A Study of The Optimal Portfolio Construction Using Sharpe's Single Index Model

CHAPTER 1
INTRODUCTION
1.1 INTRODUCTION TO THE PROBLEM
Due to the volatile nature of capital market the decision making process for an investor is very
difficult. The major factors to be considered while making investment decision are risk and return.
An informed investor has to seek an effective trade-off between these two factors. Hence, portfolio
management is a crucial decision for an investor. An investor has to use various tools and techniques
to find out optimal portfolio.
―A study on the construction of optimal portfolio using Sharpe‘s single index model with special
reference to CNX Nifty Shares‖ is an effort to construct an optimal portfolio from 50 shares which
are constituents of CNX Nifty index. Five years historical data is used analysis. This study is very
helpful to get an awareness of various decisions in capital market.
1.2 STATEMENT OF THE PROBLEM

High inflation rate prevailing in the economy erodes the value of investments in risk free assets such
as bank deposits and debt instruments. Hence, an investor has to allocate some portion of his savings
to high return instruments such as equity for achieving his long term goals. However, the volatility
of stock market makes the decision making a complex process.
Hence, the problem under study is to construct an optimal portfolio using Sharpe‘s optimization
model and conduct an evaluation of the portfolio with other portfolios of same return or risk to prove
that this optimization model is simple and highly effective for portfolio construction.
1.3 SCOPE AND SIGNIFICANCE OF STUDY
The effectiveness of a portfolio is decided the collection of assets under portfolio and their
proportions. There for an investor who want to invest his own shall be thorough with the methods of
security analysis, portfolio analysis, portfolio selection, portfolio evaluation and revision.
Since this study attempts to touch almost all the points required to reach optimal portfolio it has very
significance for an investor.
1.4 OBJECTIVES OF THE STUDY
1. To perform the risk return analysis of the CNX NIFTY Index shares.
2. To construct an optimal portfolio using Shape‘s optimization model and find out risk
and return of optimal portfolio.
3. Construct two random portfolios. One with same rate of return as optimal portfolio and another
with same risk as optimal portfolio.
4. To evaluate the performance of these three portfolios using Sharpe‘s ratio, Treynor‘s
ratio and Jensen Measure.
1.5 RESEARCH METHODOLOGY
The conceptual structure within which the research is conducted is described below.
Sample Design
The population involved in this project the 50 shares which constitutes in CNX Nifty index.
Population Size
In this research the sample size constitutes 50 shares which constitute CNX Nifty Index.
Survey Method
All the 50 Nos. of shares which constitute the CNX Nifty Index is used for the study.
Hence, the survey method used is census method.
Research Design
This project is based on analytical research design.
Area of Research
This research is to be conducted at the Branch of M/s. Angel Broking securities Ltd..
Sources of Data
The price movements of NSE CNX Nifty index and stock prices are the fundamental data for the
study. The main source of information is web sites, Magazines and journals.
Tools for Data Analysis
The data collected from sources has been analyzed using ratios and formulas .Tools like Arithmetic
mean, standard deviation, Alpha, Beta, Covariance, Sharpe Index, Treynor‘s ratio and Jensen‘s
measure are used.
The Microsoft Excel package is used for performing calculations and analysis.
1.6 CHAPTER LAYOUT

The study is presented in 6 chapters.
Chapter 1: Introduction
Chapter 2: Industry Profile
Chapter 3: Company Profile
Chapter 4: Theoretical Frame Work of study
Chapter 5: Analysis and Interpretations of Data
Chapter 6: Summary, Findings and Conclusion.

The chapter six is followed by bibliography which contains the details of the books, journals and
web sites referred for this project.
1.7 LIMITATIONS OF THE STUDY

Duration of the study is limited hence extensive and deep study such as fundamental analysis and
technical analysis could not be possible.
The beta value changes from time to time. It may not reflect the future volatility of returns. Hence
the portfolio needs to be revised periodically.
An optimized portfolio cannot reduce systematic risk affecting the entire market. Hence, the return
from the portfolio varies with the general trend in the markets.
Industry Profile
CHAPTER 2
INDUSTRY PROFILE
2.1 INTRODUCTION
In the previous chapter brief introduction to the problem, scope and significance of the problem and
research methodology adopted was detailed.
In this chapter the stock market industry profile is described under following headings. Stock
Market, Stock Exchange, History of Indian Stock Market and Major Stock Exchanges In India. A brief
summary of the chapter is given in the Conclusion section.
2.2 STOCK MARKET

Capital market is the financial market for equity instruments and debt instruments with a maturity
greater than one year. The Capital market includes both primary market and secondary markets.
The primary market is the market that deals with new securities, i.e., the securities that are offered to
the investing public for the first time. So it is a market for new issues. Because of that, it is also
called the new issues market.
The secondary market is the market in which existing securities are traded. This market is also
known as stock market.
2.2.1 History of Stock Market
In 12th century France the courretiers de change were concerned with managing and regulating the
debts of agricultural communities on behalf of the banks. Because these men also traded with debts,
they could be called the first brokers.
In the middle of the 13th century, Venetian bankers began to trade in government securities. Bankers
in Pisa, Verona, Genoa and Florence also began trading in government securities during the 14th
century. Italian companies were also the first to issue shares. Companies in England and the Low
Countries followed in the 16th century.
The Dutch East India Company (founded in 1602) was the first joint-stock company to get a fixed
capital stock and as a result, continuous trade in company stock occurred on the Amsterdam
Exchange. Soon thereafter, a lively trade in various derivatives, among which options and repos,
emerged on the Amsterdam market. Dutch traders also pioneered short selling.
There are now stock markets in virtually every developed and most developing economies, with the
world's largest markets being in the United States, United Kingdom, Japan, India, Pakistan, China,
Canada, Germany, France, South Korea and the Netherlands.
2.3 STOCK EXCHANGE
A stock exchange is a place which aggregates buyers and sellers. In the stock exchanges buying and
selling of long term securities such as stocks and bonds takes place. Exchanges may also cover other
types of security such as derivatives, commodities and currencies, etc.
2.3.1 Function and the Purpose of Stock Market
The purpose of a stock exchange is to facilitate the exchange of securities between buyers and
sellers, thus providing a marketplace (virtual or real). The exchanges provide real-time trading
information on the listed securities, facilitating price discovery.
The stock market is one of the most important ways for companies to raise money. This allows
businesses to be publicly traded, and raise additional financial capital for expansion by selling shares
of ownership of the company in a public market. Companies may want to get their stock listed on a
stock exchange for liquidity of shares and increase share holder value. The liquidity that an exchange
affords the investors enables their holders to quickly and easily sell securities. This is an attractive
feature of investing in stocks, compared to other less liquid investments such as property and other
immoveable assets.
Exchanges also act as the clearinghouse for each transaction, meaning that they collect and deliver
the shares, and guarantee payment to the seller of a security. This eliminates the risk to an individual
buyer or seller that the counterparty could default on the transaction.
2.3.2 Physical and Electronic Exchanges
Some exchanges are physical locations where transactions are carried out on a trading floor, by a
method known as open outcry. An example of such an exchange is the New York Stock Exchange.
The other type of stock exchange is a virtual kind, composed of a network of computers where trades
are made electronically by traders. An example of such an exchange is the National Stock Exchange
of India (NSE).
The National Stock Exchange of India (NSE) is a virtual listed exchange, where all of the trading is
done over a computer network. The buyers and sellers are electronically matched. One or more
market makers will always provide a bid and ask price at which they will always purchase or sell
'their' stock. People trading in big exchanges get greater number of potential counterparties (buyers
for a seller, sellers for a buyer), and probably the best price.
2. 3.4 Size of the Market
At the close of 2014, the size of the world stock market (total market capitalization) was about
US$55 trillion. By country, the largest market was the United States (about 34%), followed by Japan
(about 6%) and the United Kingdom (about 6%).
The table below represents the list of largest stock exchanges around the world. New York stock
exchange (NYSE) is the biggest stock exchange in the world in terms of market capitalization.
th
Bombay Stock Exchange (BSE) holds the 10 place and National Stock Exchange of India (NSE)
th
holds 11 place.
Table 2.1: Ranking of Stock Exchanges
based on Market capitalization
Market Cap
Rank Stock Exchange
(in US$ trillion)
1 NYSE 19.2
2 NASDAQ 6.84
3 Tokyo Stock Exchange 4.43
4 Euronext 3.37
5 Hong Kong Stock Exchange 3.26
6 Shanghai Stock Exchange 2.96
7 TMX, Canada 2.14
8 Shenzhen Stock Exchange 1.95
9 Deutsche Borse 1.69
10 BSE India 1.58
11 National Stock Exchange India 1.55
12 Swiss Exchange 1.51
13 Australian Stock Exchange 1.41
14 Korea Exchange 1.23
(Source: www.wikipedia.com)
2.3.5 Behaviour of the Stock Market
According to interpretation of the efficient-market hypothesis (EMH), only changes in fundamental

factors, such as the outlook for margins, profits or dividends, ought to affect share prices beyond the
short term, where random 'noise' in the system may prevail.
The excessive optimism may drive prices unduly high or excessive pessimism may drive prices
unduly low. A succession of good news items about a company may lead investors to overreact
positively (unjustifiably driving the price up). A period of good returns also boosts the investors'
self-confidence, reducing their (psychological) risk threshold. Emotions can drive prices up and
down, people are generally not as rational as they think, and the reasons for buying and selling are
generally obscure. There have been famous stock market crashes that have ended in the loss of
billions of dollars and wealth destruction on a massive scale. An increasing number of people are
involved in the stock market, especially since the social security and retirement plans are being
increasingly privatized and linked to stocks and bonds and other elements of the market.
2.3.6 Stock Market Index
The movements of the prices in a market or section of a market are captured in price indices called
stock market indices, of which there are many, e.g., the S&P, BSE SENSEX, CNX NIFTY indices.
Such indices are usually market capitalization weighted, with the weights reflecting the contribution
of the stock to the index. The constituents of the index are reviewed frequently to include/exclude
stocks in order to reflect the changing business environment.
2.3.7 Derivative Instruments
Financial innovation has brought many new financial instruments whose values depend on the prices
of stocks. Some examples are exchange-traded funds (ETFs), stock index and stock options, single-
stock futures, and stock index futures.
2.4 HISTORY OF INDIAN STOCK MARKET
The Indian stock market has a history of about 299 years old. It was in early 18th Century, the main
institution that is dealing in the trading of shares and stocks is the East India Company. Later by
around 1830′s the main dealing in the shares and stocks (mainly in bank and cotton) was initiated in
Bombay. However, the items in which the trading took place increased tremendously by the end of
1839. There after the concept of broker business was started which show momentum in the mid 18th
century. This concept has attracted nm\ember of people to indulge in the trading of items. By 1860,
the number of brokers who are dealing in the trading of items goes up to 60 in number. Further, the
number of brokers increased from 60 to 250 in around 1862-1863.
People who need to trade generally gathered on the street which was popularly known as the Dalal
Street and the trading and the transaction used to take place from the Dalal Street. It was in year
1875 that the first stock exchange was formulated in the name of ―The Native Share and Stock
Brokers Association‖ which is presently known as the Bombay stock exchange there after it was in
year 1908, that the stock exchange in Calcutta was formulated known as‖ The Calcutta Stock
Exchange Association‖. The formation of the Madras Stock exchange took place in 1920 which was
started with around 100 brokers who are trading in the madras Stock exchange. It was in 1934 when
the Lahore Stock exchange was established. The Uttar Pradesh stock exchange and the Nagpur stock
Exchange were established in year 1940. In year 1944, the Hyderabad stock exchange was
established. It was in year 1947 that the ―Delhi Stock and Share Broker Association Limited‖ and
―The Delhi stocks and Shares exchange Limited‖ was established in Delhi.
There was shutdown of various stock exchanges in India due to the depression that took place after
Independence. It was under the Securities Contracts (Regulations) Act, 1956 that various stock
exchanges has got a recognition as a recognized stock exchange such as Bombay, Delhi, Hyderabad,
Indore etc. there are several other stock exchanges that were established post independence.
2.5 MAJOR STOCK EXCHANGES IN INDIA
The Major stock exchanges in India such as Bombay Stock Exchange (BSE), Calcutta Stock
Exchange, National Stock Exchange, Interconnected Stock Exchange (ISE), OTCEI, Cochin Stock
Exchange Ltd. is detailed below.
2.5.1 The Bombay Stock Exchange
The Bombay Stock Exchange is the oldest exchange in Asia. It traces its history to 1855, when four
Gujarati and one Parsi stockbroker would gather under banyan trees in front of Mumbai's Town Hall.
The location of these meetings changed many times as the number of brokers constantly increased.
The group eventually moved to Dalal Street in 1874 and in 1875 became an official organization
known as "The Native Share & Stock Brokers Association". Figure below shows Bombay Stock
Exchange
Fig 2.1 Bombay Stock Exchange
On 31 August 1957, the BSE became the first stock exchange to be recognized by the Indian
Government under the Securities Contracts Regulation Act. In 1980, the exchange moved to the Fort
area. In 1986, it developed the BSE SENSEX index, giving the BSE a means to measure overall
performance of the exchange. In 2000, the BSE used this index to open its derivatives market,
trading SENSEX futures contracts. The development of SENSEX options along with equity
derivatives followed in 2001 and 2002, expanding the BSE's trading platform.
Historically an open outcry floor trading exchange, the Bombay Stock Exchange switched to an
electronic trading system in 1995. This automated, screen based trading platform called BSE On-line
trading (BOLT) had a capacity of 8 million orders per day. The BSE has also introduced a
centralized exchange-based internet trading system, bsewebex.co.in to enable investors anywhere in
the world to trade on the BSE platform.
At present BSE has 5696 listed companies with a market capitalization of Rs.1,03,15,342 crores. It
has 2,81,37,285 number of registered investors.
2.5.2 Calcutta Stock Exchange

