SECURITY ANALYSIS AND PORTFOLIO

MANAGEMENT
Project submitted in !rti!" #u"#i""ment #or t$e !%!rd o# De&ree o#
MASTER OF 'USINESS ADMINISTRATION
(
DECLARATION
I $ereb) dec"!re t$!t t$is Project Reort tit"ed *SECURITY ANALYSIS
AND PORTFOLIO MANAGEMENT+ submitted b) me to t$e De!rtment o#
'usiness M!n!&ement, ----, is ! bon!#ide %or. undert!.en b) me !nd it is
not submitted to !n) ot$er Uni/ersit) or Institution #or t$e !%!rd o# !n) de&ree
di"om! 0 certi#ic!te or ub"is$ed !n) time be#ore1
N!me !nd Address o# t$e Student Si&n!ture o# t$e Student
2
AC3NO4LEDGEMENT
I %ou"d "i.e to &i/e seci!" !c.no%"ed&ement to ---- #or $is consistent
suort !nd moti/!tion1
I !m &r!te#u" to ----, Associ!te ro#essor in #in!nce, ---- #or $is
tec$nic!" e5ertise, !d/ice !nd e5ce""ent &uid!nce1 6e not on") &!/e m)
roject ! scruu"ous critic!" re!din&, but !dded m!n) e5!m"es !nd ide!s to
imro/e it1
I !m indebted to m) ot$er #!cu"t) members %$o &!/e time !nd !&!in
re/ie%ed ortions o# t$is roject !nd ro/ide m!n) /!"u!b"e comments1
I %ou"d "i.e to e5ress m) !reci!tion to%!rds m) #riends #or t$eir
encour!&ement !nd suort t$rou&$out t$is roject1
7
CONTENTS
C6APTER8"
INTRODUCTION
C6APTER82
SECURITY ANALYSIS
C6APTER87
PORTFOLIO MANAGEMENT
C6APTER89
PORTFOLIO ANALYSIS
C6APTER8:

PRACTICAL STUDY OF SOME SELECTED SCRIPS
C6APTER8;
CONCLUSION AND SUGGESTIONS
'I'ILIOGRAP6Y
9
O'<ECTI=ES
TO STUDY AND UNDERSTAND T6E PORTFOLIO MANAGEMENT
CONCEPTS1
TO STUDY AND UNDERSTAND T6E SECURITY ANALYSIS CONCEPTS1
TO MEASURE T6E RIS3 AND RETURN OF PORTFOIO OF COMPANIES1
TO SELECT AN OPTIMUM PORTFOLIO1
:
RESEARC6 MET6ODOLOGY
SECONDARY DATA>8
D!t! co""ected #rom /!rious 'oo.s, Ne%s!ers !nd Internet1
LIMITATIONS
T6E MA<OR LIMITATIONS OF T6E PRO<ECT ARE >8
DETAILED STUDY OF T6E TOPIC 4AS NOT POSSI'LE DUE TO T6E
LIMITED SI?E OF T6E PRO<ECT1
T6ERE 4AS A CONSTRAINT 4IT6 REGARD TO TIME ALLOCATED FOR
T6E RESEARC6 STUDY1
T6E A=AILA'ILITY OF INFORMATION IN T6E FORM OF ANNUAL
REPORTS @ PRICE FLUCTUATIONS OF T6E COMPANIES 4AS A 'IG
CONSTRAINT TO T6E STUDY1
;
C6APTER (
INTRODUCTION
6ISTORY OF STOC3 E-C6ANGE
T$e on") stoc. e5c$!n&es oer!tin& in t$e (At$ centur) %ere t$ose o# 'omb!) set u
in (BC: !nd A$med!b!d set u in (BA91 T$ese %ere E##icient M!r.et 6)ot$esis or&!niDed !s
/o"unt!r) non8ro#it8m!.in& !ssoci!tion o# bro.ers to re&u"!te !nd rotect t$eir interests1
'e#ore t$e contro" on securities tr!din& bec!me ! centr!" subject under t$e constitution in
(A:E, it %!s ! st!te subject !nd t$e 'omb!) securities contr!cts Fcontro"G Act o# (A2: used to
re&u"!te tr!din& in securities1 Under t$is Act, T$e 'omb!) Stoc. E5c$!n&e %!s reco&niDed in
(A2C !nd A$med!b!d in (A7C1
Durin& t$e %!r boom, ! number o# stoc. e5c$!n&es %ere or&!niDed e/en in 'omb!),
A$med!b!d !nd ot$er centers, but t$e) %ere not reco&niDed1 Soon !#ter it bec!me ! centr!"
