Keshava Final

Effect of diversifying portfolio risk in stock market INTRODUCTION: Though the first stock exchange in India was established
over a hundred years ago, investment in equity started becoming popular in India only in the late 1970s because of the forced dilution of the foreign equity holdings in well- managed multinational companies. The eighties saw a steady growth of the equities cult with increasing larger number of companies tapping the stock market to meet their resources needed. The liberalization process and opening up of the Indian economy, which began in the eighties, picked up speed with the presentation of the union budget in July 1991. The budgets ever since have confirmed the Governments resolve to integrate the Indian economy with the world economy , despite temporary disruptions in the environment now and then .What is more important is that the returns in the Indian stock markets, even in dollar terms , have been at par with the best in the world in the last 10 years, boosting the confidence of the international investors . There is little doubt that we all are into a new era of the economic growth and prosperity, where financial securities would be the best avenue for investing our savings. We know, however that investing in stocks and shares is at best a high risk proposition. Many of us have been raised on the belief that investing in shares is different from gambling and is therefore something to be shunned. There is a little doubt that stock markets can be treacherous. The history of stock markets the world over is replete with booms and busts; of overnight millionaires and instant paupers. The Indian stock market has been no different.
VIVEKANANDA DEGREE COLLEGE, BANGALORE 1
Effect of diversifying portfolio risk in stock market Is investing in shares therefore chasing a chimera? The Indian stock markets are being rapidly professionalized. The entry of young, first generation brokers and several banks sponsored mutual funds is transforming the competitive structure of the market. The anticipated entry of Private Indian and foreign companies mutual funds would accentuate the competition further. These developments imply that individual investors would have to play against increasingly more sophisticated players in the market.
1.1
INVEST IN WHAT YOU KNOW Investors often behave in a typically restless and fickle manner,
never satisfied with what they have- always looking for the next hot stock. This outlook is usually translated into cumbersome portfolios with an unmanageably large number of scrip. Most of us believe that diversification is good since it reduce risk. Isnt that what we have always been taught? The efforts of various financial scholars who studied all this stuff in the fifties, sixties and seventies, showed that after a point there is no further risk reduction gained other costs increase. by adding more assets, but instead transaction and The Ideal number of investments recommended by
different experts ranges between twelve and twenty, without getting into the merits of these arguments and their methodologies for measuring risk, the key points Is that most of the researcher came to the conclusion that beyond a limit, there is no further gain in diversification.
Effect of diversifying portfolio risk in stock market At the same time, the risk reduction implies the selection of investments whose performances are not correlated. If all investments are in the steel industry, then there is no real diversification, since all the stocks will be highly correlated i.e. likely to move in the same direction at the time. Hence we tend to spread our stocks across industries. Even here certain industries could be closely linked. For example, the white goods and automobile segments which are both dependent on consumer spending may have similar boom bust cycles, which will in turn have a significant correlation with the fortunes of companies making steel flats. Hence, a further diversification of investment spread across these segment is unlikely to help in reducing risk. Keeping track of a vast number of scripts can be nightmarish, especially in the Indian context. For an investor whose business is not stocks, even reading all the balance sheets is a laborious chore not to mention keeping abreast of half yearly results, company announcements, industry outlooks, etc. as a result we are sometime unaware of bad news, or find out too late. The larger number of companies we invest in the higher the chances of being out of touch with their performances. It all goes back to the psychology of individual. Any investor will be far more prudent with an investment that is worth 10-15% of their assets than one, which accounts for mere 1%. The chances are that they will evaluate their options more critically, thereby improving their hit rate.
Effect of diversifying portfolio risk in stock market 1.2 INDIA: THE PROMISE OF GROWTH:
The economy of the India is 4th largest in the world as measured by Purchasing Power Priority (PPP). When measured in USD exchange rate terms, it is the 10th largest in the world, with a GDP of US $1.0 trillion (2007). India is the second fastest growing major economy in the world, with a GDP growth rate of 9.2%at the end of second quarter of 2008-09. However, Indias huge population results in a per capita income of $3400 at PPP and $820 at nominal. The World Bank classifies India as a low income economy. The economy diverse and encompasses agricultural, handicrafts, textile, manufacturing and a multitude of services. Although two-third of Indian workforce still earns their livelihood directly or indirectly through agriculture, services are a growing sector playing an increasingly important role of Indias economy. The advent of digital age and the large number young and educated populace fluent in English, is gradually transforming India as a important back office destination for global companies for outsourcing of their customer services and technical support. India is a major exporter of highly skilled workers in software and financial services and software engineering. Other sectors like manufacturing; Pharmaceutical, biotechnology, nanotechnology, telecommunication, shipbuilding and aviations are showing strong potential with higher growth rates. India followed a socialist inspired approaches for most of its independent history, with strict Government control over provide sector participation, Foreign Trade and Foreign Direct Investment (FDI). However, since the early 1990s, India has gradually opened up its market through economic reforms
Effect of diversifying portfolio risk in stock market by reducing Government control on Foreign Trade and Foreign Direct Investment (FDI). The privatization of publicly owned industries and the opening of certain sectors to private and Foreign interests as proceeded slowly amid political debate. The India forces a burgeoning population and the challenge of reducing economic and social inequality. Poverty remains a serious problem, although it has declined significantly since independence, mainly due to Green Revolution and economic reforms. SELECTED ECONOMIC INDICATORS: India remained relatively unscathed from the 1997-98 Asian Financial Sector crises and has maintained a healthy growth rate of over 5%despite recession in major world economics over the past 2 years. This demonstrates the size, strength and resilience of the Indian economy. Were it not for the resilience of China and India, the world would have been in deep recession in 2008. The sectoral composition of GDP reflects a transition. While the agricultural and industrial sectors have continued to grow, the services sector has grown at a significantly higher pace it currently contributes nearly half of the Indias GDP. On the external front, cumulative foreign investment inflows have been US$ 50 billion since 1991.This includes over US$28 billion of foreign direct investment (FDI) and about US$22.6 billion in portfolio investment.
Effect of diversifying portfolio risk in stock market Licensing has been removed from all but six sectors .The Indian government is determined to remove any remaining road blocks, real or perceived .India has one of the most transparent and liberal FDI regimes among the emerging developing economics .The union government has been continuously opening up new sectors to foreign investment , while enhancing FDI limits in others. The year 2002 saw the opening up of the defense, print media, housing and real estate and urban mass transportation sectors. SECTORAL OVERVIEW AGRICULTURE: Two thirds of Indias population lives in rural areas. Agriculture in India is one of the most prominent sectors in its economy .Agriculture and allied sectors like forestry; logging and fishing accounted for 19.9% of the GDP in 2005 and employed 62% of the countrys population .It accounts for 8.56% of Indias exports. About 43% of Indias geographical area is used for agricultural activity. Despite a steady decline of its share in the GDP, agriculture is still the largest economic sector and plays a significant role in the overall socio- economic development of India. The performance of the agricultural sector has continuously been improving (over many decades), helping the country achieve a surplus in food grains production. This has been facilitated through new agricultural techniques and tools acquired by Indian farmers, mechanization, use of high yielding varieties of seeds, increasing use of fertilizers and irrigation facilities , on going operational research in the countrys numerous agricultural universities and colleges ,etc. With liberalization of trade in
Effect of diversifying portfolio risk in stock market agricultural commodities, India enjoys a competitive advantage in a number of agricultural and processed food products exports. Agriculture accounts for 62 per cent of total employment MANUFACTURING India has moved from an agrarian to a manufacturing and services led economy. The manufacturing sector accounted for 19.3% of the total GDP. The country has built a diversified industrial base comprising traditional handicrafts, small, medium and large manufacturing companies and high technology oriented products. The industrial output has grown to approx US$ 65 billion. The country has emerged as an important global manufacturing hubmany multinational corporations (MNCs) like Pepsi, General Electric (GE), General Motors(GM), Ford , Suzuki, Hyundai, Gillette, LG etc. Have followed Indias economic liberation process from close quarters and set up successful operations in the country in recent years. They have been able to leverage cost advantages while adhering to global manufacturing facilities. Companies in the manufacturing sector have consolidated around their area of core competence by tying up with foreign companies to acquire new technologies, management expertise and access to foreign markets. The cost benefits associated with manufacturing in India, have positioned India as a preferred destination for manufacturing and sourcing for global markets.
Effect of diversifying portfolio risk in stock market
SERVICES
The services sector currently accounts for almost half of the countrys GDP. Expanding at a rate of 8-10% per annum, services are the fastest growing sector in the Indian economy. In fact, the growth in Indias GDP, despite the global slowdown, is attributed largely to its strong performance. Indias exports of services have been growing at close to 20% per annum, increasing their share in world exports to 1.5%, compared to the dismal share of merchandise exports at only 0.8%. The service sector accounts for 60.7% of the total GDP. Availability of highly skilled workers has encouraged many international companies to carry out their research and development activities in India. IT, biotech, tourism, health, financial services and education hold the promise of sustainable high growth. To give a perspective:
The Indian IT industry has grown from US$ 0.8 billion in 1994-95 to US$ 10.1 billion in 2001-02. Domestic software has grown at 46% while software exports have grown at 62% over the last 5 years.
The last decade has seen the Indian entertainment industry grow exponentially. The key drivers for this have been technology and the governments recognition of the importance of the sector. The industry is expected to grow at a compound annual growth rate (CAGR) of 27%. Revenues are increased from US$ 3 billion in 2002 to US$ 10 billion in 2005.
VIVEKANANDA DEGREE COLLEGE, BANGALORE
Information Technology Enabled Services (ITES) with elements like call centers; back office processing, content development and medical transcription is the key to rapid growth. The sector has an employment potential of 1.1 million by 2008.
Infrastructures
The infrastructure sector in India, traditionally reserved for the government, is progressively being opened up for private sector participation. According to the India infrastructure report (IIR), currently 5.5% of the GDP is invested in the infrastructure sector. This needs to be increased to 7% in the next three years and gradually to 8%, by which time the annual investment in infrastructure facilities is going to treble or rise even more, from the current level of RS. 6000 Billion.
PORTS
The country has a 7500 km long coastline dotted with numerous major and minor ports. The areas that have been identified for participation and investment by the private sector include leasing out existing assets of the ports, construction of additional assets such as container terminals, cargo berths, handling equipment, repair facility, captive power plants and captive facilities for port based industries. Foreign investment up to 100 per cent equity participation is permitted in ports through the automatic route for construction and maintenance of ports and harbors.
Effect of diversifying portfolio risk in stock market A number of private companies have already set up port facilities n the country. Two Greenfield ports that are Pipavav and Mundra in Gujarat have been set up through private participation and these have been able to compete with existing major ports. Many multinational and domestic players have taken over existing port has been taken over by an Australian port major. ROADS India has the first largest road network in the world, spanning 3.38 million kilometers. Most of the private investment in thus sector has traditional been through the build-operate-transfer schemes. However, now many new projects are being bid out on toll collection mechanism. Currently the National Highways Authority of India (NHAI) is implemented the Development Project (NHDP) is largest ever highway development project to be undertaken in the country. The project involves widening of over 13000 km of highways in the country. The investment for this project is estimated at USS 13.2 billion at 1999 prices, the project has been broken up into a large number of smaller segments, many of which have been commissioned. Currently work has been completed on 1976 kilometers and another 5222 kilometers of length is under construction.
AIRPORTS
There are 449 airports/airstrips in the country. Among these, the Airports Authority of India (AAI) owns and manages 5 international airports,
Effect of diversifying portfolio risk in stock market 87 domestic airports and 28 civil enclaves at Defense Airfields and provides air traffic services over the entire Indian airspace and adjoining oceans areas. In 1998-99, these airports/civil enclaves handled 4.20 lakh aircraft movements involving 24.17 million domestic and 12.83 million international passengers and 221 thousand metric tones of domestic cargo and 468 thousand metric tones of international cargo. 51 percent of traffic was handled at the international airports at Mumbai and Delhi. Presently various airlines are operating through 61 airports. The remaining is lying unutilized at best handling occasional aircrafts operations.
POWER
Power sector, hitherto, had been funded mainly through budgetary support and external borrowings. But given the budgetary support limitation due to growing demands from other sectors, particularly social sector and the severe borrowing constraints, a new financing strategy was enunciated in 1991 allowing private enterprise a larger role in the power sector.
Presently, restructuring and regulatory reforms include bringing about reforms in the State Electricity Boards (SEBs) through establishment of the State Electricity Regulatory Commissions. Reforms are progressing steadily in the sector and privatizations of SEBs have already begun. The government is a one-time settlement of dues of SEBs. In effect, a large amount of liquidity will be injected in the sector.
The ministry of power has also formulated a blue print to provide reliable, affordable and quality power to all users in the country i.e. power on demand by 2012. This requires huge increase in generation capacity, up gradation of existing generation facility and also the transmission and distribution network.
TELECOMMUNICATION: Indias telecommunication network ranks among the top ten countries in the world and one of the largest telecom network in Asia. One of the largest worlds largest and fastest growing telecom markets, the country has an investment potential estimated at US$69 billion by 2010.
Despite a strong base of a billion people, the countrys teledensity per hundred population has grown from 7.08 in march 2004 to 8.95 in ,march 2005 and to a level of 12.74 in march 2006 and estimated to grow 15% by 2010. The government had allowed private participation in cellular services in 1992.the sector witnessed partial de-regulation between 1994 and 1999. The government announced the new telecom policy (NTP) in 1999 to further deregulate sector with respect to services like basic, international long distance
Effect of diversifying portfolio risk in stock market (ILD),national long distance (NLD) and wireless in local loop(WLL)among others.
FINANCIAL SECTOR The far-reaching changes in the Indian economy since liberalization in the early 1990s have had a deep impact on the Indian financial sector. The financial sector has gone through a complex and sometimes painful process of restructuring, capitalizing on new opportunities as well as responding to new challenges. During the last decade, there has been a broadening and deepening of financial markets. Several new instruments and products have been introduced .existing sectors have been opened to new private players. This has given a strong impetus to the development and modernization of the financial sector. New player have adopted international best practices and modern technology to offer a more sophisticated range of financial services to corporate and retail customers. This process has clearly improved the range of financial service providers available to Indian customers. The entry of new players has led to even existing players upgrading their products offerings and distribution channels. This continued to be witnessed in 2002-03 across key sectors like commercial banking and insurance, where private players achieved significant success. These changes have taken place against a wider systemic backdrop
of easing of controls on interest rates and their realignment with market rates , gradual reduction in resource pre-emption by the government, relaxation of stipulation on concessional lending and removal of access to concessional
Effect of diversifying portfolio risk in stock market resources for financial institutions. Over the past few years, he sector has also witnessed substantial progress in regulation and supervision. Financial intermediaries have gradually moved to internationally norms for income recognition, asset classification and provisioning and capital adequacy. This process continued in 2002-03, with RBI announcing guidelines for risk based supervision and consolidated supervision. While maintaining its soft interest rate stance, RBI cautioned banks against taking large interest rate risks, and advocated a move towards a floating rate interest rate structure. The past decade was also an eventful one for the Indian capital markets.
DISINVESTMENT The government over the past decade has been increasingly redefining its role from being a provider of goods and services to that of a policy maker and facilitator. Towards this objective, the government has been consistently divesting its stake in various public sector undertakings (PSUs). Between 1991 and 2003, the government divestment process had
yielded US$6.3 billion to the national exchequer. 1.3.CURRENT SCENARIO OF THE INDIAN ECONOMY
Effect of diversifying portfolio risk in stock market The second half of 2003 saw an upsurge in optimism with a bountiful monsoon emerging after 3 years of deficient rainfall. Expectations rose and consumer confidence soared on the assumption that the economy would now capitalize on its intrinsic strengths .GDP is now expected to grow .there is again renewed optimism that it can reach its recognized potential of more than 8% pa if the second phase of reforms is carried out in a time bound manner over the next few years. Amidst this upbeat mood, the flip side has to be kept in mind. In the Indian Economic survey tabled in parliament at the end of February 2003, the Finance Ministry had stated that fiscal consolidation has to be given a priority so that funding to the private sector is not crowed out. The Economic Survey called for a cut in untargeted subsidies and encouraging public investment in physical and social infrastructure .it has also recommended streamlining the tax system to shore up revenues .The areas earmarked for rationalization of subsidies are food, fertilizers, liquefied petroleum gas (LPG) and kerosene. The savings rate in the country has overtaken the rate of investment in 2001-02 for the first time since 1975.savings are 24% of the GDP while domestic investment is 23.7% as of a year ago. This confirms the widely held view that investments have been subdued for the past few years. During the past year or so the rupee has been strengthening against the US$. In July 2002 the rupee traded at 48.67% to the dollar .In February 2004 it is trading at 45.30. The external debt situation has improved significantly in recent years and the external debt-GDP ratio decreased from 28.7% at end of March 1991 to 21% currently.
Effect of diversifying portfolio risk in stock market And India now aims at emerging as an economic superpower in the coming decades.
Effect of diversifying portfolio risk in stock market RESEARCH DESIGN EFFECT OF DIVERSIFYING PORTFOLIO RISK IN
STOCK MARKET .is a study that was conducted for 20 stocks listed in the national stock Exchange. It covers a period of 1 year from a 1 st April 2008 to 31st march 2009. The stocks represent a wide cross section of industries and most of them have been part of the NIFTY although some have been dropped from the NIFTY during its periodic reconstitution .the current Nifty was not chosen because many of the stocks currently constituting them have not been traded for the previous years. The basis of portfolio analysis is that the portfolios, which are the combinations of individual securities, do not take the characteristics of their individual components .portfolio analysis considers the determination of future risk and return in holding various types / categories of securities. The aim of the paper is to analyze the securities in a portfolio and to help an investor to reduce risk through proper diversification. While on the topic of return we should also consider the subject of risk-both portfolio risk and the individual risk of the security. Diversification can help to reduce portfolio risk by eliminating unsystematic risk for which investors are not rewarded .investors are rewarded for taking market risk. Because diversification averages the returns of the assets within the portfolio, it attenuates the potential highs (and lows). Diversification among companies, industries and asset classes affords the investor the greatest protection against business risk, financial risk and volatility.
Effect of diversifying portfolio risk in stock market Finally, in a large portfolio of common stocks, the unsystematic risk associated with one stock typically has no impact on the unsystematic risk associated with any other stock; this conclusion is derived from the definition of an unsystematic risk. Consequently, the portion of the return on a stock, which arises from the unsystematic risk, would tend to offset the portion, which arises from the unsystematic risk for another stock in the portfolio .in a portfolio of thirty or more stocks, it would be reasonable to expect that the effects of unsystematic risk on various stocks would offset each other, thereby eliminating the risk arising from this source. Analytical and quantitative method sources. The data has been collected is used for the research study.
Information is secondary in nature was collected through various secondary from the published records of the like economic times, companies , various trade journals, news papers
business standards etc .magazines like business world, business standards, business today and various text books on investment, portfolio management etc.
Title of the study:

A Study on EFFECT OF DIVERSIFYING PORTFOLIO RISK IN STOCK MARKET.
Statement of the Problem:

Intelligent investing is about how effectively an investor is able to balance risk and return. The basis of portfolio analysis is that portfolios, which are the combinations of individual securities, do not take the characteristics of their individual components. The principle of diversification involves investigating portfolio of securities to ensure that losses in some will offset by gain in others, thereby reducing the risk on return. The study focuses on the effect of diversifying the risk of portfolio. In general, the problem is if the number of securities in a portfolio increases, say up to 20, will diversification reduce the unsystematic risk measured by standard deviation, and with any further diversification will it result only in marginal reduction of portfolio risk.
NEED FOR STUDY The need for the study is to analyze the securities in a portfolio and to help an investor to reduce risk through proper diversification.
Effect of diversifying portfolio risk in stock market Objectives of the study: To understand the diversification of risk To examine. whether diversification of stocks in a portfolio reduces the un systematic risk To examine the effect of diversification beyond a certain limit. To offer suggestions based on study.
SCOPE OF THE RESEARCH The scope of this research would include dissemination of information relating to diversification of stocks in a portfolio and contributing to a better understanding the context, resources, structure, systems, process, and reforms of this diversification to the investors. METHODOLOGY The methodology followed in literature survey and preparation of subtracts as under: By visiting various libraries and with reference given in various articles in magazines, literature survey was undertaken. Bibliography list from the book was prepared with consulting of project guide the area and topic was selected. The relevant articles was studied from various publications and abstract was prepared for the purpose.
Effect of diversifying portfolio risk in stock market After discussing with guide about the literature survey the topic of study was finally given a clear cut shape with the specific objectives methodology to be followed both for collection and analysis of the data. RESEARCH TYPE Since the evaluation of the data has to be conducted on the information collected from the secondary sources the type of research carried out will be the analytical in nature .Since the data will be expressed in terms of quantity/numbers Quantitative research will be used.
SAMPLING PLAN
SAMPLING TECHNIQUE: The sampling technique used was non probabilistic judgment sampling. SAMPLE UNIT : The sample units are the closing share prices of Indian companies that are included in the National Stock Exchanges broad based index- NIFTY. SAMPLE SIZE: 20 companies closing share prices. SOURCES OF DATA Preparation of project report pre supposes a good knowledge of the subject and the topic, which is selected for a detailed analysis. This requires and extensive survey of literatures available in the form of
21
News papers/ Magazines Books/published articles Trade journals
Effect of diversifying portfolio risk in stock market Company records In house publications of institutions Data released by national statistical organization.
RESEARCH TOOLS USED FOR THE ANALYSIS For all the variables the collected data was arranged in a tabular form. Relevant statistical tools were used for analyzing the obtained data. The inferences were drawn using the analysis. Mean Standard deviation Variance Covariance
LIMITATION OF THE RESEARCH One of the limitations of the research is the time span of period selected & time available for the study. Research Scope limitations results in using a limited number of companies. The conclusions are based on the area & the number of companies selected.
Effect of diversifying portfolio risk in stock market Skewness of the study.
LAYOUT OF THE CHAPTER
CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5
INTRODUCTION RESEARCH DESIGN PROFILES OF THE COMPANIES ANALYSIS & INTERPRETATION OF DATA SUMMARIES OF FINDINGS, CONCLUSIONS & RECOMMENDATIONS
ANALYSIS OF THE COMPANIES USED IN THE RESEARCH The portfolios of securities are based on the companies from the NSE NIFTY index. A brief introduction of the National Stock Exchange is given below THE NSE ORGANISATION The National Stock Exchange of India Limited has genesis in the report of the High Powered Study Group on Establishment of New Stock Exchanges, which recommended promotion of a National Stock Exchange by financial institutions to provide access to investors from all across the country on an equal footing. Based on the recommendations NSE was promoted by leading Financial Institutions at the behest of the Government of India and was incorporated in November 1992 as tax-paying company. On its recognition as a stock exchange under the securities contracts (Regulation) Act, 1956 in April 1993, NSE commenced operations in the wholesale Debt market (WDM) segment in June 1994. The Capital Market (Equities) segment commenced operations in November 1994 and operations in Derivatives segments commended in June 2000.
Effect of diversifying portfolio risk in stock market S & P CNX NIFTY S & P CNX Nifty is a well diversified 50 stock index accounting for 23 sectors of the economy. It is used for a variety of purposes such as benchmarking fund portfolios, index based derivatives and index funds. S & P CNX Nifty is owned and managed by India Index Services and Products Ltd. (IISL) which is a joint venture between NSE and CRISIL. IISL is Indias first specialized company focused upon the index as a core product. IISL have a consulting and licensing agreement with Standard & Poors (S&P) who are world leaders in index services.
The total traded value of all Nifty stocks is approximately 70% of the traded value of all stocks on the NSE.
Nifty stocks represent about 59% of the total market capitalization.
Impact cost of the S& P CNX Nifty for portfolio size of Rs. 5 million is 0.10%.
S & P CNX Nifty is professionally maintained and is ideal for derivatives trading.
Effect of diversifying portfolio risk in stock market TABLE 1 CONSTITUENT COMPANIES LIST OF NSE NIFTY as on MAY 2009
Company Name Asia Brown Boveri Ltd. Associated Cement
Industry Electrical Equipment Cement & Cement Products Automobiles 2 and
Symbol ABB ACC BAJAJ AUTO BHARTIARTL BPCL CIPLA DABUR DRREDDY GAIL GLAXO
Companies Ltd. Bajaj Auto Ltd. Bharati Tele
3 Wheelers Telecommunication Services Refineries Pharmaceuticals Personal Care Pharmaceuticals Gas Pharmaceuticals
Ventures Ltd. Bharat Petroleum Corporation Ltd. Cipla Ltd. Dabur India Ltd. Dr. Reddys Laboratories Ltd. GAIL (INDIA) LIMITED Glaxosmithkline Pharmaceuticals India Ltd. Grasim Industries Ltd. Gujarat Ambuja
Cement & Cement Products Cement & Cement Products Computers Software Finance Housing
GRASIM GUJAMBCEM HCLTECH HDFC
Cements Ltd. HCL Technologies Ltd. Housing

