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Secondary objectives
Regular return. Stable income. Appreciation of capital. More liquidity. Safety of investment. Tax benefits.
Portfolio management services helps investors to make a wise choice between alternative investment with pit any post trading hassles this service renders optimum returns to the investors by proper selection of continuous changes of one plan to another plane with in the same scheme, any portfolio management must specify the objectives like maximum returns, and risk capital appreciation, safety etc in their offer.
RISK
Risk is uncertainty of the income / capital appreciations or loss or both. All investments are risky. The higher the risk taken, the higher is the return. But proper management of risk involves the rights choices of investments whose risks are compensating. The total risks of two companies may be different and even lower than the risk of a group of two companies if their companies are offset by each other.
Systematic risks
Systematic risks affected from the entire market are (the problems, raw material availability, tax policy or government policy, inflation risk, interest risk and financial risk). It is managed by the use of Beta of different company shares.
Unsystematic risks
Unsystematic risks are mismanagement, increasing inventory, wrong financial policy, defective marketing etc. this is diversifiable or avoidable because it is possible to eliminate or diversify away this components of risks to a considerable extents by investing in a large portfolio of securities. The unsystematic risk stems from inefficiency magnitude of those factors different from one company to another. 5
RETURNS ON PORTFOLIO
Each security in a portfolio contributes returns in the proportion of its investments in security. Thus the portfolio expected return is the weighted average of the expected return, from each of the securities, with weights representing the proportions share of the security in the total investment. Why does an investor have so many securities in his portfolio? If the security ABC gives the maximum return why not he invests in that security all his funds and thus maximize return? The answer to this questions lie in the investors perception of risk attached to investments, his objectives of income, safety, appreciation, liquidity and hedge against loss of value of money etc. this pattern of investment in different asset categories, types of investment, etc, would all be described under the caption of diversification, which aims at the reduction or even elimination of non-systematic risks and achieve the specific objectives of investors.
RISK ON PORTFOLIO
The expected returns from individual securities carry some degree of risk. Risk on the portfolio is different from the risk on individual securities. The risk is reflected in the variability of the returns from zero to infinity. Risk of the individual assets or a portfolio is measured by the variance of its returns. The expected return depends on the probability of the returns and their weighted contribution to the risk of the portfolio. These are two measures of risk in this context one is the absolute deviation and other standard deviation.
Normally, the higher the risk that the investor takes, the higher is the return. There is, how ever, a risk less return on capital of about 12% which is the bank rate charged by the R.B.I or long term, yielded on government securities at around 13% to 14%. This risk less return refers to lack of variability of return and no uncertainty in the repayment or capital. But other risks such as loss of liquidity due to parting with money etc. may however remain, but are rewarded by the total return on the capital. Risk-return is subject to variation and the objectives of the portfolio manager are to reduce that variability and thus reduce the risky by choosing an appropriate portfolio. Traditional approach advocates that one security holds the better, it is according to the modern approach diversification should not be quantity that should be related to the quality of scripts which leads to quality of portfolio. Experience has shown that beyond the certain securities by adding more securities expensive.
Portfolio managers
Is a person who is in the wake of a contract agreement with a client, advices or directs or undertakes on behalf of the clients, the management or distribution or management of the funds of the clients as the case may be.
Advisory role
Advice new investments, review the existing ones, identification of objectives, recommending high yield securities etc.
account the credit policy, industrial growth, foreign exchange possible change in corporate laws etc.
Financial analysis
He/she should evaluate the financial statement of company in order to understand, their net worth future earnings, prospectus and strength.
Study of industry
He should study the industry to know its future prospects, technical changes etc. required for investment proposal he should also see the problems of the industry.
A portfolio manager in the Indian context has been Brokers (Big brokers) who on the basis of their experience, market trends, Insider trader, helps the limited knowledge persons. The ones who use to manage the funds of portfolio, now being managed by the portfolio of Merchant Banks professionals like MBAs CAs And many financial institutions have entered the market in a big way to manage portfolio for their clients.
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According to SEBI rules it is mandatory for portfolio managers to get them selfs registered. Registered merchant bankers can acts as portfolio managers Investors must look forward, for qualification and performance and ability and research base of the portfolio managers.
The following points must be considered by portfolio managers while analyzing the securities
1. Nature of the Industry and its Product: Long term trends of industries, competition with in, and out side the industry, Technical changes, labor relations, sensitivity, to Trade cycle. 2. Industrial analysis of prospective earnings cash flows, working capital, dividends, etc. 3. Ratio analysis: Ratio such as Debt Equity Ratio, current ratio, net worth, profit earnings ratio, return on Investment are worked out to decide the portfolio. The wise principle of portfolio management suggests that Buy when the market is low or BEARISH, and sell when the market is rising or BULLISH.
Fundamental approach
This approach will be worked Based on intrinsic value of shares
Technical approach
This approach will be worked on Dowjones theory, Random walk theory, etc.
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Capital assets pricing approach (CAPM) it pays more weight age, to risk or portfolio diversification of portfolio.
