model is a mathematical model for security
selection published by Fischer Black and Jack Treynor in 1973. The model assumes
an investor who considers that most securities are priced efficiently, but who believes
he has information that can be used to predict the abnormal performance (Alpha) of a
few of them; the model finds the optimum portfolio to hold under such conditions.

In essence the optimal portfolio consists of two parts:

1. A passively invested index Rinds containing all securities in proportion to their

market value

2. Active portfolio containing the securities for which the investor has made a
prediction about alpha. In the active portfolio the weight of each stock is
proportional to the alpha value divided by the variance of the residual risk.

35
 The Treynor-Black model is a multifactor model applied to the equity
universe, equities being relatively less risky to Derivatives, suit the appetite of a
moderate risk friendly investor.

The Treynor-Black model, tries to define risk and return when constructing a
portfolio of assets. The model tries to be consistent with Efficient Market Hypothesis
to construct a portfolio, while using alpha, which is the projected return of the security
over the market adjusted risk free Rate/return. The optimal portfolio will lean towards
securities with alphas greater than zero, indicating outperformance. Alpha is
determined in a subjective manner and helps in deciding whether to buy, hold or sell
the security.

The model tries to find a mix of securities, where their associated alphas and
systematic risks generate the highest possible benefit from active management

• SYSTEMATIC RISK:

These are risk associated with the economic, political, sociological and other
macro Level change. They affect the entire market as a whole and cannot be
controlled or eliminating merely by diversifying ones portfolio the degree, to which
different portfolios are affected by these systematic risk as compared to the effect on
the market as a whole, is different and is measure by beta. To put it differently,
systematic risk s of various securities differ due to their relationship with the market.
The beta factor describes the movement of stocks or a portfolio's return in relation to
that of the market return. As the society is dynamic, changes occur in the economic,
political and social systems constantly. These changes have an influence on the
performance of companies and thereby on their stock price. But these changes affect
all securities in varying degrees. For example, economic and political instability
adversely affects all industries and companies.

Systematic risk = i2m2

1. Interest rate risk:

Interest rate risk is type of systematic risk that particularly affects debt
securities like bond and debentures. A bond or normally has a fixed coupon rate of
interest. The issuing company pays interest to the bond holder at this coupon rate. A
bond is normally issued with a coupon rate which is equally to the interest rate

36
prevailing in the market at the time of issue. Subsequent to the issue, the market
interest rare may change but the coupon rate remains constant till the maturity of the
instrument. The change in market interest rate relative to the coupon rate of a bond
causes changes in its market price. The market price of bonds and debentures is
inversely related to the market interest rate. As a result, the market price of debt
securities fluctuates in response to variations in interest rates is known as interest rate.

Market risk:

Market risk is a type of systematic risk that affects shares. Market price of
shares move up or down consistently for some time periods. A general rise in share
prices is referred to as a bullish trend, whereas a general fall in share prices is referred
to as bearish

2. Purchasing power risk:

Another type of systematic risk is the purchasing power risk. It refers to the
variation in investor returns caused by inflation. Inflation result in lowering of the
purchasing power of money. When an investor purchases a security, he foregoes the
opportunity to buy some goods of services. In other words, he is postponing his
consumption. Meanwhile, if there is inflation in the economy, the price of goods and
services would increase and thereby the investor actually experiences a decline in the
purchasing power of his investment and the return from the investment. For all
practice purposes, the market return are measure by the return on the index (Nifty,
Mid-cap etc.), since the index is a good to the market.

• UNSYSTEMATIC RISK:

Unsystematic risk is unique to a firm or industry. It does not affect an average

investor. Unsystematic risk is caused by factors like labor strike, irregular
disorganized management policies and consumer preferences. These factors are
independent of the price mechanism operating in the securities market. The problems
of both systematic and unsystematic risk are inherent in industries dealing with basic
raw materials as well as in consumer goods industries.

Unsystematic risks can be further classified into business and financial risk.
Every industry and its shareholders face both systematic and unsystematic risk. The
systematic portion results from overall market influences and unsystematic portion

37
results from company and industry influences systematic and unsystematic risk can be
sub-divided and analyzed separately

Unsystematic risk =ei2 =aei2 - i2 m2

Beta tool used to measure market risk.

The, most important part of the equation is B or Beta. It is used to describe the
relationship between the stock return and, market index's returns. If the regression line
is at an exact 45 degree angle beta will be equal to 1.0. A 1% change in market index
shows it is on the average accompanied by a 1%, change in the stock of the vertical
axis. The percentage changes in the prices of the stock are regressed against the
percentage changes in the price of a market. Index Usually in the S&P CNX NIFTY
price index, Beta may be positive a market index. Usually in the S & P CNX NIFTY
price index, positive or negative. Usually betas are found to be positive. We rarely
find a negative beta, which reflects a movement, contrary to the market. 4:5 betas,
indicates that the market index change of 1 % was whatever the market index rose or
fell by 1 %, the stock could rise and falls by 1.5%. Beta is referred to a systematic risk
to the market, and a.+ E is the unsystematic risk. Beta is a useful price of information
both for individual stock as well as portfolios but as a Beta is a measure of risk, it is
better used in the analysis portfolios.

2.3 ARTICLE RELATED LITERATURE REVIEWS

2.3.1 "Sharpe's Single Index Model and its Application Portfolio

Construction: An Empirical Study".

Published Date: 2014

Author: Kapil Sen and CA Disha Fattawat

Abstract: Studied Sharpe's Single Index Model and its Application Portfolio
Construction. The study reveals that the construction of optimal portfolio investment
by using Sharpe's Single Index Model is easier and more comfortable than by using
Markowitz's Mean-Variance Model.

2.3.2 "Application of Sharpe Single Index Model to BSE".

Published Date: 2014

38
Author: Naveen

Abstract: Studied "Application of Sharpe Single Index Model to BSE". The study
shows that Sharpe gave a road map to construct the optimal portfolio. The study
shows that cut off rate Plays a vital role in constructing the optimal portfolio. The
study also states that investor should continuously monitor his portfolio because
market situation keeps on changing so investor should revise his portfolio
accordingly.

2.3.3 "Explains the investment alternatives available for rational

investor".
Published Date: 2014

Author: Gopalakrishna, Muthu

Abstract: explains the investment alternatives available for rational investor. A

comparison of traditional portfolio theory with that of modern portfolio theory is
made in this study. This study aims to test whether single index model offers an
appropriate explanation of stock returns on IT stocks. The samples included in this
study consists of 13 actively traded scrip's listed in the National Stock Exchange
Limited, Bombay (NSE).The scrip's in the sample are selected from NSE IT index.
The secondary data for a period 2004-2008 has been used for the study. By applying
regression on the market return and excess security return it is found that IT index has
a phenomenal amount of sensitiveness over S&P CNX Nifty. The study investigated
that there are four aggressive stocks having beta coefficient of more than one. It is
recommended that among the sample companies all the stocks are undervalued except
one stock and thus the investors can pick these stocks to revise their portfolio.

2.3.4 "Optimal portfolio construction using Sharpe's single index

model - a study of selected stocks from Bse".

Published Date: December 2014

Author: Dr.R.Nalini

Abstract: To make wise decisions in investment, there is a need for knowledge on

security analysis and portfolio management. A rational investor aims at attaining
maximum return with minimum risk. As the scope of investment avenues with
39
varying degrees of risk is vast, the scope of the present study is relating to equity
portfolio construction with selected stocks from the BSE. Constructing an optimal
portfolio is a challenging task for the individual as well as the institutional investors.
This study is aimed at creating awareness in the minds of investors regarding the
utility of Sharpe's Single Index Model in portfolio construction. The Indian investors
also may reap the benefits of Sharpe's Single Index Model , (SIM) as the number of
companies traded in the stock exchanges is increasing year after year. Fifteen
companies from the S&P BSE Sensex index were selected for the study. Among the
fifteen sample companies, only four were selected for optimal portfolio using SIM.
The results of the present study and such micro level studies have more utility value
to the fund managers.

