PROJECT REPORT

ON

“AN INSIGHT INTO PORTFOLIO MANAGEMENT WITH

RELEVANCE TO CUSTOMER EXPECTATIONS”

AT
INDIA INFOLINE LTD

Submitted to Siva Sivani Institute of Management

In the partial fulfillment for the Award of the Degree of
POST GRADUATION DIPLOMA IN MANAGEMENT
(Banking Insurance and Finance)

Submitted by
B. NITHIN
(Roll No: B2-34)
SIVA SIVANI INSTITUTE OF MANAGEMENT
Kompally, Hyderabad.
(2008-2010).
 TABLE OF CONTENTS
Chapter 1
 Introduction
 Introduction about portfolio management
 Objectives of the study
 Research Methodology
 Limitations of the study
Chapter 2
 Industry Profile
 Company profile
 Department details
Chapter 3
 Review of articles

Chapter 4
 Portfolio Management & Investment Decision
 Introduction to Portfolio Management
 Objectives of Portfolio Management
 Need for Portfolio Management
 Elements of Portfolio Management
 Return on Portfolio Management
 Portfolio Risk
 Risk-Return analysis
 Investment Decision
 Investment objectives
 Guidelines for better Investment
Chapter 5
 Analysis on few securities
 Calculated Average and Standard Deviation
 Analysis on the performance of the securities
 Calculation of Correlation Co-efficient
Chapter 6
 Case lets

Chapter 7
 Conclusions & Suggestions
 Findings
 Suggestions

Chapter 8
 Annexure

Chapter 9
 Bibliography.
 DECLARATION

I hereby declare that the project work entitled “AN INSIGHT

INTO PORTFOLIO MANAGEMENT WITH RELEVANCE TO
CUSTOMER EXPECTATION” at INDIA INFOLINE LTD, HYDERABAD.
This dissertation is being submitted to SIVA SIVANI INSTITUTE OF
MANAGEMENT for the partial fulfillment of POST GRADUATION
DIPLOMA IN MANAGEMENT (Banking Insurance and Finance) during the
year 2009.

B.NITHIN
 ACKNOWLEDGEMENT

I take this opportunity to express my deep and sincere gratitude to the management

of INDIA INFOLINE LTD for their gesture of allowing me to undertake this

project and its various employees who lent their hand towards the completion of this

study.

I thank Mr. MURALIDHAR PRASAD, Assistant Professor (Finance) for his

valuable guidance at every stage.

I am particularly indebted to Mr. VENKATESHWAR RAO, (Executive Vice

President) for allowing me to carry out my project work in the organization and

Mr.B.NAGESHWAR RAO guide for this project and Mr.VISHWANATH for

helping me to complete this project work.

(B. NITHIN).
CHAPTER 1
 INTRODUCTION OF THE STUDY

Very broadly, the investment process consists of two tasks. The

first task is security analysis which focuses on seeking the risk and return
characteristics of the available investment alternatives. The second task is
portfolio selection which involves choosing the best possible portfolio from the
set of feasible portfolio.

Portfolio theory originally was proposed by Harry Markowitz in

1950s, was the first formal attempt to quantify the risk of a portfolio and
develop a methodology for determining the optimal portfolio. Prior to the
development of the theory, investors dealt with the concepts of risk and return
somewhat loosely. Intuitively smart investors knew the benefit of diversification
which is reflected in the traditional adage “Do not put all your eggs in one
basket”. Henry Markowitz was the first person to show quantitatively why and
how diversification reduces risk. In recognition of his seminal contributions in
this field he was awarded the Nobel Prize in Economics in 1990.

This present study focuses how investors can construct the best
possible portfolio with the help of efficient diversification.

OBJECTIVES OF THE STUDY:

 Focused study on Portfolio Management.

 To clearly identify the objective of the portfolio and constraints of

the client.

 To help the client to design effective portfolio.

 To clearly define the construction of portfolio process.

 To take decision regarding risk and return of the portfolio

constructed.
  To verify whether the objectives of the client are met.

RESEARCH METHODOLOGY:
PRIMARY DATA
 Data collected from brokers and members of India Infoline Ltd.
 Data collected through questionnaires.

 Data collected through telephonic conversation.

SECONDARY DATA
 Data collected from various books.
 Data collected from newspapers and internet.

LIMITATIONS OF THE STUDY:

 Portfolio management being a vast subject, detailed study about the topic
was not possible because of the limited size of the project.

 In the present study amount invested to be diversified is minimal.

 As market is too volatile, predictions may not be perfect.



CHAPTER 2
 INDUSTRY PROFILE

The Indian broking industry is one of the oldest trading industries that have
been around even before the establishment of the BSE in 1875. Despite passing
through a number of changes in the post liberalisation period, the industry has
found its way towards sustainable growth.

