Portfolio 20-03-2011

CHAPTER - 1 INTRODUCTION
INTRODUCTION TO PORTFOLIO MANAGEMENT

A portfolio is a collection of securities since it is really desirable to invest the entire funds of an individual or an institution or a single security, it is essential that every security be viewed in a portfolio context. Thus it seems logical that the expected return of the portfolio. Portfolio analysis considers the determine of future risk and return in holding various blends of individual securities. Portfolio expected return is a weighted average of the expected return of the individual securities but portfolio variance, in short contrast, can be something reduced portfolio risk is because risk depends greatly on the co-variance among returns of individual securities. Portfolios, which are combination of securities, may or may not take on the aggregate characteristics of their individual parts. Since portfolio expected return is a weighted average of the expected return of its securities, the contribution of each security the portfolios expected returns depends on its expected returns and its proportionate share of the initial portfolios market value. It follows that an investor who simply wants the greatest possible expected return should hold one security, the one which is considered to have a greatest expected return. Very few investors do this, and very few investment advisors would counsel such and extreme policy instead, investors should diversify, meaning that their portfolio should include More than one security.
OBJECTIVES OF PORTFOLIO MANAGEMENT

The main objective of investment portfolio management is to maximize the returns from the investment and to minimize the risk involved. Moreover, risk in price or inflation erodes the values of money and hence investment must provide a protection against inflation.
Secondary objectives
Regular return. Stable income. Appreciation of capital. More liquidity. Safety of investment. Tax benefits.
Portfolio management services helps investors to make a wise choice between alternative investment with pit any post trading hassles this service renders optimum returns to the investors by proper selection of continuous changes of one plan to another plane with in the same scheme, any portfolio management must specify the objectives like maximum returns, and risk capital appreciation, safety etc in their offer.
NEED FOR PORTFOLIO MANAGEMENT

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

Investment management is a complex activity which may be broken down into the following steps Specification of investment objectives and constraints: The typical objectives sought by investors are currents income, capital appreciation, and safety of principle. The relative importance of these objectives should be specified further the constraints arising from liquidity, time horizon, tax and special circumstances must be identified. Choice of the Asset mix: The most important decision in portfolio management is the asset mix decision very broadly; this is concerned with the proportion of stock (equity shares and units/ shares of equity oriented mutual funds) and bonds in the portfolio. The appropriate stock-bond mix depends mainly on the risk tolerance and investment horizon of the investor.
ELEMENTS OF PORTFOLIO MANAGEMENT

Portfolio management is on-going process involving the following basic tasks: Identification of the investors objectives, constraints and preferences. Strategies are to be developed and implemented in tune with investment policy formulated. Review and monitoring of the performance of the portfolio. Finally the evaluation of the portfolio.
RISK
Risk is uncertainty of the income / capital appreciations or loss or both. All investments are risky. The higher the risk taken, the higher is the return. But proper management of risk involves the rights choices of investments whose risks are compensating. The total risks of two companies may be different and even lower than the risk of a group of two companies if their companies are offset by each other.
The two major types of risks are

Systematic or market related risk. Unsystematic or company related risks.
Systematic risks
Systematic risks affected from the entire market are (the problems, raw material availability, tax policy or government policy, inflation risk, interest risk and financial risk). It is managed by the use of Beta of different company shares.
Unsystematic risks
Unsystematic risks are mismanagement, increasing inventory, wrong financial policy, defective marketing etc. this is diversifiable or avoidable because it is possible to eliminate or diversify away this components of risks to a considerable extents by investing in a large portfolio of securities. The unsystematic risk stems from inefficiency magnitude of those factors different from one company to another. 5
RETURNS ON PORTFOLIO
Each security in a portfolio contributes returns in the proportion of its investments in security. Thus the portfolio expected return is the weighted average of the expected return, from each of the securities, with weights representing the proportions share of the security in the total investment. Why does an investor have so many securities in his portfolio? If the security ABC gives the maximum return why not he invests in that security all his funds and thus maximize return? The answer to this questions lie in the investors perception of risk attached to investments, his objectives of income, safety, appreciation, liquidity and hedge against loss of value of money etc. this pattern of investment in different asset categories, types of investment, etc, would all be described under the caption of diversification, which aims at the reduction or even elimination of non-systematic risks and achieve the specific objectives of investors.
RISK ON PORTFOLIO
The expected returns from individual securities carry some degree of risk. Risk on the portfolio is different from the risk on individual securities. The risk is reflected in the variability of the returns from zero to infinity. Risk of the individual assets or a portfolio is measured by the variance of its returns. The expected return depends on the probability of the returns and their weighted contribution to the risk of the portfolio. These are two measures of risk in this context one is the absolute deviation and other standard deviation.
RISK RETURN ANALYSIS

All investment has some risk. Investment in shares of companies has its own risk or uncertainty; these risks arise out of variability of yields and uncertainty of appreciation or depreciation of share prices, losses of liquidity etc. The risk over time can be represented by the variance of the returns. While the return over time is capital appreciation plus payout, divided by the purchase price of the shar Y (SML) Security market line Expected Return Variable returns } Risk Free Return. o x
Normally, the higher the risk that the investor takes, the higher is the return. There is, how ever, a risk less return on capital of about 12% which is the bank rate charged by the R.B.I or long term, yielded on government securities at around 13% to 14%. This risk less return refers to lack of variability of return and no uncertainty in the repayment or capital. But other risks such as loss of liquidity due to parting with money etc. may however remain, but are rewarded by the total return on the capital. Risk-return is subject to variation and the objectives of the portfolio manager are to reduce that variability and thus reduce the risky by choosing an appropriate portfolio. Traditional approach advocates that one security holds the better, it is according to the modern approach diversification should not be quantity that should be related to the quality of scripts which leads to quality of portfolio. Experience has shown that beyond the certain securities by adding more securities expensive.
Simple diversification reduces

An assets total risk can be divided into systematic plus unsystematic risk, as shown below Unsystematic risk is that portion of the risk that is unique to the firm (for example, risk due to strike and management errors). Unsystematic risk can be reduced to zero by simple diversification. Simple diversification is the random selection of securities that are to be added to a portfolio. As the number of randomly selected added to a portfolio is increased, the level of unsystematic risk approaches zero. However market related systematic risk cannot be reduced by simple diversification. This risk is common to all securities.
Persons involved in portfolio management Investor

The peoples who are interested in investing their fund
Portfolio managers
Is a person who is in the wake of a contract agreement with a client, advices or directs or undertakes on behalf of the clients, the management or distribution or management of the funds of the clients as the case may be.
Discretionary portfolio manager

Means a manager who exercise under a contract relating to a portfolio management exercise any degree of discretion as to investment or management of portfolio or securities or funds of clients as the case may be. The relationship between an investor and portfolio manager is of a highly interactive nature The portfolio manger carries out all the transitions pertaining to the investor under the power of attorney during the last two decades, and increasing complexity was witnessed in the capital market and its trading procedures in this context a key (uninformed) investor formed investor found himself in a tricky situation, to keep track of market movement, update his knowledge, yet stay in the capital market and make money, therefore in looked forward to resuming help from portfolio manager to do for him. The portfolio management seeks to strike a balance between risks and return. The generally rule in that greater risk more of the profits but S.E.B.I in its guidelines prohibits portfolio managers to promise any return to investor. Portfolio management is not a substitute to the inherent risks associated with equity investment.
Who can be a portfolio manager?

Only those who are registered and pay the required license fee are eligible to operate as portfolio managers. An applicant for this purpose should have necessary infrastructure with professionally qualified persons and with a minimum of two persons with experience in this business and a minimum net worth of Rs.50lacs. The certificate once granted is valid for three years. Fees payable for registration are Rs.2.5 lacs every for two years and Rs 1 lacs for the third year. From the fourth year onwards, renewal fees per annum are Rs 75000. These are subjected to change by the SEBI. The SEBI has imposed a number of obligations and a code of conduct on them. The portfolio manager should have a high standard of integrity, honesty, and should not have been convicted of any economic offence or moral turpitude. He should not resort to rigging up of prices, insider trading or creating false markets, etc. their books of accounts are subject to inspection to inspection and audit by the SEBI. The observance of the code of conduct and guidelines given by the SEBI are subject to inspection and penalties for violation are imposed. The manager has to submit periodical returns and documents as may be required by the SEBI from time-to-time.
Functions of portfolio managers

Advisory role Conducting market and economic services Financial analysis Study of stock market Study of industry Decide the type of port folio
Advisory role
Advice new investments, review the existing ones, identification of objectives, recommending high yield securities etc.
Conducting market and economic service

This is essential for recommending good yielding securities they have to study the current fiscal policy, budget proposal; individual policy etc. further portfolio manager should take in to
account the credit policy, industrial growth, foreign exchange possible change in corporate laws etc.
Financial analysis
He/she should evaluate the financial statement of company in order to understand, their net worth future earnings, prospectus and strength.
Study of stock market

He/she should observe the trends at various stock exchange and analysis scripts so that he is able to identify the right securities for investment.
Study of industry
He should study the industry to know its future prospects, technical changes etc. required for investment proposal he should also see the problems of the industry.
Decide the type of portfolio

Keeping in mind the objectives of portfolio a portfolio manager has to decide weather the portfolio should comprise equity preference shares, debentures convertibles, non-convertibles or partly convertibles, money market, securities etc. or a mix of more than one type of proper mix ensures higher safety yield and liquidity coupled with balanced risk techniques of portfolio management.
A portfolio manager in the Indian context has been Brokers (Big brokers) who on the basis of their experience, market trends, Insider trader, helps the limited knowledge persons. The ones who use to manage the funds of portfolio, now being managed by the portfolio of Merchant Banks professionals like MBAs CAs And many financial institutions have entered the market in a big way to manage portfolio for their clients.
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According to SEBI rules it is mandatory for portfolio managers to get them selfs registered. Registered merchant bankers can acts as portfolio managers Investors must look forward, for qualification and performance and ability and research base of the portfolio managers.
The following points must be considered by portfolio managers while analyzing the securities
1. Nature of the Industry and its Product: Long term trends of industries, competition with in, and out side the industry, Technical changes, labor relations, sensitivity, to Trade cycle. 2. Industrial analysis of prospective earnings cash flows, working capital, dividends, etc. 3. Ratio analysis: Ratio such as Debt Equity Ratio, current ratio, net worth, profit earnings ratio, return on Investment are worked out to decide the portfolio. The wise principle of portfolio management suggests that Buy when the market is low or BEARISH, and sell when the market is rising or BULLISH.
Stock market operation can be analyzed by

1. Fundamental Approach 2. Technical Approach
Fundamental approach
This approach will be worked Based on intrinsic value of shares
Technical approach
This approach will be worked on Dowjones theory, Random walk theory, etc.
Prices are based upon demand and supply of the market.

