Mallik

A STUDY ON ‘‘SECURITY ANALYSIS & PORTFOLIO MANAGEMENT’’ IN

KARVY STOCK BROKING LIMITED

Submitted in partial Fulfillment of the requirement for the Degree of

MASTER OF BUSINESS ADMINISTRATION Submitted by Mr. K. MALLIKARJUN (11K81E0021) Under the Guidance of Mr. Ch. B. V. L. Sudheer MBA, (Ph.D) Associate Professor

Department of Business Management

St. MARTIN’S ENGINEERING COLLEGE (Affiliated to JNTU, Hyderabad)

DHULAPALLY (V), SECUNDERABAD 500 014

2011 - 2013

A STUDY ON ‘‘SECURITY ANALYSIS & PORTFOLIO MANAGEMENT’’ IN

KARVY STOCK BROKING LIMITED

Submitted in partial Fulfillment of the requirement for the Degree of

MASTER OF BUSINESS ADMINISTRATION Submitted by Mr. K. MALLIKARJUN (11K81E0021) Under the Guidance of Mr. Ch. B. V. L. Sudheer MBA, (Ph.D) Associate Professor

Department of Business Management

St. MARTIN’S ENGINEERING COLLEGE (Affiliated to JNTU, Hyderabad) DHULAPALLY (V), SECUNDERABAD 500 014

2011 - 2013

DECLARATION I hereby declare that the project titled “Security Analysis & Portfolio Management” has been prepared by me as a part of requirement of “Master of Business Administration” degree of JNT University Hyderabad and this study is my original project report.

I K. MALLIKARJUN (11K81E0021) student of St. Martin’s Engineering College pursing the Master of Business Administration in Finance declared that results embodied in this project have not been submitted to any other university or institution for award of Master of Business Administration. The findings and suggestions in this work are based on the information collected by me.

Place: Secunderabad Date:

K. MALLIKARJUN (11K81E0021)

CERTIFICATE This is to certify

that the project entitled “SECURITY ANALYSIS & PORTFOLIO

MANAGEMENT” is a bonafide record done by K. MALLIKARJUN in partial fulfillment for the award of “MASTER OF BUSINESS ADMINISTRATION”

degree , from

JNTU, Hyderabad, for the academic year 2011 - 2013.

Project Guide Mr. Ch. B. V. L. Sudheer MBA, (Ph.D) Associate Professor

Head of the Department Mr. T. Chandra Sekhara Reddy Associate Professor External Evaluator

ACKNOWLEDGEMENTS I would like to express my sincere gratitude to Mr. MUKARJI, ASST MANAGER, my project supervisor, for his guidance and continuous support on this project, without his endeavor the project would not have been completed successfully. I wish to express my sincere thanks to Mr. T. Chandra Shekar Reddy, HOD St.Martin’s Engineering College for valuable suggestions, constant help and encouragement in every stage during the preparation of project report. I extend my humble thank to Mr. Ch. B. V. L. SUDHEER M.B.A., (Ph.D) Associate Professor, Project Guide for his inspiring guidance, valuable suggestions and for rendering helpful hand in completion of the project. I retract my deepest sense of gratitude to Dr. B. P. SINGH, Principal and Management for the facilities provided and indebtedness to my family, friends and others who provided me with their full co-operation and support in successful completion of the project.

Place: Secunderabad Date:

K. MALLIKARJUN

(11K81E0023)

INDEX CHAPTER CHAPTER – 1

CONTENTS  INTRODUCTION

PAGE NO. 1–8

ℑ OBJECTIVE OF THE STUDY ℑ SCOPE OF THE STUDY ℑ METHODOLOGY OF THE STUDY ℑ LIMITATIONS OF THE STUDY

CHAPTER – 2

 INDUSTRY PROFILE

9 – 28

&  COMPANY PROFILE CHAPTER – 3

 THEORETICAL FRAMEWORK

29 – 51

CHAPTER – 4

 DATA ANALYSIS

52 – 70

CHAPTER – 5

& INTERPRETATION  FINDINGS

71

 SUGGESTIONS

73

 BIBLIOGRAPHY

74

ABSTRACT Portfolio Management is used to select a portfolio of new product development projects to achieve the following goals: •

Maximize the profitability or value of the portfolio

•

Provide balance

•

Support the strategy of the enterprise Portfolio Management is the responsibility of the senior management team of an

organization or business unit. This team, which might be called the Product Committee, meets regularly to manage the product pipeline and make decisions about the product portfolio. Often, this is the same group that conducts the stage-gate reviews in the organization. A logical starting point is to create a product strategy - markets, customers, products, strategy approach, competitive emphasis, etc. The second step is to understand the budget or resources available to balance the portfolio against. Third, each project must be assessed for profitability (rewards), investment requirements (resources), risks, and other appropriate factors. The weighting of the goals in making decisions about products varies from company. But organizations must balance these goals: risk vs. profitability, new products vs. improvements, strategy fit vs. reward, market vs. product line, long-term vs. short-term. Several types of techniques have been used to support the portfolio management process: •

Heuristic models

•

Scoring techniques

•

Visual or mapping techniques The earliest Portfolio Management techniques optimized projects' profitability or

financial returns using heuristic or mathematical models. However, this approach paid little attention to balance or aligning the portfolio to the organization's strategy. Scoring techniques weight and score criteria to take into account investment requirements, profitability, risk and strategic alignment. The shortcoming with this approach can be an over emphasis on financial measures and an inability to optimize the mix of projects.

Chapter – 1 

INTRODUCTION 

Need of the study



Objective of the Study



Scope of the Study



Research Methodology



Limitations of the Study

INTRODUCTION Security Analysis is the analysis of tradable financial instruments called securities. These can be classified into debt securities, equities, or some hybrid of the two. More broadly, futures contracts and tradable credit derivatives are sometimes included. Security analysis is typically divided into fundamental analysis, which relies upon the examination of fundamental business factors such as financial statements, and technical analysis, which focuses upon price trends and momentum. Quantitative analysis may use indicators from both areas. Security analysis is about valuing the assets, debt, warrants, and equity of companies from the perspective of outside investors using publicly available information. The security analyst must have a thorough understanding of financial statements, which are an important source of this information. As such, the ability to value equity securities requires cross-disciplinary knowledge in both finance and financial accounting. While there is much overlap between the analytical tools used in security analysis and those used in corporate finance, security analysis tends to take the perspective of potential investors, whereas corporate finance tends to take an inside perspective such as that of a corporate financial manager. Portfolio management and investment decision as a concept came to be familiar with the conclusion of second world war when thing can be in the stock market can be liberally ruined the fortune of individual, companies ,even government ‘s it was then discovered that the investing in various scripts instead of putting all the money in a single securities yielded weather return with low risk percentage, it goes to the credit of HARYMERKOWITZ, 1991 noble laurelled to have pioneered the concept of combining high yielded securities with these low but steady yielding securities to achieve optimum correlation coefficient of shares. Portfolio management refers to the management of portfolio’s for others by professional investment managers it refers to the management of an individual investor’s portfolio by professionally qualified person ranging from merchant banker to specified portfolio company.

Definition by SEBI: A portfolio management 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; port folio 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 is return or risk preference to that of the port folio that he holds. The portfolio analysis is thus an 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; both of them together and cannot be dissociated. Portfolios are combination of assets held by the investors. These combination may be various assets classed like equity and debt or of different issues like Govt. bonds and corporate debts are of various instruments like discount bonds, debentures and blue chip equity nor scripts of emerging Blue chip companies. Portfolio analysis includes portfolio construction, selection of securities 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 and rowing companies and in risky ventures.

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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. 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.

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NEED OF THE STUDY Portfolio management or investment helps investors in effective and efficient management of their investment to achieve this goal. The rapid growth of capital markets in India has opened up new investment avenues for investors. The stock markets have become attractive investment options for the common man. But the need is to be able to effectively and efficiently manage investments in order to keep maximum returns with minimum risk. Hence this study on PORTFOLIO MANAGEMENT” to examine the role process and merits of effective investment management and decision.

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OBJECTIVES OF THE STUDY  To study the investment decision process.  To analysis the risk return characteristics of sample scripts.  Ascertain portfolio weights.  To construct an effective portfolio this offers the maximum return for minimum risk.

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SCOPE OF STUDY This study covers the Markowitz model. 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. Also the study includes the calculation of individual Standard Deviation of securities and ends at the calculation of weights of individual securities involved in the portfolio.

These percentages help in allocating the funds available for

investment based on risky portfolios.

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RESEARCH METHODOLOGY A system of collecting data for research projects is known as research methodology. The data may be collected for either theoretical or practical research. Research methodology is a way to systematically solve the research problem. It may be understood as a science of studying how research is done scientifically. In it we study the various steps that are generally adopted by a researcher in studying his research problem along with the logic behind them. RESEARCH DESIGN Task of defining the research problem is the preparation of the research project, popularly known as the “research design”. Decisions regarding what, where, when, how much, by what means concerning an inquiry or a research study constitute a research design. A research design is the arrangement of conditions for collection and analysis of data in a manner that aims to combine relevance to the research purpose with economy in procedure. It is a framework or blueprint for conducting the marketing research project. DATA COLLECTION Generally the available primary data is used wherever is not available within the time permitted and so secondary data has been generated from secondary sources collected. PRIMARY DATA It includes the data collected from the personal interaction with authorized manner of karvy. SECONDARY DATA The secondary method includes the lectures delivered by the superintend of respective dept. The Boucher and materials provided by Karvy Stock Broking ltd & also collected from www.moneycontrol.com & Dallal Street Magazine.

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LIMITATION OF THE STUDY 

Construction of Portfolio is restricted to two companies based on Markowitz model.



Very few and randomly selected scripts / companies are analyzed from BSE listings.



Data collection was strictly confined to secondary source. No primary data is associated with the project.



Detailed study of the topic was not possible due to limited size of the project.



There was a constraint with regard to time allocation for the research study i.e. for a period of two months.



Only two samples have been selected for constructing a portfolio.



