PORTFOLIO MANAGEMENT

MEANING:
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 that 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 Manager is defined as: Portfolio means the total holdings of securities belonging to any person.

PORTFOLIO MANAGER
It means any person who 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

It 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.

IMPORTANTNCE OF THE STUDY

A portfolio is a collection of investments held by an institution or a private individual. In building up an investment portfolio a financial institution will typically conduct its own investment analysis, whilst a private individual may make use of the services of a financial advisor or a financial institution which offers portfolio management services. Holding a portfolio is 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 stocks, bonds, options, warrants, gold certificates, real estate, futures contracts, production facilities, or any other item that is expected to retain its value.

IMPORTANCE OF PORTFOLIO MANAGEMENT:

Emergence of institutional investing on behalf of individuals. A number of financial

institutions, mutual funds and other agencies are undertaking the task of investing money of small investors, on their behalf. Growth in the number and size of ingestible funds a large part of household savings is being directed towards financial assets. Increased market volatility risk and return parameters of financial assets are continuously changing because of frequent changes in governments industrial and fiscal policies, economic uncertainty and instability. Greater use of computers for processing mass of data. Professionalization of the field and increasing use of analytical methods (e.g. quantitative techniques) in the investment decision making

NEED FOR THE STUDY:

The Portfolio Management deals with the process of selection securities from the number of opportunities available with different expected returns and carrying different levels of risk and the selection of securities is made with a view to provide the investors the maximum yield for a given level of risk or ensure minimum risk for a level of return. Portfolio Management is a process encompassing many activities of investment in assets and securities. It is a dynamics and flexible concept and involves regular and systematic analysis, judgment and actions. The objectives of this service are to help the unknown investors with the expertise of professionals in investment Portfolio Management. It involves construction of a portfolio based upon the investors objectives, constrains, preferences for risk and return and liability. The portfolio is reviewed and adjusted from time to time with the market conditions. The evaluation of portfolio is to be done in terms of targets set for risk and return. The changes in portfolio are to be effected to meet the changing conditions. 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 perspectives of combination of securities under constraints of risk and return.

OBJECTIVES OF THE STUDY: Primary objectives:

To analyze investment decision process towords investor company. To study and the process of diversification and to find the minimum variance portfolio. To study and assess the investment opportunity in sample selected. To study assess the value of returns the company is earning on their investment. To anaiyze risk-return analysis by morkowize portfolio theory or modern portfolio theory To analyze how risk should be minimized

Secondary objectives
To study and understand the risks in portfolio management. To study and understand the portfolio management and how its importance to the investors

RESEARCH METHODOLOGY
Research design or research methodology is the procedure of collecting, analyzing and interpreting the data to diagnose the problem and react to the opportunity in such a way where the costs can be minimized and the desired level of accuracy can be achieved to arrive at a particular conclusion. The methodology used in the study for the completion of the project and the fulfillment of the project objectives, is as follows: Market prices of the companies have been taken for the years of different dates, there by dividing the companies into 5 sectors. A final portfolio is made at the end of the year to know the changes (increase/decrease) in the portfolio at the end of the year.

Sources of the data:

Primary data: The primary data information is gathered by interviewing India Infloline Ltd Employee.

Secondary data The secondary data is collected from various financial books, magazines and from stock lists of various newspapers and India Infloline Pvt Ltd as part of the training class undertaken for project.

SCOPE OF THE STUDY:

The scope of the study is to study the portfolio management process. 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 principles governing such allocation. The modern view of investment is oriented towards the assembly of proper combinations together will give beneficial result if they are grouped in a manner to secure higher return after taking into consideration the risk element.

LIMITATIONS OF THE STUDY:

This study has been conducted purely to understand Portfolio Management for investors. Share price of scripts of 6 years period was considered Only some samples have been selected for consternating a portfolio. Construction of Portfolio is restricted to two companies based on Markowitz model. Very few and randomly selected scripts / companies are analyzed from BSE listings. 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 45 days.

INDUSTRY PROFILE

Bombay Stock Exchange Limited is the oldest stock exchange in Asia with a rich heritage. Popularly known as "BSE", it was established as "The Native Share & Stock Brokers Association" in 1875. BSE has played a pioneering role in the Indian Securities Market - one of the oldest in the world. Much before actual legislations were enacted, BSE had formulated comprehensive set of Rules and Regulations for the Indian Capital Markets. It also laid down best practices adopted by the Indian Capital Markets after India gained its Independence. Vision: "Emerge as the premier Indian stock exchange by establishing global benchmarks" BSE is the first stock exchange in the country to obtain permanent recognition in 1956 from the Government of India under the Securities Contracts (Regulation) Act, 1956.The Exchange's pivotal and pre-eminent role in the development of the Indian capital market is widely recognized and its index, SENSEX, is tracked worldwide. SENSEX, first compiled in 1986 was calculated on a "Market Capitalization-Weighted" methodology of 30 component stocks representing a sample of large, well-established and financially sound companies. The base year of SENSEX is 1978-79. From September 2003, the SENSEX is calculated on a free-float market capitalization methodology. The "free-float Market Capitalization-Weighted" methodology is a widely followed index construction methodology on which majority of global equity benchmarks are based. The launch of SENSEX in 1986 was later followed up in January 1989 by introduction of BSE National Index (Base: 1983-84 = 100). It comprised of 100 stocks listed at five major stock exchanges in India at Mumbai, Calcutta, Delhi, Ahmadabad and Madras. The BSE National Index was renamed as BSE-100 Index from October 14, 1996 and since then it is calculated taking into consideration only the prices of stocks listed at BSE. The Exchange launched dollar-linked version of BSE-100 index
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i.e. Dollex-100 on May 22, 2006. The Exchange constructed and launched on 27th May, 1994, two new index series viz., the 'BSE-200' and the 'DOLLEX-200' indices. The launch of BSE-200 Index in 1994 was followed by the launch of BSE-500 Index and 5 sectoral indices in 1999. In 2001, BSE launched the BSE-PSU Index, DOLLEX30 and the country's first free-float based index - the BSE TECK Index. The Exchange shifted all its indices to a free-float methodology (except BSE PSU index). The Exchange has a nation-wide reach with a presence in 417 cities and towns of India. The systems and processes of the Exchange are designed to safeguard market integrity and enhance transparency in operations. During the year 2004-2005, the trading volumes on the Exchange showed robust growth.\ Exchange provides an efficient and transparent market for trading in equity, debt instruments and derivatives. The BSE's On Line Trading System (BOLT) is a proprietary system of the Exchange and is BS 7799-2-2002 certified. The surveillance and clearing & settlement functions of the Exchange are ISO 9001:2000 certified. The Exchange is professionally managed under the overall direction of the Board of Directors. The Board comprises eminent professionals, representatives of Trading Members and the Managing Director of the Exchange. The Board is inclusive and is designed to benefit from the participation of market intermediaries. BSE as a brand is synonymous with capital markets in India. The BSE SENSEX is the benchmark equity index that reflects the robustness of the economy and finance. It was the First in India to introduce Equity Derivatives First in India to launch a Free Float Index First in India to launch US$ version of BSE Sensex First in India to launch Exchange Enabled Internet Trading Platform First in India to obtain ISO certification for Surveillance, Clearing & Settlement 'BSE On-Line Trading System (BOLT) has been awarded the globally recognized the Information Security Management System standard

BS7799-2:2002. First to have an exclusive facility for financial training Moved from Open Outcry to Electronic Trading within just 50 days

NATIONAL

STOCK

EXCHANGE

OF

INDIA

LIMITED

The National Stock Exchange of India Limited has genesis in the report of the High Powered Study Group on Establishment of New Stock Exchanges, which recommended promotion of a National Stock Exchange by financial institutions (FIs) to provide access to investors from all across the country on an equal footing. Based on the recommendations, NSE was promoted by leading Financial Institutions at the behest of the Government of India and was incorporated in November 1992 as a taxpaying company unlike other stock exchanges in the country. On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital Market (Equities) segment commenced operations in November 1994 and operations in Derivatives segment commenced in June 2000.The national stock exchange of India ltd is the largest stock exchange of the country. NSE is setting the agenda for change in the securities markets in India. For last 5 years it has played a major role in bringing investors from 347 cities and towns online, ensuring complete transparency, introducing financial guarantee to settlements, ensuring scientifically designed and professionally managed indices and by nurturing the dematerialization effort across the country. NSE is a complete capital market prime mover. Its wholly owned subsidiaries, National securities cleaning corporation ltd (NSCCL) provides cleaning and settlement of securities, India index services and products ltd (IISL) provides indices and index services with a consulting and licensing agreement with Standard & Poors (S&P), and IT ltd forms the technology strength that NSE works on. Today, NSE is one of the largest exchanges in the world and still forging ahead. At NSE, we are constantly working towards creating a more transparent, vibrant and innovative capital market.