I. Traditional approach assumes that II. Objectives are maximization of wealth and minimization of risk. III. Diversification reduces risk and volatility. IV. Variable returns, high illiquidity, etc.
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Capital assets pricing approach (CAPM) it pays more weight age, to risk or portfolio diversification of portfolio.
Diversification of portfolio reduces risk but it should be based on certain assessment such as
Trend analysis based on past share prices. Valuation of intrinsic value of company (trend-market moves are known for their uncertainties they are compared to be high, and low prompts of wave market trends are constituted by these waves it is a pattern of movement based on past.).
Portfolio Management and Diversification

Combinations of securities that have high risk and return features make up a portfolio. Portfolios may or may not take on the aggregate characteristics of individual part, portfolio analysis takes various components of risk and return for each industry and consider the effort of combined security. Portfolio selection involves choosing the best portfolio to suit the risk return preferences of portfolio investor management of portfolio is a dynamic activity of evaluating and revising the portfolio in terms of portfolios objectives. It is widely accepted that returns from individual scripts carry certain rate of risk. Portfolio held in spreading the risk in many securities then the risk is reduced. The basic principle is that of a portfolio holds several assets or securities. It may include in cash also, even if one goes bad the other will provide protection from the loss even cash is subject to inflation the diversification can be either vertical or horizontal the vertical diversification portfolio can have script of different companys with in the same industry. In horizontal diversification one can have different scripts chosen from different industries.
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CHAPTER - 2 REVIEW OF LITERATURE
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Portfolio Theories MARKOWITZ THEORY

Markowitz approach determines for the investor the efficient set of portfolio through 3 important variables, i.e., Standard Deviation, Covariance and Co-efficient of Correlation. Markowitz model is called the Full Covariance Model. Through this method, the investor can with the use of computer, find out the efficient set of portfolio by finding out the trade off between risk and return between the limits of zero to infinity. According to this theory, the effects of one security purchase over the effects of the other security purchase are taken into consideration and then the results are evaluated.
Assumption under Markowitz Theory

Markowitz theory is based on the modern portfolio theory under several assumptions. The assumptions are:1. The market is efficient and all investors have in their knowledge all the facts about the stock market and so on investor can continuously make superior returns either by predicting past behavior of stocks through technical analysis the intrinsic value of shares. Thus all investors are in equal category. 2. All investor before making any investment have a common goal. This is the avoidance of risk because they are risk avers. 3. All investors would like to earn the maximum rate of return that they can achieve from their investments. 4. The investors base their decisions on he expected rate of return of an investment. The expected rate of return can be found out by finding out the purchase price of a security divided by the income per year and by adding annual capital gains. It is also necessary to know the standard deviation of the rate of return, which is begin offered on the investment.
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The rate of return and standard deviation are important parameters for finding out whether investment is worthwhile for a person. 5. Markowitz brought out the theory that it was useful insight to find out how the security returns are correlated to each other. By combining the assets in such way that they give the lowest risk maximum returns could be brought out by the investor. 6. From the above it is clear that investor assumes that while making an investment he will combine his investments in such a way that he gets a maximum return and is surrounded by minimum risk. 7. The investor assumes that greater or larger the return that he achieves on his investments, the higher the risk factor that surrounds him. On the contrary when risks are low the return can also be expected to be below. 8. The investor can reduce his risk if he adds investments to his portfolio. 9. An investor should be able to get higher for each level of risk by determining the efficient set of securities.
THE SHARPE INDEX MODEL

The investor always likes to purchase a combination of stock that provides he highest return and has lowest risk. He wants to maintain a satisfactory reward to risk ratio. Traditionally analysis paid more attention to the return aspect of the stocks. Now a days risk has received increased attention and analysts are providing estimates of risk as well as return. Sharp has developed a simplified model to analyze the portfolio. He assumed that the return of a security is linearly related to a single index like the market index. Strictly speaking, the market index should consist of all the securities trading on the exchange. In the absence of it, a popular index can be treated as a surrogate for the market index.
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SINGLE INDEX MODEL

Casual observation of the stock prices over a period of time reveals that most of the stock prices move with the market index. When sensex increases, stock prices also tend to increase and viceversa. This indicates that some underlying factors affect the market index as well as the stock prices. Stock prices are related to the market index and the relationship could be used to estimate the return on stock. Towards this purpose, the following equation can be used.
i +a i R m + ei Rj = a
Where
R = Expected return on security I i = Intercept of the straight line or alpha co-efficient a i = Slope of straight line or beta co-efficient a Rm = The rate of return on marker index ei = Error team
Corner Portfolio
The entry or exit of a new stock in the portfolio generates a series of corner portfolio. In a one stock portfolio, itself is the corner portfolio. In a two stock portfolio, the minimum attainable risk (variance) and the lowest return would be the corner portfolio. As the member of stocks increases in a portfolio, the corner portfolio would be the one with lowest return and risk combination.
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Sharpes Optimal Portfolio

Sharpe has provided a model for the selection of appropriate securities in a portfolio. The selection of any stock is directly related to its excess return beta ration.
i Ri Rf / a
Where,
Ri = The expected return on stock i Rf = The return on a risk less asset
i = The expected change in the rate of return on stock I associated with one unit a
changer in the market return. The excess return is the difference between the expected return on the stock and the risk less rate of interest such as the rate offered on the government security or Treasury bill. The excess return to beta ratio measures the additional return on security (excess of the risk less asset return) per unit of systematic risk or non-diversifiable risk. This ratio provides a relationship between potential risk and reward. The steps for finding out the stocks to be included in the optimal portfolio are given below: 1. Finding out the excess return to beta ratio for each stock under consideration. 2. Rank them from the highest to the lowest 3. Proceed to calculate C for all the stocks according to the ranked order using the following formula. Ci = 2 m N ( Ri Rf ) i / 2ei / 1 + 2 N i / 2ei 4. The calculated values of Ci start declining after a particular Ci and that point is taken as the cut-off point and that stock ratio is the cut-off ratio.
Capital Asset Price Theory
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We have seen that diversifiable risk can be eliminated by diversification. The remaining risk portion is the un-diversifiable risk i.e., market risk. As a result, investors are interested in knowing the systematic risk when they search for efficient portfolios. They would like to have assets with low beta coefficient i.e., systematic risk. Investors would opt for high beta coefficient only if they provide high rate of return. The risk were averse nature of the investors is the underlying factor for this behavior. The capital asset pricing theory helps the investors top understand and the risk and return relationship of the securities. It also explains how assets should be priced in the capital market.
The CAPM Theory

Markowitz, William Sharpe, John Lintner and Jan Mossin provided the basis structure for the CAPM model. It is a model of linear general equilibrium return. In the CAPM theory, the required rate of return of an asset is having a linear relationship with assets beta value i.e., undiversifiable or systematic risk.
Assumptions
1. An individual seller or buyer cannot affect the price of a stock. This assumption is the basic assumption of the perfect competitive market. 2. Investors make their decisions only on the basis of the expected returns, standard deviations and covariances of all pairs of securities. 3. Investors are assumed to have homogenous expectations during the decision making period. 4. The investor can lend or borrow any amount of funs at the risk less rate of interest. The risk less rate of interest is the rate of interest offered for the treasury bills or government securities. 5. Assets are infinitely divisible, according to this assumption, investor could buy and quantity of share i.e., they can even buy ten rupees worth of Reliance Industry shares. 6. There is no transaction cost i.e., no cost involved in buying and selling of stocks. 7. There is no personal income tax. Hence, the investor is indifferent to the form of return either gain or dividend.
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8. Unlimited quantum if short sales are allowed. Any amount of shares an individual can sell short.
Lending and Borrowing