subject, centr!" "e&is"!tion %!s roosed !nd ! committee $e!ded b) A1D1Gor%!"! %ent into
t$e bi"" #or securities re&u"!tion1 On t$e b!sis o# t$e committeeHs recommend!tions !nd ub"ic
discussion, t$e securities contr!cts Fre&u"!tionG Act bec!me "!% in (A:;1
DEFINITION OF STOC3 E-C6ANGE>
IStoc. e5c$!n&e me!ns !n) bod) or indi/idu!"s %$et$er incoror!ted or not,
constituted #or t$e urose o# !ssistin&, re&u"!tin& or contro""in& t$e business o# bu)in&,
se""in& or de!"in& in securities1I
It is !n !ssoci!tion o# member bro.ers #or t$e urose o# se"#8re&u"!tion !nd
rotectin& t$e interests o# its members1
C
It c!n oer!te on"), i# it is reco&niDed b) t$e Go/ernment under t$e securities
contr!cts Fre&u"!tionG Act, (A:;1 T$e reco&nition is &r!nted under section 7 o# t$e Act b) t$e
centr!" &o/ernment, Ministr) o# Fin!nce1
NATURE @ FUNCTIONS OF STOC3 E-C6ANGE
T$ere is !n e5tr!ordin!r) !mount o# i&nor!nce !nd o# rejudice born out o# i&nor!nce
%it$ re&!rd to n!ture !nd #unctions o# Stoc. E5c$!n&e1 As economic de/e"oment roceeds,
t$e scoe #or !cJuisition !nd o%ners$i o# c!it!" b) ri/!te indi/idu!"s !"so &ro%1 A"on&
%it$ it, t$e oortunit) #or Stoc. E5c$!n&e to render t$e ser/ice o# stimu"!tin& ri/!te
s!/in&s !nd c$!""en&in& suc$ s!/in&s into roducti/e in/estment e5ists on ! /!st") &re!t
sc!"e1 T$ese !re ser/ices, %$ic$ t$e Stoc. E5c$!n&e !"one c!n render e##icient")1
T$e Stoc. E5c$!n&es in Indi! $!/e !n imort!nt ro"e to "!) in t$e bui"din& o# ! re!"
s$!re$o"ders democr!c)1 To rotect t$e interest o# t$e in/estin& ub"ic, t$e !ut$orities o# t$e
Stoc. E5c$!n&es $!/e been incre!sin&") subjectin& not on") its members to ! $i&$ de&ree o#
disci"ine, but !"so t$ose %$o use its #!ci"ities8<oint Stoc. Com!nies !nd ot$er bodies in
%$ose stoc.s !nd s$!res it de!"s1
T$e !cti/ities o# t$e Stoc. E5c$!n&e !re &o/erned b) ! reco&niDed code o# conduct
!!rt #rom st!tutor) re&u"!tions1 In/estors bot$ !ctu!" !nd otenti!" !re ro/ided, t$rou&$ t$e
d!i") Stoc. E5c$!n&e Juot!tions1 T$e job o# t$e Stoc. E5c$!n&e !nd its members is to s!tis#)
t$e need o# m!r.et #or in/estments to brin& t$e bu)ers !nd se""ers o# in/estments to&et$er,
!nd to m!.e t$e HE5c$!n&eH o# Stoc. bet%een t$em !s sim"e !nd #!ir !s ossib"e1
NEED FOR A STOC3 E-C6ANGE
B
As t$e business !nd industr) e5!nded !nd econom) bec!me more com"e5 in n!ture,
! need #or erm!nent #in!nce !rose1 Entrereneurs reJuire mone) #or "on& term needs,
%$ere!s in/estors dem!nd "iJuidit)1 T$e so"ution to t$is rob"em &!/e %!) #or t$e ori&in o#
Hstoc. e5c$!n&eH, %$ic$ is ! re!d) m!r.et #or in/estment !nd "iJuidit)1
As er t$e Securities Contr!ct Act, (A:;, ISTOC3 E-C6ANGEI me!ns !n) bod) o#
indi/idu!"s %$et$er incoror!ted or not constituted #or t$e urose o# re&u"!tin& or
contro""in& t$e business o# bu)in&, se""in& or de!"in& in securitiesI1
'Y8LA4S
'esides t$e !bo/e !ct, t$e securities contr!cts Fre&u"!tionG ru"es %ere !"so m!de in
(A:C to re&u"!te cert!in m!tters o# tr!din& on t$e stoc. e5c$!n&es1 T$ere !re !"so b)8"!%s o#
e5c$!n&es, %$ic$ !re concerned %it$ t$e #o""o%in& subjects1
Oenin& 0 c"osin& o# t$e stoc. e5c$!n&es, timin& o# tr!din&, re&u"!tion o# b"!n.
tr!ns#ers, re&u"!tion o# b!d"! or c!rr)o/er business, contro" o# t$e sett"ement !nd ot$er
!cti/ities o# t$e stoc. e5c$!n&e, #i5!tion o# m!r&ins, #i5!tion o# m!r.et rices or m!.in& u
rices, re&u"!tion o# t!r!/!ni business Fjobbin&G, etc1, re&u"!tion o# bro.ers tr!din&,
'ro.er!&e c$!r&es, tr!din& ru"es on t$e e5c$!n&e, !rbitr!tion !nd sett"ement o# disutes,
Sett"ement !nd c"e!rin& o# t$e tr!din& etc1
REGULATION OF STOC3 E-C6ANGE>
T$e securities contr!cts Fre&u"!tionG !ct is t$e b!sis #or oer!tions o# t$e stoc.