OVER THE COUNTER EXCHANGE OF INDIA OTCEI was incorporated in 1990 as a section 25 company under the companies Act 1956 and is recognized as a stock exchange under section 4 of the securities Contracts Regulation Act, 1956. The exchange was set up to aid enterprising promotes in raising finance for new projects in a cost effective manner and to provide investors with a transparent and efficient mode of trading Modeled along the lines of the NASDAQ market of USA, OTCEI introduced many novel concepts to the Indian capital markets such as screen-based nationwide trading, sponsorship of companies, market making and scrip less trading. As a measure of success of these efforts, the Exchange today has 115 listings and has assisted in providing capital for enterprises that have gone on to build successful brands for themselves like VIP Advanta, Sonora Tiles & Brilliant mineral water, etc. Need for OTCEI: Studies by NASSCOM, software technology parks of India, the venture capitals funds and the governments IT tasks Force, as well as rising interest in IT, Pharmaceutical, Biotechnology and Media shares have repeatedly emphasized the need for a national stock market for innovation and high growth companies. Innovative companies are critical to developing economics like India, which is undergoing a major technological revolution. With their abilities to generate employment opportunities and contribute to the economy, it is essential that these companies not only expand existing operations but also set up new units. The key issue for these companies is raising timely, cost effective and long term capital to sustain their operations and enhance growth. Such companies, particularly those that have been in operation for a short time, are unable to raise funds through the traditional financing methods, because they have not yet been evaluated by the financial world. Who would find OTCEI helpful? High-technology enterprises Companies with high growth potential Companies focused on new product development Entrepreneurs seeking finance for specific business projects

The Indian economy is demonstrating signs of recovery and it is essential that these companies have suitable financing alternative to fund their growth and maintain competitiveness. OTCEI, With its entry guidelines and eligibility requirement tailored for such innovative and growth oriented companies, is ideally positioned as the preferred route for raising funds through initial public offer(IPOs) or primary issues, in this country.

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COMPANCY PROFILE
History
We were founded in 1995 by Mr. Nirmal Jain (Chairman and Managing Director) as an independent business research and information provider. We gradually evolved into a one-stop financial services solutions provider. Our strong management team comprises competent and dedicated professionals

We are a pan-India financial services organization across 1,361 business locations and a presence in 428 cities. Our global footprint extends across geographies with offices in New York, Singapore and Dubai. We are listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

We offer a wide range of services and products comprising broking (retail and institutional equities and commodities), wealth management, credit and finance, insurance, asset management and investment banking.

We are registered with the BSE and the NSE for securities trading, MCX, NCDEX and DGCX for commodities trading, CDSL and NSDL as depository participants. We are registered as a Category I merchant banker and are a SEBI registered portfolio manager. We also received the FII license in IIFL Inc. IIFL Securities Pvt Ltd received approval from the Monetary Authority of Singapore to carry out corporate advisory and dealing in securities operations. Two subsidiaries India Info line Investment Services and Moneyline Credit Limited are registered with RBI as non-deposit taking non-banking financial services companies. India info line Housing Finance Ltd, the housing finance arm, is registered with the National Housing

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Bank.

Milestones
1995
Incorporated as an equity research and consulting firm with a client base that included leading FIIs, banks, consulting firms and corporates.

1999
Restructured the business model to embrace the internet; launched

archives.indiainfoline.com mobilised capital from reputed private equity investors.

2000
Commenced the distribution of personal financial products; launched online equity trading; entered life insurance distribution as a corporate agent. Acknowledged by Forbes as Best of the Web and ...must read for investors.

2004
Acquired commodities broking license; launched Portfolio Management Service.

2005
Listed on the Indian stock markets.

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2006
Acquired membership of DGCX; launched investment banking services.

2007
Launched a proprietary trading platform; inducted an institutional equities team; formed a Singapore subsidiary; raised over USD 300 mn in the group; launched consumer finance business under the Moneyline brand.

2008
Launched wealth management services under the IIFL Wealth brand; set up India Infoline Private Equity fund; received the Insurance broking license from IRDA; received the venture capital license; received inprinciple approval to sponsor a mutual fund; received Best broker- India award from FinanceAsia; Most Improved Brokerage- India award from Asiamoney.

2009
Received registration for a housing finance company from the National Housing Bank; received Fastest growing Equity Broking House - Large firms in India by Dun & Bradstreet.

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Company Structure
India Infoline Limited is listed on both the leading stock exchanges in India, viz. the Stock Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) and is also a member of both the exchanges. It is engaged in the businesses of Equities broking, Wealth Advisory Services and Portfolio Management Services. It offers broking services in the Cash and Derivatives segments of the NSE as well as the Cash segment of the BSE. It is registered with NSDL as well as CDSL as a depository participant, providing a one-stop solution for clients trading in the equities market. It has recently launched its Investment banking and Institutional Broking business.

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A SEBI authorized Portfolio Manager; it offers Portfolio Management Services to clients. These services are offered to clients as different schemes, which are based on differing investment strategies made to reflect the varied risk-return preferences of clients.

India Infoline Media and Research Services Limited.

The content services represent a strong support that drives the broking, commodities, mutual fund and portfolio management services businesses. Revenue generation is through the sale of content to financial and media houses, Indian as well as global.

It undertakes equities research which is acknowledged by none other than Forbes as 'Best of the Web' and 'a must read for investors in Asia'. India Infoline's research

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is available not just over the internet but also on international wire services like Bloomberg (Code: IILL), Thomson First Call and Internet Securities where India Infoline is amongst the most read Indian brokers.

India Infoline Commodities Limited.

India Infoline Commodities Pvt Limited is engaged in the business of commodities broking. Our experience in securities broking empowered us with the requisite skills and technologies to allow us offer commodities broking as a contracyclical alternative to equities broking. We enjoy memberships with the MCX and NCDEX, two leading Indian commodities exchanges, and recently acquired membership of DGCX. We have a multi-channel delivery model, making it among the select few to offer online as well as offline trading facilities.

India Infoline Marketing & Services

India Infoline Marketing and Services Limited is the holding company of India Infoline Insurance Services Limited and India Infoline Insurance Brokers Limited.

(a)India Infoline Insurance Services Limited is a registered Corporate Agent with the Insurance Regulatory and Development Authority (IRDA). It is the largest Corporate Agent for ICICI Prudential Life Insurance Co Limited, which is India's largest private Life Insurance company India info was the first corporate agent to get licensed by IRDA in early 2001.

(b) India Infoline Insurance Brokers Limited is a newly formed subsidiary which will

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carry out the business of Insurance broking. We have applied to IRDA for the insurance broking licence and the clearance for the same is awaited. Post the grant of license, we propose to also commence the general insurance distribution business.

