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INDEX
UNIT I:
INTRODUCTION
NEED OF THE STUDY
OBJECTIVES OF THE STUDY
RESEARCH METHODOLOGY
SCOPE OF THE STUDY
LIMITATIONS OF THE STUDY
REVIEW OF LITERATURE
UNIT II:
COMPANY PROFILE
UNIT III:
DATA ANALYSIS
INTERPRETATIONS
UNIT IV:
FINDINGS
CONCLUSIONS AND SUGGESTIONS
APPENDIX:
BIBLIOGRAPHY
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UNIT - I
INTRODUCTION
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INTRODUCTION TO PORTFOLIO:
The portfolio analysis begins where the security analysis ends and this fact has
important consequences for investors. Portfolio, where are combinations of securitiesmay or may not take on the aggregate characteristics of there individual parts.
Portfolio analysis considers the determination of future risk and return in holding
various blends of individual securities. Portfolio expected return is a weighted average
of the expected return of individual securities but portfolio variances, in sharp
contrast, can be something less than a weighted average of security variances. As a
result an investor can some times reduce portfolio risk by adding another security
with grater individual risk that any other security in the portfolio. This seemingly
curious result occurs because risk depends greatly on the covariance among return of
individual securities. We will show how on investor can reduce expected risk through
diversification, why this risk reduction result from proper diversification, and how the
investor may estimate the expected return and expected risk level of a given portfolio
of assets.
Portfolio Management:
Portfolio management portfolio is combination of assets held by the investors. This
combination may be of various assets classes like equity and debt and of different
issues like government bonds and corporate debt or of various instruments like
discounts, bonds, warrants, debenture, and chip equity or scraps of emerging blue-
chip companies.
Process of investment:
Portfolio management is a complex activity which may be broken down into
the Followings steps:
1]. Specification of investment objectives and constraints.
2]. Choice of asset mix.
3]. Formulation of portfolio strategy.
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4]. Selection of securities.
5]. Portfolio execution.
6]. Portfolio rebalancing.
7]. Portfolio performance.
1. SPECIFIC INVESTMENT OBJECTIVE AND CONSTRAINS:
The objective of an investment program consist of safety of principal, liquidity,
income, stability adequate income, purchasing power stability, appreciation, freedom
from management of investment, legality and transferability.
a) Safety of principal:
The investor, to be certain of the safety of principal, should carefully review
the economic and industry trends before choosing the types of investments. Errors are
avoidable and, therefore, to ensure safety of principal, the investor should consider
diversification of assets. Adequate diversification involves mixing investments
commitments by industry, geographically, by management, by finance type and by
maturities. A proper combination of these factors would reduce losses. Diversification
to a great extent helps in proper investment programmers but it must be reasonably
accomplished and should not be out to extremes.
b) Liquidity:
Even investor requires a minimum liquidity in his investments to meet
emergencies. Liquidity will be ensuring if the investor buys a proportion of readily
saleable securities out of his total portfolio. He may, therefore, keep a small
proportion of cash, fixed deposits and units which can be immediately made liquid
like stock and property or real estate cannot be ensure immediate liquidity.
c) Income stability:
Regularity of income at a consistent rate is necessary in any investment
pattern. Not only stability, it is also important to see that income is adequate after
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taxes. It is possible to find out some good security which pays practically all their
earnings in dividends.
d) Appreciation and purchasing power stability:
Investors should balance their portfolios to fight against any purchasing power
instability. Investors should judge price level inflation, explore the possibility of gain
and loss in the investments available to them, limitations of personal and family
consideration. The investors should also try and forecast which securities will
possibly appreciate. A purchase of property at the right time will lead to appreciation
in time. Growth stocks will also appreciation over time. These, however, should be
thoughtfully and not in manner of speculation or gamble.
e) Legality and freedom from care:
All investments should be approved by law. Law relating to minors, estate, trust,
shares and insurance are studied. Illegal securities will bring out many problems for
the investor. One way being free from care is to invest in securities like unit t trust of
India, life insurance corporation or savings certificates. The management of securities
is then left to care of the trust that diversifies the investments according to safety,
stability and liquidity with the consideration of their investment policy. The identity
of legal securities and investments in such security will also help in the investor in
avoiding many problems.
f) Tangibility:
Intangible securities have many times lost their values due to price level inflation,
confiscatory laws or social collapse. Some investor prefers to keep a part of their
wealth invested in tangible proprieties like buildings, machinery, and land. It may,
however, be consider that tangible propriety does not yield an income apart from the
direct satisfaction of the possession or propriety.
2. Choice of the asset mix:
The most important decision in portfolio Management is the mix decision. Very
broadly, this is concerned with the proportions of stocks (equity shares and
units/shares of equity oriented mutual funds) and bonds (fixed income investment
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vehicles in general) in the portfolio. The appropriate stock-bound mix depends
mainly on the risk tolerance and investment horizon of investor.
3. Formulation of portfolio strategy:
Once a certain asset mix is chosen, an appropriate portfolio strategy has to be
hammered out. Two broad choices are Available: an active portfolio strategy strives
or a passive strategy. An active portfolio strategy strives to earn superior risk-adjusted
returns by resorting to market timing, or sector rotation, or security selection, or some
combination of these. A passive portfolio strategy, on the other hand, involves
holding a broadly diversified portfolio and maintaining a pre-determined level of risk
exposure.
4. Selection of securities:
Generally, investors pursue an active stance with Respect to security selection. For
stock selection investor commonly go by fundamental analysis or technical analysis
the factor that are concerned in selecting bound or fixed income instrument are yield
to maturity credit rating term to maturity tax shelter and liquidity.
5. Portfolio Execution:
This is the phase of portfolio management which is concerned with
implementing the portfolio plan by buying and or selling specified Securities in given
amounts. Through often glossed over in portfolio management decisions, these
important practical state that has a bearing on investment result.
6. Portfolio revision:
The value of a portfolio as well as its composition the relative proportions of
stock and bond components may change as prices of Stocks and bonds fluctuate of
course the fluctuation in stock is often the dominant factor underlying this change. In
response to such changes periodical rebalancing of the portfolio is required. These
primary involve a shift to bonds are vice-versa. In additional, it may call for sector
rotation as well as security switches.
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7. Performance revolution:
The performance of a portfolio should be evaluated periodically the key dimension of
portfolio performance evaluation are risk and return and the key issue is weather the
portfolio return is commensurate with its risk exposure. Such a review may provide
useful feedback to improve the quality of portfolio management process on a
continuing basis.
Portfolio diversification:
An important way to reduce the risk of investing is to diversify your investments.
Diversification is akin to not putting all your eggs in one basket. For example, if
your portfolio only consisted of stocks of technology companies. It would likely face
a substantial loss in value if a major event adversely affected the technology industry.
There are different ways to diversify a portfolio whose holdings are concentrated in
one industry. You might invest in the stocks of companies belonging to other industrygroups. You might allocate to different categories of stocks, such as growth, value, or
income stocks. You might include bonds and cash investments in your asset allocation
decisions. Potential bond categories include government, agency, municipal and
corporate bonds. You might also diversify by investing in foreign stocks and bonds.
Diversification requires you to invest din securities whose investment returns do not
move together. In other words, their investment returns have a low correlation. The
correlation coefficient is used to measure the degree that returns of two securities are
related. For example, two stocks whose returns move in lockstep have a coefficient of
+1.0. Two stocks whose returns move in exactly the opposite direction have a
correlation of -1.0. To effectively diversify, you should aim to find investments that
have a low or negative correlation.
As you increase the number of securities in your portfolio, you reach a point where
youve likely diversified as much as reasonably possible. Financial planners vary in
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their views on how many securities you need to have a fully diversified portfolio.
Some say it is 10 to 20 securities. Others say it is closer to 30 securities.
Mutual funds offer diversification at a lower cost. You can buy no-load mutual funds
from an online broker. Often, you can buy shares fund directly from the mutual fund,
avoiding a commission altogether.