e5c$!n&es in Indi!1 No e5c$!n&e c!n oer!te "e&!"") %it$out t$e &o/ernment ermission or
reco&nition1 Stoc. e5c$!n&es !re &i/en monoo") in cert!in !re!s under section (A o# t$e
!bo/e Act to ensure t$!t t$e contro" !nd re&u"!tion !re #!ci"it!ted1 Reco&nition c!n be &r!nted
to ! stoc. e5c$!n&e ro/ided cert!in conditions !re s!tis#ied !nd t$e necess!r) in#orm!tion is
A
su"ied to t$e &o/ernment1 Reco&nitions c!n !"so be %it$dr!%n, i# necess!r)1 4$ere t$ere
!re no stoc. e5c$!n&es, t$e &o/ernment c!n "icense some o# t$e bro.ers to er#orm t$e
#unctions o# ! stoc. e5c$!n&e in its !bsence1
Securities Contr!cts FRe&u"!tionG Act, (A:;>
SCFRGA !ims !t re/entin& undesir!b"e tr!ns!ctions in securities b) re&u"!tin& t$e
business o# de!"in& t$erein b) ro/idin& #or cert!in ot$er m!tters connected t$ere%it$1 T$is is
t$e rinci!" Act, %$ic$ &o/erns t$e tr!din& o# securities in Indi!1
T$e term IsecuritiesI $!s been de#ined In t$e SCFRGA1 As er Section 2F$G, t$e
HSecuritiesH inc"ude>
(1 S$!res, scrits, stoc.s, bonds, debentures, debenture stoc. or ot$er m!r.et!b"e securities
o# ! "i.e n!ture in or o# !n) incoror!ted com!n) or ot$er bod) coror!te
21 Deri/!ti/e
71 Units or !n) ot$er instrument issued b) !n) co""ecti/e in/estment sc$eme to t$e
in/estors in suc$ sc$emes1
91 Go/ernment securities
:1 Suc$ ot$er instruments !s m!) be dec"!red b) t$e Centr!" Go/ernment to be securities1
;1 Ri&$ts or interests in securities1
(E
SECURITIES AND E-C6ANGE 'OARD OF INDIA FSE'IG
Securities !nd E5c$!n&e 'o!rd o# Indi! FSE'IG setu !s !n !utonomous re&u"!tor)
!ut$orit) b) t$e Go/ernment o# Indi! in (ABB Ito rotect t$e interests o# in/estors in
securities !nd to romote t$e de/e"oment o#, !nd to re&u"!te t$e securities m!r.et !nd #or
m!tters connected t$ere%it$ or incident!" t$eretoI1 It is emo%ered b) t%o !cts n!me") t$e
SE'I Act, (AA2 !nd t$e securities contr!ct Fre&u"!tionG Act, (A:; to er#orm t$e #unction o#
rotectin& in/estorHs ri&$ts !nd re&u"!tin& t$e c!it!" m!r.ers1
Securities !nd E5c$!n&e 'o!rd o# Indi! FSE'IG re&u"!tor) re!c$ $!s been e5tended to
more !re!s !nd t$ere is ! consider!b"e c$!n&e in t$e c!it!" m!r.et1 SE'IHs !nnu!" reort #or
(AAC8AB $!s st!ted t$!t t$rou&$ out its si58)e!r e5istence !s ! st!tutor) bod), it $!s sou&$t to
b!"!nce t$e t%in objecti/es o# in/estor rotection !nd m!r.et de/e"oment1 It $!s #ormu"!ted
ne% ru"es !nd cr!#ted re&u"!tions to #oster de/e"oment1 Monitorin&1 !nd sur/ei""!nce %!s
ut in "!ce in t$e Stoc. E5c$!n&es in (AA;8AC !nd stren&t$ened in (AAC8AB1
SE'I %!s set u !s !n !utonomous re&u"!tor) !ut$orit) b) t$e &o/ernment o# Indi! in
(ABB Ito rotect t$e interests o# in/estors in securities !nd to romote t$e de/e"oment o#,
!nd to re&u"!te t$e securities m!r.et !nd #or m!tters connected t$ere%it$ or incident!"
t$eretoI1 It is emo%ered b) t%o !cts n!me") t$e SE'I Act, (AA2 !nd t$e securities contr!ct
Fre&u"!tionG Act, (A:; to er#orm t$e #unction o# rotectin& in/estorHs ri&$ts !nd re&u"!tin&
t$e c!it!" m!r.ets1
((
O'<ECTI=ES OF SE'I
T$e romu"&!tion o# t$e SE'I ordin!nce in t$e !r"i!ment &!/e st!tutor) st!tus to,
SE'I in (AA21 Accordin& to t$e re!mb"e o# t$e SE'I, t$e t$ree m!in objecti/es !re>8
To rotect t$e interests o# t$e in/estors in securities
To romote t$e de/e"oment o# securities m!r.et1
To re&u"!te t$e securities m!r.et1
SALIENT FEATURES OF SE'I
T$e SE'I s$!"" be ! bod) coror!te b) t$e n!me $!/in& eretu!" succession !nd !