The product offerings of brokerage firms today go much beyond the traditional
trading of equities. A typical brokerage firm today offers trading in equities and
derivatives online, most probably commodities futures, exchange traded funds,
distributes mutual funds and insurance and also offers personal loans for
housing, consumptions and other related loans, offers portfolio management
services, and some even go to the extent of creating niche services such as a
brokerage firm offering art advisory services. In the background of growing
opportunities for Investors to invest in India as also abroad, the range of
products and services will widen further. In the offing will be interesting
opportunities that might arise in the exchange enabled corporate bond trading,
soon after its commencement and futures trading that might be introduced in the
near future in the areas of interest rates and Indian currency.

Indian brokerage industry is highly fragmented. Numerous small firms operate

in this space. Given the growing importance of technology in operations and
increasing emphasis on regulatory compliance, smaller firms might find it
constrained to make right type of investments that will help in business growth
and promotion of investor interests.

The way the brokerage industry is run and the manner in which several of them
pursued growth and development attracted foreign financial institutions and
investment banks to buy stakes in domestic brokerage firms, paving the way for
stronger brokerage entities and possible scope for consolidation in the future.
Foreign firms picked up stake in some of the leading brokerage firms, which
might lead to creating of greater interest in investing in brokerage firms by
entities in India and abroad.

COMPANY PROFILE

India info line was founded in 1995 by group of professionals with impeccable
educational qualification and professional credentials. Its intuitional investors
include Intel capital (world’s leading technology company), CDC (promoted by
UK govt), ICICI, TDA and Reeshanar.
INDIA INFOLINE group offers the in tire gamut of investment products
including stock broking, Commodities broking, Mutual Funds, Fixed Deposits,
GOI Relief Bonds, Post office saving and life insurance. India Infoline is the
leading corporate agent of ICICI Prudential Life Insurance Company, which is
India’s No.1 private sector life insurance company.
www.indiainfoline.com has been the only Indian website to have been listed by
none other Forbes in its ‘Best of the Web’ survey of global website, not just
once but three times in a row and counting. ’A’ must read for investors in south
Asia is how they choose to describe India Infoline. It has been rated as No.1 in
the category of Business News in Asia by Alexia rating.
Stock and commodities broking is offered under the trade name 5paisa. India
Infoline Commodities Pvt. Ltd. A wholly owned subsidiary of India Infoline
Ltd., holds member ship of MCX. Com The Company has a network of 976
business locations (branches and sub-brokers) spread across 365 cities and
towns. It has more than 800,000 customers.
COMPETETORS OF TARNAKA BRANCH
• Share khan

• Religare

• Karvy

• India bulls

• Appollo sindhoori

Customers of tarnaka branch

• HNI’S whose investment ranging from Rs. 100000 to Rs. 400000.

• Number of customers increased to 1500.

• Different classes of customers are at present utilizing the services

of the company.

Products offered by India Infoline Ltd

The India Info line Pvt ltd offers the following products.
 E-broking
 Distribution
 Insurance

 E-broking:

• Equities

• Derivatives

• Commodities.
  Distribution:

• Mutual funds

• Govt of India Bonds

• Fixed Deposits.

 Insurance:

• Life insurance policies.

• Corporate sector of ICICI.

DEPARTMENT DETAILS

India Infoline is structured into three departments to provide services to its

customers.

 Sales team.
 Operations team
 Customer care team.

SALES TEAM:
OPERATIONS TEAM

Operations team includes:

• Demat Activation.
• Dealers.
• Advisors.
• Team leaders under whom dealers work.

CUSTOMER CARE TEAM

Customer care team resolves the queries of the customers.

CHAPTER 3
 Brief outline of review of literature

As a part of my study, I referred the following articles:

 S. P. Bansal, Portfolio Management Approach – The EPG

Approach, Finance India.

This article states the method of preparing portfolio in most efficient securities
to be included in the portfolio by determining the weights or proportion of each
security. The article mainly based on beta value of each security and portfolio.

 Marker Kramer, How to Control Excess Volatility in your

Portfolio.

Another article written by Mark Kramer, states the qualities needed to maintain
portfolio like patience, stepping aside to avoid the destructive storms, proper
asset allocation.
CHAPTER 4
 PORTFOLIO MANAGEMENT

INTRODUCTION
Portfolio is a combination of assets such as stocks, bonds and money
market instruments. The process of blending together the broad asset classes so
as to obtain optimum return with minimum risk is called portfolio construction.
Diversification of investments helps to spread risk over many assets. A
diversified portfolio, some securities may not perform as expected, but others
may exceed the expectation and making the actual return of the portfolio
reasonably close to the anticipated one. Keeping a portfolio of single security
may lead to a greater likelihood of the actual return somewhat different from
that of the expected return. Hence, it is a common practice to diversify
securities in the portfolio.

Portfolio may or may not take on the aggregate characteristics of their

individual parts. Portfolio is the collection of financial or real assets such as
equity shares, debentures, bonds, treasury bills and property etc. Portfolio is a
combination of assets or it consists of collection of securities. These holdings
are the result of individual preferences, decisions of the holders regarding risk,
return and a host of other considerations.