Here, it is assumed that the investor could borrow or lend any amount of money at risk less rate of interest. When this opportunity is given to the investors, they can mix risk free assets with the risk assets in a portfolio to obtain in desired rate of risk return combination. The expected return on the combination of risky and risk free combination Rp = RfXf + Rm(1 Xf) Where, Rp = Portfolio return Xf = The proportion of funds invested in risk free assets 1 Xf = The proportion of funds invested in risk assets. Rf = Risk free rate of return Rm = Return on risky assets This formula can be used to calculate the expected returns for different situation like mixing risk less assets with risky assets, investing only in the risky asset and mixing the borrowing with risk assets.
The Concept
According to CAPM, all investors hold only the market portfolio and risk less securities. The market portfolio is a portfolio comprised of all stocks in the market. Each asset is held in proportion to its market value to the all risky assets. For example, if Reliance Industry share represents 20% of all risky assets, then the market portfolio of the individual investor contains 20% of Reliance Industry shares. At this stage, the investor has the ability to borrow or lend any amount of money at the risk less rate of interest. The efficient frontier of the investor is given in figure. 19
The figure shows the efficient of the investor. The investor prefers any point between B & C because, with the same level of risk they face on line BA, they are liable to get superior profits. The ABC lines show the investors portfolio of risky assets. The investors can combine risk less asset either by lending or borrowing. This is shown in figure,
The line RfS represent all possible combination of risk less and risky asset. The S portfolio does not represent any risk less asset but the line RfS gives the combination of both. The portfolio along the path RfS is called lending portfolio i.e., some money is invested in the risk less asset or may b deposited in the bank for a fixed rate of interest if it crosses the point S, it becomes borrowing portfolio. Money is borrowed and invested in the risky asset. The straight lines are called Capital Market Line (CML). It gives the desirable set of investment opportunities between risk free and risky investments. The CML represents linear relationship between the required rates of return for efficient portfolio and their standard deviations. E (R p ) = R f + (R m R f ) p m
E(Rp) = Portfolios expected rate of return Rm = Expected return on market portfolio m = Standard deviation of market portfolio
p = Standard deviation of the portfolio
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For a portfolio on the capital market line, the expected rate of return in excess of the risk free rate is in proportion to the standard deviation of the market portfolio. The slope of the line gives the price of the risk. The slope equals the risk premium for the market portfolio Rm Rf divided by the risk or standard deviation of the market portfolio. Thus, the expected return of an efficient portfolio is Expected return = Price of time + (Price of risk X amount of risk) Price of time is the risk free rate of return. Price of risk is the premium amount higher and above the risk free return.
Security Market Line

The Capital Market Line measures the risk-return relationship of an efficient portfolio. But, it does not show the risk- return trade off for other portfolio and individual securities. Inefficient portfolios lie below the capital market line and the risk-return relationship cannot be established with the help of his capital market line. Standard deviation includes the systematic and unsystematic risk. Unsystematic risk can be diversified and it is not related to the market. If the unsystematic risk is eliminated, then the matter of concern is systematic risk alone. This systematic risk could be measured by beta. The beta analysis is useful for individual securities and portfolio whether efficient or inefficient. When an additional security is added to the market portfolio, an additional risk is also added to it. The variance of a portfolio is equal to the weighted sum of the covariance of the individual securities in the portfolio. If we add an additional security to the market portfolio, its marginal contribution to the variance of the market is the covariance between the securitys return and market portfolios return. If the security is included, the covariance between the security and the market measures the risk. Dividing it by standard deviation of market portfolio Cov lm / m can standardize covariance. This shows the systematic risk of the security, and then the expected return of the security is given by the equation. Ri Rf = Rm Rf Cov Vim / m m Covim [R m R f ] 2m 21
This equation can be rewritten as follows: Ri Rf =
The first term of the equation is nothing but the beta coefficient of the stock. The beta coefficient of the equation of SML is same as the beta of the market (Single index) model. In equilibrium, all efficient and inefficient portfolio lie along the security market line, The SML line helps to determine the expected return for a given security beta. In other words, when betas are given, we can generate expected returns for the given securities. This is explained in figure. If we assume the expected market risk premium to be 8% and the risk free rate of return to be 7%, we can calculate expected return for A, B, C and D securities using the formula. E ( R i ) = Rf + 1 [ E ( R m R f ) ]
Market Imperfection and SML

Information regarding the share price and market condition may not be immediately available to all investors; imperfect information may effect the valuation of securities. In a market with perfect information, all securities should lie on SML. Market imperfections would lead to a band to SML rather than a single line. Market imperfections after the width of the SML to a band, if imperfections were more, the width also would be larger.
Empirical tests of the CAPM

In the CAPM, beta is use to estimate the systematic risk of the security and reflects the future volatility of the stock in relation to the market. Future volatility of the stock is estimated only through historical data. Historical data are used to plot the regression line or the characteristics line and calculate beta. If historical betas are stable over a period of time, they would be good proxy for their ex-ante or expected risk. Robert A. levy, Marshall E. Blume and other studied the question of beta stability in-depth. Levy calculated betas for the both individual securities and portfolios. His study results have provided the following conclusions. 1. The betas of individuals stocks are unstable; hence the past betas for the individual securities stocks estimators of future risk. 2. The betas of portfolio of ten or more randomly selected stocks are reasonably stable, hence he past portfolio betas are good estimators of future portfolio volatility. This is 22
because of the errors in the estimate of individual securities betas tending to offset one another in a portfolio.
Various researchers have attempted to find out the validity of the model by calculating beta and realized rate of return. They attempted to test (1) whether the intercept is equal to Rf i.e., risk free rate of interest or the interest for treasury bills (2) whether the line is linear and pass through the beta = 1 being the required rate of return of the market. In general, the studies have showed the following results. 1. The studies generally showed a significant positive relationship between the expected return and the systematic risk. But the slope of the relationship is usually less than that of predicted by the CAPM. 2. The risk and return relationship appears to be linear. Empirical studies give no evidence of significant curvature in the risk/return relationship. 3. The attempt of the researchers to access the relative importance of the market and company risk has yielded results. The CAPM theory implies that unsystematic risk is not relevant, but unsystematic and systematic risks are positively related to security returns. Higher returns are needed to compensate both the risks. Most of the observed relationship reflects statistical problems rather than the true nature of capital market. 4. According to Richard Roll, the ambiguity of the market portfolio leaves the CAPM untreatable. The practice of using indices, as proxies is loaded with problems. Different indices yield different betas for the same security. 5. If the CAPM were completely valid, it should apply to all financial assets including bonds. But, when bonds are introduced into the analysis, they do not all on the security market line.
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Present Validity of CAPM

The CAPM is greatly appealing at an intellectual level, logical and rational. The basic assumptions on which the model is built raise, some doubts in the minds of the investors. Yet, investment analysis has been more creative in adapting CAPM for their uses. 1. The CAPM focuses on the market risk, makes the investors to think about the risky ness of the assets in general CAPM provides basic concept, which is truly fundamental values. 2. The CAPM has been useful in the selection of securities and portfolio. Securities with higher returns are considered to be undervalued and attractive for buy. The below normal excepted return yielding securities are considered to be overvalued and suitable for sale. 3. In the CAPM, it has been assumed that investors consider only the market risk. Given the estimate of the risk free rate, the beta of the firm, stock and the required market rate of return, one can find out the expected returns for a firms security. This expected return could be used as an estimate of the cost of retained earnings. 4. Even through CAPM has been regarded as fuseful tools to financial analysis; it has it won critics too. They point out, when the model is ex-ante; the inputs also should be ex-ante, i.e. based on the expecat5ions of the f8re. Empirical test and analysis have used ex-post i.. Past data only: 5. The historical data regarding the market return, risk free rate of return and betas vary differently for different periods. The various methods used to estimate these inputs also affect the beta value. Since the inputs cannot be estimated precisely, the expected return found out through the CAPM model is also subjected to criticism.
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Arbitrage pricing theory

Arbitrage pricing theory is one of the tools used by the investors and portfolio mangers. The capital asset pricing theory explains the returns of the securities on the basis of their respective bets. According to the previous model, the investor chooses the investment on the basis of expected return and variance. The alternative model deployed in asset pricing by Stephen Ross is known as Arbitrage Pricing Theory. The APT explains the nature of equilibrium in the asset pricing in a less complicated manner with fewer assumptions compare to CAPM.
The Assumptions
1. The investors have homogeneous expectations. 2. The investor are risk averse and utility maxi misers 3. Perfect competition prevails in the market and there is no transaction cost. The APT theory does not assume: a) Single period investment horizon b) No taxes c) Investors can borrow and lend at risk free rate of interest and d) The selection of the portfolio is based on the mean and variance analysis. These assumptions are present in CAPM theory.
Arbitrage portfolio
According to the APT theory an investor tries to find out the possibility to increase returns form his portfolio without increasing the funds in the portfolio. He also likes to keep the risk at the same level. For example, the investor holds A, B and C securities and he wants to change in proportion of securities can be denoted by X, X b and X C . The increase in the investment in security A could be carried out only if he reduces the proportion of investment either in B or C because it has already
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stated that the investor tries to earn more income without increasing his financial commitment. Thus, arbitrage portfolio. If X indicates the change in proportion,
X A + X B + X C = 0
The factor sensitivity indicates the responsiveness of a securitys return to a particular factor. The sensitiveness of securities to any factor is the weighted average of the sensitivities of the securities, weighted being the changes made in the proportion. For example, bA, bB and bC are sensitive in an arbitrage portfolio the sensitive become zero.
b A X A + b B X B + b C X C = 0
APT and CAPM

The simplest form of APT model is consistent with the simple form of the CAPM model, when only one factor is taken into consideration, the APT can be stated as.
Ri 0 + biI
It is similar to the capital market line equation:

R i = R f i + (R m R F ) , Which is similar to CAPM model
APT is more general and less restrictive than CAPM, in APT, the investor has no need to hold the market portfolio because it does not make use of the market portfolio concept. The portfolios are constructed on the basis of the factors eliminate arbitraged profits. APT is based on the law of one price to hold for all possible portfolio combinations. The APT model takes on to account of the impact of numerous factors on the security. The | Macro economic factors are taken into consideration and it is closer to reality then CAPM. The market portfolio is well defined conceptually. In APT model, factors are not well specified. Hence, the investor finds it difficult to establish equilibrium relationship. The well defined market portfolio is a significant advantage of the CAPM leading to the wide usage of the model in the stock market. The factors that have impact on one group of securities may not affect other group securities. There is a lack of constituency in the measurement of the APT model. Further, the influences of the factors are not independent of each other. It may be difficult to identify the influence
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corresponds exactly to each factor. Apart from this, not all variable that exerts influence on factor measurable.
CHAPTER 3 Company profile
27
CHAPTER 4 ABOUT STOCK MARKET
HISTORY OF STOCK EXCHANGE