Share prices of scripts of 5 years period was taken.



Duration Period 2 months.



Sample size: 5 years.



To ascertain risk, return and weights.

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Chapter – 2 

INDUSTRIAL PROFILE

INDUSTRIAL PROFILE Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago. The earliest records of security dealings in India are meager and obscure. The East India Company was the dominant institution in those days and business in its loan securities used to be transacted towards the close of the eighteenth century. By 1830's business on corporate stocks and shares in Bank and Cotton presses took place in Bombay. Though the trading list was broader in 1839, there were only half a dozen brokers recognized by banks and merchants during 1840 and 1850. The 1850's witnessed a rapid development of commercial enterprise and brokerage business attracted many men into the field and by 1860 the number of brokers increased into 60. In 1860-61 the American Civil War broke out and cotton supply from United States of Europe was stopped; thus, the 'Share Mania' in India begun. The number of brokers increased to about 200 to 250. However, at the end of the American Civil War, in 1865, a disastrous slump began (for example, Bank of Bombay Share which had touched Rs 2850 could only be sold at Rs. 87). At the end of the American Civil War, the brokers who thrived out of Civil War in 1874, found a place in a street (now appropriately called as Dalal Street) where they would conveniently assemble and transact business. In 1887, they formally established in Bombay, the "Native Share and Stock Brokers' Association" (which is alternatively known as "The Stock Exchange "). In 1895, the Stock Exchange acquired a premise in the same street and it was inaugurated in 1899. Thus, the Stock Exchange at Bombay was consolidated.

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Other Leading Cities in Stock Market Operations: Ahmadabad gained importance next to Bombay with respect to cotton textile industry. After 1880, many mills originated from Ahmadabad and rapidly forged ahead. As new mills were floated, the need for a Stock Exchange at Ahmadabad was realized and in 1894 the brokers formed "The Ahmadabad Share and Stock Brokers' Association". What the cotton textile industry was to Bombay and Ahmadabad, the jute industry was to Calcutta. Also tea and coal industries were the other major industrial groups in Calcutta. After the Share Mania in 1861-65, in the 1870's there was a sharp boom in jute shares, which was followed by a boom in tea shares in the 1880's and 1890's; and a coal boom between 1904 and 1908. On June 1908, some leading brokers formed "The Calcutta Stock Exchange Association". In the beginning of the twentieth century, the industrial revolution was on the way in India with the Swadeshi Movement; and with the inauguration of the Tata Iron and Steel Company Limited in 1907, an important stage in industrial advancement under Indian enterprise was reached. Indian cotton and jute textiles, steel, sugar, paper and flour mills and all companies generally enjoyed phenomenal prosperity, due to the First World War. In 1920, the then demure city of Madras had the maiden thrill of a stock exchange functioning in its midst, under the name and style of "The Madras Stock Exchange" with 100 members. However, when boom faded, the number of members stood reduced from 100 to 3, by 1923, and so it went out of existence. In 1935, the stock market activity improved, especially in South India where there was a rapid increase in the number of textile mills and many plantation companies were floated. In 1937, a stock exchange was once again organized in Madras - Madras Stock Exchange Association (PVT.) Limited. (In 1957 the name was changed to Madras Stock Exchange Limited). Lahore Stock Exchange was formed in 1934 and it had a brief life. It was merged with the Punjab Stock Exchange Limited, which was incorporated in 1936. [10]

Indian Stock Exchanges - An Umbrella Growth: The Second World War broke out in 1939. It gave a sharp boom which was followed by a slump. But, in 1943, the situation changed radically, when India was fully mobilized as a supply base. On account of the restrictive controls on cotton, bullion, seeds and other commodities, those dealing in them found in the stock market as the only outlet for their activities. They were anxious to join the trade and their number was swelled by numerous others. Many new associations were constituted for the purpose and Stock Exchanges in all parts of the country were floated. The Uttar Pradesh Stock Exchange Limited (1940), Nagpur Stock Exchange Limited (1940) and Hyderabad Stock Exchange Limited (1944) were incorporated. In Delhi two stock exchanges - Delhi Stock and Share Brokers' Association Limited and the Delhi Stocks and Shares Exchange Limited - were floated and later in June 1947, amalgamated into the Delhi Stock Exchnage Association Limited.

Post-Independence Scenario: Most of the exchanges suffered almost a total eclipse during depression. Lahore Exchange was closed during partition of the country and later migrated to Delhi and merged with Delhi Stock Exchange. Bangalore Stock Exchange Limited was registered in 1957 and recognized in 1963.

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Most of the other exchanges languished till 1957 when they applied to the Central Government for recognition under the Securities Contracts (Regulation) Act, 1956. Only Bombay, Calcutta, Madras, Ahmadabad, Delhi, Hyderabad and Indore, the well established exchanges, were recognized under the Act. Some of the members of the other Associations were required to be admitted by the recognized stock exchanges on a concessional basis, but acting on the principle of unitary control, all these pseudo stock exchanges were refused recognition by the Government of India and they thereupon ceased to function. Thus, during early sixties there were eight recognized stock exchanges in India (mentioned above). The number virtually remained unchanged, for nearly two decades. During eighties, however, many stock exchanges were established: Cochin Stock Exchange (1980), Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982), and Pune Stock Exchange Limited (1982), Ludhiana Stock Exchange Association Limited (1983), Gauhati Stock Exchange Limited (1984), Kanara Stock Exchange Limited (at Mangalore, 1985), Magadh Stock Exchange Association (at Patna, 1986), Jaipur Stock Exchange Limited (1989), Bhubaneswar Stock Exchange Association Limited (1989), Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989), Vadodara Stock Exchange Limited (at Baroda, 1990) and recently established exchanges Coimbatore and Meerut. Thus, at present, there are totally twenty one recognized stock exchanges in India excluding the Over The Counter Exchange of India Limited (OTCEI) and the National Stock Exchange of India Limited (NSEIL). The Table given below portrays the overall growth pattern of Indian stock markets since independence. It is quite evident from the Table that Indian stock markets have not only grown just in number of exchanges, but also in number of listed companies and in capital of listed companies. The remarkable growth after 1985 can be clearly seen from the Table, and this was due to the favouring government policies towards security market industry.

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Trading Pattern of the Indian Stock Market: Trading in Indian stock exchanges are limited to listed securities of public limited companies. They are broadly divided into two categories, namely, specified securities (forward list) and non-specified securities (cash list). Equity shares of dividend paying, growth-oriented companies with a paid-up capital of atleast Rs.50 million and a market capitalization of atleast Rs.100 million and having more than 20,000 shareholders are, normally, put in the specified group and the balance in non-specified group. Two types of transactions can be carried out on the Indian stock exchanges: (a) spot delivery transactions "for delivery and payment within the time or on the date stipulated when entering into the contract which shall not be more than 14 days following the date of the contract": and (b) forward transactions "delivery and payment can be extended by further period of 14 days each so that the overall period does not exceed 90 days from the date of the contract". The latter is permitted only in the case of specified shares. The brokers who carry over the outstanding pay carry over charges (cantango or backwardation) which are usually determined by the rates of interest prevailing. A member broker in an Indian stock exchange can act as an agent, buy and sell securities for his clients on a commission basis and also can act as a trader or dealer as a principal, buy and sell securities on his own account and risk, in contrast with the practice prevailing on New York and London Stock Exchanges, where a member can act as a jobber or a broker only. The nature of trading on Indian Stock Exchanges are that of age old conventional style of face-to-face trading with bids and offers being made by open outcry. However, there is a great amount of effort to modernize the Indian stock exchanges in the very recent times.

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Over The Counter Exchange of India (OTCEI): The traditional trading mechanism prevailed in the Indian stock markets gave way to many functional inefficiencies, such as, absence of liquidity, lack of transparency, unduly long settlement periods and benami transactions, which affected the small investors to a great extent. To provide improved services to investors, the country's first ringless, scripless, electronic stock exchange - OTCEI - was created in 1992 by country's premier financial institutions - Unit Trust of India, Industrial Credit and Investment Corporation of India, Industrial Development Bank of India, SBI Capital Markets, Industrial Finance Corporation of India, General Insurance Corporation and its subsidiaries and CanBank Financial Services. Trading at OTCEI is done over the centres spread across the country. Securities traded on the OTCEI are classified into: •

Listed Securities - The shares and debentures of the companies listed on the OTC can be bought or sold at any OTC counter all over the country and they should not be listed anywhere else

•

Permitted Securities - Certain shares and debentures listed on other exchanges and units of mutual funds are allowed to be traded

•

Initiated debentures - Any equity holding atleast one lakh debentures of particular scrip can offer them for trading on the OTC. OTC has a unique feature of trading compared to other traditional exchanges.

That is, certificates of listed securities and initiated debentures are not traded at OTC. The original certificate will be safely with the custodian. But, a counter receipt is generated out at the counter which substitutes the share certificate and is used for all transactions. In the case of permitted securities, the system is similar to a traditional stock exchange. The difference is that the delivery and payment procedure will be completed within 14 days.

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Compared to the traditional Exchanges, OTC Exchange network has the following advantages: •

OTCEI has widely dispersed trading mechanism across the country which provides greater liquidity and lesser risk of intermediary charges.

•

Greater transparency and accuracy of prices is obtained due to the screen-based scripless trading.

•

Since the exact price of the transaction is shown on the computer screen, the investor gets to know the exact price at which s/he is trading.

•

Faster settlement and transfer process compared to other exchanges.

•

In the case of an OTC issue (new issue), the allotment procedure is completed in a month and trading commences after a month of the issue closure, whereas it takes a longer period for the same with respect to other exchanges. Thus, with the superior trading mechanism coupled with information

transparency investors are gradually becoming aware of the manifold advantages of the OTCEI.

