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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
Saving:
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
Why Saving:
Saving is abstaining from present consumption for a future use.
Saving are sometimes autonomous coming from households as a matter
of habit. But bulk of the savings come for specific objectives, like interest
income, future needs, contingencies, precautionary purposes, or growth in
future wealth, leading to rise in the standard of living etc.
Saving and Investment:
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
What is investment?
“Investment may be defined as the purchase by an individual or
institutional investor of a financial or real asset that produces a return
proportional to the risk assumed over some future investment period.”
- F. Amling
“Investment defined as commitment of funds made in the
expectation of some positive rate of return. If the investment is properly
undertaken, the return will commensurate with the risk the investor
assumes.”
- Fisher & Jordan
Investment refers to acquisition of some assets. It also means the
conversion of money into claims on money and use of funds for
productive income earnings assets. In essence, it means the use of funds
for productive purpose, for securing some objectives like, income,
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
MARKETABLE ASSETS:
Shares, Bonds
Government securities
Mutual Fund
UTI units etc.
Need of investment:
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
2. Interest rate:
The level of interest rates is another factor for a sound investment
plan. Interest rates may vary between one investments to other risky and
non- risky investments. They may also differ due to different benefit
schemes offered by the investments. These aspects must be considered
before actually allocating any amount. A high rate of interest may not be
the only factor favouring the outlet for investment. The investor has to
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
5. Income:
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
6. Investment Channels:
The growth and development of the country leading to greater
economic activity has led to the introduction of a vast array of
investments. Apart from putting aside savings in savings banks where
interest is low, investors have the choice of a variety of instruments. The
question to reason out is which is the most suitable channel? Which
media will give a balanced growth and stability of return? The investor in
his choice of investment will have to try and achieve a proper mix
between high rate of return and stability of return to reap the benefits of
both. Some of the instruments available are corporate stock, provident
fund, life insurance, fixed deposits in corporate sector, Unit Trust
Schemes and so on.
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
What Is Portfolio:
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
Why Portfolio:
You will recall that expected return from individual securities
carries some degree of risk. Risk was defined as the standard deviation
around the expected return. In effect we equated a security’s risk with the
variability of its return. More dispersion or variability about a security’s
expected return meant the security was riskier than one with less
dispersion.
The simple fact that securities carry differing degrees of expected
risk leads most investors to the notion of holding more than one security
at a time, in an attempt to spread risks by not putting all their eggs into
one basket. Diversification of one’s holdings is intended to reduce risk in
an economy in which every asset’s returns are subject to some degree of
uncertainty. Even the value of cash suffers from the inroads of inflation.
Most investors hope that if they hold several assets, even if one goes bad,
the others will provide some protection from an extreme loss.
Portfolio Management:
The portfolio management is growing rapidly serving broad array
of investors – both individual and institutional – with investment
portfolio ranging in asset size from few thousands to crores of rupees.
Despite growing importance, the subject of portfolio and investment
management is new in the country and is largely misunderstood. In most
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
2. Marketability: -
A good portfolio consists of investment, which can be marketed
without difficulty. If there are too many unlisted or inactive shares in
your portfolio, you will face problems in encasing them, and switching
from one investment to another. It is desirable to invest in companies
listed on major stock exchanges, which are actively traded.
3. Tax Planning: -
Since taxation is an important variable in total planning, a good
portfolio should enable its owner to enjoy a favorable tax shelter. The
portfolio should be developed considering not only income tax, but
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
capital gains tax, and gift tax, as well. What a good portfolio aims at is
tax planning, not tax evasion or tax avoidance.
5. Liquidity:
The portfolio should ensure that there are enough funds available at
short notice to take care of the investor’s liquidity requirements. It is
desirable to keep a line of credit from a bank for use in case it becomes
necessary to participate in right issues, or for any other personal needs.