Calcutta Stock Exchange is located at the Lyons Range, Kolkata is the oldest stock exchange in
South Asia. It was incorporated in 1908 and was the second largest stock market in India.
In 1830, the bourse activities in Kolkata used to conduct under a neem tree. In 1908, the stock
exchange was incorporated and consisted of 150 members. The present building at the Lyons Range
was constructed in 1928. The Calcutta Stock Exchange Ltd was granted permanent recognition by
the Government of India with effect from April 14, 1980 under the relevant provisions of the
Securities Contracts (Regulation) Act, 1956. The Calcutta Stock Exchange followed the familiar
outcry system for stock trading up until 1997, when it was replaced by an electronic trading system
known as C-STAR (CSE Screen Based Trading And Reporting).
2.5.3 National Stock Exchange of India (NSE)
The National Stock Exchange of India Limited (NSE) is the leading stock exchange of India, located
in Mumbai. NSE was the first exchange in the country to provide a modern, fully automated screen-
based electronic trading system which offered easy trading facility to the investors spread across the
length and breadth of the country.
NSE was set up by a group of leading Indian financial institutions at the behest of the government of
India to bring transparency to the Indian capital market. Based on the recommendations laid out by
the government committee, NSE has been established with a diversified shareholding comprising
domestic and global investors. The key domestic investors include Life Insurance Corporation of
India, State Bank of India, IFCI Limited IDFC Limited and Stock Holding Corporation of India
Limited. And the key global investors are Gagil FDI Limited, GS Strategic Investments Limited,
SAIF II SE
Investments Mauritius Limited, Aranda Investments (Mauritius) Pte. Limited and PI Opportunities
Fund I.
The exchange was incorporated in 1992 as a company and was recognized as a stock exchange in
1993 under the Securities Contracts (Regulation) Act, 1956. NSE commenced operations in the
Wholesale Debt Market (WDM) segment in June 1994. The capital market (equities) segment of the
NSE commenced operations in November 1994, while operations in the derivatives segment
commenced in June 2000. The photo of National Stock Exchange is given below.
Fig 2.2 National Stock Exchange
NSE has a market capitalization of more than US$1.65 trillion, making it the world‘s 12th-largest
stock exchange as of 23 January 2017. NSE's flagship index, the CNX Nifty, the 50 stock index is
used extensively by investors in India and around the world as a barometer of the Indian capital
markets.
The National Stock Exchange of India Limited (NSE) commenced trading in derivatives with the
launch of index futures on 12 June 2000. The futures and options segment of NSE has made a global
mark. In the Futures and Options segment, trading in CNX Nifty
Index, CNX IT index, Bank Nifty Index, Nifty Midcap 50 index and single stock futures are
available. Trading in Mini Nifty Futures & Options and Long term Options on CNX Nifty are also
available. The average daily turnover in the F&O Segment of the Exchange during the financial year
April 2015 to March 2016 stood at Rs 1,52,236 Crores.
NSE‘s trading systems, is a state of-the-art application. It has an up time record of 99.99% and
processes more than 450 million messages every day with sub millisecond response time. Today
NSE can handle 1, 60,000 orders/messages per second, with infinite ability to scale up at short
notice, NSE have continuously worked towards ensuring that the settlement cycle comes down.
Settlements have always been handled smoothly. The settlement cycle has been reduced from T+5 to
T+2/T+1.
2.5.4 Cochin Stock Exchange Ltd.
COCHIN STOCK EXCHANGE LTD. is situated in Cochin in Kerala State, established in the year
1978. The exchange had a humble beginning with just 5 companies listed in 1978 -79, and had only
14 members. Today the Exchange has more than 508 members and 240 listed companies. In 1980
the Exchange computerized its offices. In order to keep pace with the changing scenario in the
capital market, CSE took various steps including trading in dematerialized shares. CSE introduced
the facility for computerized trading - "Cochin Online Trading (COLT)" on March 17, 1997.
CSE was one of the promoters of the "Interconnected Stock Exchange of India (ISE)". The objective
was to consolidate the small, fragmented and less liquid markets into a national level integrated
liquid market. With the enforcement of efficient margin system and surveillance, CSE has
successfully prevented defaults. Introduction of fast track system made CSE the stock exchange with
the shortest settlement cycle in the country at that time.
To face this challenge CSE promoted a 100% subsidiary called the "Cochin Stock Brokers Ltd.
(CSBL)" and started trading in the National Stock Exchange (NSE) and Bombay Stock Exchange
(BSE). CSBL is the first subsidiary of a stock exchange to get membership in both NSE & BSE.
CSBL also became a depository participant in the
Central Depository Services Ltd. The CSE has been playing a vital role in the economic
development of Kerala. A photo of Cochin Stock Exchange is given below.
Figure 2.3 Cochin Stock Exchange
The Cochin Stock Exchange is directly under the control and supervision of Securities & Exchange
Board of India (the SEBI), and is today a demutualized entity in accordance with the Cochin Stock
th
Exchange (Demutualization) Scheme, 2005 approved and notified by SEBI on 29 of August 2005.
Demutualization essentially means de-linking and separation of ownership and trading rights and
restructuring the Board in accordance with the provisions of the scheme.
The policy decisions of the CSE are taken by the Board of Directors. The Board is constituted with
12 members of whom less than one-fourth are elected from amongst the trading member of CSE,
another one fourth are Public Interest Directors selected by SEBI from the panel submitted by the
Exchange and the remaining are Shareholder Directors. The Board appoints the Executive Director
who functions as an ex-officio member of the Board and takes charge of the administration of the
Exchange.
2.5.5 OTCEI
Started in 1992 with the object of providing market for smaller companies that could not afford the
listing free of larger exchanges and which did not fulfill the minimum capital requirement for listing.
It aimed at creating fully decentralized and transparent market. OTC means trading across the
counter in scripts. The member or dealer of OTCEI counters are linked to the central OTCEI
computer where every counter is treated as trading floor for the OTCEI where the investor can buy
and sell.
The OTCEI is incorporated as a company under section 25 of the companies act 1956 promoted by
UTI, ICICI, IDBI, IFCI, LIC, GIC, SBI capital markets and Can Bank Financial Service. OTCEI
have special feature of screen based trading with wide network coverage rolling settlement and
market making. (Market makers in securities quote the prices at which members are willing to buy
and sell the specified number of securities. NSE is supporting OTCEI in terms of systems and
hardware.
2.5.6 Inter Connected Stock Exchange (ISE)

Started in the year 1998with the main objective to interlink the 15 odd regional Stock Exchanges
throughout the country [Bangalore, Bhuvaneswar, Chennai, Kochi, Coimbatore, Guwahati,
Hyderabad, Jaipur, Ludhiana, Indore, Magadh, Mangalore, Saurashtra (Kutch), Uttar Pradesh
(Kanpur) and Vadodara] to ensure liquidity.
The total cost of ISE was 15 crores that were shared equally by participating Stock Exchanges. The
membership fees to ISE costs Rs 16000/- along with the capital adequacy deposit of Rs 4 lakhs as
stipulated by SEBI. Another important objective of ISE is to minimize the cost of regional exchanges
as they are incurring huge costs by supporting a very illiquid market.
2.6 CONCLUSION
In this chapter the history of world stock market, function and purpose of stock market, important
stock exchanges in the world, and physical and electronic trading systems were detailed. Finally, the
history of Indian stock exchanges and important stock exchanges in India is detailed.
In the next chapter titled company profile, the overview of company, its subsidiaries, vision, mission,
values and strengths of the company will be discussed. Details of the directors, awards and
recognition won by the company are also described.
Company Profile
CHAPTER 3
COMPANY PROFILE
3.1 INTRODUCTION
In the previous chapter the history of world stock market, function and purpose of stock market,
important stock exchanges in the world, and physical and electronic trading systems were detailed.
Finally, the history of Indian stock exchanges and important stock exchanges in India was detailed.
In this chapter, the company profile is discussed under following headings. Overview of the
Company, Mission of the Company , Values of the Company. Strengths of the Company, Board of
Directors of the Company, Awards and Recognitions Won By M/S. ANGEL BROKING. This
chapter ends with a conclusion section in which a brief summary of this chapter is given.
3.2 OVERVIEW OF THE COMPANY
M/s. ANGEL BROKING LTD is a well-diversified financial services firm offering a range of
financial products and services such as retail wealth management (including securities and
commodities broking), portfolio management services, institutional broking, venture capital
management and investment banking services. As a leading Indian domestic brokerage house, M/s.
ANGEL BROKING LTD have a diversified client base that includes retail customers (including high
net worth individuals), mutual funds, foreign institutional investors, financial institutions and
corporate clients. M/s. ANGEL BROKING LTD is headquartered in Mumbai and as of December
31, 2017, had a network spread across 363 cities and towns comprising 1,160 Business Locations
operated by the company and Business Associates.
Angel Broking is the holding company and also provides financing for our retail broking customers.
M/s. ANGEL BROKING operate through the following four subsidiaries:
• ANGEL BROKING LTD

• Angel Broking Commodities Brokers Private Limited
• Angel Broking Venture Capital Advisors Private Limited
• Angel Broking Investment Advisors Private Limited .
Since inception, the business has primarily focused on retail wealth management and institutional
broking. In 2006, company diversified into investment banking and venture capital management.
The principal business activities of the M/s. ANGEL BROKING are:

Retail wealth management

Institutional broking

Investment banking

Venture capital management and advisory.
Retail wealth management business provides broking and financing services to retail customers as
well as investment advisory, financial planning and portfolio management services. As at December
31, 2006, M/s. ANGEL BROKING had 213,624 registered retail equity broking clients and 3,572
registered commodity broking clients whom M/s. ANGEL BROKING classify into three segments,
being ―mass retail‖, ―mid-tier millionaire‖ and ―private client group(PCG)‖. M/s. ANGEL
BROKING offer retail clients investment products across the major asset classes including equities,
derivatives, commodities and the distribution of third-party products such as mutual fund schemes
and primary equity offerings. M/s. ANGEL BROKING distribute these products through the
Business Locations and online channel.
Institutional broking business offers equity broking services in the cash and derivative segments to
institutional clients in India and overseas. As at December 31, 2016, M/s. ANGEL BROKING was
empanelled with 2402 institutional clients including 150 FIIs. M/s. ANGEL BROKING
service these clients through dedicated sales teams across different time zones. Retail wealth
management and institutional brokerage businesses are supported by dedicated research teams.
Research teams are focused on cash equities, equity derivatives and commodities.
Investment banking business offers financial advisory, capital raising and other investment banking
services to corporate clients, financial sponsors and other institutions. Financial advisory includes
advisory assignments with respect to mergers and acquisitions (domestic and cross-border),
divestitures, restructurings and spin-offs. Capital raising and other investment banking services
include management of public offerings, rights issues, share buybacks, open offers/delisting, private
placements (including qualified institutional placements) and syndication of debt and equity. The
current organization structure of the company is set forth below.
3.3 MISSION OF THE COMPANY

The mission of M/s. ANGEL BROKING is to be a well respected and preferred global financial
services organisation enabling wealth creation for all customers.
3.4 VALUES OF THE COMPANY

Key corporate values of the M/s. ANGEL BROKING are:

Integrity

Teamwork

Meritocracy

Passion and attitude

Excellence in execution.
3.5 STRENGTHS OF THE COMPANY

The company achieved a prominent place in the Indian financial services company due to following
strengths.
3.5.1 Large and Diverse Distribution Network
Company‘s financial products and services are distributed through a pan-India network. The
business has grown from a single location to a nationwide network spread across 1,160 Business
Locations operated by us and Business Associates in 363 cities and towns. Extensive distribution
network provides the company with opportunities to cross-sell products and services, particularly
when diversifying into new business streams. In addition to the geographical spread, M/s. ANGEL
BROKING offer an online channel to service the customers.
3.5.2 Strong research and sales teams

M/s. ANGEL BROKING believes that understanding of equity as an asset class and business
fundamentals drives the quality of their research and differentiates them from competitors. Their
research teams are focused on cash equities, equity derivatives and commodities. As at December
31, 2016, M/s. ANGEL BROKING had 28 equity research analysts covering 208 companies in 25
sectors and 5 analysts covering 18 commodities. M/s. ANGEL BROKING have 1,964 employees,
including 739 on a contract basis.
M/s. ANGEL BROKING believes that research enables them to identify market trends and stocks
with high growth potential, which facilitates more informed and timely decision making by their
clients. This helps to build and promote their brand image and to acquire and retain institutional and
retail customers. Their research is complemented by a strong sales and dealing team. Each member
of institutional sales team has significant research experience. M/s. ANGEL BROKING believe that
this experience enables sales team to effectively market ideas generated by the research team to
client base and to build stronger client relationships.
3.5.3 Experienced top management

Both Promoters of the company, Mr. Angel Broking and Mr. Raamdeo Agarwal, are qualified
chartered accountants with over two decades of experience each in the financial services industry. In
addition, the top management team comprises qualified and experienced professionals with a
successful track record. M/s. ANGEL BROKING We believe that our management‘s entrepreneurial
spirit, strong technical expertise, leadership skills, insight into the market and customer needs
provide with a competitive strength which will help to implement their business strategies.
3.5.4 Well-established brand
―Angel Broking ‖ is a well established brand among retail and institutional investors in India. M/s.
ANGEL BROKING believes that this brand is associated with high quality research and advice as
well as good corporate values, like integrity and excellence in execution. M/s. ANGEL BROKING
have been able to leverage the brand awareness to grow their businesses, build relationships and
attract and retain talented individuals which is important in the financial services industry.
3.5.6 Wide range of financial products and services

The following products and services are offered by the company;

Equity Broking

PMS (Portfolio Management Service)

Investment

Banking

PE (Private Equity)

Investments

MF (Mutual Funds)

Investments

Commodity

Broking
M/s. ANGEL BROKING offer a portfolio of products to satisfy the diverse investment and strategic
requirements of retail, institutional and corporate clients. M/s. ANGEL BROKING believes that
wide range of products and services enables to build stronger relationships with, and increase
business volumes from, their clients. In addition, their diverse portfolio reduces dependence on any
particular product, service or customer and allows exploiting synergies across their businesses.
3.6 BOARD OF DIRECTORS OF THE COMPANY
The list of Board of Directors is given below.
Table 3.1: Board of Directors

