portfolio management_meenakshi parashar

8/6/2019 Portfolio Management_Meenakshi Parashar

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1.1 DEFINITION - PORTFOLIO MANAGEMENT

A portfolio is a collection of assets. The assets may be physical or financial like

Shares, Bonds, Debentures, Preference Shares, etc. The individual investor or a

fund manager would not like to put all his money in the shares of one company,which would amount to great risk. He would therefore, follow the age-old

maxim that one should not put all the eggs into one basket. By doing so, he

can achieve objective to maximize portfolio return and at the same time

minimizing the portfolio risk by diversification.

Portfolio management is the management of various financial assets,

which comprise the portfolio.

Portfolio management is a decision support system that is designed

with a view to meet the multi-faced needs of investors.

According to Securities and Exchange Board of India Portfolio is defined

as portfolio means the total holdings of securities belonging to any person.

Portfolio manager is a person who is pursuant to a contract or

arrangement with a client, advises or directs or undertakes on behalf of the client

(whether as a discretionary portfolio manager or otherwise) the management or

administration of a portfolio of securities or the funds of the client. Discretionary portfolio manager means a portfolio manager who

exercises or may, under a contract relating to portfolio management exercises

any degree of discretion as to the investments or management of the portfolio of

securities or the funds of the client.

Portfolio management and investment decision as a concept came to be

familiar with the conclusion of second world war when things in the stock

market liberally ruined the fortune of individual, companies, even government, it

was then discovered that investing in various scrips instead of putting all the

money in a single security yielded greater return with low risk percentage, it

goes to the credit of HARRY MARKOWITZ, 1991 noble laurelled to have

pioneered the concept of combining high yielded securities with these slow but

steady yielding securities to achieve optimum correlation coefficient of shares.

Portfolio management refers to the management of portfolio for others

by professional investment managers it refers to the management of an

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individual investors portfolio by professionally qualified person ranging from

merchant banker to specified portfolio company.

Definition by SEBIA portfolio is the total holdings of securities belonging to any person.

Portfolio is a combination of securities that have returns and risk characteristics

of their own; portfolio may not take on the aggregate characteristics of their

individual parts.

Thus a portfolio is a combination of various assets and /or instruments of

investments. Combination may have different features of risk and return separate

from those of the components. The portfolio is also built up of the wealth or

income of the investor over a period of time with a view to suit return or risk

preference to that of the port folio that he holds. The portfolio analysis is thus an

analysis of risk return characteristics of individual securities in the portfolio

and changes that may take place in combination with other securities due

interaction among them and impact of each on others.

Security analysis is only a tool for efficient portfolio management.

Portfolios are combination of assets held by the investors. These combinations

may be various assets classed like equity and debt or of different issues like

Govt. bonds and corporate debts or of various instruments like discount bonds,

debentures and blue chip equity scrips.

Portfolio analysis includes portfolio construction, selection of securities,

and revision of portfolio, evaluation and monitoring of the performance of the

portfolio. All these are part of the portfolio management.

The traditional portfolio theory aims at the selection of such securities

that would fit in well with the asset preferences, needs and choices of the

investors. Thus, retired executive invests in fixed income securities for a regular

and fixed return. A business executive or a young aggressive investor on the

other hand invests in growing companies and in risky ventures.

The modern portfolio theory postulates that maximization of returns and

minimization of risk will yield optional returns and the choice and attitudes of

investors are only a starting point for investment decisions and that vigorous risk

returns analysis is necessary for optimization of returns.

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1.2 NEED & IMPORTANCE OF THE STUDY

Portfolio management has emerged as a separate academic discipline in

India. Portfolio theory that deals with the rational investment decision-making

process has now become an integral part of financial literature.

Investing in securities such as share, debentures & bonds is profitable as

well as exciting. It is indeed rewarding but involves a great deal of risk.

Investing in financial securities is now considered to be one of the most risky

avenues of investment. It is rare to find investors investing their entire savings in

a single security. Instead they tend to invest in a group of securities. Such group

of securities is called as PORTFOLIO. Creation of portfolio helps to reduce riskwithout sacrificing returns. Portfolio management deals with the analysis of

individual securities as well as with the theory and practice of optimally

combining securities into portfolios.

The modern theory is the view that by diversification risk can be

reduced. The investor can make diversification either by having a large number

of shares of companies in different regions, in different industries or those

producing different types of product lines. Modern theory believes in the

perspective of combination of securities under constraints of risk and returns.

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1.3 SCOPE OF THE STUDY

The study covers the calculation of correlations between the different

securities in order to find out at what percentage funds should be invested among

the companies in the portfolio.

It includes the calculation of individual Standard Deviation of securities,

weights of individual securities involved in the portfolio.

These percentages help in allocating the funds available for investment

based on risky portfolios.

It also includes risk and return of portfolios and their performance

evaluation for a limited number of scrips.

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1.4 OBJECTIVES OF THE STUDY

The major objectives of the study are as follows

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

2. To construct an effective portfolio that offers the maximum return for

minimum risk.

3. To help the investor choose wisely between alternative investments.

4. To understand, analyze and select the best portfolio.

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1.5 RESEARCH METHODOLOGY

The time taken for the completion of the project is 45 days.

Sample Size: 6 COMPANIESSampling technique: Random sampling

SOURCES OF DATA COLLECTION: The data collection methods include

both the primary and secondary collection methods.

Primary collection methods: Study was done by personal investigation through

observation and personal discussion with the authorized clerks and members of

the exchange.

Secondary collection methods: The secondary collection methods include

Companies Annual Reports

Information from Internet

Publications

Information provided by India Infoline

COMPANIES SELECTED

Infosys Technologies Ltd

Reliance Industries Ltd

Tata steel Ltd

Ultratech Cements Ltd

ICICI Bank

ITC Ltd

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1.6 LIMITATIONS OF THE STUDY

This study has been conducted purely

to understand Portfolio Management for investors while other parameters

were given little importance.

Data collection was strictly confined to secondary source. No primary

data is associated with the project.

There is stiff competition that makes it difficult for the investor to choose

a good manager. However, this can be sorted out by taking his previous history

and performance into account. Studying the history of the various companies is

time consuming

Construction of portfolio is restricted to two companies based on

Markowitz model.

There was a constraint with regard to time allocation for the research

study i.e. for a period of two months. Only 6 companies were selected for the

study, which limits the combination.

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Harry Markowitz opened new vistas to modern portfolio selection by

publishing an article in the Journal of Finance in March 1952. His publication

indicated the importance of correlation among the different stocks returns in the

construction of a stock portfolio. Markowitz also showed that for a given level

of expected return in a group of securities, one security dominates the other. To

find out this, the knowledge of the correlation coefficients between all possible

securities combinations is required.

After the publication of his paper, numerous investment firms and

portfolio managers developed Markowitz algorithms to minimize portfolio

variance i.e. risk. Even today the term Markowitz diversification is used to refer

to the portfolio construction accomplished with the help of security covariance.

2.1 INVESTMENT

Investment is the commitment of funds for a return expected to be

realized in the future. Investment is the employment of funds on assets with the

aim of earning income or capital appreciation. Investment has two attributes

namely time and risk. Present consumption is sacrificed to get a return in the

future. Investment can be made in financial assets or physical assets. In either

case there is possibility that the actual return may vary from the expected return,

that possibility is risk involved in it.

Financial investment is the allocation of money to assets that are

expected to yield some gain over a period of time. Investment is an activity that

is undertaken by those who have savings. Savings can be defined as the excess

of income over expenditure.

The three important characteristics of any financial asset are:

Return- the potential return possible from an asset.

Risk- the variability in returns of the asset forms the chances of its value

going up/down.

Liquidity- the ease with which an asset can be converted into cash.

Investors tend to look at these three characteristics while deciding on

their individual preference pattern of investments. Each financial asset will have

a certain level of each of these characteristics.

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Investment is generally distinguished from speculation in terms of 3

factors namely risk, capital gain and time period. Speculation means taking up

the business risk in the hope of getting short-term gain. Speculation essentially

involves buying and selling activities with the expectation of getting profit from

the price fluctuations. The investor constantly evaluates the worth of security

whereas the speculator evaluates the price movement. Gambling is the extreme

form of speculation. There is no risk and return trade off in gambling and

negative outcomes are expected.

INVESTMENT PROCESS

INVESTMENT AVENUES

There are a large number of investment avenues for savers in India. Some ofthem are marketable and liquid, while others are non-marketable. Some of them

are highly risky while some others are almost risk less. Investors may be

individual or institutions. Investment avenues can be broadly categorized as

follows.

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CORPORATE SECURITES

PORTFOLIO:

A portfolio is a collection of investments held by an institution or an

individual. Holding a portfolio is a part of an investment and risk-limiting

strategy called diversification. By owning several assets, certain types of risk (in

particular specific risk) can be reduced. The assets in the portfolio could include

bank accounts, stocks, bonds, options, warrants, gold certificates, real estate,

futures contracts, production facilities, or any other item that is expected to

retain its value.

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EquityShares

Preferenceshares

Bonds Warrants Derivatives

Investment

Deposits

Tax Shelters

Financial Derivatives

Equity Shares

Mutual Fund

Fixed Income

Securities

Life Insurance

Real Estate Precious Objects


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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 andhence 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.

