SAPM ASSIGNMENT 3

The companies from the BSE index that were chosen by our group are as follows: 1. 2. 3. 4. 5. DLF ltd. ICICI Hindustan Unilever Ranbaxy Infosys

Average Return and Standard Deviation The average return and the standard deviation for each stock are as follows: Company DLF LTD. ICICI HUL RANBAXY INFOSYS Std Deviation% 4.361646326 3.820278645 2.027150036 3.262053471 2.344143651 Average Return% -0.080802534 0.062932137 0.069042953 0.10046007 0.118927755

Correlation Matrix CORRELATIO N DLF LTD.e h a R . ICICI N DLF LTD.

Vaziraney(10PGDM092)

HUL 0.3417 0.3654 1.0000 0.2776 0.2807

RANBAXY 0.4315 0.3550 0.2776 1.0000 0.2516

INFOSYS 0.3431 0.5010 0.2807 0.2516 1.0000

1.0000

0.6536

ICICIK h u l l a r ( 0.6536G D M 0 9 3 ) 1.0000 10P HUL

Nikhil Sharma(10PGDM094)

Nipun

0.3417 0.4315

0.3654 0.3550

RANBAXY

INFOSYS l a n i ( 0.3431G D M 0 9 5 ) 0.5010 Bab 10P

Paras

The stocks taken have a correlation of less than 0.5 in many cases. It tells us that the stocks are not co-related with each other. This may be attributed to the fact that the stocks belong to different Industries. Also if the movement in one stock is not favoured then it will not affect the other stock.

Covariance Matrix CovarianceA,B = CorrelationA,B + S.D.A + S.D.B COVARIANCE DLF LTD. DLF LTD. ICICI HUL RANBAXY INFOSYS 19.0240 10.8908 3.0216 6.1387 3.5079 ICICI 10.8908 14.5945 2.8295 4.4238 4.4866 HUL 3.0216 2.8295 4.1093 1.8356 1.3336 RANBAXY 6.1387 4.4238 1.8356 10.6410 1.9237 INFOSYS 3.5079 4.4866 1.3336 1.9237 5.4950

The said portfolio gives us the following results: Portfolio variance Standard deviation Portfolio mean 5.3859 2.3208 0.0541

For Minimum Variance Efficient Portfolio we have used Solver function in excel where the Standard deviation is kept minimum by making changes in the weights assigned to each stock. The constraints are that each weight should be > 0 and the sum total of all weights is 1. The result that we get is as follows: Weighted Border Matrix (MVE Portfolio) Weights DLF LTD. 0.0000 0.0000 0.0000 0.5330 0.1140 0.0000 0.0000 0.0000 0.0000 ICICI 0.0000 0.0000 0.0000 0.0000 0.0000 HUL 0.5330 0.0000 0.0000 1.1672 0.1115 RANBAXY 0.1140 0.0000 0.0000 0.1115 0.1382 INFOSYS 0.3531 0.0000 0.0000 0.2510 0.0774

0.3531 1.0000

0.0000 0.0000

0.0000 0.0000

0.2510 1.5297

0.0774 0.3271

0.6850 1.0134

Portfolio variance Standard deviation Portfolio mean

2.8702 1.6942 0.0902

Now this is the portfolio that is created with minimum standard deviation. Now we have made a number of portfolio by making small increments in MVE portfolio mean ,with smallest standard deviation for the given expected return. The highest utility is of the portfolio 11 with Risk Aversion Index of 3 , which is considered to be most efficient and gives us Standard Deviation = 2.3441 Mean Return = 0.1402 Utility = 0.058 Now correlation coefficients was decreased by 0.04 and a Weighted Border Matrix was developed with these correlations and the Efficient Frontier was built . The most optimum portfolio is portfolio 11 ,with Standard Deviation = 2.3441 Mean Return = 0.1406 Utility = 0.058 Now correlation coefficients was increased by 0.04 and a Weighted Border Matrix was developed with these correlations and the Efficient Frontier was built . The most optimum portfolio is portfolio 11 ,with Standard Deviation = 2.3441 Mean Return = 0.1398 Utility = 0.057 PORTFOLIO ORIGINAL RETURN
0.1402

STD.DEV. CAL
2.3441 0.1352

SLOPE
0.059809

UTILITY
0.058

735

DECREASED CORRELATION INCREASED CORRELATION

0.1406 0.1398

2.3441 2.3441

0.1356 0.1356

0.059980 376 0.059639 094

0.058 0.057