26
Effect of diversifying portfolio risk in stock market Development Finance Corporation Ltd. HDFC Bank Ltd. Hero Honda Motors Ltd. Hindalco Industries Banks Automobiles 2 and Wheelers Aluminum Diversified Refineries Banks Computers Software Petrochemicals HDFC BANK HERO HONDA HINDALCO HINDLEVER HINDPETRO ICICI BANK INFOSYSTCH IPCL
Ltd Hindustan Lever Ltd. Hindustan Petroleum Corporation Ltd. ICICI Banking Corporation Ltd. Infosys Technologies Ltd. Indian Petrochemicals Corporation Ltd. ITC Ltd. Reliance Petroleum Larsen & Turbo Maruti Udyog Ltd. Mahindra Mahindra Ltd. Mahanagar Telephone Nigam Ltd. National Aluminum Company Ltd. Oil & Natural Gas Corporation Ltd. &
Cigarettes Refineries Engineering Automobile Wheelers Automobile
4 4
ITC RPL LT MARUTI M&M MTNL
Wheelers Telecommunication Services Aluminium Oil Exploration
NATIONALUM ` ONGC
Effect of diversifying portfolio risk in stock market STERLITE Industries Ltd. Punjab & National Bank Ranbaxy Laboratories Ltd Reliance Energy Ltd. Reliance Industries Ltd. Steel Authority of India Ltd. Satyam Computer Services State Bank of India SIEMENS Sun Pharmaceutical Industries Ltd. Suzlon Energy Tata power Co. Ltd. Reliance Communication Tata Engineering & Locomotive Co. Tata Consultancy Service Tata Iron and Steel Company Ltd. Videsh Sanchar Nigam ltd. Wipro Ltd. Metals Banks Pharmaceuticals Power Refineries Steel & Steel STER PNB RANBAXY REL RELIANCE SAIL SATYAMCOMP SBIN SIEMENS SUNPHARMA SUZLON TATAPOWER RCOM TATA MOTORS TCS TATASTEEL VSNL WIPRO
Products Computers Software Banks Electricals Equipments Pharmaceuticals
Electrical Equipment Power Telecommunication Automobile 4
Wheelers Computer Service Steel & Steel
Products Telecommunication Service Computers Software
TABLE 2 CONSTITUENT COMPANIES LIST OF 20 SELECTED NSE NIFTY as on MAY 2009 S.NO 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
29
SYMBOL A B C D E F G H I J K L M N O P
COMPANIES ACC ABB INFOSYS HEROHONDA BRITANNIA MARUTI HDFC BANK ITC HIDUSTAN LEVER BHEL TATAPOWER VSNL BAJAJ AUTO ONGC RANBAXY RELIANCE
Effect of diversifying portfolio risk in stock market 17 Q TATASTEEL 18 R M&M 19 S WIPRO 20 T TCS A BRIEF INTRODUCTION TO THE COMPANIES ARE GIVEN BELOW ASSOCIATED CEMENT COMPANIES LTD. (ACC) (Cement & Cement Product industry) Associated Cement Companies (ACC) one of the leading cement producers in India came into existence consequent to the amalgamation of ten cement companies in 1936. Manufacturing and marketing of cement, ready mix concrete, refractorys and refractory products are the main business of ACC. Further the company is also into consultancy and engineering service. ACCS manufacturing base consist 14 cement plants spread well all over India. The total cement capacity of ACC stands at 161.47 lakh tones at March 31, 2008. In Jan. 1999, the company came out with rights issue to fund its capex projects involving modernization/ expansion of existing plants and creation of new capacity at Wadi. The company meets around 83% of its power requirements from its captive power plants. The captive power plant at Jamul and Kymore with an capacity of 25 MW each was commissioned in Nov, 1999. The 15 MW captive power plants stake in favor of Gujrat Ambuja Group. Notably, Gujrath Ambuja group is the most efficient and aggressive cement group in India. The disinvestment was done in phases at Rs. 370 per share.
Effect of diversifying portfolio risk in stock market ACChas completed the modernization and expansion of the Chanda and Madukkarai cement plants for increasing their capacities to around 1 MTPA each. These plants started production from 1 September 2000 and 1 October 2000 respectively. The company has completed divestment of its stake in Float glass India Ltd. (13% stake in 2001-02) International Ferrites Ltd. (35% stake in 2002-03) and Bridgestone ACC India Ltd. (19% stake in 2002 03). Further it has also sold its stake (500,000 Equity shares) in Tata Industries In 2001-02. The company is making all efforts to hive off the ACC Nihon Casting, a 100% subsidiary of ACC manufacturing alloy steel casting but has not met success yet. At the same time of existing from non-core businesses the company has not failed to invest in core activities it has acquired 76.01% stake in Eternit Everest from Etex Group in Feb 2002.
ASEA BROWN BOVERI LTD. (ABB) Electrical Equipment Industry ABB Ltd. Is a global provider of power and automation technologies that enable utility and industry customers to improve performance while lowering environmental impact? Effective January 1, 2008, in order to streamline its structure and improve operational performance, the company put into place two divisions: Power Technologies and Automation Technologies. The Power Technologies division serves electric, gas and water utilities, as well as industrial and commercial customers, with a range of products, systems and services for power transmissions, distribution and power plant automation. The automation Technologies division provides products, systems, software and services for the automation and optimization of industrial and commercial processers. Key technologies include
Effect of diversifying portfolio risk in stock market measurement and control, instrumentation, process analysis, drives and motors, power electronics, robots and low-voltage products.
For the six months ended 6/30/09, revenues rose 1% to $9.27 billion. Net income from continuing operation totaled $ 207 million, vs. a loss of $14 million. Revenues reflect increased power products orders. Net income benefited from higher margin services business. Market Cap (Intraday): 11.96B The net profit of the company increased by 45% to Rs. 540mm in F12/00 as compared to Rs. 372mm in the previous year. The companys future prospects are closely linked to investments in the power and industrial sectors. ABB is planning to sell mass market products like low voltage switches, fuses and circuit breakers and wiring accessories. INFOSYS Computer Software Industry Infosys Technologies Limited is an information technology (IT) Services Company founded in Pune, India in 1981 by N.R. Narayan Murthy and six of his colleagues. In 1983, Infosys moved its headquarters to Bangalore, the capital of Karnataka. It operates nine development centers in India and has over 30 offices worldwide. Annual revenues for fiscal year 2009 exceeded US $3.1 billion with a market capitalization of over US$30 billion. With over 72,000 employees worldwide, Infosys is one of Indias largest companies. Infosys Technologies Ltd (Infosys) was incorporated on July 2, 1987 as a private ltd company. It became public limited company on June 1992 and
Effect of diversifying portfolio risk in stock market subsequently the name was also changed Infosys Technologies Ltd... Infosys is one of Indias leading information technologies (IT) services companies. It is mainly engaged custom software development, maintenance, re-engineering services, e-commerce and internet consulting as well as dedicated offshore software development center for certain clients, of space under construction. The total employee strength up to March 2009 was 72000, as against 9831 on March 2001. Infosys Technologies came out with an IPO in Feb. 1993. In 2008 Infosys acquired the 25% stake Citibank had in its BPO offshoot Progeon, making it a wholly owned subsidiary of Infosys and changed the name to Infosys BPO Ltd. An investment of Rs. 9,500 ( 100 shares at an issue price of Rs 95) in the initial public offering of Infosys in 1993 ( Rs. 9,500 was approximately $300 according to the 1993 exchange rate) would now be worth Rs. 29,440.000 ($665,235 according to the 2009 exchange rate) after adjusting for stock splits and bonuses. This is a 3000fold increase in rupee terms over a 14 year period (1993 2009 ) and does not include the dividends that the company has paid out. In 2001 02 the company has signed up 116 new clients and had a total client base of 293 at the end of the year. The companys product FINACLE, is an integrated core banking solution that is centralized, multi currency and multi language enabled, functionally rich, and addresses both retail and corporate banking requirements. The product is having a market share of over 60% among the Indian banks. FINACLE was ranked among the top 3 best selling retail banking systems in the world by IBS. The companys banking business Unit has consolidated its position in African market, and has also expanded in the Middle East.
Effect of diversifying portfolio risk in stock market It is also planning to foray into Business Process Management and a separate company is being formed. The company also plans to focus aggressively on mobile commerce (M commerce) in the next few years. Recently the GOI has raised the investment limit in an Indian Company for FII from 49% to the maximum level approved under the FDI and the maximum limit for the software industry as approved by FDI is 100% at present, the company is in the plan of increasing the limit of such investment to 100%.
HERO HONDA Automobile Industry Hero Honda Motorcycles is the Worlds biggest manufacturer of motorcycles (by quantity). Hero Honda is a 50: 50 Joint venture that began in 1984 between the Hero group of India and Honda from Japan. It has been the worlds biggest manufacturer of 2 wheeler motorized vehicles since 2001, when it produced 1.3 million motorbikes in a single year. Hero Hondas Splendor is the worlds largest selling motorcycle. motorcycles that are low powered but very fuel efficient. India has the largest number of two wheelers in the world with 41.6 million vehicles. India has a mix of 30 percent automobiles and 70 percent two wheelers in the country. India was the second largest two wheeler manufacturer in the world starting in the 1950s with the birth of Automobile Products of India (API) that manufactured scooters. The business growth of Hero Honda has been phenomenal throughout its early days. The Munjal family started a modest busies of
Its 2 plants are in
Dharuhera and Gurgaon, both in Haryana, India. It specializes in dual use
Effect of diversifying portfolio risk in stock market bicycle components. Hero Group expanded so big that by 2002 they had sold 86 million bicycles producing 16000 bicycles a day.
The hero group also took a venture in other segments like exports, financial services, information technology, which includes customer response services and software development. Further expansion is expected in the areas of Insurance and Telecommunication. The Hero Groups phenomenal growth is the result of constant innovations, a close watch on costs and the dynamic leadership of the Group Chairman, characterized by a culture of entrepreneurship, of right attitudes and building stronger relationships with investors, partners, vendors and dealers and customers.
BRITANNIA INDUSTRIES LTD. Food and Food Processing Industry Food major Britannia Industries (BIL), is one of the leading producers of biscuits and other bakery products. Group Danone is one of the leading players in bakery products business. The association with Groupe Danone has been a good technological support to BIL. The company is jointly controlled by Groupe Danone of France, which is holding 22% stake. Britannia enjoys a prominent position in the industry. Over the last couple of years, it has trimmed down. The company rationalized its products portfolio by reducing the products from 35 to around 25. In October 1999, the company has issued bonus shares in the ratio of 1: 2. Britannia is the market leader in the 1.2 million tone Indian biscuits industry with a 60% share. It
Effect of diversifying portfolio risk in stock market mainly caters to the premium segment. With the launch of Tiger brand, it has taken a plunge in the low end category, taking competition head on with Parle which is the leader in this segment. The company has also diversified with dairy and bakery products to enter the butter, cheese and ghee markets. Britannia has built on enviable retail distribution network which services 400,000 retail outlets in 2200 towns with the help of 2,500 distributors. The company is aggressively expanding its network with a bias towards the rural market. In Dec. 2000, Britannia dropped its plans to enter the mineral water segment. The mineral water segment in India is growing at around 50% annually and is dominated by Bisleri and Bailey. BIL has acquired the trade mark KWALITY, the Chef Device and several other trademarks owned by Kwality Biscuits of Bangalore for a consideration of Rs 30 crore. It has also agreed in principle to acquire 49% equity of Kwality Biscuits. transaction is expected to be completed during the current financial year. The company has agreed to acquire 49% equity of snako Bisc (P) Ltd. Along with the trademark NUTRINE in respect of Bakery Product etc. and several other trademarks along with copyrights and designs. In March 2002, the Company entered into a joint venture with the Fonterra Cooperative Group, New Zealand. BIL will be transferring its existing dairy business to the new joint venture. MARUTI UDYOG Ltd Maruti Udyog Ltd. Is one of Indias leading automobile The
manufacturers and the market leader in the car segment, both in terms of volume of vehicles sold and revenue earned? Until recently, 18.28% of the
Effect of diversifying portfolio risk in stock market company was owned by the government, and 54.2% by Suzuki of Japan. The Indian government held an initial public offering of 25% of the company in June of 2003. As of May 10, 2009 govt. of India sold its complete share to other financial institutions. With this, govt. of India no longer has any stake in Maruti Udyog. Maruti Udyog Limited (MUL) was established in February 1981, though the actual production commenced in 1983. Through 2004, Maruti has produced over 5 million vehicles. Marutis are sold in India and various several other counties, depending upon export orders. Cars similar to Marutis (but not manufactured by Maruti Udyog) are sold by Suzuki in Pakistan and other South Asian countries. The company annually exports more than 30,000 cars and has an extremely large domestic market in India selling over five hundred thousand cars annually. Maruti 800, till 2004, was the Indias largest selling compact car ever since it was launched in 1983. More than a million units of this car have been sold worldwide so far. Currently, Maruti Alto tops the sales charts. Due to the large number of Maruti 800s sold in the Indian market, the term Maruti is commonly used to refer to this compact car model.
HOUSING DEVELOPMENT FINANCE CORPOATION LTD (HDFC) HDFC Bank one amongst the first of the new generation, tech-savvy commercial banks of India, was set up in August 1994 after the Reserve Bank of India allowed setting up the Banks in the private sector. The Bank was promoted by the Housing Development Finance Corporation Limited, a
Effect of diversifying portfolio risk in stock market premier housing finance company (Set up in 1977) of India. Net profit for the year ended March 31, 2009 is Rs 1,141.5 crore (Rs11.41 billion) compared to Rs. 870.8 crore (8.7 billion) last year. 2008 results press release Incorporated in Oct, 1977 as public limited company Housing Development Finance Corporation (HDFC) was promoted by the Industrial Credit and Investment Corporation of India with initial equity reservation for the International Finance Corporation (Washington) and his Royal Highness, the Aga Khan. The corporation provides housing loans to individuals, corporate and developers. It is also a co coordinator of the coalition of housing finance institutions in Asia and the Pacific, a public and private sector partnership project, funded by the United nations Development Program me (UNDP). The company which has been working closely with National Housing Bank to frame appropriate foreclosure norms so that securitization of housing debt is possible. Currently (2009), HDFC Bank has over 600 branches located in over 300 cities of India, and all branches of the bank are linked on an online real time basis. The bank offers many innovative products & services to individuals, corporate, trust governments, partnerships, financial institutions, mutual funds and insurance companies. The bank also has over 1600 ATMs. In the next few months the number of branches and ATMs should go up subsequently. ITC LTD Cigarettes Industry ITC Ltd. A leading FMCG Cigarette major is one of the most valuable companies of India. Even though ITC is renowned for its cigarette business it also has business interest in Hotels; Paperboards, Paper&
Effect of diversifying portfolio risk in stock market packaging; agri exports and some other FMCG products like branded packaged food, safety matches, Incense Sticks and Greeting Cards etc. Being the pioneer of 1910, it has diversified its brands across products categories. Its successful luxury filter brands of its parent company Benson & Hedges and 555. ITC was incorporated on August 24, 1910 under the name of Imperial Tobacco company of India Limited. The Company celebrated its 16th birthday on August 24, 1926, by purchasing the plot of land situated at 37, chowringhee, Kolkata, for the sum of Rs. 310,000 This decision of the company was historic in more ways than one. It was to mark the beginning of a long and eventful journey into Indias future. The companys headquarters building, Virginia House, which came up on that plot of land two years later, would go on to become one of Kolkatas most venerated landmarks. The Companys ownership progressively Indianised, and the name of the Company was changed to I.T.C Limited in 1974. Currently British American Tobacco Company (UK) controls 31.7% equity stake in ITC. Though the first six decades of the Companys existence were primarily devoted to the growth and consolidation of the Cigarettes and Leaf tobacco business, the seventies witnessed the beginnings of a corporate transformation that would usher in momentous changes in the life of the company. The companys technology, productivity, quality and manufacturing processes are comparable to the best in the world. The company has recently forayed into lifestyle retailing business with its launch of Wills range of casual and formal wear products. It has also spun off its Information Technology business into a wholly owned subsidiary to more aggressively