FUNCTIONS OF PORTFOLIO MANAGEMENT:

To frame the investment strategy and select an investment mix to

achieve the desired investment objectives.

To provide a balanced portfolio which not only can hedge against the

inflation but also optimise returns with the associated degree of risk

To maximise the after-tax return by investing in various tax saving

investment instruments.

NEED FOR PORTFOLIO MANAGEMENT:

It is a dynamic and flexible concept and

involves regular and systematic analysis, judgement and action. It involves

construction of a portfolio based upon the investors objectives, constraints,

preferences for risk and returns and tax liability.

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.

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Portfolio construction refers to the allocation of surplus funds in hand

among a variety of financial assets open for investment. The modern theory is

the view that by diversification, risk can be reduced. The investor can make

diversification either by having a large number of shares of companies in

different regions, in different industries or those producing different types of

product lines.

2.3 PHASES IN PORTFOLIO MANAGEMENT

PORTFOLIO MANAGEMENT is a process encompassing many

activities aimed at optimizing investment of funds, each phase is an integral part

of the whole process and the success of portfolio management depends upon the

efficiency in carrying out each phase. Five phases can be identified: -

(1) Security analysis

(2) Portfolio analysis

(3) Portfolio selection

(4) Portfolio revision

(5) Portfolio evaluation

SECURITY ANALYSIS:

It refers to the analysis of trading securities from the point of view of

their prices, return, and risk. All investment is risky and the expected return is

related to risk. The securities available to an investor for investment are

numerous and of various types. The shares of over more than 7000 companies

are listed in stock exchanges of the country. Securities classified into ownership

securities such as equity shares and preference shares and debentures and bonds.

Recently, a number of new securities such as convertible debentures and deep

discount bonds, zero coupon bonds, Flexi bonds, Floating rate bonds Global

depository receipts, Euro currency bonds etc, are issued to raise funds for

their projects by companies from which investor has to choose those securities

the is worthwhile to be included in his investment portfolio. This calls for

detailed analysis of the available securities.

Security analysis is the initial phase of the portfolio management

process. It examines the risk return characteristics of individual securities. A

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basic strategy in securities investment is to buy under priced securities and sell

over priced securities. But the problem is how to identify such securities in other

words mispriced securities. This is what security analysis is all about.

Prices of the securities in the stock market fluctuate daily on the account

of continuous buying and selling. Stock prices move in trends and cycles and are

never stable. An investor in the stock market is interested in buying securities at

low price and selling them at high price so as to get a good return on his

investment made. He therefore tries to analyse the movement of share prices in

the market.Two approaches are commonly used for this purpose.

Fundamental analysis wherein the analyst tries to determine the

intrinsic value of the share based on the current and future earning capacity of

the company.

Technical analysis is an alternative approach to the study of stock price

behaviour.

PORTFOLIO ANALYSIS:

Various groups of securities when held together behave in a different manner

and give interest payments and dividends also, which are different to the

analysis of individual securities. A combination of securities held together will

give a beneficial result if they are grouped in a manner to secure higher return

after taking into consideration the risk element.

There are two approaches in construction of the portfolio of securities.

They are

1. Traditional approach

2. Modern approach

PORTFOLIO SELECTION:

A portfolio that provides the highest returns at a given level of risk is generated.

A portfolio having this characteristic is known as an efficient portfolio. The

inputs from portfolio analysis can be used to identify the set of efficient

portfolios. From this set of efficient portfolios, the optimal portfolio has to be

selected for investment. Harry Markowitz portfolio theory provides both the

conceptual framework and analytical tools for determining the optimal portfolio

in a disciplined and objective way.

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PORTFOLIO REVISION:

The portfolio that is once selected has to be continuously reviewed over

a period of time and then revised depending on the objectives of the investor.

The care taken in construction of portfolio should be extended to the review andrevision of the portfolio. Fluctuations that occur in the equity prices cause

substantial gain or loss to the investors.

The investor should have competence and skill in the revision of the

portfolio. The portfolio management process needs frequent changes in the

composition of stocks and bonds. In securities, the type of securities to be held

should be revised according to the portfolio policy.

PORTFOLIO EVALUATION:

The evaluation of the portfolio (done by portfolio manager) provides a feedback

about the performance to evolve better management strategy. Even though

evaluation of portfolio performance is considered to be the last stage of

investment process, it is a continuous process. There are number of situations in

which an evaluation becomes necessary and important.

RETURN:

The term Return from an investment refers to the benefits from that investment.

In the field of finance in general and security analysis in particular, the term

return is almost invariably associated with a percentage (say, return on

investment of 12%) and not a mere amount (like, profit of Rs. 150). In security

analysis we are primarily concerned with return forms a particular investment

say, a share or a debenture or other financial instrument.

Single period Returns:

It refers to a situation where an investor is concerned with return from a

single period (say, one day, one week, one month or one year).

Multi period Returns:

It refers to situation where more than single period returns are under

consideration. Investor is concern with computing the return per period, over a

longer period.

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Ex-Post Returns:

The measurement of return from the historical data can be referred to Ex-

Post returns. This includes the both current income and capital gains (or losses)

brought about by gains price of the security. The income and capital gains arethen expressed as .a percentage of the initial investment.

Ex-Ante Returns:

The majority of investors tend to emphasize the return they expect from

a security while making investment decision and the expected return of a

security. This enables the investors to look into future prospects from an

investment and the measurement of returns from expectation of benefits is

known as ex-ante returns.

RISK

Risk is uncertainty of the income /capital appreciation or loss or both. All

investments are risky. Higher the risk taken, the higher is the return. But proper

management of risk involves the right choice of investments whose risks are

compensating.

TYPES OF RISKS

Risk consists of two components. They are1. Systematic Risk

2. Unsystematic Risk

1. Systematic Risk:

Systematic risk affects the entire market. It is caused by factors external

to the particular company and uncontrollable by the company. The systematic

risk affects the market as a whole. Factors affecting the systematic risk areEconomic conditions, Political conditions and Sociological changes.

The systematic risk is unavoidable. Systematic risk is further sub-divided into

three types. They are

a) Market Risk:

Jack Clark Francis has defined market risk as that portion of total

variability of return caused by the alternating forces of bull and bear markets.

The forces that affect the stock market can be earthquake, war, political

uncertainty, etc.

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b) Interest Rate Risk:

Interest rate risk is the variation in the single period rates of return caused

by the fluctuations in the market interest rate. It is caused by changes in the

government monetary policy.

c) Purchasing Power Risk:

Variations in the returns are also caused by the loss of purchasing power of

currency. Purchasing power risk is also known as inflation risk.

2. Un-systematic Risk:

Un-systematic risk is unique and peculiar to a firm or an industry. All these

factors affect the un-systematic risk and contribute a portion in the total

variability of the return.

Managerial inefficiency

Technological change in the production process

Availability of raw materials

Changes in the consumer preference

Labour problems

The nature and magnitude of the above-mentioned factors differ from industry toindustry and company to company. They have to be analyzed separately for each

industry and firm. Un-systematic risk can be broadly classified into:

a) Business Risk

b) Financial Risk

Business Risk:

Business risk is that portion of the unsystematic risk caused by theoperating environment of the business. Business risk arises from the inability of

a firm to maintain its competitive edge and growth or stability of the earnings.

The volatility in stock prices due to factors intrinsic to the company itself is

known as Business risk. Business risk is concerned with the difference between

revenue and earnings before interest and tax.

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Business risk can be divided into

i) Internal Business Risk

Internal business risk is associated with the operational efficiency of the

firm. The efficiency of operation is reflected on the companys achievement of

its pre-set goals and the fulfilment of the promises to its investors.

ii) External Business Risk

External business risk is the result of operating conditions imposed on

the firm by circumstances beyond its control. The external factors are social and

regulatory factors, monetary and fiscal policies of the government, business

cycle and the general economic environment within which a firm or an industry

operates.

Financial Risk:

It refers to the variability of the income to the equity capital due to the

debt capital. Financial risk in a company is associated with the capital structure

of the company.

RISK AND EXPECTED RETURN:

There is a positive relationship between the amount of risk and the

amount of expected return i.e., the greater the risk, the larger the expected return

and larger the chances of substantial loss. One of the most difficult problems for

an investor is to estimate the highest level of risk he is able to assume.

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Risk is measured along the horizontal axis and increases from the left to

right.

Expected rate of return is measured on the vertical axis and rises from

bottom to top. The line from 0 to R (f) is called the rate of return or risk less

investments commonly associated with the yield on government securities.

The diagonal line form R (f) to E(r) illustrates the concept of expected

rate of return increasing as level of risk increases.

PORTFOLIO-AGE RELATIONSHIP

Age Portfolio

Below 30 80% in stocks or mutual funds

10% in cash

10% in fixed income

30 to 40 70% in stocks or mutual funds

10% in cash

20% in fixed income


10% in cash

30% in fixed income


10% in cash

40% in fixed income

Above 60 40% in stocks or mutual funds

10% in cash

50% in fixed income

These aren't hard and fast allocations, just guidelines to get you thinking about

how your portfolio should look. Your risk profile will give you more equities or

more fixed income depending on your aggressive or conservative bias.