India Infoline Investment Services Limited

Consolidated shareholdings of all the subsidiary companies engaged in loans and financing activities under one subsidiary. Recently, Orient Global, a Singapore-based investment institution invested USD 76.7 million for a 22.5% stake in India Infoline Investment Services. This will help focused expansion and capital raising in the said subsidiaries for various lending businesses like loans against securities, SME financing, distribution of retail loan products, consumer finance business and housing finance business. India Infoline Investment Services Private Limited consists of the following step-down subsidiaries.

(a) India Infoline Distribution Company Limited (distribution of retail loan products)

(b) Moneyline Credit Limited (consumer finance)

(c) India Infoline Housing Finance Limited (housing finance)

IIFL (Asia) Pvt Limited

IIFL (Asia) Pvt Limited is wholly owned subsidiary which has been incorporated in Singapore to pursue financial sector activities in other Asian markets.

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Further to obtaining the necessary regulatory approvals, the company has been initially capitalized at 1 million Singapore dollars.

Overview
We are a one-stop financial services shop, most respected for quality of its advice, personalised service and cutting-edge technology.

Equities

Indiainfoline provided the prospect of researched investing to its clients, which was hitherto restricted only to the institutions. Research for the retail investor did not exist prior to Indiainfoline. Indiainfoline leveraged technology to bring the convenience of trading to the investors location of preference (residence or office) through computerized access. Indiainfoline made it possible for clients to view transaction costs and ledger updates in real time.

APPLY IN IPOs
You could also invest in Initial Public Offers (IPOs) online without going through the hassles of filling ANY application form/ paperwork.

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PMS

Our Portfolio Management Service is a product wherein an equity investment portfolio is created to suit the investment objectives of a client. We at Indiainfoline invest your resources into stocks from different sectors, depending on your risk-return profile. This service is particularly advisable for investors who cannot afford to give time or don't have that expertise for day-to-day management of their equity portfolio.

Research

Sound investment decisions depend upon reliable fundamental data and stock selection techniques. Indiainfoline Equity Research is proud of its reputation for, and we want you to find the facts that you need. Equity investment professionals routinely use our research and models as integral tools in their work. They choose Ford Equity Research when they can clear your doubts.

Commodities

Indiainfolines extension into commodities trading reconciles its strategic intent to emerge as a one-stop solutions financial intermediary. Its experience in securities broking has empowered it with requisite skills and technologies. The Companys commodities business provides a contra-cyclical alternative to equities broking. The Company was among the first to offer the facility of commodities trading in Indias

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young commodities market (the MCX commenced operations only in 2003). Average monthly turnover on the commodity exchanges increased from Rs 0.34 bn to Rs 20.02 bn. The commodities market has several products with different and non-correlated cycles. On the whole, the business is fairly insulated against cyclical gyrations in the business.

Mortgages

During the year under review, Indiainfoline acquired a 75% stake in Moneytree Consultancy Services to mark its foray into the business of mortgages and other loan products distribution. The business is still in the investing phase and at the time of the acquisition was present only in the cities of Mumbai and Pune. The Company brings on board expertise in the loans business coupled with existing relationships across a number of principals in the mortgage and personal loans businesses. Indiainfoline now has plans to roll the business out across its pan-Indian network to provide it with a truly national scale in operations.

Home Loans Get expert advice that suits your needs

Personal Loans Freedom to choose from 4 flexible options to repay

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Loan against residential and commercial property Expert recommendations Easy documentation Quick processing and disbursal No guarantor requirement

Expert recommendations Easy documentation Quick processing and disbursal No guarantor requirement

Contact Us

Email : reach@moneylineindia.com Number : +91-22-40609174

Invest Online

Indiainfoline has made investing in Mutual funds and primary market so effortless. All you have to do is register with us and thats all. No paperwork no queues and No registration charges.

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INVEST IN MF
Indiainfoline offers you a host of mutual fund choices under one roof, backed by indepth research and advice from research house and tools configured as investor friendly.

Contact Us

Email : online@indiainfoline.com Number : +91-22-40609161

SMS

Stay connected to the market

The trader of today, you are constantly on the move. But how do you stay connected to the market while on the move? Simple, subscribe to Indiainfoline's Stock Messaging Service and get Market on your Mobile!

There are three products under SMS Service:

Market on the move. Best of the lot. VAS (Value Added Service)

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Insurance

An entry into this segment helped complete the clients product basket; concurrently, it graduated the Company into a one-stop retail financial solutions provider. To ensure maximum reach to customers across India, we have employed a multi pronged approach and reach out to customers via our Network, Direct and Affiliate channels. Following the opening of the sector in 1999-2000, a number of private sector insurance service providers commenced operations aggressively and helped grow the market. The Companys entry into the insurance sector derisked the Company from a predominant dependence on broking and equity-linked revenues. The annuity based income generated from insurance intermediation result in solid core revenues across the tenure of the policy.

Wealth Management Service

Imagine a financial firm with the heart and soul of a two-person organization. A worldleading wealth management company that sits down with you to understand your needs and goals. We offer you a dedicated group for giving you the most personal attention at every level.

Newsletters

The Daily Market Strategy is your morning dose on the health of the markets. Five intra-day ideas, unless the markets are really choppy coupled with a brief on the global

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markets and any other cues, which could impact the market. Occasionally an investment idea from the research team and a crisp round up of the previous day's top stories. That's not all. As a subscriber to the Daily Market Strategy, you even get research reports of Indiainfoline research team on a priority basis.

The India info line Weekly Newsletter is your flashback for the week gone by. A weekly outlook coupled with the best of the web stories from India info line and links to important investment ideas, Leader Speak and features is delivered in your inbox every Friday evening.

REVIEW OF LITERATURE
Portfolio Analysis: example for the Warsaw Stock Exchange International Advances in Economic Research, May, 2007 by Dorota Maria Witkowska.
Department of Econometrics and Statistics, Warsaw Agricultural University, u1. Nowoursynowska 166, 02-787 Warsaw, Poland H. Markowitz (Journal of Finance, March 1952) created foundations for the portfolio management theory and for the method of an effective selection of assets.

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Thus, the major problem is to determine the number of securities and their shares in the portfolio value, which depends on (1) the investor's attitude toward risk; (2) the investor's return expectations; and (3) the period of investments. The aim of this research is to construct portfolios under different expectations of the hypothetical investors, i.e., (A) the portfolio with the equal shares of all securities; (B) the portfolio that is efficient in Markowitz sense; (C) the minimum variance (risk) portfolio; and (D) the minimal risk portfolio that is constructed assuming the desired rate of return. The efficiency of the constructed portfolios is evaluated in terms of Treynor, Sharpe, and Jansen coefficients as well as employing expected and actual rates of return. To determine the minimal number of securities in the portfolio, the risk of 20 portfolios that consist of different number of stocks is evaluated. We conclude that the portfolio containing five elements assures the biggest decrease of risk. Thus, the constructed portfolios include securities of five companies listed at the Warsaw Stock Exchange. These companies composite (among others) two major market indexes (WIG and WIG20), and represent different economic branches, i.e., metals, oil and gas, banking, hotels, and construction, since we expect that their rates of returns are not strongly and positively correlated, which is important in the risk diversification. The investigation is provided for the actual data regarding daily prices in the period 20022005. All constructed portfolios are characterized by positive returns and they guaranteed the risk premium. The expected rates of return are smaller than the actual ones. Portfolio D keeps the first position regarding expected and actual rates of return, but it is characterized by the highest risk. Portfolio C is characterized by the smallest risk but also the smallest return. It is worth mentioning that the expected rate of return of portfolio A is not much smaller than applying more sophisticated methods to the portfolio construction, and the real rate of return places portfolio A on the second position in the portfolios ranking. Analyzing efficiency of the constructed portfolios and employing well-known measures, we notice that Treynor and Jensen coefficients properly point out the portfolio with the highest efficiency, while the Sharpe coefficient misclassified constructed portfolios.