Portfolio management concerns the construction & maintenance of a

collection of investment. It is investment of funds in different securities in
which the total risk of the portfolio is minimized, while expecting maximum
return from it. It primarily involves reducing risks rather that increasing return.
Return is obviously important though, and the ultimate objective of portfolio
manager is to achieve a chosen level of return by incurring the least possible
risk.
OBJECTIVES OF PORTFOLIO MANAGEMENT
1. Basic objectives
The basic objective of Investment/portfolio management can be
classified into two categories as follows:
(a) To maximize yield

(b) To minimize risk.

2. Secondary objectives
(a) Regular return
(b) Stable income
(c) Appreciation of capital
(d) More liquidity
(e) Tax benefits
(f) Safety of the investment
(g) Marketability
(h) Liquidity
NEED FOR PORTFOLIO MANAGEMENT

Portfolio management is a process encompassing many activities of

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

Investment management is also known as Portfolio Management, is a complex

process or activity that may be divided into seven broad phases: -
1. Specification of Investment Objectives and Constraints.
2. Choice of Asset Mix.
3. Formulation of Portfolio Strategy.
4. Selection of Securities.
5. Portfolio Execution.
6. Portfolio Rebalancing.
7. Performance Evaluation.
 Specification of Investment Objectives and Constraints

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

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

Income: - To provide a steady stream of income through regular

interest/dividend payment.
Growth: - To increase the value of the principal amount through capital
appreciation.
Stability: - To protect the principal amount invested from the risk of
loss.
 Choice of asset mix

Based on the objectives and constraints, you have to specify your asset
allocation, that is, you have to decide how much of your portfolio has to
be invested in each of the following asset categories:

 Cash
  Bonds

 Stocks

 Real estate

 Precious metals

 Others.

Empirical studies have shown that nearly 90 percent of the variance of the
portfolio return is explained by its asset mix. Put differently, only about 10
percent of the variance of the portfolio return is explained by other
elements like ‘sector rotation’ or ‘security selection’.
 Formulation of portfolio strategy

After you have chosen a certain asset mix, you have to formulate an
appropriate portfolio strategy. Two broad choices are available in this
respect, an active portfolio and passive portfolio.

 Active portfolio strategy is followed by most investment professionals

and aggressive investors who strive to earn superior returns, after
adjustment for risk. The 4 principal vectors of an active strategy are:

♦ Market timing

♦ Sector rotation

♦ Security selection

♦ Use of a specialized concept

 Passive strategy rests on the tenet that the capital market is fairly efficient
with respect to the available information. Hence, the search for superior
returns through an active strategy is considered futile.
 Selection of securities

This involves selecting an asset which best suits the portfolio. An asset
should be selected based on certain study viz. fundamental analysis,
technical analysis or random selection of assets. Some of the factors such
as yield to maturity, risk of default, tax shield, and liquidity should be
properly evaluated.
 Portfolio execution

The next step is to implement the portfolio plan by buying and/or selling
specified securities to be included in the portfolio have been identified. It
is an important practical step that has a significant bearing on investment
results. For effectively handling the portfolio execution phase you should
understand the trading game, what motivates trade, nature of key players
in this game, who are the likely winners and losers in this game and what
guidelines should be borne in mind while trading.

 Portfolio rebalancing

Portfolio rebalancing involves reviewing and revising the portfolio

composition. The initial portfolio is left undisturbed. It is essentially a
‘buy and hold policy’. Irrespective of what happens to relative values, no
rebalancing is done. Then after a specific time, ‘the constant mix policy
calls’ for maintaining the portfolio in line with their target value.

 Performance evaluation

The key dimensions of portfolio performance evaluation are rate of return

and risk. The performance attribution is to determine the contribution
made by the decisions in the areas of asset allocation, sector choice and
security selection.
RETURN ON PORTFOLIO:

Each security in a portfolio contributes returns in the proportion of its

investment in security. Thus the portfolio expected return is the weighted
average of the expected returns, from each of the Securities, with weights
representing the proportionate 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 question lies in the investor’s
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, security categories, types of
investments, etc, would all be described under the caption of diversification,
which aims at the reduction or even elimination of non-systematic or company
related risks and achieve the specific objectives of the investors.
PORTFOLIO RISK:

Risk on a portfolio is different from the risk on individual securities. This

risk is reflected in the variability of the returns from zero to infinity. The
expected return depends on the probability of the returns and their weighted
contribution to the risk of the portfolio. There are two measures of risk in this
context-one is the absolute deviation and the other standard deviation.
Most investors invest in a portfolio of assets, as they don’t want to pull all
their eggs in one basket. Hence, what really matters to them is not the risk and
return of the stocks in isolation, but the risk and the return of the portfolio as a
whole.
RISK-RETURN ANALYSIS:
All investments have some risks. Investments in shares of companies
have its own risks or uncertainty. These risks arise out of variability of returns
on yields and uncertainty of appreciation or depreciation of share prices, loss of
liquidity, etc, and the risk over time can be represented by the variance of the
returns, while the return over time is capital appreciation plus payout divided by
the purchase price of the share.