However, it's important to always have some equities in your portfolio no matter

what your age.

2.4 PORTFOLIO THEORIES

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1. MARKOWITZ MODEL:

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 areward risk context. It used statistical analysis for the measurement of risk and

mathematical programming for selection of assets in a portfolio in an efficient

manner. Markowitz approach determines for the investor the efficient set of

portfolio through three important variables i.e., Return, Standard deviation and

Co-efficient of correlation.

Markowitz model is also called as a Full Covariance Model. Through

this model, the investor can, with the use of computer, find out the efficient set

of portfolio by finding out the trade off between risk and return, between the

limits of zero and infinity. Most people agree that holding two stocks is less

risky than holding one stock. For example, holding stocks from textile, banking

and electronic companies is better than investing all the money on the textile

companys stock.

Markowitz had given up the single stock portfolio and introduced

diversification. The single stock portfolio would be preferable if the investor is

perfectly certain that his expectation of highest return would turn out to be real.

In the world of uncertainty, most of the risk adverse investors would like to join

Markowitz rather than keeping a single stock, because diversification reduces

the risk.

ASSUMPTIONS:

All investors are rational and risk-averse.

Investors base their investment decisions on the expected return and

standard deviation of returns from a possible investment.

The investor assumes that greater or larger the return that he achieves on

his investments, the higher the risk factor surrounds him. On the contrary when

risks are low the return can also be expected to be low.

All investors have access to the same information at the same time.

Investors have an accurate conception of possible returns, i.e., the

probability beliefs of investors match the true distribution of returns.

There are no taxes or transaction costs.

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All investors are price takers, i.e., their actions do not influence prices.

Any investor can lend and borrow an unlimited amount at the risk free

rate of interest.

All securities can be divided into parcels of any size.

CONSTRUCTION OF THE PORTFOLIO

The purpose of the study is to find out at what percentage of investment should

be invested between two companies, on the basis of risk and return of each

security in comparison. These percentages help in allocating the funds available

for investment based on risky portfolios. In order to know the riskof the stock

or scrip, we use the formula

Standard Deviation = Variance

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

Where,

(R-R) 2 = Square of difference between sample and mean.

n = Number of samples observed.

After that, we need to compare the stocks or scrips of two companies with each

other by using the correlation co-efficient as given below.

Covariance (COV ab) = 1/n (RA-RA) (RB-RB)

nab = Correlation Coefficient = COV ab / a * b

Where,

(RA-RA) (RB-RB) = Combined deviations of A&B

a * b = Product of standard deviation of A&B

COV ab = Covariance between A&B

n = Number of observations

The next step would be the construction of the optimal portfolio on the basis of

what percentage of investment should be invested when two securities and

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stocks are combined i.e. calculation of two assets portfolio weight by using

minimum variance equation, which is given below.

Wa = b [b-(nab*a)]

a2 + b2 - 2nab*a*b

Wb = 1 Wa

Where,

Wa = Weight of security A

Wb = Weight of security B

a = standard deviation of A

b = standard deviation of B

nab= correlation co-efficient between A&B

The final step is to calculate the portfolio risk(combined risk)

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

Where,

Wa = Proportion of investment in security A

Wb = Proportion of investment in security B

a = Standard deviation of security A

b = Standard deviation of security B

nab = Correlation co-efficient between securities A & B

Rp = Portfolio risk

2. THE SHARPES INDEX MODEL/SINGLE INDEX

MODEL:

William Sharpe has suggested a simplified method of diversification of

portfolios. He has made the estimates of the expected return and variance ofindexes, which are related to economic activity. Sharpes Theory assumes

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that securities returns are related to each other only through common

relationships with basic underlying factor i.e. market return index. Individual

securities return is determined solely by random factors and on its

relationship to this underlying factor with the following formula:

Ri = i+i Rm+ei

Where Ri = expected return on security i

i = intercept of the straight line or alpha co-efficient

i = slope of straight line or beta co-efficient

Rm = the rate of return on market index

ei = error term with a mean of zero & a std.dev., which is a

constant

3. CAPITAL ASSET PRICING MODEL (CAPM):

Markowitz, William Sharpe, John Lintner and Jan Mossin provided the

basic structure of CAPM. William F. Sharpe emphasised the risk factor in

portfolio theory is a combination of two risks i.e., systematic risk and

unsystematic risk. The systematic risk attached to each of the security is

same irrespective of any number of securities in the portfolio. The total risk

of portfolio is reduced, with increase in number of stocks, as a result of

decrease in the unsystematic risk distributed over number of stocks in the

portfolio. Therefore, the relationship between an assets return and its

systematic risk can be expressed by the CAPM, which is also called the

Security Market Line.

E (Ri) = Rf+ (Rm Rf)

Where,

E (Ri) = Expected return on any individual security (or portfolio)

Rf = Risk free rate of return

= Market sensitivity index of individual security (or portfolio)

Rm = Expected rate of return on the market portfolio

Rm- Rf= Market premium or risk premium

4. ARBITRAGE PRICING THEORY

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According to this theory the returns of the securities are influenced

by a number of macroeconomic factors such as growth rate of industrial

production rate of inflation, spread between low-grade and high-grade

bonds.

The foundation for APT is the law of one price. The law of one price

states that two identical goods should sell at the same price. If they sold at

different prices anyone could engage in arbitrage by simultaneously buying

at low prices and selling at the high prices and make a risk less profit.

Arbitrage also applies to financial assets. If two financial assets have the

same risk, they should have the same expected return. If they do not have the

same expected return, a riskless profit could be earned by simultaneously

selling the low return asset and buying the high-return asset. The arbitrage

pricing line for one risk factor can be written as:

E (ri) = 0 + ii

Where,

E (ri) = The expected return on the security i

0 = The return on the zero beta portfolios

i = The factor risk premium

i = The sensitivity of the asset i to the risk factor

Two factor Arbitrage pricing model:

E (rp) = 0 + 11 +22

Where,

2 = The risk premium associated with risk factor2

2 = The factor beta coefficient for factor 2, and the factors 1 &2 are

uncorrelated

3.1 INDUSTRY PROFILE:

FINANCIAL SERVICES

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Financial services refer to services provided by the finance industry. The

finance industry encompasses a broad range of organizations that deal with the

management of money. Among these organizations are banks, credit card

companies, insurance companies, consumer finance companies, stock

brokerages, investment funds and some government sponsored enterprises.

The financial services sector contributed 15 per cent to India's GDP in

FY09, and is the second-largest component after trade, hotels, transport and

communication all combined together, as per the Banking & Finance Journal,

released by an industry body in August 2010.

Stock markets: Market capitalization of India as a proportion of world

market cap has risen to a record high. According to data sourced from

Bloomberg, the country's market capitalization as a proportion of the world

market cap is currently 3.34 per cent. India's current market-cap is US$ 1.55

trillion as compared with world market-cap of US$ 46.5 trillion. This is higher

than 3.12 per cent share India enjoyed at the market peak of January 2008.

As analyzed by Venture Intelligence, private equity firms obtained exit

routes for their investments in a record 121 companies during 2010, including 24

via IPOs. (2009 had witnessed 66 liquidity events including 7 via IPOs).

Insurance: The Indian Life Insurance industry is one on the strongest

growing sectors in the country. Currently a US$ 41-billion industry, India is the

fifth largest life insurance market and growing at a rapid pace of 32-34 per cent

annually. Currently, there are 22 life insurance companies operating in India,

according to the Life Insurance Council (LIC).

Banking services: Significantly, on a year-on-year basis, bank credit

grew by 24.4 per cent in 2010 as against RBIs projections of 20 per cent for the

entire fiscal 2010-11.

Investment management: Investment management is the professional

management of various securities (shares, bonds and other securities) and assets

in order to meet specified investment goals for the benefit of the investors.

Investors may be institutions or private investors.

Government-sponsored enterprises (GSEs): The GSEs are group of

financial services corporations created by the United States Congress. Their

function is to enhance the flow of credit to targeted sectors of the economy and to

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make those segments of the capital market more efficient and transparent. The

desired effect of the GSEs is to enhance the availability and reduce the cost of

credit to the targeted borrowing sectors: agriculture, home finance and education

Scope of financial services:

The scope of financial services in India has grown manifold in recent years, and

consumers have a much wider choice in terms of savings and investments. There is a

broad range of brokerage firms, investment services, financial consulting firms, foreign

and private banks, global insurance companies, taxation service providers, home loan

and car equity firms and other banking companies now expanding their operation in the

country. For young candidates there are bright career opportunities in the fields of

financial advisory services, insurance and banking services, investment management,

financial analysis, stock market consultants, brokering agents, financial planners and

economists.

History of financial service sector:

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

The Great Depression (1929): The Great Depression originated in the US with

the Wall Street crash in October 1929. The effects of the depression spread

across the world, especially in the heavy industries. Capital requirements

regulation, financial service industry oversights and the insurance of deposit

accounts sprang out of this tumultuous period.

Black Monday (1987): On October 19, the stock markets across the world

witnessed a huge crash. This was the largest one day decline in the stock market

history. The crash started in Hong Kong, spreading to Europe and the US.

Analysts blamed computer trading systems for magnifying the losses.