Diversification of portfolio reduces risk but it should be based on certain assessment such as
Trend analysis based on past share prices. Valuation of intrinsic value of company (trend-market moves are known for their uncertainties they are compared to be high, and low prompts of wave market trends are constituted by these waves it is a pattern of movement based on past.).
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The rate of return and standard deviation are important parameters for finding out whether investment is worthwhile for a person. 5. Markowitz brought out the theory that it was useful insight to find out how the security returns are correlated to each other. By combining the assets in such way that they give the lowest risk maximum returns could be brought out by the investor. 6. From the above it is clear that investor assumes that while making an investment he will combine his investments in such a way that he gets a maximum return and is surrounded by minimum risk. 7. The investor assumes that greater or larger the return that he achieves on his investments, the higher the risk factor that surrounds him. On the contrary when risks are low the return can also be expected to be below. 8. The investor can reduce his risk if he adds investments to his portfolio. 9. An investor should be able to get higher for each level of risk by determining the efficient set of securities.
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i +a i R m + ei Rj = a
Where
R = Expected return on security I i = Intercept of the straight line or alpha co-efficient a i = Slope of straight line or beta co-efficient a Rm = The rate of return on marker index ei = Error team
Corner Portfolio
The entry or exit of a new stock in the portfolio generates a series of corner portfolio. In a one stock portfolio, itself is the corner portfolio. In a two stock portfolio, the minimum attainable risk (variance) and the lowest return would be the corner portfolio. As the member of stocks increases in a portfolio, the corner portfolio would be the one with lowest return and risk combination.
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Where,
i = The expected change in the rate of return on stock I associated with one unit a
changer in the market return. The excess return is the difference between the expected return on the stock and the risk less rate of interest such as the rate offered on the government security or Treasury bill. The excess return to beta ratio measures the additional return on security (excess of the risk less asset return) per unit of systematic risk or non-diversifiable risk. This ratio provides a relationship between potential risk and reward. The steps for finding out the stocks to be included in the optimal portfolio are given below: 1. Finding out the excess return to beta ratio for each stock under consideration. 2. Rank them from the highest to the lowest 3. Proceed to calculate C for all the stocks according to the ranked order using the following formula. Ci = 2 m N ( Ri Rf ) i / 2ei / 1 + 2 N i / 2ei 4. The calculated values of Ci start declining after a particular Ci and that point is taken as the cut-off point and that stock ratio is the cut-off ratio.
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We have seen that diversifiable risk can be eliminated by diversification. The remaining risk portion is the un-diversifiable risk i.e., market risk. As a result, investors are interested in knowing the systematic risk when they search for efficient portfolios. They would like to have assets with low beta coefficient i.e., systematic risk. Investors would opt for high beta coefficient only if they provide high rate of return. The risk were averse nature of the investors is the underlying factor for this behavior. The capital asset pricing theory helps the investors top understand and the risk and return relationship of the securities. It also explains how assets should be priced in the capital market.
Assumptions
1. An individual seller or buyer cannot affect the price of a stock. This assumption is the basic assumption of the perfect competitive market. 2. Investors make their decisions only on the basis of the expected returns, standard deviations and covariances of all pairs of securities. 3. Investors are assumed to have homogenous expectations during the decision making period. 4. The investor can lend or borrow any amount of funs at the risk less rate of interest. The risk less rate of interest is the rate of interest offered for the treasury bills or government securities. 5. Assets are infinitely divisible, according to this assumption, investor could buy and quantity of share i.e., they can even buy ten rupees worth of Reliance Industry shares. 6. There is no transaction cost i.e., no cost involved in buying and selling of stocks. 7. There is no personal income tax. Hence, the investor is indifferent to the form of return either gain or dividend.
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8. Unlimited quantum if short sales are allowed. Any amount of shares an individual can sell short.
The Concept
According to CAPM, all investors hold only the market portfolio and risk less securities. The market portfolio is a portfolio comprised of all stocks in the market. Each asset is held in proportion to its market value to the all risky assets. For example, if Reliance Industry share represents 20% of all risky assets, then the market portfolio of the individual investor contains 20% of Reliance Industry shares. At this stage, the investor has the ability to borrow or lend any amount of money at the risk less rate of interest. The efficient frontier of the investor is given in figure. 19
The figure shows the efficient of the investor. The investor prefers any point between B & C because, with the same level of risk they face on line BA, they are liable to get superior profits. The ABC lines show the investors portfolio of risky assets. The investors can combine risk less asset either by lending or borrowing. This is shown in figure,
The line RfS represent all possible combination of risk less and risky asset. The S portfolio does not represent any risk less asset but the line RfS gives the combination of both. The portfolio along the path RfS is called lending portfolio i.e., some money is invested in the risk less asset or may b deposited in the bank for a fixed rate of interest if it crosses the point S, it becomes borrowing portfolio. Money is borrowed and invested in the risky asset. The straight lines are called Capital Market Line (CML). It gives the desirable set of investment opportunities between risk free and risky investments. The CML represents linear relationship between the required rates of return for efficient portfolio and their standard deviations. E (R p ) = R f + (R m R f ) p m
E(Rp) = Portfolios expected rate of return Rm = Expected return on market portfolio m = Standard deviation of market portfolio
p = Standard deviation of the portfolio
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For a portfolio on the capital market line, the expected rate of return in excess of the risk free rate is in proportion to the standard deviation of the market portfolio. The slope of the line gives the price of the risk. The slope equals the risk premium for the market portfolio Rm Rf divided by the risk or standard deviation of the market portfolio. Thus, the expected return of an efficient portfolio is Expected return = Price of time + (Price of risk X amount of risk) Price of time is the risk free rate of return. Price of risk is the premium amount higher and above the risk free return.