2.3.5 "Applicability and utility of the Single Index Model in the

Indian context".

Published Date: 2014

Author: Dileep and Rao, Kesava

Abstract: Studied the applicability and utility of the Single Index Model in the Indian
context and also evaluated the performance of the portfolio thus constructed in terms
of its rate of return. A sample of thirty companies belonging to various sectors was
chosen for study and the data required for this study was collected from secondary
sources. It was found that only four companies were included in portfolio
construction. The study concluded that William Sharpe's Single Index Model will be
sustainable and applicable to the Indian market where investors can construct a
portfolio for improving the expected returns on their investment.

2.3.6 "An approach to the portfolio selection based on Sharpe's

Single Index Model".

Published Date: 2013

Author: Kumar, Arun and Manjunatha

Abstract: Presented an approach to the portfolio selection based on Sharpe's Single

Index Model. The main objective of the study is to analyze the performance of
securities based on aggregate weighted average of EPS, Sales and net profit. The

40
secondary data has been collected from websites. Stocks covered in S&P CNX Nifty
are taken out for analysis. The yearly data for five years has been taken. The securities
which top on aggregate weighted average have been selected for the constructing
portfolio. For analyzing the securities various statistical tools like weighted average,
simple average, standard deviation, regression analysis, systematic and unsystematic
risk are used. Out of the fifty companies in S&P CNX Nifty only six securities were
selected for the optimal portfolio construction. The percentage of investment to be
made in the selected securities has been calculated using Sharpe's Single Index
Model. The study reveals that stock prices and market index move in the same
direction.

2.3.7 "Conducted a study to construct an optimal portfolio using

Sharpe's Single Index Model considering no short sales".

Published Date: 2014

Author: Sarker, Mokta Rani

Abstract: Conducted a study to construct an optimal portfolio using Sharpe's Single

Index model considering no short sales. The study has been conducted on individual
securities listed in Dhaka Stock Exchange, where short sales are not allowed. The
monthly closing prices of one hundred and sixty four companies listed in Dhaka Stock
Exchange and share price index for the period of July 2007 to June 2013 have been
considered in this study. This method formulates a unique cut-off point, selects stocks
having excess return to beta ratio surpassing this cut-off point and determines the
percentage of investment to be made in each & of selected stocks. The optimum
portfolio consists of thirty three stocks selected out of one hundred and sixty four
stocks giving the return of 6.17%. From this empirical analysis to some extent, an
investor can forecast individual securities return through the market movement and
can make use of it.

2.3.8 "Aimed at developing an optimal portfolio of equity of IT sector

through Sharpe's Single Index Model".

Published Date: 2012

Author: Andrade, Pratibha Jenifer

41
Abstract: Aimed at developing an optimal portfolio of equity of IT sector through
Sharpe's single Index Model. In this study, a sample of six top performing IT
companies traded in BSE has been chosen The data related to the daily returns of the
securities and the market index has been collected through secondary sources. Data
has been collected for a period of three years i.e. 2009 to 2011. It was found that the
optimal portfolio has been constructed with five companies.

2.3.9 "Constructed an optimal portfolio using fifty companies which

were listed on the NSE".

Published Date: 2014

Author: Desai, Radhika and Surti, Manisha

Abstract: constructed an optimal portfolio using fifty companies which were listed on
the NSE and the time duration of the study is three years. Among the fifty companies
only ten companies were selected for the optimum portfolio. The proportion of
investment made in each security has been calculated using the Sharpe's Single Index
Model. The volatility of security has been analyzed. The research provides direction
to investors regarding performance of securities. Once the performance is analyzed
and optimum portfolio of securities is constructed, it enables the investor to take
appropriate decisions.

2.3.10 "Sharpe's single index model on equity portfolio of large caps

companies of selected sectors in India".

Published Date: 2014

Author: Varadharajan and Ganesh

Abstract: Applied the SIM on equity portfolio of large caps companies of selected
sectors in India. The main aim of this study is to find out the optimum portfolio from
the selected companies in three major sectors like power sector, shipping sector and
textile sector. From each sector six companies have been selected and so a total of
eighteen companies are selected as samples. The companies with the largest market
capitalization in each sector have 1st April selected. Data for five financial years were
used for constructing the portfolio; i.e. from 1 st April 2006 to 31st march 2011. All
calculations have been done using MS Excel. From the analysis it was found that only

42
five companies were included in the portfolio constructed out of the eighteen
companies.

2.4.1 SECTOR INFORMATION

India's pharmaceutical sector has seen unwavering growth in the past few
years, going up to 23 billion USD in 2013 from 23 billion USD in 2002. Various
industry reports suggest that the pharmaceutical sector in India has been growing
consistently at the rate of 13-14 % every year since the last five years. According to
the consulting firm McKinsey & Company, India's pharmaceutical sector will touch
55 billion USD by 2020 and generics are expected to continue to dominate the market
while patent-protected products are likely to constitute 10 per cent of the market till
2015.

Indian pharmaceutical industry companies can broadly be classified as

domestic companies and foreign companies (MNCs). Some of the major players
include GlaxoSmithKline, Cipla, Dr. Reddy's Laboratories, Ranbaxy, Pfizer etc.
Financial year 2013 was challenging on the domestic front and witnessed sluggish
growth owing to acute competition from unlisted players and so on. Growth in the
sector is expected to be boosted this year due to increasing consumer spending, rapid
urbanization.

There has been a paradigm shift in the attitude of people in India towards
healthcare. A larming rise in cases of cardiovascular problems, nervous system
disorders, diabetes and many other diseases as well as disorders has created more
awareness in the growing population about the need of improvement in medical
sector. Therefore, there is a great need for pharmaceutical companies to invest their
time and resources in research and development of new, efficient and cost effective
drugs.

India has an organized pharmaceutical market of its own, which is being

considered as a potential partner by other countries. The Indian Pharma Market is
ranked number 3 in terms of volume and 10th in terms of market value. Indian
pharma companies are also proving to be global leaders in production of generics and
vaccines.

43
 According to a report by the Department of Industrial Policy and Promotion
(DIPP), India has attracted Direct Foreign Investment of US$ 11,391.03 million from
April 2000- 2013 and will see an upsurge in the years to come. Biopharmaceuticals is
also increasingly becoming an area of interest given the complexity in manufacture
and limited competition.

According to a report by IMS Health, the domestic pharmaceutical market has

seen a growth of 13.5 % and recorded total sales of Rs 6,883 crore (US$ 1.12 billion)
in the month of July 2013. The major reasons for this growth can be attributed to
continual growth in prolonged therapies, increasing sales of generic medicines and
strengthening hold over rural markets.

Employment Trends

With the expected growth rate of 14% per annum, Indian Pharmaceutical
sector is expected to create more jobs in India in 2014 and add 45,000 fresh openings
to its current strength. Not marred by recession or inflation, the pharma sector has a
competitive advantage of prospering steadily and thus attracts lots of young
professionals looking at pharmaceutical as their prospective career option. This sector
has also been responsible in creating a rich talent pool of researchers, scientists,
doctors and project managers.