common se!" %it$ o%er to !cJuire, $o"d !nd disose o# roert), bot$ mo/!b"e !nd
immo/!b"e, !nd to contr!ct, !nd s$!"", b) t$e s!id n!me, sue or b) sued1
T$e 6e!d O##ice o# t$e 'o!rd s$!"" be !t 'omb!)1 T$e 'o!rd m!) est!b"is$ o##ices !t
ot$er "!ces in Indi!1 In 'omb!), t$e 'o!rd is situ!ted !t Mitt!" Court, '8 4in&, 229,
N!rim!n Point, 'omb!)89EE E2(1
T$e c$!irm!n !nd t$e Members o# t$e 'o!rd !re !ointed b) t$e Centr!"
Go/ernment1
T$e &ener!" suerintendence, direction !nd m!n!&ement o# t$e !##!irs o# t$e 'o!rd
!re in ! 'o!rd o# Members, %$ic$ m!) e5ercise !"" o%ers !nd do !"" !cts !nd t$in&s
%$ic$ m!) be e5ercised or done b) t$!t 'o!rd1
T$e Go/ernment c!n rescribe terms o# o##ice !nd ot$er conditions o# ser/ice o# t$e
C$!irm!n !nd Members o# t$e 'o!rd1 T$e members c!n be remo/ed under section ;
o# t$e SE'I Act under seci#ied circumst!nces1
It is rim!r) dut) o# t$e 'o!rd to rotect t$e interest o# t$e in/estor in securities !nd
to romote t$e de/e"oment o# !nd to re&u"!te t$e securities m!r.et b) suc$ me!sures,
!s it t$in.s #it1
(2
FUNCTIONS OF SE'I
Re&u"!tin& t$e business in Stoc. E5c$!n&e !nd !n) ot$er securities m!r.et1
Re&isterin& !nd re&u"!tin& t$e %or.in& o# Stoc. 'ro.ers, Sub8'ro.ers, S$!re Tr!ns#er
A&ents, '!n.ers to t$e issue, Trustees to trust deeds, Re&istr!rs to !n issue, Merc$!nt
'!n.ers, Under%riters,
Port#o"io M!n!&ers, In/estment Ad/isers !nd suc$ ot$er Intermedi!ries %$o m!) be
!ssoci!ted %it$ securities m!r.et in !n) m!nner1
Re&isterin& !nd re&u"!tin& t$e %or.in& o# co""ecti/e in/estment sc$emes inc"udin&
Mutu!" Funds1
Promotin& !nd re&u"!tin& se"#8re&u"!tor) or&!niD!tions1
Pro$ibitin& #r!udu"ent !nd un#!ir tr!de r!ctices in t$e securities m!r.et1 Promotin&
in/estorHs educ!tion !nd tr!inin& o# intermedi!ries in securities m!r.et1 Pro$ibitin&
Insiders Tr!din& in securities1
Re&u"!tin& subst!nti!" !cJuisition o# s$!res !nd t!.e8o/er o# com!nies
C!""in& #or in#orm!tion, underst!ndin& insection, conductin& enJuiries !nd !udits o#
t$e Stoc. E5c$!n&es, Intermedi!ries !nd Se"#8Re&u"!tor) or&!niD!tions in t$e
securities m!r.et1
(7
PROFILE OF
NATIONAL STOC3 E-C6ANGE
(9
NATIONAL STOC3 E-C6ANGE
T$e NSE %!s incoror!ted in No/ember (AA2 %it$ !n eJuit) c!it!" o# Rs12:crs1 T$e
Intern!tion!" Securities Consu"t!nc) FIS CG o# 6on& 3on& $e"ed in settin& u NSE1 ISC
re!red t$e det!i"ed business "!ns !nd inst!""!tion o# $!rd%!re !nd so#t%!re s)stems1 T$e
romotions #or NSE %ere Fin!nci!" Institutions, Insur!nces Com!nies, '!n.s !nd SE'I
C!it!" M!r.et Ltd1, In#r!structure Le!sin& !nd Fin!nci!" Ser/ices Ltd1 !nd Stoc. 6o"din&
Coror!tion Ltd1
It $!s been set u to stren&t$en t$e mo/e to%!rds ro#ession!"is!tion o# t$e c!it!"
