ASSIGNMENT

ON

PORTFOLIO MANAGEMENT

TOPIC:RISK ESTIMATION OF ONE TO TEN SECURITIES FOR TEN YEARS

DEPARTMENT OF COMMERCE, SCHOOL OF MANAGEMENT, PONDICHERRY UNIVERSITY

SUBMITTED TO SUBMITTED BY DR. DANIEL LAZAR DARUN V (12351034) ASSOCIATE PROFESSOR SUMESH TP (12351048) DEPARTMENT OF COMMERCE MUHAMMED SHAFI UK (12351056) SCHOOL OF MANAGEMENT MCOM (BF) SECTION: A

RISK ESTIMATION OF ONE TO TEN SECURITIES FOR

TEN YEARS

INTRODUCTION

Risk refers to the possibility that the actual outcome of an

investment will differ from its expected outcome . there are two

classification of risk ie. Systematic and unsystematic risk. A proper

analysis of risk will helps the investors to diversify the risk involved it

and select proper company to invest hard earned money. Here we are

studying the risk involved in banking industry. Banks are selected on the

basis of market capitalization.SBI,BOB,PNB,BOI,CANARA

BANK,IDBI,UNION BANK,SYNDICATE BANK,IOB,ORIENTAL BANK are the

banks we selected.

There is an general talk about stock market investment, 90% of

investors making losses because of lack of knowledge about

ascertainment and analysis of risk involved it.

OBJECTIVES

To ascertain total risk or SD

To ascertain systematic and unsystematic risk involved in securities

To find out the company which has lowest and highest risk.

To suggest a company for investment

RESERCH PROBLEM

Majority of investors in securities market making loss because of

lack of knowledge about the ascertainment or risk and return. There

are two types of risk systematic and unsystematic risk, unsystematic

risk can be diversifiable and the measurement of unsystematic risk will

help the investors to diversify risk and select suitable securities.

METHODOLOGY

10 companies selected from banking industry on the basis of

market capitalization.

Adjusted closing price of banks collected from yahoo finance

Adjusted closing price of NIFTY collected in NSE

Find security return and then find Standard deviation on it

Find Beta by using security return and market return

Unsystematic risk is calculated by taking the different between

Standard deviation and Beta

LIMITATION

Only ten Banks are taken to study risk involved in Banking industry

Study is based on ten years monthly closing price

RISK

Risk can be defined as the “Potential for variability in return”. Or it is the

possibility of variation between expected and realized return with regards to an

investment. Or the possibility that the return of holding securities less than the

return that were expected, Sources may be the failure of dividend or securities

price changes. Risk is the uncertainty that the expected return of investment may

not be realized

In other words risk is uncertainty that the expected return on investment

may not be realized .risk and return are highly proportional i.e. higher the rate of

return higher the rate of risk and vice versa.

ELEMENTS OF RISK

Following are the two elements of risk

A. Systematic risk

B. Unsystematic risk

Thus total risk should be

A. SYSTEMATIC RISK

The risk inherent in nature or affect entire market and un-diversifiable is

known as systematic risk.

FEATURES

Following are the important features of systematic risk

Un-diversifiable

External

Un-controllable

Affect entire market

Total risk=Systematic risk + Unsystematic risk

TYPES OF SYSTEMATIC RISK

1. INTEREST RATE RISK

It tell about the inverse relationship between the interest rate and stock price.

Speculators often resort to margin trading, as the increased rate of interest rate will

tightening the borrowing capacity of investors. Thus

higher interest rate-stock price fall

Lower interest rate-stock price increase.

Affect directly to bonds and indirectly to shares

If interest rate is higher than the cost of borrowed capital will

increase, then the profitability of companies also decrease, which leads to

lower than and the price of share will decrease

If interest rate increases, the risk of securities increases under the following

ways.

a. Increase the interest based on companies, which caused lower

profitability and dividend and fall in the share price

b. Higher interest rate cause increase the cost of borrowed fund of

investors may not come forward to purchase or trade securities, which

result fall in demand and decrease the price of securities.

2. MARKET RISK

Variation in return caused by volatility of the stock market is referred to as

market risk.

Indices such as SENSEX,NIFTY are the indicators

It may not explain short-term movements but applicable in long term

movements

Political, social, and economic factors influencing market risk.

Market rate risk is due to bull and bear phase in market, market risk

may cause of potential loss of principal by investor i.e., when investor sell

securities at lower price than the purchase.

Market risk is caused by investor reaction to tangible as well as intangible

events.

Tangible events

Economic factors

Political factors

Social factors

Intangible events

Market psychology

Emotional instability of investors acting collectively leads to an

inner banking overreaction

3. PURCHASING POWER RISK

Variation in investors returns caused by inflation because inflation lowering

the purchasing power of money or purchasing power of investment.

Purchasing power risk also called as inflation risk. It is arises due to risking

general price level, which leads to lowering the purchasing power of currency and

decrease the demand for particular security and reduce the price for it. Inflation

also influences the profitability of concerned organization and reduced the level of

return.