The need of skilled manpower in the pharmaceutical industry ranges widely

from R&D, Quality Assurance (QA), Intellectual Property (IP), manufacturing to even
sales and marketing. What the pharma industry needs is to have better policies to
retain and nurture the existing talent and equip them with necessary skills. However,
this sector is emerging as a popular choice amongst Gen Y, since the nature of work,
primarily treating patients and research for new drug discoveries plays an integral role
in meeting their key career aspirations.

Challenges
• Greater customer expectations.
• Restricted discovery and developing process.
• Effective product life-cycle management.
• Increase in pricing policies.

44
 2.4.2 COMPANY PROFILE

CIPLA

Chemical, Industrial & Pharmaceutical Laboratories, now known as Cipla,

was incorporated 1935.Khwaja Abdul Hamied, the founder of Cipla gave the
company all his patent and proprietary formulas for several drugs and medicines,
without charging any royalty. On August 17, 1935, Cipla was registered as a public
limited company with an authorized capital of Rs 6 lakhs.

Business of the company:

The company focuses on development of new formulations and has a wide

range of pharmaceutical products. It offers prescription drugs, bulk drugs, animal
products and pesticides. It also offers a wide range of food and beverages, baked
foods, oral hygiene products, detergents, room fresheners and personal care products.

Almost 55% of its overall income from its operations comes from outside
India. It has 5,500 registered products in various countries. Cipla offers drugs used for
treatment of cancer, Alzheimer's, arthritis, Parkinson's, cardiovascular diseases and
many more. It also offers drugs that prevent transmission of AIDS from mother to
child. The company provides consulting services on preparation of products and
materials conducts plant evaluation and supplies plant equipments.

Cipla has set up two institutes namely Dr K.A Hamied Institute and Cipla
Cancer Palliative Care & Training Centre. It has a presence across 170 countries with
manufacturing units approved by regulatory authorities like USFDA, WHO-Canada
and MHRA-UK, among others.

45
 Cipla was first company outside US and Europe to launch CFC-free inhalers.
In 2007 Cipla launched oral emergency contraceptive pill under the brand name I-Pill.
Cipla also launched a breakthrough screening technology in India called the 'No
Touch Breast Scan (NTBS); ' the first-ever painless, non-invasive and radiation-free
breast scanning technique for detecting breast cancer at an early stage.

In 2009, Cipla launched generic versions of anti-flu drugs oseltamivir and

zanamivir in the local market to treat the HlNl influenza, spreading across the globe
and in India. In 2010, Piramal Healthcare Limited announced the signing of a
definitive agreement with Cipla Limited for purchase of all intellectual property rights
in India related to “i-pill” for an aggregate consideration of Rs 95 crore.

Achievements:

The company won the Forbes Asia's "Best under a Billion" List from Forbes
Magazine.

Cipla also won the Most Profitable Company overall among those "Under a
Billion in the Region's Top 200 Small and Mid Size companies" from Forbes
Magazine.

Milestones:

1935-Dr K A Hamied sets up The Chemical, Industrial and Pharmaceutical

Laboratories Ltd. in a rented bungalow, at Bombay Central. 1941-As the Second
World War cuts off drug supplies, the company starts producing fine chemicals,
dedicating all its facilities for the war effort. 1952- Sets up first research division for
attaining self-sufficiency in technological development. 1960- Starts operations at
second plant at Vikhroli, Mumbai, producing fine chemicals with special emphasis on
natural products. 1968- Cipla manufactures ampicillin for the first time in the country.
1972-Starts Agricultural Research Division at Bangalore, for scientific cultivation of
medicinal plants. 1976-Cipla launches medicinal aerosols for asthma. 1980-Wins
Chemexcil Award for Excellence for exports. 1982-Fourth factory begins operations
at Patalganga, Maharashtra. 1984-Develops anti-cancer drugs, vinblastine and
vincristine in collaboration with the National Chemical Laboratory, Pune.

46
 Wins Sir P C Ray Award for developing in-house technology for indigenous
manufacture of a number of basic drugs. 1985-US PDA approves Cipla’s bulk drug
manufacturing facilities. 1988-Cipla wins National Award for Successful
Commercialization of Publicly Funded R&D. 1991-Lauches etoposide, a
breakthrough in cancer chemotherapy, in association with Indian Institute of Chemical
Technology.

The company pioneers the manufacture of the antiretroviral drug, zidovudine,

in technological collaboration with Indian Institute of Chemical Technology,
Hyderabad. 1994- Cipla's fifth factory begins commercial production at Kurkumbh,
Maharashtra. 1997-Launches transparent Rotahaler, the world's first such dry powder
inhaler device now patented by Cipla in India and abroad. The palliative cancer care
centre set up by the Cipla Foundation, begins offering free services at Warje, near
Pune.

1998- Launches lamivudine, becoming one of the few companies in the world
to offer all three component drugs of retroviral combination therapy (zidovudine and
stavudine already launched). 1999-Launches Nevirapine, antiretroviral drug, used to
prevent the transmission of AIDS from mother to child. 2000-Cipla became the first
company, outside the USA and Europe to launch CFC-free inhalers - ten years before
the deadline to phase out use of CFC in medicinal products. 2002-Four state-of-the-art
manufacturing facilities set up in Goa in a record time of less than twelve months.
2003-Launches TIOVA (Tiotropium bromide), a novel inhaled, long-acting
anticholinergic bronchodilator that is employed as a once-daily maintenance treatment
for patients with chronic obstructive pulmonary disease (COPD).Commissioned
second phase of manufacturing operations at Goa. 2005-Sest-up state-of-the-art
facility for manufacture of formulations at Baddi, Himachal Pradesh.

2007-Sets-up state-of-the-art facility for manufacture of

formulations Sikkim. 2010-Sets up state-of-the-art facility for manufacture of
formulations at Indore.

47
ALEMBIC

Alembic was incorporated in 1907 as Alembic Chemical Works Company,

primarily engaged in production of tinctures and alcohol at Baroda. Later the
company set up distillery plant for pharmaceutical purposes at Baroda. It started
manufacturing of cough syrup, vitamins, tonics and sulphur drugs.

In 1952, the company set up its research and development activity. Currently
the company has developed research activity in area of chemistry, microbiology,
pharmaceutical technology and bio-equivalence.

The company's manufacturing units are located in Baroda and Baddi.

Company's plant has received various certifications such as ISO-9002, ISO-14001 and
ISO 27001 and also follows WHO-GMP guidelines.

The company has presence in 75 countries globally.

Business area

APIs- the Company is engaged in manufacturing of active pharmaceutical

ingredients for anti-parkinsons, anti-depressants, cephalosporins, macrolides and
others.

Bulk Pharmaceuticals- Under this the company manufactures bulk drugs that
are phosgene based and intermediates.

Formulation- The company manufactures around 150 products under this

segment in therapeutic areas such as anti-infective, cough and cold products to
cardiovascular and oral anti-diabetics.

48
 Herbal and Nutraceuticals- The company manufactures herbal and
Nutraceuticals and has created brands like Isovon, Protinules, ALA-100, Diax and
many more.

Alembic also provides contract research services in area of chemistry,

bioequivalence and bioanalytical. It also manufactures products for animal care such
as Antibiotics-injections, Analgesics, Antipyretics, antidiarrhoeals, Vitamins-Oral and
injectable, Tonics and Nutritional feed supplements.

Outlook

The company has acquired API manufacturing unit of Nirayu that is located at
Gujarat at a consideration of Rs 17.50 Crores.

BIOCON

Biocon, Asia's largest biotechnology company, started itself with seed capital
of Rs.10, 000 in 1978, is now a billion dollar company. The company manufactures
biotechnological products catering to the healthcare segment. It is engages itself in all
phases of the product cycle from discovering to development & then commercializing
the same drugs. This pharmaceutical company has fermentation-based technology,
creating cost effective drugs. Syngene and Clinigene, subsidiaries of Biocon conduct
R& D programs for international pharmaceutical and biotechnology majors.