National Stock Exchange (NSE): With the liberalization of the Indian economy, it was found inevitable to lift the Indian stock market trading system on par with the international standards. On the basis of the recommendations of high powered Pherwani Committee, the National Stock Exchange was incorporated in 1992 by Industrial Development Bank of India, Industrial Credit and Investment Corporation of India, Industrial Finance Corporation of India, all Insurance Corporations, selected commercial banks and others. Trading at NSE can be classified under two broad categories: (a) Wholesale debt market and (b) Capital market. Wholesale debt market operations are similar to money market operations institutions and corporate bodies enter into high value transactions in financial instruments such as government securities, treasury bills, public sector unit bonds, commercial paper, certificate of deposit, etc. There are two kinds of players in NSE: [15]

(a) Trading members and (b) Participants. Recognized members of NSE are called trading members who trade on behalf of themselves and their clients. Participants include trading members and large players like banks who take direct settlement responsibility. Trading at NSE takes place through a fully automated screen-based trading mechanism which adopts the principle of an order-driven market. Trading members can stay at their offices and execute the trading, since they are linked through a communication network. The prices at which the buyer and seller are willing to transact will appear on the screen. When the prices match the transaction will be completed and a confirmation slip will be printed at the office of the trading member. NSE has several advantages over the traditional trading exchanges. They are as follows: •

NSE brings an integrated stock market trading network across the nation.

•

Investors can trade at the same price from anywhere in the country since intermarket operations are streamlined coupled with the countrywide access to the securities.

•

Delays in communication, late payments and the malpractice’s prevailing in the traditional trading mechanism can be done away with greater operational efficiency and informational transparency in the stock market operations, with the support of total computerized network. Unless stock markets provide professionalized service, small investors and

foreign investors will not be interested in capital market operations. And capital market being one of the major source of long-term finance for industrial projects, India cannot afford to damage the capital market path. In this regard NSE gains vital importance in the Indian capital market system.

Preamble: Often, in the economic literature we find the terms ‘development’ and ‘growth’ are used interchangeably. However, there is a difference. Economic growth refers to the [16]

sustained increase in per capita or total income, while the term economic development implies sustained structural change, including all the complex effects of economic growth. In other words, growth is associated with free enterprise, where as development requires some sort of control and regulation of the forces affecting development. Thus, economic development is a process and growth is a phenomenon. Economic planning is very critical for a nation, especially a developing country like India to take the country in the path of economic development to attain economic growth.

Why Economic Planning for India? One of the major objective of planning in India is to increase the rate of economic development, implying that increasing the rate of capital formation by raising the levels of income, saving and investment. However, increasing the rate of capital formation in India is beset with a number of difficulties. People are poverty ridden. Their capacity to save is extremely low due to low levels of income and high propensity to consume. Therefore, the rate of investment is low which leads to capital deficiency and low productivity. Low productivity means low income and the vicious circle continues. Thus, to break this vicious economic circle, planning is inevitable for India. The market mechanism works imperfectly in developing nations due to the ignorance and unfamiliarity with it. Therefore, to improve and strengthen market mechanism planning is very vital. In India, a large portion of the economy is nonmonitised; the product, factors of production, money and capital markets is not organized properly. Thus the prevailing price mechanism fails to bring about adjustments between aggregate demand and supply of goods and services. Thus, to improve the economy, market imperfections has to be removed; available resources has to be mobilized and utilized efficiently; and structural rigidities has to be overcome. These can be attained only through planning.

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In India, capital is scarce; and unemployment and disguised unemployment is prevalent. Thus, where capital was being scarce and labour being abundant, providing useful employment opportunities to an increasing labour force is a difficult exercise. Only a centralized planning model can solve this macro problem of India. Further, in a country like India where agricultural dependence is very high, one cannot ignore this segment in the process of economic development. Therefore, an economic development model has to consider a balanced approach to link both agriculture and industry and lead for a paralleled growth. Not to mention, both agriculture and industry cannot develop without adequate infrastructural facilities which only the state can provide and this is possible only through a well carved out planning strategy. The government’s role in providing infrastructure is unavoidable due to the fact that the role of private sector in infrastructural development of India is very minimal since these infrastructure projects are considered as unprofitable by the private sector. Further, India is a clear case of income disparity. Thus, it is the duty of the state to reduce the prevailing income inequalities. This is possible only through planning.

Planning History of India: The development of planning in India began prior to the first Five Year Plan of independent India, long before independence even. The idea of central directions of resources to overcome persistent poverty gradually, because one of the main policies advocated by nationalists early in the century. The Congress Party worked out a program for economic advancement during the 1920’s, and 1930’s and by the 1938 they formed a National Planning Committee under the chairmanship of future Prime Minister Nehru. The Committee had little time to do anything but prepare programs and reports before the Second World War which put an end to it. But it was already more than an academic exercise remote from administration. Provisional government had been elected in 1938, and the Congress Party leaders held positions of responsibility. After the war, the Interim government of the pre-independence years appointed an Advisory Planning Board. The Board produced a number of somewhat disconnected Plans itself. But, more important in the long run, it recommended the appointment of a Planning Commission. The Planning Commission did not start work properly until 1950. During the first three years of independent India, the state and economy scarcely had a stable structure at all, while millions of refugees crossed the newly established borders of India and Pakistan, [18]

and while ex-princely states (over 500 of them) were being merged into India or Pakistan. The Planning Commission as it now exists, was not set up until the new India had adopted its Constitution in January 1950.

Objectives of Indian Planning: The Planning Commission was set up the following Directive principles: •

To make an assessment of the material, capital and human resources of the country, including technical personnel, and investigate the possibilities of augmenting such of these resources as are found to be deficient in relation to the nation’s requirement.

•

To formulate a plan for the most effective and balanced use of the country’s resources.

•

Having determined the priorities, to define the stages in which the plan should be carried out, and propose the allocation of resources for the completion of each stage.

•

To indicate the factors which are tending to retard economic development, and determine the conditions which, in view of the current social and political situation, should be established for the successful execution of the Plan.

•

To determine the nature of the machinery this will be necessary for securing the successful implementation of each stage of Plan in all its aspects.

•

To appraise from time to time the progress achieved in the execution of each stage of the Plan and recommend the adjustments of policy and measures that such appraisals may show to be necessary.

•

To make such interim or auxiliary recommendations as appear to it to be appropriate either for facilitating the discharge of the duties assigned to it or on a consideration of the prevailing economic conditions, current policies, measures and development programs; or on an examination of such specific problems as may be referred to it for advice by Central or State Governments.

The long-term general objectives of Indian Planning are as follows: •

Increasing National Income

•

Reducing inequalities in the distribution of income and wealth

•

Elimination of poverty [19]

•

Providing additional employment; and

•

Alleviating bottlenecks in the areas of : agricultural production, manufacturing capacity for producer’s goods and balance of payments. Economic growth, as the primary objective has remained in focus in all Five Year

Plans. Approximately, economic growth has been targeted at a rate of five per cent per annum. High priority to economic growth in Indian Plans looks very much justified in view of long period of stagnation during the British rule.

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Chapter – 2 

COMPANY PROFILE

COMPANY PROFILE Karvy Stock Broking Limited, one of the cornerstones of the Karvy edifice, flows freely towards attaining diverse goals of the customer through varied services. Creating a plethora of opportunities for the customer by opening up investment vistas backed by research-based advisory services. Here, growth knows no limits and success recognizes no boundaries. Helping the customer create waves in his portfolio and empowering the investor completely is the ultimate goal.

Stock Broking Services: It is an undisputed fact that the stock market is unpredictable and yet enjoys a high success rate as a wealth management and wealth accumulation option. The difference between unpredictability and a safety anchor in the market is provided by indepth knowledge of market functioning and changing trends, planning with foresight and choosing one's options with care. This is what we provide in our Stock Broking services. We offer services that are beyond just a medium for buying and selling stocks and shares. Instead we provide services which are multi dimensional and multi-focused in their scope. There are several advantages in utilizing our Stock Broking services, which are the reasons why it is one of the best in the country. We offer trading on a vast platform National Stock Exchange and Bombay Stock Exchange. More importantly, we make trading safe to the maximum possible extent, by accounting for several risk factors and planning accordingly. We are assisted in this task by our in-depth research, constant feedback and sound advisory facilities. Our highly skilled research team, comprising of technical analysts as well as fundamental specialists, secure result-oriented information on market trends, market analysis and market predictions. This crucial information is given as a constant feedback to our customers, through daily reports delivered thrice daily ; The Pre-session Report, where market scenario for the day is predicted, The Mid-session Report, timed to arrive during lunch break , where the market forecast for the rest of the day is given and The Postsession Report, the final report for the day, where the market and the report itself is reviewed. To add to this repository of information, we publish a monthly magazine "Karvy The Finapolis", which analyzes the latest stock market trends and takes a close look at the various investment options, and products available in the market, while a [21]

weekly report, called "Karvy Bazaar Baatein", keeps you more informed on the immediate trends in the stock market. In addition, our specific industry reports give comprehensive information on various industries. Besides this, we also offer special portfolio analysis packages that provide daily technical advice on scrips for successful portfolio management and provide customized advisory services to help you make the right financial moves that are specifically suited to your portfolio. Our Stock Broking services are widely networked across India, with the number of our trading terminals providing retail stock broking facilities. Our services have increasingly offered customer oriented convenience, which we provide to a spectrum of investors, high-networth or otherwise, with equal dedication and competence. But true to our spirit, this success is not our final destination, but just a platform to launch further enhanced quality services to provide you the latest in convenient, customer-friendly stock management. Over the years we have ensured that the trust of our customers is our biggest returns. Factors such as our success in the Electronic custody business has helped build on our tradition of trust even more. Consequentially our retail client base expanded very fast. To empower the investor further we have made serious efforts to ensure that our research calls are disseminated systematically to all our stock broking clients through various delivery channels like email, chat, SMS, phone calls etc. Our foray into commodities broking has been path breaking and we are in the process of converting existing traders in commodities into the more organized mainstream of trading in commodity futures, both as a trading and risk hedging mechanism. In the future, our focus will be on the emerging businesses and to meet this objective, we have enhanced our manpower and revitalized our knowledge base with enhances focus on Futures and Options as well as the commodities business.

