PROJECT REPORT PORTFOLIO MANAGEMENT

Project Report Submitted To SCHOOL OF MANAGEMENT STUDIES DURING THE ACADAMIC YEAR-2009-2011

UNDER THE GUIDANCE OF SUBMITED BY Dr.MARY JESSICA SPURAN KUMAR MBMA61

PROJECT WORK Mr.BODA 09

SCHOOL OF MANAGEMENT STUDIES UNIVERSITY OF HYDERABAD

Certificate By The Guide

This is to certify that candidate BODA SPURAN KUMAR bearing Roll No:09MBMA61 is a student of SMS at UNIVERSITY OF HYDERABAD, prepared this project work entitled PORTFOLIO MANAGEMENT under my supervision.

Dr. Mary Jessica

Place: Hyderabad Date:

Declaration
I hereby declare that this final project report titled,

PORTFOLIO MANAGEMENT is the result of my own effort in the training which I did as a part of the curriculum. It has not been duplicated from any other earlier works and all information provided in this report is genuine. This report is submitted for the partial fulfillment of MBA program. It has not been submitted to any other university or for any other degree.

Place: Hyderabad SPURAN KUMAR Date (09MBMA61)

BODA :

Acknowledgement
The research on STOCK MARKET REACTION TO NEW POLICY CHANGE ANNOUNCEMENTS has been given to me as part of the curriculum. I have tried my best to present this information as clearly as possible using basic terms that I hope will be comprehended by the widest spectrum of researchers, analyst and students for further studies. I would like to take the pleasure of this opportunity to express my heartful gratitude to my guide Professor Dr. MARY JESSICA (Faculty Member, SMS) who took personal interest and gave valuable suggestions through out my field work and completion of the project. I thank all my faculty members of MBA department for their valuable suggestions throughout my course. The importance of the moral support and good wishes of my parents and friends is external and I am very much indebted to them. Finally I thank all my friends who directly or indirectly helped me a lot during my project. BODA (09

SPURAN KUMAR MBMA61)

SERIAL NO
1.1 Efficiency market

CONTENTS Introduction

PAGE NO 8 9 11 13

CHAPTER 1 CHAPTER 2

1.2 event study methodology Review Of Literature Methodology 3.1 Research Problem 3.2 Purpose of Study 3.3 Objectives of Study 3.4 Data and Sample Size

CHAPTER 3

16-19 3.5 Event to be Studied 3.6 Period of Study 3.7 Methodology used Data Analysis and Interpretations 4.1 Finding of log price 4.2 Regression of market return with stock return. 4.3 Estimation of the residual valves

CHAPTER 4

4.4 Averaging of Residual Valves and finding Cumulative Abnormal returns 4.5 Charts of Cumulative Abnormal Returns 4.6 Analysis of Abnormal Returns

20-52

CHAPTER 5 CHAPTER 6 CHAPTER 7

Summary Findings And Conclusions Bibliography

53 54 55

1.1 DEFINITION - PORTFOLIO MANAGEMENT

A portfolio is a collection of assets. The assets may be physical or financial like Shares, Bonds, Debentures, Preference Shares, etc. The individual investor or a fund manager would not like to put all his money in the shares of one company, which would amount to great risk. He would therefore, follow the age-old maxim that one should not put all the eggs into one basket. By doing so, he can achieve objective to maximize portfolio return and at the same time minimizing the portfolio risk by diversification. Portfolio management is the management of various financial assets, which comprise the Portfolio management is a decision support system that is designed with a view to meet According to Securities and Exchange Board of India Portfolio is defined as portfolio Portfolio manager is a person who is pursuant to a contract or arrangement with a client, portfolio. the multi-faced needs of investors. means the total holdings of securities belonging to any person. advises or directs or undertakes on behalf of the client (whether as a discretionary portfolio manager or otherwise) the management or administration of a portfolio of securities or the funds of the client. Discretionary portfolio manager means a portfolio manager who exercises or may, under a contract relating to portfolio management exercises any degree of discretion as to the investments or management of the portfolio of securities or the funds of the client. Portfolio management and investment decision as a concept came to be familiar with the conclusion of second world war when things in the stock market liberally ruined the fortune of individual, companies, even government, it was then discovered that investing in various scrips instead of putting all the money in a single security yielded greater return with low risk percentage, it goes to the credit of HARRY MARKOWITZ, 1991 noble laurelled to have pioneered the concept of combining high yielded securities with these slow but steady yielding securities to achieve optimum correlation coefficient of shares. Portfolio management refers to the management of portfolio for others by professional investment managers it refers to the management of an individual investors portfolio by professionally qualified person ranging from merchant banker to specified portfolio company.

Definition by SEBI
A portfolio is the total holdings of securities belonging to any person. Portfolio is a combination of securities that have returns and risk characteristics of their own; portfolio may not take on the aggregate characteristics of their individual parts. Thus a portfolio is a combination of various assets and /or instruments of investments. Combination may have different features of risk and return separate from those of the components. The portfolio is also built up of the wealth or income of the investor over a period of time with a view to suit return or risk preference to that of the port folio that he holds. The portfolio analysis is thus an analysis of risk return characteristics of individual securities in the portfolio and changes that may take place in combination with other securities due interaction among them and impact of each on others. Security analysis is only a tool for efficient portfolio management. Portfolios are combination of assets held by the investors. These combinations may be various assets classed like equity and debt or of different issues like Govt. bonds and corporate debts or of various instruments like discount bonds, debentures and blue chip equity scrips. Portfolio analysis includes portfolio construction, selection of securities, and revision of portfolio, evaluation and monitoring of the performance of the portfolio. All these are part of the portfolio management. The traditional portfolio theory aims at the selection of such securities that would fit in well with the asset preferences, needs and choices of the investors. Thus, retired executive invests in fixed income securities for a regular and fixed return. A business executive or a young aggressive investor on the other hand invests in growing companies and in risky ventures. The modern portfolio theory postulates that maximization of returns and minimization of risk will yield optional returns and the choice and attitudes of investors are only a starting point for investment decisions and that vigorous risk returns analysis is necessary for optimization of returns.

1.2 NEED & IMPORTANCE OF THE STUDY

Portfolio management has emerged as a separate academic discipline in India. Portfolio theory that deals with the rational investment decision-making process has now become an integral part of financial literature. Investing in securities such as share, debentures & bonds is profitable as well as exciting. It is indeed rewarding but involves a great deal of risk. Investing in financial securities is now considered to be one of the most risky avenues of investment. It is rare to find investors investing their entire savings in a single security. Instead they tend to invest in a group of securities. Such group of securities is called as PORTFOLIO. Creation of portfolio helps to reduce risk without sacrificing returns. Portfolio management deals with the analysis of individual securities as well as with the theory and practice of optimally combining securities into portfolios. The modern theory is the view that by diversification risk can be reduced. The investor can make diversification 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.

1.3 SCOPE OF THE STUDY

The study covers the calculation of correlations between the different securities in order to find out at what percentage funds should be invested among the companies in the portfolio. It includes the calculation of individual Standard Deviation of securities, weights of individual securities involved in the portfolio. These percentages help in allocating the funds available for investment based on risky portfolios. It also includes risk and return of portfolios and their performance evaluation for a limited number of scrips.

1.4 OBJECTIVES OF THE STUDY

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The major objectives of the study are as follows

1.

To study the investment pattern and its related risk & returns.

2. To construct an effective portfolio that offers the maximum return for minimum risk. 3. To help the investor choose wisely between alternative investments. 4. To understand, analyze and select the best portfolio.