Normally, the higher the risk that the investors takes, the higher is the
return. There is, however, a risk less return on capital of about 12%, which is
the bank rate charged by the RBI or long-term, yielded on govt. securities at
around 13% to 14%. This risk less returns refers to lack of variability of return
and no uncertainty in the repayment of the 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 objective of the portfolio manager is to reduce that variability and thus
reduce the risk by choosing an appropriate portfolio.
 There are two types of risks, namely:
• Market risk or Systematic risk, and
• Company risk or Unsystematic risk.

SEBI NORMS:
SEBI has prohibited the Portfolio Manager to assume any risk on behalf
of the client. Portfolio Manager cannot also assure any fixed return to the client.
The investments made or advised by him are subject to risk, which the client
has to bear. The investment consultancy and management has to be charged at
rates, which are fixed at the beginning and transparent as per the contract. No
sharing of profits or discounts or cash incentives to clients is permitted.
The Portfolio Manager is prohibited to do lending, badla financing and
bills discounting as per SEBI norms. He cannot put the clients’ funds in any
investment, not permitted by the contract, entered into with the client. Normally
investments can be made in both capital market and money market instruments.
Client’s money has to be kept in a separate account with the public sector
bank and cannot be mixed up with his own funds or investments. All the deals
done for a client’s account are to be entered in his name and Contract Notes,
Bills and etc., are all passed by his name. A separate ledger account is
maintained for all purchases/sales on client’s behalf, which should be done at
the market price. Final settlement and termination of contract is as per the
contract. During the period of contract, Portfolio Manager is only acting on a
contractual basis and on a fiduciary basis. No contract for less than a year is
permitted by the SEBI.
CRITERIA FOR INVESTMENT DECISION:

Firstly, the investment decision depends on the mood of the market. As

per the empirical studies, share prices depends on the fundaments of the
company only to the extent of 50% and the rest is decided the mood of the
market and the expectations of the company’s performance and its share price.
These expectations depend on the analyst’s ability to foresee and forecast the
future performance of the company. For price paid for a share at present
depends on the flow of returns in future, expected from the company.
Secondly and following from the above, decision to invest will be based
on the past performance, present working and the future expectations of the
company’s performance, both operationally and financially. These in turn will
influence the share prices.
Thirdly, investment decision depends on the investor’s perception on
whether the present share price is fair, overvalued or undervalued. If the share
price is fair he will hold it (Hold Decision) if it is overvalued, he will sell it (Sell
Decision) and if it is undervalued, he will buy it (Buy Decision). These are
general rule, but exceptions may be there. Thus even when prices are rising,
some investors may buy as their expectations of further rise may outweigh their
conception of overvaluation. That means, the concepts of overvaluation or
under valuation are relative to time, space and man. What may be overvalued a
little while ago has become undervalued following later developments;
information or sentiment and mood may change the whole market scenario and
of the valuation of shares. There are two more decisions, namely, Average Up
and Average Down of prices.
The investment decision may also depend on the investor’s preferences,
moods, or fancies. Thus an investor may go on a spending spree and invest in
cats and dogs of companies, if he has taken a fancy or he is flooded with money
from lottery or prizes. A Rational investor would however make investment
decisions on scientific study of the fundamentals of the company and in a
planned manner.
At present, investors mostly depend on hearsay and advice of friends,
relatives, sub-brokers, etc., for the investment decision, but not on any scientific
study of the company’s fundamentals. In view of the increasing mushroom
growth of companies and lack of any track record of many promoters,
investment decision making became on hunches, hearsay etc.
INVESTMENT OBJECTIVES:

1) The first basic objective of investment is the return on it or yields. The

yields are higher, the higher is the risk taken by investors. The risk less return is
the bank deposit rate of 8% at present or Bank rate of 6.5%. Here the risk is
least as funds are safe and returns are certain.
2) Secondly, each investor has his own asset preferences and choice of
investments. Thus some risk adverse operators put their funds in bank or post
office deposits or deposits/certificates with co-operatives and PSU’s. Some
invest in real estate; land and building while others invest mostly in gold, silver
and other precious stones, diamonds etc.
3) Thirdly, every investor aims at providing for minimum comforts of
house furniture, vehicles, consumer durables and other household requirements.
After satisfying these minimum needs, he plans for his income, saving in
insurance (LIC and GIC etc.) pension and provident funds etc. In the choice of
these, the return is subordinated to the needs of the investor.
4) Lastly, after satisfying all the needs and requirements, the rest of the
savings would be invested in financial assets, which will give him future
incomes and capital appreciation so as to improve his future standard of living.
These may be in stock/capital market investments.

QUALITIES FOR SUCESSFUL INVESTING

 Contrary thinking
 Patience
 Composure
 Flexibility and
 Openness
CHAPTER 5
 ANALYSIS ON FEW SECURITIES

As a part of study few securities are studied to fit the portfolio of clients.
Securities are studied on statistical basis to know the risk and return elements of
the portfolio. The analysis on the securities gives a very good idea about which
stock to be picked to best fit the portfolio of the client. In order to pick a stock
several valuations and a good amount of study on that particular company is
very much necessary. A good knowledge about the happenings in the market
should also be considered. The following study is conducted based on 5 months
data.

