CHAPTER - I

INTRODUCTION

1
 INTRODUCTION

The financial market is the driver of the economic growth and development of
any country. A sound financial market can take the country to the apex. Financial
resources were by allocating the resources through one of the ways such as portfolios,
which are combinations of various securities. Portfolio analysis includes analyzing the
range of possible portfolios that can be constituted from a given set of securities.

A combination of securities with different risk- return characteristics will

constitute the portfolio of the investor. A portfolio is a combination of various assets
and/or instruments of investments. The portfolio is also built up out of the wealth or
income of the investor over a period of time with a view to suit his risk and return
preferences to that of the portfolio that he holds. The portfolio analysis is an analysis
of the risk-return characteristics of individual securities in the portfolio and changes
that may take place in combination with other securities due to interactions among
themselves and impact of each one of them on others.

As individuals are becoming more and more responsible for ensuring their
own financial future. In addition, as interest rates have come down and the stock
market has gone up and come down again, clients have a choice of leaving their
saving in deposit accounts, or putting those savings in unit trusts or investment
portfolios which invest in equities and/or bonds. Investing in unit trusts or mutual
funds is one way for individuals and corporations alike to potentially enhance the
returns on their savings.

2
 IMPORTANCE OF STUDY

A portfolio is a collection of investments held by an institution or a private

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

Portfolio management involves deciding what assets to include in the portfolio,

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

Thus, portfolio management is all about strengths, weaknesses, opportunities

and threats in the choice of debt vs. equity, domestic vs. international, growth vs.
safety and numerous other trade-offs encountered in the attempt to maximize return at
a given appetite for risk.

3
 NEED FOR THE STUDY

The Portfolio Management deals with the process of selection securities from
the number of opportunities available with different expected returns and carrying
different levels of risk and the selection of securities is made with a view to provide
the investors the maximum yield for a given level of risk or ensure minimum risk for
a level of return.

Portfolio Management is a process encompassing many activities of

investment in assets and securities. It is a dynamics and flexible concept and involves
regular and systematic analysis, judgment and actions. The objectives of this service
are to help the unknown investors with the expertise of professionals in investment
Portfolio Management. It involves construction of a portfolio based upon the
investor’s objectives, constrains, preferences for risk and return and liability. The
portfolio is reviewed and adjusted from time to time with the market conditions. The
evaluation of portfolio is to be done in terms of targets set for risk and return. The
changes in portfolio are to be effected to meet the changing conditions.

Portfolio Construction refers to the allocation of surplus funds in hand among

a variety of financial assets open for investment. Portfolio theory concerns itself with
the principles governing such allocation. The modern view of investment is oriented
towards the assembly of proper combinations held together will give beneficial result
if they are grouped in a manner to secure higher return after taking into consideration
the risk element.

The modern theory is the view that by diversification, risk can be reduced. The
investor can make diversification either by having a large number of shares of
companies in different regions, in different industries or those producing different
types of product lines. Modern theory believes in the perspectives of combination of
securities under constraints of risk and return.

4
 Objectives of the study

 To study the investment pattern and its related risks & returns.
 To find out optimal portfolio, which gave optimal return at a
minimize risk to the investor.
 To understand portfolio selection process.
 To see whether the portfolio risk is less than individual risk on
whose basis the portfolios are constituted
 To see whether the selected portfolios is yielding a satisfactory
and constant return to the investor
 To understand, analyze and select the best portfolio.

5
 RESEARCH METHODOLOGY

Research design or research methodology is the procedure of collecting,

analyzing and interpreting the data to diagnose the problem and react to the
opportunity in such a way where the costs can be minimized and the desired level of
accuracy can be achieved to arrive at a particular conclusion.

The methodology used in the study for the completion of the project and the
fulfillment of the project objectives, is as follows:

• Market prices of the companies have been taken for the years of different
dates, there by dividing the companies into 5 sectors.
• A final portfolio is made at the end of the year to know the changes
(increase/decrease) in the portfolio at the end of the year.

6
SOURCES OF THE DATA:

Primary data:

The primary data information is gathered from Karvy finapolis by

interviewing Karvy executives.

Secondary data:

The secondary data is collected from various financial books, magazines and
from stock lists of various newspapers and Karvy as part of the training class
undertaken for project.

PERIOD OF THE STUDY

The present study it covers the last 5 years information about the portfolio
performance evolution using Markowitz theory, from the period of 2004-2009. Study
was taken up to 45 days.

7
 LIMITATIONS OF THE STUDY

 This study has been conducted purely to understand Portfolio Management for
investors.
 Construction of Portfolio is restricted to two companies based on Markowitz
model.
 Very few and randomly selected scrips / companies are analyzed from BSE
listings.
 Detailed study of the topic was not possible due to limited size of the project.
 There was a constraint with regard to time allocation for the research study i.e.
for a period of 45 days.

8
 CHAPTER-II

INDUSTRY PROFILE

9
 INDUSTRE PROFILE

Bombay Stock Exchange Limited is the oldest stock exchange in Asia with a
rich heritage. Popularly known as "BSE", it was established as "The Native Share &
Stock Brokers Association" in 1875. BSE has played a pioneering role in the Indian
Securities Market - one of the oldest in the world. Much before actual legislations
were enacted, BSE had formulated comprehensive set of Rules and Regulations for
the Indian Capital Markets. It also laid down best practices adopted by the Indian
Capital Markets after India gained its Independence.

Vision:
"Emerge as the premier Indian stock exchange by establishing global
benchmarks"
BSE is the first stock exchange in the country to obtain permanent recognition in
1956 from the Government of India under the Securities Contracts (Regulation) Act,
1956.The Exchange's pivotal and pre-eminent role in the development of the Indian
capital market is widely recognized and its index, SENSEX, is tracked worldwide.
SENSEX, first compiled in 1986 was calculated on a "Market Capitalization-
Weighted" methodology of 30 component stocks representing a sample of large, well-
established and financially sound companies. The base year of SENSEX is 1978-79.
From September 2004, the SENSEX is calculated on a free-float market capitalization
methodology. The "free-float Market Capitalization-Weighted" methodology is a
widely followed index construction methodology on which majority of global equity
benchmarks are based.

The launch of SENSEX in 1986 was later followed up in January 1989 by

introduction of BSE National Index (Base: 1983-84 = 100). It comprised of 100
stocks listed at five major stock exchanges in India at Mumbai, Calcutta, Delhi,
Ahmedabad and Madras. The BSE National Index was renamed as BSE-100 Index
from October 14, 1996 and since then it is calculated taking into consideration only
the prices of stocks listed at BSE.

10
 The Exchange launched dollar-linked version of BSE-100 index i.e. Dollex-
100 on May 22, 2007. The Exchange constructed and launched on 27th May, 1994,
two new index series viz., the 'BSE-200' and the 'DOLLEX-200' indices. The launch
of BSE-200 Index in 1994 was followed by the launch of BSE-500 Index and 5
sectoral indices in 1999. In 2002, BSE launched the BSE-PSU Index, DOLLEX-30
and the country's first free-float based index - the BSE TECK Index. The Exchange
shifted all its indices to a free-float methodology (except BSE PSU index). The
Exchange has a nation-wide reach with a presence in 417 cities and towns of India.
The systems and processes of the Exchange are designed to safeguard market integrity
and enhance transparency in operations. During the year 2005-2006, the trading
volumes on the Exchange showed robust growth.

The Exchange provides an efficient and transparent market for trading in

equity, debt instruments and derivatives. The BSE's On Line Trading System (BOLT)
is a proprietary system of the Exchange and is BS 7799-2-2002 certified. The
surveillance and clearing & settlement functions of the Exchange are ISO 9001:2000
certified. The Exchange is professionally managed under the overall direction of the
Board of Directors. The Board comprises eminent professionals, representatives of
Trading Members and the Managing Director of the Exchange. The Board is inclusive
and is designed to benefit from the participation of market intermediaries.