1.5 RESEARCH METHODOLOGY

The time taken for the completion of the project is 45 days. Sample Size: 6 COMPANIES Sampling technique: Random sampling SOURCES OF DATA COLLECTION: The data collection methods include both the primary and secondary collection methods. Primary collection methods: Study was done by personal investigation through observation and personal discussion with the authorized clerks and members of the exchange. Secondary collection methods: The secondary collection methods include Companies Annual Reports Information from Internet Publications

COMPANIES SELECTED
Reliance Industries Ltd Tata steel Ltd Ultratech Cements Ltd ICICI Bank ITC Ltd

1.6 LIMITATIONS OF THE STUDY

This study has been conducted purely to understand Data collection was strictly confined to secondary source. No primary data is associated There is stiff competition that makes it difficult for the investor to choose a good manager.

Portfolio Management for investors while other parameters were given little importance. with the project. However, this can be sorted out by taking his previous history and performance into account. Studying the history of the various companies is time consuming Construction of portfolio is restricted to two companies based on Markowitz model. There was a constraint with regard to time allocation for the research study i.e. for a period

of two months. Only 6 companies were selected for the study, which limits the combination.

Harry Markowitz opened new vistas to modern portfolio selection by publishing an article in the Journal of Finance in March 1952. His publication indicated the importance of correlation 10

among the different stocks returns in the construction of a stock portfolio. Markowitz also showed that for a given level of expected return in a group of securities, one security dominates the other. To find out this, the knowledge of the correlation coefficients between all possible securities combinations is required. After the publication of his paper, numerous investment firms and portfolio managers developed Markowitz algorithms to minimize portfolio variance i.e. risk. Even today the term Markowitz diversification is used to refer to the portfolio construction accomplished with the help of security covariance.

2.1 INVESTMENT
Investment is the commitment of funds for a return expected to be realized in the future. Investment is the employment of funds on assets with the aim of earning income or capital appreciation. Investment has two attributes namely time and risk. Present consumption is sacrificed to get a return in the future. Investment can be made in financial assets or physical assets. In either case there is possibility that the actual return may vary from the expected return, that possibility is risk involved in it. Financial investment is the allocation of money to assets that are expected to yield some gain over a period of time. Investment is an activity that is undertaken by those who have savings. Savings can be defined as the excess of income over expenditure. The three important characteristics of any financial asset are: Return- the potential return possible from an asset. Risk- the variability in returns of the asset forms the chances of its value going up/down. Liquidity- the ease with which an asset can be converted into cash. Investors tend to look at these three characteristics while deciding on their individual preference pattern of investments. Each financial asset will have a certain level of each of these characteristics. Investment is generally distinguished from speculation in terms of 3 factors namely risk, capital gain and time period. Speculation means taking up the business risk in the hope of getting short-term gain. Speculation essentially involves buying and selling activities with the expectation of getting profit from the price fluctuations. The investor constantly evaluates the 11

worth of security whereas the speculator evaluates the price movement. Gambling is the extreme form of speculation. There is no risk and return trade off in gambling and negative outcomes are expected.

INVESTMENT PROCESS

INVESTMENT AVENUES
There are a large number of investment avenues for savers in India. Some of them are marketable and liquid, while others are non-marketable. Some of them are highly risky while some others are almost risk less. Investors may be individual or institutions. Investment avenues can be broadly categorized as follows.

Investment

A
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Equity Shares

Fixed Income Securities Deposits Life Insurance

Mutual Fund Tax Shelters

Real Estate Financial Derivatives

Precious Objects

CORPORATE SECURITES

Equity Shares

Preference shares

Bonds

Warrants

Derivatives

PORTFOLIO:
A portfolio is a collection of investments held by an institution or an individual. Holding a portfolio is a part of an investment and risk-limiting strategy called diversification. By owning several assets, certain types of risk (in particular specific risk) can be reduced. The assets in the portfolio could include bank accounts, stocks, bonds, options, warrants, gold certificates, real estate, futures contracts, production facilities, or any other item that is expected to retain its value.

2.2 PORTFOLIO MANAGEMENT

Many times the investors go on acquiring assets in an ad hoc & unplanned manner & the result is high risk, low return profile that they may face. All such assets of financial nature such as 13

gold, silver, real-estate, building, insurance policies, post office certificate would constitute his portfolio & the wise investor not only plans his portfolio as per risk return profile or preferences but manages his portfolio efficiently so as to secure the highest return for the lowest risk possible at that level of investment. This is in short the portfolio management. The basic principle is that the higher the risk, the higher is the return &investor should have clear perception of elements of risk & return when he makes investments. Risk return analysis is essential for the investment & portfolio management. An investor considering investment in securities is faced with the problem of choosing from among a large no. of securities. His choice depends upon the risk return characteristics of individual securities. He would attempt to choose the most desirable securities & like to allocate his funds over group of securities. As the economic and financial environment keep changing the risk return characteristics of individual securities as well as portfolios also change. An investor invests his funds in a portfolio expecting to get a good return consistent with the risk that he has to bear. Portfolio management comprises all the processes involved in the creation & maintenance of an investment portfolio. It deals specifically with Security Analysis, Portfolio Analysis, Selection, Revision and Evaluation. Portfolio management is a complex process, which tries to make investment activity more rewarding and less risky.

RESEARCH
(e.g., Security Analysis)

PORTFOLIO MANAGERS CLIENTS

OPERATIONS (e.g. buying and selling of Securities)

OBJECTIVES OF PORTFOLIOMANAGEMENT:
The main objective of investment portfolio management is to maximize the returns from the investment and to minimize the risk involved in investment. Moreover, risk in price or inflation erodes the value of money and hence investment must provide a protection against inflation. Secondary objectives: The following are the other ancillary objectives: Regular return. Stable income. 14

Appreciation of capital. More liquidity. Safety of investment. Tax benefits.

FUNCTIONS OF PORTFOLIO MANAGEMENT:

To frame the investment strategy and select an investment mix to achieve the desired To provide a balanced portfolio which not only can hedge against the inflation but also To maximise the after-tax return by investing in various tax saving investment investment objectives. optimise returns with the associated degree of risk instruments.

NEED FOR PORTFOLIO MANAGEMENT:

It is a dynamic and flexible concept and involves regular and systematic analysis, judgement and action. It involves construction of a portfolio based upon the investors objectives, constraints, preferences for risk and returns and tax liability. tune with the market conditions. set for risk and returns. Portfolio construction refers to the allocation of surplus funds in hand among a variety of financial assets open for investment. The modern theory is the view that by diversification, risk can be reduced. The investor can make diversification either by having a large number of shares of companies in different regions, in different industries or those producing different types of product lines. The evaluation of portfolio is to be done in terms of targets The portfolio is reviewed and adjusted from time to time in

2.3 PHASES IN PORTFOLIO MANAGEMENT

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PORTFOLIO MANAGEMENT is a process encompassing many activities aimed at optimizing investment of funds, each phase is an integral part of the whole process and the success of portfolio management depends upon the efficiency in carrying out each phase. Five phases can be identified: (1) Security analysis (2) Portfolio analysis (3) Portfolio selection (4) Portfolio revision (5) Portfolio evaluation

SECURITY ANALYSIS:
It refers to the analysis of trading securities from the point of view of their prices, return, and risk. All investment is risky and the expected return is related to risk. The securities available to an investor for investment are numerous and of various types. The shares of over more than 7000 companies are listed in stock exchanges of the country. Securities classified into ownership securities such as equity shares and preference shares and debentures and bonds. Recently, a number of new securities such as convertible debentures and deep discount bonds, zero coupon bonds, Flexi bonds, Floating rate bonds Global depository receipts, Euro currency bonds etc, are issued to raise funds for their projects by companies from which investor has to choose those securities the is worthwhile to be included in his investment portfolio. This calls for detailed analysis of the available securities. Security analysis is the initial phase of the portfolio management process. It examines the risk return characteristics of individual securities. A basic strategy in securities investment is to buy under priced securities and sell over priced securities. But the problem is how to identify such securities in other words mispriced securities. This is what security analysis is all about. Prices of the securities in the stock market fluctuate daily on the account of continuous buying and selling. Stock prices move in trends and cycles and are never stable. An investor in the stock market is interested in buying securities at low price and selling them at high price so as to get a good return on his investment made. He therefore tries to analyse the movement of share prices in the market. Two approaches are commonly used for this purpose. Fundamental analysis wherein the analyst tries to determine the intrinsic value of the Technical analysis is an alternative approach to the study of stock price behaviour. share based on the current and future earning capacity of the company.