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
The pig-farmer on the other hand, knows that pigs are meant for
slaughter. Similarly, an investor adopting this approach buys and sells
shares as fast as pigs are growth and slaughtered. Pigs become pork and
equity hard cash.
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
shifting from the one industry to another industry, changing from one
company to another company. Any portfolio requires monitoring and
revision. Portfolios activities will depend on daily basis keeping in view
the market opportunities. Portfolio revision uses some theoretical tools
like security analysis that already discuss before this, Markowitz model,
Risk-Return evaluation.
Portfolio revision involves changing the existing mix of securities.
This may be effected either by changing the securities currently included
in the portfolio or by altering the proportion of fund invested in the
securities. New securities may be added to the portfolio or some of the
existing securities may be removed from the portfolio. Portfolio revision
thus, leads to purchasing and sales of securities. The objective of
portfolio revision is the same as the objective of portfolio selection, i.e
maximizing the return for a given level of risk or minimizing the risk foa
given level of return. The ultimate aim of portfolio revision is
maximization of returns and minimizing of risk.
Having constructed the optimal portfolio, the investor has to
constantly monitor the portfolio to ensure that it continues to be optimal.
As the economy and financial markets are dynamic, changes take place
almost daily. As time passes, securities, which were once attractive, may
cease to be so. New securities with promises of high returns and low risk
may emerge. The investor now has to revise his portfolio in the light of
the development in the market. This revision leads to purchase of some
new securities and sale of some of the existing securities from the
portfolio. The mixture of security and its proportion in the portfolio
changes as a result of the revision.
Portfolio revision may also be necessitated some investor related
changes such as availability of additional funds, changes in risk attitude
need of cash for other alternative use etc.
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
1. Statutory Stipulations:
Investment companies and mutual funds manage the largest
portfolios in every country. These institutional investors are
normally governed by certain statutory stipulations regarding their
investment activity. These stipulations often act as constraints in
timely portfolio revision.
2. Transaction cost:
Buying and selling of securities involve transaction costs such as
commission and brokerage. Frequent buying and selling of
securities for portfolio revision may push up transaction cost
thereby reducing the gains from portfolio revision. Hence, the
transaction costs involved in portfolio revision may act as a
constraint to timely revision of portfolio.
3. Intrinsic difficulty:
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
4. Taxes:
Tax is payable on the capital gains arising from sale of securities.
Usually, long term capital gains are taxed at a lower than short-
term capital gains. To qualify as long-term capital gain, a security
must be held by an investor for a period not less than 12 months
before sale. Frequent sales of securities in the course of periodic
portfolio revision of adjustment will result in short-term capital
gains which would be taxed at a higher rate compared to long-term
capital gains. The higher tax on short-term capital gains may act as
a constraint to frequent portfolios.
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
Where,
SI = Sharpe’s Index
Rt = Average return on portfolio
Rf = Risk free return
σf = Standard deviation of the portfolio return.