Asian Financial Crisis (1990): The Asian Financial Crisis was triggered by the

collapse of Thai baht as the government of Thailand decided to float the national

currency. The nation had a huge foreign debt at that point, driving it to the verge

of bankruptcy. The crisis rippled across the whole of Southeast Asia and has led

to many emerging market countries to reduce debts and build up foreign

currency reserves.

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Stock Market Downturn (2002): Stock exchanges around the world witnessed

a significant decline in March 2002. It was attributed to the bursting of the Dot-

com Bubble, which saw major Internet companies going bankrupt.

Sub-prime Crisis (2007): Credit markets faced major crunch due to large scale

default on loans. It led to the Financial Crisis of 2008 2009 and resulted in the

bankruptcy, fire-sale acquisition and government bailouts of finance service

industry giants such as Lehman Brothers, Bear Stearns, AIG, Fannie Mae,

Freddie Mac, Merrill Lynch, Wachovia, Northern Rock, Lloyds TSB, HBOS,

RBS and the entire banking system of Iceland. The world economy can expect

reduced growth rates and tighter regulations as a result of this crisis.

Growth of financial services sector:

In the post-economic reform and liberalization era, the banking and financial services

sector has witnessed rapid growth in India. As of 2007, the value of banking assets in

India was growing at a compounded annual growth rate of 24%. A large number of

mutual funds, venture capital funds and private equity funds have mushroomed in India

with substantial foreign investments in this sector. Almost all of the world class

financial services institutions and foreign banks have established their presence in India.

The growth of financial sector in India at present is nearly 8.5% per year. The rise in the

growth rate suggests the growth of the economy. The financial policies and the

monetary policies are able to sustain a stable growth rate. The reforms pertaining to the

monetary policies and the macroeconomic policies over the last few years have

influenced the Indian economy to the core. The development of the system pertaining to

the financial sector was the key to the growth of the same. With the opening of the

financial market variety of products and services were introduced to suit the need of the

customer. The Reserve Bank of India played a dynamic role in the growth of the

financial sector of India.

The financial services sector contributed 15% to Indias GDP in FY09, and is the

second-largest component after trade, hotels, transport and communication all combined

together, as per the Banking & Finance Journal, released by an industry body in August

2010.

3.2 COMPANY PROFILE:

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INDIA INFOLINE LIMITED (IIFL)

India Infoline Ltd. was founded in 1995 by a group of professional with

impeccable educational qualifications and professional credentials. Its

institutional investors include Intel Capital (world's leading technologycompany), CDC (promoted by UK government), ICICI, TDA and Reeshanar.

India Infoline group offers the entire gamut of investment products

including stock broking, Commodities broking, Mutual Funds, Fixed Deposits,

GOI Relief bonds, Post office savings and life Insurance. India Infoline is the

leading corporate agent of ICICI Prudential Life Insurance Co. Ltd., which is

India' No. 1 Private sector life insurance company.

www.indiainfoline.com has been the only India Website to have been

listed by none other than Forbes in its 'Best of the Web' survey of global

website, not just once but three times in a row and counting... A must read for

investors in south Asia is how they choose to describe India Infoline. It has

been rated as No. l the category of Business News in Asia by Alexia rating.

Stock and Commodities broking is offered under the trade name 5paisa.

India Infoline Commodities Pvt. Ltd., a wholly owned subsidiary of India

Infoline Ltd., holds membership of MCX and NCDEX

Main Objects of the Company

Main objects as contained in its Memorandum of Association are:

1. To engage or undertake software and internet based services, data

processing IT enabled services, software development services, selling

advertisement space on the site, web consulting and related services including

web designing and web maintenance, software product development and

marketing, software supply services, computer consultancy services, E-

Commerce of all types including electronic financial intermediation business

and E-broking, market research, business and management consultancy.

2. To undertake, conduct, study, carry on, help, promote any kind of

research, probe, investigation, survey, developmental work on economy,

industries, corporate business houses, agricultural and mineral, financial

institutions, foreign financial institutions, capital market on matters related to

investment decisions primary equity market, secondary equity market,

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debentures, bond, ventures, capital funding proposals, competitive analysis,

preparations of corporate / industry profile etc. and trade / invest in researched

securities.

VISION STATEMENT OF THE COMPANY

Our vision is to be the most respected company in the financial services

space in India.

MISSION

To become a full-fledged financial services company known for its quality of

advice personalised services and cutting edge technology.

Products: the India Infoline Pvt. Ltd. offers the following products

E-broking

Distribution

Insurance

PMS

Mortgages

a. E-BrokingIt refers to Electronic Broking of Equities, Derivatives and Commodities under

the brand name of 5paisa

1. Equities

2. Derivatives

3. Commodities

b. Distribution

1. Mutual funds

2. Govt. of India bonds.

3. Fixed deposits

c. Insurance

1. Life insurance policies

2. General Insurance

3. Health Insurance Policies.

THE CORPORATE STRUCTURE

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The India Infoline group comprises the holding company, India Infoline

Ltd, which has 5 wholly-owned subsidiaries, engaged in distinct yet

complementary businesses which together offer a whole bouquet of products

and services to make your money grow.

The corporate structure has evolved to comply with oddities of the

regulatory framework but still beautifully help attain synergy and allow

flexibility to adapt to dynamics of different businesses.

The parent company, India Infoline Ltd owns and manages the web

properties www.Indiainfoline.com and www.5paisa.com. It also undertakes

research Customized and off-the-shelf. Indian Infoline Securities Pvt. Ltd. is a

member of BSE, NSE and DP with NSDL. Its business encompasses securities

broking Portfolio Management services.

India Infoline.com Distribution Co. Ltd., Mobilizes Mutual Funds and

other personal investment products such as bonds, fixed deposits, etc.

India Infoline Insurance Services Ltd. is the corporate agent of ICICI Prudential

Life Insurance, engaged in selling Life Insurance, General Insurance and Health

Insurance products.

India Infoline Commodities Pvt. Ltd. is a registered commodities broker

MCX and offers futures trading in commodities. India Infoline Investment

Services Pvt. Ltd. is proving margin funding and NBFC services to the

customers of India Infoline Ltd.

Management of India Infoline Ltd.:

India Infoline is a professionally managed Company. The promoters

who run the company/s day-to-day affairs as executive directors have

impeccable academic professional track records.

Nirmal Jain, chairman and Managing Director, is a Chartered

Accountant, (All India Rank 2); Cost Account, (All India Rank l) and has a post-

graduate management degree from IIM Ahmedabad. He had a successful career

with Hindustan Lever, where he inter alia handled Commodities trading and

export business. Later he was CEO of an equity research organization.

R. Venkataraman, Director, is armed with a post- graduate management

degree from IIM Bangalore, and an Electronics Engineering degree from IIT,

Kharagpur. He spent eight fruitful years in equity research sales and private

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equity with the cream of financial houses such as ICICI group, Barclays de

Zoette and G.E. Capital

The non-executive directors on the board bring a wealth of experience

and expertise.

Satpal khattar - Reeshanar investments, Singapore. The key management team

comprises seasoned and qualified professionals.

SWOT ANALYSIS:

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STRENGTHS:

1. India Infoline is a one-stop financial services shop, most respected for

quality of advice, personalised service and cutting-edge technology.

2. Multi-channel delivery model, making it among the select few to offer

online as well as offline trading facilities.

3. Strong distribution network of 177 branches across 19 states, which

provided it with an unmatched reach within its segment.

4. The company provides a prudent mix of proprietary and outsourced

technologies, which facilitate business growth without a corresponding

increase in costs.

5. The company provides funding facilities to clients.

WEAKNESS:

1. High targets for the financial advisors and sales department due to

increase in competition.

2. Many competitors in the market provide similar services with slightdifference in premium and offerings.

3. High brokerage charges for low category company shares.

4. Low customer retention rate.

OPPORTUNITIES:

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1. Huge market is still untapped. The service sector is growing rapidly and

there are many opportunities for development.

2. Company has opportunities in research and development and other new

areas of financial services.

3. It can focus on analysis of prices, so that it can forecast price movements

and make the customers aware of it.

THREATS:

1. Entry of new players in the market due to huge market potential.

2. Entry of many other competitors with equally strong experience and financial

strength is making the competition difficult and saturating the urban markets.

3. The market is skewed primarily to the metros with Mumbai,

Ahmadabad, and New Delhi accounting for major bulk of the trading.

4. Brand related - challenge being to maintain high decibel and impactful

communication on a sustained basis.