The first term of the equation is nothing but the beta coefficient of the stock. The beta coefficient of the equation of SML is same as the beta of the market (Single index) model. In equilibrium, all efficient and inefficient portfolio lie along the security market line, The SML line helps to determine the expected return for a given security beta. In other words, when betas are given, we can generate expected returns for the given securities. This is explained in figure. If we assume the expected market risk premium to be 8% and the risk free rate of return to be 7%, we can calculate expected return for A, B, C and D securities using the formula. E ( R i ) = Rf + 1 [ E ( R m R f ) ]
because of the errors in the estimate of individual securities betas tending to offset one another in a portfolio.
Various researchers have attempted to find out the validity of the model by calculating beta and realized rate of return. They attempted to test (1) whether the intercept is equal to Rf i.e., risk free rate of interest or the interest for treasury bills (2) whether the line is linear and pass through the beta = 1 being the required rate of return of the market. In general, the studies have showed the following results. 1. The studies generally showed a significant positive relationship between the expected return and the systematic risk. But the slope of the relationship is usually less than that of predicted by the CAPM. 2. The risk and return relationship appears to be linear. Empirical studies give no evidence of significant curvature in the risk/return relationship. 3. The attempt of the researchers to access the relative importance of the market and company risk has yielded results. The CAPM theory implies that unsystematic risk is not relevant, but unsystematic and systematic risks are positively related to security returns. Higher returns are needed to compensate both the risks. Most of the observed relationship reflects statistical problems rather than the true nature of capital market. 4. According to Richard Roll, the ambiguity of the market portfolio leaves the CAPM untreatable. The practice of using indices, as proxies is loaded with problems. Different indices yield different betas for the same security. 5. If the CAPM were completely valid, it should apply to all financial assets including bonds. But, when bonds are introduced into the analysis, they do not all on the security market line.
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The Assumptions
1. The investors have homogeneous expectations. 2. The investor are risk averse and utility maxi misers 3. Perfect competition prevails in the market and there is no transaction cost. The APT theory does not assume: a) Single period investment horizon b) No taxes c) Investors can borrow and lend at risk free rate of interest and d) The selection of the portfolio is based on the mean and variance analysis. These assumptions are present in CAPM theory.
Arbitrage portfolio
According to the APT theory an investor tries to find out the possibility to increase returns form his portfolio without increasing the funds in the portfolio. He also likes to keep the risk at the same level. For example, the investor holds A, B and C securities and he wants to change in proportion of securities can be denoted by X, X b and X C . The increase in the investment in security A could be carried out only if he reduces the proportion of investment either in B or C because it has already
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stated that the investor tries to earn more income without increasing his financial commitment. Thus, arbitrage portfolio. If X indicates the change in proportion,
X A + X B + X C = 0
The factor sensitivity indicates the responsiveness of a securitys return to a particular factor. The sensitiveness of securities to any factor is the weighted average of the sensitivities of the securities, weighted being the changes made in the proportion. For example, bA, bB and bC are sensitive in an arbitrage portfolio the sensitive become zero.
b A X A + b B X B + b C X C = 0
APT is more general and less restrictive than CAPM, in APT, the investor has no need to hold the market portfolio because it does not make use of the market portfolio concept. The portfolios are constructed on the basis of the factors eliminate arbitraged profits. APT is based on the law of one price to hold for all possible portfolio combinations. The APT model takes on to account of the impact of numerous factors on the security. The | Macro economic factors are taken into consideration and it is closer to reality then CAPM. The market portfolio is well defined conceptually. In APT model, factors are not well specified. Hence, the investor finds it difficult to establish equilibrium relationship. The well defined market portfolio is a significant advantage of the CAPM leading to the wide usage of the model in the stock market. The factors that have impact on one group of securities may not affect other group securities. There is a lack of constituency in the measurement of the APT model. Further, the influences of the factors are not independent of each other. It may be difficult to identify the influence
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corresponds exactly to each factor. Apart from this, not all variable that exerts influence on factor measurable.
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to regulate trading in securities. Under this Act, the Bombay stock exchange was recognized in 1927 and Ahmadabad in 1937 During the war boom, a number of stock exchanges were organized even in Bombay, Ahmadabad and other centers, but they were not recognized. Soon after it became a central subject, central legislation was proposed and a committees and public discussion, the securities contracts (regulation) Act became law in 1956.