Effect of diversifying portfolio risk in stock market pursue emerging opportunities. ITC is one of the largest exporters of Indian agri commodities.
At Canada, Tikaria and Madhukkarai were commissioned during the year 2002 03. In 2000, Tata group has exited from the company by divesting their 14% equity.
HINDUSTAN LEVER LTD (HLL) Diversified Industry Three subsidiaries, Vanaspati Manufacturing company (HVM),
Lever Brothers India Limited (LBIL), United Traders Limited (UTL) merged to form Hindustan Lever Ltd. (HLL) 1958 Hindustan Lever Research Centre started functioning. HLL has achieved market leadership in soaps and detergents as well as hair and skin care products and is the second largest manufacturer of dental care products. HLL is also market leader in tea, processed coffee, ice cream and frozen desserts, tomato based products, jams and quashes. HLL has over 36,000 employees, and has created 2 lakh indirect jobs. Its operations are spread across 70 locations in India. There are over 50 factories, of which 28 are in backward areas. The operations involve 2000 suppliers and associates and 7000 stockiest and agent. In addition to gaining leadership in Indian market, HLL has emerged as a major exporter. Its is a Super Star Trading House, an honor that only seven Indian companies enjoy. With a portfolio of soaps, detergents, tea, tomato bases products, cosmetic,
Effect of diversifying portfolio risk in stock market agri products, leather products and marine products, HLLs exports turnover in the year 2000 was Rs 1800 crores.
International Best foods (IBF) are amalgamated with the company. As per the scheme of amalgamation two equity shares of HLL is allotted for every three equity shares of IBF. The company has signed an agreement with ICI India, a subsidiary of ICI plc, UK, for sale of Nickel Catalyst business and Adhesives business, a sub unit of specialty chemicals Divisions of the companys Chemicals and Agri operations for a consideration of Rs. 21 crore and Rs 9 crores respectively. The company has expanded the installed capacity of Soaps during the year 2002-03 by 5822 tonnes taking the total capacity to 219416 tonnes. Expansion has also went on during 2002-03 in respect of personal products by 13961 (total capacity 87920 tonnes ) tonnes, Glycerine by 666 tonnes ( total capacity 6655 tonnes ) and Fatty acids by 4167 tonnes ( total capacity 48333 tonnes).
BHEL BHARAT HEAVY ELECTRICALS LTD. BHEL is the largest engineering and manufacturing enterprise in India in the energy related /infrastructure sector, today. BHEL was established more than 40 years ago, ushering in the indigenous Heavy Electrical Equipment industry in India a dream that has been more than realized with a well recognized track record of performance. The company has been earning profits continuously since 1971 72 and playing dividends since 1976 77.
Effect of diversifying portfolio risk in stock market BHEL manufactures over 180 products under 30 major product groups and caters to core sectors of the Indian Economy Viz., Power Generation & Transmission, Industry, Transportation, Telecommunication, Renewable Energy, etc. The wide network of BHELs 14 manufacturing divisions, four power sector regional centers, over 100 project sites, eight service centers and 18 regional offices, enables the company to promptly serve its customers and provide them with suitable products, systems and services efficiently and at competitive prices. The high level of quality & reliability of its products is due to the emphasis on design, engineering and manufacturing to international standards by acquiring and adapting some of the best technologies from leading companies in the world, together with technologies developed in its own R & D centers. BHEL has acquired certifications to Quality Management Systems (ISO 9001), Environmental Management Systems (ISO 14001) and Occupational health & Safety Management Systems (OHSAS 18001) and is also well on its journey towards Total Quality Management. BHELs operations are organized around three business sectors, namely power, industry including transmission, Transportation, Telecommunication & Renewable Energy and Overseas Business. This enables BHEL to have a strong customer orientation, to be sensitive to his needs and respond quickly to the changes in the market. The greatest strength of BHEL is its highly skilled and committed 42,600 employees. Every employee is given an equal opportunity to develop himself and grow in his career. Continuous training and retraining, career planning, a positive work culture and participative style of management all
Effect of diversifying portfolio risk in stock market these have engendered development of a committed and motivated work force setting new benchmarks in terms of productivity, quality and responsiveness.
TATA POWER Co. Ltd. Power Industry The Tata Power Company Limited is Indias largest private sector electricity generating company with an installed generation capacity of over 2300 MW. The company has emerged as pioneer in the Indian power sector, with track record of performance, customer care and sustained growth. Tata power has a presence in all areas of power sector generation (thermal, hydro, solar and wind) transmission and distribution. Inspired by a powerful vision, the founders of Tata Power pioneered the generation of electricity in India with the commissioning of Indias first large hydro electric project in 1915. The thermal power stations of the company are located at Trombay in Mumbai, Jojobera in Jharkhand and Belgaum in Karnataka. Ahmednagar. In a first of its kind project, Tata Power has entered into a 51:49 joint venture with Power Grid corporation of India for the 1200 km Tala transmission project. The joint venture is Indias first transmission project to execute with private /public partnership. Tata Electric Company (TEC) operates as bulk power supply licensee in Mumbai. The company enjoys a preeminent position in the licensed power producers accounting for 52% of the installed capacity. The
The hydro
stations are located in the Western Ghats of Maharashtra and the wind farm in
Effect of diversifying portfolio risk in stock market companys client base consists of around 280 large customers connected with a load of 500 mw. TEC have Hydel plants at Bhira, Bhivpuri and Khopoli, and thermal power plant at Trombay. The Total capacity is 1778mw. A combination of hydel and thermal enables TEC to charge lower tariff to clients, since the variables cost of generating hydel power is only a small fraction of the cost of thermal. TEC have highly depreciated old plants and hence it is investing in modernization. It incurs low T & D loses due to few customers and lower risk of theft and pilferage among HT users. In FY 2000, the companys T & D losses stood at 2.17% which is lowest in the country. The CAGR of the company for the past ten years stands at 14% with most of plants of the company almost fully utilized; the incremental revenues are coming from R & M. The company is also aggressive on adding additional capacities in and out of Mumbai. However, lower off take by BSES after the commissioning of the Dahanu plant has also led to a marginal decline in sales volumes.
VIDESH SANCHAR NIGHAM LIMITED (VSNL) Videsh Sanchar Nigma Ltd is a global Indian Telecommunications Company. VSNL is a provider of international wholesale voice services, and a wholesale voice over Internet protocol provider. VSNL was Indias sole telecom carrier for international calls unit 2002. While domestic calls are carried by Mahanagar Telephone Nigam Limited (MTNL) Bharat Sanchar Nigam Limited (BSNL) and private companies, international calls were routed through VSNL. It also provided bandwidth for Internet service providers.
Effect of diversifying portfolio risk in stock market In 2002 the Indian Government privatized VSNL. The Tata Group group acquired a controlling stake in VSNL and the government holds a minority stake. The Indian government owns approximately 26 percent of VSNLs equity and the Tata Group about 45 percent. The balance is held between various overseas equity holders, including ADR holders, Indian, institutions and the Indian public. The company offers its products and services under the brand name Tata Indicom in India. The company stock is now traded on the Bombay Stock Exchange and also trades in the United States as an American Depository Receipt (ADR) under the ticker symbol VSL. Revenues for the financial year 2006 stood at approximately US $1.03 billion. Videsh Sanchar Nigam Ltd. (VSNL) is no longer the sole provider of international log distance services in India. The lucrative monopoly once provided about 90% of the companys sales. VSNL is the countrys leading ISP, although its share of that market is decreasing, too. VSNL hopes to enter the domestic long distance phone market, and it is building up its network infrastructure. Before opening the international long distance market to competition, the government of India sold a 25% stake in VSNl, with management control, to the Tata conglomerate in 2002. VSNL is buying a stake in fixed line operator Tata Teleservices. The government still owns about 26% of VSNL; a unit of the Tata Group owns 46%. BAJAJ AUTO LTD Bajaj Auto is a major Indian automobile manufacturer. It is Indias largest and the worlds 4the largest two and three wheeler maker. It is based in Pune, Maharashtra, with plants in Waluj near Aurangabad, Akurdi and
Effect of diversifying portfolio risk in stock market Chakan, near Pune. Bajaj Auto makes and exports motor scooters,
motorcycles and the auto rickshaw. It is widely believed that Bajaj is headed for a de merger into 2 separate companies; Bajaj Auto and Bajaj Finance. It is expected that sum of the parts created, will be worth more than the current whole, as was the case in the de merger of Reliance Industries. Bajaj Auto came into existence on November 29, 1945 as M/s Bachraj Trading Corporation Private Limited. It started off by selling imported two and three wheelers in India. In 1959, it obtained license from the Government of India to manufacture tow and three wheelers and it went public in 1960. In 1970, it rolled out its 100,000 vehicle. In 1977, it managed to produce and sell 1000,000 vehicles in single financial year. In 1985, it started producing at Waluj in Aurangabad. In 1986, it managed to produce and sell 500,000 vehicles in a single financial year. In 1995, it rolled out its ten millionth vehicles and produced and sold 1 million vehicles in a year. The company over the last decade has successfully changed its image from a scooter manufacturer to a two wheeler manufacturer, product range ranging from scooter to scooter to Motorcycle. Its real growth in numbers has come in the last 4 years after successful introduction of a few models in the motorcycle segment. The company is headed by Rahul Bajaj who is worth more than US $ 1.5 billion
OIL AND NATURAL GAS CORPORATION LIMITED
Effect of diversifying portfolio risk in stock market Oil and Natural Gas Corporation Limited (ONGC) (incorporated on June 23, 1993) is a public sector petroleum company based in Dehradun, India. It is a Fortune Global 500 company, and contributes 77% of Indias crude oil production and 81% of Indias natural gas production. It is the highest profit making corporation in India. It was set up as commission on August 14, 1956. company. ONGC is engaged in exploration and production activities. It is involved in exploring and exploiting hydrocarbons in 26 sedimentary basins of India. It produces about 30% of Indias crude oil. It owns and operates more than 11,000 kilometers of pipelines in India. Until recently (march 2009) it was the largest company in terms of market cap in India. Indian government holds 74.14% equity stake in this
RANBAXY LABORATORIES LTD Pharmaceuticals industry Incorporated in Jun61 as a private limited company, Ranbaxy Laboratories (RLL) manufactures and markets pharmaceutical dosage forms (for human health care), animal health care products, bulk drugs and intermediates, diagnostics, laboratory chemicals and reagents. It is the largest exporter of bulk drugs and pharmaceutical dosage forms in India. For several years, it has consistently been winning export awards, the last one being the top Trishul award form CHEMEXCIL in Nov 92.RILL has three successful overseas joint ventures in Nigeria, Malaysia and Thailand. A joint venture incorporated in India with Eli Lilly a leading original research company in pharmaceuticals was began its operations.
Effect of diversifying portfolio risk in stock market For easier access to the European Markets, RLL bought a drug firm in Ireland in Jan. 96. In 1996, it acquired six leading brands from Gulf. Croslands Research Laboratories, a leading manufacturer of dermatological pharmaceutical formulations has been merged with RLL. The company was the first to launch prescription products under its own label in the United States. In Mar. 2000 it launched CLAFRINAST; this novel drug compound belongs to the VLA (Very Large Antigen) drug which represents totally new mechanism for treatment of asthma. In a recent major strategic decision, Ranbaxy has decided to disinvest its entire 50% in the 50:50 joint ventures Eli Lilly Ranbaxy and finally dissolve its either year old joint venture with the US-based Eli Lilly and Company. For Ranbaxy, retaining its 50% stake would entail an investment of about Rs 37cr. In June 2001, Ranbaxy Laboratories Netherlands B.V, a wholly owned subsidiary of Ranbaxy Laboratories (RLL) and Vectura (ventura), a world leader in the application of particle science for the development of novel drug delivery systems, made a collaboration to develop a new cost-effective, patent protected oral-controlled release technology with potential application for a broad range of pharmaceuticals compounds.
Reliance Group The Reliance Group, founded by Dhirubhai H. Ambani (19322002), is Indias largest private sector enterprise, with businesses in the energy and materials value chain. Groups annual revenues are in excess of USD 22 billion. The flagship company, Reliance Industries Limited, is a
Effect of diversifying portfolio risk in stock market Fortune Global 500 company and is the largest private sector company in India. Backward vertical integration has been the cornerstone of the evolution and growth of Reliance. Starting with textiles in the late seventies, Reliance pursued a strategy of backward vertical integration in polyester, fibre intermediates, plastics, petrochemicals, petroleum refining and oil and gas exploration and production - to be fully integrated along the materials and energy value chain. The Groups activities span exploration and production of oil and gas, petroleum refining and marketing petrochemicals (polyester, fibre, intermediates, plastics and chemicals), textiles and retail. Reliance enjoy global leadership in its businesses, being the largest polyester yarn and fibre producer in the world and among the top five to ten producers in the world in major petrochemical products. The Group exports products in excess of USD 7 billion to more than 100 countries in the world. There are more than 25000 employees on the rolls of Group companies. Major Group Companies are Reliance Industries Limited (including main subsidiaries Reliance Petroleum Limited and Reliance Retail Limited), Indian Petrochemicals Corporation limited and Reliance Industrial Infrastructure Limited
Tata Iron and Steel Company Limited Tata Steel, Formerly known as TISCO (Tata Iron and Steel Company Limited) is a steel company based in Jamshedpur, India.
Effect of diversifying portfolio risk in stock market Its main plant is located in Jamshedpur, Jharkhand, though with its recent acquisitions, the company has become a multinational with operations in various countries. The registered office of Tata Steel is in Mumbai. In the year 2000, the company was recognized as the worlds lowest-cost producer of steel. The company was also recognized as the worlds best steel producer by World Steel Dynamics in 2005. The company is listed on BSE NSE. Tata Steel annually produces 9 million tones of steel. Its turnover in fiscal year 2007-08 was Rs. 17,144 crores (consolidated turnover was 22,518 crores). The companys operating profit (PBT) in the same year was Rs. 5932 crores while its PAT was Rs. 3734.62 crores; it produced a record-breaking 5.0 million tones of salable steel in its Jamshedpur works that year. Tata steel rapidly expanding its production capacity and plans to produce 100 MTPA (million tones of steel per annum) by 2015. It acquired Singapores NatSteel in August 2004, which added 2 million tones to its installed annual capacity. Tata augmented its steel making capacity in Jamshedpur by 1 MTPA in September 2005. In February 2005, Tata Steel acquired the steel-making operations of Singapores NatSteel Ltd., winning access to its operations in seven countries, including two steel processing plants in China and capacity addition of 2.0 MTPA. In the same year it acquired Thailands Millennium Steel PCL that also had a capacity of 1.7 million tones p.a. In March 2008, it acquired two steel making units in Vietnam through its subsidiary NatSteel Asia, thereby inching forward to take 4th spot in world steel companies ranking.
Mahindra and Mahindra Limited Tech Mahindra Ltd. (tech M) formerly known as a Mahindra British Telecom (MBT) is a joint venture between Mahindra and Mahindra Limited (M&M) and British Telecommunications Plc (BT), UK with M&M holding 57% and BT holding 43% of equity. Tech Mahindra has its headquarters at Pune, India. Tech Mahindra commenced operations as a Software Services company in 1988 and focuses on providing services to the global telecom industry. Today it is the leading telecom solution provider in India. Tech Mahindra Limited (formerly known a Mahindra-British Telecom Limited) is the global leader in providing end-to-end IT services and solutions to the Telecom industry. Over 18000 professionals services clients across various telecom segments, from multiple offshore development centers across 7 cities in India and UK and 13 sales offices across Americas, Europe and AsiaPacific. Having serviced premium telecom companies worldwide, for nearly two decades, Tech Mahindra combines deep domain expertise in OSS (Operations Support Systems) and BSS (Business Support Systems) Systems, Intellectual leadership and a global workforce advantage to provide services to leading players in the telecom ecosystem. Tech Mahindra provides a wide variety of services ranging from IT strategy and consulting to system integration, design, application development, implementation, maintenance and product engineering. Through a rich Telecom heritage, Tech Mahindra