The only stock exchanges operating in the 19 the century were those of Bombay set up in 1875 and Ahmadabad set up in 1894. These were organized as voluntary non-profit-making association of brokers to regulate and protect their interests. Before the control on securities trading become a central subject and the Bombay securities contracts (control) Act of 1925 used
28
to regulate trading in securities. Under this Act, the Bombay stock exchange was recognized in 1927 and Ahmadabad in 1937 During the war boom, a number of stock exchanges were organized even in Bombay, Ahmadabad and other centers, but they were not recognized. Soon after it became a central subject, central legislation was proposed and a committees and public discussion, the securities contracts (regulation) Act became law in 1956.
DEFINITION OF STOCK EXCHANGE

Stock exchange means anybody or individuals whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities. It is an association of member brokers for the purpose of self-regulation and protecting the interests of its members. It can operate only if it is recognized by the Government under the securities contracts (regulation) Act, 1956. The recognition is granted under section 3 of the act by the central government, Ministry of Finance.
NATURE & FUNCTIONS OF STOCK EXCHANGE

There is an extraordinary amount of ignorance and of prejudice born out of ignorance with regard to nature and functions of Stock Exchange. As economic development proceeds, the scope for acquisition and ownership of capital by private individuals also grow. Along with it, the opportunity for Stock Exchange to render the service of stimulating private savings and challenging such savings into productive investment exists on a vastly great scale. These are services, which the Stock Exchange alone can render efficiently.
29
The Stock Exchanges in India have an important role to play in the building of a real shareholders democracy. To protect the interest of the investing public, the authorities of the Stock Exchanges have been increasingly subjecting not only its members to a high degree of discipline, but also those who use its facilities-Joint Stock Companies and other bodies in whose stocks and shares it deals. The activities of the Stock Exchange are governed by a recognized code of conduct apart from statutory regulations. Investors both actual and potential are provided, through the daily Stock Exchange quotations. The job of the Stock Exchange and its members is to satisfy the need of market for investments to bring the buyers and sellers of investments together, and to make the Exchange of Stock between them as simple and fair a process as possible.
CHARACTERISTICS OF STOCK EXCHANGES IN INDIA

Traditionally, a stock exchange has been as association of individual members called brokers, formed for the express purpose of regulating and facilitating the buying and selling of securities by the public and institutions at large. A stock exchange in India operates with the recognition from the government under the securities and contracts (Regulation Act, 1956). The member brokers are essentially the middlemen, who transact in securities on behalf of the public for a communism or on their behalf. There are at present 24 stock exchanges in India. The largest among them, being the Bombay Stock Exchange (BSE), which alone accounts for over 80% of due total volume of transactions in shares in the country.
Securities and Exchange Board of India (SEBI) has been setup in Bombay by the Government to oversee the orderly development of Stock Exchange in the country. All companies wishing to raise capital from the public are required to list their securities on at least one Stock Exchange. Thus, all ordinary shares, Preference Shares and Debentures of publicly held companies are listed in one or more Stock Exchanges. Stock Exchanges also facilitate trading in the securities of the public sector companies as well as Government Securities.
30
NEED FOR A STOCK EXCHANGE

As the business and industry expanded and economy became more complex in nature, a need for permanent finance arose. Entrepreneurs require money for long-term needs, were as investors demand liquidity. The solution to this problem gave way for the origin of Stock Exchange, which is a ready market for investment and liquidity. As per the Securities Contract Act, 1956, Stock Exchange means any body of individuals whether incorporated or not, constituted for the purpose of regulating or controlling the business of buying, selling or dealing in securities. Securities include: Shares, Scrips, Stocks, Bonds, Debentures and other Marketable Securities. Government Securities. Rights or Interests in Securities.
SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

Securities and Exchange Board of India (SEBI) set up as an autonomous regulatory authority by the government of India in 1988 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto. It is empowered by two acts namely the SEBI Act, 1992 and the securities contract (regulation) Act, 1956 to perform the function of protecting investors rights and regulating the capital markets.
31
Securities and Exchange Board of India (SEBI) regulatory reach has been extended to more areas and there is a considerable change in the capital market. SEBI's annual report for 1997-98 has stated that through out its six-year existence as a statutory body, it has sought to balance the twin objectives of investor protection and market development. It has formulated new rules and crafted regulations to foster development. Monitoring and surveillance was put in place in the Stock Exchanges in 1996-97 and strengthened in 1997-98. SEBI was set up as an autonomous regulatory authority by the government of India in 1988 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto. It is empowered by two acts namely the SEBI Act, 1992 and the securities contract (regulation) Act, 1956 to perform the function of protecting investors rights and regulating the capital markets.
OBJECTIVES OF SEBI
The promulgation of the SEBI ordinance in the parliament gave statutory status to SEBI in 1992. According to the preamble of the SEBI, the three main objectives are: To protect the interests of the investors in securities. To promote the development of securities market. To regulate the securities market.
FUNCTIONS OF SEBI
Regulating the business in Stock Exchange and any other securities market. Registering and regulating the working of Stock Brokers, Sub-Brokers, Share Transfer Agents, Bankers to the issue, Trustees to trust deeds, Registrars to an issue, Merchant Bankers, Underwriters, Portfolio Managers, Investment Advisers and such other Intermediaries who may be associated with securities market in any manner. 32
Registering and regulating the working of collective investment schemes including Mutual Funds. Promoting and regulating self-regulatory organizations. Prohibiting fraudulent and unfair trade practices in the securities market. Promoting investor's education and training of intermediaries in securities market. Prohibiting Insiders Trading in securities. Regulating substantial acquisition of shares and take-over of companies. Calling for information, understanding inspection, conducting enquiries and audits of the Stock Exchanges, Intermediaries and Self-Regulatory organizations in the securities market.
BOMBAY STOCK EXCHANGE

The Stock Exchange, Mumbai, Popularly known as "Bombay Stock Exchange" (BSE) was established in 1875 as "The Native Share and Stock Brokers Association", as a voluntary nonprofit making association. It has evolved over the years into its present status as the premier Stock Exchange in the country. It may be noted that the Bombay Stock Exchange is the oldest one in Asia, even older than the Tokyo Stock Exchange, which was founded in 1878.
33
The Bombay Stock Exchange, while providing an efficient and transparent market for trading in securities, upholds the interests of the investors and ensures redressal of their grievances, whether against the companies or its own member-brokers. It also strives to educate and enlighten the investors by making available necessary informative inputs and conducting investor education programmes A Governing Board comprising of 9 elected Directors (one third of them retire every year by rotation), Two SEBI Nominees, Seven Public representatives and an Executive Director is the Apex Body, which decides the policies and regulates the affairs of the Bombay Stock Exchange The Executive Director as the Chief Executive Officer is responsible for the day-to-day administration of the Bombay Stock Exchange.
SECURITIES TRADED
The securities traded in the BSE are classified into three groups namely, specified shares of 'A' group and non-specified securities. The latter is sub-divided into 'B1' and 'B' groups. 'A' group contains the companies with large outstanding shares, good track record and large volumes of business in the secondary market. Settlements of all the shares are carried out through the Clearing House. Year Number of Listed Market Companies Capitalization (In Crores) Annual Turnover Average Daily (In Crores) Turnover (Rs. In Billion)
1994-95 1995-96 1996-97 1997-98 2000-04
4702 5602 5832 5853 6000
4355 5365 4639 5630 5479
677 501 1243 2706 2449
1.8 2.2 5.2 8.5 11.5
NATIONAL STOCK EXCHANGE
34
The National Stock Exchange was incorporated in November, 1992 with an equity capital of Rs. 25crores. The International Securities Consultancy (ISC) of Hong Kong has helped in setting up National Stock Exchange. ISC has prepared the detailed business plans and installation of hardware and software systems. The promotions for National Stock Exchange were Financial Institutions, Insurances Companies, Banks and SEBI Capital Market Limited, Infrastructure Leasing and Financial Services Limited and Stock Holding Corporation Limited. trading facilities to investors. National Stock Exchange is not an exchange in the traditional sense where brokers own and manage the exchange. A two tier administrative set up involving a company board and a governing board of the exchange is envisaged. National Stock Exchange is a national market for shares Public Sector Units Bonds, Debentures and Government The National Stock Exchange (NSE) of India became operational in the capital market segment on 3rd, November 1994 in Mumbai. The genesis of the NSE lies in the recommendations of the Pherwani Committee (1991). Apart from NSE, it had recommended for the establishment of National Stock Market System also. Committee pointed out six major defects in the Indian Stock Market. It has been set up to strengthen the move towards professionalisation of the capital market as well as provide nation wide securities
OBJECITVES OF NATIONAL STOCK EXCHANGE

To establish a nation wide trading facility fro equities, debt instruments and hybrids. To ensure equal access to investors all over the country through appropriate communication network. To provide a fair, efficient and transparent securities market to investors using an electronic communication network. To enable shorter settlement cycle and book entry settlement system. To meet current international standards of securities market.
35
PROMOTERS OF NATIONAL STOCK EXCHANGE