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The Stock Exchanges in India have an important role to play in the building of a real shareholders democracy. To protect the interest of the investing public, the authorities of the Stock Exchanges have been increasingly subjecting not only its members to a high degree of discipline, but also those who use its facilities-Joint Stock Companies and other bodies in whose stocks and shares it deals. The activities of the Stock Exchange are governed by a recognized code of conduct apart from statutory regulations. Investors both actual and potential are provided, through the daily Stock Exchange quotations. The job of the Stock Exchange and its members is to satisfy the need of market for investments to bring the buyers and sellers of investments together, and to make the Exchange of Stock between them as simple and fair a process as possible.
Securities and Exchange Board of India (SEBI) has been setup in Bombay by the Government to oversee the orderly development of Stock Exchange in the country. All companies wishing to raise capital from the public are required to list their securities on at least one Stock Exchange. Thus, all ordinary shares, Preference Shares and Debentures of publicly held companies are listed in one or more Stock Exchanges. Stock Exchanges also facilitate trading in the securities of the public sector companies as well as Government Securities.
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Securities and Exchange Board of India (SEBI) regulatory reach has been extended to more areas and there is a considerable change in the capital market. SEBI's annual report for 1997-98 has stated that through out its six-year existence as a statutory body, it has sought to balance the twin objectives of investor protection and market development. It has formulated new rules and crafted regulations to foster development. Monitoring and surveillance was put in place in the Stock Exchanges in 1996-97 and strengthened in 1997-98. SEBI was set up as an autonomous regulatory authority by the government of India in 1988 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto. It is empowered by two acts namely the SEBI Act, 1992 and the securities contract (regulation) Act, 1956 to perform the function of protecting investors rights and regulating the capital markets.
OBJECTIVES OF SEBI
The promulgation of the SEBI ordinance in the parliament gave statutory status to SEBI in 1992. According to the preamble of the SEBI, the three main objectives are: To protect the interests of the investors in securities. To promote the development of securities market. To regulate the securities market.
FUNCTIONS OF SEBI
Regulating the business in Stock Exchange and any other securities market. Registering and regulating the working of Stock Brokers, Sub-Brokers, Share Transfer Agents, Bankers to the issue, Trustees to trust deeds, Registrars to an issue, Merchant Bankers, Underwriters, Portfolio Managers, Investment Advisers and such other Intermediaries who may be associated with securities market in any manner. 32
Registering and regulating the working of collective investment schemes including Mutual Funds. Promoting and regulating self-regulatory organizations. Prohibiting fraudulent and unfair trade practices in the securities market. Promoting investor's education and training of intermediaries in securities market. Prohibiting Insiders Trading in securities. Regulating substantial acquisition of shares and take-over of companies. Calling for information, understanding inspection, conducting enquiries and audits of the Stock Exchanges, Intermediaries and Self-Regulatory organizations in the securities market.
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The Bombay Stock Exchange, while providing an efficient and transparent market for trading in securities, upholds the interests of the investors and ensures redressal of their grievances, whether against the companies or its own member-brokers. It also strives to educate and enlighten the investors by making available necessary informative inputs and conducting investor education programmes A Governing Board comprising of 9 elected Directors (one third of them retire every year by rotation), Two SEBI Nominees, Seven Public representatives and an Executive Director is the Apex Body, which decides the policies and regulates the affairs of the Bombay Stock Exchange The Executive Director as the Chief Executive Officer is responsible for the day-to-day administration of the Bombay Stock Exchange.
SECURITIES TRADED
The securities traded in the BSE are classified into three groups namely, specified shares of 'A' group and non-specified securities. The latter is sub-divided into 'B1' and 'B' groups. 'A' group contains the companies with large outstanding shares, good track record and large volumes of business in the secondary market. Settlements of all the shares are carried out through the Clearing House. Year Number of Listed Market Companies Capitalization (In Crores) Annual Turnover Average Daily (In Crores) Turnover (Rs. In Billion)
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The National Stock Exchange was incorporated in November, 1992 with an equity capital of Rs. 25crores. The International Securities Consultancy (ISC) of Hong Kong has helped in setting up National Stock Exchange. ISC has prepared the detailed business plans and installation of hardware and software systems. The promotions for National Stock Exchange were Financial Institutions, Insurances Companies, Banks and SEBI Capital Market Limited, Infrastructure Leasing and Financial Services Limited and Stock Holding Corporation Limited. trading facilities to investors. National Stock Exchange is not an exchange in the traditional sense where brokers own and manage the exchange. A two tier administrative set up involving a company board and a governing board of the exchange is envisaged. National Stock Exchange is a national market for shares Public Sector Units Bonds, Debentures and Government The National Stock Exchange (NSE) of India became operational in the capital market segment on 3rd, November 1994 in Mumbai. The genesis of the NSE lies in the recommendations of the Pherwani Committee (1991). Apart from NSE, it had recommended for the establishment of National Stock Market System also. Committee pointed out six major defects in the Indian Stock Market. It has been set up to strengthen the move towards professionalisation of the capital market as well as provide nation wide securities
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NSE-NIFTY
The National Stock Exchange on April 22, 1996 launched a new Equity Index. The NSE-50. The new Index which replaces the existing NSE-100 Index, is expected to serve as an appropriate Index for the new segment of futures and options. "Nifty" means National Index for Fifty Stock. The NSE-50 comprises 50 companies that represent 20 broad Industry groups with an aggregate market capitalization of around Rs.1,70,000 crores. All companies included in the Index have a market capitalization in excess of Rs.500crores each and should have traded for 85% of trading days at an impact cost of less than 1.5%. The base period for the index is the close of prices on Nov 3, 1995, which makes one year of completion of operation of NSE's capital market segment. The base value of the Index has been set at 1000.