BSE as a brand is synonymous with capital markets in India. The BSE SENSEX
is the benchmark equity index that reflects the robustness of the economy and finance.
It was the –

 First in India to introduce Equity Derivatives

 First in India to launch a Free Float Index
 First in India to launch US$ version of BSE Sensex
 First in India to launch Exchange Enabled Internet Trading Platform
 First in India to obtain ISO certification for Surveillance, Clearing &
Settlement
 'BSE On-Line Trading System’ (BOLT) has been awarded the
globally

11
 recognized the Information Security Management System standard
BS7799-2:2002.
 First to have an exclusive facility for financial training
 Moved from Open Outcry to Electronic Trading within just 50 days
In 2002, the name The Stock Exchange, Mumbai, was changed to BSE. BSE,
which had introduced securities trading in India, replaced its open outcry system of
trading in 1995, when the totally automated trading through the BSE Online trading
(BOLT) system was put into practice. The BOLT network was expanded, nationwide,
in 1997. It was at the BSE's International Convention Hall that India’s 1st Bell ringing
ceremony in the history Capital Markets was held on February 18th, 2003. It was the
listing ceremony of Bharti Tele ventures Ltd.

BSE with its long history of capital market development is fully geared to
continue its contributions to further the growth of the securities markets of the
country, thus helping India increases its sphere of influence in international
financial markets.

12
 NATIONAL STOCK EXCHANGE OF INDIA LIMITED

The National Stock Exchange of India Limited has genesis in the report of the
High Powered Study Group on Establishment of New Stock Exchanges, which
recommended promotion of a National Stock Exchange by financial institutions (FIs)
to provide access to investors from all across the country on an equal footing. Based
on the recommendations, NSE was promoted by leading Financial Institutions at the
behest of the Government of India and was incorporated in November 1992 as a tax-
paying company unlike other stock exchanges in the country.

On its recognition as a stock exchange under the Securities Contracts

(Regulation) Act, 1956 in April 1993, NSE commenced operations in the Wholesale
Debt Market (WDM) segment in June 1994. The Capital Market (Equities) segment
commenced operations in November 1994 and operations in Derivatives segment
commenced in June 2000.

The national stock exchange of India ltd is the largest stock exchange of the
country. NSE is setting the agenda for change in the securities markets in India. For
last 5 years it has played a major role in bringing investors from 347 cities and towns
online, ensuring complete transparency, introducing financial guarantee to
settlements, ensuring scientifically designed and professionally managed indices and
by nurturing the dematerialization effort across the country.

NSE is a complete capital market prime mover. It’s wholly owned

subsidiaries, National securities cleaning corporation ltd (NSCCL) provides cleaning
and settlement of securities, India index services and products ltd (IISL) provides
indices and index services with a consulting and licensing agreement with Standard &
Poor’s (S&P), and IT ltd forms the technology strength that NSE works on.

13
 Today, NSE is one of the largest exchanges in the world and still forging
ahead. At NSE, we are constantly working towards creating a more transparent,
vibrant and innovative capital market.

OVER THE COUNTER EXCHANGE OF INDIA

OTCEI was incorporated in 1990 as a section 25 company under the

companies Act 1956 and is recognized as a stock exchange under section 4 of the
securities Contracts Regulation Act, 1956. The exchange was set up to aid
enterprising promotes in raising finance for new projects in a cost effective manner
and to provide investors with a transparent and efficient mode of trading Modeled
along the lines of the NASDAQ market of USA, OTCEI introduced many novel
concepts to the Indian capital markets such as screen-based nationwide trading,
sponsorship of companies, market making and scrip less trading. As a measure of
success of these efforts, the Exchange today has 115 listings and has assisted in
providing capital for enterprises that have gone on to build successful brands for
themselves like VIP Advanta, Sonora Tiles & Brilliant mineral water, etc.

Need for OTCEI:

Studies by NASSCOM, software technology parks of India, the venture

capitals funds and the government’s IT tasks Force, as well as rising interest in IT,
Pharmaceutical, Biotechnology and Media shares have repeatedly emphasized the
need for a national stock market for innovation and high growth companies.
Innovative companies are critical to developing economics like India, which is
undergoing a major technological revolution. With their abilities to generate
employment opportunities and contribute to the economy, it is essential that these
companies not only expand existing operations but also set up new units. The key
issue for these companies is raising timely, cost effective and long term capital to
sustain their operations and enhance growth. Such companies, particularly those that
have been in operation for a short time, are unable to raise funds through the
traditional financing methods, because they have not yet been evaluated by the
financial world.

14
Who would find OTCEI helpful?
• High-technology enterprises
• Companies with high growth potential
• Companies focused on new product development
• Entrepreneurs seeking finance for specific business projects

The Indian economy is demonstrating signs of recovery and it is essential that

these companies have suitable financing alternative to fund their growth and maintain
competitiveness.

OTCEI, With its entry guidelines and eligibility requirement tailored for such
innovative and growth oriented companies, is ideally positioned as the preferred route
for raising funds through initial public offer(IPOs) or primary issues, in this country.

15
 CHAPTER - III
COMPANY PROFILE

16
 COMPANY PROFILE
Background:

Karvy Consultants Limited was started in the year 1981, with the vision and
enterprise of a small group of practicing Chartered Accountants. Initially it was
started with consulting and financial accounting automation, and carved inroads into
the field of registry and share accounting by 1985. Since then, it has utilized its
experience and superlative expertise to go from strength to strength…to better its
services, to provide new ones, to innovate, diversify and in the process, evolved as
one of India’s premier integrated financial service enterprise.
Today, Karvy has access to millions of Indian shareholders, besides
companies, banks, financial institutions and regulatory agencies. Over the past one
and half decades, Karvy has evolved as a veritable link between industry, finance and
people. In January 1998, Karvy became the first Depository Participant in Andhra
Pradesh. An ISO 9002 company, Karvy's commitment to quality and retail reach has
made it an integrated financial services company.

An Overview:

KARVY, is a premier integrated financial services provider, and ranked

among the top five in the country in all its business segments, services over 16 million
individual investors in various capacities, and provides investor services to over 300
corporates, comprising the who is who of Corporate India. KARVY covers the entire
spectrum of financial services such as Stock broking, Depository Participants,
Distribution of financial products - mutual funds, bonds, fixed deposit, equities,
Insurance Broking, Commodities Broking, Personal Finance Advisory Services,
Merchant Banking & Corporate Finance, placement of equity, IPOs, among others.
Karvy has a professional management team and ranks among the best in technology,
operations and research of various industrial segments.
17
Karvy milestones:

Today, Karvy service over 6 lakhs customer accounts spread across over 250
cities/towns in India and serves more than 75 million shareholders across 7000
corporate clients and makes its presence felt in over 12 countries across 5 continents.
All of Karvy services are also backed by strong quality aspects, which have helped
Karvy to be certified as an ISO 9002 company by DNV.

18
ACHIEVEMENTS:

 Among the top 5 stock brokers in India (4% of NSE volumes)

 India's No. 1 Registrar & Securities Transfer Agents
 Among the top 3 Depository Participants
 Largest Network of Branches & Business Associates
 ISO 9001:2000 certified operations by DNV
 Among top 10 Investment bankers
 Largest Distributor of Financial Products
 Adjudged as one of the top 50 IT uses in India by MIS Asia
 Full Fledged IT driven operations
 First ISO-9002 Certified Registrars in India
 Ranked as “The Most Admired Registrar” by MARG
 Largest mobilize of funds as per PRIME DATABASE
 First depository participant from Andhra Pradesh.
 Handled over 500 public issues as Registrars.
 Handling the Reliance account, which accounts for nearly 10 million account
holders?
Range of services:

• Stock broking services

• Distribution of Financial Products (investments & loan products)
• Depository Participant services
• IT enabled services
• Personal finance Advisory Services
• Private Client Group
• Debt market services
• Insurance & merchant banking
• Mutual Fund Services
• Corporate Shareholder Services
• Other global services

Besides these, they also offer special portfolio analysis packages that provide
daily technical advice on scrips for successful portfolio management and provide

19
customized advisory services to help customers make the right financial moves that
are specifically suited to their portfolio. They are continually engaged in designing the
right investment portfolio for each customer according to individual needs and budget
considerations.

Karvy Consultants limited deals in Registrar and Investment Services. Karvy is one of
the early entrants registered as Depository Participant with NSDL (National Securities
Depository Limited), the first Depository in the country and then with CDSL (Central
Depository Services Limited).

Karvy stock broking is a member of National Stock Exchange (NSE), The Bombay
Stock Exchange (BSE), and The Hyderabad Stock Exchange (HSE). The services
provided are multi dimensional and multi-focused in their scope: to analyze the latest
stock market trends and to take a close looks at the various investment options and
products available in the market. Besides this, they also offer special portfolio
analysis packages.