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Optimizing portfolios using extensions of Markowitz theory

. A seminal application of OR techniques to finance was by Harry Markowitz (1952, 1987) when he specified portfolio theory as a quadratic programming problem (for a survey of this theory, see Board, Sutcliffe and Ziemba, 1999). Participants in financial markets usually wish to construct diversified portfolios because this has the substantial advantage of reducing risk, while leaving expected returns unchanged. The objective function for the portfolio problem is generally specified as minimizing risk for a given level of expected return, or maximizing expected return for a given level of risk. While returns produce a linear objective function, risk imodeled using the variance, leading to an objective function with quadratic variance and covariance terms.

INTRODUCTION:
A portfolio is a collection of investments held by an institution or a private individual. In building up an investment portfolio a financial institution will typically conduct its own investment analysis, whilst a private individual may make use of the services of a financial advisor or a financial institution which offers portfolio management services. Holding a portfolio is 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 stocks, bonds, options, warrants, gold certificates, real estate, futures contracts, production facilities, or any other item that is expected to retain its value. Portfolio management involves deciding what assets to include in the portfolio, given the goals of the portfolio owner and changing economic conditions. Selection involves deciding what assets to purchase, how many to purchase, when to purchase them, and what assets to divest. These decisions always involve some sort of performance measurement, most typically expected return on the portfolio, and the risk associated with this return (i.e. the standard deviation of the return). Typically the expected returns from portfolios, comprised of different asset bundles are compared. The unique goals and circumstances of the investor must also be considered. Some investors are more risk averse than others. Mutual funds have developed particular techniques to optimize their portfolio holdings.
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Thus, portfolio management is all about strengths, weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety and numerous other trade-offs encountered in the attempt to maximize return at a given appetite for risk.

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ASPECTS OF PORTFOLIO MANAGEMENT:

Basically portfolio management involves A proper investment decision making of what to buy & sell Proper money management in terms of investment in a basket of assets so as to satisfy the asset preferences of investors. Reduce the risk and increase returns.

OBJECTIVES OF PORTFOLIO MANAGEMENT:

The basic objective of Portfolio Management is to maximize yield and minimize risk. The other ancillary objectives are as per needs of investors, namely: Regular income or stable return Appreciation of capital Marketability and liquidity Safety of investment Minimizing of tax liability.

NEED FOR PORTFOLIO MANAGEMENT:

The Portfolio Management deals with the process of selection securities from the number of opportunities available with different expected returns and carrying different levels of risk and the selection of securities is made with a view to provide the investors the maximum yield for a given level of risk or ensure minimum risk for a level of return. Portfolio Management is a process encompassing many activities of investment in assets and securities. It is a dynamics and flexible concept and involves regular and systematic analysis, judgment and actions. The objectives of this service are to help the unknown investors with the expertise of professionals in investment Portfolio Management. It involves construction of a portfolio based upon the investors objectives, constrains, preferences for risk and return and liability. The portfolio is

28

reviewed and adjusted from time to time with the market conditions. The evaluation of portfolio is to be done in terms of targets set for risk and return. The changes in portfolio are to be effected to meet the changing conditions. 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 principles governing such allocation. The modern view of investment is oriented towards the assembly of proper combinations held together will give beneficial result if they are grouped in a manner to secure higher return after taking into consideration the risk element. 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 perspectives of combination of securities under constraints of risk and return.

ELEMENTS:
Portfolio Management is an on-going process involving the following basic tasks. Identification of the investors objective, constrains and preferences which help formulated the invest policy. Strategies are to be developed and implemented in tune with invest policy formulated. This will help the selection of asset classes and securities in each class depending upon their risk-return attributes. Review and monitoring of the performance of the portfolio by continuous overview of the market conditions, companys performance and investors circumstances. Finally, the evaluation of portfolio for the results to compare with the targets and needed adjustments have to be made in the portfolio to the emerging conditions and to make up for any shortfalls in achievements (targets).

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Schematic diagram of stages in portfolio management:

Specification and quantification of investor objectives, constraints, and preferences

Monitoring investor related input factors

Portfolio policies and strategies

Capital market expectations

Portfolio construction and revision asset allocation, portfolio optimization, security selection, implementation and execution

Attainment of investor objectives

Performance measurement

Relevant economic, social, political sector and security considerations

Monitoring economic and market input factors

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PROCESS OF PORTFOLIO MANAGEMENT:

The Portfolio Program and Asset Management Program both follow a disciplined process to establish and monitor an optimal investment mix. This six-stage process helps ensure that the investments match investors unique needs, both now and in the future.

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1. IDENTIFY GOALS AND OBJECTIVES:

When will you need the money from your investments? What are you saving your money for? With the assistance of financial advisor, the Investment Profile Questionnaire will guide through a series of questions to help identify the goals and objectives for the investments.

2. DETERMINE OPTIMAL INVESTMENT MIX:

Of investments (cash, fixed income and equities) that match individual risk and return need Once the Investment Profile Questionnaire is completed, investors optimal investment mix or asset allocation will be determined. An asset allocation represents the mix

3. CREATE A CUSTOMIZED INVESTMENT POLICY STATEMENT

When the optimal investment mix is determined, the next step is to formalize our goals and objectives in order to utilize them as a benchmark to monitor progress and future updates.

4. SELECT INVESTMENTS
The customized portfolio is created using an allocation of select QFM Funds. Each QFM Fund is designed to satisfy the requirements of a specific asset class, and is selected in the necessary proportion to match the optimal investment mix.

5. MONITOR PROGRESS
Building an optimal investment mix is only part of the process. It is equally important to maintain the optimal mix when varying market conditions cause investment mix to drift away from its target. To ensure that mix of asset classes stays in line with investors unique needs, the portfolio will be monitored and rebalanced back to the optimal investment mix

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6. REASSESS NEEDS AND GOALS

Just as markets shift, so do the goals and objectives of investors. With the flexibility of the Portfolio Program and Asset Management Program, when the investors needs or other life circumstances change, the portfolio has the flexibility to accommodate such changes.

RISK:
Risk refers to the probability that the return and therefore the value of an asset or security may have alternative outcomes. Risk is the uncertainty (today) surrounding the eventual outcome of an event which will occur in the future. Risk is uncertainty of the income/capital appreciation or loss of 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 compensation.

RETURN:
Return-yield or return differs from the nature of instruments, maturity period and the creditor or debtor nature of the instrument and a host of other factors. The most important factor influencing return is risk return is measured by taking the price income plus the price change.

PORTFOLIO RISK:
Risk on portfolio is different from the risk on individual securities. This risk is reflected by in the variability of the returns from zero to infinity. The expected return depends on probability of the returns and their weighted contribution to the risk of the portfolio.

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RETURN ON PORTFOLIO:
Each security in a portfolio contributes returns in the proportion of its investment in security. Thus the portfolio of expected returns, from each of the securities with weights representing the proportionate share of security in the total investments.

RISK RETURN RELATIONSHIP:

The risk/return relationship is a fundamental concept in not only financial analysis, but in every aspect of life. If decisions are to lead to benefit maximization, it is necessary that individuals/institutions consider the combined influence on expected (future) return or benefit as well as on risk/cost. The requirement that expected return/benefit be commensurate with risk/cost is known as the "risk/return trade-off" in finance. All investments have some risks. An investment in shares of companies has its own risks or uncertainty. These risks arise out of variability of returns or yields and uncertainty of appreciation or depreciation of share prices, loss of liquidity etc. and the overtime can be represented by the variance of the returns. Normally, higher the risk that the investors take, the higher is the return.