Effect of diversifying portfolio risk in stock market has built long-term sustainable relationships with telecom customers through delivery of IT services that help them achieve significant ROI and the greatest competitive advantage in the telecom marketplace. Committed to quality, Tech Mahindra adds value to client businesses through well-established methodologies, tools and techniques backed by its stringent quality processes. Tech Mahindra is ISO 9001:2000 certified and is also assessed at SEI-CMMi Level 5 and SEI-PCMMi Level 5. Tech Mahindra is also BS7799 Certified. Majority owned by Mahindra & Mahindra, Indias fifth largest commercial group, in partnership with BT Plc (BT), Europes second largest telecom service provider, Tech Mahindra has grown rapidly to becom the 8th largest software exporter in India (Nasscom 2005).
WIPRO COMPUER Software Industry Wipro commenced operations as an agro based industry and is now a diversified, integrated company in information technology, Finance, Insurance, Banking Manufacturing, Healthcare, Retail, Utilities, Telecom, Datacom. Wipro Technologies is an IT service company established in 1980 in India. It is a subsidiary Wipro Limited (incorporated 1946, in operation since 1945). It is headquartered in Bangalore. It is the third largest IT service company in India. It has 68000 employees as of Apr 2009, inclusive of its BPO arm which it acquired in 2002.
Effect of diversifying portfolio risk in stock market Wipro Technologies has over 300 customers across USA, Europe and Japan including 50 of the Fortune 500 companies. Some of its customers are Boeing, Cisco, Ericsson, IBM, Microsoft, Prudential, Seagate, Sony, Sun Microsystems and Toshiba.sss It is listed on the New York Stock Exchange and it is part of its TMT (Technology media telecom) index. With revenue in the excess of US $ 3 billion, Wipro is one of India major information technology companies. Wipro has dedicated development centres and offices across India, Europe, North America and Asia Pacific. Wipro is providing services of IT & IS consulting for E business Transformation, electric Commerce, Web Enabling, ERP, Data Warehousing and Customer Relationship Management. It has entered into a financial joint venture with Bickman Instrumental, US; to form Wipro began to manufacture bio-analytical instruments in India. Wipro Lighting is a major diversification of Wipro, manufacturing and marketing lighting products for households and the commercial and industrial markets. Wipro has set up an overseas design centre, Odyssey 21 for undertaking projects and product developments in advanced technologies for overseas clients. Five of Wipros manufacturing and development facilities secured the ISO 9001 certification during 1994-95. Wipro Info Tech and Wipro systems were amalgamated with Wipro in Apr. 94. Wipro Info Tech spun off its peripherals services division in to new legal entity, Wipro e peripherals Sep 2000. In Feb, 2001, Wipro became the first software three major software development and The company has strong software technology and Services Company in India to be certified for ISO 14001 certification for complying with technology centers in Bangalore.
Effect of diversifying portfolio risk in stock market engineering processes & also achieved ISO 9000 certification. Wipro is the first software company to get SEI Level 5 & also implemented Six Sigma TQM practices of software projects and support functions. The Company also has reached an agreement to purchase the equity interest in Netkracker Limited held by venture capital funds of ICICI group for a total consideration of Rs 30 million. Consequent to the purchase of equity interest, Netkracker becomes a subsidiary of the company. The Fluid Power business and Netkracker will be combined and renamed as Wipro Fluid Power Limited. TATA CONSULTANCY SERVICE LIMITED Tata consultancy Services Limited (TCS Limited) is an Indian information technology, consulting, services and business process outsourcing organization which commenced operations in 1968. As of 2008. It is Asias largest IT services firm with annualized revenues of over US $ 4 billion and has the largest number of employees among all the Indian IT companies with strength of over 95,000 for fiscal year 2005 06, it posted a net profit of Rs. 3,709 crore. TCS is part of one of Asias largest conglomerates and most respected groups, the Tata Group, which has interest in areas such as energy, telecommunication, financial services, chemicals, engineering and materials. TCS has proved its ability to compete with global giants like IBM and Accenture by being a joint contractor in the ABN Amro deal, one of the biggest outsourcing deals in Europe worth 1.8bn ($ 2.2bn). Through this deal TCS has caught the attention of top InfoTech companies of the world.
Effect of diversifying portfolio risk in stock market TCS is trying hard to move up the value chain by expanding services offerings, deepening domain expertise, adding new vertical segments, and broadening its client base. TCS finds it challenging to differentiate with other Indians IT companies as well who are largely alike in service offerings, pricing, workforce quality, skill set, execution delivery, and client servicing. As the size and complexity of the projects increase, TCS will be required to take more risks. For the larger deals it will have to compete with the top global players.
Effect of diversifying portfolio risk in stock market ANALYSIS AND INTERPRETATION FOR DATA Intelligent investing is about how effectively investors are able to balance their risk and return. Since risk is commensurate with return, achieving investment goal would mean earning the maximum possible investment income (return) within the level of risk acceptable to them. The finance theory does offer a free lunch: the reduction in risk that obtainable through diversification. An investor who spreads the wealth among many investments can reduce the volatility of the portfolio, provided only that the underlying investments are imperfectly correlated. Diversification is a lunch that has not only remained free, but has grown more lavish over the years. While many investors may wish to take active positions on the basis of their own opinions and information, all investors should carefully consider the extra risk that is involved in small concentrated portfolios.
4.1 PORTFOLIO THEORY HENRY MARKOWITZ laid the foundation to the portfolio theory in 1951. He began with a simple observation that since almost all investors invest in several securities rather than just one, there must one some benefit from investing in a portfolio of several securities. Defining the variability of return as an appropriate measure of risk of a portfolio, he provided justification for diversification of investment. He showed that in general, investing in several securities would reduce the variability of returns and hence the riskiness of a portfolio.
Effect of diversifying portfolio risk in stock market 4.1.1 NOTATION OF PORTFOLIO The set of all securities held by investors is called his portfolio. The portfolio may contain just one security but in general it will contain several securities. One of the important contributions of the portfolio theory has been to show that we should analyze the portfolio in its entirety and not merely a security in isolations.
4.2 DEFINITION OF RISK Although there is a difference in the specific definitions of risk and uncertainty, in most financial literature the two terms are used interchangeably. outcomes. The risk of an investment refers to the variability of its rate of return. To begin with, let us understand the concept of risk on an investment. Consider the returns generated by two equity stocks, A and B over a year period. Stock A: 25%, 12%, 4%, 22%, and 7%. Stock B : 16%, 13%, 11%, 17% and 13% Both stock A and Stock B have provided average returns of 14% during the 5 year period. However, it is clearly evident that stock A is a riskier investment because its returns have fluctuated more widely than that of Stock B. In other words, higher the volatility (variability) of the returns, greater will be the risk of the investment.
One way to define risk is as the uncertainty of future
Effect of diversifying portfolio risk in stock market 4.2.1 ALTERNATIVE MEASURE OF RISK One of the best known measures of risk is the variance or standard deviation of expected return. It is a statistical measure of the dispersion of returns around the expected value whereby a larger variance or standard deviation indicate greater dispersion Although there are numerous potential measures of risk, we will use the variance or standard deviation of return because The measure is somewhat intuitive It is a correct and widely recognized measure It is used in most of the theoretical asset pricing models.
4.2.2 PORTFOLIO RISK Just as the individual investment is measured by the variance of its return, the risk of the portfolio too is measured by the variance of its return.
4.3 DEFINITION OF RETURN The rate of return on an investment for a period (say one year) is defined as follows Rate of Return = annual income + (ending price beginning price) Beginning price
Effect of diversifying portfolio risk in stock market 4.3.1 PORTFOLIO RETURN The return on the portfolio of investment is equal to the weighted average of the returns on various investments in the portfolio.
4.4 MEANING OF DIVERSIFICATION Investors seem to follow the well known adage, Do not keep all your eggs in one basket They invariably invest in more than one security so that losses in one may be offset by gains in another. In this manner, investors are able to reduce the variability of returns. Diversification means dividing your investment among a variety of assets. Diversification helps to reduce risk because different investment will rise and fall independent of each other. The combinations of these assets more often than not will cancel out each others fluctuation, therefore reducing risk. Diversification in investment can be achieved in many different ways. Individuals can diversify across one type of asset classification such as stocks. To do this, one might purchase shares in the leading companies across many different (and unrelated) industries. Many other diversification strategies are also possible. You can diversify your portfolio across different types of assets (stocks, bonds, and real estate for examples) or diversify by regional decisions (such as state, region, or country). Thousands of options exist.
Effect of diversifying portfolio risk in stock market 4.4.1 THE IMPACT OF DIVERSIFICATION Diversification reduces the unsystematic risk. As is explained in portfolio theory, one can reduce risk by adding stocks in a portfolio. If the rates of return of individual securities are not perfectly positively correlated, diversification results in risk reduction. Empirical studies have shown that high benefits of diversification are obtained by forming a portfolio of 10-15 securities thereafter gains of diversification are negligible. As explained earlier, each individual stock price movement is a combination of stock related events and events affecting overall economy, or market. With diversification, events relating to individual stocks tend to cancel each other and one is left with only events common to the entire economy. Hence the risk captured in index is systematic risk of market risk.
4.4.2
DIVERSIFICATION IN STOCKS Diversification offers investors a way to reduce risk. It is possible to
have a diversified portfolio of just stocks; just bonds; stocks and bonds; or stocks, bonds, and cash, etc. effectively minimizing risk. When creating an effective diversified portfolio of stocks, considering how to reduce unsystematic risk is important. For example; it is possible that if investors invest in the book publishing industry, that all the book binders in the industry make a pact to go on strike. The effects of such an event could lead the prices of all publishing stocks in that industry to The portfolio design is very important to
Effect of diversifying portfolio risk in stock market plummet. Your holding in publishing companies would be left at a deflated level. However, if you also had holding in other industries such as oil, consumer durables and electronics, it is unlikely that the unsystematic risks in the publishing industry will adversely affect your other holdings. What is more, unfortunate circumstances in the book publishing business may result in a boom in other industries. The delays in the traditional print publishing business mentioned previously could cause people to publish materials in electronic form. If investor held stock in an electronic publishing company, your stock might even benefit from the troubles that are slowing the growth of your holdings in the book publishing industry. Unsystematic risk can be avoided by diversifying among different industries rather that just investing in the same one. Diversifying across different asset classes such as stocks, bonds, mutual funds, real estate holdings, etc may also effectively mitigate them. 4.4.3 HOW DIVERSIFICATION REDUCES RISK Diversification spreads your risk across the number of investments, reducing the impact that poor returns from any one investment is likely to have on your overall portfolio. How Diversification works Diversification follows a simple logic: The prices of shares investment often do not rise and fall in tandem. When one type of investment is on the rise, another may be declining.
By investing in two or more types of securities, you increase the possibility that when something you own is doing poorly, something else you own will be doing well. Your winners good performance can offset your losers disappointing returns.
The end result: Your portfolios overall performance is likely to be less volatile that is, undergo less price fluctuation than a portfolio invested in just one security or one type of security. Typically, your well diversified portfolio will achieve smoother returns than an investment in a single asset class.The principle of diversification involves investing in a portfolio of securities so that losses in some will offset gains in others, thereby reducing the variability of returns. In general, as the number of securities in a portfolio increase, say up to 20 or 25, the diversification reduces the portfolio risk measured by standard deviation. Thereafter, any further diversification will result only in In other words, increasing the marginal reduction of portfolio risk. in diversification.
number of securities from 30 to 100 will only bring about marginal gains
Diversifying Unsystematic Risk
Graph No. 1. Diversification reduces risk At last, while diversification reduces risk it does not eliminate it completely. A greater understanding of systematic risk and unsystematic risk can elucidate this. The relationship between diversification and risk is as shown graphically. When the portfolio has one security say stock 1 the risk of the portfolio is equal to the risk of single stock included in it. As a second security say stock 2 is added the portfolio risk decreases. As more and more securities are added the portfolio risk decreases, but at a decreasing rate and reaches a limit.
4.4.4 DIVERSIFIABLE AND NON- DIVERSIFIABLE RISK TOTAL RISK = UNIQUE RISK + MARKET RISK
The best diversified is also subject to the risk arising from fluctuation from the market index itself. This risk is known as market risk. Since all securities move with the market with some extent, this is a risk, which no amount of diversification can eliminate. The riskiness of each security can now be divided into two components; The market related risk, which cannot be diversified away at all, which is called non-diversifiable or systematic risk and another component, which can be eliminated through diversification called diversifiable or unsystematic risk or unique risk or portfolio risk. Unsystematic risk may be regarded as the extent of variability in the securities return on account of firm specific risk factors. This is also called avoidable risk because it is possible to eliminate or diversify away this component of risk to a considerable extent investing in a portfolio of large number of securities say fifteen or more. This is because the firm specific risk factors are mostly random. For example, if the management of one company in the portfolio is poor, the management of another company in the portfolio may be very good; at a given point of time if the productivity in one company
Effect of diversifying portfolio risk in stock market is low, that of another may be high and so on, so that by including sufficient number of securities in a portfolio, such factors tend to cancel out the effect of each other. Similarly, diversifying across several industries can eliminate the risk arising out of industry specific factor. Example of this type of risk includes: Business risk Financial risk Default risk Country risk
However, the market risk of stock represents that portion of risk, which is attributable to the economy wide factors like the growth rate of GNP, level of government spending, money supply and interest rate structure and inflation rate. Since these factors affect all firms to a greater or lesser degree, investors cannot avoid the risk arising from them, however diversified the portfolio may be. Hence it is also referred to as systematic risk (as it affects all securities) or non diversifiable risk. includes: Interest rate risk Inflation risk Market risk Example of this type of risk
Effect of diversifying portfolio risk in stock market Currency risk Reinvestment risk
4.5: ANALYSIS OF DATA AND CALCULATIONS