CMD & CEO Angel Broking
Joint Managing Director Raamdeo Agrawal
Navin Agarwal ,
Balkumar Agarwal
Directors
Vivek Paranjpe ,
Praveen Tripathi
Additional Independent Director Sharda Agarwal
(Source: www.angelbroking.com)
3.7 AWARDS AND RECOGNITIONS WON BY M/S. ANGEL BROKING
M/s. Angel Broking Securities won the Best Performing Equity Broker (National) Award at CNBC
TV18 Financial Advisor Awards 2015 held in Mumbai.
M/s. Angel Broking Financial Services Ltd's Analyst Mr. Jinesh Gandhi won the Best Market
Analyst Award for the categories Equity-Auto at ‗India`s Best Market Analyst Awards 2015
organized by Zee Business.
M/s. Angel Broking Securities was declared "Best Equity Broker" at Bloomberg UTV Financial
Leadership Awards in April 2014.
M/s. Angel Broking Securities was awarded with Best Performing National Financial Advisor
Equity Broker Award in 2014, second time in succession.
M/s. Angel Broking Financial Services was honoured with an award for Best Use in PR in Financial
Services Category at India PR & Corporate Communications Awards 2014.
M/s. Angel Broking Securities received Best Equity Broking House Award by BSE IPF-D&B
Equity Broking Awards 2013.
M/s. Angel Broking Mutual Fund's MOSt Shares M50 ETF was adjudged Most Innovative Fund of
the Year by CNBC TV18 CRISIL Mutual Fund Award 2013.
CNBC TV18 awarded M/s. Angel Broking the Best Performing Equity Broker Award in 2012 at
CNBC TV18 Financial Advisor Awards 2012.
Best Capital Markets & Related NBFC Award for FY11 by CNBC TV18 India Best Banks &
.
Financial Institutions Awards 2013
M/s. Angel Broking IB team won the Asia Pacific Cross Border Deal of the year award in 2012 and
the CEO Ashutosh Maheshvari got India M&A Investment Banker of the Year award.
M/s. Angel Broking Securities Ltd. rated as No.1 Broker in ET Now – Starmine Analyst Awards
2009.
M/s. ANGEL BROKING was awarded 'The Best Franchisor in Financial Services' by Franchisee
World Magazine 2008 for the second consecutive year.
M/s. Angel Broking Securities Ltd. wins the ―Best Research as Research Showcase Partner‖ at
RESEARCHBYTES IC AWARDS 2016. The winners were selected from a poll of over 1500 Fund
Managers/Analysts.
M/s. Angel Broking Securities received two awards for its equity research in IT and commodity
(forex) segments at India's Best Market Analyst Awards 2016, India's biggest Financial Market
Awards also called as ZEE Business Awards 2016.
3.8 CONCLUSION
In this chapter, the brief overview of the company, its vision, mission, values and strengths is
detailed. The details of Director Board and awards and recognitions received by the company are
also detailed. In the next chapter titled theoretical framework, traditional approach and modern
approach to portfolio management is described. The portfolio construction by traditional method is
detailed. Tools used for fundamental analysis and Technical analysis are described. The steps in
portfolio construction using Sharpe‘s single index model, the formula used for portfolio evaluation,
Risk and return calculations shall be discussed.
Theoretical
Framework
CHAPTER 4
THEORETICAL FRAMEWORK
4.1 INTRODUCTION
In the previous chapter, the brief overview of the company, its vision, mission, values and strengths
were detailed. The details of Director Board and awards and recognitions received by the company
were also detailed.
In this chapter the theoretical frame work of the study is discussed under following headings.
Portfolio Construction, Traditional Approach, Security Analysis, Portfolio Analysis, Portfolio Selection,
Portfolio Revision, Portfolio Evaluation, Return and Risk Analysis of Portfolio, Modern Approaches
to Portfolio Selection, Portfolio Evaluation Methods, Formulae Used For the Study. A brief summary
of this chapter is given in the Conclusion section.
4.2 PORTFOLIO CONSTRUCTION

Portfolio is a combination of securities such as stocks bonds and money market instruments.
Diversification of investments over different assets helps to reduce risk without sacrificing return.
When determining a proper asset allocation one aims at maximizing the expected return and
minimizing the risk. The process of blending together the broad asset classes so as to obtain
optimum return with minimum risk is called portfolio construction.
4.3 APPROACHES TO PORTFOLIO CONSTRUCTION

There are two approaches to portfolio construction of the portfolio of securities viz,

Traditional approach

Modern approach
In traditional approach, investor‘s needs in terms of income and capital appreciation are evaluated
and appropriate securities are selected to meet the needs of the investor. The common practice in the
traditional approach is to evaluate the entire financial plan of the individual.
In modern approach, portfolios are constructed to maximize the expected return for a given level of
risk. It views the portfolio construction in terms of the expected return and the risk associated with
obtaining the expected return.
4.4 TRADITIONAL APPROACH OF PROTFOLIO CONSTRUCTION

The construction of portfolio by traditional method is carried out in 5 steps.
The five steps are
1. Security analysis
2. Portfolio analysis
3. Portfolio selection
4. Portfolio revision
5. Portfolio evaluation
These steps are detailed below under separate headings.
4.5 SECURITY ANALYSIS

Security analysis is the initial step of portfolio management. Security analysis is a method which
helps to calculate the value of various assets. There are two alternate approaches to security analysis
namely fundamental analysis and technical analysis.
4.5.1 Fundamental Analysis

The fundamental analysis tries to appraise intrinsic value of shares through economic, industry and
company analyses. If the price of share is lower than the intrinsic value, an investor buys it. If he
finds the price of the share higher than the intrinsic value, the investor sells the share and makes
profit.
Fig 4.1: Steps in Fundamental Analysis
Economic Analysis
Industry Analysis
Company Analysis
a. Economic Analysis
Economic Analysis is a systematic approach in which economists and other professionals will
estimate the economic environment and its strengths and weaknesses. The level of economic activity
has an impact on investment in many ways. When the level of economic activity is low, the stock
prices are low, and when the level of economic activity is high, stock prices are high reflecting the
prosperous outlook for sales and profits of the firm. The commonly analysed macroeconomic factors
are as follows;
 Gross domestic product (GDP)

 Savings and investment
 Inflation
 Interest rates
 Budget
 Tax structure
 Balance of payment
 Monsoon and agriculture
 Infrastructure facilities
 Demographic factors
 Economic forecasts
 Economic indicators
The state of economy determines the growth of GDP and investment opportunities. An economy
with favourable savings, investments, stable prices, balance of payments, and infrastructure facilities
provides a best environment for stock investment. A rising stock market indicates a strong economy
ahead.
b. Industry Analysis
An industry is a group of firms that have similar technological structure of production and produce
similar products. An industry analysis consists of three major elements: the underlying forces at
work in the industry; the overall attractiveness of the industry; and the critical factors that determine
a company's success within the industry.
The first step in performing an industry analysis is to assess the impact of Porter's five forces. "The
collective strength of these forces determines the ultimate profit potential in the industry, where
profit potential is measured in terms of long term return on invested capital," Porter stated. "The goal
of competitive strategy for a business unit in an industry is to find a position in the industry where
the company can best defend itself against these competitive forces or can influence them in its
favor."
Understanding the underlying forces determining the structure of the industry can highlight the
strengths and weaknesses of a business, show where strategic changes can make the greatest
difference, and illuminate areas where industry trends may turn into opportunities or threats.
i) Ease of Entry
Ease of entry refers to how easy or difficult it is for a new firm to begin competing in the industry.
The ease of entry into an industry is important because it determines the likelihood that a company
will face new competitors. In industries that are easy to enter, sources of competitive advantage tend
to wane quickly. On the other hand, in industries that are difficult to enter, sources of competitive
advantage last longer, and firms also tend to benefit from having a constant set of competitors.
ii) Power of Suppliers
Suppliers can gain bargaining power within an industry through a number of different situations. For
example, suppliers gain power when an industry relies on just a few suppliers, when there are no
substitutes available for the suppliers' product, when there are switching costs associated with
changing suppliers. Supplier power can affect the relationship between a business and its customers
by influencing the quality and price of the final product.
iii) Power of Buyers
Powerful buyers can exert pressure on small businesses by demanding lower prices, higher quality,
or additional services, or by playing competitors off one another. The power of buyers tends to
increase when single customers account for large volumes of the business's product, when substitutes
are available for the product, when the costs associated with switching suppliers are low.
iv) Availability of Substitutes
Substitutes limit the potential returns of an industry by placing a ceiling on the prices firms in the
industry can profitably charge. Product substitution occurs when a business's customer comes to
believe that a similar product can perform the same function at a better price.
v) Competitors
The intensity of competition tends to increase when an industry is characterized by a number of

well-balanced competitors, a slow rate of industry growth, high fixed costs, or a lack of
differentiation between products. Another factor increasing the intensity of competition is high exit
barriers—including specialized assets, emotional ties, government or social restrictions, strategic
interrelationships with other business units, labor agreements, or other fixed costs which make
competitors stay and fight even when they find the industry unprofitable.
vi) Industry attractiveness and industry success factors
Industry attractiveness is the presence or absence of threats exhibited by each of the industry forces,
the greater the threat posed by an industry force, the less attractive the industry becomes.
Success factors are those elements that determine whether a company succeeds or fails in a given
industry. They vary greatly by industry. Some examples of possible success factors include quick
response to market changes, a complete product line, fair prices, excellent product quality or
performance, knowledgeable sales support, a good record for deliveries, solid financial standing, or a
strong management team.
Industrial growth follows life cycle patterns. Buying shares beyond the pioneering stage and selling
of shares before the stagnation stage are ideal for investors. The cost structure, R&D and the
government policies regarding the industries influence the growth and profitability of the industries.
SWOT analysis reveals the real status of the industry.
c. Company Analysis
Company analysis is a process carried out by investors to evaluate securities, collecting data related
to the company‘s profile, products and services as well as profitability. A company analysis looks
into the goods and services proffered by the company. If the company is involved in manufacturing
activities, the analysis studies the products produced by the company and also analyzes the demand
and quality of these products. If it is a service business, the investor studies the services put forward.
In the company analysis, the investor analyses information related to the company and evaluates the
present and future values of the stock. The present and future values are affected by a number of
factors and they are given below.
The competitive edge of the company could be measured with the company‘s market share, growth
and stability of sales.
The financial statement reveals information about the financial state of the company. Fund flow and
cash flow statement is used to analyze the financial health of the company.
The ratio analysis helps the investor to study the individual parameters like profitability, liquidity,
leverage, and the value of stock.
4.5.2 Technical Analysis

It is the process identifying trend reversals at an earlier stage to formulate the buying and selling
strategy. With the help of several indicators, the analyst analyses the relationship between price-
volume and supply demand for overall market and individual stock.
The generally used technical tools are

 Dow theory
 Volume of trading
 Short selling
 Bars and charts
 Moving averages
 Oscillators
4.5.2.1 Dow Theory

The market moves in a general direction called trend. According to ―Dow Theory‖ the trend is
divided in to primary, intermediate and short term trend. The primary trend may be the broad upward
or downward movement that may last for a year or two. The intermediate trends are corrective
movements that may last for three weeks to three months. The short term trend refers to day-to-day
price movement.
Fig 4.2: Trends in stock market

Source: www.fidelity.com
Dow gives special emphasis on volume. Volume expands along with the bull market and narrows
along with the bear market. Large volume with rise in price indicates bull market. Large volume
with fall in price indicates bear market.
4.2.5.2 Breadth of the market

The net difference between the number of stocks advanced and number of stocks declined is the
breadth of the market. A ratio of 0.75 indicates short-term buying opportunity and there will be an
intermediate rally in the beginning of bearish trend. A rise above 1.25 indicates selling opportunities.
4.5.2.3 Short selling

Short selling is a technical indicator referring to selling of shares that are not owned. If the short selling
ratio is less than 1 it indicates that the market is overbought and a decline can be expected. Value above 1
indicates bullish trend and if it is above 2 the market is oversold.
4.5.2.4 Moving Averages

Moving averages indicates the underlying trend in the scrip. For identifying short term trend 10 to 30 day
moving averages are used. In the case of medium term trend, 50 to 125 day are adopted, 200-day moving
average is used to identify long-term trend.
The chart below shows the moving averages for 50 and 200 days.
Fig 4.3: Moving Averages
(Source: www.onlinetradingconcepts.com)
4.5.2.5 Oscillators
Oscillators such as Relative strength index (RSI) and Rate of change (ROC) indicate the market
momentum or scrip momentum. The oscillators indicate overbought and oversold conditions, possible
trend reversal, rise or decline in stock momentum.
4.5.2.6 Relative Strength Index
A technical momentum indicator that compares the magnitude of recent gains to recent losses in an
attempt to determine overbought and oversold conditions of an asset. It is calculated using the
following formula:
RSI = 100 - 100/ (1 + RS*)
*Where RS = Average of x days' up closes / Average of x days' down closes.
Fig 4.4: Relative Strength Index
(Source: www.investopedia.com)
From the chart, the RSI ranges from 0 to 100. An asset is deemed to be overbought once the RSI
approaches the 70 level, meaning that it may be getting overvalued and is a good candidate for a
pullback. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting
oversold and therefore likely to become undervalued.
4.5.2.7 Rate- Of-Change (ROC) Indicator
The Rate-of-Change (ROC) indicator, which is also referred to as simply Momentum, is a pure
momentum oscillator that measures the percent change in price from one period to the next. The
ROC calculation compares the current price with the price ―n‖ periods ago. The plot forms an
oscillator that fluctuates above and below the zero line as the Rate-of-Change moves from positive
to negative. As a momentum oscillator, ROC signals overbought-oversold conditions.
4.5.2.8 Charts
Charts are valuable and easiest tools in the technical analysis. The graphic presentation of the data
helps the investor to find out the trend of the price without the difficulty. The charts indicate past
historic price movement, current trend, important support and resistance, and probable future action
of the market by projection.
There are four main types of charts that are used by investors and traders depending on the
information that they are seeking and their individual skill levels. The chart types are: the line chart,
the bar chart, the candlestick chart and the point and figure chart. In the following sections, we will
focus on the S&P 500 Index during the period of January 2006 through May 2006. Notice how the
data used to create the charts is the same, but the way the data is plotted and shown in the charts is
different.
a. Line Chart
The most basic of the four charts is the line chart because it represents only the closing prices over a
set period of time. The line is formed by connecting the closing prices over the time frame. Line
charts do not provide visual information of the trading range for the individual points such as the
high, low and opening prices. However, the closing price is often considered to be the most
important price in stock data compared to the high and low for the day and this is why it is the only
value used in line charts. A line chart is shown in the figure below.
Fig 4.5: Line Chart
b. Bar Charts
The bar chart expands on the line chart by adding several more key pieces of information to each
data point. A bar chart is shown in the figure below.
Fig 4.6: Bar Chart
The chart is made up of a series of vertical lines that represent each data point. This vertical line
represents the high and low for the trading period, along with the closing
price. The close and open are represented on the vertical line by a horizontal dash. The opening price
on a bar chart is illustrated by the dash that is located on the left side of the vertical bar. Conversely,
the close is represented by the dash on the right. Generally, if the left dash (open) is lower than the
right dash (close) then the bar will be shaded black, representing an up period for the stock, which
means it has gained value. A bar that is colored red signals that the stock has gone down in value
over that period. When this is the case, the dash on the right (close) is lower than the dash on the left
(open).
c. Candlestick Charts
The candlestick chart is similar to a bar chart, but it differs in the way that it is visually constructed.
Similar to the bar chart, the candlestick also has a thin vertical line showing the period's trading
range. A candlestick chart is shown below.
Fig 4.7: Candlestick Chart
The difference comes in the formation of a wide bar on the vertical line, which illustrates the
difference between the open and close. And, like bar charts, candlesticks also rely heavily on the use
of colors to explain what has happened during the trading period. A
major problem with the candlestick color configuration, however, is that different sites use different
standards; therefore, it is important to understand the candlestick configuration used at the chart site
you are working with. There are two color constructs for days up and one for days that the price
falls. When the price of the stock is up and closes above the opening trade, the candlestick will
usually be white or clear. If the stock has traded down for the period, then the candlestick will
usually be red or black, depending on the site. If the stock's price has closed above the previous day's
close but below the day's open, the candlestick will be black or filled with the color that is used to
indicate an up day.
d. Point and Figure Charts