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TYPES OF RISKS: risk consists of two components. They are 1. Systematic Risk 2. Un-systematic Risk

1. SYSTEMATIC RISK: Systematic risk refers to that portion of total variability in return caused by factors affecting the prices of all securities. Economic, Political and sociological changes are sources of systematic risk. Their effect is to cause prices of nearly all individual common stocks and/or all individual bonds to move together in the same manner. i. Market Risk: Variability in return on most common stocks that are due to basic sweeping changes in investor expectations is referred to as market risk. Market risk is caused by investor reaction to tangible as well as intangible events. ii. Interest rate-Risk: Interest rate risk refers to the uncertainty of future market values and of the size of future income, caused by fluctuations in the general level of interest rates. iii. Purchasing-Power Risk: Purchasing power risk is the uncertainty of the purchasing power of the amounts to be received. In more events everyday terms, purchasing power risk refers to the impact of or deflation on an investment.

UNSYSTEMATIC RISK: Unsystematic risk is the portion of total risk that is unique to a firm or industry. Factors such as management capability, consumer preferences, and labor strikes Cause systematic variability of return in a firm. Unsystematic factors are largely independent of factors affecting securities markets in general. Because these factors affect one firm, they must be examined for each firm. Unsystematic risk that portion of risk that is unique or peculiar to a firm or an industry, above and beyond that affecting

35

securities markets in general. Factors such as management capability, consumer preferences, and labor strikes can cause unsystematic variability of return for a companys stock. i. Business Risk: Business risk is a function of the operating conditions faced by a firm and the variability these conditions inject into operating income and expected dividends. Business risk can be divided into two broad categories a. Internal Business Risk b. External Business Risk a. Internal business risk is associated with the operational efficiency of the firm. The operational efficiency differs from company to company. The efficiency of operation is reflected on the companys achievement of its pre-set goals and the fulfillment of the promises to its investors. b. External business risk is the result of operating conditions imposed on the firm by circumstances beyond its control. The external environments in which it operates exert some pressure on the firm. 2.Financial Risk: Financial risk is associated with the way in which a company finances its activities. Financial risk is avoided risk to the extent that management has the freedom to decide to borrow or not to borrow funds. A firm with no debit financing has no financial risk

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MARKOWITZ MODEL
THE MEAN VARIANCE CRITERION: Dr. Harry M. Markowitz is credited with developing the first modern portfolio analysis model in order to arrange for the optimum allocation of assets with in portfolio. To reach these objectives, Markowitz generated portfolio with in a reward risk context. In essence, Markowitz model is a theoretical framework for the analysis of risk return choices. Decisions are based on the concept of efficient portfolios. Markowitz model is a theoretical framework for the analysis of risk, return choices and this approach determines an efficient set of portfolio return through three important variable that is, Return Standard Deviation Coefficient of correlation

Markowitz model is also called as a Full Covariance Model. Through this model the investor can find out the efficient set of portfolio by finding out the tradeoff between risk and return, between the limits of zero and infinity. According to this theory, the effect of one security purchase over the effects of the other security purchase is taken into consideration and then the results are evaluated. 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. 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 expected return level chosen, and asset are substituted until the portfolio combination expected returns, set of efficient portfolio is generated.

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Assumptions:
The Markowitz model is based on several assumptions regarding investor behavior: 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 possess utility curve, which demonstrates diminishing marginal utility of wealth. 3. Individuals estimate risk on the basis of variability of expected return. 4. Investors base decisions solely on expected return and variance of return only. 5. For a given risk level, investors prefer high returns to lower returns. Similarly for a given level of expected return, investors prefer less 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 higher expected return with the same expected return. CAPITAL ASSET PRICING MODEL: (CAPM) The CAPM is a model for pricing an individual security (asset) or a portfolio. For individual security perspective, the security market line (SML) is used and its relation to expected return and systematic risk (beta) to show how the market must price individual securities in relation to their security risk class. The SML enables us to calculate the reward-to-risk ratio for any security in relation to that of the overall market. Therefore, when the expected rate of return for any security is deflated by its beta coefficient, the reward-to-risk ratio for any individual security in the market is equal to the market reward-to-risk ratio, thus: Individual securitys / beta = Reward-to-risk ratio Markets securities (portfolio) Reward-to-risk ratio

, The Security Market Line, seen here in a graph, describes a relation between the beta and the asset's expected rate of return

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The market reward-to-risk ratio is effectively the market risk premium and by rearranging the above equation and solving for E (Ri), we obtain the Capital Asset Pricing Model (CAPM).

Where:

is the expected return on the capital asset is the risk-free rate of interest (the beta coefficient) the sensitivity of the asset returns to market returns,

or also

, is the expected return of the market

Is sometimes known as the market premium or risk premium (the difference between the expected market rate of return and the risk-free rate of return). Beta measures the volatility of the security, relative to the asset class. The equation is saying that investors require higher levels of expected returns to compensate them for higher expected risk. We can think of the formula as predicting a security's behavior as a function of beta:

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CAPM says that if we know a security's beta then we know the value of r that investors expect it to have.

Assumptions of CAPM:

All investors have rational expectations. There are no arbitrage opportunities. Returns are distributed normally. Fixed quantity of assets. Perfectly efficient capital markets. Investors are solely concerned with level and uncertainty of future wealth Separation of financial and production sectors. Thus, production plans are fixed. Risk-free rates exist with limitless borrowing capacity and universal access. The Risk-free borrowing and lending rates are equal. No inflation and no change in the level of interest rate exist. Perfect information, hence all investors have the same expectations about security returns for any given time period.

Shortcomings Of CAPM:

The model assumes that asset returns are (jointly) normally distributed random variables. It is however frequently observed that returns in equity and other markets are not normally distributed.

The model assumes that the variance of returns is an adequate measurement of risk.

The model does not appear to adequately explain the variation in stock returns. The model assumes that given a certain expected return investors will prefer lower risk (lower variance) to higher risk and conversely given a certain level of risk will prefer higher returns to lower ones.

The model assumes that all investors have access to the same information and agree about the risk and expected return of all assets.

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(Homogeneous expectations assumption)

The model assumes that there are no taxes or transaction costs. The market portfolio consists of all assets in all markets, where each asset is weighted by its market capitalization. This assumes no preference between markets and assets for individual investors, and that investors choose assets solely as a function of their risk-return profile. It also assumes that all assets are infinitely divisible as to the amount which may be held or transacted.

The market portfolio should in theory include all types of assets that are held by anyone as an investment (including works of art, real estate, human capital...)

Unfortunately, it has been shown that this substitution is not innocuous and can lead to false inferences as to the validity of the CAPM, and it has been said that due to the in observability of the true market portfolio, the CAPM might not be empirically testable.

The efficient frontier:

The CAPM assumes that the risk-return profile of a portfolio can be optimized an optimal portfolio displays the lowest possible level of risk for its level of return. Additionally, since each additional asset introduced into a portfolio further diversifies the portfolio, the optimal portfolio must comprise every asset, with each asset valueweighted to achieve the above. All such optimal portfolios, i.e., one for each level of return, comprise the efficient frontier. A line created from the risk-reward graph, comprised of optimal portfolios.

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The optimal portfolios plotted along the curve have the highest expected return possible for the given amount of risk. Because the unsystemic risk is diversifiable, the total risk of a portfolio can be viewed as beta.

Note : The expected market rate of return is usually measured by looking at the arithmetic average of the historical returns on a market portfolio.

Measuring the Expected Return and Standard Deviation of a Portfolio

The expected return on a portfolio is the weighted average of the returns of individual assets, where each asset's weight is determined by its weight in the portfolio. The formula is: E (Rp) = [WaX E (Ra)] + [WaX E (Ra)] Where E= is stands for expected Rp= Return on the portfolio Wa= Weight of asset n where n my stand for asset a, betc.