Biocon produces anti diabetic agents like Acarbose, Pioglitazone, and

Repaglinides & Rosiglitazone. In the biological segment it produces Insulin,
Erythropoietin (EPO), Filgrastim (GCSF), and Streptokinase & Monoclonal
Antibodies. The drug major produces mycophenolate mofetil, sirolimus and
tacrolimus. It also produces & market mix of specialty & industrial enzymes for
industries like paper, brewing, beverages, food, brewing, textiles & distilling. The
company's drug portfolio consists of lovastatin, simvastatin, pravastatin and
atorvastatin.

Business of the Company:

Biocon's fully integrated business model spans the entire drug value chain,
from pre-clinical discovery to clinical development and through to commercialization.
Its businesses in custom research (Syngene), clinical development (Clinigene) and
biopharmaceuticals (Biocon) provide multiple revenue streams to balance risk, drive

49
innovation, deliver products and accelerate growth. As the company increases the
complexity and scope of its own R&D and manufacturing operations, especially in
new product discovery and development, it believes that the custom and clinical
research services will continue to offer important synergies.

Syngene: Pre-Clinical Discovery

Biocon's custom research organization, Syngene, offers modular and

integrated services in small and large molecule discovery and development. Offering
meticulous IPR protection, we provide customized solutions to pharmaceutical,
biotechnology, chemical, and agrochemical industries in the areas of chemistry,
biology, process development and scale-up, formulation and analytical development,
preclinical services, and GMP manufacturing for clinical supplies.

Clinigene: Clinical Research

Clinigene International Limited., a full-service Clinical Research

Organization, is an innovative provider of world-class clinical research solutions to
global pharmaceutical and bitechnology companies. With state-of-the-art
infrastructure and highly experienced clinical research professionals, Clinigene's
services span a broad spectrum of drug development activities including human
pharmacology, bioanalytical research laboratory for small and large molecules, central
laboratory, clinical operations, medical writing, medical monitoring, safety
management & pharmacovigilance, clinical data management & biostatistics and
Regulatory services supporting early through late phase clinical development
programs across a wide range of therapeutic areas.

Biocon: Commercialization

Biocon has an impressive track record of commercialization capabilities. The

company has brought to market a considerable portfolio of biopharmaceuticals, led by
the blockbuster Statins. The commercialization of Insulin, Immunosuppressant's and a
range of Biogenerics demonstrates company's highly advanced process development
and manufacturing expertise. Under rapid progress are two challenging collaborative
projects for the development of novel medicine, including Oral Insulin and Tlh.
Biocon also markets a basket of branded formulations in India, among them
INSUGEN, BIOMAb EGFR and EPO.

50
Milestones

• Biocon is India India's first biotechnology company set up in 1978

• It became first company to export microbial enzymes to the US & Europe

• Biocon is the first Indian company to be approved by US PDA for the

manufacture of lovastatin, a cholesterol-lowering molecule

• Biocon is the first biotechnology company to receive ISO 9001 certification

in India

• Syngene, a Biocon subsidiary, is India's first custom research company in

drug discovery

• Biocon was awarded the Biotech Product and Process Development and
Commercialization Award in 2001 by the Department of Biotechnology,
Ministry of Science and Technology, Government of India

• Syngene was awarded the Certificate of Excellence for Export Achievement

by the Government of India, for two consecutive years 2002-2003

• Biocon launches BIOMAb EGFR - India's first anti-cancer, therapeutic

Monoclonal Antibody-based drug for treating solid tumours of epithelial
origin, such as head & neck cancers, 2006

• Being premier in biotechnological segment, Company is having a consistent

performance in revenue & profit. Revenue for company comes from major
three segments i.e. Bio Pharmaceuticals, enzymes, research & technical
licensing fees. Looking at year to year performance the company is giving
consistent profit on an average of 13%.

History of the Company:

November 29, 1978: Biocon's Founding Day - the start of a biorevolution in

India. Over the years, Biocon has evolved from an enzyme-manufacturing company
into a fully integrated biopharmaceutical enterprise. Today, we leverage a formidable
combination of proprietary fermentation technologies and research skills to develop
affordable therapy for unmet medical needs

51
 Biocon India is incorporated as a joint venture between Biocon Biochemicals
Ltd. of Ireland and an Indian entrepreneur, Kiran Mazumdar-Shaw

1979: Biocon is the first Indian company to manufacture and export enzymes
to USA and Burope

1989 : Unilever pic. acquires Biocon Biochemicals Ltd. in Ireland and merges
it with its subsidiary, Quest International

1994: Biocon establishes Syngene International Pvt. Ltd. as a Custom research

Company (CRC) to address the growing need for outsourced R&D in the
pharmaceutical sector

1996: The commercial success of Biocon's proprietary fermentation plant

leads to a 3-fold expansion

Biocon leverages its technology platform to enter biopharmaceuticals and

statins

1997: Biocon spearheads initiatives1 in human healthcare through a dedicated

manufacturing facility

1998: Unilever inks a deal with ICI to sell its specialty chemicals division of
which Quest International is a part. Unilever agrees to sell its shareholding in Biocon
to the Indian promoters. Biocon becomes an independent entity

2000: Biocon commissions its first fully automated submerged fermentation

plant to produce specialty pharmaceutical

2010 :Biocon explores investment in Malaysia in partnership with

BiotechCorp Biocon and Bayer join hands to create awareness for self monitoring for
diabetics

Syngene and Endo Pharmaceuticals, USA to jointly discover and develop

novel biological drug molecules to fight cancer

Biocon acquires stake of its Cuban partner CIMAB S.A. in their seven year
old JV, Biocon Biopharmaceuticals Pvt. Ltd

Biocon and Optimer Pharmaceuticals announce manufacturing and supply

agreement for a nove! API, first-in-class anti-infective (C. difficile)

52
 Biocon and the Center of Molecular Immunology (CIM), based in Havana,
Cuba strengthen their existing research partnership by joining forces for an integrated
antibody program in immunology

Biocon and Pfizer announce strategic global agreement for the worldwide
commercialization of Biocon's biosimilar versions of Insulin and Insulin analog
products: Recombinant Human Insulin, Glargine, Aspart and Lispro

Biocon announces a strategic foreign direct investment in Malaysia with the

Malaysian Biotechnology Corporation SdnBhd (BiotechCorp)

2011: Biocon divests its stake in its German subsidiary, AxiCorp GmbH, to the
existing group of promoter shareholders.

Awards:

• 2010: Biocon wins Bio-Excellence Award for Outstanding Achievement in

the Healthcare Sector at Bangalore Bio

• 2009: Biocon among Top 20 Indian companies in Forbes 'Best Under A

Billion' list.

• Biocon wins Bio-Excellence Award for Outstanding Achievement in the

Healthcare Sector at Bangalore Bio

• Syngene wins Bio-Excel!ence Award for outstanding achievement in the

Biotech Service Sector at Bangalore Bio

• Biocon bags IDMA'Best Patent of the year1 award

• BlOMAb EGFR was voted 'Bio-Spectrum Asia-Pacific Product of the year',

2008

• Biocon wins prestigious BioSingapore Asia Pacific Biotechnology Award for

Best Listed Company

• 2008: Biocon is ranked among the top 20 global biotechnology companies

(Source: Med Ad News, June 2008)

• Biocon is the 7th largest biotech employer in the world (Source: Med Ad
News, June 2008)

• 2007: Syngene receives 'BioServices Company of the Year1, BioSpectrum

Awards

53
 • Biocon's BIOMAb EGFR wins 'Product of the Year', BioSpectrum Awards

• 2006: Best IT User Award in the Pharmaceutical Sector, NASSCOM

UNICHEM

Unichem Laboratories, incorporated in 1962, is engaged in manufacturing

formulations, pharmaceuticals and active pharmaceutical ingredients (APIs). The
company was promoted by the late Amrut Mody, a pioneer in the Indian
pharmaceuticals business. The company offers products in therapeutic areas like
gastrointestinal, cardiovascular, diabetes, psychiatry, neurology, anti-bacterial, anti-
infective and pain management, among others.