The point and figure chart has a long history of use dating back to the first technical traders. This
type of chart reflects price movements and is not as concerned about time and volume in the
formulation of the points. The point and figure chart removes the noise, or insignificant price
movements, in the stock, which can distort traders' views of the price trends. These types of charts
also try to neutralize the skewing effect that time has on chart analysis.
Fig 4.8: Point and figure Chart
( Source:www.investopedia.com)
The Xs represent upward price trends and the Os represent downward price trends. There are also
numbers and letters in the chart; these represent months, and give investors an idea of the date. Each
box on the chart represents the price scale, which adjusts depending on the price of the stock: the
higher the stock's price the more each box represents. On most charts where the price is between $20
and $100, a box represents $1, or 1 point for the stock. The other critical point of a point and figure
chart is the reversal criteria. This is usually set at three but it can also be set according to the
chartist's discretion. The reversal criteria set how much the price has to move away from the high or
low in the price trend to create a new trend or, in other words, how much the price has to move in
order for a column of Xs to become a column of Os, or vice versa. When the price trend has moved
from one trend to another, it shifts to the right, signaling a trend change.
4.6 PORTFOLIO ANALYSIS
Security analysis provides a set of securities suitable for investment. From these securities a large
number of portfolios can be constructed by choosing different set of securities and also by varying
weight of securities. The diversification has the effect of reducing the portfolio risk by minimizing
the unsystematic risk which affects individual security or industry. Whereas over diversification
reduces the return from portfolio. A rational investor has to find out the most efficient portfolio by
choosing appropriate trade-off between risk and return.
4.7 PORTFOLIO SELECTION
Portfolio analysis gives different portfolios available for investment. From these portfolios an
optimal portfolio is selected for investment.
4.8 PORTFOLIO REVISION
As the economy and business environment changes the return from securities also changes. The
portfolio has to include new securities which promises high return and exclude securities which has
become underperformer. Hence, after constructing an optimal portfolio the investor has to
periodically monitor the portfolio to ensure that it remains optimal.
4.9 PORTFOLIO EVALUATION
The evaluation of portfolio provides feedback about performance to evolve better management
strategy. The return and risk of portfolio over a period of time is evaluated. These values are
compared with standard values such as market index to assess the relative performance of the
portfolio.
4.10 RETURN AND RISK ANALYSIS OF PORTFOLIO
Portfolio‘s performance analysis consists of examining the risk-return characteristics of the portfolio.
4.10.1 Return
The return of a portfolio is measured by its average total return over a standard holding period,
usually one year. The total return consists of investment income such as dividends plus capital
gain/loss. The rate of return earned by the portfolio is calculated compared with the bench mark like
market index.
The return of a portfolio is given by
Rp = Σ Xi Ri
i=1
Where
Rp = Portfolio average return
Xi = Weight or proportion of security ‗i‘ in portfolio
Ri = Expected return of Security i
4.10.2 Risk
Risk is the possibility of not realizing return or realizing return less than expected. The risk is
broadly classified into two types;
1. Systematic Risk
2. Unsystematic Risk
4.10.2.1 Systematic Risk

Systematic risk refers to that portion of variation in return caused by factors that affect the price of
all securities. The effect of systematic risk is to move prices of all individual securities in same
direction. The systematic risk arises due to following reasons.
a. Market Risk: Variation in prices arises out of changes in demand and supply pressures in the
market following the changing flow of news and expectations.
b. Interest Rate risk: The market perception is influenced by changes in interest rates which
in-turn affects the riskiness of investments due to their effects on returns expectations and the total
principal amount due to be refunded.
c. Purchasing Power Risk: Purchasing power risk is the uncertainty of the purchasing power
of the amounts to be received due to both inflation and deflation.
4.10.2.2 Unsystematic Risk
Unsystematic risk refers to that portion of risk which is caused due to factors unique or related to a
firm or industry. This type of risk can be divided further in to the following types.
a. Business Risk: Business risk may be due to internal factors or external factors. Internal risk
is caused by factors such as improper product mix, non availability of raw material, incompetence to
face competence, absence of strategic management, etc. External risks arise due to factors which are
beyond the control of the firm e.g.
business cycles, government controls, changes in laws, international market conditions.
b. Financial Risk: Financial risk is associated with the capital structure of the company. The
extent of risk depends on the leverage of the firm‘s capital structure.
c. Credit of Default Risk: Credit risk is associated with probability of a buyer will default. The
borrower‘s credit rating might have fallen suddenly and he may become default prone. Proper
management of credit risk reduces the chances of non- payment and reduces credit risk.
d. Other Risks: In addition to above risk there are many more risks particularly associated with
foreign securities. These are monetary value risk, political risk, and foreign government indebtedness
risk.
4.10.3 Calculation of Risk on a Portfolio

Risk on a portfolio is not same as risk on individual securities. Portfolios standard deviation is a
good indicator of the risk of the portfolio. The portfolio risk of a portfolio of 2 securities can be
calculated using the following formula:
σp = √W12 σ12 + W22 σ22 + 2 W1 W2 (r 12 σ1 σ2)
Where
σp= Standard deviation of portfolio
W1 = Weight or proportion of security 1 in portfolio W2 = Weight or proportion of security 2 in

portfolio σ1= Standard deviation of security 1 σ2= Standard deviation of security 2
r12 = Correlation co-efficient of returns of security 1 and security 2
4.11 MODERN APPROACHES TO PORTFOLIO SELECTION
In modern approach of portfolio selection the stocks are not selected based on the need for income or
appreciation. The selection is based on the risk and return analysis. Modern Portfolio Theory (MPT)
approaches investing by examining the entire market and the whole economy. The theory is an
alternative to the older method of analyzing each investment‘s individual merits. MPT places a large
emphasis on the correlation between investments. Correlation is the amount we can expect various
investments – and various asset classes – to change in value compared with each other. The
commonly used models are given below.
 Sharpe‘s single index model

 Markowitz mean-variance optimization model
 Capital Asset Pricing Model (CAPM)
 Arbitrage Pricing Theory
4.11.1 Sharpe’s Single Index Model
Sharpe‘s single index model was developed by William Sharpe for the construction of optimal
portfolio using less number of inputs. The simplicity is the most important feature of the Sharpes‘s
single index model over Markowit‘z model. Markowitz‘s model uses large number of covariance.
Taking idea from the Markowit‘z, suggested that index to which securities are related can be used for
covariance generation, William Sharpe formulated single index model.
The regression equation is
Ri =αi +βi*Rm+ei
Where,
Ri = Return on security i
αi = Constant term (Securities return when market excess return is zero)
βi = Beta of security
ei = error term.
The key assumptions are
1. The error term ei is zero mean and had finite variance.
2. The securities are related through common response to return of market index.
Meaning the error term of one security is not correlated with error term of any other security. COV
(ei, ej) = 0
3.There is no correlation between error term and return on market index.
COV (ei, Rm)=0
The expected return of security is
Ri =αi +βi*Rm+ei
As ei zero in value so,
Ri =αi +βi*Rm
The variance of the return of the security is

2 2* 2
σi = σei2+ βi σm
The major assumption of Sharpe‘s single model is that the co-variation of the security can be
explained by one single factor known as index.
* 2
COV (i, j) = βi βj*σm
Where,
COV (i, j) = Covariance between security i and j.
βi = Beta of security i
βj = Beta of security j.
2
σm = Variance of the return of market index.
Steps in Construction of Optimal Portfolio Using Single Index Model
This model firstly ranks the securities based on their excess return to beta ratio. After that all
securities are arranged according to their ranks. Then cutoff rate is calculated and it is compared with
excess return to beta for deciding whether to select the security for investment or not. The model
explains the weight that should be allocated to each security to obtain optimal portfolio.
Step 1: Calculate excess return to beta ratio for each security under consideration
Excess return to beta ratio = (Ri-Rf)/βi
Where
Ri = Expected return of Security i

Rf = Risk free rate of return
Present MIBOR rate is taken as risk free rate Rf
βi = the Beta co-efficient of the security or excess return of the security over market index
Step 2: Rank the securities based on the excess return to beta ratio.
Step 3: Calculate the cut of rate using the formulae. Highest cut off rate will be regarded as C*
Where
σm2 = Market variance
Ri - Rf = Market risk premium

σei2 = Unsystematic risk of the security
Step 4: Selection of securities for investment. If (R i- Rf)/βi is greater than cut off rate then the
security will be included in the portfolio.
Step 5: Calculate the proportion to be invested in each security is calculated.
Where
C* is the cut off rate
4.11.2 Markowitz Mean-Variance Optimization Model (Tangency Model)

Harry Markowitz developed algorithms to minimize portfolio risk. His study was first published in
Journal of Finance in March 1952. Markowitz indicated the importance of correlation among the
returns of different stocks in construction of a stock portfolio.
Markowitz Model
The theory assumes that investors prefer to minimize risk. The theory assumes that given the choice
of two portfolios with equal returns, investors will choose the one with the least risk. If investors
take on additional risk, they will expect to be compensated with additional return. According to
MPT, risk comes in two major categories:
 Systematic Risk – the possibility that the entire market and economy will show losses
negatively affecting nearly every investment; also called market risk.
 Unsystematic Risk – the possibility that an investment or a category of investments will
decline in value without having a major impact upon the entire market
Diversification generally does not protect against systematic risk because a drop in the entire market
and economy typically affects all investments. However, diversification is
designed to decrease unsystematic risk. Since unsystematic risk is the possibility that one single
thing will decline in value, having a portfolio invested in a variety of stocks, a variety of asset
classes and a variety of sectors will lower the risk of losing much money when one investment type
declines in value.
The Efficient Frontier
In order to compare investment options, Markowitz developed a system to describe each investment
or each asset class with math, using unsystematic risk statistics. Then he further applied that to the
portfolios that contain the investment options. He looked at the expected rate-of-return and the
expected volatility for each investment. He named his risk-reward equation The Efficient Frontier.
The graph below is an example of what the Efficient Frontier equation looks like when plotted. The
purpose of The Efficient Frontier is to maximize returns while minimizing volatility.
Fig 4.9: Efficient Frontier
Portfolios along The Efficient Frontier should have higher returns than is typical, on average, for the
level of risk the portfolio assumes.
The Efficient Frontier line starts with lower expected risks and returns, and it moves upward to
higher expected risks and returns. So people with different Investor Profiles (tolerance for risk and
personal preferences) can find an appropriate portfolio anywhere along the Efficient Frontier line.
The optimal portfolio is the Tangent Portfolio that is the mix found where the straight line is tangent
to the Efficient Frontier portfolio.
4.11.3 Capital Asset Pricing Model (CAPM)
William F. Sharpe developed CAPM. He emphasized that the risk factor in portfolio theory is a
combination of two risks, the systematic risk and unsystematic risk. The total risk of the portfolio is
reduced with increase in number of securities in a portfolio. This is due in the unsystematic risk
distributed over a number of securities.
Beta Coefficient
CAPM calculates a required return based on a risk measurement. To do this, the model relies on a
risk multiplier called the beta coefficient. Beta coefficient is a measure of the volatility or systematic
risk, of a security or a portfolio in comparison to the market as a whole. Beta is the tendency of a
security's returns to respond to swings in the market.
A beta of 1 indicates that the security's price will move with the market. A security with beta of less
than 1 will be less volatile than the market. A beta of greater than 1 indicates that the security's price
will be more volatile than the market. For example, if a stock's beta is 1.2, it's theoretically 20%
more volatile than the market.
Assumptions of CAPM
The CAPM depends on certain assumptions. The original assumptions were:
1. Investors are wealth maximizers who select investments based on expected return and
standard deviation.
2. Investors can borrow or lend unlimited amounts at a risk-free (or zero risk) rate.
3. There are no restrictions on short sales (selling securities that you don't yet own) of any
financial asset.
4. All investors have the same expectations related to the market.
5. All financial assets are fully divisible (you can buy and sell as much or as little as you like)
and can be sold at any time at the market price.
6. There are no transaction costs.
7. There are no taxes.
8. No investor's activities can influence market prices.
9. The quantities of all financial assets are given and fixed.
CAPM Formula
The CAPM formula is sometimes called the Security Market Line formula and consists of the
following equation:
r* = Rf + β(Rm - Rf)
It is basically the equation of a line, where:
r* = required return , Rf = the risk-free rate , Rm = the average market return
β = the beta coefficient of the security
Fig 4.10: CAPM Model
The Rm – Rf term is called the market risk premium.
The risk-free rate (Rf) is the return that an investment with no risks should earn, commonly returns
on Treasury securities is used as risk-free rate.
Limitations of CAPM
1. The CAPM is based on the expectations about the future.
2. The beta coefficient is unstable. It may not reflect the future volatility of returns.
3. CAPM focuses attention only to systematic (market related) risk. However, total risk is more
relevant and related to returns.
4. Investors do not follow postulation of CAPM and do not diversify in a planned manner.
5. SML is not applicable to bond analysis, although bonds are a part of portfolio of investors.
4.11.4 Arbitrage Pricing Theory (APT)

Arbitrage pricing theory (APT) was developed by Stephen Ross in 1976. It is a method of estimating
the price of an asset. The theory assumes an asset's return is dependent on various macroeconomic,
market and security-specific factors.
The APT formula is:
E (rj) = rf + bj1RP1 + bj2RP2 + bj3RP3 + bj4RP4 + ... + bjnRPn
Where:
E (rj) = the asset's expected rate of return

rf = the risk-free rate
bj = the sensitivity of the asset's return to the particular factor RP = the risk premium associated with the
particular factor
There are an infinite number of security-specific influences for any given security including
inflation, production measures, investor confidence, exchange rates,
market indices or changes in interest rates. It is up to the analyst to decide which influences are
relevant to the asset being analyzed.
Once the analyst derives the asset's expected rate of return from the APT model, he or she can determine
what the "correct" price of the asset by using discounted cash flow model. .
The APT allows the user to adapt the model to the security being analyzed. And as with other pricing
models, it helps the user decide whether a security is undervalued or overvalued and so he or she can
profit from this information. APT is also very useful for building portfolios because it allows
managers to test whether their portfolios are exposed to certain factors.
4.12 PORTFOLIO EVALUATION METHODS