CALCULATION OF AVERAGE RETURN OF COMPANIES:

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Return(R) = Dividend + (Closing Price-Opening price) * 100

Opening Price

Average Return = R/N

1. INFOSYS TECHNOLOGIES LTD:

Year Dividend

(D) (Rs)

Opening

Price

(P0)

(Rs)

Closing

Price (P1)

(Rs)

(P1-P0) (D+(P1-

P0))/P0*100

2005-2006 7.5 2099 2996.75 897.75 43.13

2006-2007 11.5 3000 2240.5 -759.5 -24.93

2007-2008 13.3 2242 1768.4 -473.6 -20.53

2008-2009 23.5 1758 1117.85 -640.15 -35.08

2009-2010 25 1125 2605.25 1480.25 133.8

TOTAL RETURNS 96.39

Returns

2005-06 = (07.50+ (2996.75-2099)) /2099 * 100 = 43.13

2006-07 = (11.50+ (2240.50-3000)) /3000 * 100 = -24.93

2007-08 = (13.25+ (1768.40-2242)) /2242 * 100 = -20.53

2008-09 = (23.50+ (1117.85-1758)) /1758 * 100 = -35.08

2009-10 = (25.00+ (2605.25-1125)) /1125 * 100 = 133.80

Average Return = 96.39/5 = 19.28

2. RELIANCE INDUSTRIES LTD.

Year

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Dividend

(D) (Rs)

Open

Price

(P0)

(Rs)

Closing

Price (P1)

(Rs)

(P1-P0) (D+(P1-

P0))/P0*100

2005-2006 10 520.05 889.65 369.6 72.99

2006-2007 11 893.45 1,270.35 376.9 43.41

2007-2008 13 1,252.5

5

2,881.05 1628.5 131.05

2008-2009 13 2,950.0

0

1,230.25 -1719.8 -57.86

2009-2010 7 1,240.0

5

1,089.40 -150.65 -11.58

TOTAL RETURNS 178.01

Returns

2005-06 = (10.00+ (889.65-520.05)) /520.05 * 100 = 72.99

2006-07 = (11.00+ (1270.35-893.45)) /893.45 * 100 = 43.41

2007-08 = (13.00+ (2881.05-1252.55)) /1252.55 * 100 = 131.05

2008-09 = (13.00+ (1230.25-2950.00)) /2950.00 * 100 = -57.86

2009-10 = (07.00+ (1089.40-1240.05)) /1240.05 * 100 = -11.58

Average Return = 178.01/5 = 35.602

3. TATA STEEL LTD:

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Year Dividend

(D) (Rs)

Open

Price

(P0)(Rs)

Closing

Price (P1)

(Rs)

(P1-P0) (D+(P1-

P0))/P0*10

0

2005-2006 10 520.05 889.65 369.6 72.99

2006-2007 11 893.45 1,270.35 376.9 43.41

2007-2008 13 1,252.5

5

2,881.05 1628.5 131.05

2008-2009 13 2,950.0

0

1,230.25 -1719.8 -57.86

2009-2010 7 1,240.0

5

1,089.40 -150.65 -11.58


Returns

2005-06 = (13.00+ (380.30-391.00)) /391.00 * 100 = 0.59

2006-07 = (15.50+ (482.30-382.00)) /382.00 * 100 = 32.89

2007-08 = (16.00+ (934.80-484.00)) /484.00 * 100 = 96.38

2008-09 = (16.00+ (216.85-938.00)) /938.00 * 100 = -75.18

2009-10 = (08.00+ (617.60-218.40)) /218.40 * 100 = 186.79

Average Return = 241.47/5 = 48.29

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4. ULTRATECH CEMENT LTD:

Year

Dividend

(D) (Rs)

Opening

Price(P0)

(Rs)

ClosingPrice (P1)

(Rs) (P1-P0)

(D+(P1-

P0))/P0*10

0

2005-2006 1.75 342 427.15 85.15 25.41

2006-2007 4 434.5 1096.9 662.4 153.55

2007-2008 5 1108 1014.5 -93.5 -7.99

2008-2009 5 1040 383.1 -656.9 -62.68

2009-2010 6 389.25 915.1 525.85 136.63


Returns

2005-06 = (1.75+ (427.15-342.00)) /342.00 * 100 = 25.41

2006-07 = (4.00+ (1096.90-434.50)) /434.50 * 100 = 153.55

2007-08 = (5.00+ (1014.50-1108.00)) /1108.00 * 100 = -7.99

2008-09 = (5.00+ (383.10-1040.00)) /1040.00 * 100 = -62.68

2009-10 = (6.00+ (915.10-389.25)) /389.25 * 100 = 136.63

Average Return = 244.92/5 = 48.98

5. ICICI BANK:

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Year

Dividend

(D) (Rs)

Opening

Price

(P0)

(Rs)

Closing

Price (P1)

(Rs) (P1-P0)

(D+(P1-

P0))/P0*100

2005-2006 8.5 374.85 584.7 209.85 58.25

2006-2007 10 586.25 890.4 304.15 53.59

2007-2008 11 889 1232.4 343.4 39.86

2008-2009 11 1235 448.35 -786.65 -62.81

2009-2010 12 455 875.7 420.7 95.1


Returns

2005-06 = (08.50+ (584.7-374.85)) /374.85 * 100 = 58.25

2006-07 = (10.00+ (890.4-586.25)) /586.25 * 100 = 53.59

2007-08 = (11.00+ (1232.4-889)) /889 * 100 = 39.86

2008-09 = (11.00+ (448.35-1235)) /1235 * 100 = -62.81

2009-10 = (12.00+ (875.7-455)) /455 * 100 = 95.10

Average Return = 183.99/5 = 36.8

6. ITC LTD:

Year (P1-P0)

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Dividend

(D) (Rs)

Opening

Price

(P0)

(Rs)

Closing

Price (P1)

(Rs)

(D+(P1-

P0))/P0*10

0

2005-2006 2.65 1324.5 142 -1182.5 -89.08

2006-2007 3.1 142.5 175.95 33.45 25.65

2007-2008 3.5 177.9 210.3 32.4 20.18

2008-2009 3.7 212 171.45 -40.55 -17.38

2009-2010 10 172.5 250.85 78.35 51.22

TOTAL RETURNS -9.41

Returns

2005-06 = (02.65+ (142.00-1324.50)) /1324.50 * 100 = -89.08

2006-07 = (03.10+ (175.95-142.50)) /142.50 * 100 = 25.65

2007-08 = (03.50+ (210.30-177.90)) /177.90 * 100 = 20.18

2008-09 = (03.70+ (171.45-212.00)) /212.00 * 100 = -17.38

2009-10 = (10.00+ (250.85-172.50)) /172.50 * 100 = 51.22

Average Return = -9.41/5 = -1.88

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AVERAGE RETURNS

COMPANY

AVERAGE

RETURNINFOSYS TECHNOLOGIES (IT) 19.28

RELIANCE INDUSTRIES (REFINARIES) 35.602

TATA STEEL (STEEL) 48.29

ULTRATECH (CEMENTS) 48.98

ICICI (BANKING) 36.8

ITC (Cigarettes, tobacco products) -1.88

INTERPRETATION:

From the above graph, we understand that by investing in diversified securities,

we can diversify the risk of losses. Tata Steel (48.29) and Ultratech cement

(48.98) are earning higher returns, and other securities are earning medium and

negative returns (ITC Ltd).

CALCULATION OF STANDARD DEVIATION:

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

Standard Deviation = Variance

1. INFOSYS TECHNOLOGIES LTD:

Year Return (R)

Avg. Return

(R) (R-R) (R-R) 2

2005-2006 43.13 19.28 23.85 568.82

2006-2007 -24.93 19.28 -44.21 1954.52

2007-2008 -20.53 19.28 -39.81 1584.84

2008-2009 -35.08 19.28 -54.36 3955.01

2009-2010 133.80 19.28 114.52 13114.83

TOTAL = (R-R) 2 20178.02

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

= 1/4 (20178.02) = 5044.5

Standard Deviation = Variance = 5044.5 = 71.02

2. RELIANCE INDIA LTD:

Year

Retur

n (R)

Avg. Return

(R) (R-R) (R-R)2

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2005-2006 72.99 35.6 37.39 1398.01

2006-2007 43.41 35.6 7.81 60.99

2007-2008 131.05 35.6 95.45 9110.70

2008-2009 -57.86 35.6 -93.46 8734.77

2009-2010 -11.58 35.6 -47.18 2225.95

TOTAL = (R-R)2 21530.42

Variance = 1/n-1 (R-R) 2 = 1/4 (21530.42) = 5382.61


3. TATA STEEL:

Year

Retur

n (R)

Avg. Return

(R) (R-R) (R-R) 2

2005-2006 0.59 48.29 -47.7 2275.29

2006-2007 32.89 48.29 -15.4 237.162007-2008 96.38 48.29 48.09 2312.65

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2008-2009 -75.18 48.29 -123.47 15244.84

2009-2010186.79 48.29 138.5 19182.25

TOTAL = (R-R) 2 39252.19

Variance = 1/n-1 (R-R) 2 = 1/4 (39252.19) = 9813.05


4. ULTRATECH CEMENT:

Year Return (R)

Avg. Return

(R) (R-R) (R-R) 2

2005-2006 25.41 48.98 -23.57 555.55

2006-2007 153.55 48.98 104.57 10934.88

2007-2008 -7.99 48.98 -56.97 3245.58

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2008-2009 -62.68 48.98 -111.66 12467.96

2009-2010 136.63 48.98 87.65 7682.52

TOTAL = (R-R) 2 34886.49

Variance = 1/n-1 (R-R) 2 = 1/4 (34886.49) = 8721.62

Standard Deviation = Variance = 8721.62= 93.39

5. ICICI BANK:

Year Return (R)