m!r.et !s %e"" !s ro/ide n!tion %ide securities tr!din& #!ci"ities to in/estors1
NSE is not !n e5c$!n&e in t$e tr!dition!" sense %$ere bro.ers o%n !nd m!n!&e t$e
e5c$!n&e1 A t%o tier !dministr!ti/e setu in/o"/in& ! com!n) bo!rd !nd ! &o/ernin& bo!rd
o# t$e e5c$!n&e is en/is!&ed1
NSE is ! n!tion!" m!r.et #or s$!res o# Pub"ic Sector Units 'onds, Debentures !nd
Go/ernment securities, since in#r!structure !nd tr!din& #!ci"ities !re ro/ided1
NSE8NIFTY>
T$e NSE on Ari" 22, (AA; "!unc$ed ! ne% eJuit) Inde51 T$e NSE8:E1 T$e ne%
Inde5 %$ic$ re"!ces t$e e5istin& NSE8(EE Inde5 is e5ected to ser/e !s !n !rori!te Inde5
#or t$e ne% se&ment o# #utures !nd otions1
INiftyI me!ns N!tion!" Inde5 #or Fi#t) Stoc.s1
(:
T$e NSE8:E comrises :E com!nies t$!t reresent 2E bro!d Industr) &rous %it$ !n
!&&re&!te m!r.et c!it!"iD!tion o# !round Rs1(,CE,EEE crs1 A"" com!nies inc"uded in t$e
Inde5 $!/e ! m!r.et c!it!"iD!tion in e5cess o# Rs1:EE crs e!c$ !nd s$ou"d $!/e tr!ded #or
B:K o# tr!din& d!)s !t !n im!ct cost o# "ess t$!n (1:K1
T$e b!se eriod #or t$e inde5 is t$e c"ose o# rices on No/7, (AA: %$ic$ m!.es one
)e!r o# com"etion o# oer!tion o# NSEHs c!it!" m!r.et se&ment1 T$e b!se /!"ue o# t$e Inde5
$!s been set !t (EEE1
NSE8MIDCAP INDE->
T$e NSE midc! Inde5 or t$e <unior Ni#t) comrises :E stoc.s t$!t reresents 2(
bo!rd Industr) &rous !nd %i"" ro/ide roer reresent!tion o# t$e midc! se&ment o# t$e
Indi!n c!it!" M!r.et1 A"" stoc.s in t$e Inde5 s$ou"d $!/e m!r.et c!it!"iD!tion o# &re!ter
t$!n Rs12EE crs !nd s$ou"d $!/e tr!ded B:K o# t$e tr!din& d!)s !t !n im!ct cost o# "ess
21:K1
T$e b!se eriod #or t$e inde5 is No/ 9, (AA; %$ic$ si&ni#ies t%o )e!rs #or com"etion
o# oer!tions o# t$e c!it!" m!r.et se&ment o# t$e oer!tion1 T$e b!se /!"ue o# t$e Inde5 $!s
been set !t (EEE1
A/er!&e d!i") turn o/er o# t$e resent scen!rio 2,:B,2(2 FL!csG !nd number o#
!/er!&e d!i") tr!des 2,(;E FL!csG1
At resent, t$ere !re 29 stoc. e5c$!n&es reco&niDed under t$e Securities Contr!ct
FRe&u"!tionG Act, (A:;1 T$e) !re>
(;
STOC3 E-C6ANGES IN INDIA
S1No NAME OF T6E STOC3 E-C6ANGE YEAR
( 'omb!) Stoc. E5c$!n&e (BC:
2 6)der!b!d Stoc. E5c$!n&e (A97
7 A$med!b!d S$!re !nd Stoc. 'ro.ers Associ!tion (A:C
9 C!"cutt! Stoc. E5c$!n&e Associ!tion Limited (A:C
: De"$i Stoc. E5c$!n&e Associ!tion Limited1 (A:C
; M!dr!s Stoc. E5c$!n&e Associ!tion Limited1 (A:C
C Indoor Stoc. 'ro.ers Associ!tion1 (A:B
B '!n&!"ore Stoc. E5c$!n&e1 (A;7
A Coc$in Stoc. E5c$!n&e1 (ACB
(E Pune Stoc. E5c$!n&e Limited1 (AB2
(( U1P Stoc. E5c$!n&e Associ!tion Limited1 (AB2
(2 Lud$i!n! Stoc. E5c$!n&e Associ!tion Limited1 (AB7
(7 <!iur Stoc. E5c$!n&e Limited1 (AB9
(9 G!u$!t$i Stoc. E5c$!n&e Limited1 (AB9
(: M!n&!"ore Stoc. E5c$!n&e Limited (AB:
(; M!&$!d Stoc. E5c$!n&e Limited, P!tn! (AB;
(C '$u/!nes$%!r Stoc. E5c$!n&e Associ!tion Limited (ABA
(B O/er t$e Stoc. E5c$!n&e Limited1 (ABA
(A S!ur!st$r! 3utc$ Stoc. E5c$!n&e Limited1 (AAE
2E =!dod!r! Stoc. E5c$!n&e Limited1 (AA(
2( Coimb!tore Stoc. E5c$!n&e Limited1 (AA(
22 Meerut Stoc. E5c$!n&e Limited1 (AA(
27 N!tion!" Stoc. E5c$!n&e Limited (AA2
29 Inte&r!ted Stoc. E5c$!n&e1 (AAA
(C
PROFILE OF 'OM'AY STOC3