For instance:
Which portfolio perform better performance from following two
portfolio, by using Sharpe’s model
Portfolio Average return Standard deviation Risk free rate
A 50% 10% 24%
B 60% 18% 24%
For Portfolio A: Rt – Rf
SI =
σf
Rt = 50
Rf = 24
σf = 0.10
0.50 – 0.24
SI = = 0.26 / 0.10
0.10
= 2.6 Portfolio A
For Portfolio B: Rt – Rf
SI =
σf
0.60 – 0.24
SI = = 0.36 / 0.18
0.18
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
= 2, Portfolio B
For portfolio X: Rn - Rf
Tn =
βm
Rn = 0.44 Rf = 0.22 βm = 0.12
0.44 – 0.22 0.22
Tn = = = 0.092
2.40 2.40
Tn = = = 0.125
2.4 2.40
Conclusion: Portfolio Y is better than X because Tnx < Tny
(c) Jensen’s Measure:
Jensen attempts to construct a measure of absolute performance on
a risk adjusted basis. This measure is based on CAPM model. It measures
the portfolio manager’s predictive ability to achieve higher return than
expected for the accepted riskiness. The ability to earn returns through
successful prediction of security prices on a standard measurement. The
Jensen measure of the performance of portfolio can be calculated by
applying the following formula:
Rp = Rf + (RMI – Rf) x β
Where, Rp = Return on portfolio
RMI = Return on market index
Rf = Risk free rate of return
For instance: From the following data, the portfolio performance can be
measure according to Jensens model as follow:
Portfolio Estimated Return on portfolio Portfolio Beta
I 40% 1.5
II 34% 1.1
III 46% 1.8
Market Index: 36% 1.03
Risk free rate of return: 20%
Market Beta =1.00
For portfolio –I:
RMI = 40%, Rf = 20%, β=3
Rp = 20 + (40 – 20) x 1.5
= 50%
For portfolio – II:
RMI = 34%, Rf = 20%, β = 1.1
Rp = 20 + (34 – 20) x 1.1 = 35.4%
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
individual investor and cater to his preferences. The manager has to keep
a list of such investment avenues along with return-risk profile, tax
implications, yield and other return such as convertible options, bonus,
rights etc. A ready reckoned giving out the analysis of the risk involved
in each investment and the corresponding return should be kept.
The portfolio construction, as referred to earlier, be made on the
basis of the investment strategy, set out for each investor. Through choice
of asset classis, instrument of investment and the specific scripts, save of
bond or equity of different risk and return characteristics, the choice of
tax characteristics, risk level and other feature of investment, are decided
upon.
Portfolio Investment Process:-
The ultimate aim of the portfolio manager is to reduce the risk and
increase the return to the investor in order to reach the investment
objectives of an investor. The manager must be aware of the investment
process. The process of portfolio management involves many logical
steps like portfolio planning, portfolio implementation and monitoring.
The portfolio investment process applies to different situation. Portfolio
is owned by different individuals and organizations with different
requirements. Investors should buy when prices are very low and sell
when prices rise to levels higher that their normal fluctuation.
The process used to manage a security portfolio is conceptually the
same as that used in any managerial decision. One should (1) Panning,
(2) Implement the plan; and (3) Monitor the result. This portfolio
investment process is displayed schematically as follow:
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
Planning:
Investor’s situation
Market Condition
Speculative policies
Strategic asset allocation
Implementation:
Rebalance Strategic Asset Allocation
Tactical Asset Allocation
Security Selection
Monitoring:
Evaluate Statement of Investment Policy
Evaluate Investment Performance
1) PLANNING OF PORTFOLIO:
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
stock market, which in turn affects the portfolio. The continues revision
of a portfolio depends upon the following factors:
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
Return:-
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
Risk:-
The Webster’s New Collegiate Dictionary definition of risk
includes the following meanings: “……. Possibility of loss or injury …..
the degree or probability of such loss”. This conforms to the connotations
put on the term by most investors. Professional often speaks of
“downside risk” and “upside potential”. The idea is straightforward
enough: Risk has to do with bad outcomes, potential with good ones.
In considering economic and political factors, investors commonly
identify five kinds of hazards to which their investments are exposed. The
following tables show components of risk:
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
1. Market Risk:
Market risk is referred to as stock / security variability due to
changes in investor’s reaction towards tangible & intangible events is the
chief cause affecting market risk. The first set that is the tangible events,
has a ‘real basis but the intangible events are based on psychological
basis.
Here, Real Events, comprising of political, social or Economic
reason. Intangible Events are related to psychology of investors or say
emotional intangibility of investors. The initial decline or rise in market
price will create an emotional instability of investors and cause a fear of
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
Year, the required rate of return will have to be adjusted with upward
revision. Such a change in process will affect government securities,
corporate bonds & common stocks.