NSE-MIDCAP INDEX
The National Stock Exchange Midcap Index or the Junior Nifty comprises 50 stocks that represents 21 board Industry groups and will provide proper representation of the madcap segment of the Indian Capital Market. All stocks in the Index should to establish a nation wide trading facility fro equities, debt instruments and communication network. To provide a fair, efficient and transparent securities market to investors using an electronic communication network. To enable shorter settlement cycle and book entry settlement system. hybrids. To ensure equal access to investors all over the country through appropriate
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Portfolio analysis believes in the maximization of return through a combination of securities. The modern portfolio theory discusses the relationship between different securities and then draws inter-relationship of risks between them. It is not necessary to achieve success only by trying to get all securities of minimum risk. The theory states that by combining a security of low risk with another security of high risk, success can be achieved by an investor in making a choice of investment outlets.
Average Return =
R = Ri / N
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Where R = Average Return Ri = Return of the Security I for the year T N = Number of Years Based on above average return of securities of Ranbaxy is earning higher return and ITC is earning lowest return. Other securities are earning medium rage returns such are Wipro, ICICI and Reliance.
FIGURE NO 1
S. No. 1 2 3 4 5
S.D = 1/ n 1(R R ) 2
T=1 Based on above calculations Standard deviations like that Ranbaxy is highest and ITC is lower, where other securities are having medium standard deviation.
FIGURE NO 2
Wipro 1
ICICI 0.3787 1
Formula
Correlation Co-efficient (nab ) = COV (ab) / a.b Where COV (ab) = 1/ n 1(RA RA )(RB RB
Formula
Weight of a (Wa) = Weight of b (Wb) =
b( b naba) /( a 2 + b 2 ) ( 2nab.a.b)
1 Wa
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S.NO 1 2 3 4 5 6 7 8 9 10
COMBINATION Wipro & ITC Wipro & Ranbaxy Wipro & ICICI Wipro & Reliance ITC & Ranbaxy ITC & ICICI ITC & Reliance Ranbaxy & ICICI Ranbaxy & Reliance ICICI & Reliance
PORTFOLIO RISK 33.10 109.27 56.84 58.54 11.69 33.47 23.82 69.76 23.62 63.09
Formula:
p = a 2 Wa 2 + b 2 Wb 2 + 2.nab.a.b.WaWb
Where:
a = S tan drard deviation of Securitiy a b = S tan drad deviation of Security b Wa = Weight of Security a Wb = Weight of Security b nab = Correlation Coeffient between Secutiry a & b p = Portfolio Risk
S.NO 1 2 3 4 5 6 7 8 9 10
COMBINATION Wipro & ITC Wipro & Ranbaxy Wipro & ICICI Wipro & Reliance ITC & Ranbaxy ITC & ICICI ITC & Reliance Ranbaxy & ICICI Ranbaxy & Reliance ICICI & Reliance
PORTFOLIO RETURN -2.1632 -17.045 4.648 4.984 -7.418 -1.340 -5.816 6.686 16.291 9.703
Formula: Rp = (Ra X Wa) + (Rb X Wb) Where: Ra = Average Return of Security a Rb = Average Return of Security b Wa = Weight of Security a Wb = Weight of Security b Rp = Portfolio Return
S.NO 1 2 3 4 5 6 7 8 9 10
COMBINATION Wipro & ITC Wipro & Ranbaxy Wipro & ICICI Wipro & Reliance ITC & Ranbaxy ITC & ICICI ITC & Reliance Ranbaxy & ICICI Ranbaxy & Reliance ICICI & Reliance
PORTFOLIO RISK 33.10 109.27 56.84 58.54 11.69 33.47 23.82 69.76 23.62 63.09
Portfolio Return -2.1632 -17.045 4.648 4.984 -7.418 -1.340 -5.816 6.686 16.291 9.703
FIGURE NO 3
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Portfolio Section
Portfolio analysis provides the input for next phase in portfolio management, which is portfolio selection. The proper goal of portfolio construction is to generate a portfolio that provides the highest returns at a given level of risk. The inputs from portfolio analysis can be used to identify the set of efficient portfolios. From this the optimal portfolio must be selected for investment. Harry Markowitz portfolio theory provides both the conceptual framework and analytical tools for determining the optimal portfolio in a disciplined and objective way. So, out of the various combinations (related to five companies), the optimal portfolio is Ranbaxy & Reliance, as this portfolio has minimum risk of 23.62% with maximum return of 16.291%. Hence, I can say that it is better to invest in these portfolios.