E-C6ANGE
(B
'OM'AY STOC3 E-C6ANGE
T$is Stoc. E5c$!n&e, Mumb!i, ou"!r") .no%n !s I'OM'AY STOC3
E-C6ANGE F'SEGI %!s est!b"is$ed in (BC: !s HHT$e N!ti/e S$!re !nd Stoc. 'ro.ers
Associ!tionI, !s ! /o"unt!r) non8ro#it m!.in& !ssoci!tion1 It $!s e/o"/ed o/er t$e )e!rs into
its resent st!tus !s t$e remiere Stoc. E5c$!n&e in t$e countr)1 It m!) be noted t$!t t$e
Stoc. E5c$!n&e is t$e o"dest one in Asi!, e/en o"der t$!n t$e To.)o Stoc. E5c$!n&e, %$ic$
%!s #ounded in (BCB1
T$e e5c$!n&e, %$i"e ro/idin& !n e##icient !nd tr!ns!rent m!r.et #or tr!din& in
securities, u$o"ds t$e interests o# t$e in/estors !nd ensures redress!" o# t$eir &rie/!nces,
%$et$er !&!inst t$e com!nies or its o%n member bro.ers1 It !"so stri/es to educ!te !nd
en"i&$ten t$e in/estors b) m!.in& !/!i"!b"e necess!r) in#orm!ti/e inuts !nd conductin&
in/estor educ!tion ro&r!mmes1
A &o/ernin& bo!rd comrisin& o# A e"ected directors, 2 SE'I nominees, C ub"ic
reresent!ti/es !nd !n e5ecuti/e director is t$e !e5 bod), %$ic$ decides t$e o"icies !nd
re&u"!tes t$e !##!irs o# t$e e5c$!n&e1
T$e E5ecuti/e director !s t$e c$ie# e5ecuti/e o##icer is resonsib"e #or t$e d!) to d!)
!dministr!tion o# t$e e5c$!n&e1
'SE INDICES>
In order to en!b"e t$e m!r.et !rtici!nts, !n!")sts etc1, to tr!c. t$e /!rious us !nd
do%ns in t$e Indi!n stoc. m!r.et, t$e E5c$!n&e introduced in (AB; !n eJuit) stoc. inde5
c!""ed 'SE8SENSE- t$!t subseJuent") bec!me t$e b!rometer o# t$e moments o# t$e s$!re
rices in t$e Indi!n stoc. m!r.et1 It is ! IM!r.et c!it!"iD!tion8%ei&$tedI inde5 o# 7E
comonent stoc.s reresentin& ! s!m"e o# "!r&e, %e"" est!b"is$ed !nd "e!din& com!nies1
(A
T$e b!se )e!r o# SENSE- is (ACB8CA1 T$e SENSE- is %ide") reorted in bot$ domestic !nd
intern!tion!" m!r.ets t$rou&$ rint !s %e"" !s e"ectronic medi!1
SENSE- is c!"cu"!ted usin& ! m!r.et c!it!"iD!tion %ei&$ted met$od1 As er t$is
met$odo"o&), t$e "e/e" o# t$e inde5 re#"ects t$e tot!" m!r.et /!"ue o# !"" 7E comonent stoc.s
#rom di##erent industries re"!ted to !rticu"!r b!se eriod1 T$e tot!" m!r.et /!"ue o# !
com!n) is determined b) mu"ti")in& t$e rice o# its stoc. b) t$e number o# s$!res
outst!ndin&1 St!tistici!ns c!"" !n inde5 o# ! set o# combined /!ri!b"es Fsuc$ !s rice !nd
number o# s$!resG ! comosite Inde51 An Inde5ed number is used to reresent t$e resu"ts o#
t$is c!"cu"!tion in order to m!.e t$e /!"ue e!sier to %or. %it$ !nd tr!c. o/er ! time1 It is
muc$ e!sier to &r!$ ! c$!rt b!sed on Inde5ed /!"ues t$!n one b!sed on !ctu!" /!"ues %or"d
o/er m!jorit) o# t$e %e"" .no%n Indices !re constructed usin& IM!r.et c!it!"iD!tion
%ei&$ted met$odI1
In r!ctice, t$e d!i") c!"cu"!tion o# SENSE- is done b) di/idin& t$e !&&re&!te m!r.et
/!"ue o# t$e 7E com!nies in t$e Inde5 b) ! number c!""ed t$e Inde5 Di/isor1 T$e Di/isor is
t$e on") "in. to t$e ori&in!" b!se eriod /!"ue o# t$e SENSE-1
T$e Di/isor .ees t$e Inde5 com!r!b"e o/er ! eriod o# time !nd it is t$e re#erence
oint #or t$e entire Inde5 m!inten!nce !djustments1 SENSE- is %ide") used to describe t$e
mood in t$e Indi!n Stoc. m!r.ets1 '!se )e!r !/er!&e is c$!n&ed !s er t$e #ormu"!>
'!se )e!r !/er!&e is c$!n&ed !s er t$e #ormu"!