1. Business Risk:
Business risk arises due to the uncertainty of return which depend
upon the nature of business. It relates to the variability of the business,
sales, income, expenses & profits. It depends upon the market conditions
for the product mix, input supplies, strength of the competitor etc. The
business risk may be classified into two kind viz. internal risk and
External risk.
Internal risk is related to the operating efficiency of the firm. This
is manageable by the firm. Interest Business risk loads to fall in revenue
& profit of the companies.
External risk refers to the policies of government or strategic of
competitors or unforeseen situation in market. This risk may not be
controlled & corrected by the firm.
2. Financial Risk:
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
Rate of
Return Low Average High
Risk Risk Risk Market Line
Risk
Chart-B: RISK RETURN RELATIONSHIP: DIFFERENT STOCKS
Degree of risk
Source: Financial Management, By Ravi M. Kishore, Page No: 1145-46
Given the composite market line prevailing at a point of time,
investors would select investments that are consistent with their risk
preference. Some will consider low risk investments, while others prefer
high risk investments.
The construction of a best portfolio will depend upon a careful
security analysis. The portfolio management always thinks about the
return and rewards of different financial assets which are fully involved
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
Return on Portfolio:-
The portfolio value is highly influenced by return of individual
securities. Each security in a portfolio contributes return in the proportion
of its investment is security. Thus, the portfolio value may increase and
the targeted goals can be achieved. The return on portfolio is the
weighted average of the expected returns, from each security with a
proportionate weight of the different securities in the total investment.
The return on portfolio depends upon the selection of financial asset
which was made according to the investor’s perception. The efficiency of
a portfolio is highly influenced by a number of factors, i.e. investor’s
objective, investor’s risk presumption, safety of investment, capital
appreciation, liquidity of financial asset, hedging, time horizon set out by
investor, constraints regarding diversification by the investor etc.
The data of the following table reveals the calculation of 4
portfolio’s return and risk
Proportion of funds Expected Contribution of
Security invested in each return on each security to
security (Weights) each security return
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
Solution:
Weighted Return Weighted
Return Probability
(1) Return deviation deviations
(2) (3)
(2 x 3) from mean squared
1 7% 0.30 0.021 - 0.033 0.001
2 11% 0.55 0.060 0.007 0.001
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
Risk on Portfolio:-
Risk is the most important element in portfolio management. Risk
is reflected in the variability of the returns from Zero to infinity. The risk
on a portfolio is different from the risk on individual securities. The
expected return of a portfolio depends on the probability of the returns
and their weighted contribution to the risk. This is the essence of risk.
Risk means, the probability of various possible bad outcomes from a
constructed portfolio. The measurement of risk in portfolio involves
(a) Finding of average absolute deviation.
(b) Standard deviation.
These elements can be explained with following illustrations:
The probability of each of the return of a portfolio is given below.
Calculate the absolute deviations for the given portfolio.
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
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High
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
R
I
S Moderate
K
Low
2) Bank Deposits:-
Commercial Bank has been extending deposits facilities to the
public and has been the Indian investor’s greatest investment opportunity.
The various schemes offered by commercial Banks are in the categories
of saving accounts. Fixed Deposits, recurring deposits, monthly re-
payment plan, cash certificates, children’s deposits schemes and
retirement plans. The saving account offers an interest rate of 4% per
annum. One fixed deposits the banks give a rate of 6.5% per annum.
High
R
I
S Moderate
K
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
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Low
3) Provident Funds:-
High
R
I
S Moderate
K
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
Low
4) Equity Shares: -
The investment in equity share has a number of positive aspect
associated with it. These are Capital Appreciation as a hedge against
inflation, bonus shares, Right shares, voting rights, marketability, annual
dividends and fringe benefits etc. Income tax and wealth tax benefits are
also available to investment in equity share, 50% of the contribution
made by investors in shares of new companies qualifies for deduction
under section 80CC. No deduction is available in under section 80CCA
with effect from 1993-94 except rebate of Section 88.