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Ra= Return on asset n where n may stand for asset a, betc The portfolio standard deviation (p) measure the risk associated with the expected return of the portfolio.

The formula is p =wa2 2 + wa2 2 + 2wawbrab a b The term rab represents the correlation between the returns of investments a and b. The correlation coefficient, r, will always reduce the portfolio standard deviation as long as it is less than +1.00.

Portfolio diversification:
Diversification occurs when different assets make up a portfolio.

The benefit of diversification is risk reduction; the extent of this benefit depends upon how the returns of various assets behave over time. The market rewards diversification. We can lower risk without sacrificing expected return, and/or we can increase expected return without having to assume more risk. Diversifying among different kinds of assets is called asset allocation.

The diversification can either be vertical or horizontal.

In vertical diversification a portfolio can have scripts of different companies within the same industry. In horizontal diversification one can have different scripts chosen from different industries. An important way to reduce the risk of investing is to diversify your investments. Diversification is akin to "not putting all your eggs in one basket." For example: If portfolio only consisted of stocks of technology companies, it would likely face a substantial loss in value if a major event adversely affected the technology industry. There are different ways to diversify a portfolio whose holdings are concentrated in one industry. We can invest in the stocks of companies belonging to other industry groups. We can allocate our portfolio among different categories of stocks, such as growth,

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value, or income stocks. We can include bonds and cash investments in our assetallocation decisions. We can also diversify by investing in foreign stocks and bonds. Diversification requires us to invest in securities whose investment returns do not move together. In other words, the investment returns have a low correlation. The correlation coefficient is used to measure the degree to which returns of two securities are related. As we increase the number of securities in our portfolio, we reach a point where likely diversified as much as reasonably possible. Diversification should neither be too much or too less. It should be adequate according to the size of the portfolio.

The Efficient Frontier and Portfolio Diversification

The graph on the shows how volatility increases the risk of loss of principal, and how this risk worsens as the time horizon shrinks. So all other things being equal, volatility is minimized in the portfolio. If we graph the return rates and standard deviations for a collection of securities, and for all portfolios we can get by allocating among them. Markowitz showed that we get a region bounded by an upward-sloping curve, which he called the efficient frontier.

44

It's clear that for any given value of standard deviation, we would like to choose a portfolio that gives you the greatest possible rate of return; so we always want a portfolio that lies up along the efficient frontier, rather than lower down, in the interior of the region. This is the first important property of the efficient frontier: it's where the best portfolios are.

The second important property of the efficient frontier is that it's curved, not straight. If we take a 50/50 allocation between two securities, assuming that the year-toyear performance of these two securities is not perfectly in sync -- that is, assuming that the great years and the lousy years for Security 1 don't correspond perfectly to the great years and lousy years for Security 2, but that their cycles are at least a little off -- then the standard deviation of the 50/50 allocation will be less than the average of the standard deviations of the two securities separately. Graphically, this stretches the possible allocations to the left of the straight line joining the two securities

45

THE FOUR PILLARS OF DIVERSIFICATION: a. The yield provided by an investment in a portfolio of assets will be closer to the Mean Yield than an investment in a single asset. b. When the yields are independent - most yields will be concentrated around the Mean. c. When all yields react similarly - the portfolio's variance will equal the variance of its underlying assets. d. If the yields are dependent - the portfolio's variance will be equal to or less than the lowest

Market portfolio:
The efficient frontier is a collection of portfolios, each one optimal for a given amount of risk. A quantity known as the Sharpe ratio represents a measure of the amount of additional return (above the risk-free rate) a portfolio provides compared to the risk it carries. The portfolio on the efficient frontier with the highest Sharpe Ratio is known as the market portfolio, or sometimes the super-efficient portfolio. This portfolio has the property that any combination of it and the risk-free asset will produce a return that is above the efficient frontier - offering a larger return for a given amount of risk than a portfolio of risky assets on the frontier would.

46

PORTFOLIO PERFORMANCE EVALUATION: A Portfolio manager evaluates his portfolio performance and identifies the sources of strengths and weakness. The evaluation of the portfolio provides a feed back 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. Evaluation has to take into account: Rate of returns, or excess return over risk free rate. Level of risk both systematic (beta) and unsystematic and residual risks through proper diversification.

Some of the models used to evaluate portfolio performance are: Sharpes ratio Treynor ratio Jensens alpha

Sharpes ratio:
A ratio developed by Nobel Laureate William F. Sharpe to measure riskadjusted performance. It is calculated by subtracting the risk-free rate from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns.

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The Sharpe ratio tells us whether the returns of a portfolio are due to smart investment decisions or a result of excess risk. This measurement is very useful because although one portfolio or fund can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been.

Treynors ratio:
The Treynor ratio is a measurement of the returns earned in excess of that which could have been earned on a risk less investment. The Treynor ratio is also called reward-to-volatility ratio. It relates excess return over the risk-free rate to the additional risk taken; however systematic risk instead of total risk is used. The higher the Treynor ratio, the better is the performance under analysis. Treynors ratio = (Average Return of the Portfolio - Average Return of the Risk-Free Rate) / Beta of the Portfolio Like the Sharpe ratio, the Treynor ratio (T) does not quantify the value added, if any, of active portfolio management. It is a ranking criterion only. A ranking of portfolios based on the Trey nor Ratio is only useful if the portfolios under consideration are subportfolios of a broader, fully diversified portfolio. If this is not the case, portfolios with identical systematic risk, but different total risk, will be rated the same.

Jensens alpha:
An alternative method of ranking portfolio management is Jensen's alpha, which quantifies the added return as the excess return above the security market line in the capital asset pricing model. Jensen's alpha (or Jensen's Performance Index) is used to determine the excess return of a stock, other security, or portfolio over the security's required rate of return as determined by the Capital Asset Pricing Model.

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This model is used to adjust for the level of beta risk, so that riskier securities are expected to have higher returns. The measure was first used in the evaluation of mutual fund managers by Michael Jensen in the 1970's. To calculate alpha, the following inputs are needed:

The realized return (on the portfolio), The market return, The risk-free rate of return, and The beta of the portfolio.

Rjt - Rft = j + j (RMt - Rft) Where Rjt = average return on portfolio j for period oft Rft = risk free rate of return for period oft j = intercept that measures the forecasting ability to the manager j = systematic risk measure RMt = average return on the market portfolio for periodt

Portfolio management in India:

In India, portfolio management is still in its infancy. Barring a few Indian banks, and foreign banks and UTI, no other agency had professional portfolio managementuntil1987. After the setting up of public sector Mutual Funds, since 1987, professional portfolio management, backed by competent research staff became the order of the day. After the success of mutual funds in portfolio management, a number of brokers and investment consultants some of whom are also professionally qualified have become portfolio managers. The SEBI has then imposed stricter rules, which included their registration, a code of conduct and minimum infrastructure, experience and expertise etc. The guidelines of SEBI are in the direction of making portfolio management a responsible professional service to be rendered by experts in the field.

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PORTFOLIO ANALYSIS:
Portfolio analysis includes portfolio construction, selection of securities, revision of portfolio evaluation and monitoring the performance of the portfolio. All these are part of subject of portfolio management which is a dynamic concept. Individual securities have risk-return characteristics of their own. Portfolios, which are combinations of securities may or may not take on the aggregate characteristics of their individuals parts. Portfolio analysis considers the determination of future risk and return in holding various blends of individual securities. As we know that expected return from individual securities carries some degree of risk. 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 Traditional approach Modern approach

TRADITIONAL APPROACH: Traditional approach was based on the fact that risk could be measured on each individual security through the process of finding out the standard deviation and that security should be chosen where the deviation was the lowest. Traditional approach believes that the market is inefficient and the fundamental analyst can take advantage for the situation. Traditional approach is a comprehensive financial plan for the individual.It takes into account the individual needs such as housing, life insurance and pension plans. Traditional approach basically deals with two major decisions. They are a) Determining the objectives of the portfolio b) Selection of securities to be included in the portfolio

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Modern Approach:
There use calculate the portfolio. Risk and Return and decision is based on the risk applied of the investor.