The different evaluation methods commonly used for portfolio evaluation are
1. Sharpe‘s Ratio
2. Treynor‘s Ratio
3. Jenson‘s Performance Index
4.12.1 Sharpe’s Ratio
Sharpe‘s performance index or Sharpe‘s ratio was developed by William Sharpe and gives a single
value to be used for the performance ranking of various portfolios. The index assigns highest value
to the portfolio which has best risk-adjusted average rate of return.
Sharpe‘s ratio measures risk premium of the portfolio relative to the total amount of risk in the
portfolio. The risk premium is the difference between the portfolio‘s average rate of return and
riskless rate of return. The standard deviation of the portfolio indicates the risk.
Sharpe Ratio = Rp-Rf

σp
Where;
σp = Standard deviation of the portfolio return
4.12.2 Treynor’s Ratio

Treynor‘s ratio was developed by Jack Treynor. It is the ratio of risk premium to the volatility of return.
The risk premium is the difference between average return of the portfolio riskless rate of return.
Volatility of portfolio is measured by the portfolio beta.
Treynor‘s Ratio = Rp-Rf

βp
Where;
βp = the Beta co-efficient of the portfolio
4.12.3 Jensen’s Measure
This absolute risk adjusted return measure was developed by Michael Jensen. This ratio attempts to
measure the differential between actual return of the portfolio and the expected return of the
portfolio.
Jensen‘s Measure = Rp - E(Rp)

E (Rp) = α + βp (Rm - Rf)
Where;
E (Rp) = Expected return of portfolio Rm = Average market return
βp = Beta co-efficient of the portfolio
4.13 FORMULAE USED FOR THE STUDY
The formulas used for the study are detailed below.
4.13.1 Portfolio Construction

Return = (Today‘s price- Last year‘s price)*100
Last year‘s price
Alpha = Stock return- (Beta * Market return)
αi = Ri – (βi*Rm)
βi = nΣxy- ΣxΣy
2 2
n Σx - (Σx)
n
Portfolio Alpha (αp) = Σ w i αi
i=1
Where wi = the proportion of security in the portfolio n
Portfolio Beta (βp) = Σ wi βi

i=1
Portfolio return = Portfolio Alpha + (Portfolio Beta * Market return)
Rp = αp+ (βp* Rm)

2 2
Portfolio Systematic Risk= βp σm
n
Portfolio Beta (βp) =Σ wi σei
i=1
n
2 2+
Total risk of Portfolio = βp σm Σw
i=1
4.13.2 Portfolio Evaluation

1. Sharpe’s Ratio
Sharpe‘s ratio = Portfolio Return- Risk free rate
Portfolio standard deviation
Sharpe Ratio = Rp-Rf
σp
Where;

σp = Standard deviation of the portfolio return
2. Treynor’s Ratio
Treynor‘s Ratio = Portfolio Return – Risk free rate of return

Portfolio Beta
Treynor‘s Ratio = Rp-Rf

βp
Where;

βp = the Beta co-efficient of the portfolio
3. Jensen’s Measure
Jensen‘s Measure = Rp - E(Rp)
E (Rp) = α + βp (Rm - Rf)
Where;

E (Rp) = Expected return of portfolio Rm = Average market return
βp = Beta co-efficient of the portfolio
4.14 CONCLUSION
In this chapter the traditional approaches and modern approaches to portfolio management is
described. The portfolio construction by traditional method is detailed. Tools of fundamental analysis
and Technical analysis are described.
The steps in portfolio construction using Sharpe‘s single index model, the formula used for portfolio
evaluation, risk and return calculations are detailed. Finally, an abstract of formulae used for this
study is given.
In the next chapter titled Analysis and Interpretation, the data collected will be analyzed and optimal
portfolio using Sharpe‘s single index model is constructed. Along with, a portfolio having same
return as optimal portfolio and another portfolio with same risk as optimal portfolio is constructed.
The portfolios are evaluated using Sharpe‘s ratio, Treynor‘s ratio and Jensen Measure.
Data Analysis &
Interpretations
CHAPTER 5
ANALYSIS AND INTERPRETATIONS
5.1 INTRODUCTION
In the previous chapter the traditional approaches and modern approaches to portfolio management
is described. The portfolio construction by traditional method is detailed. Tools of fundamental
analysis and Technical analysis are described. The steps in portfolio construction using Sharpe‘s
single index model, the formula used for portfolio evaluation, risk and return calculations are
detailed. Finally, an abstract of formulae used for this study is given.
The data for study, mainly stock prices for the last five years were collected from the Angel Broking
Securities, Manjeri. The analysis done using those data and its interpretations are discussed under
following headings. CNX Nifty Index Shares, Analysis of Securities, Analysis of Risk of Securities,
Construction of Optimal Portfolio Using Sharpe‘s Single Index model, Measuring Return and Risk
of Optimal Portfolio, Construction of Portfolio #2 with Same Return as Optimal Portfolio,
Construction of Portfolio # 3 with Same Risk as Optimal Portfolio. The three portfolios are
evaluated in the section called portfolio evaluation using three ratios viz, Sharpe‘s index, Treynor‘s
ratio and Jensen Measure. A brief summary of this chapter is provided in the conclusion section.
5.2 CNX NIFTY INDEX SHARES

The CNX NIFTY 50 Index comprises of 50 companies from various sectors, which ranks high in
market capitalization. The weight of stocks in the index is determined by the market capitalization of
free floating shares of the respective companies.
CNX Nifty index is used as a barometer of Indian stock market and economy. The list of 50 shares
which constitutes the index is shown the table 5.1given in the next page.
Table 5.1: List of CNX Nifty 50 shares
SLNo Security SLNo.Security

1 ACC 26 Infosys
2 Ambuja Cements 27 ITC
3 Asian Paints 28 Jindal Steel& Power (JSP)
4 Axis Bank 29 Kotak Bank
5 Bajaj Auto 30 L&T
6 Bharti Airtel 31 Lupin
Mahindra &Mahindra
7 BHEL 32
(M&M)
8 BoB 33 Maruti Suzuki
9 BPCL 34 NMDC
10 Cairn Energy 35 NTPC
11 Cipla 36 ONGC
12 Coal India 37 Power Grid
13 DLF 38 PNB
Dr. Reddy's Laboratories
14 39 Reliance Industries
(DRL)
15 GAIL 40 SBI
16 Grasim 41 Sesa Sterlite
17 HCL Tech 42 Sun pharma
18 HDFC 43 Tata Motors
19 HDFC Bank 44 Tata Power
20 Hero Motor Corporation 45 Tata Steel
21 Hindalco 46 TCS
Hindustan Unilever Ltd.
22 47 Tech Mahindra
(HUL)
23 ICICI Bank 48 Ultratech Cements
24 IDFC 49 Wipro
25 IndusInd bank 50 Zee Entertainment.

(Source: www.nse.com)
5.3 ANALYSIS OF SECURITES

Here all of the 50 CNX NIFTY index stocks are used for study. Security analysis involves
calculation of average return, variance, alpha and beta of the securities. These values form the basic
secondary data for the formation of optimal portfolio.
Security analysis on all the CNX Nifty shares were conducted and average return, variance, alpha
and beta of the security of the shares were calculated using Microsoft Excel
Return = (Today‘s price- Last year‘s price)*100
Last year‘s price
Average return of security Ri‘= Σ Ri/n
Average return of the market Rm = Σ Rm/n
2
Variance of security σi 2 = Σ (Ri-Ri‘) /(n-1)
2= Σ 2
Variance of market σm (Rm-Rm‘) /(n-1)
Covariance of Security & Market COV R,M = Σ(Ri-Ri‘)*(Rm-Rm‘)/ (n-1)
2
Beta of security β = COV R, M / σm
Alpha of security α = Ri‘- β Rm‘
A Microsoft Excel work sheet was prepared with above formulae and calculations were done using
computers. A sample calculation of Ambuja Cements is shown in the Chapter Appendix –A
(Page.93). The table below shows the summary of calculation of all shares.
5.3.1 Summary Table Showing Return and Risk
The table 5.2 given in the next page shows the return, alpha, beta and variance of CNX Nifty shares.
Table 5.2: Summary table showing risk and return of CNX NIFTY shares
Return Alpha Beta Variance Return Alpha Beta Variance

2 2 2 2
Name of Security Ri %) α β σi (%) Name of Security Ri (%) α β σi (%)
ACC 11.29 17.04 -0.56 186.92 ITC 24.69 32.71 -0.79 409.81
Ambuja Cements 17.82 10.79 0.21 211.34 Jindal Steel 24.44 -19.75 -0.45 346.71
Asian Paints 42.05 39.90 1.65 3723.36 Kotak Bank 15.35 -0.96 1.59 748.70
Axis Bank 27.00 0.81 0.55 1342.00 L&T 13.06 -4.81 1.744 552.70
Bajaj Auto 14.65 18.47 -0.37 230.48 Lupin 41.66 27.7 1.36 458.18
Airtel 7.68 -3.60 1.10 331.74 M&M 27.95 45.39 -1.70 774.93
BHEL -7.99 -26.53 1.80 331.74 Maruti 25.77 4.63 2.06 1060.17
BoB 22.83 10.60 0.66 1175.07 NMDC 19.78 20.88 -0.107 849.63
BPCL 31.74 13.60 1.07 779.79 NTPC 10.39 10.10 0.03 148.28
Cairn -3.59 4.06 -0.74 245.22 ONGC 8.42 4.76 0.35 193.62
Cipla 17.33 -0.33 1.72 935.17 Power Grid 9.59 1.39 0.799 368.82
Coal India 9.64 -0.24 0.965 329.21 PNB 11.52 2.29 0.90 675.25
DLF -10.99 -16.14 0.502 715.38 Reliance -1.23 -8.86 0.745 262.39
Dr. Reddy's 23.24 14.76 0.82 202.80 SBI 24.48 6.54 1.75 500.94
Gail 1.05 -9.91 1.06 292.50 Sesa Sterlite -24.44 -19.75 -0.457 346.71
Grasim 6.11 -1.13 0.706 253.11 Sun Pharma 39.38 33.79 0.645 219.51
HCL Tech 41.93 28.98 1.26 1297.79 Tata Motors 18.41 17.72 0.07 335.99
HDFC 21.65 8.86 1.24 358.71 Tata Power -5.22 -7.43 0.215 65.75
HDFC Bank 22.89 18.77 0.402 151.07 Tata Steel -5.92 -10.71 0.466 726.16
Hero Motor 9.52 14.56 -0.49 547.74 TCS 29.92 27.36 0.249 673.14
Hindalco -1.667 -15.35 1.33 1707.17 Tech Mahindra 35.29 18.80 1.60 1762.50
HUL 32.17 32.06 0.011 130.87
ICICI Bank 24.24 4.83 1.89 666.45 Ultratech Cements 24.32 23.71 0.06 179.75
IDFC 5.19 -13.69 1.84 1126.94 Wipro 10.59 2.59 0.78 681.72
IndusInd bank 40.77 27.37 1.30 701.68 Zee Ent. 22.03 9.15 1.25 1519.34
Infosys 15.35 -9.66 1.59 748.70 CNX NIFTY 10.2746 0 1 149.25
(Source: Summarized from the secondary data)
Inferences:
Form the above table following inferences are made.
 Asian Paints has highest return (42.05 %) and Sesa Sterlite has lowest return
 (-24.44 %).
 Mahindra & Mahindra has highest Alpha (45.39) and BHEL has lowest Alpha
 (-26.53).
 Maruti Suzuki has highest Beta (2.06) and Mahindra and Mahindra has lowest Beta (-1.70).
2
 Asian Paints has highest Variance (3723.36 % ) and Tata Power has lowest variance
2
(65.75% ).
 The return of CNX Nifty index was 10.2476 % for the period and market risk was 149.25 %
2
.
5.4 RISK ANALYSIS OF SECURITIES

The total risk of securities is divided in to two; the systematic risk which cannot be diversified and
unsystematic or security specific risk which can be reduced by diversification. Systematic and
unsystematic risks are measured by using Sharpe‘s index model.
5.4.1 Systematic Risk of Securities

The systematic risk indicates non diversifiable part of the risk of a security. It is calculated using the
following formulae.
2
Systematic risk = βi2 σm
Where σm2 = Variance of Market

2
Market is represented by CNX NIFTY, from table No. 5.2 = 149.25 % .
The calculations are performed using Microsoft excel software. The result of calculation of
systematic risk of securities is given in the table below.
Table 5.3: Systematic Risk of CNX NIFTY Shares
Systematic Systematic Risk

2 2 2 2
Security βi σm Risk Security βi σm (βi σm )
2 2
(βi σm )
ACC -0.56 149.25 46.80 Infosys 1.59 149.25 377.32
Ambuja Cements 0.21 149.25 6.58 ITC -0.79 149.25 93.15
Asian Paints 1.65 149.25 406.33 JSP -0.45 149.25 30.22
Axis Bank 0.55 149.25 45.15 Kotak Bank 1.59 149.25 377.32
Bajaj Auto -0.37 149.25 20.77 L&T 1.74 149.25 453.95
Bharti Airtel 1.10 149.25 180.59 Lupin 1.36 149.25 276.05
BHEL 1.80 149.25 483.57 M&M -1.70 149.25 431.33
BoB 0.66 149.25 65.01 Maruti 2.06 149.25 633.36
BPCL 1.07 149.25 170.88 NMDC -0.11 149.25 1.71
Cairn Energy -0.75 149.25 83.28 NTPC 0.03 149.25 0.13
Cipla 1.72 149.25 441.54 ONGC 0.35 149.25 18.28
Coal India 0.97 149.25 139.92 Power Grid 0.80 149.25 95.28
DLF 0.50 149.25 37.61 PNB 0.90 149.25 120.89
Dr. Reddy's 0.82 149.25 100.36 Reliance 0.75 149.25 82.84
Gail 1.06 149.25 167.70 SBI 1.75 149.25 457.08
Grasim 0.71 149.25 74.39 Sesa Sterlite -0.46 149.25 31.17
HCL Tech 1.26 149.25 236.95 Sun Pharma 0.65 149.25 62.09
HDFC 1.24 149.25 229.49 Tata Motors 0.07 149.25 0.73
HDFC Bank 0.40 149.25 24.28 Tata Power 0.22 149.25 6.90
Hero Mot -0.49 149.25 35.83 Tata Steel 0.47 149.25 32.41
Hindalco 1.33 149.25 264.01 TCS 0.25 149.25 9.25
HUL 0.01 149.25 0.02 Tech Mahindra 1.60 149.25 382.08
ICICI Bank 1.89 149.25 533.14 Ultra tech 0.06 149.25 0.54
IDFC 1.84 149.25 505.30 Wipro 0.78 149.25 90.80
IndusInd bank 1.30 149.25 252.23 Zee Ent. 1.25 149.25 233.20
(Source: Summarized from the secondary data in the Table 5.2)
Inference:
2
From the above table it is inferred that Hindustan Unilever has minimum systematic risk (0.02 % )
2
and Axis bank has highest systematic risk (975.06 % ).
It means Hindustan Unilever is less affected by ups and downs in market and Axis Bank share price
is highly influenced by volatility in the market.
5.4.2 Unsystematic Risk of the Securities