PORTFOLIO ANALYSIS:
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Various groups of securities when held together behave in a different manner and give interest payments and dividends also, which are different to the analysis of individual securities. A combination of securities held together will give a beneficial result if they are grouped in a manner to secure higher return after taking into consideration the risk element. There are two approaches in construction of the portfolio of securities. They are 1. 2. Traditional approach Modern approach

PORTFOLIO SELECTION:
A portfolio that provides the highest returns at a given level of risk is generated. A portfolio having this characteristic is known as an efficient portfolio. The inputs from portfolio analysis can be used to identify the set of efficient portfolios. From this set of efficient portfolios, the optimal portfolio has to 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.

PORTFOLIO REVISION:
The portfolio that is once selected has to be continuously reviewed over a period of time and then revised depending on the objectives of the investor. The care taken in construction of portfolio should be extended to the review and revision of the portfolio. Fluctuations that occur in the equity prices cause substantial gain or loss to the investors. The investor should have competence and skill in the revision of the portfolio. The portfolio management process needs frequent changes in the composition of stocks and bonds. In securities, the type of securities to be held should be revised according to the portfolio policy.

PORTFOLIO EVALUATION:
The evaluation of the portfolio (done by portfolio manager) provides a feedback about the performance to evolve better management strategy. Even though evaluation of portfolio performance is considered to be the last stage of investment process, it is a continuous process. There are number of situations in which an evaluation becomes necessary and important.

RETURN:
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The term Return from an investment refers to the benefits from that investment. In the field of finance in general and security analysis in particular, the term return is almost invariably associated with a percentage (say, return on investment of 12%) and not a mere amount (like, profit of Rs. 150). In security analysis we are primarily concerned with return forms a particular investment say, a share or a debenture or other financial instrument. Single period Returns: It refers to a situation where an investor is concerned with return from a single period (say, one day, one week, one month or one year). Multi period Returns: It refers to situation where more than single period returns are under consideration. Investor is concern with computing the return per period, over a longer period. Ex-Post Returns: The measurement of return from the historical data can be referred to Ex- Post returns. This includes the both current income and capital gains (or losses) brought about by gains price of the security. The income and capital gains are then expressed as .a percentage of the initial investment. Ex-Ante Returns: The majority of investors tend to emphasize the return they expect from a security while making investment decision and the expected return of a security. This enables the investors to look into future prospects from an investment and the measurement of returns from expectation of benefits is known as ex-ante returns.

RISK
Risk is uncertainty of the income /capital appreciation or loss or both. All investments are risky. Higher the risk taken, the higher is the return. But proper management of risk involves the right choice of investments whose risks are compensating.

TYPES OF RISKS
Risk consists of two components. They are 1. Systematic Risk 2. Unsystematic Risk

1. Systematic Risk:
18

Systematic risk affects the entire market. It is caused by factors external to the particular company and uncontrollable by the company. The systematic risk affects the market as a whole. Factors affecting the systematic risk are Economic conditions, Political conditions and Sociological changes. The systematic risk is unavoidable. Systematic risk is further sub-divided into three types. They are a) Market Risk: Jack Clark Francis has defined market risk as that portion of total variability of return caused by the alternating forces of bull and bear markets. The forces that affect the stock market can be earthquake, war, political uncertainty, etc. b) Interest Rate Risk: Interest rate risk is the variation in the single period rates of return caused by the fluctuations in the market interest rate. It is caused by changes in the government monetary policy. c) Purchasing Power Risk: Variations in the returns are also caused by the loss of purchasing power of currency. Purchasing power risk is also known as inflation risk.

2. Un-systematic Risk:
Un-systematic risk is unique and peculiar to a firm or an industry. All these factors affect the unsystematic risk and contribute a portion in the total variability of the return. Managerial inefficiency Technological change in the production process Availability of raw materials Changes in the consumer preference Labour problems

The nature and magnitude of the above-mentioned factors differ from industry to industry and company to company. They have to be analyzed separately for each industry and firm. Unsystematic risk can be broadly classified into: a) b) Business Risk Financial Risk

Business Risk:

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Business risk is that portion of the unsystematic risk caused by the operating environment of the business. Business risk arises from the inability of a firm to maintain its competitive edge and growth or stability of the earnings. The volatility in stock prices due to factors intrinsic to the company itself is known as Business risk. Business risk is concerned with the difference between revenue and earnings before interest and tax. Business risk can be divided into i) Internal Business Risk Internal business risk is associated with the operational efficiency of the firm. The efficiency of operation is reflected on the companys achievement of its pre-set goals and the fulfilment of the promises to its investors. ii) External Business Risk External business risk is the result of operating conditions imposed on the firm by circumstances beyond its control. The external factors are social and regulatory factors, monetary and fiscal policies of the government, business cycle and the general economic environment within which a firm or an industry operates. Financial Risk: It refers to the variability of the income to the equity capital due to the debt capital. Financial risk in a company is associated with the capital structure of the company.

RISK AND EXPECTED RETURN:

There is a positive relationship between the amount of risk and the amount of expected return i.e., the greater the risk, the larger the expected return and larger the chances of substantial loss. One of the most difficult problems for an investor is to estimate the highest level of risk he is able to assume.

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Risk is measured along the horizontal axis and increases from the left to right. Expected rate of return is measured on the vertical axis and rises from bottom to top. The line from 0 to R (f) is called the rate of return or risk less investments commonly The diagonal line form R (f) to E(r) illustrates the concept of expected rate of return

associated with the yield on government securities. increasing as level of risk increases.

PORTFOLIO-AGE RELATIONSHIP
Age Below 30 Portfolio 80% in stocks or mutual funds 10% in cash 30 to 40 10% in fixed income 70% in stocks or mutual funds 10% in cash 40 to 50 20% in fixed income 60% in stocks or mutual funds 10% in cash 50 to 60 30% in fixed income 50% in stocks or mutual funds 10% in cash Above 60 40% in fixed income 40% in stocks or mutual funds 10% in cash 50% in fixed income These aren't hard and fast allocations, just guidelines to get you thinking about how your portfolio should look. Your risk profile will give you more equities or more fixed income depending on your aggressive or conservative bias. However, it's important to always have some equities in your portfolio no matter what your age.

2.4 PORTFOLIO THEORIES 1. MARKOWITZ MODEL:

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Dr. Harry M. Markowitz is credited with developing the first modern portfolio analysis in order to arrange for the optimum allocation of assets with in portfolio. To reach this objective, Markowitz generated portfolios within a reward risk context. It used statistical analysis for the measurement of risk and mathematical programming for selection of assets in a portfolio in an efficient manner. Markowitz approach determines for the investor the efficient set of portfolio through three important variables i.e., Return, Standard deviation and Co-efficient of correlation. Markowitz model is also called as a Full Covariance Model. Through this model, 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 and infinity. Most people agree that holding two stocks is less risky than holding one stock. For example, holding stocks from textile, banking and electronic companies is better than investing all the money on the textile companys stock. Markowitz had given up the single stock portfolio and introduced diversification. The single stock portfolio would be preferable if the investor is perfectly certain that his expectation of highest return would turn out to be real. In the world of uncertainty, most of the risk adverse investors would like to join Markowitz rather than keeping a single stock, because diversification reduces the risk.

ASSUMPTIONS:
All investors are rational and risk-averse. Investors base their investment decisions on the expected return and standard deviation of The investor assumes that greater or larger the return that he achieves on his investments,

returns from a possible investment. the higher the risk factor surrounds him. On the contrary when risks are low the return can also be expected to be low. All investors have access to the same information at the same time. Investors have an accurate conception of possible returns, i.e., the probability beliefs of There are no taxes or transaction costs. All investors are price takers, i.e., their actions do not influence prices. Any investor can lend and borrow an unlimited amount at the risk free rate of interest. All securities can be divided into parcels of any size.

investors match the true distribution of returns.