Portfolio revision
Economy and financial markets are dynamic, change take place almost daily. As time passes securities which were once attractive may lease to be so. New securities with promise of high return and low risk may emerge. The investor now has to revise his portfolio in the light of developments in the market. This leads to purchase of some new securities and sale of some of the existing securities and their proportion in the portfolio changes as a result of the revision. The revision has to be scientifically and objectively so as to ensure the optimality of the revised portfolio, it important as portfolio analysis and selection.
Portfolio Evaluation The objective of constructing a portfolio and revising I t periodically is to earn maximum returns with minimum risk. Portfolio evaluation is the process, which is concerned with assessing the performance of the portfolio over a selected period of time in terms of returns and risk. This involves quantities measurement of actual return realized. Alternative measures of performance evaluation have been developed by investor and portfolio managers for their use. It provides a mechanism for identifying weakness in the investment process and improving them. The portfolio management process is an on going process to portfolio construction, continues with portfolio revision and evaluation. The evaluation provides the necessary feedback for better 46
designing of portfolio the next time and around. Superior performance is achieved thorough continual refinement of portfolio management skills.
WIPRO
Year 2006-07 2007-08 2008-09 2009-10 2010-11 Opening Share price (P0) 538.55 571.60 488.75 330.85 671.50 Closing Share price (P1) 559.40 432.10 245.90 706.95 441.40 (P1 P0) 20.85 -139.50 -242.85 376.10 -230.10 Total Return (P1 P0)/ P0*100 3.87 -24.40 -49.69 113.67 -34.27 9.18
ICICI
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RELIANCE
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49
RANBAXY
Year 2006-07 2007-08 2008-09 2009-10 2010-11 Opening Share price (P0) 472.50 371.95 479.75 166.00 443.30 Closing Share price (P1) 351.90 438.45 165.70 475.40 452.20 (P1 P0) -120.60 66.50 -314.05 309.40 8.90 Total Return (P1-P0)/ P0*100 -25.52 17.88 -65.46 186.38 2.01 115.29
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20062.03 07 -26.24 2007-51.53 08 111.83 2008-36.11 09 200910 201011 (R) = 9.18 ( R R )2 17157.88 Average Return = (R)/N = 9.18/5 = 1.84 Variance = 1/N 1 ( R R )2 = 1/5 1 (17157.88) = 4289.47 Standard Deviation = 4289.47 = 65.49
ICICI
Year Return (R) Avg. Rtn. ( R ) 8.48 8.48 8.48 44.20 8.48 -11.13 8.48 -96.27 98.86 6.76
RR
200635.72 07 -19.61 2007-104.75 08 90.38 2008-1.72 09 200910 201011 (R) = 42.42 ( R R )2 20798.61 Average Return = (R)/N = 42.42/5 = 8.48 Variance = 1/N 1 ( R R )2 = 1/5 1 (20798.61) = 5199.65 Standard Deviation = 5199.65 = 72.11
RELIANCE
Year 2006Return (R) Avg. Rtn. ( R ) -19.70 11.76
RR
-31.46 52
( R R )2 989.73
07 11.76 133.62 200711.76 -80.72 08 11.76 31.95 145.38 200811.76 -58.41 -68.96 09 43.71 2009-46.65 10 201011 (R) = 58.78 ( R R )2 Average Return = (R)/N = 58.78/5 = 11.76
29792.28
RANBAXY
Year 200607 200708 200809 200910 201011 (R) = Return (R) Avg. Rtn. ( R ) 23.06 23.06 23.06 -25.52 23.06 17.88 23.06 -65.46 186.38 2.01
RR
115.29
( R R )2 37339.16
Average Return = (R)/N = 115.29/5 = 23.06 Variance = 1/N 1 ( R R )2 = 1/5 1 (37339.16) = 9334.79 Standard Deviation = 9334.79 = 96.62
ITC
Year 200607 200708 2008Return (R) Avg. Rtn. ( R ) -25.81 -1.76 28.86 -1.76 -15.94 -1.76 39.25 -1.76 -35.15 -1.76
RR
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-8.79
( R R )2 4513.76
Average Return = (R)/N = -8.79/5 = -1.76 Variance = 1/N 1 ( R R )2 = 1/5 1 (4513.76) = 1128.44 Standard Deviation = 1128.44 = 33.59
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(RA RA )(RB RB )
-48.82 -803.47 730.69 4586.15 1205.71
(RA RA )(RB RB ) ( )(
5670.26
a = 65.49
b = 33.59
2.