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Depository Participants: The onset of the technology revolution in financial services Industry saw the emergence of Karvy as an electronic custodian registered with National Securities Depository Ltd (NSDL) and Central Securities Depository Ltd (CSDL) in 1998. Karvy set standards enabling further comfort to the investor by promoting paperless trading across the country and emerged as the top 3 Depository Participants in the country in terms of customer serviced. Offering a wide trading platform with a dual membership at both NSDL and CDSL, we are a powerful medium for trading and settlement of dematerialized shares. We have established live DPMs, Internet access to accounts and an easier transaction process in order to offer more convenience to individual and corporate investors. A team of professional and the latest technological expertise allocated exclusively to our demat division including technological enhancements like SPEED-e, make our response time quick and our delivery impeccable. A wide national network makes our efficiencies accessible to all. Karvy Consultants Limited was started in the year 1981, with the vision and enterprise of a small group of practicing Chartered Accountants. Initially it was started with consulting and financial accounting automation, and carved inroads into the field of registry and share accounting by 1985. Since then, it has utilized its experience and superlative expertise to go from strength to strength…to better its services, to provide new ones, to innovate, diversify and in the process, evolved as one of India’s premier integrated financial service enterprise. Today, Karvy has access to millions of Indian shareholders, besides companies, banks, financial institutions and regulatory agencies. Over the past one and half decades, Karvy has evolved as a veritable link between industry, finance and people. In January 1998, Karvy became the first Depository Participant in Andhra Pradesh. An ISO 9002 company, Karvy's commitment to quality and retail reach has made it an integrated financial services company.

An Overview: [23]

KARVY, is a premier integrated financial services provider, and ranked among the top five in the country in all its business segments, services over 16 million individual investors in various capacities, and provides investor services to over 300 corporates, comprising the who is who of Corporate India. KARVY covers the entire spectrum of financial services such as Stock broking, Depository Participants, Distribution of financial products - mutual funds, bonds, fixed deposit, equities, Insurance Broking, Commodities Broking, Personal Finance Advisory Services, Merchant Banking & Corporate Finance, placement of equity, IPOs, among others. Karvy has a professional management team and ranks among the best in technology, operations and research of various industrial segments. Today, Karvy service over 6 lakhs customer accounts spread across over 250 cities/towns in India and serves more than 75 million shareholders across 7000 corporate clients and makes its presence felt in over 12 countries across 5 continents. All of Karvy services are also backed by strong quality aspects, which have helped Karvy to be certified as an ISO 9002 company by DNV.

ACHIEVEMENTS:  Among the top 5 stock brokers in India (4% of NSE volumes).  India's No. 1 Registrar & Securities Transfer Agents.  Among the top 3 Depository Participants.  Largest Network of Branches & Business Associates.  ISO 9001:2000 certified operations by DNV.  Among top 10 Investment bankers.  Largest Distributor of Financial Products.  Adjudged as one of the top 50 IT uses in India by MIS Asia.  Full Fledged IT driven operations .  First ISO-9002 Certified Registrars in India.  Ranked as “The Most Admired Registrar” by MARG.  Largest mobilize of funds as per PRIME DATABASE.  First depository participant from Andhra Pradesh.  Handled over 500 public issues as Registrars. [24]

 Handling the Reliance account, which accounts for nearly 10 million account holders?

Range of services: •

Stock broking services

•

Distribution of Financial Products (investments & loan products)

•

Depository Participant services

•

IT enabled services

•

Personal finance Advisory Services

•

Private Client Group

•

Debt market services

•

Insurance & merchant banking

•

Mutual Fund Services

•

Corporate Shareholder Services

•

Other global services Besides these, they also offer special portfolio analysis packages that provide

daily technical advice on scrips for successful portfolio management and provide customized advisory services to help customers make the right financial moves that are specifically suited to their portfolio. They are continually engaged in designing the right investment portfolio for each customer according to individual needs and budget considerations.

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Karvy Consultants limited deals in Registrar and Investment Services. Karvy is one of the early entrants registered as Depository Participant with NSDL (National Securities Depository Limited), the first Depository in the country and then with CDSL (Central Depository Services Limited).

Karvy stock broking is a member of National Stock Exchange (NSE), The Bombay Stock Exchange (BSE), and The Hyderabad Stock Exchange (HSE). The services provided are multi dimensional and multi-focused in their scope: to analyze the latest stock market trends and to take a close looks at the various investment options and products available in the market. Besides this, they also offer special portfolio analysis packages.

The paradigm shift from pure selling to knowledge based selling drives the business today. The monthly magazine, Finapolis, provides up-dated market information on market trends, investment options, opinions etc. Thus empowering the investor to base every financial move on rational thought and prudent analysis and embark on the path to wealth creation.

Karvy is recognized as a leading merchant banker in the country, Karvy is registered with SEBI as a Category I merchant banker. This reputation was built by capitalizing on opportunities in corporate consolidations, mergers and acquisitions and corporate restructuring.

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Karvy has a tie up with the world’s largest transfer agent, the leading Australian company, Computer share Limited. It has attained a position of immense strength as a provider of across-the-board transfer agency services to AMCs, Distributors and Investors. Besides providing the entire back office processing, it also provides the link between various Mutual Funds and the investor.

Karvy global services limited covers Banking, Financial and Insurance Services (BFIS), Retail and Merchandising, Leisure and Entertainment, Energy and Utility and Healthcare sectors.

Karvy comtrade limited trades in all goods and products of agricultural and mineral origin that include lucrative commodities like gold and silver and popular items like

oil,

pulses

and

cotton

through

a

well-systematized

trading

platform.

Karvy Insurance Broking Pvt. Ltd. provides both life and non-life insurance products to retail individuals, high net-worth clients and corporates. With Indian markets seeing a sea change, both in terms of investment pattern and attitude of investors, insurance is no more seen as only a tax saving product but also as an investment product.

Karvy Inc. is located in New York to provide various financial products and information on Indian equities to potential foreign institutional investors (FIIs) in the region. This entity would extensively facilitate various businesses of Karvy viz., stock broking (Indian equities), research and investment by QIBs in Indian markets for both secondary and primary offerings. [27]

Quality Policy: To achieve and retain leadership, Karvy shall aim for complete customer satisfaction, by combining its human and technological resources, to provide superior quality financial services. In the process, Karvy will strive to exceed Customer's expectations.

Quality Objectives: As per the Quality Policy, Karvy will:  Build in-house processes that will ensure transparent and harmonious relationships with its clients and investors to provide high quality of services.  Establish a partner relationship with its investor service agents and vendors that will help in keeping up its commitments to the customers.  Provide high quality of work life for all its employees and equip them with adequate knowledge & skills so as to respond to customer's needs.  Continue to uphold the values of honesty & integrity and strive to establish unparalleled standards in business ethics.  Use state-of-the art information technology in developing new and innovative financial products and services to meet the changing needs of investors and clients.  Strive to be a reliable source of value-added financial products and services and constantly guide the individuals and institutions in making a judicious choice of same.  Strive to keep all stake-holders (shareholders, clients, investors, employees, suppliers and regulatory authorities) proud and satisfied.

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Chapter – 3 

REVIEW OF LITERATURE

REVIEW OF LITERATURE A security is a fungible, negotiable instrument representing financial value. Securities are broadly categorized into debt securities (such as banknotes, bonds and debentures) and equity securities, e.g., common stocks; and derivative contracts, such as forwards, futures, options and swaps. The company or other entity issuing the security is called the issuer. A country's regulatory structure determines what qualifies as a security. For example, private investment pools may have some features of securities, but they may not be registered or regulated as such if they meet various restrictions. Securities may be represented by a certificate or, more typically, "noncertificated", that is in electronic or "book entry" only form. Certificates may be bearer, meaning they entitle the holder to rights under the security merely by holding the security, or registered, meaning they entitle the holder to rights only if he or she appears on a security register maintained by the issuer or an intermediary. They include shares of corporate stock or mutual funds, bonds issued by corporations or governmental agencies, stock options or other options, limited partnership units, and various other formal investment instruments that are negotiable and fungible. Corporations or governmental agencies, stock options or other options, limited partnership units, and various other formal investment instruments those are negotiable and fungible

PORTFOLIO: A portfolio is a collection of securities since it is really desirable to invest the entire funds of an individual or an institution or a single security, it is essential that every security be viewed in a portfolio context. Thus it seems logical that the expected return of the portfolio. Portfolio analysis considers the determine of future risk and return in holding various blends of individual securities. Portfolio expected return is a weighted average of the expected return of the individual securities but portfolio variance, in short contrast, can be something reduced portfolio risk is because risk depends greatly on the co-variance among returns of individual securities. Portfolios, which are combination of securities, may or may not take on the aggregate characteristics of their individual parts. [29]

Since portfolios expected return is a weighted average of the expected return of its securities, the contribution of each security the portfolio’s expected returns depends on its expected returns and its proportionate share of the initial portfolio’s market value. It follows that an investor who simply wants the greatest possible expected return should hold one security; the one which is considered to have a greatest expected return. Very few investors do this, and very few investment advisors would counsel such and extreme policy instead, investors should diversify, meaning that their portfolio should include more than one security.

OBJECTIVES OF 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.  Appreciation of capital.  More liquidity.  Safety of investment.  Tax benefits.

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Portfolio management services helps investors to make a wise choice between alternative investments with pit any post trading hassle’s this service renders optimum returns to the investors by proper selection of continuous change of one plan to another plane with in the same scheme, any portfolio management must specify the objectives like maximum return’s, and risk capital appreciation, safety etc in their offer.