Asset allocation:
Asset allocation is the process of spreading your investment across the three major
asset classes of stocks, bonds, and cash. Asset allocation is a very important part ofyour investment decision-making. Professional financial planner frequently point out
that asset allocation decisions are responsible for most of your investment return.
Asset allocation begins with setting up an initial allocation. First, you should
determine your investment profile. Specifically, this requires you to assess you
investment horizon, risk tolerance, and financial goals:
Investment horizon:
Also called time horizon your investment horizon is the number of years you have to
save for a financial goal. Since youre likely to have more than one goal, this means
you will have more than one investment horizon. For example, saving for your five-
year-daughters college has an investment horizon of 12 years. Saving for your
retirement in 30 tears has an investment horizon of 30 year. When you retire, you will
want to have saved a lump sum that is large enough to generate earnings every year
until you die.
Risk tolerance:
Your risk tolerance is a measure of your willingness to accept a higher degree of risk
in exchange for the chance to earn a higher rate of return. This is called the risk-return
trade-Off. Some of us, naturally, are conservative investor, while others are
aggressive investors.
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As a general rule, the younger you are, the higher your risk tolerance and the more
aggressive you can be. As a result, you can afford to allocate a higher percentage of
your investments to securities with more risk. These include aggressive growth stocks
and the mutual funds that invest in them. A more Aggressive allocation is viable
because you have more time to recover form a poor year of investment returns.
Financial goal:
Your financial goal are also an important consideration in deciding on an initial
allocations a general rule, younger and aggressive investors allocate 70%to 100%of
their portfolios to stocks, with the remainder in bonds and cash. Conservative
investors allocate 40%to60% in stocks, 30% to50%in bonds, and the remainder in
cash.
Moderate investor allocate somewhere between the allocation of aggressive and
conservative to make an initial allocation, you need to build a portfolio of individual
securities, mutual funds, or both. In general, mutual funds provide more
diversification benefit for the buck.
How you choose to precisely allocate among the major asset classes depends, in part,
on other factors. For example, if example, if interest rates are expected to rise, you
might allocate a greater percentage to money market mutual funds, adsorb other bank
deposits. If rates are headed lower, you may choose to allocate more to stocks or
bonds.
Financial planners suggest that you rebalance, or reallocate, your portfolio from time
to time. They differ in their views on how often you should reallocate. It may be once
a year or it may be every three to six months. At a minimum, reallocation lets you up
date any changes in your investment profile, or to take advantage of a change in
interest rates. Rebalancing often involves nothing more than a fine-tuning of your
current allocations. For example, a conservative investor may decide to shift 5%of her
portfolio form stocks to cash to take advantage of higher rates that money market
funds may be offering.
Risk
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Risk and uncertainty are an integral part of an investment decision. Technically risk
can be defined as a situation where the possible consequences of the decision that is to
be taken are known. Uncertainty is generally defined to apply to situation where the
probabilities cannot be estimated. However, risk and uncertainty are used
interchangeably.
Risk is composed of demands that bring inn the variations in return of income.
The main forces contributing to risk are price and interest. Risk is also influenced by
external and internal considerations. External risks are uncontrollable and broadly
affect the investment. These external risks are called systemic risk. Risk due to
internal environment of a firm or those effecting particular industry are referred to as
unsystematic risk.
Systematic Risk
It is non-diversification risk and is associated with the securities market as well as the
economic, sociologic, political, and legal consideration of price of all securities in
economy. The effect of these factors is put pressure on all securities in such a way
that the price of all stock will move in same direction. For example, during a boom
period prices of all securities will and indicate that the economy is moving toward
prosperity.
Systematic risk further divided into
-Market Risk
-Interest Risk
-Purchasing power Risk
Market Risk:
Source of risk: market risk is referred to as stock variability due to changes in
investors attitudes and expectations. The investors reaction towards tangible and
intangible events is chief cause affecting market risk. The first set, that is, the
tangible events has a real basis but the intangible events are based on a
psychological basis or reaction to expectations or realities.
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Market risk triggers off through real events comprising political, social and economic
reasons. The initial decline or risk in market price will create an emotional
instability of investors and causes a fear of loss are creating an undue confidence,
relating possibility of profit. The reaction to loss will culminate in excessive selling
and pushing prices down towards declaim in prices rather than increase in prices.
Market risks cannot be eliminated while financial risks can be reduced.
Through diversification also, market risk can be reduced but not eliminated because
prices of all stocks moves together and any equity stock investor will be faced by the
risk of a downwards market and declaim in security prices.
Market risk cannot be eliminated while financial risks can be reduced.
Through diversification also, marker risk can be reduced but not eliminated because
prices of all stock moves together and equity stock investor will be faced by the risk
of a download market and decline in security prices.
Interest Rate Risk
There are four types of movements in prices of stocks in the market. These
may be termed as
1. long-term
2. cyclical(bulls and bears markets)
3. intermediate or within the cycle and
4. Short-term.
The prices of securities will rise or fall, depending on the change in interest rate the
longer the maturity period of a security the higher the yield on an investment and
lower the fluctuations in price. Short-term interest rates fluctuate at a great speed and
are now more volatile the long-term securities but their changes have a similar effect
price. Traditionally investor could attempt to forecast cyclical swings in interest rates
and prices merely by forecasting up and downs in general business activity. Some of
the factors that are responsible complicated analysis are the difference between actual
and expected inflation in monitory policy and industrial recessions in the economy. If
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interest rate could be calculated and forecast accurately, investor would buy and sell
securities with confidence.
Interest rate risk can also be reduced by analyzing the different kinds of securities
available for investment. A government bond or a bond issued by the financial
institution like IDBI is a risk less bond. Even if government bonds give a slightly low
rate of interest, in the long run they are better for a conservative investor because he is
assured of his return. Then the price of securities in the private corporate sector will
fall and interest rate will increase. The direct effect of increasing in the level of
interest rate will raise the price of securities.
Purchasing power Risk:
Purchasing power risk is also known as inflation risk. This risk arises out of change in
prices of goods and services and technically it covers both inflation and deflation
periods. During last two decades, it has been seen that inflationary have been
continuously affecting the Indian economy. Therefore, in India purchasing power risk
is associated with inflation and rising prices in the economy.
Inflation in India has been eithercost push ordemand pull. This type of inflation
has been seen when costs of production rise or when there is demand for product but
there is no smooth supply and consequently prices rise. In India, the cost push
inflation has led to enormous problem as rise in prices of raw material has greatly
increased costs of production. The increase in costs of production has shown a rising
in wholesale price index and consumer price index. A rising trend in price index
reflects a price spiral in economy
All investors should have an approximate estimate in their minds before investing
their funds of the expected return after making an allowance for purchasing power
risk the allowance for raise in prices can be made through a check list of the cost of
living index. The behavior of purchasing power risk can in some ways be compared to
interest rate risk. They have a systematic influence on the price of both stocks and
bonds if the consumer price index in a country shows a constant increasing of 4% and
suddenly jumps to 5% in the next year the required rate of return will also have to be
adjusted with an upward revision. Such change in the process will affect governmentsecurities corporate bonds and common stocks.
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Unsystematic Risk:
It is unique to a firm or industry. It does not affect an average investor. Unsystematic
risk is caused by factor like labor strikes, irregular disorganized policies, the
consumer preferences. These factors are independent of prices mechanism operating
in the securities market. The problems of both systematic and unsystematic risk are
inherent in industries dealing with basic raw materials as well as in consumer goods
industries. The important of unsystematic risk arises out of the uncertain surrounding
a particular firm or Industry due to the factory like labor strikes consumer preference
and management policies. The uncertainties directly effect the financing and
operating environment of the firm. Unsystematic risk can owing to these
considerations be said to complement the systematic risk forces.