High
R
I
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
S Moderate
K
Low
5) Government Bonds:-
The government bond, there is two categories of these bonds,
namely, tax-free and taxable. The tax-free bonds are 9 to 10% bonds
issued for Rs.1000; interest compounded half-yearly and payable half-
yearly. They have a maturity period of 7 to 10 years with the facility for
buy-back sometimes provided to small investors up to certain limits. The
taxable bonds yield 13% or above, compounded half-yearly and payable
half-yearly. They have normally a face value of Rs.1000/- and have buy-
back facilities similar to taxable bonds. Income from these bonds is tax
exempt up to Rs.12, 000/- under section 80L.
High
R
I
S Moderate
K
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
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Low
High
R
I
S Moderate
K
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
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Low
7) Debentures:-
A debenture is just a loan bond. Debenture holders are lenders but
not owners of the company. They don’t enjoy any voting rights. Usually
Debentures are of the face value of Rs.100/- each. They carry a fixed rate
of interest. The ruling rate in the market for debentures is 10% to 14%.
There are no income tax or wealth tax benefits for an investment in
Debenture.
High
R
I
S Moderate
K
Low
RETURN
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
DIVERSIFICATION
1. Simple Diversification,
2. Over Diversification,
3. Efficient Diversification.
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
Importance of Diversification:-
Diversification process:-
The process of diversification has various phases involving
investment into various classes of assets like equity, preference shares,
money market instruments like commercial paper, inter-corporate
investments, deposits etc. Within each class of assets, there is further
possibility of diversification into various industries, different companies
etc. The proportion of funds invested into various classes of assets,
instruments, industries and companies would depend upon the objectives
of investor, under portfolio management and his asset preferences,
income and asset requirements. The subject is further elaborated in
another chapter.
A portfolio with the objective of regular income would invest a
proportion of funds in bonds, debentures and fixed deposits. For such
investment, duration of the life of the bond/debenture, quality of the asset
as judged by the credit rating and the expected yield are the relevant
variables.
Bond market is not well developed in India but debentures, partly
or fully convertible into equity are in good demand both from individuals
and mutual funds. The portfolio manager has to use his analytical power
and discretion to choose the right debentures with the required duration,
yield and quality. The duration and immunization of expected inflows of
funds to the required quantum of funds have to be well planned by the
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
Naïve Diversification:-
be eliminated. Thus a fairly large portfolio has only systematic risk and
has relatively little unsystematic risk. That is why there is no gain in
adding securities to a portfolio beyond a certain portfolio size.
International Diversification:-
The benefits of diversification are well perceived by portfolio
managers, that many in developed countries started investing in foreign
bonds, stocks and other instruments. They found that can extend
diversification principle to foreign stocks, bonds etc, to improve returns
for a given risk by adopting proper techniques of diversification.
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
ANALYSIS OF PORTFOLIO
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
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Money Mkt.
3.41%
Debt
28.37% Equity
Debt
Money Mkt.
Equity
68.21%
Annualized returns of this fund on the basis of fact sheet for last 1st
year of 35.01% and last 3 years average 13.28%. Now last years’ returns
i.e. 35.01% it would be compared with the bank officer’s portfolio who
has invested in following way:
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
Return Profile
Risk Profile
Credit * Market * Interest * Liquidity
Security Proportion
Risk Risk Rate Risk Risk *
Equity 60 % Medium – Medium – Low- Medium
Shares Higher Higher Medium – High
Debenture 20 % Low – Low – Medium – Low -
Medium Medium High Medium
Bond 20 % Low- Low– Medium- Low–
Fund Medium Medium high Medium
58. 33 % Portfolio Risk Profile: Lower to Medium Risk
Interpretation: -
So, LICMF Balance Fund portfolio gave the double return than the
bank officer’s portfolio because there fund has invested in number of
good companies, so diversified portfolio give good return.