The paradigm shift from pure selling to knowledge based selling drives the
business today. The monthly magazine, Finapolis, provides up-dated market
information on market trends, investment options, opinions etc. Thus empowering the
investor to base every financial move on rational thought and prudent analysis and
embark on the path to wealth creation.

20
 Karvy is recognized as a leading merchant banker in the country, Karvy is
registered with SEBI as a Category I merchant banker. This reputation was built by
capitalizing on opportunities in corporate consolidations, mergers and acquisitions
and corporate restructuring.

Karvy has a tie up with the world’s largest transfer agent, the leading
Australian company, Computer share Limited. It has attained a position of immense
strength as a provider of across-the-board transfer agency services to AMCs,
Distributors and Investors. Besides providing the entire back office processing, it also
provides the link between various Mutual Funds and the investor.

Karvy global services limited covers Banking, Financial and Insurance Services
(BFIS), Retail and Merchandising, Leisure and Entertainment, Energy and Utility and
Healthcare sectors.

Karvy comtrade limited trades in all goods and products of agricultural and
mineral origin that include lucrative commodities like gold and silver and popular
items like oil, pulses and cotton through a well-systematized trading platform.

Karvy Insurance Broking Pvt. Ltd. provides both life and non-life insurance
products to retail individuals, high net-worth clients and corporates. With Indian
markets seeing a sea change, both in terms of investment pattern and attitude of
investors, insurance is no more seen as only a tax saving product but also as an
investment product.

21
 Karvy Inc. is located in New York to provide various financial products and
information on Indian equities to potential foreign institutional investors (FIIs) in the
region. This entity would extensively facilitate various businesses of Karvy viz., stock
broking (Indian equities), research and investment by QIBs in Indian markets for both
secondary and primary offerings.
Quality Policy:

To achieve and retain leadership, Karvy shall aim for complete customer
satisfaction, by combining its human and technological resources, to provide superior
quality financial services. In the process, Karvy will strive to exceed Customer's
expectations.

Quality Objectives

As per the Quality Policy, Karvy will:

 Build in-house processes that will ensure transparent and harmonious

relationships with its clients and investors to provide high quality of services.
 Establish a partner relationship with its investor service agents and
vendors that will help in keeping up its commitments to the customers.
 Provide high quality of work life for all its employees and equip them
with adequate knowledge & skills so as to respond to customer's needs.
 Continue to uphold the values of honesty & integrity and strive to
establish unparalleled standards in business ethics.
 Use state-of-the art information technology in developing new and
innovative financial products and services to meet the changing needs of
investors and clients.
 Strive to be a reliable source of value-added financial products and
services and constantly guide the individuals and institutions in making a
judicious choice of same.
 Strive to keep all stake-holders (shareholders, clients, investors,
employees, suppliers and regulatory authorities) proud and satisfied.

22
 CHAPTER – IV
THEORETICAL
FRAME WORK

23
 THEORETICAL FRAME WORK
INTRODUCTION:

A portfolio is a collection of investments held by an institution or a private

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

Portfolio management involves deciding what assets to include in the

portfolio, given the goals of the portfolio owner and changing economic conditions.
Selection involves deciding what assets to purchase, how many to purchase, when to
purchase them, and what assets to divest. These decisions always involve some sort of
performance measurement, most typically expected return on the portfolio, and the
risk associated with this return (i.e. the standard deviation of the return). Typically the
expected returns from portfolios, comprised of different asset bundles are compared.

The unique goals and circumstances of the investor must also be considered.
Some investors are more risk averse than others. Mutual funds have developed
particular techniques to optimize their portfolio holdings.

Thus, portfolio management is all about strengths, weaknesses, opportunities

and threats in the choice of debt vs. equity, domestic vs. international, growth vs.
safety and numerous other trade-offs encountered in the attempt to maximize return at
a given appetite for risk.

24
Aspects of Portfolio Management:

Basically portfolio management involves

 A proper investment decision making of what to buy & sell
 Proper money management in terms of investment in a basket of assets so
as to satisfy the asset preferences of investors.
 Reduce the risk and increase returns.

OBJECTIVES OF PORTFOLIO MANAGEMENT:

The basic objective of Portfolio Management is to maximize yield and minimize

risk. The other ancillary objectives are as per needs of investors, namely:
 Regular income or stable return
 Appreciation of capital
 Marketability and liquidity
 Safety of investment
 Minimizing of tax liability.

NEED FOR PORTFOLIO MANAGEMENT:

The Portfolio Management deals with the process of selection securities from
the number of opportunities available with different expected returns and carrying
different levels of risk and the selection of securities is made with a view to provide
the investors the maximum yield for a given level of risk or ensure minimum risk for
a level of return.

Portfolio Management is a process encompassing many activities of

investment in assets and securities. It is a dynamics and flexible concept and involves

25
regular and systematic analysis, judgment and actions. The objectives of this service
are to help the unknown investors with the expertise of professionals in investment
Portfolio Management. It involves construction of a portfolio based upon the
investor’s objectives, constrains, preferences for risk and return and liability. The
portfolio is reviewed and adjusted from time to time with the market conditions.
The evaluation of portfolio is to be done in terms of targets set for risk and
return. The changes in portfolio are to be effected to meet the changing conditions.
Portfolio Construction refers to the allocation of surplus funds in hand among a
variety of financial assets open for investment. Portfolio theory concerns itself with
the principles governing such allocation. The modern view of investment is oriented
towards the assembly of proper combinations held together will give beneficial result
if they are grouped in a manner to secure higher return after taking into consideration
the risk element.

The modern theory is the view that by diversification, risk can be reduced. The
investor can make diversification either by having a large number of shares of
companies in different regions, in different industries or those producing different
types of product lines. Modern theory believes in the perspectives of combination of
securities under constraints of risk and return.

ELEMENTS:

Portfolio Management is an on-going process involving the following basic tasks.

 Identification of the investors objective, constrains and preferences which help

formulated the invest policy.
 Strategies are to be developed and implemented in tune with invest policy
formulated. This will help the selection of asset classes and securities in each
class depending upon their risk-return attributes.
 Review and monitoring of the performance of the portfolio by continuous
overview of the market conditions, company’s performance and investor’s
circumstances.

26
  Finally, the evaluation of portfolio for the results to compare with the targets
and needed adjustments have to be made in the portfolio to the emerging
conditions and to make up for any shortfalls in achievements (targets).

Schematic diagram of stages in portfolio management:

27
 Specification and
quantification of
investor
objectives, Monitoring investor
constraints, and related input factors
preferences

Portfolio policies
and strategies Portfolio construction
and revision asset Attainment of
allocation, portfolio investor
optimization, security objectives
selection,
Capital market
implementation and Performance
expectations
execution measurement

Relevant Monitoring
economic, social, economic and
political sector market input factors
and security
considerations

PROCESS OF PORTFOLIO MANAGEMENT:

28
 The Portfolio Program and Asset Management Program both follow a
disciplined process to establish and monitor an optimal investment mix. This six-stage
process helps ensure that the investments match investor’s unique needs, both now
and in the future.

1. IDENTIFY GOALS AND OBJECTIVES:

When will you need the money from your investments? What are you saving your
money for? With the assistance of financial advisor, the Investment Profile
Questionnaire will guide through a series of questions to help identify the goals and
objectives for the investments.

2. DETERMINE OPTIMAL INVESTMENT MIX:

Once the Investment Profile Questionnaire is completed, investor’s optimal

investment mix or asset allocation will be determined. An asset allocation represents
the mix of investments (cash, fixed income and equities) that match individual risk
and return needs.
This step represents one of the most important decisions in your portfolio
construction, as asset allocation has been found to be the major determinant of long-
term portfolio performance.

3. CREATE A CUSTOMIZED INVESTMENT POLICY STATEMENT

29
 When the optimal investment mix is determined, the next step is to formalize
our goals and objectives in order to utilize them as a benchmark to monitor progress
and future updates.

4. SELECT INVESTMENTS
The customized portfolio is created using an allocation of select QFM Funds.
Each QFM Fund is designed to satisfy the requirements of a specific asset class, and
is selected in the necessary proportion to match the optimal investment mix.

5. MONITOR PROGRESS

Building an optimal investment mix is only part of the process. It is equally

important to maintain the optimal mix when varying market conditions cause
investment mix to drift away from its target. To ensure that mix of asset classes stays
in line with investor’s unique needs, the portfolio will be monitored and rebalanced
back to the optimal investment mix

6. REASSESS NEEDS AND GOALS

Just as markets shift, so do the goals and objectives of investors. With the
flexibility of the Portfolio Program and Asset Management Program, when the
investor’s needs or other life circumstances change, the portfolio has the flexibility to
accommodate such changes.