Broadly Unsystematic risk can be classified into:
-Business risk
-Financial risk
Business Risk
Every corporate organization has its own objectives and goals and aims at
particulars gross profit and operating income and also expects to provide a certain
level of dividend income to its shareholders. It also hopes to plough back some
profits. Once it identifies its operating level of earnings, the degree of variation from
this operating level would measure business risk. For example, if operating income is
expected to be15 % in year business risk will be low if the operating income varies
between and 14 and 16%. If the operating income is as low, as 10% or as high as18%
it would be said that the business risk is high.
Business risk is also associated with risks directly affecting the internal
environment of the firm and those of circumstances beyond its control. The former is
classified as internal business risk and the latter as external business risk. Within these
two broad categories of risk, the firm operates.
Internal business risk may be represented by firms limiting environment with
in which conducts its business. It is the frame work with in which the firm conducts
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its business drawing its efficiency largely from the constraints with in which its
functions. Internal risk will be of differing degrees in each firm and the degree to
which each firm achieves its goals and attainment level is reflected in its operating
efficiency
External risks of the business are due to many factors. Some of factors that can
be summarized are:-
Business cycle: some industries moves automatically with the business cycle,
others move counter-cyclically;
Demographic factors: such as geographical distribution of population by age,
group and race;
Political policies: change in decisions, topping of state government to some
extent affect the working of an industry;
Monetary policy: reserve bank of Indias policies with regard to monetary
and fiscal policies may also affect revenues through an affect on cost as well
as availability of funds.
Environment: the economic environment of the economy also influences the
firm and costs and revenues.
Financial Risk:
Financial risk in company is associated with method through which it plans its
financial structure. If the capital structure of a company tends to make earning
unstable, the company may fail financially. How a company raises funds to finance its
needs and growth will have an impact ion its future earnings and consequently on the
stability of earnings. Debts financing provides a low cost source of funds to a
company, at the same time providing financial leverage for the common stock
holders. As long as the earnings of the company are higher than the cost of borrowed
funds, the earnings per shares of common stock are increased. Unfortunately, large
amount of debt financing also increases the variability of the returns of the common
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stock holders and thus increases their risk. It is found that variation in returns is the
financial risk.
Financial risk and business risk are somewhat related. While business risk is
concerned with an analysis of the incomes statements between revenues and earnings
before interest and taxes (EBIT), financial risk can be stated as being between
earnings before interest and taxes (EBIT) and earnings before taxes (EBT).
Investors attitude towards return and risk
Before concluding the discussion on risk and its measurements, let us turn
back to the investors attitude towards risk and return. Understanding and measuring
return and risk is fundamental to the investment process and increases an awareness
of the investment problem. Most investors are risk averse. They must be aware of
risk in different investment whether they are confronted with high, moderate or low
risk and the kinds of risks investment are exposed to before making their investment.
To have a higher return, the investor should be able to accept the fact that he has to be
faced with greater risk. In commercial bank and life insurance saving, most of the
risks are low but purchasing power risk. The investor has to decide for himself
whether he would like to choose a group of securities which will give him 15%return
with 10% risk or a return of 25% with 20% risk.
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RISK RETURNS OF VARIOUS INVESTMENT ALTERNATIVES
Management
decision
Investment Mutual
risk
Business
risk
Interest
risk
Purchasing
power risk
High Growth commonstock
High High Low Low
High Speculativecommon stock
High High Low Low
Moderate Blue cheeps(highquality commonstock)
Moderate High Low Low
Moderate Convertiblepreferred stock
Moderate Moderate Low Low
Low Convertibledebentures
Moderate Moderate Low Low
Low Corporate bonds Low Low High High
Low Governmentbonds
Low Low High High
Low Short-term(government
bonds)
Low Low Low High
Low Money marketfunds
Low low Low High
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NEED OF THE STUDY
Investing has been an activity confined to the rich and business class in the
past. This can be attributed to the fact that availability of invisible funds is a pre-
requisite to deployment of funds .But, today, we find that investment has Become a
house hold word and is very popular with people e from all walks of Life.
Increasing popularity of investments can be attributed to the following factors:
1. Increase in working population, larger family incomes and consequent higher
Savings;
2. Provision of tax incentives in respect of investments in specified channels;
3. Increase in tendency of people to hedge against inflation;
4. Availability of large and attractive investment alternatives;
5. Increase in investment related publicity;
6. Ability of investments to provide income and capital gains etc.
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OBJECTIVES OF THE STUDY:
To construct three portfolios of public sector units, public limited companiesand foreign collaboration and find their ex-post return and risk for the period of three
year.
To make a comparative study of the risk-adjusted measure of portfolio
performance using the sharpes and Treynors performance index under total risk and
market risk situations, by taking ex-post returns for a period of three years.
Learning objectives:
1. Calculate the total return, return relative, and cumulative wealth index.
2. Compute the arithmetic, mean, and geometric mean of a return series.
3. Explain the rationale for using standard deviation as the principle measure of
Risk.
4. Measure the expected return and risk of a security.
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RESEARCH METHODOLOGY
Using a model consisting of two modules has carried out the work. The first moduleinvolves the selection of portfolio and the second module involved evaluation of
portfolios performance.
MODULE-1
Securities selection and portfolio construction has been made by taking scrips Public
Sector Units, public limited companies and foreign collaboration units. Equal weight
age has been given to industries like shipping, oil & gas and power growth orientedindustries like pharmaceuticals, banking and FMCG and technology oriented
industries like software and telecommunications.
MODULE-2
Portfolio performance was evaluated by ranking holding periods return under total
risk and market risk situation (measured by standard deviation and Beta coefficient)
for the period of three years.
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SCOPE OF THE STUDY
The study of optimization portfolio risk & returns has been fulfilled within the
effective study of different portfolio according to the companys information.
This study also delivers the enumeration of different levels of analysis &
strategy implementation.
The software companies like Wipro provided the update data to the effective
study.
Some of the data has been grabbed from the outer sources which are not
provided by the companies.
This study has been put partial concentration on companys revenues as they
did not provide the optimum information.
The optimum information has been studied for giving an effective out comes
by the minimum resources.
Some of the study has been done externally due to non availability of
sufficient data by the company.
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LIMITATIONS OF THE STUDY
The work has been carried out under the following limitations:
The all portfolio consists of riskily assets there are no risk-free assets.
Risky assets consists of equity shares and where as risk-free assets consists of
investments in the saving bank account, deposits, treasury bills, bonds, etc
The holding period for risky assets was for I yr i.e. shares were assumed to be
purchased at the first day and sold at the second consecutive day and average
return for I yr is considered.
An equal no of shares i.e. I (one) share of each script is assumed to be
purchased form the secondary market.
Return on the saving bank account is considered as benchmark rate of return.
The entire portfolio has been held constant for the whole period of the three
years.
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THEORETICAL ARTICLES
Measurement of Risk:
The risk of a portfolio can be measured by using the following measure of risk.
Variability
Investment risk is associated with the variability of rates of return. The more variable
is the return, the more risky the investment. The total variance is the rate of return on
a stock around the expected average, which includes both systematic and
unsystematic risk.
The total risk can be calculated by using the standard deviation. The standard
deviation of a set of numbers is the squares root of the square of deviation around the
arithmetic average.
Symbolically, the standard deviation be expressed as-
Where,
ri is the mean return of the portfolio and
rit is the return from the portfolio for a particular year
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SHARPES PERFORMANCE INDEX
William Sharpes measure of portfolio performance is also known as reward tovariability ratio (RVAR). It is simply the ratio of reward, which is defined as realized
portfolio returns in excess of the risk free rate, to the variability of return measured by
the standard deviation relation to total risk assumed by the investor. The measure can
be defined follows:-
Rp-rf
RVAR =
Where,
rp =the average return for the portfolio (P) during it HPR
rf= risk free rate of return during HPR
= the standard deviation of the portfolio (P) during HPR
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CAPITAL MARKET LINE
Capital market shows the conditions prevailing in the capital market in terms ofexpected return and risk. It depicts the equilibrium condition that prevails in the
market for efficient portfolios consisting of the portfolio of risky assets or risk free
asset or both. All combination of risky and risk free portfolio are bounded by the
capital market line, and all investors will end up with portfolio somewhere on the
capital market line. The capital market is usually derived under the assumptions that
there exists a risk a risk-less asset available for investment.