B. UNSYSTEMATIC RISK

The return from a security sometimes vary, because of certain factors

affecting only the company issuing such security is known as unsystematic risk.

Examples are raw material scarcity, labor strike management inefficiency etc.

FEATURES

Diversifiable

Internal

Controllable

TYPES OF UNSYSTEMATIC RISK

1) BUSINESS RISK

Business risk is function of variability in the operating condition of a firm,

these conditions inject into operating income and dividends.

Business risk are classified into two internal and external

Internal business risk: Efficiency of firms operation within the

operating environment of firm.

External business risk:Beyond the control of firm

2) FINANCIAL RISK

Financial risk is a function of financial leverage. Variability in EPS due to

presence of debt capital in capital structure of a company is referred to as

financial risk.

Financial risk is based on capital structure of firm. A firm with no debt

financing has no financial risk ,if it has debt capital in its capital structure which

increase the burden of company in the form of fixed interest which influence the

dividend payment capacity of firm and its market price negatively.

MEASUREMENT OF RISK

Risk in investment is associated with Return, which cannot be measured

without the measurement of return.

Return:Income received on an investment plus any change in market price,

usually expressed as a percent of the beginning market price of the investment.

MEASUREMENT OF STANDARD DEVIATION OR TOTAL RISK

Standard deviation is the total risk involved in securities or it is the summation

of systematic risk and unsystematic risk.

MEASUREMENT OF BETA

Beta is the systematic risk or undiversifiable risk. This can be calculated by the

following formula.

INTERPRETATION OF BETA

Following is the table showing the interpretation of Beta. Beta shows the

changes or variation in return in relation to variation in market return, I.e. how

much will be the changes in security return caused by variation in market index.

UNSYSTEMATIC RISK

Standard Deviation is the total risk and beta is the systematic risk, so here

the different is taken as the unsystematic risk. Unsystematic risk is the different

between Standard deviation and systematic risk.

Value of Beta Interpretation

ß < 0 Asset generally moves in the opposite direction as compared to the index

ß = 0 Movement of the asset is uncorrelated with the movement of the benchmark

0 < ß < 1 Movement of the asset is generally in the same direction as, but less than the movement of the benchmark

ß = 1 Movement of the asset is generally in the same direction as, and about the same amount as the movement of the benchmark

ß > 1 Movement of the asset is generally in the same direction as, but more than the movement of the benchmark

ANALYSIS

STANDARD DEVIATION/TOTAL RISK

Following is the table showing the total risk involved in the banking

securities over the past ten years from 2003-04 to 2012-13. Average risk of

securities for the ten years also calculated.

Highest average Standard deviation highlighted in Red color and lowest

standard deviation is highlighted by sky-blue.

AVERAGE STANDARD DEVIATION

Following table showing average standard deviation of banks for past ten years

INTERPRETATION

Highest SD showed by IDBI at .1805 it indicates higher variation of return of

IDBI and lowest SD showed by SBI at .1200 it indicates lowest variation of return

of SBI.

BETA/SYSTEMATIC RISK

Following is the table showing systematic risk of banking companies for the

past ten years from 2003-04 to 2012-13, with average Beta value for the ten

years. Highest Average beta highlighted in red colour and lowest beta highlighted

in skyblue

0

0.05

0.1

0.15

0.2

SD FOR 10 YEARS

SD FOR 10 YEARS

10 YEARS AVERAGE BETA

Following is the table showing ten years average beta of ten banking companies.

INTERPRETATION

Highest beta showed by IDBI at .2430, it indicates 1 % change in index return

would cause .2430 change in IDBI stock return and lowest beta showed by PNB at

.0754

UNSYSTEMATIC RISK

Following is the table showing Unsystematic risk of the ten banking

companies for past ten years from 2003-04 to 2012-13.Average risk for the ten

years also showed here. Highest value is highlighted in red color and lowest is

highlighted in sky blue.

0

0.05

0.1

0.15

0.2

0.25

BETA-10 YEARS

BETA-10 YEARS

10 YEARS AVERAGE UNSYSTEMATIC RISK

Following is the graphical representation of average unsystematic risk for

past ten years

INTERPRETATION

Highest unsystematic risk showed by PNB at .0569 and lowest unsystematic risk

showed by SBI at -0988

-0.1

-0.08

-0.06

-0.04

-0.02

0

0.02

0.04

0.06

UNSYSTEMATIC RISK -10 YEARS

UNSYSTEMATIC RISK -10 YEARS

FINDINGS

Lowest sd showed by sbi at .1172

SD of banks falling over the period of time

Oriental bank has lowest beta of .0158

Lowest unsystematic ris is showed by pnb at .0325

Unsystematic risk in banks is lower than systematic risk means the internal

factors affecting return of security are well managed

CONCLUSION

Here the estimation of Risk of ten securities for ten years suggest SBI for

investment purpose because it shows lowest SD .Unsystematic risk of banks are

lower than the systematic risk. Which shows the internal factors that affect

Banking companies return are effectively managed.