Return From the angle of securities can be fixed income securities such as: (a) Debentures –partly convertibles and non-convertibles debentures debt with tradable Warrants. (b) Preference shares (c) Government securities and bonds (d) Other debt instruments (e) Variable income securities (f) Equity shares (g) Money market securities like treasury bills commercial papers etc. Portfolio managers has to decide up on the mix of securities on the basis of contract with the client and objectives of portfolio

NEED FOR PORTFOLIO MANAGEMENT: Portfolio management is a process encompassing many activities of investment in assets and securities. It is a dynamic and flexible concept and involves regular and systematic analysis, judgment and action. The objective of this service is to help the unknown and investors with the expertise of professionals in investment portfolio management. It involves construction of a portfolio based upon the investor’s objectives, constraints, preferences for risk and returns and tax liability. The portfolio is reviewed and adjusted from time to time in tune with the market conditions. The evaluation of portfolio is to be done in terms of targets set for risk and returns. The changes in the portfolio are to be effected to meet the changing condition. Portfolio construction refers to the allocation of surplus funds in hand among a variety of financial assets open for investment. Portfolio theory concerns itself with the [31]

principles governing such allocation. The modern view of investment is oriented more go towards the assembly of proper combination of individual securities to form investment portfolio. A combination of securities held together will give a beneficial result if they grouped in a manner to secure higher returns after taking into consideration the risk elements. The modern theory is the view that by diversification risk can be reduced. Diversification can be made by the investor either by having a large number of shares of companies in different regions, in different industries or those producing different types of product lines. Modern theory believes in the perspective of combination of securities under constraints of risk and returns.

PORTFOLIO MANAGEMENT PROCESS: Investment management is a complex activity which may be broken down into the following steps:

1. Specification of investment objectives and constraints: The typical objectives sought by investors are current income, capital appreciation, and safety of principle. The relative importance of these objectives should be specified further the constraints arising from liquidity, time horizon, tax and special circumstances must be identified.

2. Choice of the asset mix : The most important decision in portfolio management is the asset mix decision very broadly; this is concerned with the proportions of ‘stocks’ (equity shares and units/shares of equity-oriented mutual funds) and ‘bonds’ in the portfolio. The appropriate ‘stock-bond’ mix depends mainly on the risk tolerance and investment horizon of the investor.

ELEMENTS OF PORTFOLIO MANAGEMENT: Portfolio management is on-going process involving the following basic tasks: 

Identification of the investor’s objectives, constraints and preferences.

[32]



Strategies are to be developed and implemented in tune with investment policy formulated.



Review and monitoring of the performance of the portfolio.



Finally the evaluation of the portfolio.

Risk: Risk is uncertainty of the income /capital appreciation or loss or both. All investments are risky. The higher the risk taken, the higher is the return. But proper management of risk involves the right choice of investments whose risks are compensating. The total risks of two companies may be different and even lower than the risk of a group of two companies if their companies are offset by each other.

SOURCES OF INVESTMENT RISK: Business risk: As a holder of corporate securities (equity shares or debentures), you are exposed to the risk of poor business performance. This may be caused by a variety of factors like heightened competition, emergence of new technologies, development of substitute products, shifts in consumer preferences, inadequate supply of essential inputs, changes in governmental policies, and so on.

Interest Rate Risk: The changes in interest rate have a bearing on the welfare on investors. As the interest rate goes up, the market price of existing firmed income securities falls, and vice versa. This happens because the buyer of a fixed income security would not buy it at its par value of face value o its fixed interest rate is lower than the prevailing interest rate on a similar security. For example, a debenture that has a face value of RS. 100 and a fixed rate of 12% will sell a discount if the interest rate moves up from, say 12% to 14%.while the chances in interest rate have a direct bearing on the prices of fixed income securities, they affect equity prices too, albeit somewhat indirectly.

The two major types of risks are:  Systematic or market related risk.  Unsystematic or company related risks. [33]

Systematic Risks: affected from the entire market are (the problems, raw material availability, tax policy or government policy, inflation risk, interest risk and financial risk). It is managed by the use of Beta of different company shares.

The Unsystematic Risks are mismanagement, increasing inventory, wrong financial policy, defective marketing etc. this is diversifiable or avoidable because it is possible to eliminate or diversify away this component of risk to a considerable extent by investing in a large portfolio of securities. The unsystematic risk stems from inefficiency magnitude of those factors different form one company to another.

RETURNS ON PORTFOLIO: Each security in a portfolio contributes return in the proportion of its investments in security. Thus the portfolio expected return is the weighted average of the expected return, from each of the securities, with weights representing the proportions share of the security in the total investment. Why does an investor have so many securities in his portfolio? If the security ABC gives the maximum return why not he invests in that security all his funds and thus maximize return? The answer to this questions lie in the investor’s perception of risk attached to investments, his objectives of income, safety, appreciation, liquidity and hedge against loss of value of money etc. this pattern of investment in different asset categories, types of investment, etc., would all be described under the caption of diversification, which aims at the reduction or even elimination of non-systematic risks and achieve the specific objectives of investors

[34]

RISK ON PORTFOLIO: The expected returns from individual securities carry some degree of risk. Risk on the portfolio is different from the risk on individual securities. The risk is reflected in the variability of the returns from zero to infinity. Risk of the individual assets or a portfolio is measured by the variance of its return. The expected return depends on the probability of the returns and their weighted contribution to the risk of the portfolio. These are two measures of risk in this context one is the absolute deviation and other standard deviation. Most investors invest in a portfolio of assets, because as to spread risk by not putting all eggs in one basket. Hence, what really matters to them is not the risk and return of stocks in isolation, but the risk and return of the portfolio as a whole. Risk is mainly reduced by Diversification.

RISK RETURN ANALYSIS: All investment has some risk. Investment in shares of companies has its own risk or uncertainty; these risks arise out of variability of yields and uncertainty of appreciation or depreciation of share prices, losses of liquidity etc. The risk over time can be represented by the variance of the returns. While the return over time is capital appreciation plus payout, divided by the purchase price of the share.

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Normally, the higher the risk that the investor takes, the higher is the return. There is, however, a risk less return on capital of about 12% which is the bank, rate charged by the R.B.I or long term, yielded on government securities at around 13% to 14%. This risk less return refers to lack of variability of return and no uncertainty in the repayment or capital. But other risks such as loss of liquidity due to parting with money etc., may however remain, but are rewarded by the total return on the capital. Risk-return is subject to variation and the objectives of the portfolio manager are to reduce that variability and thus reduce the risk by choosing an appropriate portfolio. Traditional approach advocates that one security holds the better, it is according to the modern approach diversification should not be quantity that should be related to the quality of scripts which leads to quality of portfolio. Experience has shown that beyond the certain securities by adding more securities expensive.

Simple Diversification Reduces: An asset’s total risk can be divided into systematic plus unsystematic risk, as shown below: Systematic risk (undiversifiable risk) + unsystematic risk (diversified risk) =Total risk =Var (r). Unsystematic risk is that portion of the risk that is unique to the firm (for example, risk due to strikes and management errors.) Unsystematic risk can be reduced to zero by simple diversification. Simple diversification is the random selection of securities that are to be added to a portfolio. As the number of randomly selected securities added to a portfolio is increased, the level of unsystematic risk approaches zero. However market related systematic risk cannot be reduced by simple diversification. This risk is common to all securities.

Persons involved in portfolio management: Investor: [36]

Are the people who are interested in investing their funds?

Portfolio Managers: Is a person who is in the wake of a contract agreement with a client, advices or directs or undertakes on behalf of the clients, the management or distribution or management of the funds of the client as the case may be.

Discretionary Portfolio Manager: Means a manager who exercise under a contract relating to a portfolio management exercise any degree of discretion as to the investment or management of portfolio or securities or funds of clients as the case may be. The relationship between an investor and portfolio manager is of a highly interactive nature The portfolio manager carries out all the transactions pertaining to the investor under the power of attorney during the last two decades, and increasing complexity was witnessed in the capital market

and its trading procedures in this context

a key

(uninformed) investor formed ) investor found him self in a tricky situation , to keep track of market movement ,update his knowledge, yet stay in the capital market and make money , therefore in looked forward to resuming help from portfolio manager to do the job for him .The portfolio management seeks to strike a balance between risk’s and return. The generally rule in that greater risk more of the profits but S.E.B.I. in its guidelines prohibits portfolio managers to promise any return to investor. Portfolio management is not a substitute to the inherent risks associated with equity investment.

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

Functions of Portfolio Managers: •

Advisory Role: advice new investments, review the existing ones, identification of objectives, recommending high yield securities etc.

•

Conducting Market and Economic Service: this is essential for recommending good yielding securities they have to study the current fiscal policy, budget proposal; individual policies etc further portfolio manager should take in to account the credit policy, industrial growth, foreign exchange possible change in corporate law’s etc.

•

Financial Analysis: he should evaluate the financial statement of company in order to understand, their net worth future earnings, prospectus and strength.

•

Study of stock market : he should observe the trends at various stock exchange and analysis scripts so that he is able to identify the right securities for investment [38]

Study of industry: he should study the industry to know its future prospects,

•

technical changes etc, required for investment proposal he should also see the problem’s of the industry.

Decide the type of port folio: keeping in mind the objectives of portfolio a

•

portfolio manager has to decide weather the portfolio should comprise equity preference

shares, debentures,

convertibles,

non-convertibles

or partly

convertibles, money market, securities etc or a mix of more than one type of proper mix ensures higher safety, yield and liquidity coupled with balanced risk techniques of portfolio management. A portfolio manager in the Indian context has been Brokers (Big brokers) who on the basis of their experience, market trends, Insider trader, helps the limited knowledge persons. Registered merchant bankers can act’s as portfolio manager’s Investor’s must look forward, for qualification and performance and ability and research base of the portfolio managers.

Technique’s of portfolio management: As of now the under noted technique of portfolio management: are in vogue in our country 1. Equity Portfolio: Is influenced by internal and external factors the internal factors affect the inner working of the company’s growth plans are analyzed with referenced to Balance sheet, profit & loss a/c (account) of the company. Among the external factor are changes in the government policies, Trade cycle’s, Political stability etc. 2. Equity Stock Analysis: under this method the probable future value of a share of a company is determined it can be done by ratio’s of earning per share of the company and price earnings ratio.

EPS =

Profit After Tax No. of Equity Shares

[39]

Price Earning Ratio =

Market Price Earnings per Share

One can estimate trend of earning by EPS, which reflects trends of earning quality of company, dividend policy, and quality of management. Price earnings ratio indicate a confidence of market about the company future, a high rating is preferable.