As mentioned above, study is conducted on few securities which are shown as

below:

MARKET PERFORMANCE DURING PAST 5 MONTHS

Past 5 months market has been very volatile, very sensitive to information.
Market recovered well from the huge downturn in the October 2008 and is
performing better now. However, near future of the market is unpredictable
because it again depends on the reforms government is going to take. Thus,
market being volatile is performing better after recovering from huge downturn.
CALCULATION OF STANDARD DEVIATION OF RETURN
AND SHARE VALUE OF THE SECURITIES:

Scrip Mean Standard Standard

Returns Deviation of Deviation of Share
Returns Valuations
TATA STEEL 0.1121% 4.60 65.31

NTPC 0.1601% 2.40 11.50

ONGC 0.7337% 3.45 135.027

ITC 0.112% 2.38 9.11

DLF 0.75% 6.26 68.229

RELIANCE 0.4933% 3.35 351.113

INDUSTRIES
INFOSYS 0.6433% 2.46 145.95

BHARTI -0.21% 3.41 85.20

AIRTEL

HDFC 0.33% 4 278.85

HINDUSTAN -0.00107% 2.18 9.8218

UNILEVER
MTNL -0.00318 2.61 12.017
LARSEN AND 0.154% 3.41 11.50
TOUBRO
NTPC:

The deviation in the share value and returns of NTPC is not very volatile. As the
company is very strong in its fundamentals, it is performing well in the market.
Company is performing well compared to other shares even in the present
volatile market conditions. Even in the future it is expected to do well as it is
clear from the above graph i.e., rising in the end. There might be a slight
increase in the deviation in the end as we can see that when there is an increase
it is reaching up to 3. So the behavior of the stock shows it is better to hold the
stock for long term and collect average returns or time the market well so that
profit can be booked if properly timed.
LARSEN AND TOUBRO

When we take Nifty as benchmark to analyze this stock, it clearly shows that
the pattern it is following is similar to the market movements. Generally this
share is considered to be speculative scrip. Generally investors time the market
to book profits with this stock. This stock seems risky when held for long term.
Any other stock along with this may produce good returns because risk can be
mitigated. This stock best suits a client who can take risk. There are many
fluctuations in the above graph, which shows this stock should be used for
speculative purpose and time properly to earn good amount of returns.
ITC

The above graph shows that ITC is following a pattern of deviation in the
market. A decline in the end is expected to grow. But the volatility of returns is
less as FMCG is considered to be ever-green sector. Investors mainly use this
sector for the purpose of hedging because however volatile be the market, the
sector deviates very less. It is better to hold this stock for long term along with
some speculative scrip so as to minimize the risk and earn good returns. These
fluctuations can be ignored but should be watched because these deviations can
be controlled if properly used along with some other speculative share.
DLF

This stock has performed well during last three months because of some
promotional activity, prior to that it has not performed well because of huge
crisis in the reality sector. But it has recovered well and is performing well now.
But this stock should be timed well again well because there was a stage where
the price has come down to Rs. 200. So it is better to use this stock along with
some strong supportive stock to minimize the risk and get every opportunity of
getting good amount of returns from this stock because, it has high potential of
generating good returns.
INFOSYS

This is again considered as speculative share in the market because nothing can
be predicted, as we have seen that the stock fell even when the company has
announced good amount of profits. So it is better to hold it and check with the
timing of the market. This stock should be maintained along with some long
term security to gain good amount of returns by minimizing the risk. Deviation
in this stock is less and is also going along with the benchmark index. So, it is
better to hold this stock for a risky client and time the market properly.
BHARTI AIRTEL

This is also a speculative share. Basing on the graph, we can say that it a risky
share. But when the pattern of the share is observed properly, every alternate
head and shoulder is at same level, that means it has very good supporting and
resistant levels. Moreover, the company has recently announced its 37%
penetration in Andhra Pradesh and also its future expansion which is also very
good sign for the company in the market. It is considered as very good stock in
the telecom sector. Its plan to merge with MTNL also may have some effect not
only in the short term but also in the long term. However the deviations can be
minimized by taking the average returns if the share is going to fall after certain
period. But this is considered to be very good stock if its future expansion is
considered. It is better to hold the stock long term.
Reliance Industries Ltd.

Empirical study shows that Reliance Industries have 30% weight on the market
performance. As the current market is very volatile, the above graph also shows
that the company in the current market situation is not very consistent. When
Nifty is taken as benchmark to analyze this stock, there will be perfect matching
in the above graph. So this will perform well in the long term and better to hold
the stock. This is very risky in the present situation, so better to hold it along
with some hedging device so as to earn positive returns.
Oil & Natural Gas Corporation Ltd.