Headquartered in Mumbai, the company operates at five manufacturing

locations in Roha (Maharashtra), Goa, Ghaziabad (Uttar Pradesh), Pithampur
(Madhya Pradesh) and Baddi (Himachal Pradesh).

The company's manufacturing facilities have received approval from various

international agencies namely UK MHRA, MCC (South Africa), WHO (Geneva) and
TGA (Australia). The manufacturing plants have also received ISO 9001:2000 and
ISO 14001:2004 certifications for quality management.

Unichem also operates a research and development facility located at

Jogeshwari (Mumbai). This facility conducts research in area of Novel Drug Delivery
Systems (NDDS) and develops non-infringing routes for the manufacture of products
directed at the regulated markets.

Milestones

• 1944- Unichem was commissioned by Late Amrut Mody.

• 1952- The company forayed into exporting activities.

• 1953- Unichem entered into hormonal products segment. The same year it
launched UNIPROGESTIN.

54
• 1962- The company collaborated with foreign entity UCB for bulk-drugs. It
set up its first formulation plant at Jogeshwari. The company got listed at
Bombay Stock Exchange. Unichem launched OESTROGEN and Progestin.

• 1963- The company entered co-marketing of formulations tie up with Uni

Sankyo.

• 1968- Unichem set up a formulation plant at Ghaziabad.

• 1970- As part of back integration strategy, the company commissioned

manufacturing of Anti-TB Drugs.

• 1972- As an acknowledgement for Late Amrut Mody's pioneering effort in

Indian pharma industry, he was awarded Padma Bhushan.

• 1973- Unichem's research laboratory was recognized for PhD work by

Bombay University. Unichem's R&D centre was recognized by Department
of Science and Technology.

• 1976- The company set up a fine chemicals unit at Roha.

• 1978- Unichem commissioned its Roha bulk drug plant.

• 1979- The company received its first clearance from drug authorities for
NEFEDIFINE.

• 1983- Unichem received the USFDA approval for hydrochlorothiazide

manufactured at the Jogeshwari plant. The company introduced Anti-TB -
Isoniazid, Rifampicin in white tablet form for the first time in India.

• 1984- UNISEARCH was established in collaboration with Upjohn. The

company forayed anti-biotic segment and launched Ampoxin (Ampicillin
and Cloxacillin combination).

• 1987-The company entered the animal health care business.

• 1994-1999- Unichem underwent thorough restructuring and transformation

in line with future growth strategies.

• 1996- Two companies namely Unichem Exports and Unisearch was merged
with Unichem Laboratories.

• 1997- The company's formulation plant located at Goa was commissioned. It

set up new corporate office set up at Unichem Bhavan Jogeshwari, Mumbai.

55
• 1998- The company's formulations plant located at Baddi was fully
operational. 1997-2000- The company implemented BaaN ERP.

• 1999- Unichem set up a modern multipurpose bulk drug plant located at

Roha. Molecular generics division was launched.

• 2000- The drug major received South African Health Authority and UK
MCA (MHRA) certifications for Goa and Bade Plants

• 2001- Unichem set up new research and development centre at Mumbai. The
same year it also set up New Biosciences R&D Centre located at Bangalore
that would conduct research work in Bio-technology

• 2002- It formed a joint venture in UK called Niche Generics.

• 2002-2003- The company divested its animal healthcare division. It

established subsidiaries in South Africa and Brazil. The company also
undertook modernization of formulations plant located at Ghaziabad.

• 2004- Unichem conducted restructuring of Unisearch and launched of

Unisearch CD Division.

• 2005- The company set up of new pharma technology development center

located at Goa. Unichem Baddi Unit II plant was commissioned. It acquired
API manufacturing unit at Pithampur

• 2006- The company received USFDA certification for the Goa Plant. It
launched specialties division. In the same year it acquired 100% stake in
Niche Generics, United Kingdom.

• 2007- Unikare division launched that catered to Dermatology and Allied

therapies segment.

56
Future Strategies

Unichem will continue to work on the therapeutic segments and will develop
cost effective processes for the existing molecules. It will also focus on develop new
drug delivery systems and new products for international business.

WELCURE

Welcure Drugs & Pharmaceutical Ltd. (WDPL) was incorporated as a Public

Limited Company under the Companies Act, 1956 on 4th June, 1992 and obtained the
certificate of commencement of business on 19th June 1992,

Welcure is an Internationally ISO 9001:2000 and WHO-GMP Certified

Company. It has to its credit the most modern and sophisticated manufacturing
facilities of International Standards which include ultramodern plant, machinery and
equipment, own R & D, in house testing laboratory and captive power generation.

Presently, the Company is engaged in the business of manufacture and

marketing of pharmaceuticals formulations in the form of tablets, capsules and dry
syrups. The Company is manufacturing over hundred varieties of formulations
including antibiotics, sulpha drugs, vitamins, analgesics, antipyretics, corticosteroids,
anti-malarials, anti-dysentery, anti-tuberculosis, anti-diabetics, tranquilizers, sedatives
and gastro intestinals. The products of the company have already been well accepted
in the domestic markets and the Company has an established customer base.

In March 2000 WDPL entered into a five-year agreement with Bihar Drugs
and Chemicals Ltd (BDCL), a subsidiary of Bihar State Pharmaceutical and Chemical
Development Corporation Ltd, for manufacturing various pharmaceutical pro ducts
(both generic as well as branded) for the latter on loan licence basis. WDPL
manufactures the drugs in tablet, capsule and syrup form at its facilities situated in
Bhiwadi (Rajastban). The Company's principal activity is to manufacture
pharmaceutical products. The products of the Company include tablets, capsules,
liquid orals and dry syrups.

57
COMBAT

Incorporated under the Companies Act, 1956 on 18th September, 1986,

Combat is a professionally managed, well established Public Limited Company,
engaged in the manufacture of Pharmaceutical Formulations. Combat has been
showing continuous growth in Sales and Profits by Marketing its Branded
Formulations and entering into agreements with various companies for Custom
Manufacturing. Built on a reputation of a quality provider, during the years of
operations, the Products of the company have been well accepted by the Trade and
Medical Fraternity across India.

Playing a key role in promoting and sustaining development in the vita! field
of Pharmaceutical, Combat Drugs boasts of quality Fixed Dosage Formulations with
links to a WHO cGMP Manufacturing facility with a fully fledged Quality Control
Laboratory and a well designed Quality Assurance Program, approved by regulatory
authorities in India.

Quality, Efficacy & Service are the three key words in the Company's Motto in
providing succor to the ailing Humanity by producing high quality medicines at an
affordable cost for combating life threatening Diseases and improving the global
standards of health.

The company has time and again strived to develop the products by way of
improvement in the process as well as the packing aspects. Combat has and will
continue to monitor the markets for any advancement in the packaging and look to
improve internally and be open to suggestions from both the suppliers as well as the
customers in order to improve.