Ne% b!se )e!r !/er!&e L o"d b!se )e!r !/er!&e MFne% m!r.et /!"ue0o"d m!r.et /!"ueG
2E
C6APTER N 2
SECURITY ANALYSIS
2(
SECURITY ANALYSIS
De#inition>
For m!.in& roer in/estment in/o"/in& bot$ ris. !nd return, t$e in/estor $!s to m!.e
stud) o# t$e !"tern!ti/e !/enues o# t$e in/estment8t$eir ris. !nd return c$!r!cteristics, !nd
m!.e ! roer rojection or e5ect!tion o# t$e ris. !nd return o# t$e !"tern!ti/e in/estments
under consider!tion1 6e $!s to tune t$e e5ect!tions to t$is re#erence o# t$e ris. !nd return
#or m!.in& ! roer in/estment c$oice1 T$e rocess o# !n!")Din& t$e indi/idu!" securities !nd
t$e m!r.et !s ! %$o"e !nd estim!tin& t$e ris. !nd return e5ected #rom e!c$ o# t$e
in/estments %it$ ! /ie% to identi#) under/!"ues securities #or bu)in& !nd o/er/!"ues
securities #or se""in& is bot$ !n !rt !nd ! science t$!t is %$!t c!""ed securit) !n!")sis1
Securit)>
T$e securit) $!s inc"usi/e o# s$!res, scrits, bonds, debenture stoc. or !n) ot$er
m!r.et!b"e securities o# "i.e n!ture in or o# !n) debentures o# ! com!n) or bod) coror!te,
t$e &o/ernment !nd semi &o/ernment bod) etc1
In t$e strict sense o# t$e %ord, ! securit) is !n instrument o# romissor) note or !
met$od o# borro%in& or "endin& or ! source o# contributin& to t$e #unds need b) ! coror!te
bod) or non8coror!te bod), ri/!te securit) #or e5!m"e is !"so ! securit) !s it is !
romissor) note o# !n indi/idu!" or #irm !nd &i/es rise to c"!im on mone)1 'ut suc$ ri/!te
securities o# ri/!te com!nies or romissor) notes o# indi/idu!"s, !rtners$i or #irm to t$e
intent t$!t t$eir m!r.et!bi"it) is oor or ni", !re not !rt o# t$e c!it!" m!r.et !nd do not
constitute !rt o# t$e securit) !n!")sis1
22
An!")sis o# securities>
Securit) !n!")sis in bot$ tr!dition!" sense !nd modern sense in/o"/es t$e rojection o#
#uture di/idend or ensurin& #"o%s, #orec!st o# t$e s$!re rice in t$e #uture !nd estim!tin& t$e
intrinsic /!"ue o# ! securit) b!sed on t$e #orec!st o# e!rnin&s or di/idend1
Securit) !n!")sis in tr!dition!" sense is essenti!"") on !n!")sis o# t$e #und!ment!"
/!"ue o# s$!res !nd its #orec!st #or t$e #uture t$rou&$ t$e c!"cu"!tion o# its intrinsic %ort$ o#
s$!re1
Modern securit) !n!")sis re"ies on t$e #und!ment!" !n!")sis o# t$e securit), "e!din& to
its intrinsic %ort$ !nd !"so rise8return !n!")sis deendin& on t$e /!ri!bi"it) o# t$e returns,
co/!ri!nce, s!#et) o# #unds !nd t$e rojection o# t$e #uture returns1
I# t$e securit) !n!")sis b!sed on #und!ment!" #!ctors o# t$e com!n), t$en t$e #orec!st
o# t$e s$!re rice $!s to t!.e into !ccount ine/it!b") t$e trends !nd t$e scen!rio in t$e
econom), in t$e industr) to %$ic$ t$e com!n) be"on&s !nd #in!"") t$e stren&t$s !nd
%e!.nesses o# t$e com!n) itse"#1 Its m!n!&ement, romoters b!c.%!rd, #in!nci!" resu"ts,
rojection o# e5!nsion, term "!nnin& etc1
Aro!c$es to Securit) An!")sis>
Fund!ment!" An!")sis
Tec$nic!" An!")sis
E##icient M!r.et 6)ot$esis
27
FUNDAMENTAL ANALYSIS
ItHs ! "o&ic!" !nd s)stem!tic !ro!c$ to estim!tin& t$e #uture di/idends @ s$!re rice
!s t$ese t%o constitutes t$e return #rom in/estin& in s$!res1 Accordin& to t$is !ro!c$, t$e
s$!re rice o# ! com!n) is determined b) t$e #und!ment!" #!ctors !##ectin& t$e Econom)0
Industr)0 Com!n) suc$ !s E!rnin&s Per S$!re, DIP r!tio, Cometition, M!r.et S$!re,
Ou!"it) o# M!n!&ement etc1 it c!"cu"!tes t$e true %ort$ o# t$e s$!re b!sed on itHs resent !nd
#uture e!rnin& c!!cit) !nd com!res it %it$ t$e current m!r.et rice to identi#) t$e mis8
riced securities1
Fund!ment!" !n!")sis in/o"/es ! t$ree8ste e5!min!tion, %$ic$ c!""s #or>
(1 Underst!ndin& o# t$e m!cro8economic en/ironment !nd de/e"oments1
21 An!")sin& t$e rosects o# t$e Andustr) to %$ic$ t$e #irm be"on&s
71 Assessin& t$e rojected er#orm!nce o# t$e com!n)1
MACRO ECONOMIC ANALYSIS>
T$e m!cro8econom) is t$e o/er!"" economic en/ironment in %$ic$ !"" #irms oer!te1
T$e .e) /!ri!b"es common") used to describe t$e st!te o# t$e m!cro8econom) !re>
Gro%t$ R!te o# Gross Domestic Product FGDPG
T$e Gross Domestic Product is me!sure o# t$e tot!" roduction o# #in!" &oods !nd
ser/ices in t$e econom) durin& ! seci#ied eriod usu!"") ! )e!r1 T$e &ro%t$ r!te E GDP is
t$e most imort!nt indic!tor o# t$e er#orm!nce o# t$e econom)1 T$e $i&$er t$e &ro%t$ r!te
o# GDP, ot$er t$in&s bein& eJu!", t$e more #!/our!b"e it is #or t$e stoc. m!r.et1
29
Industri!" Gro%t$ R!te>
T$e stoc. m!r.et !n!")sts #ocus more on t$e industri!" sector1 T$e) "oo. !t t$e o/er!""