CONSTRUCTION OF THE PORTFOLIO

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The purpose of the study is to find out at what percentage of investment should be invested between two companies, on the basis of risk and return of each security in comparison. These percentages help in allocating the funds available for investment based on risky portfolios. In order to know the risk of the stock or scrip, we use the formula Standard Deviation = Variance Variance = (1/n-1) (R-R) 2

Where, (R-R) 2 = Square of difference between sample and mean. n = Number of samples observed. After that, we need to compare the stocks or scrips of two companies with each other by using the correlation co-efficient as given below. Covariance (COV ab) = 1/n (RA-RA) (RB-RB) nab = Correlation Coefficient = COV ab / a * b

Where, (RA-RA) (RB-RB) = Combined deviations of A&B a * b = Product of standard deviation of A&B COV ab = Covariance between A&B n = Number of observations

The next step would be the construction of the optimal portfolio on the basis of what percentage of investment should be invested when two securities and stocks are combined i.e. calculation of two assets portfolio weight by using minimum variance equation, which is given below.

23

Wa =

b [b-(nab*a)] a2 + b2 - 2nab*a*b

Wb = 1 Wa Where, Wa = Weight of security A Wb = Weight of security B a = standard deviation of A b = standard deviation of B nab= correlation co-efficient between A&B

The final step is to calculate the portfolio risk (combined risk) RP = a2*Wa2 + b2*Wb2 + 2nab*a*b*Wa*Wb

Where, Wa = Proportion of investment in security A Wb = Proportion of investment in security B a = Standard deviation of security A b = Standard deviation of security B nab = Correlation co-efficient between securities A & B Rp = Portfolio risk

2. THE SHARPES INDEX MODEL/SINGLE INDEX MODEL:

William Sharpe has suggested a simplified method of diversification of portfolios. He has made the estimates of the expected return and variance of indexes, which are related to economic activity. Sharpes Theory assumes that securities returns are related to each other only through common relationships with basic underlying factor i.e. market return index. 24

Individual securities return is determined solely by random factors and on its relationship to this underlying factor with the following formula: Ri = i+i Rm+ei Where Ri = expected return on security i i = intercept of the straight line or alpha co-efficient i = slope of straight line or beta co-efficient Rm = the rate of return on market index ei = error term with a mean of zero & a std.dev., which is a constant

3. CAPITAL ASSET PRICING MODEL (CAPM):

Markowitz, William Sharpe, John Lintner and Jan Mossin provided the basic structure of CAPM. William F. Sharpe emphasised the risk factor in portfolio theory is a combination of two risks i.e., systematic risk and unsystematic risk. The systematic risk attached to each of the security is same irrespective of any number of securities in the portfolio. The total risk of portfolio is reduced, with increase in number of stocks, as a result of decrease in the unsystematic risk distributed over number of stocks in the portfolio. Therefore, the relationship between an assets return and its systematic risk can be expressed by the CAPM, which is also called the Security Market Line. E (Ri) = Rf + (Rm Rf) Where, E (Ri) = Expected return on any individual security (or portfolio) Rf Rm = Risk free rate of return = Market sensitivity index of individual security (or portfolio) = Expected rate of return on the market portfolio

Rm- Rf = Market premium or risk premium

4. ARBITRAGE PRICING THEORY

According to this theory the returns of the securities are influenced by a number of macroeconomic factors such as growth rate of industrial production rate of inflation, spread between low-grade and high-grade bonds.

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The foundation for APT is the law of one price. The law of one price states that two identical goods should sell at the same price. If they sold at different prices anyone could engage in arbitrage by simultaneously buying at low prices and selling at the high prices and make a risk less profit. Arbitrage also applies to financial assets. If two financial assets have the same risk, they should have the same expected return. If they do not have the same expected return, a riskless profit could be earned by simultaneously selling the low return asset and buying the highreturn asset. The arbitrage pricing line for one risk factor can be written as: E (ri) = 0 + ii Where, E (ri) = The expected return on the security i 0 i i = The return on the zero beta portfolios = The factor risk premium = The sensitivity of the asset i to the risk factor E (rp) = 0 + 11 + 22 Where, 2 = The risk premium associated with risk factor2 2 = The factor beta coefficient for factor 2, and the factors 1 &2 are uncorrelated

Two factor Arbitrage pricing model:

3.1 INDUSTRY PROFILE: FINANCIAL SERVICES

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Financial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are banks, credit card companies, insurance companies, consumer finance companies, stock brokerages, investment funds and some government sponsored enterprises. The financial services sector contributed 15 per cent to India's GDP in FY09, and is the second-largest component after trade, hotels, transport and communication all combined together, as per the Banking & Finance Journal, released by an industry body in August 2010. Stock markets: Market capitalization of India as a proportion of world market cap has risen to a record high. According to data sourced from Bloomberg, the country's market capitalization as a proportion of the world market cap is currently 3.34 per cent. India's current market-cap is US$ 1.55 trillion as compared with world market-cap of US$ 46.5 trillion. This is higher than 3.12 per cent share India enjoyed at the market peak of January 2008. As analyzed by Venture Intelligence, private equity firms obtained exit routes for their investments in a record 121 companies during 2010, including 24 via IPOs. (2009 had witnessed 66 liquidity events including 7 via IPOs). Insurance: The Indian Life Insurance industry is one on the strongest growing sectors in the country. Currently a US$ 41-billion industry, India is the fifth largest life insurance market and growing at a rapid pace of 32-34 per cent annually. Currently, there are 22 life insurance companies operating in India, according to the Life Insurance Council (LIC). Banking services: Significantly, on a year-on-year basis, bank credit grew by 24.4 per Investment management: Investment management is the professional management of cent in 2010 as against RBIs projections of 20 per cent for the entire fiscal 2010-11.

various securities (shares, bonds and other securities) and assets in order to meet specified investment goals for the benefit of the investors. Investors may be institutions or private investors. Government-sponsored enterprises (GSEs): The GSEs are group of financial services

corporations created by the United States Congress. Their function is to enhance the flow of credit to targeted sectors of the economy and to make those segments of the capital market more efficient and transparent. The desired effect of the GSEs is to enhance the availability and reduce the cost of credit to the targeted borrowing sectors: agriculture, home finance and education

Scope of financial services:

The scope of financial services in India has grown manifold in recent years, and consumers have a much wider choice in terms of savings and investments. There is a broad range of brokerage firms, 27

investment services, financial consulting firms, foreign and private banks, global insurance companies, taxation service providers, home loan and car equity firms and other banking companies now expanding their operation in the country. For young candidates there are bright career opportunities in the fields of financial advisory services, insurance and banking services, investment management, financial analysis, stock market consultants, brokering agents, financial planners and economists.

History of financial service sector:

The major events that have shaped the modern finance service sector are:

The Great Depression (1929): The Great Depression originated in the US with the Wall Street crash in October 1929. The effects of the depression spread across the world, especially in the heavy industries. Capital requirements regulation, financial service industry oversights and the insurance of deposit accounts sprang out of this tumultuous period.

Black Monday (1987): On October 19, the stock markets across the world witnessed a huge crash. This was the largest one day decline in the stock market history. The crash started in Hong Kong, spreading to Europe and the US. Analysts blamed computer trading systems for magnifying the losses.

Asian Financial Crisis (1990): The Asian Financial Crisis was triggered by the collapse of Thai baht as the government of Thailand decided to float the national currency. The nation had a huge foreign debt at that point, driving it to the verge of bankruptcy. The crisis rippled across the whole of Southeast Asia and has led to many emerging market countries to reduce debts and build up foreign currency reserves.

Stock Market Downturn (2002): Stock exchanges around the world witnessed a significant decline in March 2002. It was attributed to the bursting of the Dot-com Bubble, which saw major Internet companies going bankrupt.