RISK:

Risk refers to the probability that the return and therefore the value of an asset
or security may have alternative outcomes. Risk is the uncertainty (today) surrounding
the eventual outcome of an event which will occur in the future. Risk is uncertainty of
the income/capital appreciation or loss of both. All investments are risky. The higher
the risk taken, the higher is the return. But proper management of risk involves the
right choice of investments whose risks are compensation.
RETURN:

30
 Return-yield or return differs from the nature of instruments, maturity period
and the creditor or debtor nature of the instrument and a host of other factors. The
most important factor influencing return is risk return is measured by taking the price
income plus the price change.

PORTFOLIO RISK:

Risk on portfolio is different from the risk on individual securities. This risk is
reflected by in the variability of the returns from zero to infinity. The expected return
depends on probability of the returns and their weighted contribution to the risk of the
portfolio.

RETURN ON PORTFOLIO:
Each security in a portfolio contributes returns in the proportion of its
investment in security. Thus the portfolio of expected returns, from each of the
securities with weights representing the proportionate share of security in the total
investments.

RISK – RETURN RELATIONSHIP:

The risk/return relationship is a fundamental concept in not only financial

analysis, but in every aspect of life. If decisions are to lead to benefit maximization, it
is necessary that individuals/institutions consider the combined influence on expected
(future) return or benefit as well as on risk/cost. The requirement that expected
return/benefit be commensurate with risk/cost is known as the "risk/return trade-off"
in finance.

All investments have some risks. An investment in shares of companies has its
own risks or uncertainty. These risks arise out of variability of returns or yields and
uncertainty of appreciation or depreciation of share prices, loss of liquidity etc. and
the overtime can be represented by the variance of the returns. Normally, higher the
risk that the investors take, the higher is the return.

31
.

TYPES OF RISKS:
Risk consists of two components. They are
1. Systematic Risk
2. Un-systematic Risk

1. SYSTEMATIC RISK:

Systematic risk refers to that portion of total variability in return caused by

factors affecting the prices of all securities. Economic, Political and sociological
changes are sources of systematic risk. Their effect is to cause prices of nearly all
individual common stocks and/or all individual bonds to move together in the same
manner.
i. Market Risk: Variability in return on most common stocks that are due to
basic sweeping changes in investor expectations is referred to as market risk.
Market risk is caused by investor reaction to tangible as well as intangible
events.
ii. Interest rate-Risk: Interest –rate risk refers to the uncertainty of future
market values and of the size of future income, caused by fluctuations in the
general level of interest rates.
iii. Purchasing-Power Risk: Purchasing power risk is the uncertainty of the
purchasing power of the amounts to be received. In more events everyday
terms, purchasing power risk refers to the impact of or deflation on an
investment.
2. UNSYSTEMATIC RISK:

32
 Unsystematic risk is the portion of total risk that is unique to a firm or
industry. Factors such as management capability, consumer preferences, and labor
strikes Cause systematic variability of return in a firm. Unsystematic factors are
largely independent of factors affecting securities markets in general. Because these
factors affect one firm, they must be examined for each firm. Unsystematic risk that
portion of risk that is unique or peculiar to a firm or an industry, above and beyond
that affecting securities markets in general. Factors such as management capability,
consumer preferences, and labor strikes can cause unsystematic variability of return
for a company’s stock.

i. Business Risk:
Business risk is a function of the operating conditions faced by a firm and the
variability these conditions inject into operating income and expected dividends.
Business risk can be divided into two broad categories
a. Internal Business Risk
b. External Business Risk
a. Internal business risk is associated with the operational efficiency of the firm.
The operational efficiency differs from company to company. The efficiency
of operation is reflected on the company‘s achievement of its pre-set goals and
the fulfillment of the promises to its investors.
b. External business risk is the result of operating conditions imposed on the firm
by circumstances beyond its control. The external environments in which it
operates exert some pressure on the firm. The external factors are social and
regulatory factors, monetary and fiscal policies of the government, business
cycle and the general economic environment within which a firm or an
industry operates.

ii. Financial Risk:

Financial risk is associated with the way in which a company finances its
activities. Financial risk is avoided risk to the extent that management has the freedom
to decide to borrow or not to borrow funds. A firm with no debit financing has no
financial risk
THE MEAN VARIANCE CRITERION:

33
Dr. Harry M. Markowitz is credited with developing the first modern portfolio
analysis model in order to arrange for the optimum allocation of assets with in
portfolio. To reach these objectives, Markowitz generated portfolio with in a reward
risk context. In essence, Markowitz model is a theoretical framework for the analysis
of risk return choices. Decisions are based on the concept of efficient portfolios.

Markowitz model is a theoretical framework for the analysis of risk, return

choices and this approach determines an efficient set of portfolio return through three
important variable that is,
 Return
 Standard Deviation
 Coefficient of correlation

Markowitz model is also called as a “Full Covariance Model“. Through this

model the investor can find out the efficient set of portfolio by finding out the trade
off between risk and return, between the limits of zero and infinity. According to this
theory, the effect of one security purchase over the effects of the other security
purchase is taken into consideration and then the results are evaluated. Markowitz had
given up the single stock portfolio and introduced diversification. The single stock
portfolio would be preferable if the investor is perfectly certain that his expectation of
highest return would turn out to be real. In the world of uncertainty, most of the risk
averse investors would like to join Markowitz rather than keeping a single stock,
because diversification reduces the risk.

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 for a specified level
of expected return level chosen, and asset are substituted until the portfolio
combination expected returns, set of efficient portfolio is generated.

Assumptions:

34
The Markowitz model is based on several assumptions regarding investor behavior:
1. Investors consider each investment alternative as being represented by a
probability distribution of expected returns over some holding period.
2. Investors maximize one period-expected utility and possess utility curve,
which demonstrates diminishing marginal utility of wealth.
3. Individuals estimate risk on the basis of variability of expected return.
4. Investors base decisions solely on expected return and variance of return only.
5. For a given risk level, investors prefer high returns to lower returns. Similarly
for a given level of expected return, investors prefer less risk to more risk.

Under these assumptions, a single asset or portfolio of assets is considered to be

“efficient” if no other asset or portfolio of assets higher expected return with the same
expected return.

THE SPECIFIC MODEL:

In developing this model, Markowitz first disposed of the investor behavior

rule that the investor should maximize expected return. This rule implies non-
diversified single security analysis portfolio with the highest expected return is the
most desirable portfolio. Only by buying that single security portfolio would
obviously be preferable if the investor were perfectly certain that this highest expected
return would turn out to be the actual return. However, under real world conditions of
uncertainty, most risk adverse investors join with Markowitz in discarding the role of
calling for maximizing the expected returns. As an alternative, Markowitz offers the
“expected returns/variance” rule.
Markowitz has shown the effect of diversification by regarding the risk of
securities. According to him, the security with the covariance, which is either negative
or low amongst them, is the best manner to reduce risk. Markowitz has been able to
show that securities, which have, less than positive correlation will reduce risk with
out, in any way, bringing the return down. According to his research study a low
correlation level between securities in the portfolio will show less risk.
According to him, investing in a large number of securities is not the right
method of investment. It is the right kind of security that brings the maximum results.

35
Henry Markowitz has given the following formula for a two-security portfolio and
three security portfolios.

σ ρ = √(x1)2 (σ 1)2 + (X2)2 (σ 2)2 + 2(X1)(X2)(r12)(σ 1) (σ 2)

σ ρ = √(x1)2(σ 1)2+(X2)2(σ 2)2 + (X3)2(σ 3)2 +2(X1)(X2)(r12)(σ 1) (σ 2)+ 2(X1)(X3)(r13)
(σ 1) (σ 3)+ 2(X2)(X3)(r23)(σ 2) (σ 3)

σ p = Standard deviation of the portfolio return

X1= proportion of the portfolio invested in security 1

X2= proportion of the portfolio invested in security 2
X3= proportion of the portfolio invested in security 3
σ 1= standard deviation of the return on security 1
σ 2= standard deviation of the return on security 2
σ 3= standard deviation of the return on security 3
r12= coefficient of correlation between the returns on securities 1 and 2
r13= coefficient of correlation between the returns on securities 1 and 3
r23= coefficient of correlation between the returns on securities 2 and 3

CAPITAL ASSET PRICING MODEL: (CAPM)

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

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

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

Reward-to-risk ratio Reward-to-risk ratio

The Security Market Line, seen here in a graph, describes a relation between
the beta and the asset's expected rate of return
36
 The market reward-to-risk ratio is effectively the market risk premium and by
rearranging the above equation and solving for E (Ri), we obtain the Capital Asset
Pricing Model (CAPM).