It is further assumed that investor can borrow or lend as much as desired at the risk
free rate (rf). Given this opportunity, investors can then mix the risk free assets with a
portfolio or risky assets to obtain the desired risk return combination. Using the
capital market line can graphically represent Sharpes measure for portfolios. The
vertical axis represents the return on the portfolios and the horizontal axis represents
the standard deviation for returns. The vertical intercept is rf. RVAR measures the
slope of the line form rf to the portfolio being evaluated. The steeper the line, the
higher the slope (RVAR) and the better the performance
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TREYNORS PERFORMNCE INDEX
The measure is also referred to as reward to volatility ratio (RVOL). Treynor soughtto relate return on a portfolio to its risk. He distinguished between total risk and
systematic risk assuming that the portfolio is well diversified. In measuring the
portfolio performance Treynor introduced the concept of characteristic line.
The slope of the characteristics measures the relative volatility of the portfolios
returns. The slope of this line is the beta co-efficient which is measure of the volatility
(or responsiveness) of the portfolios returns in relation to those of the market index.
Treynors ratio is the realized portfolios return in excess of the risk-free to the
volatility of return as measured by the portfolio beta
RVOT = rp - rfBp
Average excess return of portfolio (P)= --------------------------------------------
Systematic risk for portfolio
Where,
rp =the average return for the portfolio (P) during it HPR
rf= risk free rate of return during HPR
bp= beta portfolio
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SECURITY MARKET LINE
The security market line indicates the risk-return trade-off for portfolios andindividual securities. Treynor extended his analysis to identify the component of risk
that will be compensated by the market. It is known as systematic risk and is
commonly measured by the beta.
Beta is a measure of risk that applies to all assets and portfolios whether
efficient or inefficient. Security market line specifies the relationship between
expected return and risk for all assets and portfolios whether efficient or inefficient.
The security market is obtained by taking the risk (beta) on the horizontal axis and
portfolio return on the vertical axis. The security market line can be graphically
shown as follows.
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Beta
Beta is a market risk measure employed primarily in the equity markets. It measures
the systematic risk of a single instrument or an entire portfolio. William Sharpe(1964) first used the notion in his landmark paper introducing the capital asset pricing
model (CAPM). The name beta was applied later. Beta describes the sensitivity of
an instrument or portfolio to broad market movements.
The stock market (represented by an index such as the S&P 500 or 100) is assigned a
beta of 1.0. By comparison, a portfolio (or instrument) which has a beta of 0.5 will
tend to participate in broad market moves, but only half as much as the market
overall. A portfolio (or instrument) with a beta of 2.0 will
Tend to benefit or suffer from broad market moves twice as much as the market
overall.
The formula for beta is
XY- (X) (Y)
nX2 (X) 2
Where X is the market return
And Y is the security return
Both quantities are calculated using simple returns. Beta is generally estimated
form historical price time series. For example, 60 trading days of simple returns might
be used with sample estimators for covariance and variance. It is possible to construct
negative beta portfolios. Approaches include.
Beta is sometimes used as a measure of a portfolios market risk. This can be
misleading because beta does not capture specific risk. Because of specific risk. A
portfolio can have a low beta, but still be highly volatile.
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Its price fluctuations would simply have a low correlation with those of the overall
market. It is said that a security or portfolio having higher beta will perform well
provided market has to go up i.e., market index.
UNIT - II
COMPANY PROFILE
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INDIAN STOCK MARKET AN OVERVIEW
CAPITAL MARKET IN INDIA
Indian markets have recently thrown open a new avenue for retail investors and
traders to participate in: commodity derivatives. For those who want to diversify their
portfolios beyond shares, bonds and real estate, commodities are the best option. Till
some months ago, this wouldn't have made sense. For retail investors could have done
very little to actually invest in commodities such as gold and silver or oilseeds in the
futures market. This was nearly impossible in commodities except for gold and silver
as there was practically no retail avenue for punting in commodities. Whatever it may
be , with the setting up of three multi-commodity exchanges in the country, retail
investors can now trade in commodity futures without having any physical stocks
Commodities actually offer immense potential to become a separate asset class for
market-savvy investors, arbitrageurs and speculators. Retail investors, who claim to
understand the equity markets may find commodities an unfathomable market. But
commodities are easy to understand as far as fundamentals of demand and supply are
concerned. Retail investors should understand the risks and advantages of trading in
commodities futures before taking a leap. Historically, pricing in commodities futures
has been less volatile compared with equity and bonds, thus providing an efficient
portfolio diversification option.
Like any other market, the one for commodity futures plays a valuable role in
information pooling and risk sharing. The market mediates between buyers and sellers
of commodities, and facilitates decisions related to storage and consumption of
commodities. In the process, they make the underlying market more liquid
The trading of commodities consists of direct physical trading and derivatives trading.
The commodities markets have seen an upturn in the volume of trading in recent
years. In the five year up to 2010, the value of global physical exports of commodities
increased by 17% while the notional value outstanding of commodity OTC(over the
counter) derivatives increased more than 500% and commodity derivative trading on
exchanges more than 200%.
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The notional value outstanding of banks OTC commodities derivatives contacts
increased 27% in 2010 to $9.0 trillion. OTC trading accounts for the majority of
trading in gold and silver. Overall, precious metal accounted for 8% of OTC
commodities derivatives trading in 2010, down from their 55% share a decade earlier
as trading in energy derivatives rose.
Global physical and derivatives trading of commodities on exchanges increased more
than a third in 2010 to reach 1,684 million contacts. Agricultural contracts trading
grew by 32% in 2010, energy 29% and industrial metals by 30%. Precious metals
trading grew by 3% with higher volume in New York being partially offset by
declining volume in Tokyo. Over 40% of quarter in China. Trading on exchanges in
China and India has gained in importance in recent years due to their emergence as
significant commodities consumers and producers.
Present scenario
Todays commodity market is a global market place not only for agricultural
products, but also currencies and financial instruments such as Treasury bonds and
securities futures. Its a diverse marketplace of farmers, exporter, importers,
manufacturers and speculators. Modern technology has transformed commodities into
a global marketplace where a Kansas farmer can match a bid from a buyer in Europe.
The 2008 global boom in commodity prices- for everything from coal to corn was
fueled by heated demand from the likes of China and India, plus unbridled speculation
in forward markets.
The bubble popped in the closing months of 2008 across the board. As a result,
farmers are expected to face a sharp drop in crop prices, after years of record revenue.
Other commodities, such as steel, are also expected to tumble due to lower demand.
This will be a rare positive for manufacturing industries, which will experience a drop
in some input costs, partly offsetting the decline in downstream demand.
The Indian broking industry is one of the oldest trading industries that have been
around even before the establishment of BSE in 1875.
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Inception- The roots of a stock market in India began in the 1860s during the
American Civil War that led to a sudden surge in the demand for cotton from
India resulting in setting up of a number of joint stock companies that issued
securities to raise finance.
Bubble burst- The early stock market saw a boom till 1865, and then in Jul
1865, what was then used to be called the share mania ended with burst of the
stock market bubble. In the aftermath of the crash, banks, on whose building
steps share brokers used to gather to seek stock tips and share news,
disallowed them to gather there, thus forcing them to find a place of their own,which later turned into the Dalal Street. A group of about 300 brokers formed
the stock exchange in Jul 1875, which led to the formation of a trust in 1887
known as the Native Share and Stock Brokers Association
Beginning of a new phase- A new phase in the Indian stock markets began in
the 1970s, with the introduction of Foreign Exchange Regulation Act (FERA)
that led to divestment of foreign equity by the multinational companies, which
created a surge in retail investing.