(RA RA )(RB RB )
-98.62 135.92 4561.43 18264.07 760.12
(RA RA )(RB RB ) ( )(
23622.92
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= 1/5-1(23622.92) = 5905.73
a = 65.49
b = 96.62
3.
(RA RA )(RB RB )
72.51 514.56 5397.76 1107.19 62.11
(RA RA )(RB RB ) ( )(
7154.13
a = 65.49
b = 72.11
4.
(RA RA )(RB RB )
09 200910 201011
(RA RA )(RB RB ) ( )(
6271.60
a = 65.49
b = 86.30
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5.
(RA RA )(RB RB )
1168.35 -158.61 1255.21 6697.75 702.86
(RA RA )(RB RB ) ( )(
9665.56
a = 33.59
b = 96.62
6.
(RA RA )(RB RB )
-859.07 -600.46 1485.35 3706.48 57.43
-24.0 5 30.62 -14.18 41.01 -33.3 9 35.72 -19.61 -104.75 90.38 -1.72
(RA RA )(RB RB ) ( )(
3789.73
58
a = 33.59
b = 72.11
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7.
(RA RA )(RB RB )
756.61 4091.44 1144.61 1310.27 1950.31
-24.0 5 30.62 -14.18 41.01 -33.3 9 -31.46 133.62 -80.72 31.95 -58.41
(RA RA )(RB RB ) ( )(
9253.24
a = 33.59
b = 86.30
8.
(RA RA )(RB RB )
-1735.28 101.57 9272.47 14760.86 36.21
(RA RA )(RB RB ) ( )(
22435.83
60
a = 96.62
b = 72.11
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9.
(RA RA )(RB RB )
1528.33 -692.15 7145.33 5218.07 1229.53
(RA RA )(RB RB ) ( )(
14429.11
a = 96.62
b = 86.30
10.
(RA RA )(RB RB )
-1123.75 -2620.29 8455.42 2887.64 100.46
(RA RA )(RB RB ) ( )(
7699.48
62
a = 72.11
b = 86.30
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Where, Xa = WIPRO, Xb = ICICI Xa = 72.11(72.11 (0.3787)65.49)/65.492+72.112-(2*0.3787*65.49*72.11) = 3411.44/5911.98 = 0.5770 Xb = 1 Xa = 1 0.5770 = 0.423 Xa = 57.7%, Xb = 42.3%
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65
= 1095.88 = 33.10
= 11941.65 = 109.27
= 3231.31 = 56.84
66
= 3428.04 = 58.54
= 136.87 = 11.69
= 1120.90 = 33.47
= 567.82 = 23.82
p = 96.622*-0.1232+72.112*1.1232+2(0.8050*96.62*72.11*-0.123*1.123)
= 4867.01 = 69.76
= 557.90 = 23.62
10.ICICI & RELIANCE a = 72.11, b = 86.30 , Wa = 0.627, Wb = 0.373, nab = 0.3093 p = 72.112*0.6272+86.302*0.3732+2(0.3093*72.11*86.30*0.627*0.373) = 3980.71 = 63.09
Where,
Ra = Average Return of Security a Rb = Average Return of Security b Wa = Weight of Security a Wb = Weight of Security b Rp = Portfolio Return Portfolios WIPRO & ITC WIPRO & RANBAXY WIPRO & ICICI WIPRO & RELIANCE ITC & RANBAXY ITC & ICICI ITC & RELIANCE RANBAXY & ICICI RANBAXY & RELIANCE ICICI & RELIANCE Ra 1.84 1.84 1.84 1.84 -1.76 -1.76 -1.76 23.0 6 23.0 6 8.48 Wa 0.1120 1.89 0.577 0.683 1.228 0.959 1.300 -0.123 0.401 0.627 Rb -1.76 23.0 6 8.48 11.7 6 23.0 6 8.48 11.7 6 8.48 11.7 6 11.7 6 Wb 1.112 0 -0.89 0.423 0.317 -0.228 0.041 -0.30 1.123 0.599 0.373 Rp= (Ra*Wa)+(Rb*Wb) -2.1632 -17.045 4.648 4.984 -7.418 -1.340 -5.816 6.686 16.291 9.703
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FINDINGS & CONCLUSION FOR TWO ASSETS PORTFOLIOS 1. WIPRO & ITC In this combination, as per the calculations and the study, WIPRO bears a proportion of -0.1120and where as ITC bears a proportion of 1.1120 The standard deviation of two companies is 65.49 and 33.59 respectively. The companies whose standard deviation is lesser is considered to be less risky. Therefore, it is advisable for the investors to invest in ITC which is lesser risky when compared to WIPRO The combined portfolio risk of the companies is 33.10. 2. WIPRO & RANBAXY According to this combination, the portfolio weights of WIPRO & RANBAXY are 1.89 and -0.89 respectively. The standard deviation of WIPRO is 65.49 where as RANBAXY is 96.62 so, if any investor wants to invest his money or fund in this portfolio it is suggested that he should invest his large portion of fund in WIPRO and remaining part in RANBAXY. The portfolio risk of two companies is 109.27 which suggests the investor to go for portfolio investment rather than individual investment. 3. WIPRO & ICICI In this kind of portfolio, the proportion of WIPRO is 0.577 and ICICI is 0.423. The standard deviation of WIPRO is 65.49 where as the standard deviation of ICICI is 72.11. it is advisable for the investor to invest his major proportion in WIPRO because it is less risky and more profitable. The risk of portfolio is 56.84 which reduces the risk of individual stocks.