The following points must be considered by portfolio managers while analyzing the securities. 1. Nature of the industry and its product: long term trends of industries, competition within, and outside the industry, Technical changes, labour relations, sensitivity, to Trade cycle.

2. Industrial analysis of prospective earnings, cash flows, working capital, dividends, etc. 3. Ratio analysis: Ratio such as debt equity ratio’s current ratio’s net worth, profit earnings ratio, return on investment, and are worked out to decide the portfolio. The wise principle of portfolio management suggests that “Buy when the market is low or BEARISH, and sell when the market is rising or BULLISH”. Stock market operation can be analyzed by: a) Fundamental approach :- based on intrinsic value of share’s b) Technical approach:-based on Dowjone’s theory, Random walk theory, etc.

Prices are based upon demand and supply of the market. i. Traditional approach assumes that ii. Objectives are maximization of wealth and minimization of risk. iii. Diversification reduces risk and volatility. iv. Variable returns, high illiquidity; etc. Capital Assets pricing approach (CAPM) it pay’s more weight age, to risk or portfolio diversification of portfolio.

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Diversification of portfolio reduces risk but it should be based on certain assessment such as: Trend analysis of past share prices. Valuation of intrinsic value of company (trend-marker moves are known for their Uncertainties they are compared to be high, and low prompts of wave market trends are constituted by these waves it is a pattern of movement based on past). The following rules must be studied while cautious portfolio manager before decide to invest their funds in portfolio’s. 1. Compile the financials of the companies in the immediate past 3 years such as turnover, gross profit, net profit before tax, compare the profit earning of company with that of the industry average nature of product manufacture service render and it future demand ,know about the promoters and their back ground, dividend track record, bonus shares in the past 3 to 5 years ,reflects company’s commitment to share holders the relevant information can be accessed from the RDC(registrant of companies)published financial results financed quarters, journals and ledgers. 2. Watch out the highs and lows of the scripts for the past 2 to 3 years and their timing cyclical scripts have a tendency to repeat their performance ,this hypothesis can be true of all other financial , 3.

The higher the trading volume higher is liquidity and still higher the chance of

speculation, it is futile to invest in such shares who’s daily movements cannot be kept track, if you want to reap rich returns keep investment over along horizon and it will offset the wild intraday trading fluctuation’s, the minor movement of scripts may be ignored, we must remember that share market moves in phases and the span of each phase is 6 months to 5 years. a.

Long term of the market should be the guiding factor to enable you to invest and quit. The market is now bullish and the trend is likely to continue for some more time.

b.

UN tradable shares must find a last place in portfolio apart from return; even capital invested is eroded with no way of exit with no way of exit with inside. [41]

How at all one should avoid such scripts in future? (1) Never invest on the basis of an insider trader tip in a company which is not sound (insider trader is person who gives tip for trading in securities based on prices sensitive up price sensitive un published information relating to such security). (2) Never invest in the so called promoter quota of lesser known company (3) Never invest in a company about which you do not have appropriate knowledge. (4) Never at all invest in a company which doesn’t have a stringent financial record your portfolio should not a stagnate (5) Shuffle the portfolio and replace the slow moving sector with active ones , investors were shatter when the technology , media, software , stops have taken a down slight. (6) Never fall to the magic of the scripts don’t confine to the blue chip company‘s, look out for other portfolio that ensure regular dividends. (7) In the same way never react to sudden raise or fall in stock market index such fluctuation is movement minor correction’s in stock market held in consolidation of market their by reading out a weak player often taste on wait for the dust and dim to settle to make your move” .

[42]

PORT FOLIO MANAGEMENT AND DIVESIFICATOIN: Combinations of securities that have high risk and return features make up a portfolio. Portfolio’s may or may not take on the aggregate characteristics of individual part, portfolio analysis takes various components of risk and return for each industry and consider the effort of combined security. Portfolio selection involves choosing the best portfolio to suit the risk return preferences of portfolio investor management of portfolio is a dynamic activity of evaluating and revising the portfolio in terms of portfolios objectives It may include in cash also, even if one goes bad the other will provide protection from the loss even cash is subject to inflation the diversification can be either vertical or horizontal the vertical diversification portfolio can have script of different company’s within the same industry. In horizontal diversification one can have different scripts chosen from different industries. It should be an adequate diversification looking in to the size of portfolio. Traditional approach advocates the more security one holds in a portfolio , the better it is according to modern approach diversification should not be quantified but should be related to the quality of scripts which leads to the quality and portfolio subsequently experience can show that beyond a certain number of securities adding more securities become expensive. Investment in a fixed return securities in the current market scenario which is passing through a an uncertain phase investors are facing the problem of lack of liquidity combined with minimum returns the important point to both is that the equity market and debt market moves in opposite direction .where the stock market is booming, equities perform better where as in depressed market the assured returns related securities market outperform equities. It is cyclic and is evident in more global market keeping this in mind an investor can shift from fixed income securities to equities and vise versa along with the changing market scenario , if the investment are wisely planned they , fetch good returns even when the market is depressed most , important the investor must adopt the time bound strategy in differing state of market to achieve the optimum result when the aim is short term returns it would be [43]

wise for the investor to invest in equities when the market is in boom & it could be reviewed if the same is done. Maximum of returns can be achieved by following a composite pattern of investment by having, suitable investment allocation strategy among the available resources.

 Never invest in a single securities your investment can be allocated in the following areas: 1. Equities:-primary and secondary market. 2. Mutual Funds 3. Bank deposits 4. Fixed deposits & bonds and the tax saving schemes

 The different areas of fixed income are as:Fixed deposits in company Bonds Mutual funds schemes with an investment strategy to invest in debt investment in fixed deposit can be made for the simple reason that assured fixed income of a high of 14-17% per annum can be expected which is much safer then investing a highly volatile stock market, even in comparison to banks deposit which gives a maximum return of 12% per annum, fixed deposit s in high profile esteemed will performing companies definitely gives a higher returns.

BETA: The concept of Beta as a measure of systematic risk is useful in portfolio management. The beta measures the movement of one script in relation to the market trend*. Thus BETA can be positive or negative depending on whether the individual scrip moves in the same direction as the market or in the opposite direction and the extent of variance of one scrip vis-à-vis the market is being measured by BETA. The BETA is negative if the share price moves contrary to the general trend and positive if it moves in the same direction. The scrip’s with higher BETA of more than one are called aggressive, and those with a low BETA of less than one are called defensive. It is therefore it is necessary, to calculate Betas for all scrip’s and choose those with high Beta for a portfolio of high returns.

[44]

Definition of investment: According to F. AMLING “Investment may be defined as the purchase by an individual or an Institutional investor of a financial or real asset that produces a return proportional to the risk assumed over some future investment period”. According to D.E. Fisher and R.J. Jordon, Investment is a commitment of funds made in the expectation of some positive rate of return. If the investment is properly undertaken, the return will be commensurate with the risk of the investor assumes”.

Concept of Investment: Investment will generally be used in its financial sense and as such investment is the allocation of monetary resources to assets that are expected to yield some gain or positive return over a given period of time. Investment is a commitment of a person’s funds to derive future income in the form of interest, dividends, rent, premiums, pension benefits or the appreciation of the value of his principal capital. Many types of investment media or channels for making investments are available. Securities ranging from risk free instruments to highly speculative shares and debentures are available for alternative investments. All investments are risky, as the investor parts with his money. An efficient investor with proper training can reduce the risk and maximize returns. He can avoid pitfalls and protect his interest. There are different methods of classifying the investment avenues. A major classification is physical Investments and Financial Investments. They are physical, if savings are used to acquire physical assets, useful for consumption or production. Some physical assets like ploughs, tractors or harvesters are useful in agricultural production. A few useful physical assets like cars, jeeps etc., are useful in business. Many items of physical assets are not useful for further production or goods or create income as in the case of consumer durables, gold, silver etc. among different types of investment, some are marketable and transferable and others are not. Examples of marketable assets are shares and debentures of public limited companies, particularly the [45]

listed companies on Stock Exchange, Bonds of P.S.U., Government securities etc. nonmarketable securities or investments in bank deposits, provident fund and pension funds, insurance certificates, post office deposits, national savings certificate, company deposits, private limited companies shares etc.

The investment process may be described in the following stages: Investment Policy: The first stage determines and involves personal financial affairs and objectives before making investment. It may also be called the preparation of investment policy stage. The investor has to see that he should be able to create an emergency fund, an element of liquidity and quick convertibility of securities into cash. This stage may, therefore be called the proper time of identifying investment assets and considering the various features of investments.

Investment Analysis: After arranging a logical order of types of investment preferred, the next step is to analyze the securities available for investment. The investor must take a comparative analysis of type of industry, kind of securities etc. the primary concerns at this stage would be to form beliefs regarding future behavior of prices and stocks, the expected return and associated risks.

Investment Valuation: Investment value, in general is taken to be the present worth to the owners of future benefits from investments. The investor has to bear in mind the value of these investments. An appropriate set of weights have to be applied with the use of forecasted benefits to estimate the value of the investment assets such as stocks, debentures, and bonds and other assets. Comparison of the value with the current market price of the assets allows a determination of the relative attractiveness of the asset allows a determination of the relative attractiveness of the asset. Each asset must be value on its individual merit.

Portfolio Construction and Feed-Back: Portfolio construction requires knowledge of different aspects of securities in relation to safety and growth of principal, liquidity of assets etc. In this stage, we study, [46]

determination of diversification level, consideration of investment timing selection of investment assets, allocation of invest able wealth to different investments, evaluation of portfolio for feed-back.

INVESTMENT DECISIONS- GUIDELINES FOR EQUITY INVESTMENT: Equity shares are characterized by price fluctuations, which can produce substantial gains or inflict severe losses. Given the volatility and dynamism of the stock market, investor requires greater competence and skill-along with a touch of good luck too-to invest in equity shares. Here are some general guidelines to play to equity game, irrespective of weather you aggressive or conservative.  Adopt a suitable formula plan.  Establish value anchors.  Assets market psychology.  Combination of fundamental and technical analyze.  Diversify sensibly.  Periodically review and revise your portfolio.