Sub-prime Crisis (2007): Credit markets faced major crunch due to large scale default on loans. It led to the Financial Crisis of 2008 2009 and resulted in the bankruptcy, fire-sale acquisition and government bailouts of finance service industry giants such as Lehman Brothers, Bear Stearns, AIG, Fannie Mae, Freddie Mac, Merrill Lynch, Wachovia, Northern Rock, Lloyds TSB, HBOS, RBS and the entire banking system of Iceland. The world economy can expect reduced growth rates and tighter regulations as a result of this crisis.

Growth of financial services sector:

28

In the post-economic reform and liberalization era, the banking and financial services sector has witnessed rapid growth in India. As of 2007, the value of banking assets in India was growing at a compounded annual growth rate of 24%. A large number of mutual funds, venture capital funds and private equity funds have mushroomed in India with substantial foreign investments in this sector. Almost all of the world class financial services institutions and foreign banks have established their presence in India. The growth of financial sector in India at present is nearly 8.5% per year. The rise in the growth rate suggests the growth of the economy. The financial policies and the monetary policies are able to sustain a stable growth rate. The reforms pertaining to the monetary policies and the macroeconomic policies over the last few years have influenced the Indian economy to the core. The development of the system pertaining to the financial sector was the key to the growth of the same. With the opening of the financial market variety of products and services were introduced to suit the need of the customer. The Reserve Bank of India played a dynamic role in the growth of the financial sector of India. The financial services sector contributed 15% to Indias GDP in FY09, and is the second-largest component after trade, hotels, transport and communication all combined together, as per the Banking & Finance Journal, released by an industry body in August 2010.

CALCULATION OF AVERAGE RETURN OF COMPANIES:

29

Return(R) = Dividend + (Closing Price-Opening price) Opening Price Average Return = R/N

* 100

1. RELIANCE INDUSTRIES LTD. Year Dividend Open (D) (Rs) Price (P0) 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 11 13 13 7 Closing Price (P1) (P1-P0) (Rs) 1628.5 -1719.8 -150.65 -35.75 -43.6 (D+(P1P0))/P0*100 130.893 -57.8559 -11.1004 -2.62797 -4.10546 55.20326

(Rs) 1252.55 2881.05 2950 1230.25 1240.05 1089.4 1094 1058.25 1062 1018.4 TOTAL RETURNS

Average Return = 55.20326/5 = 11.04

2. TATA STEEL LTD: Year

30

Dividend Open (D) (Rs) Price (P0) (Rs) 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 15.5 16 16 8 -

Closing Price (P1) (Rs)

(P1-P0)

(D+(P1P0))/P0*100

484 934.8 938 216.85 218.4 617.6 622.7 678.95 684.2 630.35 TOTAL RETURNS

450.8 -721.15 399.2 56.25 -53.85

96.34298 -75.1759 190.1099 10.31797 -7.87051 213.7244

Average Return = 213.7244/5 = 42.74 3. ULTRATECH CEMENT LTD: Dividend Opening (D) (Rs) Year 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 Price (P0) 4 5 5 6 Closing Price (P1) (D+(P1P0))/P0*100 -8.07762 -62.6827 136.3776 18.9235 -1.1418 83.39903

(Rs) (Rs) (P1-P0) 1108 1014.5 -93.5 1040 383.1 -656.9 389.25 915.1 525.85 915 1082.15 167.15 1086 1073.6 -12.4 TOTAL RETURNS

Average Return = 83.39903/5 = 16.68 4. ICICI BANK: Dividend Opening (D) (Rs) Year Price (P0) (Rs) Closing Price (P1) (Rs) 31 (P1-P0) (D+(P1P0))/P0*100

2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

10 11 11 12 -

889 1232.4 1235 448.35 455 875.7 888 1144.65 1153 1101.3 TOTAL RETURNS

343.4 -786.65 420.7 256.65 -51.7

39.75253 -62.8057 94.87912 30.25338 -4.48395 97.59541

Average Return = 97.59541/5 = 19.52 5. ITC LTD: Dividend Opening (D) (Rs) Year 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 Price (P0) 3.1 3.5 3.7 10 Closing Price (P1) (D+(P1P0))/P0*100 19.95503 -17.4764 47.56522 -26.494 8.87372 32.42353

(Rs) (Rs) (P1-P0) 177.9 210.3 32.4 212 171.45 -40.55 172.5 250.85 78.35 251 174.5 -76.5 175.8 191.4 15.6 TOTAL RETURNS

Average Return = 32.42353/5 = 6.48

AVERAGE RETURNS

COMPANY RELIANCE INDUSTRIES (REFINARIES) TATA STEEL (STEEL) ULTRATECH (CEMENTS) ICICI (BANKING) ITC (Cigarettes, tobacco products)

AVERAGE RETURN 11.04 42.74 16.68 19.52 6.48

32

INTERPRETATION:
From the above graph, we understand that by investing in diversified securities, we can diversify the risk of losses. Tata Steel (42.74) is earning higher returns, and other securities are earning medium or low returns.

CALCULATION OF STANDARD DEVIATION:

Variance = 1/n-1 (R-R) 2 Standard Deviation = Variance

1. RELIANCE INDIA LTD:

33

Year 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

Return (R) Avg. Return (R) 130.893 11.04 -57.8559 11.04 -11.1004 11.04 -2.62797 11.04 -4.10546 11.04

(R-R) 119.853 -68.896 -22.14 -13.668 -15.145

(R-R)2 14364.7 4746.65 490.197 186.813 229.385 20017.78

TOTAL = (R-R)2 Variance = 1/n-1 (R-R) 2 = 1/4 (20017.78) = 5004.45 Standard Deviation = Variance = 5004.45 = 70.74

2. TATA STEEL:

Year 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

Return (R) Avg. Return (R) 96.34298 42.74 -75.1759 42.74 190.1099 42.74 10.31797 42.74 -7.87051 42.74

(R-R) 53.603 -117.92 147.37 -32.422 -50.611

(R-R) 2 2873.28 13904.2 21717.9 1051.19 2561.42 42107.94

TOTAL = (R-R) 2 Variance = 1/n-1 (R-R) 2 = 1/4 (42107.94) = 10526.98 Standard Deviation = Variance = 10526.98= 102.60 34

3. ULTRATECH CEMENT:

Year 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

Return (R) Avg. Return (R) (R-R) -8.0776 16.68 -62.683 136.378 18.9235 -1.1418 16.68 16.68 16.68 16.68

(R-R) 2 -24.758 -79.363 119.698 2.2435 -17.822 612.939 6298.49 14327.6 5.03329 317.617

TOTAL = (R-R) 2 Variance = 1/n-1 (R-R) 2 = 1/4 (21561.69) = 5390.42 Standard Deviation = 4. ICICI BANK: Variance = 5390.42= 73.42

21561.69

Year Return (R) Avg. Return (R) 2006-2007 39.7525 19.52 2007-2008 -62.806 19.52 2008-2009 94.8791 19.52 2009-2010 30.2534 19.52 2010-2011 -4.484 19.52

(R-R) 20.2325 -82.326 75.3591 10.7334 -24.004

(R-R)2 409.354 6777.57 5678.99 115.206 576.192 13557.32

TOTAL = (R-R) 2 Variance = 1/n-1 (R-R) 2 = 1/4 (13557.32) = 3389.33 Standard Deviation = 5. ITC LTD: Variance = 3389.33= 58.22

35

Year Return (R) Avg. Return (R) 2006-2007 19.955 6.48 2007-2008 -17.476 6.48 2008-2009 47.5652 6.48 2009-2010 -26.494 6.48 2010-2011 8.87372 6.48

(R-R) 13.475 -23.956 41.0852 -32.974 2.39372

(R-R) 2 181.576 573.89 1687.99 1087.28 5.7299 3536.474

TOTAL = (R-R) 2

Variance = 1/n-1 (R-R) 2 = 1/4 (3536.474) = 884.12 Standard Deviation = Variance = 884.12 = 29.73

AVERAGE RISK
COMPANY RELIANCE INDUSTRIES TATA STEEL ULTRATECH ICICI BANK ITC LTD RISK 70.74 102.60 73.42 58.22 29.73

36

INTERPRETATION: From the above graph, we can understand that Tata Steel & Ultratech Cement has highest standard deviation and hence high risk; where as other securities have average risk. By investing in diversified portfolio, we can diversify the risk.