IDBI, ICICI, IFCI, LIC, GIC, SBI, Bank of Baroda, Canara Bank, Corporation Bank, Indian Bank, Oriental Bank of Commerce, Union Bank of India, Punjab National Bank, Infrastructure Leasing and Financial Services, Stock Holding Corporation of India and SBI Capital Market are the promoters of NATIONAL STOCK EXCHANGE.
NSE-NIFTY
The National Stock Exchange on April 22, 1996 launched a new Equity Index. The NSE-50. The new Index which replaces the existing NSE-100 Index, is expected to serve as an appropriate Index for the new segment of futures and options. "Nifty" means National Index for Fifty Stock. The NSE-50 comprises 50 companies that represent 20 broad Industry groups with an aggregate market capitalization of around Rs.1,70,000 crores. All companies included in the Index have a market capitalization in excess of Rs.500crores each and should have traded for 85% of trading days at an impact cost of less than 1.5%. The base period for the index is the close of prices on Nov 3, 1995, which makes one year of completion of operation of NSE's capital market segment. The base value of the Index has been set at 1000.
NSE-MIDCAP INDEX
The National Stock Exchange Midcap Index or the Junior Nifty comprises 50 stocks that represents 21 board Industry groups and will provide proper representation of the madcap segment of the Indian Capital Market. All stocks in the Index should to establish a nation wide trading facility fro equities, debt instruments and communication network. To provide a fair, efficient and transparent securities market to investors using an electronic communication network. To enable shorter settlement cycle and book entry settlement system. hybrids. To ensure equal access to investors all over the country through appropriate
36
To meet current international standards of securities market.
STOCK EXCHANGES IN INDIA

S.No 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. NAME OF THE STOCK EXCHANGE Bombay Stock Exchange Hyderabad Stock Exchange. Ahmadabad Share and Stock Brokers Association. Calcutta Stock Exchange Association Limited. Delhi Stock Exchange Association Limited. Madras Stock Exchange Association Limited. Indoor Stock Brokers Association. Bangalore Stock Exchange. Cochin Stock Exchange. Pune Stock Exchange Limited. U.P Stock Exchange Association Limited. Ludhiana Stock Exchange Association Limited. Jaipur Stock Exchange Limited. Gauhathi Stock Exchange Limited. Mangalore Stock Exchange Limited. Maghad Stock Exchange Limited, Patna. Bhubaneswar Stock Exchange Association Limited. Over the Counter Exchange of India, Bombay. Saurasthra Kutch Stock Exchange Limited. Vadodara Stock Exchange Limited. Coimbatore Stock Exchange Limited. Meerut Stock Exchange Limited. National Stock Exchange Limited. Integrated Stock Exchange. YEAR 1875 1943 1957 1957 1957 1957 1958 1963 1978 1982 1982 1983 1984 1984 1985 1986 1989 1989 1990 1991 1991 1991 1992 1999
37
CHAPTER 5 DATA ANALYSIS
PORTFOLIO MANAGEMENT CONCEPTUAL FRAME WORK

38
Portfolio analysis believes in the maximization of return through a combination of securities. The modern portfolio theory discusses the relationship between different securities and then draws inter-relationship of risks between them. It is not necessary to achieve success only by trying to get all securities of minimum risk. The theory states that by combining a security of low risk with another security of high risk, success can be achieved by an investor in making a choice of investment outlets.
Average Returns of The Company: Table No 1

S. No. 1 2 3 4 5 Security WIPRO ICICI RELIANCE RANBAXY ITC Average 1.84 8.48 11.76 23.06 -1.76
Average Return =
R = Ri / N
39
Where R = Average Return Ri = Return of the Security I for the year T N = Number of Years Based on above average return of securities of Ranbaxy is earning higher return and ITC is earning lowest return. Other securities are earning medium rage returns such are Wipro, ICICI and Reliance.
FIGURE NO 1
Standard Deviation of the Companies: Table No 2

40
S. No. 1 2 3 4 5
Security WIPRO ICICI RELIANCE RANBAXY ITC
Std dev 65.49 72.11 86.30 96.62 33.59
S.D = 1/ n 1(R R ) 2
T=1 Based on above calculations Standard deviations like that Ranbaxy is highest and ITC is lower, where other securities are having medium standard deviation.
FIGURE NO 2
CORRELATION CO-EFFICIENT BETWEEN THE SECURITIES

41
Security Wipro ICICI Reliance Ranbaxy ITC
Wipro 1
ICICI 0.3787 1
Reliance 0.2774 0.3093 1
Ranbaxy 0.9333 0.8050 0.4326 1
ITC 0.6444 0.3911 0.7980 0.7445 1
Formula
Correlation Co-efficient (nab ) = COV (ab) / a.b Where COV (ab) = 1/ n 1(RA RA )(RB RB
PORTFOLIO WEIGHTS: Table No 3

S.NO 1 2 3 4 5 6 7 8 9 10 PORTFOLIO Wipro & ITC Wipro & Ranbaxy Wipro & ICICI Wipro & Reliance ITC & Ranbaxy ITC & ICICI ITC & Reliance Ranbaxy & ICICI Ranbaxy & Reliance ICICI & Reliance CORRELATION WEIGHT OF A 0.6444 -0.1120 0.9333 1.89 0.3787 0.5770 0.2774 0.683 0.7445 1.228 0.3911 0.959 0.7980 1.300 0.8050 -0.123 0.4326 0.401 0.3093 0.627 WEIGHT OF B 1.1120 -0.89 0.423 0.317 -0.228 0.041 -0.30 1.123 0.599 0.373
Formula
Weight of a (Wa) = Weight of b (Wb) =
b( b naba) /( a 2 + b 2 ) ( 2nab.a.b)
1 Wa
Portfolio Risk: Table No 4
42
S.NO 1 2 3 4 5 6 7 8 9 10
COMBINATION Wipro & ITC Wipro & Ranbaxy Wipro & ICICI Wipro & Reliance ITC & Ranbaxy ITC & ICICI ITC & Reliance Ranbaxy & ICICI Ranbaxy & Reliance ICICI & Reliance
PORTFOLIO RISK 33.10 109.27 56.84 58.54 11.69 33.47 23.82 69.76 23.62 63.09
Formula:
p = a 2 Wa 2 + b 2 Wb 2 + 2.nab.a.b.WaWb
Where:
a = S tan drard deviation of Securitiy a b = S tan drad deviation of Security b Wa = Weight of Security a Wb = Weight of Security b nab = Correlation Coeffient between Secutiry a & b p = Portfolio Risk
Portfolio Return: Table No 5 43
S.NO 1 2 3 4 5 6 7 8 9 10
PORTFOLIO RETURN -2.1632 -17.045 4.648 4.984 -7.418 -1.340 -5.816 6.686 16.291 9.703
Formula: Rp = (Ra X Wa) + (Rb X Wb) Where: Ra = Average Return of Security a Rb = Average Return of Security b Wa = Weight of Security a Wb = Weight of Security b Rp = Portfolio Return
Portfolio Risk & Return: Table No 6

44
S.NO 1 2 3 4 5 6 7 8 9 10
PORTFOLIO RISK 33.10 109.27 56.84 58.54 11.69 33.47 23.82 69.76 23.62 63.09
Portfolio Return -2.1632 -17.045 4.648 4.984 -7.418 -1.340 -5.816 6.686 16.291 9.703
FIGURE NO 3
PORTFOLIO SELECTION, REVISION & EVALUATION
45
Portfolio Section
Portfolio analysis provides the input for next phase in portfolio management, which is portfolio selection. The proper goal of portfolio construction is to generate a portfolio that provides the highest returns at a given level of risk. The inputs from portfolio analysis can be used to identify the set of efficient portfolios. From this the optimal portfolio must be selected for investment. Harry Markowitz portfolio theory provides both the conceptual framework and analytical tools for determining the optimal portfolio in a disciplined and objective way. So, out of the various combinations (related to five companies), the optimal portfolio is Ranbaxy & Reliance, as this portfolio has minimum risk of 23.62% with maximum return of 16.291%. Hence, I can say that it is better to invest in these portfolios.
Portfolio revision
Economy and financial markets are dynamic, change take place almost daily. As time passes securities which were once attractive may lease to be so. New securities with promise of high return and low risk may emerge. The investor now has to revise his portfolio in the light of developments in the market. This leads to purchase of some new securities and sale of some of the existing securities and their proportion in the portfolio changes as a result of the revision. The revision has to be scientifically and objectively so as to ensure the optimality of the revised portfolio, it important as portfolio analysis and selection.
Portfolio Evaluation The objective of constructing a portfolio and revising I t periodically is to earn maximum returns with minimum risk. Portfolio evaluation is the process, which is concerned with assessing the performance of the portfolio over a selected period of time in terms of returns and risk. This involves quantities measurement of actual return realized. Alternative measures of performance evaluation have been developed by investor and portfolio managers for their use. It provides a mechanism for identifying weakness in the investment process and improving them. The portfolio management process is an on going process to portfolio construction, continues with portfolio revision and evaluation. The evaluation provides the necessary feedback for better 46
designing of portfolio the next time and around. Superior performance is achieved thorough continual refinement of portfolio management skills.
CALCULATION OF AVERAGE RETURNS OF COMPANIES
WIPRO
Year 2006-07 2007-08 2008-09 2009-10 2010-11 Opening Share price (P0) 538.55 571.60 488.75 330.85 671.50 Closing Share price (P1) 559.40 432.10 245.90 706.95 441.40 (P1 P0) 20.85 -139.50 -242.85 376.10 -230.10 Total Return (P1 P0)/ P0*100 3.87 -24.40 -49.69 113.67 -34.27 9.18
Returns are calculated as below

Return of 06-07 = (P1-P0)/P0*100 = (559.40-538.55)/538.55*100 = 3.87 Return of 07-08 = (P1-P0)/P0*100 = (432.10-571.60)/571.60*100 = -24.40 Return of 08-09 = (P1-P0)/P0*100 = (245.90-488.75)/488.75*100 = -49.69 Return of 09-10 = (P1-P0)/P0*100 = (706.95-330.85)/330.85*100 = 113.67 Return of 10-11 = (P1-P0)/P0*100 = (441.40-671.50)/671.50*100 = -34.27 Average Return = 9.18/5 = 1.84
ICICI
47
Year 2006-07 2007-08 2008-09 2009-10 2010-11
Opening Share price (P0) 591.75 865.85 879.60 479.20 951.95
Closing Share price (P1) 853.35 769.40 332.80 952.50 1016.35
(P1 P0) 261.60 -96.42 -546.80 473.75 64.40 Total Return
(P1-P0)/ P0*100 44.20 -11.13 -96.27 98.86 6.76 42.42