Unsystematic risk refers to that portion of risk which is caused due to factors unique or related to a
firm or industry.
The total Risk of the security is the sum of systematic risk and non-systematic risk, the unsystematic
risk is fond out by deducting systematic risk from total risk. i.e.
Unsystematic risk = Variance of security- Systematic risk.
The unsystematic risk is calculated using the formula,

2 2 2.
Unsystematic risk = σi - βi σm
Where
2
σi = Variance of security
βi = Beta of Security
2=
σm The variance of market index
Market is represented by CNX NIFTY INDEX
2
From Summary table 5.2, σm 2= 149.25(% )
The table 5.4 given in the next page shows the calculation of unsystematic risk of securities.
Table 5.4: Unsystematic risk of CNX NIFTY shares
Security σi 2 βi Unsystematic Security σi 2 βi Unsystematic

Risk Risk
2 2( 2 2 2 2( 2 2
σei =σi - βi σm ) σei =σi - βi σm )
ACC 186.92 -0.56 140.11 Infosys 748.7 1.59 371.38
Ambuja Cements 211.34 0.21 204.76 ITC 409.81 -0.79 316.66
Asian Paints 3723.36 1.65 3317.03 Jindal 346.71 -0.45 316.49
Axis Bank 1342 0.55 1296.85 Kotak Bank 748.7 1.59 371.38
Bajaj Auto 230.48 -0.37 209.72 L&T 552.7 1.74 98.75
BHEL 331.74 1.80 -151.83 M&M 774.93 -1.70 343.60
BoB 1175.07 0.66 1110.06 Maruti Suzuki 1060.17 2.06 426.81
BPCL 779.79 1.07 608.91 NMDC 849.63 -0.11 847.92
Cairn Energy 245.22 -0.75 161.94 NTPC 148.28 0.03 148.15
Cipla 935.17 1.72 493.63 ONGC 193.62 0.35 175.34
DLF 715.38 0.50 677.77 PNB 675.25 0.90 554.36
Dr. Reddy's 202.80 0.82 102.44 Reliance Ind. 262.39 0.75 179.55
Gail 292.50 1.06 124.80 SBI 500.94 1.75 43.86
Grasim 253.11 0.71 178.72 Sesa Sterlite 346.71 -0.46 315.54
HDFC 358.71 1.24 129.22 Tata Motors 335.99 0.07 335.26
Hero Mot 547.74 -0.49 511.91 Tata Steel 726.16 0.47 693.75
Hindalco 1707.17 1.33 1443.16 TCS 673.14 0.25 663.89
ICICI Bank 666.45 1.89 133.31 Ultratech Cements 179.75 0.06 179.21
IDFC 1126.94 1.84 621.64 Wipro 681.72 0.78 590.92
IndusInd bank 701.68 1.30 449.45 Zee Entertainment 1519.34 1.25 1286.14
(Source: Secondary data from Table 5.2)
Inference:
2
From the table it is inferred that the Asian Paints has highest unsystematic risk (3317.02 % ) and Dr.
2
Reddy‘s lab has lowest unsystematic risk (100.77 % ).
5.4.3 Total Risk of Securities
Total risk of a security is the sum of systematic and unsystematic risks.
Total Risk = Systematic Risk + Unsystematic Risk.
The table 5.5 given in the next page shows the total risk of securities.
Table 5.5: Total risk of CNX NIFTY shares
Systematic Unsystematic Total Systematic Unsystematic Total

Security Security
Risk Risk Risk Risk Risk Risk
ACC 46.80 140.11 186.92 Infosys 377.32 371.38 748.70
Ambuja Cements 6.58 204.76 211.34 ITC 93.15 316.66 409.81
Asian Paints 406.33 3317.03 3723.36 JSP 30.22 316.49 346.71
Axis Bank 45.15 1296.85 1342.00 Kotak Bank 377.32 371.38 748.70
Bajaj Auto 20.77 209.72 230.48 L&T 453.95 98.75 552.70
BHEL 483.57 -151.83 331.74 M&M 431.33 343.60 774.93
BoB 65.01 1110.06 1175.07 Maruti 633.36 426.81 1060.17
BPCL 170.88 608.91 779.79 NMDC 1.71 847.92 849.63
Cairn Energy 83.28 161.94 245.22 NTPC 0.13 148.15 148.28
Cipla 441.54 493.63 935.17 ONGC 18.28 175.34 193.62
DLF 37.61 677.77 715.38 PNB 120.89 554.36 675.25
Dr. Reddy's 100.36 102.44 202.80 Reliance 82.84 179.55 262.39
Gail 167.70 124.80 292.50 SBI 457.08 43.86 500.94
Grasim 74.39 178.72 253.11 Sesa Sterlite 31.17 315.54 346.71
HDFC 229.49 129.22 358.71 Tata Motors 0.73 335.26 335.99
Hero Motor 35.83 511.91 547.74 Tata Steel 32.41 693.75 726.16
Hindalco 264.01 1443.16 1707.17 TCS 9.25 663.89 673.14
ICICI Bank 533.14 133.31 666.45 Ultra tech 0.54 179.21 179.75
IDFC 505.30 621.64 1126.94 Wipro 90.80 590.92 681.72
IndusInd bank 252.23 449.45 701.68 Zee Entertainment 233.20 1286.14 1519.34
(Source: Secondary data from Tables 5.2 to 5.4)
Inference:
2
From the above table it is inferred that, the Asian Paints has highest total risk (3723.36 % ) and
2
Hindustan Uniliver Ltd (130.88 % ) has lowest total risk.
5.5 CONSTRUCTION OF OPTIMAL PORTFOLIO USING SHARPE’S

OPTIMIZATION MODEL
The construction of optimal portfolio using Sharpe‘s single index model involves following steps.
1. Ranking of the securities based on excess return over risk i.e. (Ri - Rf)/ β ratio.
2. Calculation of Cut-off point
3. Selection of securities based on the cut-off point
4. Calculation of Weight of each security in the portfolio.
5.5.1 Ranking of Securities
The CNX NIFTY securities are ranked based on (Ri - Rf)/ β ratio.
Where;
Ri= Return of the security
Rf = the risk free rate.
The latest MIBOR (Mumbai Inter Bank Offer Rate) is taken as risk free rate Rf. The present rate is
7.21 %. Hence, 7.21% is taken as risk free rate for calculation.
The table 5.6 given in the next page shows the rank of securities based on (Ri - Rf)/ β ratio.
Table 5.6: Ranking of CNX NIFTY shares
Security Ri Rf β (Ri - Rf)/ β Rank Security Ri Rf β (Ri - Rf)/ β Rank

ACC 11.29 7.21 -0.56 -7.29 41 Infosys 15.35 7.21 1.59 5.12 28
Ambuja
17.82 7.21 0.21 50.52 7 ITC 24.69 7.21 -0.79 -22.13 45
Cements
Jindal Steel&
Asian Paints 42.05 7.21 1.65 21.16 16 24.44 7.21 -0.45 -38.29 48
Power
Axis Bank 27.00 7.21 0.55 35.98 10 Kotak Bank 15.35 7.21 1.59 5.12 29
Bajaj Auto 14.65 7.21 -0.37 -19.94 44 L&T 13.06 7.21 1.74 3.35 32
Bharti Airtel 7.68 7.21 1.10 0.42 34 Lupin 41.66 7.21 1.36 25.33 13
BHEL -7.99 7.21 1.80 -8.44 40 M&M 27.95 7.21 -1.70 -12.20 43
BoB 22.83 7.21 0.66 23.67 14 Maruti 25.77 7.21 2.06 9.01 24
BPCL 31.74 7.21 1.07 22.93 15 NMDC 19.78 7.21 -0.11 -117.48 50
Cairn -3.59 7.21 -0.75 14.46 19 NTPC 10.39 7.21 0.03 106.00 4
Cipla 17.33 7.21 1.72 5.88 26 ONGC 8.42 7.21 0.35 3.46 25
Coal India 9.64 7.21 0.97 2.52 33 Power Grid 9.59 7.21 0.80 2.98 31
DLF -10.99 7.21 0.50 -36.26 47 PNB 11.52 7.21 0.90 4.79 27
Dr. Reddy's 23.24 7.21 0.82 19.55 17 Reliance -1.23 7.21 0.75 -11.32 42
GAIL 1.05 7.21 1.06 -5.81 38 SBI 24.48 7.21 1.75 9.87 22
Grasim 6.11 7.21 0.71 -1.56 35 Sesa Sterlite -24.44 7.21 -0.46 69.26 6
HCL Tech 41.93 7.21 1.26 27.56 11 Sun Pharma 39.38 7.21 0.65 49.88 8
HDFC 21.65 7.21 1.24 11.65 21 Tata Motors 18.41 7.21 0.07 160.00 3
HDFC Bank 22.89 7.21 0.40 39.01 9 Tata Power -5.22 7.21 0.22 -57.82 49
Hero Motor
9.52 7.21 -0.49 -4.71 39 Tata Steel -5.92 7.21 0.47 -28.18 46
Corp
Hindalco -1.667 7.21 1.33 -6.67 37 TCS 29.92 7.21 0.25 91.20 5
Tech
HUL 32.17 7.21 0.01 2269.09 1 35.29 7.21 1.60 17.55 18
Mahindra
ICICI Bank 24.24 7.21 1.89 9.01 23 Ultratech 24.32 7.21 0.06 285.17 2
IDFC 5.19 7.21 1.84 -1.10 36 Wipro 10.59 7.21 0.78 4.33 30
IndusInd
40.77 7.21 1.30 25.82 12 Zee Ent. 22.03 7.21 1.25 11.86 20
Bank
(Source: Summarized from the secondary data of Table 5.2)
5.5.2 Calculation of Cut-Off Point
The securities are rearranged based on the rank of (Ri - Rf)/ β ratio.
Then the he cut of rate is calculated using the formulae.
Where
σm2 = Market variance

Ri - Rf = Market risk premium
σei2 = Unsystematic risk of the security
The calculation of cut-off point is shown in the table 5.7 given in the next page.
From the table it seen that the cut- off point C i shows a character of increasing gradually and after
reaching a peak value it i starts decreasing gradually. This point is highest cut off rate and it will be
denoted as C*.
The cut-off point determines which securities are to be included in the portfolio. The Securities with
(Ri-Rf)/ β values up to cut off point C* (25.1394) are included in the portfolio. Securities with (Ri-
Rf)/ β values beyond cut off point are excluded from the portfolio.
Table 5.7: Calculation of optimal portfolio
SECURITY β σei 2 (Ri - Rf)/ β C* Zi ΣZi Weight

Xi=Zi/ ΣZi
HUL 0.01 130.85 2378.18 25.1394 0.0022 0.1684 0.013
Ultratech 25.1394 0.1684
Cements 0.06 179.21 305.17 0.0056 0.033
Tata Motors 0.07 335.26 177.14 25.1394 0.0022 0.1684 0.013
NTPC 0.03 148.15 146.00 25.1394 0.0007 0.1684 0.004
TCS 0.25 663.89 96.02 25.1394 0.0066 0.1684 0.039
Sesa Sterlite 0.46 315.54 66.63 25.1394 0.0275 0.1684 0.163
Ambuja Cements 0.21 204.76 56.24 25.1394 0.0067 0.1684 0.040
Sun Pharma 0.65 157.42 51.74 25.1394 0.0703 0.1684 0.417
HDFC Bank 0.40 126.79 41.99 25.1394 0.0215 0.1684 0.128
Axis Bank 0.55 1296.9 38.16 25.1394 0.0030 0.1684 0.018
HCL Tech 1.26 1060.8 28.51 25.1394 0.0050 0.1684 0.030
IndusInd bank 1.30 449.45 26.74 25.1394 0.0060 0.1684 0.036
Lupin 1.36 182.13 26.21 25.1394 0.0109 0.1684 0.065
BoB 0.66 1110.1 25.48 25.1394 0.0001 0.1684 0.001
Total Σ Zi= 0.1684
Σ Wi= 1.00
(Source: Secondary data in the table 5.7)
Inference:
The Sun pharma has highest weight in the portfolio (41.7 %) and Bank of Baroda has lowest weight
in the optimal portfolio (0.1%).
5.6 MEASURING RETURN AND RISK OF OPTIMAL PORTFOLIO

The return and risk of optimal portfolio is required for evaluation of portfolio with other portfolios.
5.6.1 Calculation of Portfolio Alpha in Optimal Portfolio

The portfolio alpha is the weighted average of the specific returns (alpha) of the individual
securities. The Portfolio alpha is calculated using the equation
Portfolio Alpha (αp) = Σ wi αi,

i=1
Where Wi= weight of security, αi = Alpha of security
Table 5.8: Calculation of alpha of optimal portfolio
Alpha * Weight
Security Alpha (αi) Weight (wi)
(wi* αi)
Ambuja Cements 39.90 0.040 1.5960
Axis Bank 0.81 0.018 0.0146
BoB 10.60 0.001 0.0106
HCL Tech 28.98 0.030 0.8694
HDFC Bank 18.77 0.128 2.4026
Hindustan Uniliver 32.06 0.013 0.4168
IndusInd bank 27.37 0.036 0.9853
Lupin 27.70 0.065 1.8005
NTPC 10.10 0.004 0.0404
Sesa Sterlite -19.75 0.163 -3.2193
Sun Pharma 33.79 0.417 14.0904
Tata Motors 17.72 0.013 0.2304
TCS 27.36 0.039 1.0670
Ultratech Cements 23.71 0.033 0.7824
Total 21.0872
(Source: Secondary data from the table 5.2 and table 5.7)
Inference:
From the above table, it is inferred that the alpha (excess return over the market) of optimal portfolio
is 21.09%.
5.6.2 Calculation of Portfolio Beta in Optimal Portfolio