Growth supporting factors-The early 1980s witnessed another surge in stock
markets when major companies such as Reliance accessed equity markets for
resource mobilization that evinced huge interest from retail investors. A new
set of economic and financial sector reforms that began in the early 1990s
gave further impetus to the growth of the stock markets in India.
Setting up of SEBI- the Securities and Exchange Board of India (SEBI),
which was set up in 1988 as an administrative arrangement, was given
statutory powers with the enactment of the SEBI Act, 1992. The broad
objectives of the SEBI include-
o to protect the interests of the investors in securities
o to promote the development of securities markets and to regulate the
securities markets
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Incorporation of NSE- NSE was incorporated in Nov 1992 as a tax
paying company, the first of such stock exchanges in India, since stock
exchanges earlier were trusts, being run on no-profit basis. NSE was
recognized as a stock exchange under the Securities Contracts
(Regulations) Act 1956 in Apr 1993. It commenced operations in
wholesale debt segment in Jun 1994 and capital market segment (equities)
in Nov 1994. The setting up of the National Stock Exchange brought to
Indian capital markets several innovations and modern practices and
procedures such as nationwide trading network, electronic trading, greater
transparency in price discovery and process driven operations that had
significant bearing on further growth of the stock markets in India. To
speed the securities settlement process, The Depositories Act 1996 was
passed that allowed for dematerialization (and dematerialization)
of securities in depositories and the transfer of securities through
electronic book entry. The National Securities Depository Limited
(NSDL) set up by leading financial institutions, commenced operations in
Oct 1996.
Despite passing through a number of changes in the post liberalization period,
the industry has found its way towards sustainable growth. A stock Broker is a
regulated professional who buys and sells shares and other securities through
market makers or Agency Only Firms on behalf of investors. To work as a
broker a certificate of registration from SEBI is mandatory after satisfying all
the terms and conditions.
FINANCIAL MARKETS
The financial markets have been classified as
Cash market (spot market) largest traded, the spot market or cash market is a
commodities or securities market in which goods are sold for cash and
delivered immediately. Derivatives market after cash market, the derivatives
markets are the financial markets for derivatives. The market can be divided
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into two that for exchange traded derivatives and that for over-the-counter
derivatives.
Debt market - The bond market (also known as the debt, credit, or fixed
income market) is a financial market where participants buy and sell debt
securities.
Commodities market after commodities market, Commodity markets are
markets where raw or primary products are exchanged. These raw
commodities are traded on regulated commodities exchanges, in which they
are bought and sold in standardized contracts.
PARTICIPANTS IN FINANCIAL MARKET
There are two basic financial market participant categories, Investor vs. Speculator
and Institutional vs. Retail. Action in financial markets by central banks is usually
regarded as intervention rather than participation.
Supply side vs. demand side
A market participant may either be coming from the Supply Side, hence supplying
excess money (in the form of investments) in favor of the demand side; or coming
from the Demand Side, hence demanding excess money (in the form of borrowed
equity) in favor of the Supply Side. This equation originated from Keynesian
Advocates. The theory explains that a given market may have excess cash; hence the
supplier of funds may lend it; and those in need of cash may borrow the funds
supplied. Hence, the equation: aggregate savings equals aggregate investments.
The demand side consists of: those in need of cash flows (daily operational needs);
those in need of interim financing (bridge financing); those in need of long-term funds
for special projects (capital funds for venture financing).
The supply side consists of: those who have aggregate savings (retirement funds,
pension funds, insurance funds) that can be used in favor of demand side. The origin
of the savings (funds) can be local savings or foreign savings. So much pensions or
savings can be invested for school buildings; orphanages; (but not earning) or for roadnetwork (toll ways) or port development (capable of earnings).
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The earnings go to owner (Savers or Lenders) and the margin goes to the banks.
When the principal and interest are added up, it will reflect the amount paid for the
user (borrower) of the funds. Thus, an interest percentage for the cost of using the
funds.
Investor vs. Speculator
Investor
An investor is any party that makes an Investment.
However, the term has taken on a specific meaning in finance to describe the
particular types of people and companies that regularly
purchase equity ordebtsecurities for financial gain in exchange forfunding an
expanding company. Less frequently the term is applied to parties who purchase real
estate,currency,commodityderivatives,personal property, or otherassets.
Speculation
Speculation, in the narrow sense of financial speculation, involves the buying,
holding, selling, and short-selling of stocks, bonds, commodities, currencies,
collectibles, real estate, derivatives or any valuable financial instrument to profit from
fluctuations in its price as opposed to buying it for use or for income via methods such
as dividends or interest. Speculation or agiotage represents one of three market roles
in western financial markets, distinct from hedging, long term investing and arbitrage.
Speculators in an asset may have no intention to have long term exposure to that asset.
Institutional vs. Retail
Institutional investor
An institutional investor is an investor, such as a bank, insurance company, retirement
fund, hedge fund, or mutual fund, that is financially sophisticated and makes large
investments, often held in very large portfolios of investments. Because of their
sophistication, institutional investors may often participate in private placements ofsecurities, in which certain aspects of the securities laws may be inapplicable.
http://en.wikipedia.org/wiki/Investmenthttp://en.wikipedia.org/wiki/Investmenthttp://en.wikipedia.org/wiki/Financehttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Fundinghttp://en.wikipedia.org/wiki/Real_estatehttp://en.wikipedia.org/wiki/Real_estatehttp://en.wikipedia.org/wiki/Real_estatehttp://en.wikipedia.org/wiki/Currencyhttp://en.wikipedia.org/wiki/Currencyhttp://en.wikipedia.org/wiki/Commodityhttp://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Personal_propertyhttp://en.wikipedia.org/wiki/Personal_propertyhttp://en.wikipedia.org/wiki/Assetshttp://en.wikipedia.org/wiki/Assetshttp://en.wikipedia.org/wiki/Investmenthttp://en.wikipedia.org/wiki/Financehttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Fundinghttp://en.wikipedia.org/wiki/Real_estatehttp://en.wikipedia.org/wiki/Real_estatehttp://en.wikipedia.org/wiki/Currencyhttp://en.wikipedia.org/wiki/Commodityhttp://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Personal_propertyhttp://en.wikipedia.org/wiki/Assets -
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Retail investor
A retail investor is an individual investor possessing shares of a given security. Retailinvestors can be further divided into two categories of share ownership.
1. A Beneficial Shareholder is a retail investor who holds shares of their
securities in the account of a bank or broker, also known as in Street Name.
The broker is in possession of the securities on behalf of the underlying
shareholder.
2. A Registered Shareholder is a retail investor who holds shares of theirsecurities directly through the issuer or its transfer agent. Many registered
shareholders have physical copies of their stock certificates.
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PROFILE OF THE COMPANY MERFIN INDIA LIMITED
NSE Membership
HSE Membership
BSE Membership
The company was incorporated in 1995 with main objects of carrying Finance,
Leasing, and capital Market activities such as Brokerage of various stocks exchanges,
to act as various intermediaries of capital market. The company has obtained NationalStocks Exchange membership in February 1996 and commenced its trading activities
at present. It has six branches through out Andhra Pradesh having around 30 trading
terminals.
It has been doing trading for various clients, sub brokers both for equity and debt,
market scripts like Bonds, Debenture etc. The company is also acting as a sub-
broker\dealer in Bombay Stoke Exchange the company in growing year after year in
times of clients branches and turnover of the securities.
Merfin Systems is an industry-leading innovator of value-added paper systems. Since
1984, Merfin has served the away- from home industry in North America with
strong partnerships with our customers, employees and suppliers. With a full line of
paper products for the hygienic and food service markets, we fulfill our mission of
Innovation, Quality and Excellence for the customers we serve. Through Buckeye
Technologies, our parent company, we have manufacturing operations in the United
States. Canada, Brazil and Germany.