Where:

• is the expected return on the capital asset

• is the risk-free rate of interest

• (the beta coefficient) the sensitivity of the asset returns to market returns,

or also ,

• is the expected return of the market

is sometimes known as the market premium or risk premium (the

difference between the expected market rate of return and the risk-free rate of return).

Beta measures the volatility of the security, relative to the asset class. The
equation is saying that investors require higher levels of expected returns to
compensate them for higher expected risk. We can think of the formula as predicting
a security's behavior as a function of beta:

CAPM says that if we know a security's beta then we know the value of r that
investors expect it to have.
Assumptions of CAPM:
• All investors have rational expectations.
• There are no arbitrage opportunities.

37
 • Returns are distributed normally.
• Fixed quantity of assets.
• Perfectly efficient capital markets.
• Investors are solely concerned with level and uncertainty of future wealth
• Separation of financial and production sectors. Thus, production plans are
fixed.
• Risk-free rates exist with limitless borrowing capacity and universal access.
• The Risk-free borrowing and lending rates are equal.
• No inflation and no change in the level of interest rate exists.
• Perfect information, hence all investors have the same expectations about
security returns for any given time period.

Shortcomings Of CAPM:

• The model assumes that asset returns are (jointly) normally distributed random
variables. It is however frequently observed that returns in equity and other
markets are not normally distributed.
• The model assumes that the variance of returns is an adequate measurement of
risk.
• The model does not appear to adequately explain the variation in stock returns.
• The model assumes that given a certain expected return investors will prefer
lower risk (lower variance) to higher risk and conversely given a certain level
of risk will prefer higher returns to lower ones.
• The model assumes that all investors have access to the same information and
agree about the risk and expected return of all assets. (Homogeneous
expectations assumption)
• The model assumes that there are no taxes or transaction costs.

• The market portfolio consists of all assets in all markets, where each asset is
weighted by its market capitalization. This assumes no preference between
markets and assets for individual investors, and that investors choose assets

38
 solely as a function of their risk-return profile. It also assumes that all assets
are infinitely divisible as to the amount which may be held or transacted.
• The market portfolio should in theory include all types of assets that are held
by anyone as an investment (including works of art, real estate, human
capital...)
Unfortunately, it has been shown that this substitution is not innocuous and
can lead to false inferences as to the validity of the CAPM, and it has been said that
due to the in observability of the true market portfolio, the CAPM might not be
empirically testable.

The efficient frontier:

39
 The CAPM assumes that the risk-return profile of a portfolio can be optimized
- an optimal portfolio displays the lowest possible level of risk for its level of return.
Additionally, since each additional asset introduced into a portfolio further diversifies
the portfolio, the optimal portfolio must comprise every asset, with each asset value-
weighted to achieve the above. All such optimal portfolios, i.e., one for each level of
return, comprise the efficient frontier.

A line created from the risk-reward graph, comprised of optimal portfolios.

The optimal portfolios plotted along the curve have the highest expected
return possible for the given amount of risk.Because the unsystemic risk is
diversifiable, the total risk of a portfolio can be viewed as beta.

40
 Note 1: The expected market rate of return is usually measured by looking at the
arithmetic average of the historical returns on a market portfolio.

Note 2: The risk free rate of return used for determining the risk premium is
usually the arithmetic average of historical risk free rates of return and not the
current risk free rate of return.

Measuring the Expected Return and Standard Deviation of a Portfolio

41
 The expected return on a portfolio is the weighted average of the returns of
individual assets, where each asset's weight is determined by its weight in the
portfolio.

The formula is:

E (Rp) = [WaX E (Ra)] + [WaX E (Ra)]

Where
E= is stands for expected
Rp= Return on the portfolio
Wa= Weight of asset n where n my stand for asset a, b…etc.
Ra= Return on asset n where n may stand for asset a, b…etc

The portfolio standard deviation (σp) measure the risk associated with the
expected return of the portfolio.

The formula is σp = √wa2 σ2 + wa2 σ2 + 2wawbrab σa σb

The term rab represents the correlation between the returns of investments a and
b. The correlation coefficient, r, will always reduce the portfolio standard deviation as
long as it is less than +1.00.

Portfolio diversification:

Diversification occurs when different assets make up a portfolio.

The benefit of diversification is risk reduction; the extent of this benefit depends upon
how the returns of various assets behave over time. The market rewards
diversification. We can lower risk without sacrificing expected return, and/or we can
increase expected return without having to assume more risk. Diversifying among
different kinds of assets is called asset allocation.

The diversification can either be vertical or horizontal.

42
 In vertical diversification a portfolio can have scripts of different companies
within the same industry. In horizontal diversification one can have different scripts
chosen from different industries.

An important way to reduce the risk of investing is to diversify your investments.

Diversification is akin to "not putting all your eggs in one basket."

For example: If portfolio only consisted of stocks of technology companies, it would

likely face a substantial loss in value if a major event adversely affected the
technology industry.

There are different ways to diversify a portfolio whose holdings are

concentrated in one industry. We can invest in the stocks of companies belonging to
other industry groups. We can allocate our portfolio among different categories of
stocks, such as growth, value, or income stocks. We can include bonds and cash
investments in our asset-allocation decisions. We can also diversify by investing in
foreign stocks and bonds.

Diversification requires us to invest in securities whose investment returns do

not move together. In other words, the investment returns have a low correlation. The
correlation coefficient is used to measure the degree to which returns of two securities
are related. As we increase the number of securities in our portfolio, we reach a point
where likely diversified as much as reasonably possible. Diversification should
neither be too much or too less. It should be adequate according to the size of the
portfolio.

The Efficient Frontier and Portfolio Diversification

43
 The graph on the shows how volatility increases the risk of loss of principal,
and how this risk worsens as the time horizon shrinks. So all other things being equal,
volatility is minimized in the portfolio.

If we graph the return rates and standard deviations for a collection of

securities, and for all portfolios we can get by allocating among them. Markowitz
showed that we get a region bounded by an upward-sloping curve, which he called the
efficient frontier.

It's clear that for any given value of standard deviation, we would like to
choose a portfolio that gives you the greatest possible rate of return; so we always
want a portfolio that lies up along the efficient frontier, rather than lower down, in the
interior of the region. This is the first important property of the efficient frontier: it's
where the best portfolios are.

44
The second important property of the efficient frontier is that it's curved, not straight.
If we take a 50/50 allocation between two securities, assuming that the year-to-year
performance of these two securities is not perfectly in sync -- that is, assuming that
the great years and the lousy years for Security 1 don't correspond perfectly to the
great years and lousy years for Security 2, but that their cycles are at least a little off --
then the standard deviation of the 50/50 allocation will be less than the average of the
standard deviations of the two securities separately. Graphically, this stretches the
possible allocations to the left of the straight line joining the two securities

THE FOUR PILLARS OF DIVERSIFICATION:

a. The yield provided by an investment in a portfolio of assets will be closer to

the Mean Yield than an investment in a single asset.
b. When the yields are independent - most yields will be concentrated around the
Mean.
c. When all yields react similarly - the portfolio's variance will equal the
variance of its underlying assets.
d. If the yields are dependent - the portfolio's variance will be equal to or less
than the lowest

45
 CHAPTER - V

DATA ANALYSIS

46
 DATA ANALYSIS

CALCULATION OF AVERAGE RETURN OF COMPANIES:

Average return = ∑ R/N

GUJARAT AMBUJA CEMENT LTD (GACL):

Opening Closing
(P1-P0)/
Year share price share price (P1-P0)
P0*100
(P0) (P1)
2004-2005 306.10 401.55 95.45 31.18
2005-2006 405.00 79.60 -325.40 -80.35
2006-2007 80.00 141.30 61.30 76.63
2007-2008 144.80 119.35 -25.45 -17.58
2008-2009 120.00 80.60 -39.4 -32.83
TOTAL RETURN -22.95

Average return = -22.95/5= -4.59

LARSEN AND TOUBRO (LNT):