The above graph shows that ONGC is following a pattern in the market. The
stock has supporting and resistant levels which is controlling g the movements
of the stock. It is better to hold it for long term and is considered moderately
risky. However, this stock is known fundamentally strong in the respective
sector.
Tata Steel Ltd.

Clear examination of the above graph shows that the movement is along with
the benchmark index i.e., Nifty but the returns are above the Nifty line. The
deviations in the stock are through the market Nifty Index. So it clearly shows
that it is better to hold the stock short term as in the long term market is
unpredictable as market is very volatile. It is better to time the stock along with
the market movements and book profits. This stock is best suitable for risky
clients.
HDFC Bank

The above graph shows that the deviations in the stock are increasing
consistently. But, it is expected to perform good in the near future because
among the private banking sector, this stock is performing well. So, it is better
for the investor to hold this stock for long term and minimize the risk. Returns
on this stock are also seen well in the past. This is a risky stock producing good
amount of returns. So, it is better to hold this stock for long term.
HINDUSTAN UNILEVER

The above stock is known to be very strong in the FMCG sector. The above
graph shows that the returns on the stock is deviating, however the movements
are following a pattern which can be predictable. It has come down from 2.58 to
1.3 and again reached the same level, from where it has reached to 1.95. This
movement of the stock is very clear. So it is better to hold the stock for long
term as the returns at present are negative because market is not performing
well but HUL which is considered to be very strong fundamentally will perform
well in the long term.
The above charts depict that major part of risk is covered by speculative shares
like DLF, Tata Steel, Reliance Industries, L&T, and Bharti Airtel where as
major part of average returns are yielded from the same companies. So, the
golden rule “Higher the risk, higher the return” is perfectly suitable here.

Risk on Midcap shares such as MTNL, HUL are less risky and returns are also
less but performing well.

So, a perfect combination of these two minimizes the risk and maximizes return.

However, it can be noticed that shares viz., Infosys, ONGC which are moderate
risky occupy major share in the returns chart. So a perfect blend of these stocks
along with the above mentioned risky and very less volatile stocks may produce
good amount of returns thereby minimizing the risk.

Stocks such as HUL and MTNL, which have very less share in the returns, are
expected to perform well in the long term because of their penetration in the
market. So, an eye on these stocks may minimize the risk and generate good
returns.
CORRELATION BETWEEN STOCKS

In the case of perfect positive correlated Securities or Stock, The risk can
be reduced to a minimum level, where as in the case of negative correlated
securities the risk can be reduced to zero, which is company risk but the market
risk prevails the same for the security or stock in a portfolio.

Positive correlation means both the securities are moving in the same
direction i.e., either upward or downward. Whereas negative correlation means,
the securities are moving in opposite direction, which is more profitable because
when securities which are moving in the opposite directions are put together,
the resultant risk may be minimized.

So it is always important to check the correlation co-efficient between

two securities while picking so as to perfectly fit the portfolio.

The portfolio which is constructed is picked only after understanding the

correlation between the securities. It is always better to choose securities in a
portfolio only after checking their correlation and return factors.
 BETA VALUES OF THE ABOVE MENTIONED SHARES

BETAS
MTNL 0.41
INFOSYS 0.71
ONGC 0.85
ITC 0.54
BHARTI AIRTEL 0.92
DLF 1.59
HUL 0.48
HINDALCO 1.18
HDFC 1
L&T 1.11
TATA STEEL 1.34
NTPC 0.87

Beta value shows the responsiveness of a particular stock with the movements
of the market. The above table clearly shows HDFC Bank is responding
according to the market. Higher beta value gives higher returns, so DLF, Tata
Steel gives maximum returns. MTNL has low beta value, so returns from that
particular stock can be expected to be very low.
CHAPTER 6
 CASE LETS

As a part of study, 3 clients have been picked up to construct portfolio. The

customers are evaluated on different parameters to know their taking capacity
and their expectations as returns. The portfolio is constructed based on their
expectations and limitations in the construction of portfolio. The risk taking
capacity of the customers is evaluated based on the questionnaire and
accordingly the assets are selected. The risk and return of the client on the
portfolio is calculated based on statistical calculations. The details of the client
and selection of portfolio are discussed below:

Client 1
Investor profile
54 year old investor, a government employee, saving and investing to get
regular income and aggressive returns. After evaluating risk, it is concluded that
he is a conservative risk taker.
His annual income is Rs. 550000 per annum.
Out of this, his savings are Rs. 200000 per annum.
Now, diversification is to be made so as to meet his requirements and
expectations.
So, his investment avenues include:
 Rs. 50000 in bank deposits out of which Rs. 25000 in Savings Bank
account and Rs. 25000 in Fixed Deposits, to earn to earn regular income
and bear less/nil risk.
  Rs. 50000 in government bonds, 6.07%, 2014 presently trading at Rs.
102.30 whose face value is Rs 100. The bond to be held till maturity so
as to earn regular interest.

 Rs. 100000 to be invested in equities so as to earn aggressive returns.