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
PORTFOLIO
13.65% 11.68%
7.54%
15.58%
8.10%
2.17%
8.20%
20.34% 12.92%
Annualized returns of this fund on the basis of fact sheet for last 1st
year of 97.23% and last 3 years average 13.00%. Now last years’ returns
i.e. 97.23% it would be compared with the portfolio return of retired
college professor invested in following way:
Return Profile
Portfolio Expected Return = R1 X1 + R2 X2 + R3 X3
= (0.40 x 12) + (0.25 x 8) + (0.35 x 10)
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
= 4.8 + 2 + 3.5
= 10.30%
Risk Profile
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
Interpretation:
So, LICMF equity Fund portfolio gave the very return than the
college professor’s portfolio because there fund has invested in number of
good companies, so diversified portfolio gives good return
college and Share Broker. One has two investment avenues in his
portfolio and other has three securities in his portfolio. So we
check out risk and return of both people as follow:
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
• Return on Portfolio:
Rp = R1X1 + R2X2
Where: Rp = Expected return to portfolio
R1 = Average Expected return of security one
R2 = Average Expected return of security second.
X1 = Proportion of security one
X2 = Proportion of security second.
• Risk on Portfolio:
For the calculation of risk we considered the formula of Markowitz
model it is as follow
Where,
6p = Risk of portfolio
X1 = Proportion of security 1
X2 = Proportion of security 2
Ø1 = Standard deviation of security 1
Ø2 = Standard deviation of security 2
r12 = Co-efficient of correlation between security 1 & 2
X = ∑X = 32 = 16
N 2
Ø1 = ∑( X – X ) 2
N
= 32 = 16 =4
2
X = ∑X = 24 = 12
N 2
Ø2 = ∑(X2 – X2)2
N
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
= 32 = 16 =4
2
Where,
Cov12 = Co-variance between security one and second
R1 = Return on security one
R2 = Return on security second.
R2 & R1 = Expected return
r12 = Cov12 = 12
Ø1 Ø2 4x4
R12= 0.75
= 4+4+6
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
= 16
Risk = 3.74 %
o Return of Portfolio:
o Risk on Portfolio:
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
X = ∑X = 32 = 16
N 2
Ø1 = ∑( X – X ) 2
N
= 32 = 16 =4
2
X = ∑X = 24 = 12
N 2
Ø2 = ∑(X2 – X2)2
N
= 32 = 16 =4
2
1 14 12 –2 4
2 10 12 2 4
Total 24 0 8
X = ∑X = 24 = 12
N 2
Ø3 = ∑(X3 – X3)2
N
= 8 = 4 =2
2
r12 = - 0.74
r23 = - 0.68
r23 = - 1.48
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
6p = X12 Ø12 + X22 Ø22 + X32 Ø32 + 2X1X2 r12 Ø1 Ø2 + 2X2X3 r23 Ø2 Ø3
+ 2X1X3 r13 Ø1Ø3
Where,
6p = Risk of portfolio
X1 = Proportion of security 1
X2 = Proportion of security 2
X3 = Proportion of security 3
Ø1 = Standard deviation of security 1
Ø2 = Standard deviation of security 2
Ø3 = Standard deviation of security 3
r12 = Co-efficient of correlation between security 1 & 2
r23 = Co-efficient of correlation between security 2 & 3
r13 = Co-efficient of correlation between security 1 & 3
= - 0.79
Risk = - 0.88
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
10.00%
5.00% 3.74%
- 0.88%
0.00%
Lecturer of college Share Broker
-5.00%
Risk Retrun
Interpretation:
We can see two different portfolios of two persons i.e. Lecturer and
Share broker. We calculate the risk and return on it. So lecturer has two
securities and share broker has three securities in his portfolio. The
investment avenue of the lecturer has high risk and high return. The
investment avenue of the share broker has low risk and it get low return
in compared to lecturer because of he has low risk.
So from above comparison we can find that when risk is high then
return also high, when risk is low then return low. Also find that
diversified portfolio give good return with low risk.