The portfolio beta is the weighted average of the beta coefficient of the individual
securities. The portfolio beta is calculated using the equation.
n
Portfolio Beta (βp) = Σ wi βi
i=1
Where
wi = Proportion of investment in security i.
βi = beta of individual securities.
The table below shows the calculation of beta of optimal portfolio.
Table 5.09: Calculation of beta of optimal portfolio

Beta Weight Beta * Weight
Security
(βi) (wi) (wi βi)
Ambuja Cements 0.21 0.040 0.00840
Axis Bank 0.55 0.018 0.00990
BoB 0.66 0.001 0.00066
HCL Tech 1.26 0.030 0.03780
HDFC Bank 0.40 0.128 0.05120
Hindustan 0.00013
Uniliver 0.01 0.013
IndusInd bank 1.30 0.036 0.04680
Lupin 1.36 0.065 0.08840
NTPC 0.03 0.004 0.00012
Sesa Sterlite -0.46 0.163 -0.07500
Sun Pharma 0.65 0.417 0.27105
Tata Motors 0.07 0.013 0.00091
TCS 0.25 0.039 0.00975
Ultratech Cements 0.06 0.033 0.00198
Total 0.45212
Inference:
From the above table it is inferred that beta of the portfolio is 0.4512, i.e. for 1% variation in value
of market index, the risk in portfolio will be only 0.45 %.
5.6.3 Calculation of Return of the Optimal Portfolio

The expected return of a portfolio is calculated using the formulae
Rp= αp + βp*Rm
Where,
αp = Portfolio alpha
βp = Portfolio beta
Rm = Market Return
The table below shows the calculation of return of optimal portfolio.
Table 5.10: Calculation of return of optimal portfolio

Portfolio Portfolio Portfolio Market Portfolio Return
Alpha Beta Return Rp= αp + βp*Rm
(αp) (βp) (Rm) (%)
OPTIMAL
21.09 0.45 10.25 25.72
PORTFOLIO
(Source: Secondary data from the table 5.2, table 5.9 and table 5.10)
Inference:
From the above table it is inferred that, the average return of the optimal portfolio for the five years
from 2012-2017 is 25.72 %.
5.6.4 Calculation of Residual Variance (Unsystematic Risk) In Optimal Portfolio
Unsystematic risk or Residual variance of a portfolio is given by the equation
n
2
Unsystematic risk = Σ wi σei2
i=1
Where
wi = Weight of Security in portfolio
2
σei = Residual variance of individual securities.
The table given below shows the calculation of unsystematic risk of optimal portfolio.
Table 5.11: Calculation of unsystematic risk of optimal portfolio

2 2
Residual Weight wi * σei
Security Variance 2
(wi) (% )
(σei
Ambuja Cements 204.76 0.040 0.001600 0.3276
Axis Bank 1296.90 0.018 0.000324 0.4202
BoB 1110.10 0.001 0.000001 0.0011
HCL Tech 1060.80 0.030 0.000900 0.9547
HDFC Bank 126.79 0.128 0.016384 2.0773
Hindustan Uniliver 130.85 0.013 0.000169 0.0221
IndusInd bank 449.45 0.036 0.001296 0.5825
Lupin 182.13 0.065 0.004225 0.7695
NTPC 148.15 0.004 0.000016 0.0024
Sesa Sterlite 315.54 0.163 0.026569 8.3836
Sun Pharma 157.42 0.417 0.173889 27.3736
Tata Motors 335.26 0.013 0.000169 0.0567
TCS 663.89 0.039 0.001521 1.0098
Ultratech Cements 179.21 0.033 0.001089 0.1952
Total 42.1762
Inference:
2
From the above table it is inferred that the residual variance of the optimal portfolio is 42.176 % .
5.6.5 Calculation of Systematic Risk of Optimal Portfolio
Systematic risk of a portfolio is calculated using the equation given below.
2 2
Systematic risk of Portfolio = βp σm
Where,
βp= Beta of Portfolio
2
σm = Variance of market index.
The table below shows the calculation of systematic risk of optimal portfolio.
Table 5.12: Calculation of systematic risk of optimal portfolio
2 2 Systematic Risk
Portfolio βp βp σm
σm (
OPTIMAL PORTFOLIO 0.4521 0.2044 149.26 30.51
Inference:
2
From the above table it is inferred that the systematic risk of optimal portfolio is 30.51% .
5.6.6 Calculation of Total Risk of Portfolio

The total risk of a portfolio is sum of systematic risk and unsystematic risk of a portfolio.
This may be expressed as:
n
2= 2 2 2
σp βp σm +Σ wi σei2
i=1
Where,
2
σp = Total risk
2 2
βp σm = Systematic risk
n
2
Σ wi σei2 = Unsystematic risk i = 1
The table below shows the calculation of total risk of optimal portfolio.
Table 5.13: Calculation of systematic risk of optimal portfolio
Unsystematic Systematic Total Risk

Portfolio 2
Risk Risk (% )
OPTIMAL PORTFOLIO 42.18 30.51 72.69
Inference:
From the above table it is inferred that the total risk of optimal portfolio is 72.69 %2.
5.7 CONSTRUCTION OF PORTFOLIO #2. (A portfolio with same return as
optimal portfolio)
A portfolio is constructed selecting 14 securities is selected in random from remaining NIFTY 50
shares. Their weight is selected in such a way that portfolio return is same as that of optimal
portfolio (25.72%). Microsoft excel solver was used to find out the weight of securities.
The table below represents the securities selected and their proportion (weight) in the portfolio#2.
Table 5.14: Portfolio #2
SL No. Security Weight (Wi)

1 Asian Paints 0.04
2 Bajaj Auto 0.03
3 BHEL 0.03
4 Cairn Energy 0.01
5 Coal India 0.01
6 Dr. Reddy's Lab 0.25
7 Grasim 0.03
8 Hero motor corp. 0.02
9 ICICI Bank 0.04
10 Jindal Steel & Power 0.01
11 Maruti Suzuki 0.02
12 SBI 0.02
13 Tech Mahindra 0.38
14 Zee Entertainment 0.11
Total 1.00
(Source: Summarized from the table 5.2)
Inference:
From the above table it is inferred that the Tech Mahindra has highest weight (0.38) and Jindal Steel,
Coal India, and Cairn Energy have lowest weight of 0.01 each.
5.7.1 Calculation of Alpha of Portfolio #2
The table below shows the calculation of alpha of portfolio#2.
Table 5.15: Calculation of alpha of portfolio #2
SL No. Security Weight (Wi) Alpha (αi) αi * wi (%)

1 Asian Paints 0.04 39.90 1.5960
2 Bajaj Auto 0.03 18.47 0.5541
3 BHEL 0.03 -26.53 -0.7959
4 Cairn Energy 0.01 4.06 0.0406
5 Coal India 0.01 -0.24 -0.0024
6 Dr. Reddy's Lab 0.25 14.76 3.6900
7 Grasim 0.03 -1.13 -0.0339
8 Hero motor corp. 0.02 14.56 0.2912
9 ICICI Bank 0.04 4.83 0.1932
Jindal Steel &
10 Power 0.01 -19.75 -0.1975
11 Maruti Suzuki 0.02 4.63 0.0926
12 SBI 0.02 6.54 0.1308
13 Tech Mahindra 0.38 18.80 7.1440
14 Zee Entertainment 0.11 9.15 1.0065
Total 1.00 13.7093
Inference:
From the above table it is inferred that the alpha of portfolio#2 is 13.7093 %.
5.7.2 Calculation of Portfolio Beta of Portfolio #2
The table below shows the calculation of beta of portfolio#2.
Table 5.16: Calculation of beta of portfolio #2
Sl No. Security Beta (βi) Weight (wi) βi * wi

1 Asian Paints 0.21 0.04 0.008
2 Bajaj Auto -0.373 0.03 -0.011
3 BHEL 1.8 0.03 0.054
4 Cairn Energy -0.747 0.01 -0.007
5 Coal India 0.965 0.01 0.010
6 Dr. Reddy's Lab 0.82 0.25 0.205
7 Grasim 0.706 0.03 0.021
8 Hero motor corp. -0.49 0.02 -0.010
9 ICICI Bank 1.89 0.04 0.076
10 Jindal Steel &Power 0.45 0.01 0.005
11 Maruti Suzuki Ltd 2.06 0.02 0.041
12 SBI 1.75 0.02 0.035
13 Tech Mahindra 1.6 0.38 0.608
14 Zee Entertainment 1.25 0.11 0.138
Total 1.00 1.172
Inference:
From the above table it is inferred that the beta of portfolio#2 is 1.172.
5.7.3 Calculation of Return of the Portfolio #2
The table below shows the calculation of return of portfolio#2.
Table 5.17: Calculation of Return of portfolio #2
Portfolio Portfolio Market Portfolio Return

Portfolio Alpha Beta Return Rp= αp + βp*Rm
(αp) (βp) (Rm)
PORTFOLIO #2 13.7093 1.172 10.2476 25.72
(Source: Secondary data from the tables 5.2, 5.16 and 5.17)
Inference:
From the above table it is inferred that the return of portfolio#2 is 25.72%.
5.7.4 Calculation of Unsystematic Risk in Portfolio #2
The table below shows the calculation of unsystematic risk of portfolio#2.
Table 5.18 Calculation of unsystematic risk of portfolio #2
Residual
Weight
Security Variance wi wi * σei
2 (wi)
(σei )
Asian Paints 3317.03 0.04 0.0016 5.3072
Bajaj Auto 209.71 0.03 0.0009 0.1887
BHEL -151.83 0.03 0.0009 -0.1366
Cairn Energy 161.94 0.01 0.0001 0.0162
Coal India 189.29 0.01 0.0001 0.0189
Dr. Reddy's Lab 102.44 0.25 0.0625 6.4025
Grasim 178.72 0.03 0.0009 0.1608
Hero motor corp. 511.91 0.02 0.0004 0.2048
ICICI Bank 133.31 0.04 0.0016 0.2133
Jindal Steel &Power 316.49 0.01 0.0001 0.0316
Maruti Suzuki 426.81 0.02 0.0004 0.1707
SBI 43.86 0.02 0.0004 0.0175
Tech Mahindra 1380.42 0.38 0.1444 199.3326
Zee Entertainment 1286.14 0.11 0.0121 15.5623
Total 1.00 227.4907
Inference:
From the above table it is inferred that the unsystematic risk of portfolio#2 is 227.49 %2.
5.7.5 Calculation of Systematic Risk in Portfolio #2
The table below shows the calculation of systematic risk of portfolio#2.
Table 5.20: Calculation of systematic risk of portfolio #2
Systematic
2
Portfolio βp σm Risk
2 2)
(βp σm
PORTFOLIO #2 1.172 149.25 205.01
Inference:
From the above table it is inferred that the systematic risk of portfolio#2 is 205.01 %2.
5.7.6 Calculation of Total Risk of Portfolio #2

The table below shows the calculation of total risk of portfolio#2.
Table 5.21: Calculation of total risk of portfolio #2

Portfolio Unsystematic risk Systematic risk Total
risk
PORTFOLIO #2 227.4907 205.01 432.50
Inference:
From the above table it is inferred that the total risk of portfolio#2 is 432.50 %2.
5.8 CONSTRUCTION OF PORTFOLIO # 3. (A portfolio with same risk as
optimal portfolio)
A portfolio was constructed selecting 14 securities in random from remaining NIFTY 50 shares.
Their weight is selected in such a way that portfolio risk is same as that of optimal portfolio ( 72.69
%2). Microsoft Excel solver was used to find out the weight of securities in the portfolio.
The table below shows securities selected and their proportion (weight) in the portfolio #3.
Table 5.22: Portfolio #3
Sl No. Security Weight (wi)

1 Barati Airtel 0.080
2 BPCL 0.030
3 Cipla 0.050
4 HDFC 0.100
5 Infosys 0.018
6 ITC 0.050
7 Kotak Bank 0.030
8 L&T 0.050
9 Mahindra Mahindra 0.147
10 NMDC 0.111
11 ONGC 0.264
12 PNB 0.020
13 Power Grid 0.010
14 Wipro 0.040
Total 1.00
(Source: Secondary data from table 5.2)
Inference:
From the above table it is inferred that the ONGC has highest weight (26.4 %) and Power Grid has
lowest weight (1%) in the portfolio#3.
5.8.1 Calculation of Beta of Portfolio #3
Table 5.23: Calculation of beta of portfolio #3
Sl No. Security Weight (wi) Beta (βi) β i * wi
1 Airtel 0.080 1.10 0.09

2 BPCL 0.030 1.77 0.05
3 Cipla 0.050 1.72 0.09
4 HDFC 0.100 1.24 0.12
5 Infosys 0.018 1.59 0.03
6 ITC 0.050 -0.79 -0.04
7 Kotak Bank 0.030 1.59 0.05
8 L&T 0.050 1.74 0.09
9 Mahindra& Mahindra 0.147 -0.56 -0.08
10 NMDC 0.111 -0.11 -0.01
11 ONGC 0.264 0.35 0.09
12 PNB 0.020 0.90 0.02
13 Power Grid 0.010 0.80 0.01
14 Wipro 0.040 0.78 0.03
Total 1.00 0.53
(Source: Secondary data from the tables 5.2 and 5.22)
Inference:
From the above table it is inferred that the beta of portfolio#3 is 0.53.
5.8.2 Calculation of Unsystematic Risk in Portfolio #3
Table 5.24: Calculation of unsystematic risk of portfolio #3
2 2
Security Residual Variance (σei Weight (wi) wi * σei
Airtel 151.15 0.080 0.97
BPCL 608.91 0.030 0.55
Cipla 493.63 0.050 1.23
HDFC 129.22 0.100 1.29
Infosys 371.38 0.018 0.12
ITC 316.66 0.050 0.79
Kotak Bank 748.70 0.030 0.67
L&T 98.75 0.050 0.25
M&M 46.80 0.147 1.01
NMDC 847.92 0.111 10.45
ONGC 175.34 0.264 12.22
PNB 554.36 0.020 0.22
Power Grid 273.54 0.010 0.03
Wipro 590.92 0.040 0.95
Total 1.00 30.74
Inference:
2
From the above table it is inferred that the unsystematic risk of portfolio #3 is 30.74 % .
5.8.3 Calculation of Systematic Risk in Portfolio #3
The table shown below calculates the systematic risk of portfolio #3.
Table 5.25: Calculation of systematic risk of portfolio #3
Systematic Risk
2 2
Portfolio βp βp σm 2 2
βp σ m
PORTFOLIO #3
(Portfolio with same risk 0.53 0.281 149.25 41.95
as optimal portfolio)
Inference:
2
From the above table it is inferred that the systematic risk of portfolio #3 is 41.95 %
5.8.4 Calculation of Total Risk of Portfolio #3