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4. WIPRO & RELIANCE Investors have another alternative with this combination. The proportion of investments for WIPRO is 0.683 and for RELIANCE is 0.317. The standard deviation of WIPRO is 65.49 where as the standard deviation of RELIANCE is 86.30. In comparison of standard deviation, it is clear that WIPRO bears a lesser risk compared to RELIANCE. The combined portfolio risk is 58.54. 5. ITC & RANBAXY Here in this combination, the proportional weight of ITC is 1.228 and RANBAXY is -0.228. The standard deviation of ITC is 33.59 and standard deviation of RANBAXY is 96.62. It is better for the investor to invest in ITC to earn higher returns as it is lesser risky. The portfolio risk of two companies is 11.69which reduces the risk instead of investing in individual companies. 6 ITC & ICICI
The combination of ITC and ICICI gives the proportion of investment as 0.959 and 0.041. The standard deviation of ITC is 33.59 and the standard deviation of ICICI is 72.11. The standard deviation of ITC is less which tells us that it is lesser risky when compared to ICICI. The portfolio risk of ITC and ICICI is 33.47 it reduces the risk of the investor and gets higher returns if he invests in portfolio.
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7. ITC & RELIANCE In this combination, ITCS proportional weight is 1.300 and RELIANCES proportional weight is -0.30. the standard deviation of ITC is 33.59 and the standard deviation of RELIANCE is 86.30. there fore ITC is lesser risky.The proportional risk is 23.82. 8. RANBAXY & ICICI Investors have another alternative with this combination. The proportion of investment for RANBAXY is -0.123 and for ICICI is 1.123. The standard deviation of RANBAXY is 96.62 and the standard deviation of ICICI is 72.11. The portfolio risk is 69.76. 9. RANBAXY & RELIANCE The combination of RANBAXY and RELIANCE gives the proportion of investment as 0.401 and 0.599. The standard deviation of RANBAXY is 96.62 and the standard deviation of RELIANCE is 86.30. The standard deviation of RELIANCE is less which tells us that it is lesser risky when compared to RANBAXY. The portfolio risk of RANBAXY and RELIANCE is 23.62 it reduces the risk of the investor and gets higher returns if he invests in portfolio 10. ICICI & RELIANCE The combination of ICICI and RELIANCE gives the proportion of investment as 0.627 and 0.373. The standard deviation of ICICI is 72.11 and the standard deviation of RELIANCE is 86.30. The standard deviation of ICICI is less which tells us that it is lesser risky when compared to RELIANCE. The portfolio risk of ICICI and RELIANCE is 63.09 it reduces the risk of the investor and gets higher returns if he invests in portfolio
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CHAPTER 7 SUGGESIONS
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SUGGESTION
Before investing in shares, should look at type of shares, you want to buy and the way in which you want to deal on the stock market. Three main routes for investing in shares Invest your capital in a single company Invest your capital in a number of different companies, a portfolio of shares. Invest indirectly and spread your risk through collective investment such as investment trust and unit trust The investor is able to know the risk and return of the shares by using the analysis. The investor who takes high risk involves taking of high returns. The investor who will not take risk involves taking of less returns. The investor to be a moderate person involves taking of optimum risk or return. A small investor can maintain a portfolio with diversified stocks rather than investing in a few stocks, which he feels are good. The investor should include all those securities, which are undervalued in their portfolio, and remove those securities that are overvalued. The risk and return of all securities and individual a desired combination in his portfolio. This can be done using CAPM and Markowitz model. The investor can have a complete idea about the performance of the company by analyzing the financial ratios and will be able to calculate its intrinsic worth.
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CHAPTER 8 BIBLIOGRAPHY
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BIBLIOGRAPHY Books
DONALD FISHER & RONALD J.JORDON, SECURITIES ANALYSIS V.K. BHALLA, INVESTMENTS MANAGEMENT -S.CHAND PUBLICATIONS PORTFOLIO MANAGEMENT BY KEVIN V.A. AVADHANI, INVESTMENT MANAGEMENT. SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT - PUNITHAVATHY PANDIAN AND PROTFOLIO MANAGEMENT, 6TH EDITION.
WEBSITES
http://www.nseindia.com http://www.bseindia.com http://www.sharekhan.com http://www.motilaloswal.com http://www.kotaksecurities.com http://www.religare.com http://www.investopedia.com http://www.google.com
NEWS PAPERS ECONOMIC TIMES BUSINESS LINE MY project was completed under guidance of Mrs.lalita kumara.
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