Return of 06-07 = (P1-P0)/P0*100 = (853.35-591.75)/591.75*100 = 44.20 Return of 07-08 = (P1-P0)/P0*100 = (769.40-865.85)/865.85*100 = -11.13 Return of 08-09 = (P1-P0)/P0*100 = (332.80-879.60)/879.60*100 = -96.27 Return of 09-10 = (P1-P0)/P0*100 = (952.50-479.20)/479.20*100 = 98.86 Return of 10-11 = (P1-P0)/P0*100 = (1016.35-951.95)/951.95*100 = 6.76 Average Return = 42.42/5 = 8.48
RELIANCE
48
Year 2006-07 2007-08 2008-09 2009-10 2010-11
Opening Share price (P0) 615.45 509.75 1430.55 695.20 1137.40
Closing Share price (P1) 494.20 1250.85 515.55 999.05 606.75
(P1 P0) -121.25 741.10 -915.00 303.85 -530.65 Total Return
(P1P0) / P0*100 -19.70 145.38 -68.96 43.71 -46.65 58.78

Return of 06-07 = (P1-P0)/P0*100 = (494.20-615.45)/615.45*100 =-19.70 Return of 07-08 = (P1-P0)/P0*100 = (1250.85-509.75)/ 509.75*100 = 145.38 Return of 08-09 = (P1-P0)/P0*100 = (515.55-1430.55)/ 1430.55*100 = -68.96 Return of 09-10 = (P1-P0)/P0*100 = (999.05-695.20)/ 695.20*100 = 43.71 Return of 10-11 = (P1-P0)/P0*100 = (606.75-1137.40)/ 1137.40*100 = -46.65 Average Return = 58.78/5 = 11.76
49
RANBAXY
Year 2006-07 2007-08 2008-09 2009-10 2010-11 Opening Share price (P0) 472.50 371.95 479.75 166.00 443.30 Closing Share price (P1) 351.90 438.45 165.70 475.40 452.20 (P1 P0) -120.60 66.50 -314.05 309.40 8.90 Total Return (P1-P0)/ P0*100 -25.52 17.88 -65.46 186.38 2.01 115.29

Return of 06-07 = (P1-P0)/P0*100 = (351.90-472.50)/ 472.50*100 = -25.52 Return of 07-08 = (P1-P0)/P0*100 = (438.45-371.95)/ 371.95*100 = 17.88 Return of 08-09 = (P1-P0)/P0*100 = (165.70-479.75)/ 479.75*100 = --65.46 Return of 09-10 = (P1-P0)/P0*100 = (475.40-166.00)/ 166.00*100 = 186.38 Return of 10-11 = (P1-P0)/P0*100 = (452.20-443.30)/ 443.30*100 = 2.01 Average Return = 115.29/5 = 23.06
50
ITC (Indian Tobacco Corporation)

Year 2006-07 2007-08 2008-09 2009-10 2010-11 Opening Share price (P0) 203.75 160.05 219.90 188.90 265.85 Closing Share price (P1) 151.15 206.25 184.85 263.05 172.40 (P1 P0) -52.60 46.20 -35.05 74.15 -93.45 Total Return (P1-P0)/ P0*100 -25.81 28.86 -15.94 39.25 -35.15 -8.79

Return of 06-07 = (P1-P0)/P0*100 = (151.15-203.75)/ 203.75*100 = -25.81 Return of 07-08 = (P1-P0)/P0*100 = (206.25-160.05)/ 160.05*100 = 28.86 Return of 08-09 = (P1-P0)/P0*100 = (184.85-219.90)/ 219.90*100 = -15.94 Return of 09-10 = (P1-P0)/P0*100 = (263.05-188.90)/ 188.90*100 = 39.25 Return of 10-11 = (P1-P0)/P0*100 = (172.40-265.85)/ 265.85*100 = -35.15 Average Return = -8.79/5 = -1.76
51
CALCULATION OF STANDARD DEVIATIONS WIPRO

Year Return (R) Avg. Rtn. ( R ) 1.84 1.84 1.84 3.87 1.84 -24.40 1.84 -49.69 113.67 -34.27
RR
20062.03 07 -26.24 2007-51.53 08 111.83 2008-36.11 09 200910 201011 (R) = 9.18 ( R R )2 17157.88 Average Return = (R)/N = 9.18/5 = 1.84 Variance = 1/N 1 ( R R )2 = 1/5 1 (17157.88) = 4289.47 Standard Deviation = 4289.47 = 65.49
( R R )2 4.12 688.54 2655.34 12505.95 1303.93
ICICI
Year Return (R) Avg. Rtn. ( R ) 8.48 8.48 8.48 44.20 8.48 -11.13 8.48 -96.27 98.86 6.76
RR
200635.72 07 -19.61 2007-104.75 08 90.38 2008-1.72 09 200910 201011 (R) = 42.42 ( R R )2 20798.61 Average Return = (R)/N = 42.42/5 = 8.48 Variance = 1/N 1 ( R R )2 = 1/5 1 (20798.61) = 5199.65 Standard Deviation = 5199.65 = 72.11
( R R )2 1275.92 384.55 10972.56 8168.54 -2.96
RELIANCE
Year 2006Return (R) Avg. Rtn. ( R ) -19.70 11.76
RR
-31.46 52
( R R )2 989.73
07 11.76 133.62 200711.76 -80.72 08 11.76 31.95 145.38 200811.76 -58.41 -68.96 09 43.71 2009-46.65 10 201011 (R) = 58.78 ( R R )2 Average Return = (R)/N = 58.78/5 = 11.76
17854.30 6515.72 1020.80 3411.73
29792.28
Variance = 1/N 1 ( R R )2 = 1/5 1 (29792.28) = 7448.07 Standard Deviation = 7448.07 = 86.30
RANBAXY
Year 200607 200708 200809 200910 201011 (R) = Return (R) Avg. Rtn. ( R ) 23.06 23.06 23.06 -25.52 23.06 17.88 23.06 -65.46 186.38 2.01
RR
-48.58 -5.18 -88.52 163.32 -21.05
( R R )2 2360.02 26.83 7835.79 26673.42 443.10
115.29
( R R )2 37339.16
Average Return = (R)/N = 115.29/5 = 23.06 Variance = 1/N 1 ( R R )2 = 1/5 1 (37339.16) = 9334.79 Standard Deviation = 9334.79 = 96.62
ITC
Year 200607 200708 2008Return (R) Avg. Rtn. ( R ) -25.81 -1.76 28.86 -1.76 -15.94 -1.76 39.25 -1.76 -35.15 -1.76
RR
-24.05 30.62 -14.18 41.01 -33.39
( R R )2 578.40 937.58 201.07 1681.82 1114.89
53
09 200910 201011 (R) =
-8.79
( R R )2 4513.76
Average Return = (R)/N = -8.79/5 = -1.76 Variance = 1/N 1 ( R R )2 = 1/5 1 (4513.76) = 1128.44 Standard Deviation = 1128.44 = 33.59
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CALCULATION OF CORRELATIONS 1. CORRELATION BETWEEN WIPRO & ITC

Year 200607 200708 200809 200910 201011
RA RA RB RB
(RA RA )(RB RB )
-48.82 -803.47 730.69 4586.15 1205.71
2.03 -26.24 -51.53 111.83 -36.11
-24.05 30.62 -14.18 41.01 -33.39
(RA RA )(RB RB ) ( )(
5670.26
COVARIANCE (COVab) = 1/n-1 RA RA RB RB = 1/5-1(5670.26) = 1417.56
a = 65.49
b = 33.59
Correlation Coefficient (n ~ab) = COVab/ a.b = 1417.56/65.49*33.59 = 0.6444
2.
CORRELATION BETWEEN WIPRO & RANBAXY

Year 200607 200708 200809 200910 201011
RA RA RB RB
(RA RA )(RB RB )
-98.62 135.92 4561.43 18264.07 760.12
2.03 -26.24 -51.53 111.83 -36.11
-48.58 -5.18 -88.52 163.32 -21.05
(RA RA )(RB RB ) ( )(
23622.92
COVARIANCE (COVab) = 1/n-1 RA RA RB RB
55
= 1/5-1(23622.92) = 5905.73
a = 65.49
b = 96.62
3.
CORRELATION BETWEEN WIPRO & ICICI

Year 200607 200708 200809 200910 201011
RA RA RB RB
(RA RA )(RB RB )
72.51 514.56 5397.76 1107.19 62.11
2.03 -26.24 -51.53 111.83 -36.11
35.72 -19.61 -104.75 90.38 -1.72
(RA RA )(RB RB ) ( )(
7154.13
a = 65.49
b = 72.11
4.
CORRELATION BETWEEN WIPRO & RELIANCE

Year 200607 200708 2008RA RA 2.03 -26.24 -51.53 111.83 -36.11 RB RB -31.46 133.62 -80.72 31.95 -58.41
-63.86 -3506.19 4159.50 3572.97 2109.18 56
(RA RA )(RB RB )
09 200910 201011
(RA RA )(RB RB ) ( )(
6271.60
a = 65.49
b = 86.30
57
5.
CORRELATION BETWEEN ITC & RANBAXY

Year 200607 200708 200809 200910 201011
RA RA RB RB
(RA RA )(RB RB )
1168.35 -158.61 1255.21 6697.75 702.86
-24.05 30.62 -14.18 41.01 -33.39
-48.58 -5.18 -88.52 163.32 -21.05
(RA RA )(RB RB ) ( )(
9665.56
a = 33.59
b = 96.62
Correlation Coefficient (n ~ab) = COVab/ a.b = 2416.39/33.59*96.62= 0.7445
6.
CORRELATION BETWEEN ITC & ICICI