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ABOUT US
Merfin India ltd is one of the Indias leading wealth management, capitalmarkets and advisory companies, with offices in 7 states and territories and total client
assets of approximately Rs. 500 Crores.
Merfin India ltd offers a broad range of services to private clients, small
businesses, and institutions and corporations, organizing its activities into two
interrelated business segments - Global Markets & Investment Banking Group and
Global Wealth Management, which is comprised of Global Private Client and Global
Investment Management.
As an investment bank, it is a leading National trader and underwriter of
securities and derivatives across a broad range of asset classes and serves as a
strategic advisor to corporations, governments, institutions and individuals
worldwide.
Were growing our business by helping clients grow theirs.
Our client relationships are among our greatest competitive assets. We
deepen and enrich these relationships through disciplined growth, innovation, and
seamless execution. Corporate Governance Merfin India ltd demonstrates its
commitments to clients and shareholders through the firm's emphasis on excellence,
integrity and ethical behavior. We maintain a strong and engaged board of
independent directors to oversee our business practices and make recommendations
for improvement, if needed. With the exception of our CEO, all members of our board
are independent.
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Corporate Citizenship:
Merfin India ltd is committed to corporate social responsibility. We implement a
range of initiatives to help ensure that the communities in which we live and work arethriving with opportunities.
Company Overview
Merfin India ltd through its subsidiaries, offers capital markets services, investment
banking and advisory services, wealth management, investment management,
insurance, banking and related products and services on a global basis, including:
Securities origination, brokerage, dealer and related activities in:
Equities
Futures
Fixed income
Forwards
Mutual funds
Commodities
Swaps
Currencies
Options
Other derivatives
Investment banking
Securities origination
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Strategic advisory services, including:
Mergers and acquisitions
Strategic valuation
Other corporate finance and advisory activities
Private equity and other principal investing activities
Securities clearance, settlement, financing and services, including prime brokerage
Wealth management products and services, including financial, retirement and
generational planning Banking, trust, lending and related services, including:
Mortgage loans
Trust
Commercial loans
Deposit-taking
Securities-based loans
Cash management
Insurance and annuity products and annuity underwriting
Investment management and investment advisory services
Global investment research encompassing:
Equities
Economics
Fixed income
Equity strategy
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Equity-linked securities
Wealth management strategy
Strategic Positioning
Merfin India ltd has positioned itself to be the preeminent global investment
bank, wealth management and advisory company, an essential partner to its clients.
Key facets of this positioning include:
1) Delivering value-added advice, products and services to clients with unmatched
levels of quality and integrity
2) Investing in opportunities for growth and diversification that take advantage of the
firm's strengths and global client franchise
3) Operating with discipline and focus throughout the firm to ensure that the
appropriate resources are committed to each business opportunity
4) Managing risk and capital to ensure efficient deployment of, and appropriate
returns on, stockholders' equity
5) Developing employee talent and leadership to its full potential to achieve superior
results
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UNIT - III
DATA ANALYSIS AND
INTERPRETATIONS
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PORTFOLIO II NSE CODE
PORTFOLIO1 NSE CODE
BANK OF INDIA BANKINDIA
BHEL HEL
HLL HINDLEVER
M&M M&M
SCI SCI
SATYAM COMPUTER SAYTAMCOMP
VSNL VSNL
GLAXO GLAXO
SAIL SAIL
IBP IBP
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TATA POWER TATAPOWER
ITC ITC
ESCORTS ESCORTS
UTI BANK UTIBANK
WIPRO WIPRO
BHRATI BHRATI
DRREDDYS DRREDDY
IPCL IPCL
TISCO TISCO
PORTFOLIO III NSECODE
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ING VYSYA VYSY ABANK
ABB ABB
CADILA CADILA
MICO BOSH MICO
GE SHIPPING GESHIP
HUGHES SOFTWARE HUGHESSOFT
TATA TELECOM TATATELECM
NICOLAS PHARMA NICOLASPIR
ONGC ONGC
ESSAR STEEL ESSARGUJ
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MODULE I
HOLDING PERIOD RETURNS
All the investment is made at a certain period of time. Holding period returnsenables an investor to know his returns during that period of time. It can be computed
by using the formula:-
Holding period returns (HPR) =
(Todays closing price-Yesterdays closing price)
________________________________________
Yesterdays closing price
Holding period returns are used for comparative criterion. Holding period returns can
be compared for making an assessment of relative returns.
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Portfolio I for 2009-10
Name of the
script
Face
value
Dividend
declared (%)
Dividend
Amount
Market price
where%Return on
dividend
%return
on
Total
Return
BANK OFINDIA
10 00 10.5 0 -17.42 -17.42
BHEL 10 40 4 128.7 3.11 40.62 43.729
HLL 1 300 3 222.2 1.35 5.84 7.1901
M&M 10 0 0 119.2 0.00 8.11 8.11
SCI 10 0 0 30.0 0.00 98.11 98.11
SATHYAMCOM
2 0 0 243.7 0.00 41.24 41.24
VSNL 10 0 0 286.2 0.00 -20.27 -20.27
GLAXO 10 0 7 417.8 1.68 -3.18 -1.504
IBP 10 100 10 294.3 3.40 119.95 123.35
SAIL 10 0 0 5.7 0.00 -3.98 -3.98
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Return27.855
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Portfolio I for 2010-11
Name of the
script
Face
value
Dividend
declaredDividend
Amount
Market
price
%Return
on
%return
on
Total
Return
BANK OFINDIA
10 30 3 26.5 11.32 89.32 100.6
BHEL 10 40 4 180.8 2.21 24.99 27.2
HLL 1 300 3 227.25 1.32 -39.47 -38.15
M&M 10 55 5.5 112.8 4.88 -6.52 -1.644
SCI 10 0 0 72.55 0.00 -20.9 -20.9
SATHYAMCOM
2 110 2.2 257 0.86 -28.55 -27.69
VSNL 10 85 8.5 188.5 4.51 -88.61 -84.1
GLAX 10 70 7 342.7 2.04 -6.5 -4.457
IBP 10 140 14 891.35 1.57 -13.95 -12.38
SALI 10 0 0 5.65 0.00 71.74 71.74
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Return: 1.026
Portfolio I for 2011-12
Name of the
script
Face
value
Dividend
declaredDividend
Amount
Market
price where
%Return
on
%return
on
Total
Return
BANK OFINDIA
10 10 1 39.35 2.541 49.06 51.601
BHEL 10 30 3 223.65 1.341 107.1 108.44
HLL 1 300 3 149.15 2.011 8.43 10.441
M&M 10 90 9 99.1 9.082 164.23 173.31
SCI 10 0 0 51.25 0.000 109.51 109.51
SATHYAMCOM
2 140 2.8 173.65 1.612 67.29 68.902
VSNL 10 45 4.5 74.3 6.057 59.51 65.567