The table below shows the calculation of total risk of portfolio#3.
Table 5.26: Calculation of total risk of portfolio #3
Portfolio Unsystematic Risk Systematic Risk Total

Risk
PORTFOLIO #3
(Portfolio with
30.74 41.95 72.69
same risk as
optimal portfolio)
Inference:
2
From the above table it is inferred that the total risk of portfolio #3 is 72.69 % .
5.8.5 Calculation of Alpha of Portfolio #3
The table below shows the calculation of alpha of portfolio#3.
Table 5.27: Calculation of alpha of portfolio #3
SL No. Security Alpha (αi) Weight (wi) αi * wi

1 Airtel -3.60 0.080 -0.29
2 BPCL 13.60 0.030 0.41
3 Cipla -0.33 0.050 -0.02
4 HDFC 8.86 0.100 0.89
5 Infosys -0.97 0.018 -0.02
6 ITC 32.71 0.050 1.64
7 Kotak Bank -0.96 0.030 -0.03
8 L&T -4.81 0.050 -0.24
9 M&M 4.80 0.147 0.71
10 NMDC 20.88 0.111 2.32
11 ONGC 4.76 0.264 1.26
12 PNB 2.29 0.020 0.05
13 Power Grid 1.39 0.010 0.01
14 Wipro 2.59 0.040 0.10
Total 1.00 6.78
5.8.6 Calculation of Return of the Portfolio #3

The table below shows the calculation of return of portfolio#3.
Table 5.28: Calculation of return of portfolio #3
Portfolio Portfolio Portfolio Market Portfolio Return

Alpha Beta Return Rp= αp + βp*Rm
(αp) (βp) (Rm)
PORTFOLIO #3 6.78 0.53 10.2476 12.21
(Source: Secondary data from the tables5.2, 5.23 and 5.27)
Inference:
From the above table it is inferred that the return of portfolio #3 is 12.21 %.
105
5.9 PORTFOLIO EVALUATION

For evaluating the performance a portfolio it is necessary to consider both risk and return.
The following three evaluation methods are used.

Sharpe‘s Ratio

Treynor‘s Ratio

Jensen Measure
5.9.1. Portfolio Evaluation Using Sharpe’s Index

Sharpe‘s ratio is the ratio of excess return to risk. The risk is taken as total risk of portfolio indicated
by standard deviation of portfolio.
Sharpe’s Ratio = (Rp-Rf)/ σp
The table below shows the calculation of Sharpe‘s index.
Table 5.29: Calculation of Sharpe’s index of portfolios
Rp Rf σp (Rp-Rf)/
PORTFOLIO Rank
(%) (%) (%) σp
Optimal Portfolio 25.72 7.21 72.69 0.255 1
Portfolio#2
(Portfolio with same return as 25.72 7.21 432.50 0.043 3
optimal portfolio)
Portfolio #3
(Portfolio with same risk as 12.21 7.21 72.69 0.069 2
optimal portfolio)
(Source: Secondary data from the tables 5.11, 5.14, 5.18, 5.21, 5.26 and 5.28)
Inference:
Sharpe‘s ratio is highest for optimal portfolio indicating that the performance of Sharpe‘s optimal
portfolio is superior to that of other portfolios.
5.9.2 Portfolio Evaluation by Using Treynor’s Ratio
Treynor‘s ratio also indication of excess returns to risk. Here risk is defined as systematic risk or
market risk.
Treynor’s Ratio = (Rp-Rf)/ βp
Table below shows the calculation of Treynor‘s ratio.
Table 5.30: Calculation of Treynor’s ratio of portfolios
Portfolio Rp Rf βp (%) (Rp-Rf)/ βp Rank

(%) (%)
OPTIMAL
PORTFOLIO 25.72 7.21 0.452 40.95 1
PORTFOLIO#2
(Portfolio with same return as 25.72 7.21 1.172 15.79 2
optimal portfolio)
PORTFOLIO #3
(Portfolio with same risk as 12.21 7.21 0.53 9.43 3
optimal portfolio)
(Source: Secondary data from the tables 5.10, 5.11, 5.17, 5.18, 5.23 and 5.28)
Inference:
Treynor‘s ratio is highest for Sharpe‘s optimal portfolio indicating that the performance of Sharpe‘s
optimal portfolio is superior to that of other portfolios.
5.9.3 Portfolio Evaluation by Using Jensen Measure
Jensen Measure gives return earned by the portfolio above the expected return as mandated by the
Capital Asset Pricing Model (CAPM). A positive value indicates superior performance of the port
folio.
Jensen’s Measure = Rp - E(Rp)

E(Rp) = Rf + βp (Rm - Rf)
Where
E(Rp) = Expected return of portfolio
Rm = Average market return
Rf = Risk free rate of return = (Latest MIBOR rate =7.21)
βp = Beta co-efficient of the portfolio.
The table below shows the calculation of expected return of portfolios.
Table 5.31: Calculation of expected return of portfolios
Portfolio Rf βp Rm Rm - Rf E(Rp)
Optimal Portfolio 7.21 0.452 10.2476 3.0376 8.58

Portfolio#2
(Portfolio with same
7.21 1.172 10.2476 3.0376 10.77
return as optimal
portfolio)
Portfolio #3
(Portfolio with same risk 7.21 0.53 10.2476 3.0376 8.82
(Source: Secondary data from the tables 5.2, 5.10, 5.17, and 5.23)
The table below shows the calculation of Jensen Measure ofportfolios.
Table 5.32: Calculation of Jenson’s measure of portfolios
Portfolio Ri E(Rp) Rp - E(Rp) Rank

PORTFOLIO#1
25.72 8.58 17.14 1
Optimal Portfolio
PORTFOLIO#2
(Portfolio with same return 25.72 10.77 14.95 2
PORTFOLIO #3
(Portfolio with same risk as 12.21 8.82 3.39 3
optimal portfolio)
(Source: Secondary data from the tables 5.2, 5.11, 5.18, 5.28 and 5.31)
Inference:
Jensen Measure is highest for Sharpe‘s optimal portfolio indicating that the performance of Sharpe‘s
optimal portfolio is superior to that of other portfolios.
5.10 CONCLUSION
In this chapter the data collected was analyzed and an optimal portfolio using Sharpe‘s single index
model was constructed. Along with, a portfolio having same return as optimal portfolio and another
portfolio with same risk as optimal portfolio is constructed. The portfolios were evaluated using
Sharpe‘s ratio, Treynor‘s ratio and Jensen Measure.
In the next chapter the finding, Suggestion and conclusion of the study is detailed.
Conclusion
CHAPTER 6
CONCLUSION
6.1 INTRODUCTION
In the previous chapter the data collected were analyzed and optimal portfolio using Sharpe‘s single
index model was constructed. Along with, a portfolio having same return as optimal portfolio and
another portfolio with same risk as optimal portfolio was constructed.
The portfolios were evaluated using Sharpe‘s ratio, Treynor‘s ratio and Jensen Measure and they
were ranked based on those ratios.
In this chapter the finding, Suggestion and conclusion of study is detailed.
6.2 FINDINGS
The study titled ―A study on construction of optimal portfolio of CNX Nifty shares using Sharpe‘s
portfolio single index model‖ has following findings.
6.2.1 Security Analysis

Risk & Return of Securities
Risk

Tech Mahindra has highest risk (1762.49)

Hindustan Uniliver (130.88) has lowest risk.
Return
 Asian Paints has highest return (42.05 %).
 Sesa Sterlite has lowest return (-24.44 %).
Alpha

Mahindra & Mahindra has highest Alpha (45.39).

BHEL has lowest Alpha (-26.53).
Beta

Maruti Suzuki has highest Beta (2.06).

Mahindra &Mahindra has lowest Beta (-1.70).
Systematic & Unsystematic Risk of Securities

Systematic Risk

Axis bank has highest systematic risk (975.06 %).

Hindustan Uniliver has minimum systematic risk (0.02 %).
Unsystematic Risk

Asian Paints has highest unsystematic risk (3317.02).

Dr. Reddy‘s Lab has lowest unsystematic risk (100.77)
6.2.2 Portfolio Construction & Optimization

An optimal portfolio and two other portfolios with different criteria were constructed and their risk
and return has been evaluated. The optimal portfolio had 14 shares with a cut of point of 25.1394.
Two other Portfolios were constructed by using 14 nos. of randomly selected Nifty Shares each such
a way that Portfoilo#2 has same return as that of Optimal Portfolio (25.72 %) and Portfolio #3 had
same risk as that of Optimal Portfolio (72.69%).
Return & Risk


Optimal portfolio has a return of 25.72 % and a risk of 72.69 %.

Portfoilo#2 has same return of 25.72 % but its risk was very high (432.50%).
 Portfolio #3 has a risk of 72.69% (same as optimal portfolio) but its return is very low
(12.21%).
6.2.3 Portfolio Evaluation
Three methods were employed for evaluation of portfolios, i.e., Sharpe‘s Ratio, Treynor‘s ratio and
Jensen Measure.

Sharpe‘s ratio indicated that optimal port folio has highest rank (0.255).

Treynor‘s ratio indicated that the optimal portfolio is the best portfolio (40.95%)

Jenson‘s measure indicated that optimal portfolio is the best portfolio with maximum
extra return (17.14%).
All those evaluation methods proved that optimal portfolio is the best portfolio.
6.3 SUGGESTIONS
Since the equity markets are highly volatile, the investors must strive to maximize return with
minimum risk.
This study has revealed that the Sharpe‘s single index model of portfolio optimization is very simple
and most effective tool for delivering highest risk adjusted return. Hence, investors are advised to
use this financial model to improve the performance of their portfolio and achieve the investment
objective of maximizing return and minimizing risk.
The study can be also extended to include a midcap and small cap stock which offers higher return
than large cap stocks.
Statistical tools such as ‗t- test‘ can be used for proving the superiority of optimal portfolio
constructed using Sharpe‘s single index model.
6.4 CONCLUSION
Since there are thousands of companies listed in the stock market, the equity selection
and portfolio construction is a highly complex task. The study titled “A study on
construction of optimal portfolio of CNX Nifty shares using Sharpe’s portfolio
single index model” was a successful attempt to simplify the task of equity selection, portfolio
construction and portfolio evaluation.
This study gives a practical knowledge of construction of portfolio by considering risk and reward
factors of security market.
BIBLIOGRAPHY
BOOKS
1. Kothari C.R, Research Methodology: Methods and Techniques, New Age International
Pvt.Ltd., New Delhi, 2004.
2. Gupta K Shashi, Gupta Neeti, Financial Management, Kalyani Publishers, Ludhiana, 2015.
3. Dr. Chandra Prasanna, Investment Analysis and Portfolio Management, Tata McGraw- Hill
Publishing Company Limited, 2004.
4. Pandian Punithavathy, Meera E, Machiraju H.R, Investment Management, Vikas

Publishing House PVT LTD, New Delhi, 2013.
5. Kevin.S, Portfolio Management, Printice Hall of India Pvt. Ltd, New Delhi, 2003
MAGAZINES, JOURNALS & NEWS PAPERS
JOURNALS
1. Chauhan . A. Apurva, A study on usage of Sharpe’s single index model in Portfolio
Construction, Global Journal for Research Analysis, 2016
WEBSITES
1. http://www.nseindia.com
2. http://www.bse.com
3. http://www.investopedia.com
4. http:// www.cochinstockexchange.com
5. http://www.fidelity.com
6. http://www.finance.yahoo.com
7. http://www.angelbroking.com

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CHAPTER 1

1.2 STATEMENT OF THE PROBLEM

1.4 OBJECTIVES OF THE STUDY

1.5 RESEARCH METHODOLOGY

This project is based on analytical research design.

Tools for Data Analysis

1.6 CHAPTER LAYOUT

Chapter 6: Summary, Findings and Conclusion.

1.7 LIMITATIONS OF THE STUDY

2.2 STOCK MARKET

2.2.1 History of Stock Market

2.3 STOCK EXCHANGE

2.3.1 Function and the Purpose of Stock Market

2.3.2 Physical and Electronic Exchanges

2. 3.4 Size of the Market

2.3.5 Behaviour of the Stock Market

According to interpretation of the efficient-market hypothesis (EMH), only changes in fundamental

2.3.6 Stock Market Index

2.3.7 Derivative Instruments

2.5.1 The Bombay Stock Exchange

Fig 2.1 Bombay Stock Exchange

2.5.2 Calcutta Stock Exchange

2.5.3 National Stock Exchange of India (NSE)

Fig 2.2 National Stock Exchange

2.5.4 Cochin Stock Exchange Ltd.

Figure 2.3 Cochin Stock Exchange

2.5.6 Inter Connected Stock Exchange (ISE)

3.2 OVERVIEW OF THE COMPANY

• ANGEL BROKING LTD

3.3 MISSION OF THE COMPANY

3.4 VALUES OF THE COMPANY

3.5 STRENGTHS OF THE COMPANY

3.5.2 Strong research and sales teams

3.5.3 Experienced top management

3.5.6 Wide range of financial products and services

Table 3.1: Board of Directors

3.7 AWARDS AND RECOGNITIONS WON BY M/S. ANGEL BROKING

4.2 PORTFOLIO CONSTRUCTION

4.3 APPROACHES TO PORTFOLIO CONSTRUCTION

4.4 TRADITIONAL APPROACH OF PROTFOLIO CONSTRUCTION

4.5 SECURITY ANALYSIS

4.5.1 Fundamental Analysis

 Gross domestic product (GDP)

iii) Power of Buyers

iv) Availability of Substitutes

The intensity of competition tends to increase when an industry is characterized by a number of

4.5.2 Technical Analysis

The generally used technical tools are

4.5.2.1 Dow Theory

Fig 4.2: Trends in stock market

4.2.5.2 Breadth of the market

4.5.2.3 Short selling

4.5.2.4 Moving Averages

Fig 4.3: Moving Averages

4.5.2.6 Relative Strength Index

RSI = 100 - 100/ (1 + RS*)

*Where RS = Average of x days' up closes / Average of x days' down closes.

Fig 4.4: Relative Strength Index

Fig 4.6: Bar Chart

Fig 4.7: Candlestick Chart

d. Point and Figure Charts

Fig 4.8: Point and figure Chart

4.6 PORTFOLIO ANALYSIS