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
CONCLUSION
It is important to understand that equity shares are not
recommended for all investors. If you are past sixty, and dependent on
your savings for a living, I would strongly advise you not to buy and hold
equity shares only but also in other securities which gives a regular
income in periodic intervals. The stock markets are by nature volatile and
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
1. Do not speculate.
2. Do not invest in new issues.
3. Do not put all your eggs in one basket.
4. Limit the number of scrips in your portfolio.
5. Invest for the long term.
6. Invest in real value.
7. Invest in sunrise industries.
8. Disinvest before a company becomes a sunset industry.
9. Do not marry your stocks.
10. Set a limit to your greed.
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
FINDINGS
Investment in Mutual funds schemes specializes in the
business of investment management, and therefore professional
management for carrying out their activities. Professional
management ensures that the best investment avenues are tapped with
the aid of comprehensive information and detailed research. It also
ensures that expenses are kept under tight control and market
opportunities are fully utilized. An investor who opts for direct
equity investing loses out on these benefits.
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
schemes
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
ANNEXURE -1
CREDIT RISK
All the above factors may not only affect the prices of securities
but also the time taken by the fund or redemption of units, which could be
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
INTEREST-RATE RISK
Interest rate fluctuation is a common phenomenon with its
consequent impact on investment values and yields. Interest rate risk
refers to the risk of the change in value of your investment as a result of
movement in interest rates. Suppose you have invested in a security
yielding 8% p.a. for 3 years. One year down the line, interest rate have
moved and a similar security can be issued only at 9%. Due to the lower
yield, the value of your security gets reduced. The current value of a
security is calculated by using the market rate as the discount rate for the
security’s expected cash flows.
increase or decrease in the level of interest rates. The new level of interest
rates is determined by the rates at which government and other entities
raise new money and/or the price levels at which the market is already
dealing in existing securities. The price risk is minimal in the case of
floating rate or rating sensitized instruments or inflation linked bonds.
The price risk does exist if the investment is made under a redo
agreement.
MARKET RISK
Market risk is the risk of movement in security prices due to
factors that affect the market as a whole, rather than particular companies
or industries. Natural disasters (and certain man-made ones, like war) can
be one such factor. The most important of these factors is the phase the
markets are going through. Stock markets and alternating bullish and
bearish periods. There are several theories that partially explain why
these bull and bear markets keep alternating. Bearish stock markets
usually precede economic recessions. Bearish bond markets result
generally from high market interest rates, which in turn, are pushed by
high rates of inflation. Bullish stock markets are witnessed during
economic recovery and boom periods. Bullish bond markets result from
low interest rates and low rates of inflation. Thus, experts believe that
good economic forecasting is the key to anticipating changes in the stock
and bond markets. You need to find answers to the following questions:
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
LIQUIDITY RISK
Money has only a limited value if it is not readily available to you
as and when you need it. The ready availability of money is called
liquidity in financial jargon. An investment should not only be safe and
profitable, but also fairly liquid. Liquidity of an investment can be
measured in terms of the speed and ease with which it can be converted
into cash, whenever you need it. An asset is said to be liquid if it can be
converted into cash quickly, and with little loss in value. Liquidity risk
refers to the possibility of the investor not being able to realize its value
when required. This may either happen due to the fact that the security
cannot be sold in the market or prematurely terminated, or because the
resultant loss in value may be unrealistically high.
ANNEXURE -2
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
BIBLIOGRAPHY
Investment Management
- V. A. Avadhani
Investment Management
- V. K. Bhalla
Investment Management
- Preeti Singh
Investment Management
- V. Gangadhar
- G. Ramesh Babu.
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.
Study of Portfolio Management
Financial
Management
- Ravi M. Kishore.
ANNEXURE - 3
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Prof. V. B. Shah Institute of Management & R. V. Patel College of Commerce, Amroli.