[Rp, P]
Where Rp = Risk portfolio P = Return portfolio

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PORTFOLIO ANALYSIS
Average Return:
The Expected rate of return is the weighted average of all possible returns multiplied by their respective probabilities. Average return = R/N

Variance and Standard deviation:

The most commonly used measure of risk in finance is variance or its square root the standard deviation. The variance and standard deviation of a historical return series.

Standard Deviation = Variance Variance = 1/n-1 (d2)

Covariance and Correlation:

Covariance and Correlation are conceptually analogous in the sense that both of them reflect the degree of co movement between two variables. Covariance (COVab) = 1/(n-1) (dx.dy) Correlation of coefficient = COVab / a* b

CALCULATION OF AVERAGE RETURN OF COMPANIES: Average return = R/N

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GUJARAT AMBUJA CEMENT LTD (GACL): Opening share price Year 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 (P0) 405.00 80.00 144.80 120.00 164.30 143.20 Closing share price (P1) 79.60 141.30 119.35 80.60 139.00 126.80 (P1-P0) -325.40 61.30 -25.45 -39.4 -25.30 -16.4 (P1-P0)/ P0*100 -80.35 76.63 -17.58 -32.83 -15.39 -11.45

-80.97 TOTAL RETURN

Average return = -80.97/6 =-13.50

500 400 300 200 100 0 -100 -200 -300 -400 Opening Closing share (P1-P0) share price price (P1) (P0) (P1-P0)/ P0*100

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

53

LARSEN AND TOUBRO (LNT): Opening share price Year 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 (P0) 988.70 1845.00 1400.00 1704 2074.75 1782 Closing share price (P1) 1844.20 1442.95 1703.20 2539.05 2212 1840 (P1-P0) 855.50 -402.05 303.20 835.05 137.5 58 (P1-P0)/ P0*100 86.53 -21.79 21.66 49.01 6.628 3.25

145.29 TOTAL RETURN

Average return = 145.29/6= 24.22

3000 2500 2000 1500 1000 500 0 -500 Opening Closing share (P1-P0) share price price (P1) (P0) (P1-P0)/ P0*100
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

54

RANBAXY LABORATORIES: Opening share price Year 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 (P0) 1252.00 364.40 393.00 350.00 624.20 602.25 Closing share price (P1) 362.35 391.85 349.15 340.95 545.00 536.10 (P1-P0) -889.65 27.45 -43.85 -9.05 -79.2 -66.15 (P1-P0)/ P0*100 -71.06 7.53 11.16 -2.59 -12.68 -10.98

-78.18 TOTAL RETURN

Average return = -78.18/6 =-13.03

1500 1000 500 0 -500 -1000 Opening Closing share (P1-P0) share price price (P1) (P0) (P1-P0)/ P0*100
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

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CIPLA Opening share price Year 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 (P0) 320.00 445.00 253.40 240.00 379.80 370.90 Closing share price (P1) 443.40 250.70 239.30 218.15 355.00 327.45 (P1-P0) 123.40 -194.30 -14.10 -21.85 -24.8 -3.45 (P1-P0)/ P0*100 38.56 -43.66 -5.56 -9.10 -6.52 -11.71

-37.99 TOTAL RETURN

Average return = -37.99/6 = -6.33

500 400 300 200 100 0 -100 -200 Opening share Closing share price (P0) price (P1) (P1-P0) (P1-P0)/ P0*100
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

ING VYSYA
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Opening share price Year 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 (P0) 585.00 164.50 159.00 186.50 444 369.35

Closing share price (P1) 162.25 157.45 185.15 227.00 368 339.75 (P1-P0) -422.75 -7.05 26.15 40.5 -76 -29.6 (P1-P0)/ P0*100 -72.26 -4.29 16.45 21.71 -17.11 -8.01 -63.51

TOTAL RETURN

Average return = -63.51/6 =-10.59

600 400 200 0 -200 -400 -600 Opening Closing share (P1-P0) share price price (P1) (P0) (P1-P0)/ P0*100
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

ICICI:

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Opening share price Year 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 (P0) 374.85 586.25 889.00 950.20 1279.00 1154

Closing share price (P1) 584.70 890.40 950.25 675.85 1081 1060 (P1-P0) 209.85 304.15 61.25 -274.35 -198 -94 (P1-P0)/ P0*100 55.98 51.88 6.89 -28.87 -15.48 -8.15

62.25 TOTAL RETURN

Average return = 62.25/6=10.38

1400 1200 1000 800 600 400 200 0 -200 -400 Opening Closing share (P1-P0) share price price (P1) (P0) (P1-P0)/ P0*100

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

AVERAGE RETURNS :

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Company GACL LNT RANBAXY CIPLA ING VYSYA ICICI

Return -13.5 24.22 -13.03 -6.33 -10.59 10.38

DIAGRAMETIC PRESENTATION:

25 20 15 10 5 0 -5
GACL LNT RANBAXY CIPLA ING VYSYA ICICI

-10
-15 Return

CALCULATION OF STANDARD DEVIATION:

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Standard Deviation = Variance Variance = 1/n-1 (d2)

GUJARAT AMBUJA CEMENT LTD: Avg. Return (R ) -13.50 -13.50 -13.50 -13.50 -13.50 -13.50 D= d2 (R-R) 44.68 -66.85 90.13 -4.08 -19.33 -1.89 1996.30 -4468.92 8123.41 -16.64 373.64 3.57 d2=6011.36

Year

Return (R)

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

31.18 -80.35 76.63 -17.58 -32.83 -15.39 TOTAL

Variance = 1/n-1 (d2) = 1/6-1 (6011.36) = 1202.272 Standard Deviation = Variance = 1202.272 = 34.673

10000 8000 6000 4000 2000 0 -2000 -4000 -6000 Return (R) Avg. Return (R ) D = (R-R) d2

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

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LARSEN & TOUBRO: Avg. Return (R ) 24.22 24.22 24.22 24.22 24.22 24.22 D= D2 (R-R) 61.06 62.53 -46.01 -2.56 24.82 -17.59 3728.32 3882.54 2116.92 -6.5536 616.032 309.41

Year

Return (R)

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

85.28 86.53 -21.79 21.66 49.04 6.63

TOTAL

d2=10646.67

Variance = 1/n-1 (d2) = 1/6-1 (10646.67) = 2129.334

Standard Deviation = Variance

= 2129.334 = 46.14

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4000 3500 3000 2500 2000 1500 1000 500 0 -500

Return (R) Avg. Return D = (R-R) (R ) d2

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

RANBAXY LABORATORIES Avg. Return (R ) -13.03 -13.03 -13.03 -13.03 -13.03 -13.03 d= D2 (R-R) 26.78 -58.03 20.56 24.19 10.44 0.35 717.16 3367.48 422.71 585.15 108.99 0.12

Year

Return (R)

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

13.75 -71.06 7.53 11.16 -2.59 -12.68

TOTAL

d2=5201.61

Variance = 1/n-1 (d2) = 1/6-1 (5201.61) = 1040.322 Standard Deviation = Variance = 1040.322 = 32.254

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3500 3000 2500 2000 1500 1000 500 0 -500 Return (R) Avg. Return (R ) D = (R-R) d2
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

CIPLA: Avg. Return (R ) -6.33 -6.33 -6.33 -6.33 -6.33 -6.33 d= D2 (R-R) -69.98 44.89 -37.33 0.77 -2.77 -0.19 4897.20 2015.11 1393.52 0.593 7.673 0.036 d2=8314.132