Combat offers a unique mix of Quality, Technology, in terms of equipment and

professional workforce, and Process Development along with ample logistics support
combined with competitively priced solutions making it a preferred choice for the
buyers.

58
 CHAPTER 3

DATA ANALYSIS AND

INTERPRETASION

59
3.1 ANALYSIS & INTERPRETATIONS:

3.1.1METHOD OF CALCULATION OF RETURNS

Step I: Daily share price of the stock is collected from the website of the National
stock exchange.

The rate of return of the stocks included in portfolio, using daily closing prices
of company is computed using the formula;

(Pt - Po)
Ri =
Po

Where,

Pt= current year price

Po = previous year price.

STEP 2: The daily index value (SENSEX) is downloaded from the National stock
exchange website (www.bseindia.com) the composition of SENSEX is subjected to
scrutiny on a periodic basis. Any change in the composition of the SENSEX could
impact all the index value.

The rate of return of the Sensex index may be computed using daily closing
points as unnder:

(Pt - Po)
Ri =
Po

Where,

Pt= current year price

Po = previous year price.

60
STEP 3: The daily return (in percentage terms) of the stock and the index is
calculated.

STEP 4: These daily return can be annualized by using arithmetic mean.

NOTE

The data has been analyzed from 1st April 2013 to 31st March 2017(i.e., for a
period of 4 years).Even stock splits are considered over a period of time.

STEP 5: Expected return calculation needs the risk free rate Rf. So, we have assumed
it as 8.03%.

3.1.2 Steps in Sharpe's single index model

Step 1: A brief profile of each of the company of Sensex index is chosen in

pharmaceutical industry.

TABLE NO 1:

SLNO COMPANY

1 ALEMBIC

2 BIOCON

3 CIPLA

4 COMBAT

5 WELCURE

6 UNICHEM



Step 2: For a period of 4 years data of the each companies have been recorded.

Step 3: For applying sharp's signal index model Ri, Rm, ei,ei2, (Ri, m2 values
data are required. So all these data are collected and calculated for proceeding further.

61
 • The variance of the index movement is computed as under:
2 =  (Rm - Rm)
N -1
• The variance of the Stock price movement is computed as under:

2 =  (Ri - Ri) 2
N -1

• Beta, to evaluate the risk.

=  (Rm - Rm)(Ri - Ri)

(Rm - Rm ) 2

Where,

= beta

Rm - return of market index

Rm = mean of market index

Ri = return of individual stock

Ri = mean of individual stock

• The systematic and unsystematic risks are computed as under:

Systematic risk = 2 m2

Unsystematic risk = ei2 - Systematic risk

• The excess return to Beta is computed using following formula:

Ri  Rf


Step 4: The Ci value is calculated using the formula.

m  ( Ri  Rf ) i
Ci 
ei 2
i 2
1  m 2  2
ei

Step 5: After Ci for the companies are calculated the value got were put in a table and
then the interpretation were made.

62
Step 6: The Ci values go on increasing up to a certain point and then start decreasing.
The highest point is called cut-off point (c*) the securities which are above c* point
are chosen to the portfolio.

Zi are to be determined to know how much funds need to be invested in each

security using the following formula:

i  Ri  Rf  
Zi  2    C *
ei  i  
Where,

ei2 = unsystematic risk

 = beta value of individual security

Ri-Rf = excess return

C* = cut off point

Step 7: Once the securities for portfolio are chosen, the proportion in which they
should be invested is to be determined. This can be done using a formula where Xi
denotes the proportion.

Zi
Xi 
 Zi

Where,

X, = proportion of investment

Step 8: Return on portfolio can be made know with the formula.

3.1.3 Research design:

In this study secondary data source is used.

• Also consider the movement of share prices, expected returns, standard

deviation and beta values.

63
• The stock price movements, the risk free rate of return and beta values for
the past 4 years are collected for analysis.

• All the values obtained above are interpreted and analyzed using Sharp's
single index model.

• The 6 companies of selected sector, constituting the sensex index have been
chosen for applying & hence construct optimal portfolio.

• The companies chosen were WELCURE DRUGS, BIOCON LIMITED,

ALEMBIC LTD, COMBAT DRUGS, and CIPLA.

64
3.2 DATA ANALYSIS & INTERPRETATION

3.2.1 Risk-free rate of return

Risk-free security has zero variance or standard deviation. The risk free securities
have no risk of default. T-bill or fixed deposit is example of risk-free securities as they
have no risk of default. The yearly fixed deposit rate of post office has been
considered as the risk-free rate of return for our calculation purpose. ' " '-'•'•'

TABLE NO 2:

Year Return

2014-15 8.2%

2015-16 8.3 %

2016-17 8.4 %

2017-18 7.23 %

Therefore the risk rate of return for the whole 3 years in the average of all the
values in the mentioned above

8.2 + 8.3  8.4  7.23

Rf=
4

Rf = 8.03%

Return on market

The return on the market is the return obtained by the companies constituting
the sensex index. The return of all the 30 companies purpose are considered and only
the yearly values are shown in the below for calculating purpose. The detailed
fluctuation of sensex index point during 4 years periods can be seen clearly in the
following table.

65
TABLE NO 3:

Year Market (Rm) Rm-R1m (Rm- R1m)2

-0.24115 0.05815111
2014-15 0.034887729
-0.20119 0.04047672
2015-16 0.074844868
-0.18079 0.03268495
2016-17 0.095243361
-0.20498 0.04201514
2017-18 0.071057189

0.276033147 0.17332793

BSE sensex daily market date of past 4 years have been taken and converted
that into yearly wise to know the market return as calculated below,

The volatility in the stock of index companies is given by

2   ( Rm  Rm)
N 1

0.17332793
4 1

=0.0578

NOTE:

• The calculation of 6 companies have been done to know the Rp (return of

company), m2(market return), ,(standard deviation), Bp(beta), ei2
(unsystematic risk) values are done below.
• The return data of the 6 companies has been analyzed from I s' April 2013 to
31st March 2017(i.e., for a period of 4 years)

ALEMBIC:

66
 TABLE NO 4:

Year Return(Rp) Rp-Rp1 Rm-Rm1 (Rp-Rp1) (Rm-Rm1)2 (Rp-Rp1)2

(Rm-Rm1)
-0.15102306 -0.24115 0.036418519 0.05815111 0.022808
2014-15 0,32806204
-0.04280619 -0.20119 0.008612104 0.04047672 0.0018324
2015-16 0,43627891
-0.26752451 -0.18079 0.0483657 0.03268495 0.0715694
2016-17 0.21156059
0.4613537
-0.20498 -0.094566418 0.04201514 0.2128472
2017-18 0.9404388
-0.001170095 0.17332793 0.3090569
1.91634034

Rp1 =
 Rp
N

1.91634034
Rp 1 =
4

Rp1 = 0.479085085

iRp =  (Rp - Rp1) 2

N 1

0.3090569
=
3

= 0.3209

Bp 
 (Rm - Rm) ( Ri - Ri)
 (Rm - Rm) 2

 0.001170095
Bp 
0.17332793

Bp= -0.006750759

ei2= i-2 m2

ei2=0.3209-(-0.0067)20.0577

ei2=0.3209

CIPLA TABLE NO 5:

67
 Year Return(Rp Rp-Rp1 Rm-Rm1 (RpRp1) (RmRm1)2 (Rp-Rp1)2
)
(Rm-Rm1)
-0.00064 -0.24115 0.000155032 0.05815111 4.1332E-07
2014-15 0.09358240
-0.07678 -0.20119 0.015447757 0.04047672 0.00589557
2015-16 0.01744271
0.153184 -0.18079 -0.027694103 0.03268495 0.02346534
2016-17 0.2474093