The closing share prices of above mentioned companies for a period of one year that is from 1st April 2008 to 31st march 2009. Graph 2: Closing share prices of ITC, HLL, VSNL & RANBAXY
60 0 50 0 40 0 30 0 20 0 10 0 0 1 2 3 4 5 6 7 8 9 1 1 1 1 0 1 2 3 IT C HL L VN S L R N AY A BX
Graph 3: Closing share prices of ABB, INFOSYS, BAJAJ, BHEL, TCS & BAJAJAUTO..
40 00 30 50 30 00 20 50 20 00 10 50 10 00 50 0 0 1 3 5 7 9 1 1 1 3 AB B I F SS NO Y BJJ AA BE HL TS C B J J UO AAA T
Graph 4: Closing share prices of TATAPOWER,TATASTEEL, M&M, WIPRO, RLIANCE, ACC, HEROHONDA &HDFC

900 800 700 600 500 400 300 200 100 0 1 2 3 4 5 6 7 8 9 10 11 12 13 TATAPOWER TATASTEEL M&M WIPRO RELIANCE ACC HEROHONDA HDFC
CALCULATION
From the data available from the above graph the total returns for the individual companies are calculated using the formula The rate of return on an investment for a period is defined as follows
Rate of return = (ending price beginning price) Beginning price Mean Return = Rate of Return N
Where N = number of days/ weeks
Mean Return =
Effect of diversifying portfolio risk in stock market Variance (Risk) of individual securities are calculated using the formual given below
= 1/ N-1
Standard Deviation of individual securities are calculated using the formula given below
=
Rit = return generated by the ith stock in the time period between 1st April 08 to 31st March 09
The Total Return, the VARIANCE and the STANDARD DEVIATION are summarized in the table as shown below
Symbol A B C D E F G H I J K L M N O P Companies ACC ABB INFOSYS Hero Honda Britannia Maruti HDFC bank IT Hindustan Lever BHEL Tata power VSNL Bajaj Auto ONGC Ranbaxy Reliance Total Return .4518 21.89 -19.5885 -20.5486 -36.59 -2.2606 27.8088 -24.469 -23.8256 6.054 -8.7158 -1.60884 -7.9034 -27.6705 -15.4958 56.305 Mean Return -0.0779 0.088266 -0.07903 -0.082860 -.1469 -0.00908 0.111 -0.0982 -0.09569 0.0231 -.0035 -0.00646 -0.03174 -0.0111 -0.06223 0.2261 Variance 6.6978 5.86 14.22 4.6377 3.9.97 6.5736 5.565 4.932 5.6591 6.1223 4.0829 11.7338 5.7 8.801 5.5761 4.828 Standard Deviation 2.58802 2.42 3.77 2.1535 1.9772 2.564 2.359 2.2208 2.3784 2.4743 2.02 3.4254 2.3875 2.966 2.361 2.197