GLAXO 10 100 10 294.7 3.393 77.02 80.413
IBP 10 0 0 199.8 0.000 123.8 123.8
SAIL 10 0 0 9.05 0.000 153.06 153.06
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Return: 94.505
PORTFOLIO II FOR 2009-10
Name of the scriptFace
value
Dividend
declaredDividend
Amount
Market
price where
%Return
on
%return
on
Total
Return
UTI INDIA 10 0 0 23.7 0.000 63.82 63.82
TATA POWER 10 0 0 103.1 0.000 18.92 18.92
ITC 10 0 0 625 0.000 -10.19 -10.19
ESORTS 10 10 1 77.1 1.297 -10.17 -8.873
VARUNSHIPPING 10 0 0 11.55 0.000 6.63 6.63
WIPRO 2 50 1 1268.45 0.079 58.71 58.789
BHARTI 10 0 0 44.35 0.000 -13.12 -13.12
DR.REDDY 5 0 0 914.95 0.000 22.24 22.24
IPCL 10 0 0 54.15 0.000 52.26 52.26
TISCO 10 0 0 115.75 0.000 -7.8 -7.8
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Return: 18.268
PORTFOLIO II FOR 2010-11
Name of the
script
Face
value
Dividend
declaredDividend
Amount
Market price
where%Return
on dividend
%return
on security
Total
Return
UTI BANK 10 22 2.2 40.7 5.40541 2.23 7.6354
TATA POWER 10 65 6.5 114.05 5.69925 2.27 7.9693
ITC 10 0 0 706.3 0 -8.61 -8.61
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ESORTS 10 10 1 61.15 1.63532 -48.74 -47.105
VARUNSHIPPING
10 0 0 11.7 0 -21.4 -21.4
WIPRO 2 50 1 1690 0.05917 -22.58 -22.521
BHARTHI 10 20 2 38.9 5.14139 -23.04 -17.899
DR.REDDY 5 100 5 1096.1 0.45616 -13.5 -13.044
IPCL 10 22.5 2.25 87.5 2.57143 8.47 11.041
TISCO 10 80 8 97.85 8.17578 35.9 44.076
Return: -5.9856
PORTFOLIO II FOR 2011-12
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Name of the scriptFace
value
Dividend
declaredDividend
Amount
Market
price where
%Return
on
%return
on
Total
Return
UTI BANK 10 25 2.5 39.9 6.26566 150.56 156.83
TATA POWER 10 70 7 114.1 6.13497 128.11 134.24
ITC 10 200 20 625.9 3.1954 54.68 57.875
ESOCRTS 10 0 0 35.25 0 76.54 76.54
VARUNSHIPPING 10 6 0.6 9.2 6.52174 105.49 112.01
WIPRO 2 200 4 1231.2 0.32489 21.35 21.675
BHARTHI 10 60 6 29.1 20.6186 183.36 203.98
DR.REDDY 5 100 5 914.95 0.54648 14.92 15.466
IPCL 10 25 2.5 83.85 2.98151 89.2 92.182
TISCO 10 100 10 135.1 7.40192 112.82 120.22
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Return: 99.102
PORTFOLIO III FOR 2009-10
Name of the
script
Face
value
Dividend
declared
(%)
Dividend
Amount
Market
price where
purchased
%Return
on
dividend
%return
on
security
Total
Return
INGVYSA 10 35 3.5 112.2 3.11943 89.95 93.069
ABB 10 0 0 238.9 0 16.72 16.72
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CADILA 5 0 0 124 0 11.282 11.28
MICOBOSH 100 0 0 2709 0 -4.06 -4.06
GESHIPPING 10 0 0 25.3 0 22.45 22.45
HUGHES 5 40 2 593.25 0.33713 -40.45 -40.113
TATATELECOM 10 0 0 56.4 0 139.1 139.1
NICOLASPHARMA 10 0 0 295.75 0 -0.047 -0.047
ONGC 10 140 14 125.65 11.1421 87.97 99.112
ESSAR STEEL 10 0 0 125.65 0 87.97 87.97
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Return 42.548
PORTFOLIO III FOR 2010-11
Name of the scriptFace
value
Dividenddeclared
(%)
Dividend
Amount
Marketprice where
purchased
%Returnon
dividend
%returnon
security
TotalReturn
ING VYSA 10 40 3.5 247.25 1.41557 4.77 6.1856
ABB 10 60 6 263.9 2.27359 12.77 15.044
CADILA 5 70 3.5 129.55 2.70166 -3.31 -0.6083
MICO BOSH 100 40 40 2387.35 1.6755 47.45 49.125
GESHIPPING 10 40 4 30.75 13.0081 25.99 38.998
HUGHES 5 40 2 277.7 0.7202 -28.22 -27.5
TATATELECOM 10 25 2.5 171.9 1.45433 47.45 48.904
NICOLASPHARMA 10 105 10.5 271.05 3.87382 -24.88 -21.006
ONGC 10 130 13 329.6 3.94417 13.43 17.374
ESSAR STEEL 10 0 0 329.6 0 13.43 13.43
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Return 13.995
PORTFOLIO III FOR 2011-12
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Name of the scriptFace
value
Dividend
declared
Dividend
Amount
Market
price where
%Return
on
%return
on
Total
Return
ING VYSA 10 40 3.5 247.25 1.41557 76.28 77.696
ABB 10 60 6 263.9 2.27359 106.67 108.94
CADILA 5 70 3.5 129.55 2.70166 144.09 146.04
MICOBOSH 100 40 40 2387.35 1.6755 138.36 140.04
GESHIPPING 10 40 4 30.75 13.0081 135.6 148.61
HUGHES 5 40 2 277.7 0.7202 117.65 118.37
TATATELCOM 10 25 2.5 171.9 1.45433 96.37 97.824
NICOLASPHARMA 10 105 10.5 271.05 3.87382 -24.88 -21.006
ONGC 10 130 13 329.6 3.94417 95.26 99.204
ESSAR STEEL 10 0 0 329.6 0 95.26 95.26
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Return 101.1727
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EX-POST PORTFOLIO RETURNS
YEAR PORTFOLIO-I PORTFOLIO- II PORTFOLIO- III
2010 27.85 18.26 42.54
2011 1.02 -5.98 13.99
2012 94.5 99.1 101.17
RI 41.1233333 37.12666667 52.567
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MODULE -II
PORTFOLIO PERFORMANCE EVALUATION
Calculation of standard deviation of returns
PORTFOLIO - I
YEAR Return Di=r-ri Di*di S.D
2010 27.85 -13.273 176.18
2011 1.02 -40.103 1608.3 48.133
2012 94.5 53.377 2849.1
Ri= 41.123 4633.5
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PORTFOLIO II
YEAR Return Di=r-ri Di*di S.D
2010 18.26 -18.867 355.95
2011 -5.98 -43.107 1858.2 55.022
2012 99.1 61.973 3840.7
Ri= 37.127 6054.8
PORTFOLIO III
YEAR Return Di=r-ri Di*di S.D
2010 45.54 -8.0267 64.427
2011 13.99 -39.577 1566.3 44.141
2012 101.17 47.603 2266.1
Ri= 53.567 3896.8
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SHARPE PERFORMANCE MEASURE
Portfolio
s
Avg
portfolio
Return (rp)
in %
Risk
free
Rate
(rf)%
Excess
Return
(rp-rf)
Standard
Deviation
Sharpes
Ratio
rp-rf/Ranking
I 41.128 5.25 35.878 48.13 0.745 2
II 37.128 5.25 31.878 55.02 0.579 3
III 52.57 5.25 47.32 44.14 1.072 1
INTERPRETATION
In this we have the three portfolios .In the three portfolios every Portfolio has
given some profits. But according to the sharps methods we have to select the
portfolios gives more returns that portfolios we have select that.
Thats why we have selected the third portfolio. Because the third portfolio
gives more Returns.
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TREYNORS PERFORMANCE MEASURE
CALCULATION OF BETA
Beta for portfolio I
Year Avg market return X X2 Avg stock return Y XY
2009-5.683
32.2927.855 158.3
2010--8.827
77.911.025 -9.0477
2011-72.886
5890.123.38 7334.4
Beta=1.05261
INTERPRETATION
In this we have the three years portfolios. In the three portfolios
Every Portfolio has given some profits at the same time some risks. But according To
the treynors methods we have to select the portfolios gives less risks that Portfolios
we have select that. Thats why we have selected the second portfolio. Because the
second portfolio gives the less risks.
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Beta for portfolio II
Year Avg market return X X2 Avg stock return Y XY
2009-10
5.68332.29
618.267 103.81
2010-11
-8.82777.91
6-5.985 52.83
2011-12
76.035780.
699.102 7534.7
72.8865890.
8111.38 7691.4
Beta= 1.210018
INTERPRETATION
This we have the three years portfolios. In the three portfolios
Every Portfolio has given some profits at the same time some risks. But according To
the treynors methods we have to select that portfolio which gives less risks that
Portfolios we have select that. Thats why we have selected the second portfolio.