CALCULATION OF CORRELATION:

Covariance (COV ab) = 1/n (RA-RA) (RB-RB) Correlation Coefficient = COV ab / a * b

1. RELIANCE INDUSTRIES AND OTHER COMPANIES:

(i) RELIANCE (RA) & TATA STEEL (RB):

YEAR

(RA-RA) 37

(RB-RB)

(RA-RA) (RB-RB)

2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

119.853 -68.896 -22.14 -13.668 -15.145

53.603 -117.92 147.37 -32.422 -50.611 TOTAL

6424.48 8124.216 -3262.77 443.1439 766.5036 12495.57

Covariance (COV ab) = 1/5 (7692.5) = 2449.11 a = 70.74 ; b = 102.6 Correlation Coefficient = COV ab / a * b = 2449.11/(70.74)(102.6)= 0.34

(ii)

RIL (RA) & ULTRATECH CEMENT (RB):

YEAR 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 TOTAL

(RA-RA) 119.853 -68.896 -22.14 -13.668 -15.145

(RB-RB) (RA-RA) (RB-RB) -24.758 -2967.3 -79.363 5467.79 119.698 -2650.1 2.2435 -30.664 -17.822 269.914 89.609

Covariance (COV ab) = 1/5 (89.609) = 17.92 a = 70.74 ; b = 73.42 38

Correlation Coefficient = COV ab / a * b = 17.92/(70.74)(73.42) = 0.003

(iii)

RIL (RA) & ICICI BANK (RB):

YEAR 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

(RA-RA) 119.853 -68.896 -22.14 -13.668 -15.145

(RB-RB) (RA-RA) (RB-RB) 20.2325 2424.93 -82.326 5671.93 75.3591 -1668.5 10.7334 -146.7 -24.004 363.541 TOTAL 6645.24

Covariance (COV ab) = 1/5(6645.24) = 1329.05 a = 70.74 ; b = 58.22 Correlation Coefficient = COV ab / a * b = 1329.05/(70.74)(58.22) = 0.32

(iv)

RIL (RA) & ITC LTD (RB):

YEAR 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

(RA-RA) 119.853 -68.896 -22.14 -13.668 -15.145

(RB-RB) (RA-RA) (RB-RB) 13.475 1615.02 -23.956 1650.47 41.0852 -909.63 -32.974 450.689 2.39372 -36.253 TOTAL 2770.3

Covariance (COV ab) = 1/5 (2770.3) = 554.06 a = 70.74 ; b = 29.73 Correlation Coefficient = COV ab / a * b = 554.06/(70.74)(29.73) = 0.2 2. TATA STEEL & OTHER COMPANIES: (i) TATA STEEL (RA) & ULTRATECH (RB): 39

YEAR 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

(RA-RA) 53.603 -117.92 147.37 -32.422 -50.611

(RB-RB) (RA-RA) (RB-RB) -24.758 -1327.1 -79.363 9358.48 119.698 17639.9 2.2435 -72.739 -17.822 901.989 TOTAL 26500.5

Covariance (COV ab) = 1/5 (26500.5) = 5300.1 a = 102.6 ; b = 73.42 Correlation Coefficient = COV ab / a * b = 5300.1/(102.6)(73.42) = 0.7

(ii)

TATA STEEL (RA) & ICICI BANK (RB):

YEAR 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

(RA-RA) 53.603 -117.92 147.37 -32.422 -50.611

(RB-RB) 20.2325 -82.326 75.3591 10.7334 -24.004 TOTAL

(RA-RA) (RB-RB) 1084.52 9707.88 11105.7 -348 1214.87 22764.9

Covariance (COV ab) = 1/5 (22764.9) = 4552.98 a = 102.6; b = 58.22 Correlation Coefficient = COV ab / a * b = 4552.98/(102.6)(58.22) = 0.76

(iii)

TATA STEEL (RA) & ITC LTD (RB):

YEAR 2006-2007 2007-2008 2008-2009

(RA-RA) 53.603 -117.92 147.37 40

(RB-RB) 13.475 -23.956 41.0852

(RA-RA) (RB-RB) 722.3 2824.89 6054.73

2009-2010 2010-2011

-32.422 -50.611

-32.974 2.39372 TOTAL

1069.08 -121.15 10549.9

Covariance (COV ab) = 1/5 (10549.9) = 2109.98 a = 102.6; b = 29.73 Correlation Coefficient = COV ab / a * b = 2982.48/(99.06)(54.56) = 0.69

3. ULTRATECH CEMENT & OTHER COMPANIES: (i) ULTRATECH (RA) & ICICI BANK (RB):

YEAR 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

(RA-RA) -24.758 -79.363 119.698 2.2435 -17.822

(RB-RB) 20.2325 -82.326 75.3591 10.7334 -24.004 TOTAL

(RA-RA) (RB-RB) -500.92 6533.64 9020.33 24.0804 427.799 15504.94

Covariance (COV ab) = 1/5 (15504.94) = 3100.99 a = 73.42 ; b = 58.22 Correlation Coefficient = COV ab / a * b = 3100.99/(73.42)(58.22) = 0.72

(ii)

ULTRATECH (RA) & ITC LTD (RB):

YEAR 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

(RA-RA) -24.758 -79.363 119.698 2.2435 -17.822

(RB-RB) 13.475 -23.956 41.0852 -32.974 2.39372 TOTAL

(RA-RA) (RB-RB) -333.61 1901.22 4917.82 -73.977 -42.661 6368.784

Covariance (COV ab) = 1/5 (6368.784) = 1273.76 a = 73.42 ; b = 29.73 41

Correlation Coefficient = COV ab / a * b = 1273.76/(73.42)(29.73) = 0.58 4. ICICI BANK & OTHER COMPANIES: (i) ICICI BANK (RA) & ITC LTD (RB):

YEAR 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

(RA-RA) 20.2325 -82.326 75.3591 10.7334 -24.004

(RB-RB) 13.475 -23.956 41.0852 -32.974 2.39372 TOTAL

(RA-RA) (RB-RB) 272.633 1972.2 3096.14 -353.92 -57.459 4929.596

Covariance (COV ab) = 1/5 (4929.596) = 985.92 a = 58.22 ; b = 29.73 Correlation Coefficient = COV ab / a * b = 985.92/(58.22)(29.73) = 0.57

42

CALCULATION OF PORTFOLIO WEIGHTS:

Wa =

b [b-(nab*a)] a2 + b2 - 2nab*a*b

Wb = 1 Wa

1. CALCULATION OF WEIGHTS OF RIL & OTHER COMPANIES: (i) RIL (a) & TATA STEEL (b) a = 70.74 b = 102.6 nab = 0.34 Wa = 102.6[102.6-(0.34*70.74)] (70.74)2 + (102.6)2 2(0.34*70.74*102.6) Wa = 8059.06 10595.52 Wa = 0.76 Wb = 1 Wa Wb = 1- 0.76 = 0.14

(ii) RIL (a) & ULTRATECH (b) 43

a = 70.74 b = 73.42 nab = 0.003 Wa = 73.42 [73.42-(0.003*70.74)] (70.74)2 + (73.42)2 2(0.003*73.42*70.74) Wa = 5374.92 10363.35 Wa = 0.52 Wb = 1 Wa Wb = 1- 0.52 = 0.48