Opening Closing
(P1-P0)/
Year share price share price (P1-P0)
P0*100
(P0) (P1)
2004-2005 530.00 982.00 452.00 85.28
2005-2006 988.70 1844.20 855.50 86.53
2006-2007 1845.00 1442.95 -402.05 -21.79
2007-2008 1400.00 1703.20 303.20 21.66
2008-2009 1704 2539.05 835.05 49.01
TOTAL RETURN 220.69

Average return = 220.69/5= 44.14

RANBAXY LABORATORIES:

47
 Opening Closing
(P1-P0)/
Year share price share price (P1-P0)
P0*100
(P0) (P1)
2004-2005 1100.10 1251.40 151.30 13.75
2005-2006 1252.00 362.35 -889.65 -71.06
2006-2007 364.40 391.85 27.45 7.53
2007-2008 393.00 349.15 -43.85 11.16
2008-2009 350.00 340.95 -9.05 -2.59
TOTAL RETURN -41.21
Average return = -41.21/5= -8.242

CIPLA:

Opening Closing
(P1-P0)/
Year share price share price (P1-P0)
P0*100
(P0) (P1)
2004-2005 1339.00 317.25 -1021.75 -76.31
2005-2006 320.00 443.40 123.40 38.56
2006-2007 445.00 250.70 -194.30 -43.66
2007-2008 253.40 239.30 -14.10 -5.56
2008-2009 240.00 218.15 -21.85 -9.10
TOTAL RETURN -96.07

Average return = -96.07/5= -19.20

MTNL:

48
 Opening Closing
(P1-P0)/
Year share price share price (P1-P0)
P0*100
(P0) (P1)
2004-2005 139.10 154.90 15.80 11.36
2005-2006 156.00 144.20 11.80 7.56
2006-2007 145.20 142.85 -2.35 -1.62
2007-2008 143.00 152.35 9.35 6.52
2008-2009 152.35 87.10 -65.25 -42.83
TOTAL RETURN -19.01

Average return = -19.01/5= -3.80

BHARTI ARTL:

Opening Closing
(P1-P0)/
Year share price share price (P1-P0)
P0*100
(P0) (P1)
2004-2005 106.25 215.60 109.35 102.92
2005-2006 218.90 345.70 126.80 57.93
2006-2007 348.90 628.85 279.95 80.24
2007-2008 635.00 862.80 227.80 35.87
2008-2009 862.00 760.35 -101.65 -11.79
TOTAL RETURN 265.17

Average return = 265.17/5= 53.03

ING VYSYA:

Opening Closing (P1-P0)/

Year (P1-P0)
share price share price P0*100
49
 (P0) (P1)
2004-2005 560.00 585.75 25.75 4.60
2005-2006 585.00 162.25 -422.75 -72.26
2006-2007 164.50 157.45 -7.05 -4.29
2007-2008 159.00 185.15 26.15 16.45
2008-2009 186.50 227.00 40.5 21.71
TOTAL RETURN -33.79

Average return = -33.79/5= -6.76

ICICI:

Opening Closing
(P1-P0)/
Year share price share price (P1-P0)
P0*100
(P0) (P1)
2004-2005 299.70 370.75 71.05 23.71
2005-2006 374.85 584.70 209.85 55.98
2006-2007 586.25 890.40 304.15 51.88
2007-2008 889.00 950.25 61.25 6.89
2008-2009 950.20 675.85 -274.35 -28.87
TOTAL RETURN 109.59

Average return = 109.59/5= 21.92

WIPRO:

Opening Closing
(P1-P0)/
Year share price share price (P1-P0)
P0*100
(P0) (P1)

50
 2004-2005 1744.40 748.00 -996.40 -57.12
2005-2006 753.00 463.45 -289.55 -38.45
2006-2007 464.00 604.55 140.55 30.29
2007-2008 607.90 554.35 -53.55 -8.81
2008-2009 555.00 397.10 -157.9 -28.45
TOTAL RETURN -102.54

Average return = -102.54/5= -20.51

SATYAM COMP:

Opening Closing
(P1-P0)/
Year share price share price (P1-P0)
P0*100
(P0) (P1)
2004-2005 370.00 409.90 39.90 10.78
2005-2006 412.00 737.80 325.80 79.08
2006-2007 740.70 483.95 -256.75 -34.66
2007-2008 486.00 474.95 -11.05 -2.27
2008-2009 474.00 335.00 -13.9 -29.32
TOTAL RETURN 23.61

Average return = 23.61/5= 4.72

CALCULATION OF STANDARD DEVIATION:

Standard Deviation = √ Variance

Variance = 1/n-1 (∑d2)

51
GUJARAT AMBUJA CEMENT LTD:

Avg. Return d=
Year Return (R) d2
(R¯ ) (R-R¯)
2004-2005 31.18 -4.59 35.77 1279.49
2005-2006 -80.35 -4.59 -75.76 5739.58
2006-2007 76.63 -4.59 81.22 6596.69
2007-2008 -17.58 -4.59 -12.99 168.74
2008-2009 -32.83 -4.59 -28.24 797.50
TOTAL ∑d2=14582

Variance = 1/n-1 (∑d2) = 1/5-1 (14582) = 3645.5

Standard Deviation = Variance = 3645.5 = 60.38

LARSEN & TOUBRO:

Avg. Return d=
Year Return (R) D2
(R¯ ) (R-R¯)
2004-2005 85.28 44.14 41.14 1692.50
2005-2006 86.53 44.14 42.39 1796.91
2006-2007 -21.79 44.14 -65.93 4346.76
2007-2008 21.66 44.14 -22.48 505.35
2008-2009 49.04 44.14 4.9 24.01
TOTAL ∑d2=8365.53

Variance = 1/n-1 (∑d2) = 1/5-1 (8365.53) = 2091.3825

Standard Deviation = Variance = 2091.3825 = 45.73

RANBAXY LABORATORIES:

Avg. Return d=
Year Return (R) D2
(R¯ ) (R-R¯)
2004-2005 13.75 -8.24 21.99 483.56
2005-2006 -71.06 -8.24 -62.82 3946.35

52
 2006-2007 7.53 -8.24 15.77 248.69
2007-2008 11.16 -8.24 19.40 376.36
2008-2009 -2.59 -8.24 5.65 31.92
TOTAL ∑d2=5086.88

Variance = 1/n-1 (∑d2) = 1/5-1 (5086.88) = 1271.72

Standard Deviation = Variance = 1271.72 = 35.66

CIPLA:

Avg. Return d=
Year Return (R) D2
(R¯ ) (R-R¯)
2004-2005 -76.31 -19.21 -57.1 3260.41
2005-2006 38.56 -19.21 57.77 3337.37
2006-2007 -43.66 -19.21 -24.45 597.80
2007-2008 -5.56 -19.21 13.65 186.32
2008-2009 -9.10 -19.21 10.11 102.21
TOTAL ∑d2=7484.11

Variance = 1/n-1 (∑d2) = 1/5-1 (7484.11) = 1871.03

Standard Deviation = Variance = 1871.03 = 43.26

MTNL:

Avg. Return d=
Year Return (R) d2
(R¯ ) (R-R¯)
2004-2005 11.36 -3.80 15.16 229.83
2005-2006 7.56 -3.80 11.36 129.05
2006-2007 -1.62 -3.80 2.18 4.75
2007-2008 6.52 -3.80 10.32 106.50

53
 2008-2009 -42.83 -3.80 -39.03 1523.34
TOTAL ∑d2=1993.47

Variance = 1/n-1 (∑d2) = 1/5-1 (1993.47) = 498.37

Standard Deviation = Variance = 498.37 = 22.32

BHARTI ARTL:

Avg. Return d=
Year Return (R) D2
(R¯ ) (R-R¯)
2004-2005 102.92 53.03 49.89 2489.01
2005-2006 57.93 53.03 4.9 24.01
2006-2007 80.24 53.03 27.21 740.38
2007-2008 37.87 53.03 -17.16 294.46
2008-2009 -11.79 53.03 -64.82 4201.63
TOTAL ∑d2=7749.49

Variance = 1/n-1 (∑d2) = 1/5-1 (7749.49) = 1937.37

Standard Deviation = Variance = 1937.37 = 44.01

ING VYSYA:

Avg. Return d=
Year Return (R) D2
(R¯ ) (R-R¯)
2004-2005 4.60 -6.76 11.36 129.05
2005-2006 -72.26 -6.76 65.5 4290.25
2006-2007 -4.29 -6.376 2.47 6.1009
2007-2008 16.45 -6.76 23.21 538.70
2008-2009 21.71 -6.76 28.47 810.54
TOTAL ∑d2=5774.64