Avg. Return

(R) (R-R) (R-R)2

2005-2006 58.25 36.8 21.45 460.1

2006-2007 53.59 36.8 16.79 281.9

2007-2008 39.86 36.8 3.06 93.64

2008-2009 -62.81 36.8 -99.61 9922.15

2009-2010 95.1 36.8 58.3 3398.89

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TOTAL = (R-R) 2 14156.68

Variance = 1/n-1 (R-R) 2 = 1/4 (14156.68) = 3539.17


6. ITC LTD:

Year Return (R)

Avg. Return

(R) (R-R) (R-R) 2

2005-2006 -89.08 -1.88 -87.2 7603.84

2006-2007 25.65 -1.88 27.53 757.9

2007-2008 20.18 -1.88 22.06 486.64

2008-2009 -17.38 -1.88 -15.5 240.25

2009-2010 51.22 -1.88 53.1 2819.61

TOTAL = (R-R) 2 11908.24

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Variance = 1/n-1 (R-R) 2 = 1/4 (11908.24) = 2977.06


AVERAGE RISK

COMPANY RISK

INFOSYS TECHNOLOGIES 71.02

RELIANCE INDUSTRIES 73.37

TATA STEEL 99.06

ULTRATECH 93.39

ICICI BANK 59.49

ITC LTD 54.56

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INTERPRETATION:

From the above graph, we can understand that Tata Steel & Ultratech Cement

has highest standard deviation and hence high risk; where as other securities

have average risk. By investing in diversified portfolio, we can diversify the

risk.

CALCULATION OF CORRELATION:

Covariance (COV ab) = 1/n (RA-RA) (RB-RB)

Correlation Coefficient = COV ab / a * b

1. INFOSYS AND OTHER COMPANIES:

(i) INFOSYS (RA) & RELIANCE INDUSTRIES (RB):

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YEAR (RA-RA) (RB-RB) (RA-RA) (RB-RB)

2005-2006 23.85 37.39 891.75

2006-2007 -44.21 7.81 -345.28

2007-2008 -39.81 95.45 -3799.862008-2009 -54.36 -93.46 5080.49

2009-2010 114.52 -47.18 -5403.05

TOTAL -3575.95

Covariance (COV ab) = 1/5 (-3575.95) = -715.19

a = 71.02 ; b = 73.37

Correlation Coefficient = COV ab / a * b

= -715.19/(71.02)(73.37) = -0.14

(ii) INFOSYS (RA) & TATA STEEL (RB):


2005-

2006

23.85 -47.7 -1137.65

2006-

2007

-44.21 -15.4 680.83

2007-

2008

-39.81 48.09 -1914.46

2008-

2009

-54.36 -123.47 6711.83

2009-

2010

114.52 138.5 15861.02

TOTAL 20201.57

Covariance (COV ab) = 1/5 (20201.57) = 4040.31

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a = 71.02 ; b = 99.06

Correlation Coefficient = COV ab / a * b = 4040.31/(71.02)(99.06) = 0.57

(iii) INFOSYS (RA) & ULTRATECH CEMENT (RB):


2005-

2006

23.85 -23.57 -562.14

2006-

2007

-44.21 104.57 -4623.04

2007-

2008

-39.81 -56.97 2267.98

2008-

2009

-54.36 -111.66 6069.84

2009-

2010

114.52 87.65 10037.68

TOTAL 13190.32


a = 71.02 ; b = 93.39

Correlation Coefficient = COV ab / a * b = 2638.06 / (71.02)(93.39) = 0.4

(iv) INFOSYS (RA) & ICICI BANK (RB):


2005-2006 23.85 21.45 511.58

2006-2007 -44.21 16.79 -742.29

2007-2008 -39.81 3.06 -121.82

2008-2009 -54.36 -99.61 5414.8

2009-2010 114.52 58.3 6676.52

TOTAL 11738.79


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a = 71.02; b = 59.49


(v) INFOSYS (RA) & ITC LTD (RB_:


2005-2006 23.85 -87.2 -2079.72

2006-2007 -44.21 27.53 -1217.10

2007-2008 -39.81 22.06 -878.21

2008-2009 -54.36 -15.5 842.58

2009-2010 114.52 53.1 6081.01TOTAL 2748.56


a = 71.02; b = 54.56


2. RELIANCE INDUSTRIES AND OTHER COMPANIES :

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


2005-2006 37.39 -47.7 -1783.5

2006-2007 7.81 -15.4 -120.27

2007-2008 95.45 48.09 4590.19

2008-2009 -93.46 -123.47 11539.51

2009-2010 -47.18 138.5 -6534.43

TOTAL 7692.5


a = 73.37 ; b = 99.06

Correlation Coefficient = COV ab / a * b = 1538.5/(73.37)(99.06)= 0.2

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(ii) RIL (RA) & ULTRATECH CEMENT (RB):

YEAR (RA-RA) (RB-RB) (RA-RA) (RB-RB)2005-2006 37.39 -23.57 -881.28

2006-2007 7.81 104.57 816.69

2007-2008 95.45 -56.97 -5437.79

2008-2009 -93.46 -111.66 10435.74

2009-2010 -47.18 87.65 -4135.33

TOTAL 798.03


a = 73.37 ; b = 93.39


(iii) RIL (RA) & ICICI BANK (RB):


2005-2006 37.39 21.45 802.022006-2007 7.81 16.79 131.13

2007-2008 95.45 3.06 292.08

2008-2009 -93.46 -99.61 9309.55

2009-2010 -47.18 58.3 -2750.59

TOTAL 13285.37

Covariance (COV ab) = 1/5(13285.37) = 2657.07

a = 73.37 ; b = 59.49


(iv) RIL (RA) & ITC LTD (RB):


2005-2006 37.39 -87.2 -3260.412006-2007 7.81 27.53 215.01

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2007-2008 95.45 22.06 2105.63

2008-2009 -93.46 -15.5 1448.63

2009-2010 -47.18 53.1 -2505.26

TOTAL -1996.4

Covariance (COV ab) = 1/5 (-1996.4) = -399.28

a = 73.37 ; b = 54.56

Correlation Coefficient = COV ab / a * b = -1996.4/(73.37)(54.56) = -0.1

3. TATA STEEL & OTHER COMPANIES:

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


2005-2006 -47.7 -23.57 1124.3

2006-2007 -15.4 104.57 -1610.38

2007-2008 48.09 -56.97 -2739.69

2008-2009 -123.47 -111.66 13786.66

2009-2010 138.5 87.65 12139.53

TOTAL 22700.42


a = 99.06 ; b = 93.39


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


2005-2006 -47.7 21.45 -1023.2

2006-2007 -15.4 16.79 -258.57

2007-2008 48.09 3.06 147.16

2008-2009 -123.47 -99.61 12298.85

2009-2010 138.5 58.3 8074.55

TOTAL 19238.79


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a = 99.06; b = 59.49


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


2005-2006 -47.7 -87.2 4159.44

2006-2007 -15.4 27.53 -423.96

2007-2008 48.09 22.06 1060.862008-2009 -123.47 -15.5 1913.78

2009-2010 138.5 53.1 7354.35

TOTAL 14912.35


a = 99.06; b = 54.56


4. ULTRATECH CEMENT & OTHER COMPANIES:

(i) ULTRATECH (RA) & ICICI BANK (RB):


2005-2006 -23.57 21.45 -505.58

2006-2007 104.57 16.79 1755.73

2007-2008 -56.97 3.06 -174.33

2008-2009 -111.66 -99.61 11122.452009-2010 87.65 58.3 5109.99

TOTAL 17308.26


a = 93.39 ; b = 59.49


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(ii) ULTRATECH (RA) & ITC LTD (RB):

YEAR (RA-RA) (RB-RB) (RA-RA) (RB-RB)2005-2006 -23.57 -87.2 2055.3

2006-2007 104.57 27.53 2878.8

2007-2008 -56.97 22.06 -1256.76

2008-2009 -111.66 -15.5 1730.73

2009-2010 87.65 53.1 4654.22

TOTAL 10062.29


a = 93.39 ; b = 54.56


5. ICICI BANK & OTHER COMPANIES:

(i) ICICI BANK (RA) & ITC LTD (RB):


2005-2006 21.45 -87.2 -1870.442006-2007 16.79 27.53 462.23

2007-2008 3.06 22.06 67.50

2008-2009 -99.61 -15.5 1543.96

2009-2010 58.3 53.1 3095.73

TOTAL 3298.98


a = 59.49 ; b = 54.56


CALCULATION OF PORTFOLIO WEIGHTS:

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Wa = b [b-(nab*a)]

a2 + b2 - 2nab*a*b

Wb = 1 Wa

1. CALCULATION OF WEIGHTS OF INFOSYS & OTHER COMPANIES:

(i) INFOSYS (a) & RIL (b)

a = 71.02

b = 73.37

nab = -0.14

Wa = 73.37[73.37-(-0.14*71.02)]

(71.02)2 + (73.37)2 2(-0.14*71.02*73.37)

Wa = 6112.66

11886

Wa = 0.5

Wb = 1 Wa

Wb = 1- 0.5 = 0.5

(ii) INFOSYS (a) & TATA STEEL (b)

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a = 71.02

b = 59.49

nab = 0.56

Wa = 59.49 [59.49-(0.56*71.02)]