Because the second portfolio gives the less risks. In the portfolio2 overall
Performances risks is the some more high. Beta is always the less the 1.but in this
Portfolio risk is 1.2 is their.
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Beta for portfolio III
Year Avg market return X X2 Avg stock return Y XY
2009-10
5.68332.29
642.548 241.8
2010-11
-8.82777.91
613.99 -123.49
2011-12
76.035780.
6101.17 7692.1
72.8865890.
8157.71 7810.4
Beta= 0.965732
INTERPRETATION;
This we have the three years portfolios. In the three portfolios Every Portfolio
has given some profits at the same time some risks. But according To the treynors
methods we have to select that portfolio which gives less risks that Portfolios we have
select that. Thats why we have selected the second portfolio. Because the second
portfolio gives the less risks. In the portfolio2 overall Performance risks are the some
more high. Beta is always the less the 1.but in this Portfolio risk is 0.9is their. In the
three portfolios the third portfolio is better.
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TREYNORS PERFORMANCE INDEX
Portfolios Portfolio AvgReturn (rp)Riskfree
Rate rf
Beta Riskpremium
Tnrp-rf\ Ranking
I 41.128 5.251.05
235.878
34.1046
2
II 37.128 5.25 1.21 31.87826.345
53
III 52.57 5.250.96
547.32
49.0363
1
INTERPRETATION
Every portfolio gives the some of the returns and risks. But every Customer think the
we wants gets the more returns at the same time in the while Getting the returns we
have the some of the risks is their. According treynors we Want the select the
portfolio which gives the less risk that is we have to select. Beta is always =1.so in
that we portfolios gives the
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HOLDING PERIOD RETURNS
In the year 2009 NSE INDEX gained 5.58% return during the same year portfolio I,II
and III has registered a growth of 27.85, 94.50 respectively. Return wise portfolio IIIemerges as best portfolio subsequently PI and PII.
During the year 2010 the NSE INDEX registered a negative growth rate of -8.82
during the same year portfolio I II and III has registered return of 18.26, -5.98 and
99.10 respectively. Return wise portfolio III performs well and portfolio I and II
occupying subsequent position.
In the year 2011 the NSE INDEX shows a fabulous growth rate of 76.88 andportfolio I, II and III performed el by 42.54, 13.29 and 101.17 and portfolio III
emerged as best portfolio subsequently portfolio I and II
OVERALL PERFORMANCE
The overall performance of the market and the portfolios can be shown by taking the
arithmetic average of return. For the previously said of three years market has
registered growth rate of 24.58. Arithmetic average of portfolio I II and III are 41.128,37.12 and 52.57 respectively. Portfolio III emerges as best performer.
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SHARPES PERFORMANCE MEASURE
Sharpes performance measure gives the appropriate return per unit of risk as
measured by standard deviation. The reward of variability ratios computed has shown
the ex-post return of per unit of risk for the three portfolios for the period of three
years.
The rate of risk of portfolio II is high deviation by 55.02 by an average return of
37.12, similarly the portfolio I has a deviation of 48.13 with a return of 41.128 and
portfolio III with a deviation of 44.14 with an average return of 55.57.Portfolio III has
a standard deviation of 48.13 with an average return of 55.57. Using 5.25 as return on
saving bank account as a proxy for the risk free rate and substituting there value in
Sharpes evaluation portfolio I gives a slope of 0.745, in portfolio I gives a reward of
35.87(41.128-5.25) for bearing a risk of 48.13 making the sharpes ratio to 0.745. For
every additional 1% risk and investor has as additional pf 0.745 returns for above
portfolio.
Portfolio II gives a return of 37.12 while the standard deviation was 55.02 using 5%
return on the saving bank account as proxy market sharpes ratio to o.579. Therefore
for every additional 1% risk investor will earn an additional 0.579 of return. And
portfolio II with a return of 52.57 with a standard deviation marking Sharpes ratio to
1.072 as additional return.
OVERALL PERFORMANCE
Overall performances of the portfolios are 41.12, 37.12 and 52.57
respectively. The risk free rate was 5.25. Investing in three portfolios during the same
period provided a risk premium of 35 .87, 31.87, and 47.32 respectively.
For every 1% of additional risk an investor will earn o.745, 0.579 and 1.07 of
return. Portfolio III outperformed by 1.072 compared with other two portfolios. The
investor will earn on return per unit of beta of 34.10, 26.34 and 49.036 by ranking the
portfolio shows that portfolio III performs well as compared with other two portfolios.
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TREYNORS PERFORMANCE MEASURE
Treynors performance measure gives appropriate return per unit of risk as
measured by the beta coefficient. Portfolio I, II and III provided a return of 41.12%,
37.12% and 52.57% with 1.05% 1.21% and 0.965% as beta coefficient respectively.
Treynors ratio for the three portfolios above the risk free rate of 5.25%was
34.16%26.34%, 49.036% respectively.
Investing in portfolio I II and III provides risk premium of 35.87, 31.87 and
47.32 for bearing a risk of beta of 1.052, % 1.21% and 0.965% respectively. Thus an
investor will earn a return per unit of beta of 34.16% 26.34% and 49.03%
respectively. Portfolio III emerging as the best performer, portfolio I and II occupies
the subsequent position.
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UNIT - IV
FINDINGS,
CONCLUSIONS & SUGGESTIONS
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FINDINGS
1. The comparison of total return between bank of India and BHEL are showing
much difference where the bank of India has -72.42 & BHEL 43.729.
2. The market price value in the year 2010-2011 is higher of Dr. Reddys and
Wipro follows with 2nd place.
3. The ITC & Wipro has showed the similar dividend declared and this is the
highest compare to other companies.
4. The average portfolio return of portfolio-3 is more than portfolio 1&2.
5. The excess return (rp-rf) of portfolio 3 is higher compare to portfolio 1 &
portfolio 2.
6. The Beta value of portfolio 2 (1.210018) is more than portfolio 1(1.0526) &
portfolio 3 (0.965732).
7. The over all performance of the portfolio are 41.12, 37.12, 52.57 respectively.
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CONCLUSIONS AND SUGGESTIONS
1. Among the three portfolios I, II and III portfolio III gives a highest return with
a proportionate risk of 44.14% with a return of 52.57%.
2. The portfolios II gives the lowest returns because of the proportionate risk is
high i.e. 55.02% and the return is very low i.e. 37.12%.
3. The portfolio I gives minimum returns among the portfolio II &III the
proportionate risk is 48.13% and the average portfolio return is 41.12%.
4. Portfolio III has outperformed in both Sharpes and Treynors measure.
5. It is advisable to invest in portfolio III i.e. foreign collaboration securities in
long run and portfolio II i.e. public limited companies in short run because the
later is more correlated with the market index.
6. Diversification of portfolios in various projects or securities may reduce high
risk and it provides the high wealth to the shareholders.
7. Beta is used to evaluate the risk proper measurement of beta may reduce thehigh risk and it gives the high risk premium.
8. High risk free rate higher the return, lower risk free rate lower the return,
according to risk free rate of return will decide.
9. Lower beta, standard deviation higher return. This value will effect on
investment.
10. I was use two methods for calculating return, first method is traditional and
second method is technical method, which is formulated by expects in
portfolio management by using of second method can estimate correct return.
11. But according to my project portfolio III is given higher return, I will go for
investment in portfolio III.
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APPENDIX
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BIBLIOGRAPHY
Prasanna Chandra (Security Analysis and Portfolio
Management)
Avadhani (Security Analysis and Portfolio
Management)
Francis and Taylor (Investment management)
Francis (Investment analysis and management)
Preeti Singh (Investment management)
Sharp W.FAlexabder G.J.Bailey : (Investments)
Sandhak.h (Mutual Fund in India)
Graham and Dodd Security Analysis, McGraw Hill
WEB SITES
www.Sharekhan.com
www.indiainfoline.com
www.amfiindia.com
www.Merfin India ltd.com
http://www.sharekhan.com/http://www.sharekhan.com/