Requirement of Portfolio: 1. Maintain adequate diversification when relative values of various securities in the portfolio change. 2. Incorporate new information relevant for return investment. 3. Expand or contrast the size of portfolio to absorb funds or with draw funds. 4. Reflect changes in investor risk disposition. .

Qualities for Successful Investing: •

Contrary thinking

•

Patience

•

Composure

•

Flexibility

•

Openness

[47]

INVESTOR’S PORTFOLIO CHOICE: An investor tends to choose that portfolio, which yields him maximum return by applying utility theory. Utility Theory is the foundation for the choice under uncertainty. Cardinal and ordinal theories are the two alternatives, which is used by economist to determine how people and societies choose to allocate scare resources and to distribute wealth among one another. The former theory implies that a consumer is capable of assigning to every commodity or combination of commodities a number representing the amount of degree of utility associated with it. Whereas the latter theory, implies that a consumer needs not be liable to assign numbers that represents the degree or amount of utility associated with commodity or combination of commodity. The consumer can only rank and order the amount or degree of utility associated with commodity. In an uncertain environment it becomes necessary to ascertain how different individual will react to risky situation. The risk is defined as a probability of success or failure or risk could be described as variability of outcomes, payoffs or returns. This implies that there is a distribution of outcomes associated with each investment decision. Therefore we can say that there is a relationship between the expected utility and risk. Expected utility with a particular portfolio return. This numerical value is calculated by taking a weighted average of the utilities of the various possible returns. The weights are the probabilities of occurrence associated with each of the possible returns.

MARKOWITZ MODEL THE MEAN-VARIENCE CRITERION 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. In essence, Markowitz’s model is a theoretical framework for the analysis of risk return choices. Decisions are based on the concept of efficient portfolios. A portfolio is efficient when it is expected to yield the highest return for the level of risk accepted or, alternatively, the smallest portfolio risk for a specified level of [48]

expected return. To build an efficient portfolio an expected return level is chosen, and assets are substituted until the portfolio combination with the smallest variance at the return level is found. At this process is repeated for expected returns, set of efficient portfolio is generated.

ASSUMPTIONS: 1. Investors consider each investment alternative as being represented by a probability distribution of expected returns over some holding period. 2. Investors maximize one period-expected utility and posse’s utility curve, which demonstrates diminishing marginal utility of wealth. 3. Individuals estimate risk on the risk on the basis of the variability of expected returns. 4. Investors base decisions solely on expected return and variance or returns only. 5. For a given risk level, investors prefer high returns to lower return similarly for a given level of expected return, Investors prefer risk to more risk. Under these assumptions, a single asset or portfolio of assets is considered to be “efficient” if no other asset or portfolio of assets offers higher expected return with the same risk or lower risk with the same expected return.

THE SPECIFIC MODEL: In developing his model, Morkowitz first disposed of the investment behavior rule that the investor should maximize expected return. This rule implies that the nondiversified single security portfolio with the highest return is the most desirable portfolio. Only by buying that single security can expected return be maximized. The singlesecurity portfolio would obviously be preferable if the investor were perfectly certain that this highest expected return would turn out be the actual return. However, under real world conditions of uncertainty, most risk adverse investors join with Markowitz in discarding the role of calling for maximizing expected returns. As an alternative, Markowitz offers the “expected returns/variance of returns” rule. Markowitz has shown the effect of diversification by reading the risk of securities. According to him, the security with covariance which is either negative or low [49]

amongst them is the best manner to reduce risk. Markowitz has been able to show that securities which have less than positive correlation will reduce risk without, in any way bringing the return down. According to his research study a low correlation level between securities in the portfolio will show less risk. According to him, investing in a large number of securities is not the right method of investment. It is the right kind of security which brings the maximum result.

CONSTRUCTION OF THE STUDY Purpose of the Study: 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 helps in allocating the funds available for investment based on risky portfolios.

Implementation of Study: For implementing the study,8 security’s or scripts constituting the Sensex market are selected of one month closing share movement price data from Economic Times and financial express from Jan 3rd to 31st Jan 2010. In order to know how the risk of the stock or script, we use the formula, which is given below: Standard Deviation = Variance

Variance =

− 1 n ( R − R )2 ∑ n −1 t =1

−

Where ( R − R ) 2 = square of difference between sample and mean. N = number of sample observed. After that, we need to compare the stocks or scripts of two companies with each other by using the formula or correlation co-efficient as given below. Co - Variance(Cov AB ) =

− − 1 n ( RA − RA )( RB − RB ) ∑ n t =1

Correlation Coefficient ( ρAB ) =

[50]

(Cov AB ) Std.A × Std.B

−

−

Where ( RA − RA)( RB − RB) = Combined Deviations of A & B (Std. A) (Std. B) = Standard Deviation of A & B COVAB = Covariance between A & B N = Number of Observation 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. FORMULA

(Std.b) 2 − ρab (Std.a)(Std.b) Xa = (Std.a) 2 + (Std.b) 2 − 2 ρab (Std.a)(Std.b) Where Std. b = Standard Deviation of b Std. a = Standard Deviation of a ρab= Correlation Co-Efficient between A & B The next step is final step to calculate the portfolio risk (combined risk), that shows how much is the risk is reduced by combining two stocks or scripts by using this formula: 2

2

σP = X1 σ12 + X 2 σ2 2 + 2X1X 2 X12 σ1σ2 Where X1 = Proportion of Investment in Security 1. X2 = Proportion of Investment in Security 2. σ1= Standard Deviation of Security 1. σ2 = Standard Deviation of Security 2. X12 = Correlation Co-efficient between Security 1 & 2. ρp = Portfolio Risk

[51]

Chapter – 4 

DATA ANSLYSIS  & INTERPRETATION

DATA ANALYSIS AND INTERPRETATION 1.

Calculation of Return of ICICI Table No. 1 Year

Beginning Price (Rs.)

2007 – 2008 2008 – 2009 2009 – 2010 2010 – 2011 2011 – 2012

Ending Price (Rs.)

141.45 297.90 375.00 587.70 892.00 Return =

Dividend (Rs.)

295.45 371.35 585.05 891.5 1238.7

Dividend + (Ending Price - Begining Price) Begining Price

Return (2008) =

7.50 + (295.45 - 141.45) ×100 =114.17% 141.45

Return (2009) =

7.50 + (371.35 - 297.90) ×100 = 27.17% 297.90

Return (2010) =

8.50 + (585.05 - 375.00) ×100 = 58.28% 375.00

Return (2011) =

8.50 + (891.50 - 587.70) ×100 = 53.13% 587.70

Return (2012) =

10.00 + (1238.70 - 892.00) ×100 = 39.98% 892.00

[52]

7.50 7.50 8.50 8.50 10.00

2.

CALCULATION OF RETURN OF HDFC Table No. 2

Year 2007 – 2008

Beginning Price (Rs.) 358.5

Ending Price (Rs.) 645.55

2008 – 2009

645.9

769.05

3.50

2009 – 2010

771

1207

4.50

2010 – 2011 2011 – 2012

1195 1630

1626.9 2877.75

5.50 7.00

Return =

Dividend (Rs.)

Dividend + (Ending Price - Begining Price) Beginnging Price

Return (2008) =

3 + (645.55 - 358.50) ×100 = 80.90% 358.50

Return (2009) =

3.50 + (769.05 - 645.90) ×100 =19.60% 645.90

Return (2010) =

4.50 + (1207.00 - 771.00) ×100 = 57.13% 771.00

Return (2011) =

5.00 + (1626.90 - 1195.00) ×100 = 36.60% 1195.00

Return (2012) =

7.00 + (2877.75 - 1630.00) ×100 = 76.97% 1630.00

[53]

3

3.

Calculation of standard deviation of ICICI Table No. 3 Year

Return (R)

R

(R - R )

(R - R ) 2

2007 – 2008

114.7

58.652

56.048

3486.6

2008 – 2009

27.17

58.652

-31.482

991.11

2009 – 2010

58.28

58.652

-0.372

0.138384

2010 – 2011

53.13

58.652

-5.522

30.492

2011 – 2012

39.98

58.652

-18.672

348.64

293.26

Average ( R ) = Variance =

∑R N

=

4856.98

293.26 = 58.652 5

1 (R - R ) 2 ∑ n -1

Standard Deviation = Variance

Standard Deviation =

1 (11905.379) 5 -1

= 34.846

[54]

4.

Calculation of standard deviation of HDFC Table No. 4 Year

Return (R)

R

(R - R )

(R - R ) 2

2007 – 2008

80.9

54.24

26.66

710.75

2008 – 2009

19.60

54.24

-34.64

1199.92

2009 – 2010

57.13

54.24

2.89

8.3521

2010 – 2011

36.6

54.24

-17.64

311.16

2011 – 2012

76.97

54.24

22.73

516.65

271.2 Average ( R ) = Variance =

∑R = N

271.20 5

2476.8

= 54.24

1 ∑(R - R ) 2 n -1

Standard Deviation = Variance

=

1 ( 2476.80) 5 -1

= 24.88

[55]

5.

Correlation between HDFC & ICICI Table No. 5

Year

DEVIATION OF

DEVIATION OF

COMBINED DEVIATION

HDFC

ICICI

(RA −RA )( RB −RB)

RA −RA

RB −RB

2007 – 2008

26.66

56.048

1494.24

2008 – 2009

-34.64

-31.482

1090.5

2009 – 2010

2.89

-0.372

-1.075

2010 – 2011

-17.64

-5.522

97.41

2011 – 2012

22.73

-18.672

-424.4 2256.675

Co − Variance (Cov AB ) =

1 n ∑ (RA − RA)(RB − RB) n t −1

Co − Variance (Cov AB ) =

1 ( 2256.675) 5

= 451.335 Correlation − Coefficient ( ρ AB ) =

=

Cov AB ( Std . A)( Std .B ) 451.335 ( 24.88)(34.846)

= 0.5206

[56]

6.