(71.02)2 + (59.49)2 2(0.56*71.02*59.49)

Wa = 1137.07

3850.92

Wa = 0.3

Wb = 1 Wa

Wb = 1- 0.3 = 0.7

(v) INFOSYS (a) & ITC LTD (b)

a = 71.02

b = 54.56

nab = 0.14

Wa = 54.56 [54.56-(0.14*71.02)]

(71.02)2 + (54.56)2 2(0.14*71.02*54.56)

Wa = 2434.3

6935.68

Wa = 0.35

Wb = 1 Wa

Wb = 1- 0.35 = 0.65

2. CALCULATION OF WEIGHTS OF RIL & OTHER COMPANIES:

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(i) RIL (a) & TATA STEEL (b)

a = 73.37

b = 99.06

nab = 0.2

Wa = 99.06[99.06-(0.2*73.37)]

(73.37)2 + (99.06)2 2(0.2*73.37*99.06)

Wa = 8359.28

12288.83

Wa = 0.68

Wb = 1 Wa

Wb = 1- 0.68 = 0.32

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

a = 73.37

b = 93.39

nab = 0.02

Wa = 93.39 [93.39-(0.2*73.37)]

(73.37)2 + (93.39)2 2(0.2*73.37*93.39)

Wa = 8584.65

13830.77

Wa = 0.62

Wb = 1 Wa

Wb = 1- 0.62 = 0.38

(iii) RIL (a) & ICICI BANK (b)

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a = 73.37

b = 59.49

nab = 0.61

Wa = 59.49 [59.49-(0.61*73.37)]

(73.37)2 + (59.49)2 2(0.61*73.37*59.49)

Wa = 876.54

3597.18

Wa = 0.24

Wb = 1 Wa

Wb = 1- 0.24 = 0.76

(iv)RIL (a) & ITC LTD (b)

a = 73.37

b = 54.56

nab = -0.1

Wa = 54.56 [54.56-(-0.1*73.37)]

(73.37)2 + (54.56)2 2(-0.1*73.37*54.56)

Wa = 3377

9160.56

Wa = 0.37

Wb = 1 Wa

Wb = 1- 0.37 = 0.63

3. CALCULATION OF WEIGHTS OF TATA STEEL & OTHER

COMPANIES:

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(i) TATA STEEL (a) & ULTRATECH (b)

a = 99.06

b = 93.39

nab = 0.49

Wa = 93.39 [93.39-(0.49*99.06)]

(99.06)2 + (93.39)2 2(0.49*99.06*93.39)

Wa = 4188.6

9468.39

Wa = 0.44

Wb = 1 Wa

Wb = 1- 0.44 = 0.56

(ii) TATA STEEL (a) & ICICI BANK (b)

a = 99.06

b = 59.49

nab = 0.65

Wa = 59.49 [59.49-(0.65*99.06)]

(99.06)2 + (59.49)2 2(0.65*99.06*59.49)

Wa = -291.44

5690.94

Wa = -0.05

Wb = 1 Wa

Wb = 1+0.05 = 1.05

(iii) TATA STEEL (a) & ITC LTD (b)

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a = 99.06

b = 54.56

nab = 0.55

Wa = 54.56 [54.56-(0.55*99.06)]

(99.06)2 + (54.56)2 2(0.55*99.06*54.56)

Wa = 4.2

6844.5

Wa = 0.0006

Wb = 1 Wa

Wb = 1-0.0006 = 0.9994

4. CALCULATION OF WEIGHTS OF ULTRATECH & OTHER

COMPANIES:

(i) ULTRATECH (a) & ICICI BANK (b)

a = 93.39

b = 59.49

nab = 0.62

Wa = 59.49 [59.49-(0.62*93.39)]

(93.39)2 + (59.49)2 2(0.62*93.39*59.49)

Wa = 94.48

5371.6

Wa = 0.02

Wb = 1 Wa

Wb = 1- 0.02 = 0.98

(ii) ULTRATECH (a) & ITC LTD (b)

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a = 93.39

b = 54.56

nab = 0.4

Wa = 54.56 [54.56-(0.4*93.39)]

(93.39)2 + (54.56)2 2(0.4*93.39*54.56)

Wa = 938.65

7622.2

Wa = 0.12

Wb = 1 Wa

Wb = 1- 0.12 = 0.88

5. CALCULATION OF WEIGHTS OF ICICI BANK & OTHER

COMPANIES:

(i) ICICI BANK (a) & ITC LTD (b)

a = 59.49

b = 54.56

nab = 0.2

Wa = 54.56 [54.56-(0.2*59.49)]

(59.49)2 + (54.56)2 2(0.2*59.49*54.56)

Wa = 2327.64

5217.54

Wa = 0.45

Wb = 1 Wa

Wb = 1- 0.45 = 0.55

CALCULATION OF PORTFOLIO RISK:

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b = 93.39

Wa = 0.72

Wb = 0.28

nab = 0.4

P = (71.02)2(0.72)2+(93.39)2(0.28)2+2(0.4)(71.02*93.39)(0.72*0.28)

= 4368.21 = 66.09

(iv) INFOSYS (a) & ICICI BANK (b)

a = 71.02

b = 59.49

Wa = 0.3

Wb = 0.7

nab = 0.56

P = (71.02)2(0.3)2+(59.49)2(0.7)2+2(0.56)(71.02*59.49)(0.3*0.7)

= 3181.8 = 56.41

(v) INFOSYS (a) & ITC LTD (b)

a = 71.02

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66/79

b = 93.39

Wa = 0.62

Wb = 0.38

nab = 0.02

P = (73.37)2(0.62)2+(93.39)2(0.38)2+2(0.02)(73.37*93.39)(0.62*0.38)

= 3393.27 = 58.25

(iii) RIL (a) & ICICI BANK (b)

a = 73.37

b = 59.49

Wa = 0.24

Wb = 0.76

nab = 0.61

P = (73.37)2(0.24)2+(59.49)2(0.76)2+2(0.61)(73.37*59.49(0.24*0.76)

= 3325.52 = 57.67

(iv) RIL (a) & ITC LTD (b)

a = 73.37

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b = 54.56

Wa = 0.37

Wb = 0.63

nab = -0.1

P = (73.37)2(0.37)2+(56.46)2(0.63)2+2(-0.1)(73.37*54.56)(0.37*0.63)

= 1731.82 = 41.61

3. CALCULATION OF PORTFOLIO RISK OF TATA STEEL &

OTHER COMPANIES:

(i) TATA STEEL (a) & ULTRATECH (b)

a = 99.06

b = 93.39

Wa = 0.44

Wb = 0.56

nab = 0.49

P = (99.06)2(0.44)2+(93.39)2(0.56)2+2(0.49)(99.06*93.39)(0.44*0.56)

= 6868.8 = 82.88

(ii) TATA STEEL (a) & ICICI BANK (b)

a = 99.06

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b = 59.49

Wa = -0.05

Wb = 1.05

nab = 0.65

P = (99.06)2(-0.05)2+(59.49)2(1.05)2+2(0.65)(99.06*59.49)(-0.05*1.05)

= 3524.14 = 59.36

(iii) TATA STEEL (a) & ITC LTD (b)

a = 99.06

b = 54.56

Wa = 0.0006

Wb = 0.9994

nab = 0.55

P= (99.06)2(0.0006)2+(54.56)2(0.9994)2+2(0.65)(99.06*54.56)

(0.0006*0.9994)

= 2976.78 = 54.56

4. CALCULATION OF PORTFOLIO RISK OF ULTRATECH &

OTHER COMPANIES:

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(i) ULTRATECH (a) & ICICI BANK (b)

a = 93.39

b = 59.49

Wa = 0.02

Wb = 0.98

nab = 0.62

P = (93.39)2(0.02)2+(59.49)2(0.98)2+2(0.62)(93.39*59.49)(0.02*0.98)

= 3537.43 = 59.48

(ii) ULTRATECH (a) & ITC LTD (b)

a = 93.39

b = 54.56

Wa = 0.12

Wb = 0.88

nab = 0.4

P = (93.39)2(0.12)2+(54.56)2(0.88)2+2(0.4)(93.39*54.56)(0.12*0.88)

= 2861.28 = 53.49

5. CALCULATION OF PORTFOLIO RISK OF ICICI BANK &

OTHER COMPANIES:

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(i) ICICI BANK (a) & ITC LTD (b)

a = 59.49

b = 54.56

Wa = 0.45

Wb = 0.55

nab = 0.2

P = (54.59)2(0.45)2+(54.56)2(0.55)2+2(0.2)(59.49*54.56)(0.45*0.55)

= 1938.47 = 44.03

INTERPRETATION:

The above graph shows that the combination of TATA STEEL & ULTRATECH

is most risky and RIL & ITC involves least risk.