-0.07576 -0.20498 0.015528653 0.04201514 0.00573934

2017-18 0.01846689
0.00343734 0.17332793 0.03510065
0.3769013

Rp1 =
 Rp
N

0.3769013
Rp 1 =
4

Rp1 =0.0942253

iRp =  (Rp - Rp1) 2

N 1

0.0351
=
3

= 0.108

Bp 
 (Rm - Rm) ( Ri - Ri)
 (Rm - Rm) 2

0.003437
Bp 
0.1733

Bp= 0.0198

ei2= i-2 m2

ei2=0.108-(0.0198)20.0577

ei2=0.108

BIOCON TABLE NO 6:

68
 Year Return(Rp) Rp-Rp1 Rm-Rm1 (RpRp1) (RmRm1)2 (Rp-Rp1)2
(Rm-Rm1)
-0.01509 -0.24115 0.003637693 0.05815111 0.00022756
2014-15 0.06540144
0.107431 -0.20119 -0.02161381 0.04047672 0.01154137
2015-16 0.18791726
-0.02349 -0.18079 0.004246241 0.03268495 0.00055165
2016-17 0.05699933
0.0116279 -0.06886 -0.20498 0.014114358 0.04201514 0.00474151
2017-18
0.3219459 0.000384481 0.17332793 0.01706208

Rp1 =
 Rp
N

03219459
Rp 1 =
4

Rp1= 0.080486483

iRp =  (Rp - Rp1) 2

N 1

.01706208
=
3

= 0.0748

Bp 
 (Rm - Rm) ( Ri - Ri)
 (Rm - Rm) 2

0.0003844
Bp 
0.173327

Bp= 0.0022

ei2= i-2 m2

ei2=0.0748-(0.0022)20.0577

ei2=0.074

COMBAT:

TABLE NO 7:

69
 Year Return(Rp) Rp-Rp1 Rm-Rm1 (RpRp1)(Rm- (RmRm1)2 (Rp-Rp1)2
Rm1)

2014-15 361.044176 270.9617 -0.24115 271.2028114 0.05815111 73420.2244

2015-16 -0.95420693 -91.0367 -0.20119 -90.83552865 0.04047672 8287.68383

2016-17 0.19296050 -89.8895 -0.18079 -89.70875971 0.03268495 8080.13111

2017-18 0.047109 -90.0354 -0.20498 -89.83042504 0.04201514 8106.37343

360.3300386 0.828098023 0.17332793 97894.4128

Rp1 =
 Rp
N

360.33
Rp 1 =
4

Rp1= 90.08251

iRp =  (Rp - Rp1) 2

N 1

97894.41
=
3

= 180.6

Bp 
 (Rm - Rm) ( Ri - Ri)
 (Rm - Rm) 2

0.828098
Bp 
0.173327

Bp= 4.77

ei2= i-2 m2

ei2=180.6-(4.77)20.0577

ei2=179.3

WELCURE:

TABLE NO 8:

70
 Year Return(Rp) Rp-Rp1 Rm-Rm1 (RpRp1)(Rm- (RmRm1)2 (Rp-Rp1)2
Rm1)

2014-15 0.06419590 0.034073 -0.24115 -0.00821662 0.05815111 0.00116099

2015-16 -0.07434147 -0.10446 -0.20119 0.021016947 0.04047672 0.01091274

2016-17 0.10563608 0.075513 -0.18079 -0.013652066 0.03268495 0.00570229

2017-18 0.025 -0.00512 -0.20498 0.00105001 0.04201514 2.6241E-05

0.1204905 0.00019827 0.17332793 0.01780226

Rp1 =
 Rp
N

0.1204
Rp 1 =
4

Rp1= 0.0301

iRp =  (Rp - Rp1

N 1

0.0178
=
4

= 0.0667

Bp 
 (Rm - Rm) ( Ri - Ri)
 (Rm - Rm) 2

0.00019827
Bp 
0.173327

Bp= 0.002

ei2= i-2 m2

ei2=0.0667-(0.002)20.0577

ei2=0.0667

UNICHEM:

TABLE NO 9:

71
 Year Return(Rp) Rp-Rp1 Rm-Rm1 (RpRp1)(Rm- (RmRm1)2 (Rp-Rp1)2
Rm1)
0.049372 -0.24115 -0.011905846 0.05815111 0.0024376
2014-15 0.12369416
0.05272 -0.20119 -0.01060656 0.04047672 0.00277935
2015-16 0.12704167
-0.09577 -0.18079 0.017314153 0.03268495 0.0091718
2016-17 -0.02144743
0.068 -0.00632 -0.20498 0.001295879 0.04201514 3.9969E-05
2016-17
0.2972884 -0.003902374 0.17332793 0.01442873

Rp1 =
 Rp
N

0.297288
Rp 1 =
4

Rp1= 0.0743

iRp =  (Rp - Rp1) 2

N 1

0.014428
=
3

= 0.07

Bp 
 (Rm - Rm) ( Ri - Ri)
 (Rm - Rm) 2

- 0.0039023
Bp 
0.173327

Bp= 0.0225

ei2= i-2 m2

ei2=0.07-(0.0225)20.0577

ei2=0.07

Note: The objective initially was to construct optimal portfolio involving 6 companies
namely Cipla, Combat, Biocon, Welcure, Alembic and Uni chem. While analyzing the
data risk and return of Combat was found to be abnormal and treated it as outlier. As
such, Combat Company has been eliminated for construction of optimal portfolio.

TABLE NO 10:

72
 Company name Return (%) Std Beta Unsystematic Rf rate
deviation risk

Alembic 47.90 0.321 -0.0067 0.320 8.03

Cipla 9.42 0.108 0.0198 0.108 8.03

Biocon 8.04 0.074 0.0022 0.074 8.03

Welcure 3.01 0.667 0.0020 0.667 8.03

Uni chem. 7.43 0.07 0.022 0.07 8.03

This table shows the values of return, beta, unsystematic risk, and risk free rate
and standard deviation of 5 companies except combat because it has abnormal return
and risk.

Determination of cut off point (C*).;

The following steps are involved in the process of determination of cutoff

point.

Step I: In order to determine the cut-Off point, first let us rank the companies based
on the decreasing value of the excess return to beta ratio.i.e., Rank according to
decreasing order of Ri-Rf/Bi values.

TABLE NO 11:

Company name Ri Beta Ri- Rank

Rf/Bi

Alembic 47.90 -0.0067 -5950.7 5

73
 Cip!a 9.42 0.0198 70.20 1

Biocon 8.04 0.0022 4.54 2

Welcure 3.01 0.0020 -2510 4

Uni chem. 7.43 0.022 -27.27 3

The ranks have been given based on the decreasing values of Ri-Rf/Bi values.

Step 2: The companies are rearranged here according to their ranks with decreasing
excess return to beta ratios.

TABLE 12:

Company name Ri Bi i ei2 Ri-

Rf/Bi

Cip!a 9.42 0.0198 0.108 0.108 70.20

Biocon 8.04 0.0022 0.074 0.074 4.54

Uni chem. 7.43 0.022 0.07 0.07 -27.27

Welcure 3.01 0.0020 0.667 0.667 -2510

Alembic 47.90 -0.0067 0.321 0.321 -5950.7

Step 3: C values for each company are calculated using the following formula.

m  ( Ri  Rf ) i
Ci 
ei 2
i 2
1  m 2  2
ei

TABLE 13:

Company ( Ri  Rf ) i  ( Ri  Rf )  i i 2  i Ci
name ei 2 ei 2 ei 2 ei 2

0.2548 0.2548 0.0036 0.0036 0.01469891

Cipla
0.00029 0.25509 0 0.0036 0.01471564
Biocon
-0.1886 -0.18831 0.0069 0.0105 -0.0108589
Uni Chem
-0.01505 -0.20365 0 0.0105 -0.0117435
Welcure

74
 -0.8322 -0.84725 0 0.0105 -0.0488567
Alembic

Note:

Ci means cumulative index and it starts from increasing values and should
select the highest value of ci, the securities which are above c* point are chosen to he
a portfolio and the remaining decreasing securities after that are rejected, i.e., 3
companies are rejected uni chem, welcure and alembic

Step 4: 'file Ci values are going on increasing up to a certain point and then starts
decreasing in the in the table shown. The highest point is called cutoff (C*) and the
securities which are above C* point are chosen to the portfolio.