Q R S T Tata Steel M&M Wipro TCS -6.8659 27.617 8.1106 -19.418 -0.02757 0.1109 0.0325 -0.0779 9.5951 6.5298 6.5917 15.197 3.098 2.555 2.5674 3.898
Table No. 3 Summary of Total return, Variance & Standard Deviation of individual companies. With the individual securities data we can create a portfolio of securities by adding stocks one by one. A total of 20 securities were selected for creating the portfolio.
THE PORTFOLIO OF SECURITES EXPECTED RETURN

The expected return on a portfolio of securities is nothing but the weighted average of the return on individual securities in the portfolio. For a portfolio of two securities, Expected portfolio return is
EP = W1 E1 + W2 E2
Where E1 is the expected return on security 1 W 1 is the weighed proportion in security 1 E2 is the expected return on security 2 W2 is the weighted proportion in security 2
EXPECTED RETURN for N securities

E(rP) = Where, E (ri) is the expected return on securities Wj is the weighted proportion in securities.
THE PORTFOLIO RISK IS CALCULATED USING THE FORMULA Standard deviation of returns merely measures the extent of deviation of returns from the average value of return.
Variance = ij =
Wi2+
Wj2 +2covij Wi Wj
The risk and return of the portfolio of companies as calculated using the above formula is summarized below.
Number of companies 1Comp ACC 2Comp ACC +ABB 3Comp Acc+ Abb+ Infosys 4 Comp Acc+Abb+ Infosys+ Hero Honda 5Comp Acc+Abb+ Infosys+ Hero Honda+ Britannia 6Comp Acc+Abb+ Infosys+ Hero Honda+ Britannia + maruti 7Comp Acc+Abb+ Infosys+ Hero Honda+ Britannia + maruti+ HDFC 8Comp Acc+Abb+ Infosys+ Hero Honda+ Britannia + maruti+ HDFC +ITC 9 Comp Acc+Abb+ Infosys+ Hero Honda+ Britannia + maruti+ HDFC +ITC+ Hind Lever 10 Comp Acc+Abb+ Infosys+ Hero Honda+ Britannia + maruti+ HDFC +ITC+ Hind Lever + BHEL 11 Comp Acc+ Abb+ Infosys+ Hero Honda+ Britannia + maruti+ HDFC +ITC+ Hind Lever + BHEL + Tata Power 12 Comp Acc+Abb+Infosys+Hero Honda+ Britannia + maruti+HDFC
72
Portfolio -0.0779 0.00518 3 -0.02289 -0.03788 -0.05978 -0.05125 -0.02807 -0.03684 -0.04338 -0.03661 -0.03646
Portfolio Risk Variance SD 6.6978 2.58802 4.66269 2.159326 4.788742 3.746 2.85960 3.010669 2.749975 2.682451 2.693057 2.235492 2.128278 2.188319 1.93545 1.691036 1.735128 1.65830 1.637819 1.641054 1.495156 1.458862
-0.03396
2.374687
1.541002
Effect of diversifying portfolio risk in stock market +ITC+ Hind Lever + BHEL + Tata Power + VSNL 13 Comp Acc+Abb+ Infosys+ Hero Honda+ Britannia + maruti+ HDFC +ITC+ Hind Lever + BHEL + Tata Power + VSNL + Bajaj Auto 14 Comp Comp Acc+ Abb+ Infosys+ Hero Honda+ Britannia + maruti+ HDFC +ITC+ Hind Lever + BHEL + Tata Power + VSNL + Bajaj Auto+ONGC 15 Comp Acc+ Abb+ Infosys+ Hero Honda+ Britannia + maruti+ HDFC +ITC+ Hind Lever + BHEL + Tata Power + VSNL + Bajaj Auto+ ONGC+ Ranbaxy 16 Comp Acc+ Abb+ Infosys+ Hero Honda+ Britannia + maruti+ HDFC +ITC+ Hind Lever + BHEL + Tata Power + VSNL + Bajaj Auto+ ONGC+ Ranbaxy + Reliance 17 Comp Acc+ Abb+ Infosys+ Hero Honda+ Britannia + maruti+ HDFC +ITC+ Hind Lever + BHEL + Tata Power + VSNL + Bajaj Auto+ ONGC+ Ranbaxy + Reliance + Tata Steel 18 Comp Acc+ Abb+ Infosys+ Hero Honda+ Britannia + maruti+ HDFC +ITC+ Hind Lever + BHEL + Tata Power + VSNL + Bajaj Auto+ ONGC+ Ranbaxy + Reliance + Tata Steel + M& M 19 Comp Acc+ Abb+ Infosys+ Hero Honda+ Britannia + maruti+ HDFC +ITC+ Hind Lever + BHEL + Tata Power + VSNL + Bajaj Auto+ ONGC+ Ranbaxy + Reliance + Tata Steel + M& M 20 Comp Acc+ Abb+ Infosys+ Hero
-0.03379
2.410893
1.552705
-0.03217
2.388194 8
1.543356
-0.03417
2.364204
1.537597
-0.01791
2.111877 3
1.455601
-0.01848
1.927624
1.388389
-0.01129
1.892359
1.37563
-0.00898
1.934909
1.39101
-0.01243
1.988414
1.410111
Effect of diversifying portfolio risk in stock market Honda+ Britannia + maruti+ HDFC +ITC+ Hind Lever + BHEL + Tata Power + VSNL + Bajaj Auto+ ONGC+ Ranbaxy + Reliance + Tata Steel + M& M + Wipro + TCS
TABLE 4 Summary of Portfolio Return, Variance & Standard Deviation Graph is plotted against number of securities in the portfolio and the standard deviation of the portfolio. The values are summarized in the table bellows. Number of Securities in a Portfolio 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 4.7 INTERPRETATION Standard Deviation of The Portfolio 2.58802 2.159326 2.188319 1.935459 1.691036 1.735128 1.658305 1.637819 1.641054 1.495156 1.458862 1.541002 1.552705 1.543356 1.537597 1.455601 1.388389 1.37563 1.39101 1.410111
Effect of diversifying portfolio risk in stock market The minimum or non diversifiable risk for this scenario would be 1.204 to you can see that once you get past 16 stocks, each additional stock does not reduce the volatility that much. And thats the problem if the stocks tend to move in the same direction as the above chart reflects. In such a scenario, the use of just the 13 or so stocks would not decrease the risk appreciably. This mean that all the stocks selected move in the same direction when something happens in the marketplace either all up or all down. That is some stocks/investments would go up when other investments in the portfolio were going down. As you can see in the top chart, 20 stocks have a standard deviation of 1.223974. The first portfolio which would be used, by unknowledgeable and / or untrained brokers and investors is more volatile (linear). Though diversification has been properly defined with around 20 stocks in a singular Portfolio that is not to say that the entire portfolio for the investor in and of it, is diversified. To identify the optimal portfolio, we calculate the expected returns and standard deviations of portfolio of 20 companies. We can draw inferences about the diversification effect by focusing on the standard deviations of the portfolios. As you can see, the standard deviation decline as the number of securities is increased. Therefore, portfolios of more securities have less risk without any decline in expected return. The drop in standard deviation is quite rapid in the beginning. The portfolio of two securities has a standard deviation of 1.8044725. The portfolio of three securities has a standard deviation of only 1.743999. In other words the security risk gets diversified when one forms a
Effect of diversifying portfolio risk in stock market portfolio of more than three securities. A portfolio of about 20 securities leads to a high level of diversification. After 20 securities the reduction in risk becomes very small so that there is not much diversification benefit by including more securities in the portfolio. The effect is due to the fact that unsystematic events do not strike all companies at the same time, so when some of your stocks have negative unsystematic events, other will have positive ones. Thus, the stocks will be offset and the unsystematic risk of the whole portfolio will be reduced. Graph shows Diversification of the portfolio Reduces Unsystematic
risk.
FINDINGS
To show that Diversification of stocks in a portfolio reduces the unsystematic risk. To show beyond a limit, there is no further gain in diversification and after a particular point there is no further risk reduction gained by adding more stocks to the portfolio. To function as a center for creating investor awareness through research.
In the study, the optimum portfolio was constructed based on the historical trend values of 20 companies from the National Stock Exchanges broad index NIFTY for the financial year 1st April 2008 to 31st march 2009. Based on this, an optimal portfolio was constructed. On the basis of closing share price return is calculated for each day which is the individual return. There after the total return is calculated for each of the securities. Portfolio was constructed on the basis of the Riskiness of the stocks. Analysis and quantitative method is used for the research study. Information which is secondary in nature was collected through various secondary sources such as News papers like Economic times, Business Standards etc. magazines like business world, Business Standards Business Today and various text books on investment, Portfolio Management etc., and Different tables were prepared using different tools like mean, standard deviation, variance etc. Many graphs are plotted for the closing prices.
SUGGESTIONS AND RECOMMENDATONS