As analyzed above the securities which suit the client better are ONGC
and ITC.

Calculating weights of the security so as to make an ideal investment is shown

below:

Standard Deviation of ONGC= 3.45 (

Standard Deviation of ITC= 2.38 (

Weight of ONGC i.e. X1=

= 0.40

Weight of ITC X2= 0.60

That means 40% to be invested in ONGC and 60% to be invested in ITC.

Using the following formula, risk can be calculated

√ [(X1)2 ( 2
+ (X2)2(σ2)2 + 2(ѓ12)(σ1)(σ2)(X1)(X2)].
√ [ (0.40)2(3.45)2 + (0.60)2(2.38)2 + 2(-0.20)(0.4)(0.6)(3.45)(2.38) ]
√3.15= 1.78.
Therefore, risk of portfolio is 1.78.
Now calculating expected return on equities is shown below:
Average return on ITC = 0.112%
Average return on ONGC = 0.7337%.
Probability of occurrence is 0.50 in both the cases.
So, expected return = (0.5)(0.112%)+(0.5)(0.7337%)
= 0.562%.

If 0.562 is for one day then, for 100 days return would be 0.1532
Therefore, return on equity= 100000*0.1532
= 15320+100000
=115320.
The above mentioned return is for 6 months.
PORTFOLIO OF CLIENT1

ASSET CLASS INVESTMENT RETURN

FIXED DEPOSITS 50000 8% P.A

SAVINGS DEPOSIT 25000 3% P.A

BONDS 25000 6.07%

EQUITIES 100000 115320 (after 6 months expected

returns)
CLIENT 2

INVESTOR PROFILE
28 year old, hardware engineer,
Working for an MNC,
Investing to earn regular fixed income and steady returns.
His annual income is Rs. 700000 and his savings are Rs. 300000 per annum.
 Rs. 50000 to be invested every year in Gayatri Projects Ltd to purchase
land after a period of time.

 Rs. 25000 to be invested in Life Insurance Policy.

 Rs. 50000 to be invested in bank fixed deposits.

 Rs. 25000 in savings bank account.

 Rs. 25000 to be invested in National Savings Certificate.

 Rs. 100000 to be invested in equities to enhance his returns.

Based on the evaluation, he is declared to be risky client.

σ1= HUL

σ2= HDFC

σ3= BHARTI AIRTEL

Calculation of weights

X1= σ1/ (σ1 + σ2 + σ3)

= 14.47/ (14.47+3.35+4)

= 0.60
X2 = σ2 / (σ1 + σ2 + σ3)

= 4 / (4+14.47+3.35)

= 0.20

X3 = 0.20.
 Equity portfolio risk can be calculated as follows:

√ [(X1)2 ( 2
+ (X2)2(σ2)2 + 2(ѓ12)(σ1)(σ2)(X1)(X2)].

=√ [(.6)2(14.47)2 + (.2)2(4)2 + (.2)2(3.35)2 + 2(.6)(.2)(-0.08)(14.47)(4) +

2(.6)(.2)(-.026)(14.47)(3.35) + 2(.2)(.2)(-.10925)(4)(3.35)]

=8.65

Therefore, risk on portfolio is 8.65%.

Expected return from the portfolio is:

(.2)(-.00102) + (.2)(-.21) + (.5)(.33)
= 0.122796
= 0.122796 * 100000
= Rs. 122796.
Calculating number years of cash outflows
Cost of land is minimum Rs.3000000. the investment is made in annuities i.e.,
equal cash flows. Rate of interest is 12%. Now we have to check in how many
years the land can be acquired.

FV =
1000000 = {50000[(1 + 0.12) n] – 1}/ 0.12
120000 = 50000(1.12) n
log2.4 = nlog1.12
0.380 = 0.0492n
N= 7.72 or 8 years approximately.
PORTFOLIO OF CLIENT 2

ASSET CLASS INVESTMENT RETURN

LAND 50000 APPRECIATION

LIC POLICY 25000 SUM ASSURED

FIXED DEPOSITS 25000 6.07%

SAVINGS BANK A/C 50000 8%

NATIONAL SAVINGS 25000 MATURITY

CERTFICATE
EQUITIES 100000 122796 (expected after 6
months)
CLIENT 3

INVESTOR PROFILE
30 year old, working as Doctor,
 Investing to earn regular income.

 Slow and positive returns.

 His annual income is Rs. 400000.

 His savings are Rs. 100000.

 He is evaluated to be moderate risk taker.

Diversification
 Rs. 15000 to be invested in Savings Bank account.

 Rs. 10000 to be invested in Fixed Deposit.

 Life Insurance Policy of Rs. 15000.

 To be invested in bonds Rs. 10000.

 Equities Rs. 50000.

Calculating risk and return on equity segment

σ1= Infosys = 2.467

σ2= MTNL = 2.64

σ3= NTPC = 18.264.

X1= σ1/( σ1 + σ2 + σ3).

 = 2.46 / (2.46 + 2.64 + 18.26)

= 0.10.