TABLE 14:

SL.No Company name ' Ci

1 Cipla 0.0146

2 Biocon 0.0147

i.e., the companies to be included in the portfolio are:

Step 5: calculation of Zi value

i  Ri  R f  
Z =
i
2    C *
ei  i  
75
Table 15:
SL.No Company Zi Xi
name

1 Cipla 12.84 0.9895

2 Biocon 0.135 0.0105

Total 12.975 1.0000

Zl calculations have been done to know the Xi values for the proportion of

investments in the selected companies.

Calculation of Zi:

i  Ri  R f  
Z= i
2    C *
ei  i  
Zi value of Biocon

0.0198
= *(70.20-0.0147)
0.108

= 0.12329*70.1873

= 12.84

Zi value of cipla

0.0022
= *(4.5454-0.0147)
0.074

= 0.0297*4.5307

= 0.135

Step 6: calculation of Xi

Zi
Xi=
 Zi

Table 16:

76
 Sl.no Company Xi
1 Cipla 0.9898
2 Biocon 0.0105
3 1.0000

Xi values have been calculated to know the percentage of investments in the 4selected
companies.

Xi value of biocon:

Zi
Xi=
 Zi

TABLE 17:
SL.No Company name Zi Xi

1 Cipla 12.84 0.9895

2 Biocon 0.135 0.0105

Total 12.975 1.0000

12.84
=
12.975

77
= 0.9895 or 98.95%

Xi value of cipla

0.135
=
12.975

= 0.0105 or 1.05%

CHAPTER 4:

78
SUMMARY OF FINDINGS

79
FINDINGS:

The study on construction of optimal portfolio using Sharpe’s single index model
found that

Even though the companies were chosen from all the sectors consisting sensex index,
the optimal portfolio constructed companies of securities belonging to only
Pharmaceutical sector. Along with Sharpe’s single index model it is wise for an
investor to make technical and fundamental analysis of the companies before
investing in that particular company.

1. Risk and return of Individual securities:

TABLE NO: 18

Company name Return (Ri) Risk(i)

Cipla 9.42% 0.321

Biocon 8.04% 0.108

Uni Chem 7.43% 0.074

Welcure 3.01% 0.667

Alembic 47.90% 0.07

The above (able shows the returns of each companies and the risk of each
companies as per the table we consider that returns of Alembic have 47.90 % and the
lower return earned by Welcure Company.

As that the risk of the company is that alembic at 0.07 % and the maximum
risk was held by welcure Company.

2. Stock selected for portfolio constructions.

TABLE NO: 19

80
 Company name Industry

Alembic Pharmaceuticals

Cipla Pharmaceuticals

Biocon Pharmaceuticals

Welcure Pharmaceuticals

Uni chem. Pharmaceuticals

The above companies are selected from pharmaceuticals sector only. These
varied companies risk and returns of portfolio calculated.

3. Proportion of stock

TABLE NO: 20

SL No Company name Xi

1 Biocon 98.95

2 Cilpa 1.05

Total 100

These above Xi values indicate that the percentage of investments should be

done of 2 companies and it is better for the investor to invest in these 2 companies as
per their percentage value.

81
 CHAPTER 5

CONCLUSIONS & SUGGESTIONS

82
CONCLUSIONS:

Predicting the future is tricky business. This is especially true in the stock
market movements. Even though the daily trend of market as could be directed using
tools of technical and fundamental analysis. Making profits by trading on specific
stock is found to be very difficult task. The construction of portfolio is very important.
The investor have to take decision on what to invest and how much to invest in a
particular security. Choosing a portfolio is important decision. Investor has taken the
decision what amount to be invested in a particular security. Therefore it is very
important to evaluate the performance of portfolio. Portfolio performance measure
should be a key aspect of the investment decision process. These tools provide the
necessary information for investors to return are only part of the story. Without
evaluating risk adjusted returns, an investor cannot possibly see the whole investment
picture, which may inadvertently lead to clouded investment decision.

Therefore, evaluation of portfolio performance is very important. Rebalancing

doesn't mean taking out money from one asset class and put that money in different
asset class. But it be done within that asset class. The money can be withdrawn also if
the investor feels that particular asset class 1 not providing him the return that he
expected and is a hurdle to get his required rate of return.

Periodically the money should be shifted to some other asset class so as to

meet the objective. To bring the portfolio into balance the taking are reinvested in
some other assets which could perform better. The return earned from a portfolio is
higher ihan the return of an individual's security. The investor can reduce his risk by
diversifying a portfolio.

Under this project portfolio is constructed on Sharpe's single index model by

taking only sensex listed companies of different sectors. Where in risk and return of
each company are evaluated and rank them on the basis of Sharpe's single index
model.

83
 The Ci values is go on increasing up to a certain point and then start
decreasing, the highest point is called cut off (c*) the securities which are above c*
point are chosen to be a portfolio. The chosen portfolios are Cipla and Biocon. Their
investment proportions are

1. Cipla= 98.95

2. Biocon =1.05

The above 2 companies are shows that positive value that's why there is no
mention of the values of other 3 rest companies because of it shows negative values.

84
SUGGESTIONS:

This chapter is bringing out the suggestion and conclusion for the present
study "Construction of optimal portfolio". The suggestion has to be given on the
based on data analysis and interpretation and findings made in the previous chapter.

The following are the suggestion for this study:

 Construction of optimal portfolio is not just one time job and continuous
change would be required as the economic condition and the market condition
keep changing.

 The study was conducted 5 companies of Sensex index. Out of that, only 2
companies are conducted in the portfolio.

 The stock price movements are influences by various fundamental factors and
the economy as a whole. Therefore, along with the Sharpe's single index model
it is wise for an investor to make technical analysis and fundamental analysis of
the companies before investing in that particular company.

 This portfolio consists of 2 companies where risk in this portfolio is less when
compared to the risk involves by investing all the money in the one company.

 An investor has (o continuously monitor the various internal and external

factors affecting the stock markets.

 The under taken project of portfolio constriction can also be done on

Markowitz model.

85
BIBLIOGRAPHY:

Reference books:

1) Donald.e.fisher, Ronald.jjordan, "Security analysis and portfolio

management".

2) Robert strongs "Portfolio construction and management &Protection"

3) " Investment management" by V.K. Bhalla.

4) Avadhani, "Security Analysis and Portfolio Management".

5) Rosanna Chandra. "Investment analysis and portfolio management", 4th

edition

WEBSITES:

1. WWW.YAHOOFINANCE.COM

2. WWW.MONEYCONTROL.COM

3. WWW.LIVESTOCKMARKET.COM

4.WWW.INVESTOPEDIA.COM

5. WWW.WIKIPEDIA.COM

6. WWW.SCRIBD.COM

7. WWW.ECONOMICTIMES.COM

8. WWW.WIKIPEDIA.COM

9. WWW.GOOGLE.COM

86