Year

Return (R)

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

-76.31 38.56 -43.66 -5.56 -9.10 -6.52

TOTAL

Variance = 1/n-1 (d2) = 1/6-1 (8314.132) = 1662.826 Standard Deviation = Variance = 1662.826 = 40.777

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5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 -500 Return (R) Avg. Return (R ) D = (R-R) d2

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

ING VYSYA: Avg. Return (R ) -10.59 -10.59 -10.59 -10.59 -10.59 -10.59 D= D2 (R-R) 15.19 -61.67 6.3 27.04 32.3 -6.52 230.73 3803.18 39.69 731.16 1043.29 42.51 d2=5890.56

Year

Return (R)

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

4.60 -72.26 -4.29 16.45 21.71 -17.11

TOTAL

Variance = 1/n-1 (d2) = 1/6-1 (5890.56) = 1178.112 Standard Deviation = Variance = 1178.112 = 34.323

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4000 3500 3000 2500 2000 1500 1000 500 0 -500

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

Return (R) Avg. Return D = (R-R) (R )

d2

ICICI:
Avg. Return (R ) 10.38 10.38 10.38 10.38 10.38 10.38 d= D2 (R-R) 13.33 45.6 41.5 -3.49 -39.25 -25.86 177.68 2079.36 1722.25 12.18 1540.56 668.73 d2=6200.76

Year

Return (R)

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

23.71 55.98 51.88 6.89 -28.87 -15.48

TOTAL

Variance = 1/n-1 (d2) = 1/6-1 (6200.76) = 1240.152 Standard Deviation = Variance = 1240.152 = 35.22

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2500 2000 1500 1000 500 0 -500 Return (R) Avg. Return (R ) D = (R-R) d2
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

RISKS: Company Risks (in % of Std. deviation) GACL LNT RANBAXY CIPLA ING VYSYA ICICI 34.673 46.14 32.254 40.777 34.323 35.22

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DIAGRAMETIC PRESENTATION:
50 40 30 20 10 0 Risks
GACL LNT RANBAXY CIPLA ING VYSYA ICICI

CALCULATION OF CORRELATION BETWEEN TWO COMPANIES:

Covariance (COVab) = 1/(n-1) (dx.dy) Correlation of coefficient = COVab / a* b GACL & LNT: Dev. Of YEAR GACL (dx) 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 44.68 -66.85 90.13 -4.08 -19.33 -1.89 TOTAL Dev. Of LNT (dy) 61.06 62.53 -46.01 -2.56 24.82 -17.59 Product of dev. (dx)(dy)

2728.16 -4180.13 -4146.88 10.44 -479.77 33.25 dx. dy =-6034.93

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COVab =1/(6-1)(-6034.93) =-1206.99 Correlation of coefficient = -1206.99/(34.67)(46.14) = -0.75

3000 2000 1000 0 -1000 -2000 -3000 -4000 -5000 Dev. Of GACL
INTERPRETATION:

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

Dev. Of LNT

Product of dev.

The Correlation of coefficient for the years 2005 to 2011 is -0.75. The deviation for the GACL 2007-2008 is as high as 90.13, 2006-2007 is -66.85 And for L&T is 62.53 for 2006-2007 and 2007-2008 is -46.01.

RANBAXY & CIPLA:

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Dev. Of YEAR RANBAXY (dx) 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 26.78 -58.03 20.56 24.19 10.44 0.35

Dev. Of CIPLA (dy) -69.98 44.89 -37.33 0.77 -2.77 -0.19

Product of dev. (dx)(dy)

-1874.06 -2604.97 -767.50 18.63 -28.92 -0.067

dx. dy = -5256.89 TOTAL

COVab =1/(6-1)(-5256.89) = -1051.38 Correlation of coefficient = 1.51.38/(32.25)(40.77) = -0.80

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500 0 -500 -1000 -1500 -2000 -2500 -3000 Dev. Of RANBAXY Dev. Of CIPLA Product of dev.
2005-2006 2006-2007

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

INTERPRETATION: The Correlation of coefficient for the years 2005 to 2011 is -0.80. The deviation for Ranbaxy for the year 2005-2006 is as high as 26.78, 2006-2007 is -58.03. And for CIPLA is 44.89 for 2006-2007 and 2005-2006 is -69.98.

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ING VYSYA & ICICI:

Dev. Of ING YEAR VYSYA (dx) 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 15.19 -61.67 6.3 27.04 32.3 -25.86

Dev. Of ICICI (dy)

Product of dev. (dx)(dy)

13.33 45.6 41.5 -3.49 -39.25 -25.86

202.48 -2812.15 261.45 -94.37 114.68 168.61

dx. dy = -2159.3 TOTAL

COVab =1/(6-1)(-2159.3) =-431.81 Correlation of coefficient = 431.81/(34.32)(35.22) = 0.35

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500 0 -500 -1000 -1500 -2000 -2500 -3000 Dev. Of ING VYSYA Dev. Of ICICI Product of dev.
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

INTERPRETATION: The Correlation of coefficient for the years 2005 to 2011 is 0.35. The deviation for IngVysya for the year 2009-2010 is as high as 32.3, 2006-2007 is -61.67. And for ICICI is 45.6 for 2006-2007 and 2009-2010 is -39.2

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Comparative analysis between different portfolioss

S.NO

BETWEEN THE COMPANIES

CO EFFICIENT OF VARIANCE - 1206 - 1051.38

CO-EFFICIENT OF CORRELATION - 0.75 - 0.80

1 2

GACL & LNT RANB AXY & CIPLA

ING VYSYA & ICICI

- 431.81

- 0.35

Interpretation
From the above analysis according to Markowitz portfolio theory GACL&LNT company is better than the other companies because co efficient of variance as well as co-efficient correlation also less than of the other companies.

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FINDINGS:
The analytical part of study for the 6 years reveals the following as for as:

CEMENT INDUSTRY: The expected return of GACL is -13.50 and L&T is 24.22 And the standard deviations are 34.673 and 46.14 respectively. GACL and L&T are having a negative correlation of -0.75.

PHARMACEUTICAL INDUSTRY: The expected returns of RANBAXY and CIPLA are -13.03 and -6.33 respectively and their standard deviations are 32.254 and 40.777 respectively. The combination of the RANBAXY and CIPLA are having a correlation of 0.80.

BANKING INDUSTRY: The expected returns of ING VYSYA and ICICI are -10.59 and 10.38 respectively. And their standard deviations are 34.323 and 35.22. The combination of ING VYSYA and ICICI are having a correlation of 0.35

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SUGGESTIONS

It is recommended that the investors who require high return should invest in banking industry.

In banking industry ICICI will be the best option. The investors who require minimum return with low risk should invest LNT and GACL.

In cement industry LNT will be best for investment. In pharmaceuticals industry Ranbaxy is the best company to invest The investors are strongly suggested to invest in banking industry.

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CONCLUSION

The comparison of cement sector, pharmaceutical sector and banking sector in this banking sector is better for investment.

In cement sector LNT is best for investment. The combination LNT and GACL are very good. In banking sector ICICI is best option for investment. The investors are strongly suggested to invest in banking industry. In pharmaceutical industry Ranbaxy better than the Cipla.

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BIBLIOGRAPHY

Books referred:
Donald E. Fischer, Ronald J. Jordan, SAPM , 1999, Sixth Edition, Portfolio Analysis, page no: 559-588 & CAPM, page no: 636-648 Prasanna Chandra, Investment Analysis & Portfolio Management, 2006, Second edition, Efficient Frontier, page no: 251-259 Business statistics. Naval Bajpai

Websites:
www.geojit.com www.investopedia.com www.capitalmarket.com www.bse.com www.nse.com www.utvi.com www.mothilaloswal.com

Business magazines:
Economics times Business standards Financial standards

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