Year 200607 200708 200809 200910 201011
RA RA RB RB
(RA RA )(RB RB )
-859.07 -600.46 1485.35 3706.48 57.43
-24.0 5 30.62 -14.18 41.01 -33.3 9 35.72 -19.61 -104.75 90.38 -1.72
(RA RA )(RB RB ) ( )(
3789.73
58
a = 33.59
b = 72.11
59
7.
CORRELATION BETWEEN ITC & RELIANCE

Year 200607 200708 200809 200910 201011
RA RA RB RB
(RA RA )(RB RB )
756.61 4091.44 1144.61 1310.27 1950.31
-24.0 5 30.62 -14.18 41.01 -33.3 9 -31.46 133.62 -80.72 31.95 -58.41
(RA RA )(RB RB ) ( )(
9253.24
a = 33.59
b = 86.30
8.
CORRELATION BETWEEN RANBAXY & ICICI

Year 200607 200708 200809 200910 201011
RA RA RB RB
(RA RA )(RB RB )
-1735.28 101.57 9272.47 14760.86 36.21
-48.58 -5.18 -88.52 163.32 -21.05
35.72 -19.61 -104.75 90.38 -1.72
(RA RA )(RB RB ) ( )(
22435.83
60
a = 96.62
b = 72.11
61
9.
CORRELATION BETWEEN RANBAXY & RELIANCE

Year 200607 200708 200809 200910 201011
RA RA RB RB
(RA RA )(RB RB )
1528.33 -692.15 7145.33 5218.07 1229.53
-48.58 -5.18 -88.52 163.32 -21.05
-31.46 133.62 -80.72 31.95 -58.41
(RA RA )(RB RB ) ( )(
14429.11
a = 96.62
b = 86.30
10.
CORRELATION BETWEEN ICICI & RELIANCE

Year 200607 200708 200809 200910 201011
RA RA RB RB
(RA RA )(RB RB )
-1123.75 -2620.29 8455.42 2887.64 100.46
35.72 -19.61 -104.75 90.38 -1.72
-31.46 133.62 -80.72 31.95 -58.41
(RA RA )(RB RB ) ( )(
7699.48
62
a = 72.11
b = 86.30
CALCULATION OF PORTFOLIO WEIGHTS FORMULA

Xa = b( b nab.a ) / a 2 + b 2 2nab.a.b Xb = 1 Xa
1. CALCULATION OF WEIGHT OF WIPRO & ITC

Where, Xa = WIPRO, Xb = ITC Xa = 33.59(33.59 (0.6444)65.49)/65.492+33.592-(2*0.6444*65.49*33.59) = -289.26/2582.11 = -0.1120 Xb = 1 Xa = 1 (-0.1120) = 1.1120 Xa = -11.20%, Xb = 111.20%
2. CALCULATION OF WEIGHT OF WIPRO & RANBAXY

Where, Xa = WIPRO, Xb = RANBAXY Xa = 96.62(96.62 (0.9333)65.49)/65.492+96.622-(2*0.9333*65.49*96.62) = 3429.83/1813.18 = 1.89 Xb = 1 Xa = 1 1.89 = -0.89 Xa = 189%, Xb = -89%
3. CALCULATION OF WEIGHT OF WIPRO & ICICI
63
Where, Xa = WIPRO, Xb = ICICI Xa = 72.11(72.11 (0.3787)65.49)/65.492+72.112-(2*0.3787*65.49*72.11) = 3411.44/5911.98 = 0.5770 Xb = 1 Xa = 1 0.5770 = 0.423 Xa = 57.7%, Xb = 42.3%
4. CALCULATION OF WEIGHT OF WIPRO & RELIANCE

Where, Xa = WIPRO, Xb = RELIANCE Xa = 86.30(86.30(0.2774)65.49)/65.492+86.302 (2*0.2774*65.49*86.30) = 5879.88/8601.02 = 0.683 Xb = 1 Xa = 1 0.683 = 0.317 Xa = 68.3%, Xb = 31.7%
5. CALCULATION OF WEIGHT OF ITC & RANBAXY

Where, Xa = ITC, Xb = RANBAXY Xa = 96.62(96.62(0.7445)33.59)/33.592+96.622 (2*0.7445*33.59*96.62) = 6919.17/5631.21 = 1.228 Xb = 1 Xa = 1 1.228 = -0.228 Xa = 122.8%, Xb = -22.8%
6. CALCULATION OF WEIGHT OF ITC & ICICI

Where, Xa = ITC, Xb = ICICI Xa = 72.11(72.11(0.3911)33.59)/33.592+72.112 (2*0.3911*33.59*72.11) = 4252.54/4433.51= 0.959 Xb = 1 Xa = 1 0.959= 0.041 Xa = 95.9%, Xb = 4.1%
64
7. CALCULATION OF WEIGHT OF ITC & RELIANCE

Where, Xa = ITC, Xb = RELIANCE Xa = 86.30(86.30(0.7980)33.59)/33.592+86.302 (2*0.7980*33.59*86.30) = 5134.43/3949.47 = 1.300 Xb = 1 Xa = 1 1.300 = -0.3 Xa = 130%, Xb = -30%
8. CALCULATION OF WEIGHT OF RANBAXY & ICICI

Where, Xa = RANBAXY, Xb = ICICI Xa = 72.11(72.11(0.8050)96.62)/96.622+72.112 (2*0.8050*96.62*72.11) = -408.86/3317.97 = -0.123 Xb = 1 Xa = 1 (-0.123) = 1.123 Xa = -12.3%, Xb = 112.3%
9. CALCULATION OF WEIGHT OF RANBAXY & RELIANCE

Where, Xa = RANBAXY, Xb = RELIANCE Xa = 86.30(86.30(0.4326)96.62)/96.622+86.302 (2*0.4326*96.62*86.30) = 3840.54/9568.81 = 0.401 Xb = 1 Xa = 1 0.401 = 0.599 Xa = 40.1%, Xb = 59.9%
10. CALCULATION OF WEIGHT OF ICICI & RELIANCE

Where, Xa = ICICI, Xb = RELIANCE Xa = 86.30(86.30(0.3093)72.11)/72.112+86.302 (2*0.3093*72.11*86.30) = 5522.88/8797.94= 0.627 Xb = 1 Xa = 1 0.627 = 0.373 Xa = 62.7%, Xb = 37.3%
65
CALCULATION OF PORTFOLIO RISK FORMULA

p = a 2Wa 2 + b 2Wb 2 + 2nab.ab.WaWb
Where
a = Standard Deviation of Security a
b = Standard Deviation of Security b

Wa = Weight of Security a Wb = Weight of Security b nab = Correlation Coefficient between Security a & b
p = Portfolio Risk
1. WIPRO & ITC
a = 65.49 b = 33.59 , Wa = -0.1120, Wb = 1.1120, nab = 0.6444

p = 65.492*-0.11202+33.592*1.11202 + 2(0.6444*65.49*33.59*-0.1120*1.1120)
= 1095.88 = 33.10
2. WIPRO & RANBAXY
a = 65.49, b = 96.62 , Wa = 1.89, Wb = -0.89, nab = 0.9333

p = 65.492 * 1.892 + 96.622 * -0.892 + 2(0.9333*65.49*96.62*1.89*-0.89)
= 11941.65 = 109.27
3. WIPRO & ICICI
a = 65.49, b = 72.11 , Wa = 0.577, Wb = 0.423, nab = 0.3787

p = 65.492 * 0.5772 + 72.112 * 0.4232 + 2(0.3787*65.49*72.11*0.577*0.423)
= 3231.31 = 56.84
66
4. WIPRO & RELIANCE
a = 65.49, b = 86.30 , Wa = 0.683, Wb = 0.317, nab = 0.2774

p = 65.492*0.6832+86.302*0.3172+2(0.2774*65.49*86.30*0.683*0.317)
= 3428.04 = 58.54
5. ITC & RANBAXY
a = 33.59, b = 96.62 , Wa = 1.228, Wb = -0.228, nab = 0.7445

p = 33.592*1.2282+96.622*-0.2282+2(0.7445*33.59*96.62*1.228*-0.228)
= 136.87 = 11.69
6. ITC & ICICI
a = 33.59, b = 72.11 , Wa = 0.959, Wb = 0.041, nab = 0.3911

p = 33.592*0.9592+72.112*0.0412+2(0.3911*33.59*72.11*0.959*0.041)
= 1120.90 = 33.47
7. ITC & RELIANCE
a = 33.59, b = 86.30 , Wa = 1.300, Wb = -0.3, nab = 0.7980

p = 33.592*1.3002+86.302*-0.32+2(0.7980*33.59*86.30*1.300*-0.3)
= 567.82 = 23.82
8. RANBAXY & ICICI
a = 96.62, b = 72.11 , Wa = -0.123, Wb = 1.123, nab = 0.8050

67
p = 96.622*-0.1232+72.112*1.1232+2(0.8050*96.62*72.11*-0.123*1.123)
= 4867.01 = 69.76
9. RANBAXY & RELIANCE
a = 96.62, b = 86.30 , Wa = 0.401, Wb = 0.599, nab = 0.4326

p = 96.622*0.4012+86.302*0.5992+2(0.4326*96.62*86.30*0.401*0.599)
= 557.90 = 23.62
10.ICICI & RELIANCE a = 72.11, b = 86.30 , Wa = 0.627, Wb = 0.373, nab = 0.3093 p = 72.112*0.6272+86.302*0.3732+2(0.3093*72.11*86.30*0.627*0.373) = 3980.71 = 63.09
Calculation of Portfolio Return Rp = (Ra * Wa) + (Rb * Wb)