CALCULATION OF PORTFOLIO RETURNS

Rp = Ra*Wa + Rb*Wb

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PORTFOLIO Ra Wa Rb Wb Rp

Infosys & RIL 19.28 0.5 35.6 0.5 27.44

Infosys & Tata

Steel 19.28 0.85 48.29 0.15 23.63

Infosys &

Ultratech 19.28 0.72 48.98 0.28 27.6

Infosys & ICICI

Bank 19.28 0.3 36.8 0.7 31.54

Infosys & ITC

Ltd 19.28 0.35 -1.88 0.65 5.53

RIL & Tata Steel 35.6 0.68 48.29 0.32 39.66RIL & Ultratech 35.6 0.62 48.98 0.38 40.68

RIL & ICICI

Bank 35.6 0.24 36.8 0.76 36.51

RIL & ITC Ltd 35.6 0.37 -1.88 0.63 11.99

Tata Steel &

Ultratech 48.29 0.44 48.98 0.56 48.68

Tata Steel &

ICICI Bank 48.29 -0.05 36.8 1.05 36.22

Tata Steel & ITCLtd 48.29 0.0006 -1.88 0.9994 -1.85

Ultratech &

ICICI Bank 48.98 0.02 36.8 0.98 37.04

Ultratech & ITC

Ltd 48.98 0.12 -1.88 0.88 4.22

ICICI Bank &

ITC Ltd -1.88 0.55 -1.88 0.45 15.53

PORTFOLIO WEIGHTS, RETURN & RISK:

PORTFOLIO

(A & B)

WEIGHT

OF A

WEIGHT

OF B

PORTFOLIO

RETURN

PORTFOLIO

RISK

INFOSYS & RIL 0.5 0.5 27.44 47.35

INFOSYS & TATA

STEEL 0.85 0.15 23.63 69.91

INFOSYS &

ULTRATECH

0.72 0.28 27.6 66.09

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CEMENT

INFOSYS & ICICI

BANK 0.3 0.7 31.54 56.41

INFOSYS & ITC LTD 0.35 0.65 5.53 46.07

RIL & TATA STEEL 0.68 0.32 39.66 64.24RIL & ULTRATECH

CEMENT 0.62 0.38 40.68 58.25

RIL & ICICI BANK 0.24 0.76 36.51 57.67

RIL & ITC LTD 0.37 0.63 11.99 41.61

TATA STEEL &

ULTRATECH

CEMENT 0.44 0.56 48.68 82.88

TATA STEEL &

ICICI BANK -0.05 1.05 36.22 59.36

TATA STEEL & ITC

LTD

0.000

6

0.999

4 -1.85 54.56

ULTRATECH

CEMENT & ICICI

BANK 0.02 0.98 37.04 59.48

ULTRATECH

CEMENT & ITC LTD 0.12 0.88 4.22 53.49

ICICI BANK & ITC 0.45 0.55 15.53 44.03

5.1 FINDINGS:

INFOSYS & RIL:

In this combination, as per the calculations and the study, Infosys bears 50% of

investment and RIL bears remaining 50%. The standard deviation i.e. risk is

reduced to 47.35.

From the return point of view, RIL is giving more return compared to that of

Infosys. From risk point of view, there is not much difference between the

standard deviation of the two companies, Infosys (71.02) and RIL (73.37). It is

better to make more investment in RIL stock.

INFOSYS & TATA STEEL:

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In this combination, the portfolio weights of the two companies are 0.85

(Infosys) and 0.15 (TATA Steel). The standard deviation of Infosys is 71.02 and

99.06 for TATA. The combination is highly risky; the standard deviation of the

portfolio is 69.91.

A risk taker can invest more in TATA, but he needs to be careful. However,

more investment in TATA is not suggested, due to high risk involved.

INFOSYS & ULTRATECH CEMENT:

Another combination for portfolio decision-making is Infosys & Ultratech. This

is a risky combination. The investment proportion is 0.72 & 0.28 respectively.

The standard deviation and returns are 71.02 & 93.39 and 19.28 & 48.98

respectively.

INFOSYS & ICICI BANK:

It is a good combination as it involves lower risk and higher return. The standard

deviation of ICICI is 59.49, which is less compared to the standard deviation of

Infosys i.e., 71.02. It means less risk is involved in ICICI compared to Infosys.

So if any investor wants to invest his funds in this portfolio, it is suggested that

he invests a large share of his funds in ICICI. The combined standard deviation

is 56.41, which is less than individual risk of Infosys and ICICI.

INFOSYS & ITC:

The combination of INFOSYS & ITC gives the proportion of 0.35 and 0.65. The

standard deviation of INFOSYS is 71.02 and ITC is 54.56. Hence the investor

should invest their funds more in ITC as the risk involved in ITC is less than

INFOSYS. The combined portfolio risk is 46.07, which is less than the

individual risk of ITC. Individual returns are 19.28 and -1.88 respectively. This

is a risky investment as it involves more risk and less return.

RIL & TATA STEEL:

The portfolio weights suggest that more investment should be made in RIL than

TATA STEEL. Portfolio weights for RIL & TATA STEEL are 0.68 & 0.32

respectively. This is a high risk high return portfolio. Standard deviation for RIL

is 73.37 and for TATA STEEL it is 99.06. Combined portfolio risk is 64.24.

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Individual returns are 35.6 and 48.29 respectively for RIL and TATA STEEL. It

is suggested that an investor should invest more in RIL compared to TATA

STEEL as it provides better returns for lower risk than the returns provided by

TATA STEEL.

RIL & ULTRATECH:

This is one of the best combinations. The portfolio weights suggest that more

investment should be made in RIL than ULTRATECH. Portfolio weights for

RIL & ULTRATECH are 0.68 & 0.32 respectively. This is a high risk-high

return portfolio. Standard deviation for RIL is 73.37 and 93.39 for

ULTRATECH. Combined portfolio risk is 58.25, which is less compared to

individual risk of RIL. Individual returns are 35.6 and 48.29 respectively for RIL

and ULTRATECH.

It is suggested that an investor should invest more in RIL, as it provides better

returns (35.6) for lower risk (73.37) when compared to ULTRATECH that

provides a return of 48.98 at a risk of 93.39.

RIL & ICICI BANK:

The investor has another alternative bearing the investment proportion of 0.24 &

0.76 for RIL & ICICI. The standard deviation of RIL is 73.37 and for ICICI it is

59.49. Hence the investor should invest their funds more in ICICI, as the risk

involved is low. It gives higher return at lower risk when compared to RIL.

The combined portfolio risk is 57.67, which is less compared to individual risk

of ICICI.

RIL & ITC:

This combination has investment proportion of 0.37 & 0.63 for RIL & ITC

respectively. The standard deviation of RIL is 73.37 and ITCs standard

deviation is 54.56, it means ITC has less risk compared to RIL. It is suggested to

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invest more in ITC though it has negative returns because investing in RIL could

be more risky.

TATA STEEL & ULTRATECH:

This is of the best combinations for a risk taker. It involves the highest risk and

gives the highest return. An investor should be careful while investing in this

portfolio.

The portfolio weights are 0.44 & 0.56 respectively. The standard deviation of

TATA STEEL & ULTRATECH is 99.06 & 93.39 respectively. And the returns

are 48.29 & 48.98.

The risk associated with these companies has been diversified and reduced to

82.88 and portfolio return is 48.68.

TATA STEEL & ICICI BANK:

The portfolio weights suggest that more investment should be made in ICICI

than TATA STEEL.

Portfolio weights for TATA STEEL & ICICI are -0.05 & 1.05 respectively. The

standard deviation is 99.06 & 59.49 respectively which has been reduced to

59.36. Optimum investment decision from the investors point of view is to

invest all in funds in ICICI, which will give him better returns with less risk.

TATA STEEL & ITC LTD:

The combination of TATA STEEL & ITC gives the proportion 0.0006 &

0.9994. The standard deviation of TATA STEEL is 99.06 and ITC is 54.56.

Hence the investor should invest their funds more in ITC as the risk involved in

ITC is less than that of TATA STEEL. Investing more in TATA STEEL is

highly risky.

The combined portfolio risk is 54.56 which is less than the individual risk of

TATA STEEL.

ULTRATECH & ICICI BANK:

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According to this combination the portfolio weights are 0.02 (ULTRATECH) &

0.98 (ICICI). The standard deviation of ULTRATECH is more than that of

ICICI i.e., 93.39 > 59.49.

If the investor wants to take low risk then ICICI is a better option as it provides

better return with less risk.

ULTRATECH & ITC LTD:

The combination of ULTRATECH & ITC gives the proportion 0.12 & 0.88. The

standard deviation of ULTRATECH is 93.39 and ITC is 54.56. Hence the

investor should invest their funds more in ITC as the risk involved in ITC is less

than that of TATA STEEL. Investing more in TATA STEEL is highly risky.

The combined portfolio risk is 53.49 which is less than the individual risk of

ULTRATECH.

ICICI BANK & ITC LTD:

According to this combination the portfolio weights are 0.45 (ICICI) & 0.55

(ITC). The standard deviation of ICICI is more than that of ITC i.e., 59.49 >

54.56. The combined portfolio risk is 44.03 which is less than the individual risk

of ICICI & ITC.

5.2 SUGGESTIONS:

1. The combination of TATA STEEL & ULTRATECH gives highest returns

but is highly risky. It is the best portfolio for a risk seeker. It is suggested to

be careful while investing in this portfolio.

2. It is suggested to invest in RIL & ULTRATECH. This is the best

combination available to an investor among the selected portfolios, sinc

portfolio management_meenakshi parashar

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