As you have seen diversification can help reduce risk by eliminating unsystematic risk from a portfolio. particular companys bad luck. By diversifying among asset classes that are negatively or weakly correlated, you further reduce the volatility of your portfolio. However, diversification can reduce the return of your portfolio as well. By selecting several assets, the overall return on your portfolio will be the weighted average of the returns of those assets. For example, let us look at a portfolio made up 50/50 of single stock and a single bond. In one year, the stock has a total return 30%, the bond 6%, The portfolio return will only be 18% (36 divided by 2) whereas, if the entire portfolio was invested in the stock the return would have been 30%. Search for an increasing number of different securities will ultimately lead to the purchase of poor quality investment, as the number of good quality stocks that we are able to identify will eventually is exhausted. This is the crucial issue or problem. Diversification is a lunch that has not only remained free, but has grown more lavish over the years. While many investors may wish to take active positions on the basis of their own opinions and information all investors should carefully consider the extra risk that is involved in small concentrated portfolios.
By choosing securities of different
companies in different industries, you can minimize the risks associated with
CONCLUSION
Investors will only be rewarded for the systematic risk of a portfolio and not unsystematic risk. Systematic risk represents the overall risk of the market and can be achieved by creating a well diversified portfolio of securities selected from the market. Diversification eliminates (or greatly reduces) unsystematic risk, which is the risk of an individual security within the market. The returns of individual stocks within the NIFTY index fluctuate according to company specific factors (unsystematic risk). If an investors portfolio contained all stocks in the index, such company specific factors would even out. However, there are some factors that affect the fortunes of all companies, such as the level of inflation, national growth or interest rates. These factors cannot be reduced through diversification and cause the volatility of a diversified portfolio of NIFTY stocks (systematic risk). Fortunately, investors do not need to hold all stocks in the NIFTY index in order to diversify away unsystematic risk. Typically a portfolio containing at least twenty randomly selected stocks from the NIFTY is sufficient to eliminate the majority of unsystematic risk. It can also be seen from the above chart that by the time a portfolio of 17 funds is created approximately 90% of the unsystematic risk is eliminated. This increases to 92% for portfolios of 20 funds.
Effect of diversifying portfolio risk in stock market Diversification reduces the unsystematic risk. As is explained in portfolio theory, one can reduce risk by adding stocks in portfolio. The research study has shown that high benefits of diversification are obtained by forming a portfolio of 20 securities; thereafter gains of diversification are negligible. As the number of securities in the portfolio increases, the systematic risk gets minimized and approaches zero, so effectively, the only risk in a portfolio remains the market risk of the securities comprising the portfolio. Though diversification results in reduced risks it has to be noted that there are diminishing returns to diversification. Going from 5 stocks to 10 stocks gives a sharp reduction in risk. Going from 10 stocks to 20 stocks gives very little reduction in risk. Hence, there is little to gain by diversifying, beyond a point. Finally we can conclude that in a large portfolio of common stocks, the unsystematic risk associated with one stock typically has no impact on the unsystematic risk associated with any other stock; this conclusion is derived from the definition of an unsystematic risk. Consequently, the portion of the return on a stock, which arises from the unsystematic risk for another stock in the portfolio, in a portfolio of thirty or more stocks, it would be reasonable to expect that the effect of unsystematic risk on various stocks would offset each other, thereby eliminating the risk arising from this source.
BIBLOGRAPHY REFERENCE
Frank K. Reily Investment analysis and Portfolio Management, The Dryden Press, 1994.
Fisher Donald & Jordan, Ronald J, Security Analysis & portfolio Management, New Delhi; Prentice Hall of India Pvt Ltd., 1995
Barau, Samir K, Etall, - Portfolio Management, New Delhi: Me Graw Hill Publishing Company Ltd, 1995.
Chandra Prasanna, Financial management, TATA Mc Graw Hill, 2001.
NEWSPAPERS & MAGAZINES The Business Line The Business Standard Outlook Money The Business World The intelligent investor
WEBSITE www.bseindia.com www.nseindia.com

Effect of diversifying portfolio risk in stock market www.mangementor.com www.finance.com

Keshava Final

Enviado por

Dados do documento

Descrição original:

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

Keshava Final

Enviado por

Direitos autorais:

Formatos disponíveis

Effect of diversifying portfolio risk in stock market INTRODUCTION: Though the first stock exchange in India was established

VIVEKANANDA DEGREE COLLEGE, BANGALORE 1

VIVEKANANDA DEGREE COLLEGE, BANGALORE 2

VIVEKANANDA DEGREE COLLEGE, BANGALORE 3

VIVEKANANDA DEGREE COLLEGE, BANGALORE 5

VIVEKANANDA DEGREE COLLEGE, BANGALORE 6

VIVEKANANDA DEGREE COLLEGE, BANGALORE 7

Effect of diversifying portfolio risk in stock market

Effect of diversifying portfolio risk in stock market

VIVEKANANDA DEGREE COLLEGE, BANGALORE 10

Effect of diversifying portfolio risk in stock market

VIVEKANANDA DEGREE COLLEGE, BANGALORE 12

VIVEKANANDA DEGREE COLLEGE, BANGALORE 13

VIVEKANANDA DEGREE COLLEGE, BANGALORE 14

VIVEKANANDA DEGREE COLLEGE, BANGALORE 16

VIVEKANANDA DEGREE COLLEGE, BANGALORE 17

VIVEKANANDA DEGREE COLLEGE, BANGALORE 18

Effect of diversifying portfolio risk in stock market

Title of the study:

Statement of the Problem:

VIVEKANANDA DEGREE COLLEGE, BANGALORE 19

VIVEKANANDA DEGREE COLLEGE, BANGALORE 20

News papers/ Magazines Books/published articles Trade journals

VIVEKANANDA DEGREE COLLEGE, BANGALORE

Effect of diversifying portfolio risk in stock market Skewness of the study.

LAYOUT OF THE CHAPTER

CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5

VIVEKANANDA DEGREE COLLEGE, BANGALORE 23

Effect of diversifying portfolio risk in stock market

Nifty stocks represent about 59% of the total market capitalization.

VIVEKANANDA DEGREE COLLEGE, BANGALORE 25

Company Name Asia Brown Boveri Ltd. Associated Cement

Industry Electrical Equipment Cement & Cement Products Automobiles 2 and

Companies Ltd. Bajaj Auto Ltd. Bharati Tele

GRASIM GUJAMBCEM HCLTECH HDFC

Cements Ltd. HCL Technologies Ltd. Housing

VIVEKANANDA DEGREE COLLEGE, BANGALORE

Cigarettes Refineries Engineering Automobile Wheelers Automobile

ITC RPL LT MARUTI M&M MTNL

Wheelers Telecommunication Services Aluminium Oil Exploration

VIVEKANANDA DEGREE COLLEGE, BANGALORE 27

Products Computers Software Banks Electricals Equipments Pharmaceuticals

Electrical Equipment Power Telecommunication Automobile 4

Wheelers Computer Service Steel & Steel

Products Telecommunication Service Computers Software

VIVEKANANDA DEGREE COLLEGE, BANGALORE 28

Effect of diversifying portfolio risk in stock market

VIVEKANANDA DEGREE COLLEGE, BANGALORE

VIVEKANANDA DEGREE COLLEGE, BANGALORE 30

VIVEKANANDA DEGREE COLLEGE, BANGALORE 33

Its 2 plants are in

Dharuhera and Gurgaon, both in Haryana, India. It specializes in dual use

VIVEKANANDA DEGREE COLLEGE, BANGALORE 40

VIVEKANANDA DEGREE COLLEGE, BANGALORE 41

OIL AND NATURAL GAS CORPORATION LIMITED

VIVEKANANDA DEGREE COLLEGE, BANGALORE 46

VIVEKANANDA DEGREE COLLEGE, BANGALORE 47

VIVEKANANDA DEGREE COLLEGE, BANGALORE 48

VIVEKANANDA DEGREE COLLEGE, BANGALORE 50

Effect of diversifying portfolio risk in stock market

VIVEKANANDA DEGREE COLLEGE, BANGALORE 52

VIVEKANANDA DEGREE COLLEGE, BANGALORE 53

VIVEKANANDA DEGREE COLLEGE, BANGALORE 54