(iii) RIL (a) & ICICI BANK (b) a = 70.74 b = 58.22 nab = 0.32 Wa = 58.22 [58.22-(0.32*70.74)] (70.74)2 + (58.22)2 2(0.32*70.74*58.22) Wa = 2071.65 5757.89 Wa = 0.36 Wb = 1 Wa Wb = 1- 0.36 = 0.64

44

(iv) RIL (a) & ITC LTD (b) a = 70.74 b = 29.73 nab = 0.2 Wa = 29.73 [29.73-(0.2*70.74)] (70.74)2 + (29.73)2 2(0.2*70.74*29.73) Wa = 463.25 5046.78 Wa = 0.09 Wb = 1 Wa Wb = 1- 0.09 = 0.91

2. CALCULATION OF WEIGHTS OF TATA STEEL & OTHER COMPANIES: (i) TATA STEEL (a) & ULTRATECH (b) a = 102.6 b = 73.42 nab = 0.7 Wa = 73.42 [73.42-(0.7*102.6)] (102.6)2 + (73.42)2 2(0.7*102.6*73.42) Wa = 117.47 5371.21 Wa = 0.02 Wb = 1 Wa Wb = 1- 0.02 = 0.98

45

(ii) TATA STEEL (a) & ICICI BANK (b) a = 102.6 b = 58.22 nab = 0.76 Wa = 58.22 [58.22-(0.76*102.6)] (102.6)2 + (58.22)2 2(0.76*102.6*58.22) Wa = -1150.19 4836.8 Wa = -0.24 Wb = 1 Wa Wb = 1+0.24 = 1.24

(iii) TATA STEEL (a) & ITC LTD (b) a = 102.6 b = 29.73 nab = 0.69 Wa = 29.73 [29.73-(0.69*102.6)] (102.6)2 + (29.73)2 2(0.69*102.6*29.73) Wa = -1220.83 4209.41 Wa = -0.29 Wb = 1 Wa Wb = 1+0.29 = 1.29

46

3. CALCULATION OF WEIGHTS OF ULTRATECH & OTHER COMPANIES: (i) ULTRATECH (a) & ICICI BANK (b) a = 73.42 b = 58.22 nab = 0.72 Wa = 58.22 [58.22-(0.72*73.42)] (73.42)2 + (58.22)2 2(0.72*73.42*58.22) Wa = 311.92 6155.3 Wa = 0.05 Wb = 1 Wa Wb = 1- 0.05 = 0.95

(ii) ULTRATECH (a) & ITC LTD (b) a = 73.42 b = 29.73 nab = 0.58 Wa = 29.73 [29.73-(0.58*73.42)] (73.42)2 + (29.73)2 2(0.58*73.42*29.73) Wa = -382.14 3742.35 Wa = -0.1 Wb = 1 Wa Wb = 1+0.1 = 1.1

47

4. CALCULATION OF WEIGHTS OF ICICI BANK & OTHER COMPANIES: (i) ICICI BANK (a) & ITC LTD (b) a = 58.22 b = 29.73 nab = 0.57 Wa = 29.73 [29.73-(0.57*58.22)] (58.22)2 + (29.73)2 2(0.57*58.22*29.73) Wa = -102.73 2300.24 Wa = -0.04 Wb = 1 Wa Wb = 1+ 0.04 = 1.04

48

CALCULATION OF PORTFOLIO RISK:

a2*Wa2 + b2*Wb2 + 2nab*a*b*Wa*Wb

1. (i)

CALCULATION OF PORTFOLIO RISK OF RIL & OTHER COMPANIES: RIL (a) & TATA STEEL (b) a = 70.74 b = 102.6 Wa = 0.76 Wb = 0.14 nab = 0.34

P = =

(70.74)2(0.76)2+(102.6)2(0.14)2+2(0.34)(70.74*102.6)(0.76*0.14) 3621.85 = 60.18

49

(ii)

RIL (a) & ULTRATECH (b) a = 70.74 b = 73.42 Wa = 0.52 Wb = 0.48 nab = 0.003

P = =

(70.74)2(0.52)2+(73.42)2(0.48)2+2(0.003)(70.74*73.42)(0.52*0.48) 2602.87 = 51.02

(iii)

RIL (a) & ICICI BANK (b) a = 70.74 b = 58.22 Wa = 0.36 Wb = 0.64 nab = 0.32

P =

(70.74)2(0.36)2+(58.22)2(0.64)2+2(0.32)(70.74*58.22)(0.36*0.64) = 2644.2 = 51.42

50

(iv)

RIL (a) & ITC LTD (b) a = 70.74 b = 29.73 Wa = 0.09 Wb = 0.91 nab = 0.2

P = =

(70.74)2(0.09)2+(29.73)2(0.91)2+2(0.2)(70.74*29.73)(0.09*0.91) 841.37 = 29.01

2.

CALCULATION OF PORTFOLIO RISK OF TATA STEEL & OTHER

COMPANIES: (i) TATA STEEL (a) & ULTRATECH (b) a = 102.6 b = 73.42 Wa = 0.02 Wb = 0.98 nab = 0.49

P =

(102.6)2(0.02)2+(73.42)2(0.98)2+2(0.49)(102.6*73.42)(0.02*0.98) = 5325.93 = 72.98

51

(ii)

TATA STEEL (a) & ICICI BANK (b) a = 102.6 b = 58.22 Wa = -0.24 Wb = 1.24 nab = 0.76

P =

(102.6)2(-0.24)2+(58.22)2(1.24)2+2(0.76)(102.6*58.22)(-0.24*1.24) = 3116.08 = 55.82

(iii)

TATA STEEL (a) & ITC LTD (b) a = 102.6 b = 29.73 Wa = -0.29 Wb = 1.29 nab = 0.69

P=

(102.6)2(-0.29)2+(29.73)2(1.29)2+2(0.69)(102.6*29.73) (-0.29*1.29) = 781.41 = 27.95

52

3.

CALCULATION OF PORTFOLIO RISK OF ULTRATECH & OTHER

COMPANIES: (i) ULTRATECH (a) & ICICI BANK (b) a = 73.42 b = 58.22 Wa = 0.05 Wb = 0.95 nab = 0.72

P = =

(73.42)2(0.05)2+(58.22)2(0.95)2+2(0.72)(73.42*58.22)(0.05*0.95) 3364.94 = 58.01

(ii)

ULTRATECH (a) & ITC LTD (b) a = 73.42 b = 29.73 Wa = -0.1 Wb = 1.1 nab = 0.58

P =

(73.42)2(-0.1)2+(29.73)2(1.1)2+2(0.58)(73.42*29.73)(-0.1*1.1)

53

844.87

= 29.07

4.

CALCULATION OF PORTFOLIO RISK OF ICICI BANK & OTHER

COMPANIES: (i) ICICI BANK (a) & ITC LTD (b) a = 58.22 b = 29.73 Wa = -0.04 Wb = 1.04 nab = 0.57

P =

(58.22)2(-0.04)2+(29.73)2(1.04)2+2(0.57)(58.22*29.73)(-0.04*1.04) = 878.23 = 29.63

54

CALCULATION OF PORTFOLIO RETURNS

Rp = Ra*Wa + Rb*Wb

PORTFOLIO RIL & Tata Steel RIL & Ultratech RIL & ICICI Bank RIL & ITC Ltd Tata Steel & Ultratech Tata Steel & ICICI Bank Tata Steel & ITC Ltd Ultratech & ICICI Bank Ultratech & ITC Ltd ICICI Bank & ITC Ltd

Ra 11.04 11.04 11.04 11.04 42.74 42.74 42.74 16.68 16.68 19.52

Wa 0.76 0.52 0.36 0.09 0.02 -0.24 -0.29 0.05 -0.1 -0.04

Rb 42.74 16.68 19.52 6.48 16.68 19.52 6.48 19.52 6.48 6.48

Wb 0.14 0.48 0.64 0.91 0.98 1.24 1.29 0.95 1.1 1.04

Rp 14.374 13.7472 16.4672 6.8904 17.2012 13.9472 -4.0354 19.378 5.46 5.9584

55

PORTFOLIO WEIGHTS, RETURN & RISK:

PORTFOLIO WEIGHT WEIGHT OF B 0.14 0.48 0.64 0.91 0.98 1.24 1.29 0.95 1.1 1.04 0.14 0.48 0.64 0.91 0.98 PORTFOLIO RETURN 14.374 13.7472 16.4672 6.8904 17.2012 13.9472 -4.0354 19.378 5.46 5.9584 14.374 13.7472 16.4672 6.8904 17.2012 PORTFOLIO RISK 60.18 51.02 51.42 29.01 72.98 55.82 27.95 58.01 29.07 29.63 60.18 51.02 51.42 29.01 72.98

(A & B) OF A 0.76 INFOSYS & RIL 0.52 INFOSYS & TATA STEEL INFOSYS & ULTRATECH 0.36 CEMENT INFOSYS & ICICI BANK INFOSYS & ITC LTD RIL & TATA STEEL RIL & ULTRATECH CEMENT RIL & ICICI BANK RIL & ITC LTD TATA STEEL & ULTRATECH CEMENT TATA STEEL & ICICI BANK TATA STEEL & ITC LTD ULTRATECH CEMENT & ICICI BANK ULTRATECH CEMENT & ITC LTD ICICI BANK & ITC 0.09 0.02 -0.24 -0.29 0.05 -0.1 -0.04 0.76 0.52 0.36 0.09 0.02

5.1 FINDINGS:
RIL & TATA STEEL: 56

The portfolio weights suggest that more investment should be made in RIL than TATA STEEL. Portfolio weights for RIL & TATA STEEL are 0.68 & 0.32 respectively. This is a high risk high return portfolio. Standard deviation for RIL is 73.37 and for TATA STEEL it is 99.06. Combined portfolio risk is 64.24. Individual returns are 35.6 and 48.29 respectively for RIL and TATA STEEL. It is suggested that an investor should invest more in RIL compared to TATA STEEL as it provides better returns for lower risk than the returns provided by TATA STEEL. RIL & ULTRATECH: This is one of the best combinations. The portfolio weights suggest that more investment should be made in RIL than ULTRATECH. Portfolio weights for RIL & ULTRATECH are 0.68 & 0.32 respectively. This is a high risk-high return portfolio. Standard deviation for RIL is 73.37 and 93.39 for ULTRATECH. Combined portfolio risk is 58.25, which is less compared to individual risk of RIL. Individual returns are 35.6 and 48.29 respectively for RIL and ULTRATECH. It is suggested that an investor should invest more in RIL, as it provides better returns (35.6) for lower risk (73.37) when compared to ULTRATECH that provides a return of 48.98 at a risk of 93.39.

RIL & ICICI BANK: The investor has another alternative bearing the investment proportion of 0.24 & 0.76 for RIL & ICICI. The standard deviation of RIL is 73.37 and for ICICI it is 59.49. Hence the investor should invest their funds more in ICICI, as the risk involved is low. It gives higher return at lower risk when compared to RIL. The combined portfolio risk is 57.67, which is less compared to individual risk of ICICI.

RIL & ITC: This combination has investment proportion of 0.37 & 0.63 for RIL & ITC respectively. The standard deviation of RIL is 73.37 and ITCs standard deviation is 54.56, it means ITC has less 57

risk compared to RIL. It is suggested to invest more in ITC though it has negative returns because investing in RIL could be more risky. TATA STEEL & ULTRATECH: This is of the best combinations for a risk taker. It involves the highest risk and gives the highest return. An investor should be careful while investing in this portfolio. The portfolio weights are 0.44 & 0.56 respectively. The standard deviation of TATA STEEL & ULTRATECH is 99.06 & 93.39 respectively. And the returns are 48.29 & 48.98. The risk associated with these companies has been diversified and reduced to 82.88 and portfolio return is 48.68. TATA STEEL & ICICI BANK: The portfolio weights suggest that more investment should be made in ICICI than TATA STEEL. Portfolio weights for TATA STEEL & ICICI are -0.05 & 1.05 respectively. The standard deviation is 99.06 & 59.49 respectively which has been reduced to 59.36. Optimum investment decision from the investors point of view is to invest all in funds in ICICI, which will give him better returns with less risk.

TATA STEEL & ITC LTD: The combination of TATA STEEL & ITC gives the proportion 0.0006 & 0.9994. The standard deviation of TATA STEEL is 99.06 and ITC is 54.56. Hence the investor should invest their funds more in ITC as the risk involved in ITC is less than that of TATA STEEL. Investing more in TATA STEEL is highly risky. The combined portfolio risk is 54.56 which is less than the individual risk of TATA STEEL.

ULTRATECH & ICICI BANK: According to this combination the portfolio weights are 0.02 (ULTRATECH) & 0.98 (ICICI). The standard deviation of ULTRATECH is more than that of ICICI i.e., 93.39 > 59.49. 58

If the investor wants to take low risk then ICICI is a better option as it provides better return with less risk. ULTRATECH & ITC LTD: The combination of ULTRATECH & ITC gives the proportion 0.12 & 0.88. The standard deviation of ULTRATECH is 93.39 and ITC is 54.56. Hence the investor should invest their funds more in ITC as the risk involved in ITC is less than that of TATA STEEL. Investing more in TATA STEEL is highly risky. The combined portfolio risk is 53.49 which is less than the individual risk of ULTRATECH. ICICI BANK & ITC LTD: According to this combination the portfolio weights are 0.45 (ICICI) & 0.55 (ITC). The standard deviation of ICICI is more than that of ITC i.e., 59.49 > 54.56. The combined portfolio risk is 44.03 which is less than the individual risk of ICICI & ITC.

5.2 SUGGESTIONS:

59

1. The combination of TATA STEEL & ULTRATECH gives highest returns but is highly risky. It is the best portfolio for a risk seeker. It is suggested to be careful while investing in this portfolio. 2. It is suggested to invest in RIL & ULTRATECH. This is the best combination available to an investor among the selected portfolios, since it gives a high return for a lower risk. 3. Investing in the combinations, RIL & ICICI, TATA STEEL & ICICI and ULTRATECH & ICICI is suggested because they compensate for the risk taken. 4. The combination of TATA STEEL & ITC is very risky and provides negative return. Hence it is advised not to invest in this combination. 5. The combination of ULTRATECH & ITC has a moderate risk but gives very low return compared to other combinations. I suggest that an investor should not invest in this portfolio.

5.3 CONCLUSION:
60

Portfolio management helps the investors to make wise choice between alternate investments and render optimum returns to the investors. When different assets are added to the portfolio, the total risk tends to decrease. Simple random diversification reduces the unsystematic risk or unique risk and hence reduces the total risk. Investor decision is solely dependent on the expected return & variance of return only. For a given level of risk investor prefers higher return to lower return. Likewise for a given level of return investor prefers lower risk than higher risk. Keeping a portfolio of single security may lead to a greater likelihood of the actual return somewhat different from that of the expected return. Hence, it is a common practice to diversify securities in the portfolio.

TEXT BOOKS:
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1. 2. 3. 4. TMH. 5.

Donald.E.Fisher, Ronald.J.Jordan, (2009) Security Analysis and Portfolio Management, 5th Alexander.G.J, Sharpe.W.F, and Bailey.J.V, (2007) Fundamentals of Investments, 5th Punivathy Pandian, (2005), Security Analysis and Portfolio Management, Vikas Prasanna Chandra, (2006), Investment Analysis and Portfolio Management, 3rd Edition, S. Kevin (2006), Security Analysis & Portfolio Management, 2nd Edition, PHI.

Edition, Pearson Education. Edition, Pearson Education, PHI. Publishing House Pvt Ltd.

MAGAZINES:
Business World Business Today

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http://nseindia.com/ http://bseindia.com/ http://www.indiainfoline.com/ http://www.investopedia.com/

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