X2 = 0.12.

X3 = 0.78.
√ [(X1)2 ( 2
+ (X2)2(σ2)2 + 2(ѓ12)(σ1)(σ2)(X1)(X2)].

= √ [ (.1)2(2.46)2 + (.12)2(2.64)2 + (18.26)2(.78)2 + 2(2.46)(2.64)(.1)(.12) +

2(2.64)(18.26)(-.09)(.12)(0.78) + 2(.33)(.78)(.1)(2.46)(18.26)]

= 7.2

Calculation of expected return =

(.5)(.16) + (.5)(.64) + (.2)(-.933)
= 0.2151.

**Total return (expected for 6 months) = 50000* 0.2150815

= 10754

= Rs.10754 + Rs. 50000

= Rs. 60754.

PORTFOLIO OF CLIENT 3
ASSET CLASS INVESTMENT RETURN

SAVINGS BANK A/C 15000 3%

FIXED DEPOSIT 10000 8%

LIC POLICY 15000 SUM ASSURED

BONDS 10000 6.07%

EQUITIES 50000 0.2150815% per day on

 average.

CHAPTER 7
 FINDINGS

 Investing in more number of equities may turn portfolio very volatile.

 Portfolio Management Service is not available in many places because of

lack of awareness and confidence in people.

 Rebalancing of portfolio is very important i.e., passive portfolio cannot

fetch good returns. In order to play safe in the market one needs to
maintain active portfolio strategy especially in this current volatile
situation.

 There are different models in constructing a portfolio, but in market the

ultimate decision lies with the investor, whatever be the model, if one can
understand the market behavior, he can play safe game.

 Portfolio of a person differs from one person to another depending on the

risk appetite, return expectations, needs and many other factors.

 A portfolio manager should have wide knowledge about each and every
investment avenue. A portfolio manager should be able to study the
market behavior as well as investor very well.

On the company

 The company has many inactive accounts piled up which are more than
the active accounts.
 The company aggressively tried to recruit customer relations officer in
large number but couldn’t penetrate in its own surroundings.
 The company had failed in properly having a strategy to sell their
products.
 None of the dealers have knowledge on technical analysis except one.
 SUGGESTIONS TO THE INVESTOR

 Grape wine knowledge is not advantageous. Listen to rumors and tips,

check for yourself.
 A proper mix of assets is necessary
 Buy stocks in companies with potential for surprises.
 Take advantage of volatility before reaching a new equilibrium.
 The investor must select the right advisors who have sound knowledge
about the product which they are offering.
 Professionalized advisory is the most important feature to the investors.
Professionalized research, analysis which will be helpful for reducing any
kind of risk to overcome.
 Check your long term and short term goals before investing.
 Do not use idle portfolio.
CHAPTER 8
 ANNEXURE
To assess your risk tolerance, seven questions are given below. Each question is
followed by three possible answers.
1. Just 6 weeks after you invested in a stock, its price declines by 20%. If
the fundamentals of the stock have not changed, what would you do?

i) Sell

ii) Do nothing

iii) Buy more.

2) Consider the previous question another way. Your stock dropped 20%, but it
is a part of a portfolio designed to meet investment goals with 3 different
time horizons.

a) What would you do if your goal were 5 years away?

i) Sell

ii) Do nothing

iii) Buy more.

b) What would you do if your goal were 15 years away?

i) Sell

ii) Do nothing

iii) Buy more.

c) What would you do if the goal were 30 years away?

i) Sell
ii) Do nothing

iii) Buy more.

3) You have bought a stock as a part of your retirement portfolio. Its price rises
by 25% after one month. If the fundamentals of the stock have not changed,
what would you do?

i) Sell

ii) Do nothing

iii) Buy more.

4) You are investing for retirement which is 15 years away. What would you
do?

i) Invest in a money market mutual fund or a guaranteed investment

contract

ii) Invest in a balanced mutual fund has a stock: bond mix of 50: 50.

iii) Invest in an aggressive growth mutual fund.

5) As a prize winner, you have been given some choice. Which one would you
choose?

i) Rs. 50000 in cash.

ii) A 50% chance to get Rs. 125000.

iii) A 20% chance to get Rs. 375000.

6) A good investment opportunity has come your way. To participate in it you

have to borrow money. Would you like to take loan?

i) No.

ii) Perhaps.
 iii) Yes.

7) Your company, which is planning to go public after 3 years, is offering stock

to its employees. Until it goes public, you can’t sell shares. Your investment,
however, has the potential of multiplying 10 times when the company goes
public. How much money would you invest?

i) Nothing.

ii) Three months salary.

iii) 6 months salary.

CHAPTER 9
 BIBLIOGRAPHY

Referred Books:
• Security Analysis and Portfolio Management, Parvathy Pandian.
• Security Analysis and Portfolio Management, Prasanna Chandra.
Websites:
www.nseindia.com
www.indiainfoline.com
www.finance.yahoo.com
www.bseindia.com
www.investopedia.com
www.docstoc.com