68
Where,
Ra = Average Return of Security a Rb = Average Return of Security b Wa = Weight of Security a Wb = Weight of Security b Rp = Portfolio Return Portfolios WIPRO & ITC WIPRO & RANBAXY WIPRO & ICICI WIPRO & RELIANCE ITC & RANBAXY ITC & ICICI ITC & RELIANCE RANBAXY & ICICI RANBAXY & RELIANCE ICICI & RELIANCE Ra 1.84 1.84 1.84 1.84 -1.76 -1.76 -1.76 23.0 6 23.0 6 8.48 Wa 0.1120 1.89 0.577 0.683 1.228 0.959 1.300 -0.123 0.401 0.627 Rb -1.76 23.0 6 8.48 11.7 6 23.0 6 8.48 11.7 6 8.48 11.7 6 11.7 6 Wb 1.112 0 -0.89 0.423 0.317 -0.228 0.041 -0.30 1.123 0.599 0.373 Rp= (Ra*Wa)+(Rb*Wb) -2.1632 -17.045 4.648 4.984 -7.418 -1.340 -5.816 6.686 16.291 9.703
69
CHAPTER 6 FINDINGS & CONCLUSION
70
FINDINGS & CONCLUSION FOR TWO ASSETS PORTFOLIOS 1. WIPRO & ITC In this combination, as per the calculations and the study, WIPRO bears a proportion of -0.1120and where as ITC bears a proportion of 1.1120 The standard deviation of two companies is 65.49 and 33.59 respectively. The companies whose standard deviation is lesser is considered to be less risky. Therefore, it is advisable for the investors to invest in ITC which is lesser risky when compared to WIPRO The combined portfolio risk of the companies is 33.10. 2. WIPRO & RANBAXY According to this combination, the portfolio weights of WIPRO & RANBAXY are 1.89 and -0.89 respectively. The standard deviation of WIPRO is 65.49 where as RANBAXY is 96.62 so, if any investor wants to invest his money or fund in this portfolio it is suggested that he should invest his large portion of fund in WIPRO and remaining part in RANBAXY. The portfolio risk of two companies is 109.27 which suggests the investor to go for portfolio investment rather than individual investment. 3. WIPRO & ICICI In this kind of portfolio, the proportion of WIPRO is 0.577 and ICICI is 0.423. The standard deviation of WIPRO is 65.49 where as the standard deviation of ICICI is 72.11. it is advisable for the investor to invest his major proportion in WIPRO because it is less risky and more profitable. The risk of portfolio is 56.84 which reduces the risk of individual stocks.
71
4. WIPRO & RELIANCE Investors have another alternative with this combination. The proportion of investments for WIPRO is 0.683 and for RELIANCE is 0.317. The standard deviation of WIPRO is 65.49 where as the standard deviation of RELIANCE is 86.30. In comparison of standard deviation, it is clear that WIPRO bears a lesser risk compared to RELIANCE. The combined portfolio risk is 58.54. 5. ITC & RANBAXY Here in this combination, the proportional weight of ITC is 1.228 and RANBAXY is -0.228. The standard deviation of ITC is 33.59 and standard deviation of RANBAXY is 96.62. It is better for the investor to invest in ITC to earn higher returns as it is lesser risky. The portfolio risk of two companies is 11.69which reduces the risk instead of investing in individual companies. 6 ITC & ICICI
The combination of ITC and ICICI gives the proportion of investment as 0.959 and 0.041. The standard deviation of ITC is 33.59 and the standard deviation of ICICI is 72.11. The standard deviation of ITC is less which tells us that it is lesser risky when compared to ICICI. The portfolio risk of ITC and ICICI is 33.47 it reduces the risk of the investor and gets higher returns if he invests in portfolio.
72
7. ITC & RELIANCE In this combination, ITCS proportional weight is 1.300 and RELIANCES proportional weight is -0.30. the standard deviation of ITC is 33.59 and the standard deviation of RELIANCE is 86.30. there fore ITC is lesser risky.The proportional risk is 23.82. 8. RANBAXY & ICICI Investors have another alternative with this combination. The proportion of investment for RANBAXY is -0.123 and for ICICI is 1.123. The standard deviation of RANBAXY is 96.62 and the standard deviation of ICICI is 72.11. The portfolio risk is 69.76. 9. RANBAXY & RELIANCE The combination of RANBAXY and RELIANCE gives the proportion of investment as 0.401 and 0.599. The standard deviation of RANBAXY is 96.62 and the standard deviation of RELIANCE is 86.30. The standard deviation of RELIANCE is less which tells us that it is lesser risky when compared to RANBAXY. The portfolio risk of RANBAXY and RELIANCE is 23.62 it reduces the risk of the investor and gets higher returns if he invests in portfolio 10. ICICI & RELIANCE The combination of ICICI and RELIANCE gives the proportion of investment as 0.627 and 0.373. The standard deviation of ICICI is 72.11 and the standard deviation of RELIANCE is 86.30. The standard deviation of ICICI is less which tells us that it is lesser risky when compared to RELIANCE. The portfolio risk of ICICI and RELIANCE is 63.09 it reduces the risk of the investor and gets higher returns if he invests in portfolio
73
CHAPTER 7 SUGGESIONS
74
SUGGESTION
Before investing in shares, should look at type of shares, you want to buy and the way in which you want to deal on the stock market. Three main routes for investing in shares Invest your capital in a single company Invest your capital in a number of different companies, a portfolio of shares. Invest indirectly and spread your risk through collective investment such as investment trust and unit trust The investor is able to know the risk and return of the shares by using the analysis. The investor who takes high risk involves taking of high returns. The investor who will not take risk involves taking of less returns. The investor to be a moderate person involves taking of optimum risk or return. A small investor can maintain a portfolio with diversified stocks rather than investing in a few stocks, which he feels are good. The investor should include all those securities, which are undervalued in their portfolio, and remove those securities that are overvalued. The risk and return of all securities and individual a desired combination in his portfolio. This can be done using CAPM and Markowitz model. The investor can have a complete idea about the performance of the company by analyzing the financial ratios and will be able to calculate its intrinsic worth.
75
CHAPTER 8 BIBLIOGRAPHY
76
BIBLIOGRAPHY Books
DONALD FISHER & RONALD J.JORDON, SECURITIES ANALYSIS V.K. BHALLA, INVESTMENTS MANAGEMENT -S.CHAND PUBLICATIONS PORTFOLIO MANAGEMENT BY KEVIN V.A. AVADHANI, INVESTMENT MANAGEMENT. SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT - PUNITHAVATHY PANDIAN AND PROTFOLIO MANAGEMENT, 6TH EDITION.
WEBSITES
http://www.nseindia.com http://www.bseindia.com http://www.sharekhan.com http://www.motilaloswal.com http://www.kotaksecurities.com http://www.religare.com http://www.investopedia.com http://www.google.com
NEWS PAPERS ECONOMIC TIMES BUSINESS LINE MY project was completed under guidance of Mrs.lalita kumara.
77
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CHAPTER - 1 INTRODUCTION

INTRODUCTION TO PORTFOLIO MANAGEMENT

OBJECTIVES OF PORTFOLIO MANAGEMENT

NEED FOR PORTFOLIO MANAGEMENT

PORTFOLIO MANAGEMENT PROCESS

ELEMENTS OF PORTFOLIO MANAGEMENT

The two major types of risks are

RISK RETURN ANALYSIS

Simple diversification reduces

Persons involved in portfolio management Investor

Discretionary portfolio manager

Who can be a portfolio manager?

Functions of portfolio managers

Conducting market and economic service

Study of stock market

Decide the type of portfolio

Stock market operation can be analyzed by

Prices are based upon demand and supply of the market.

Portfolio Management and Diversification

CHAPTER - 2 REVIEW OF LITERATURE

Portfolio Theories MARKOWITZ THEORY

Assumption under Markowitz Theory

THE SHARPE INDEX MODEL

SINGLE INDEX MODEL

Sharpes Optimal Portfolio

Ri = The expected return on stock i Rf = The return on a risk less asset

Capital Asset Price Theory

The CAPM Theory

Lending and Borrowing

Security Market Line

This equation can be rewritten as follows: Ri Rf =

Market Imperfection and SML

Empirical tests of the CAPM

Present Validity of CAPM

Arbitrage pricing theory

APT and CAPM

It is similar to the capital market line equation:

CHAPTER 3 Company profile

CHAPTER 4 ABOUT STOCK MARKET

HISTORY OF STOCK EXCHANGE

DEFINITION OF STOCK EXCHANGE

NATURE & FUNCTIONS OF STOCK EXCHANGE

CHARACTERISTICS OF STOCK EXCHANGES IN INDIA

NEED FOR A STOCK EXCHANGE

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

BOMBAY STOCK EXCHANGE

1994-95 1995-96 1996-97 1997-98 2000-04

4702 5602 5832 5853 6000

4355 5365 4639 5630 5479

677 501 1243 2706 2449

1.8 2.2 5.2 8.5 11.5

NATIONAL STOCK EXCHANGE

OBJECITVES OF NATIONAL STOCK EXCHANGE

PROMOTERS OF NATIONAL STOCK EXCHANGE

To meet current international standards of securities market.

STOCK EXCHANGES IN INDIA

CHAPTER 5 DATA ANALYSIS

PORTFOLIO MANAGEMENT CONCEPTUAL FRAME WORK

Average Returns of The Company: Table No 1

Standard Deviation of the Companies: Table No 2

Security WIPRO ICICI RELIANCE RANBAXY ITC

Std dev 65.49 72.11 86.30 96.62 33.59

CORRELATION CO-EFFICIENT BETWEEN THE SECURITIES

Security Wipro ICICI Reliance Ranbaxy ITC