Correlation between ITC & COLGATE –PALMOLIVE: Table No. 6

Year 2007-2008

DEVIATION OF

DEVIATION OF

COMBINED DEVIATION

ITC

COLGATE- PALMOLIVE

(RA −RA )( RB −RB)

RA −RA

41.04

RB −RB

-3.24

-132.97

2008-2009

25.714

-14.16

-364.1

2009-2010

-95.556

26.46

-2528.4

2010-2011

17.114

18.06

309.07

2011-2012

11.714

-27.12

-317.68 -3034.08

Co − Variance (Cov AB ) =

1 n ∑ (RA − RA)(RB − RB) n t −1

Co-Variance (COVAB) =

1 ( −3034.08) 5

= 606.816 Correlation − Coefficient ( ρ AB ) =

=

Cov AB ( Std . A)( Std .B )

−606.816 (54.55)( 22.21)

= -0.5008

[57]

STANDARD DEVIATION: Table No. 7 COMPANY ITC COL-PAL BAJAJ M&M HDFC ICICI RANBAXY WIPRO CIPLA

STANDARED DEVIATION 54.55 22.21 54.60 104.186 24.88 34.846 55.13 35.123 55.22

[58]

Graph: 1

STANDARD DEVIATION 120 100 80 60 40 20 0

[59]

AVERAGE Table No. 8 COMPANY

AVERAGE

ITC COLGATE & PALMOLIVE BAJAJ M&M HDFC ICICI RANBAXY WIPRO CIPLA

8.686 27.74 48.175 71.758 54.24 58.652 10.18 -12.93 -7.744

[60]

Graph: 2

80 70 60 50 40 30 20 10 0 -10 -20

[61]

CORRELATION COEFFICIENT Table No. 9 COMPANY

R

HDFC & ICICI ITC & COLGATE BAJAJAUTO & MAHINDRA CIPLA & RANBAXY HDFC & WIPRO COLGATE & SATYAM BAJAJ &I TC CIPLA & HDFC RANBAXY & WIPRO CIPLA & BAJAJ

0.5206 0.5008 0.605 0.0295 0.0273 0.30 -0.09 0.668 0.354 0.690

[62]

PORTFOLIO WEIGHTS HDFC & ICICI Formula:

Xa =

( Std .b) 2 − ρab ( Std .a )( Std .b) ( Std .a ) 2 + ( Std .b) 2 − 2 ρab ( Std .a )( Std .b)

Xb = 1 – Xa Where

Xa X

b

=

=

HDFC ICICI

Standard Deviation of a

= 24.88

Standard Deviation of b

= 34.85

ρab

= 0.5206 Xa =

(34.85) 2 − 0.5206( 24.88)(34.85) ( 24.88) 2 + (34.85) 2 − 20.5206( 24.88)(34.85) X b =1 − X a

Xa = 0.8199 Xb = 0.1801

[63]

PORTFOLIO WEIGHTS WIPRO & ICICI Formula:

Xa =

( Std .b) 2 − ρab ( Std .a )( Std .b) ( Std .a ) 2 + ( Std .b) 2 − 2 ρab ( Std .a )( Std .b)

Xb = 1 – Xa Where

Xa X

b

=

WIPRO

=

ICICI

Standard Deviation of a

= 35.123

Standard Deviation of b

= 34.846

Xa =

(34.846) 2 − 0.5206(35.123)(34.846) (35.123) 2 + (34.846) 2 − 2 × 0.5206(35.123)(34.846)

= (34.846) X b= 1 –X a Xa = 0.4905 Xb = 0.5095

[64]

PORTFOLIO WEIGHTS ITC & COLGATE: Formula:

Xa =

( Std .b) 2 − ρab ( Std .a )( Std .b) ( Std .a ) 2 + ( Std .b) 2 − 2 ρab ( Std .a )( Std .b) Xb = 1 – Xa

Where Xa = ITC Xb = COLGATE Standard Deviation of a = 54.55 Standard Deviation of b = 22.21 ρab = 0.5008 Xa =

(22.21) 2 − 0.5208(54.55)(22.21) (54.55) 2 + (22.21) 2 − 2 × 0.5208(54.55)(22.21)

Xb = 1 – Xa Xa = 0.0503 Xb = 0.9497

[65]

PORTFOLIO WEIGHTS CIPLA & RANBAXY: Formula:

Xa =

( Std .b) 2 − ρab ( Std .a )( Std .b) ( Std .a ) 2 + ( Std .b) 2 − 2 ρab ( Std .a )( Std .b) Xb = 1 – Xa

Where Xa = CIPLA Xb = RANBAX Standard Deviation of a = 55.22 Standard Deviation of b = 55.13 ρab = 0.0295 Xa =

(55.13) 2 − 0.0295(55.22)(55.13) (55.22) 2 + (55.13) 2 − 2 × 0.0295(55.22)(55.13)

Xb = 1 – Xa Xa = 0.49916 Xb = 0.50084

[66]

PORTFOLIO WEIGHTS BAJAJ AUTO & MAHENDRA: Formula:

Xa =

( Std .b) 2 − ρab ( Std .a )( Std .b) ( Std .a ) 2 + ( Std .b) 2 − 2 ρab ( Std .a )( Std .b) Xb = 1 – Xa

Where

Xa = BAJAJ AUTO Xb = MAHENDRA Standard Deviation of a = 54.60 Standard Deviation of b = 104.186 ρab = 0.605 Xa =

(104.19) 2 − 0.605(54.60)(104.19) (54.60) 2 + (104.19) 2 − 2 × 0.605(54.60)(104.19)

Xb = 1 – Xa Xa = 1.6206 Xb = -0.6206

[67]

Two Portfolios

Correlation COMPANY Coefficient

COMPANY

PORTFOLIO

PORTFOLO

Xb

RETURN Rp

RISK σp

Xa

ICICI & HDFC

0.5206

0.8199

..0.1801

114.24

31.14

ITC & COLGATE

0.5008

0.0563

0.9497

26.835

22.77

0.605

0.49916

0.50084

1.2335

49.43

0.0295

1.6206

-0.620

122.61

171.22

CIPLA & RANBAXI M&M & BAJAJ

PORTFOLIO RETURN

R p = R a X a +R b X b

PORTFOLIO RISK σP = X12σ12 + X 2 2σ 2 2 + 2 X1X 2 X12σ1σ 2

[68]

Portfolio Return Rp ICICI & HDFC ITC & COLGATE CIPLA & RANBAXI M&M & BAJAJ

114.24 26.835 1.234 122.61

Graph: 3

[69]

Portfolio Risk: ICICI & HDFC ITC & COLGATE CIPLA & RANBAXI M&M & BAJAJ

31.14 22.77 49.43 171.22 EMBED Excel.Chart.8 \s

Graph: 4

[70]

Chapter – 5 

FINDINGS



SUGGESTIONS

FINDINGS ICICI & HDFC: The combination of ICICI and HDFC gives the proportion of

investment is

1.1801 and 0.8199 for ICICI and HDFC, based on the standard deviations The standard deviation for ICICI is 34.846 and for HDFC is 24.88. Hence the investor should invest their funds more in HDFC when compared to ICICI as the risk involved in HDFC is less than ICICI as the standard deviation of HDFC is less than that of ICICI.

ITC & COLGATE PALMOLIVE: The combination of ITC and COLGATE gives the proportion of investment is 0.0563 and 0.50084 for ITC and COLGATE, based on the standard deviations The standard deviation for ITC is 54.55 and for COLGATE is 22.2. Hence the investor should invest their funds more in COLGATE when compared to ITC as the risk involved in COLGATE is less than ITC as the standard deviation of COLGATE is less than that of ITC.

CIPLA & RANBAXY: The combination of CIPLA and RANBAXY gives the proportion of investment is 0.49916 and 0.50084 for CIPLA and RANBAXY, based on the standard deviations the standard deviation for CIPLA is 55.22 and for RANBAXY is 55.13. When compared to both the risk is almost same, hence the risk is same when invested in either of the security.

MAHENDRA & BAJAJ AUTO: The combination of M&M and BAJAJ AUTO gives the proportion of investment is 1.6206 and 0.6206 for M&M and BAJAJ AUTO, based on the standard deviations The standard deviation for M&M is 104. 186 and for BAJAJ AUTO is 54.6. Hence the investor should invest their funds more in BAJAJ AUTO when compared to M&M as the risk involved in BAJAJ AUTO is less than M&M as the standard deviation of BAJAJ AUTO is less than that of M&M.

[71]

In case of perfectly correlated securities or stocks, the risk can be reduced to a minimum point. In case of negatively correlative securities the risk can be reduced to a zero. (Which is company’s risk) but the market risk prevails the same for the security or stock in the portfolio.

[72]

Suggestions Investor would be able to achieve when the returns of shares and debentures resultant portfolio would be known as diversified portfolio. Thus portfolio construction would address itself to three major via. Selectivity, timing and diversification In case of portfolio management, negatively correlated assets are most profitable. Correlation between the BAJAJ & ITC are negatively correlated which means both the combinations of portfolios are at good position to gain in future. Investors may invest their money for long run, as both the combinations are most suitable portfolios. A rational investor would constantly examine his chosen portfolio both for average return and risk.

[73]



BIBLIOGRAPHY

BIBLIOGRAPHY BOOKS 1.

DONALDE, FISHER & RONALD J.JODON

SECURITIES ANALYSIS AND PORTFOLIO MANAGEMENT,6 TH EDITION 2.

V.K.BHALLA

INVESTMENTS MANAGEMENT S. CHAND PUBLICATION. 3.

V.A.AVADHANI.

INVESTMENT MANAGEMENT

Website: 

4. www. Investopedia.com



5. www.nseindia.com



6. www.bseindia.com.



7. www.arihantcapital.com

Newspapers & Magazine: DAIRY NEWS PAPERS. ECONOMIC TIME, FINANCIAL EXPRES.ETC

[74]