54
 Variance = 1/n-1 (∑d2) = 1/5-1 (5774.64) = 1443.66

Standard Deviation = Variance = 1443.66 = 37.99

ICICI:

Avg. Return d=
Year Return (R) d2
(R¯ ) (R-R¯)
2004-2005 23.71 21.92 1.79 3.2041
2005-2006 55.98 21.92 34.06 1160.08
2006-2007 51.88 21.92 29.96 897.60
2007-2008 6.89 21.92 -15.03 225.90
2008-2009 -28.87 21.92 -50.79 2579.62
TOTAL ∑d2=4866.40

Variance = 1/n-1 (∑d2) = 1/5-1 (4866.40) = 1216.6

Standard Deviation = Variance = 1216.6 = 34.87

WIPRO:

Avg. Return d=
Year Return (R) d2
(R¯ ) (R-R¯)
2004-2005 -57.12 -20.51 -36.61 1340.29
2005-2006 -38.45 -20.51 -17.94 321.84
2006-2007 30.29 -20.51 50.8 2580.64
2007-2008 -8.81 -20.51 11.70 136.89
2008-2009 -28.45 -20.51 -7.94 63.04
TOTAL ∑d2=4442.7

Variance = 1/n-1 (∑d2) = 1/5-1 (4442.7) = 1110.675

55
 Standard Deviation = Variance = 1110.675 = 33.33

SATYAM:

Avg. Return d=
Year Return (R) d2
(R¯ ) (R-R¯)
2004-2005 10.78 4.72 6.06 36.72
2005-2006 79.08 4.72 74.36 5529.41
2006-2007 -34.66 4.72 -39.38 1550..78
2007-2008 -2.27 4.72 -6.99 48.86
2008-2009 -29.32 4.72 -34.04 1158.72
TOTAL ∑d2=8324.49

Variance = 1/n-1 (∑d2) = 1/5-1 (8324.49) = 2081.12

Standard Deviation = Variance = 2081.12 = 45.61

CALCULATION OF CORRELATION BETWEEN TWO

COMPANIES:

Covariance (COVab) = 1/(n-1) (∑dx.dy)

Correlation of coefficient = COVab / σa* σb

GACL & LNT:

Dev. Of Product of dev.

Dev. Of LNT
YEAR GACL (dx)(dy)
(dy)
(dx)
2004-2005 35.77 41.14 1471.5778
2005-2006 -75.76 42.39 -3211.4664
2006-2007 81.22 -65.93 -5354.8346
2007-2008 -12.99 -22.48 292.0152

56
 2008-2009 -28.24 4.9 -138.376

TOTAL ∑dx. dy = -6941.084

COVab =1/(5-1)(-6941.084) =-1735.271

Correlation of coefficient = -1735.271/(60.38)(45.73) = -0.63

RANBAXY & CIPLA:

Dev. Of Product of dev.

Dev. Of CIPLA
YEAR RANBAXY (dx)(dy)
(dy)
(dx)
2004-2005 21.99 -57.1 -1255.629
2005-2006 -62.82 57.77 -3629.11
2006-2007 15.77 -24.45 -385.57
2007-2008 19.40 13.65 264.81
2008-2009 5.65 10.11 57.12

TOTAL ∑dx. dy = -4948.37

COVab =1/(5-1)(-4948.37) = -1237.09

Correlation of coefficient = -1237.09/(35.66)(43.26) = -0.80

57
MTNL & BHARTI ARTL:

Dev. Of Product of dev.

Dev. Of ARTL
YEAR MTNL (dx)(dy)
(dy)
(dx)
2004-2005 15.16 49.89 756.33
2005-2006 11.36 4.9 55.66
2006-2007 2.18 27.21 59.32
2007-2008 10.32 -17.16 -177.09
2008-2009 -39.03 -64.82 2529.92

TOTAL ∑dx. dy = 3224.14

COVab =1/(5-1)(3224.14) = 806.035

Correlation of coefficient = 806.035/(22.32)(44.01)= 0.82

ING VYSYA & ICICI:

Dev. Of ING Product of dev.

Dev. Of ICICI
YEAR VYSYA (dx)(dy)
(dy)
(dx)
2004-2005 11.36 1.79 20.3344
2005-2006 65.5 34.06 2230.93
2006-2007 2.47 29.96 74.0012
2007-2008 23.21 -15.03 -348.84
2008-2009 28.47 -50.79 -1445.99

TOTAL ∑dx. dy = 530.44

COVab =1/(5-1)(530.44) =132.61

Correlation of coefficient = 132.61/(37.99)(34.87) = 0.10

58
WIPRO & SATYAM:

Dev. Of Dev. Of Product of dev.

YEAR WIPRO SATYAM (dx)(dy)
(dx) (dy)
2004-2005 -36.61 6.06 -221.85
2005-2006 -17.94 74.36 -1334.01
2006-2007 50.80 -39.38 -2000.50
2007-2008 11.70 -6.99 -81.78
2008-2009 -7.94 -34.04 270.27

TOTAL ∑dx. dy = -3367.87

COVab =1/(5-1)(-3367.87) = -841.9675

Correlation of coefficient = -841.9675/(33.33)(45.61) = -0.55

CALCULATION OF PORTFOLIO WEIGHTS:

Deriving the minimum risk portfolio, the following formula is used:

Wa = (b )2 - rab (a) (σb)

(a)2 + (b)2 – 2rab (a) (b)
Where,
Xa is the proportion of security A
Xb is the proportion of security B
σa = standard deviation of security A
σb = standard deviation of security B
rab = correlation co-efficient between A&B

GACL & LNT:

59
 (45.73)2- (-0.63)(60.38) (45.73)
Xa =
(60.38)2 + (45.73)2-2 (-0.63) (60.38) (45.73)

= 0.42
Xb = 1- Xa
=1- 0.42
= 0.58

RANBAXY & CIPLA:

(43.26)2- (-0.80)(35.66) (43.26)
Xa =
(35.66)2 + (43.26)2 -2 (-0.80) (35.66) (43.26)
= 0.55
Xb = 1-Xa
= 1-0.55
= 0.45

MTNL & BHARTI ARTL:

()44.012 –0.82 (22.32)(44.01)

Xa =
(22.32)2 + (44.01)2 – 2(0.82)(22.32)(44.01)
= 1.37
Xb = 1 – Xa
= 1- 1.37
= -0.37

ING VYSYA & ICICI:

(34.87)2 – (0.10)(37.99)(34.87)
Xa =
(37.99)2 + (34.87)2 – 2 (0.10)(37.99)(34.87)

60
 = 0.45
Xb = 1 – Xa
= 1 – 0.45
= 0.55

WIPRO & SATYAM:

(45.61)2 – (-0.55)(33.33) (45.61)

Xa =
(33.33)2 + (45.61)2 – 2 (0.55) (33.33) (45.61)
= 0.60
Xb = 1 – Xa
= 1 – 0.60
= 0.40

CALCULATION OF PORTFOLIO RISK:

For two securities:

σP = a2*(Xa) 2
+ b2*(Xb) 2
+
2rab*a*b*Xa*Xb

Where,

σP = portfolio risk
Xa = proportion of investment in security A
Xb = proportion of investment in security B
R12 = correlation co-efficient between security 1 & 2

σa = standard deviation of security 1

61
σb = standard deviation of security 2

For three securities:

σp =√(σa)2(Xa)2+(σb)2(Xb)2+ (σc)2(Xc)2+ 2(Xa)(Xb)(rab)(σa)(σb) +

2(Xa)(Xc)(rac)(σa)(σc) + 2(Xb)(Xc)(rbc)(σb)(σc)

GACL & LNT:

σp = √(0.42)2 *(60.38)2 +(0.58)2 *(45.73)2 +2(-0.63)(60.38)(45.73)(0.42)(0.58)

= √499.09
= 22.34

RANBAXY & CIPLA:

σp = √(0.55)2 *(35.66)2 +(0.45)2 *(43.26)2 +2(-0.80)(35.66)(43.26)(0.55)(0.45)

= √152.74
= 12.36
MTNL & BHARTI ARTL:

σp =√(1.37)2 *(22.32)2+(-0.37)2*(44.01)2+2(0.82)(22.32)(44.01)(1.37)(-0.37)
= √383.58
= 19.58

ING VYSYA & ICICI:

σp = √(0.45)2 *(37.99)2 + (0.55)2 *(34.87)2 +2(0.10)(37.99)(34.87)(0.45)(0.55)

= √725.6381
= 26.94

WIPRO & SATYAM:

σp = √(0.60)2 *(33.33)2 + (0.40)2 *(45.61)2 +2(-0.55)(0.60)(0.40)(33.33)(45.61)

62
 = √331.43
= 18.20

CALCULATION OF PORTFOLIO RETURN:

Rp = W1R1 + W2R2 (for two securities)

Rp = W1R1+ W2R2 + W3R3 (for three securities)

Where,
W1, W2, W3 are the weights of the securities
R1, R2, R3 are the Expected returns

GACL & LNT:

Rp = (0.42)(-4.59) + (0.58)(44.14)
= 23.67

RANBAXY & CIPLA:

Rp = (0.55)(-8.24) + (0.45)(-19.21)
= -13.1765
MTNL & BHARTI ARTL:
Rp = (1.37)(-3.80)+(-0.37)(53.03)
= -24.83

ING VYSYA & ICICI:

Rp = (0.45)(-6.76) + (0.55)(21.92)
= 9.014

WIPRO & SATYAM:

Rp = (0.60)(-20.51) + (0.40)(4.72)
= - 10.43

63
CHAPTER-VI
64
 FINDINGS
SUGGESTIONS
CONCLUSIONS
BIBILOGRAPHY

FINDINGS

CALCULATED EXPECTED RETURNS AND STANDARD DEVIATIONS

Company name Expected return (%) Standard deviation (%)

CEMENT
GACL -4.59 60.38
LNT 44.14 45.73
PHARMACEUTICAL
RANBAXY -8.242 35.66
CIPLA -19.21 43.26

65
TELECOM

MTNL -3.80 22.32

BHARTI ARTL 53.03 44.01

BANKING

ING VYSYA -6.76 37.99

ICICI 21.92 34.87

I.T.

WIPRO -20.51 33.33

SATYAM 4.72 45.61

CEMENT INDUSTRY:

The expected return of GACL is -4.59 and L&T is 44.14. And the standard
deviations are 60.38 and 45.73 respectively.

PHARMACEUTICAL INDUSTRY:

The expected returns of RANBAXY and CIPLA are -8.242 and -19.21
respectively and their standard deviations are 35.66 and 43.26 respectively.

66
TELECOM INDUSTRY:

The expected returns of MTNL and BHARATI AIRTEL are -3.80 and 53.03
and their standard deviations are 22.32 and 44.01 respectively.

BANKING INDUSTRY:

The expected returns of ING VYSYA and ICICI are -6.76 and 21.92
respectively. And their standard deviations are 37.99 and 34.87.

I.T INDUSTRY:

The expected returns of WIPRO and SATYAM are -20.51 and 4.72, and their
standard deviations are 33.33 and 45.61 respectively.

Portfolio Returns and Risks of Companies

Company name Returns (%) Risks (%)

CEMENT
GACL
23.67 22.34
LNT
PHARMACEUTICAL
RANBAXY
-13.1765 12.36
CIPLA
TELECOM

67
MTNL
-24.83 19.58
BHARTI ARTL

BANKING

ING VYSYA
9.014 26.94
ICICI

I.T.

WIPRO
-10.43 18.20
SATYAM

CEMENT INDUSTRY:

The combination of GACL and L&T is yielding a return of 23.67% with the
standard deviation of 22.34%.

PHARMACEUTICAL INDUSTRY:

The combination of RANBAXY and CIPLA is yielding a negative return of

-13.17% with a standard deviation of 12.36%.

68
TELECOM INDUSTRY:

The combination of the MTNL and BHARATI AIRTEL is yielding a negative

return of -24.83% with a risk of 19.58%.

BANKING INDUSTRY:

The combination of the ING VYSYA and ICICI are yielding a return of
9.014% with a standard deviation of 26.94%.

I.T.INDUSTRY:

The combination of WIPRO and SATYAM is yielding a negative return of

-10.43% with a standard deviation of 18.20%.

CORRELATION COEFFICIENT BETWEEN THE COMPANIES

Company name Correlation coefficient (r)

CEMENT
GACL
-0.63
LNT
PHARMACEUTICAL
RANBAXY
-0.80
CIPLA
TELECOM

69
MTNL
0.82
BHARTI ARTL

BANKING

ING VYSYA
0.10
ICICI

I.T.

WIPRO
-0.55
SATYAM

CEMENT INDUSTRY:

GACL and L&T are having a negative correlation of -0.63.

PHARMACEUTICAL INDUSTRY:

The combination of the RANBAXY and CIPLA are having a correlation of

-0.80.

70
TELECOM INDUSTRY:

MTNL & BHARATI AIRTEL are having a correlation of 0.82.

BANKING INDUSTRY:

The combination of ING VYSYA and ICICI are having a correlation of 0.10.

I.T.INDUSTRY:

The combination of the WIPRO and SATYAM are having a negative

correlation of -0.55.

SUGGESTIONS

 Select your investments on economic grounds.

Public knowledge is no advantage.
 Buy stock with a disparity and discrepancy between the situation of the firm -
and the expectations and appraisal of the public (Contrarian approach vs.
Consensus approach).
 Buy stocks in companies with potential for surprises.
 Take advantage of volatility before reaching a new equilibrium.
 Listen to rumors and tips, check for yourself.

71
  Don’t put your trust in only one investment. It is like “putting all the eggs in
one basket “. This will help lesson the risk in the long term.
 The investor must select the right advisory body which is has sound
knowledge about the product which they are offering.

 Professionalized advisory is the most important feature to the investors.

Professionalized research, analysis which will be helpful for reducing any kind
of risk to overcome.

CONCLUSIONS

Conclusions for Portfolio Risk, Return & Investments

When we form the optimum of two securities by using minimum variance

equation, then the return of the portfolio may decrease in order to reduce the portfolio
risk.

GACL & LNT

The prime objective of this combination is to reduce risk of portfolio. Least

preference is given to the portfolio returns. As per the calculations GACL, bears a

72
proportion of 0.42 whereas LNT bears a proportion of 0.58. The standard deviations
of the companies are 60.38 for GACL and 45.73 for LNT.
This combination yields a return of 23.67 and a risk of 22.34 respectively.

RANBAXY & CIPLA

As per the calculations RANBAXY, bears a proportion of 0.55 whereas

CIPLA bears a proportion of 0.45. The standard deviations of the companies are 35.66
for RANBAXY and 43.26 for CIPLA.
This combination yields a return of –13.1765 and a risk of 12.36 respectively.
The investors shall not invest in this combination as there is negative return and there
is not much difference in their standard deviation.

MTNL & BHARTI ARTL

The individual returns of MTNL are –3.80f F& BHARTI ARTL is 53.03.
BHARTI ARTL bears a major proportion which is dominating one. The standard
deviations of the two companies are 22.32 and 44.01 respectively.
This combination yields a negative return of –24.83 and a risk of 19.58. hence
investor should invest his major proportion in BHARTI ARTL in order to maximize
his returns.
ING VYSYA & ICICI

In this situation optimum weights of ING VYSYA and ICICI are 0.45 and
0.55 respectively. The portfolio risk is 26.94, which is lesser than the individual risks
of two companies. Hence, it is recommended to invest the major proportion of the
funds in ICICI, in order to reduce the portfolio risk.

WIPRO & SATYAM

The proportion of investments for WIPRO is 0.60 and for SATYAM it is 0.40.
The standard deviations of the companies are 33.33 and 45.61 respectively.

73
 This combination yields a return of -10.43 with a risk of 18.20. Hence the
investor is advised to do not invest in this.

BIBLIOGRAPHY
Books referred:

 Donald E. Fischer, Ronald J. Jordan, SAPM , 1999, Sixth Edition, Portfolio

Analysis, page no: 559-588 & CAPM, page no: 636-648

 Punithavathy Pandian, Security Analysis & Portfolio Management, 2007,

Portfolio Markowitz Model, page no: 329-349 & CAPM, page no: 379-387.

 Prasanna Chandra, Investment Analysis & Portfolio Management, 2006,

Second edition, Efficient Frontier, page no: 251-259

Websites:

74
  www.geojit.com

 www.investopedia.com

 www.capitalmarket.com

 www.bse.com

 www.nse.com

 www.utvi.com

Business magazines:

 Business world-2008

 Outlook Money-2008

75