industri!" &ro%t$ r!te !s %e"" !s t$e &ro%t$ r!tes o# di##erent industries1
T$e $i&$er t$e &ro%t$ r!te o# t$e industri!" sector, ot$er t$in&s bein& eJu!", t$e more
#!/our!b"e it is #or t$e stoc. m!r.et1
A&ricu"ture !nd Monsoons>
A&ricu"ture !ccounts #or !bout ! Ju!rter o# t$e Indi!n econom) !nd $!s imort!nt
"in.!&es, direct !nd indirect, %it$ industr)1 6ence, t$e incre!se or decre!se o# !&ricu"tur!"
roduction $!s ! si&ni#ic!nt be!rin& on industri!" roduction !nd coror!te er#orm!nce1
A se"" o# &ood monsoons im!rts d)n!mism to t$e industri!" sector !nd buo)!nc) to
t$e stoc. m!r.et1 Li.e%ise, ! stre!. o# b!d monsoons c!sts its s$!do% o/er t$e industri!"
sector !nd t$e stoc. m!r.et1
S!/in&s !nd In/estments>
T$e dem!nd #or coror!te securities $!s !n imort!nt be!rin& on stoc. rice
mo/ements1 So in/estment !n!")sts s$ou"d .no% %$!t is t$e "e/e" o# in/estment in t$e
econom) !nd %$!t roortion o# t$!t in/estment is directed to%!rd t$e c!it!" m!r.et1 T$e
!n!")sts s$ou"d !"so .no% %$!t !re t$e s!/in&s !nd $o% t$e s!me !re !""oc!ted o/er /!rious
instruments "i.e eJuities, bonds, b!n. deosits, sm!"" s!/in&s sc$emes, !nd bu""ion1 Ot$er
t$in&s bein& eJu!", t$e $i&$er t$e "e/e" o# s!/in&s !nd in/estments !nd t$e &re!ter t$e
!""oc!tion o# t$e s!me o/er eJuities, t$e more #!/our!b"e it is #or t$e stoc. m!r.et1
Go/ernment 'ud&et !nd De#icit
Go/ernment "!)s !n imort!nt ro"e in most economIes1 T$e e5cess o# &o/ernment
e5enditures o/er &o/ernment!" re/enues reresents t$e de#icit1 4$i"e t$ere !re se/er!"
me!sures #or de#icit, t$e most ou"!r me!sure is t$e #isc!" de#icit1
2:
T$e #isc!" de#icit $!s to be #in!nced %it$ &o/ernment borro%in&s, %$ic$ is done in
t$ree %!)s1
(1 T$e &o/ernment c!n borro% #rom t$e reser/e b!n. o# Indi!1
21 T$e &o/ernment c!n resort to borro%in& in domestic c!it!" m!r.et1
71 T$e &o/ernment m!) borro% #rom !bro!d1
In/estment !n!")sts e5!mine t$e &o/ernment bud&et to !ssess $o% it is "i.e") to im!ct on
t$e stoc. m!r.et1
Price Le/e" !nd In#"!tion
T$e rice "e/e" me!sures t$e de&ree to %$ic$ t$e nomin!" r!te o# &ro%t$ in GDP is
!ttribut!b"e to t$e #!ctor o# in#"!tion1 T$e e##ect o# in#"!tion on t$e coror!te sector tends to be
une/en1 4$i"e cert!in industries m!) bene#it, ot$ers tend to su##er1 Industries t$!t enjo) !
stron& m!r.et #or t$ere roducts !nd %$ic$ do not come under t$e ur/ie% o# rice contro"
m!) bene#it1 On t$e ot$er $!nd, industries t$!t $!/e ! %e!. m!r.et !nd %$ic$ come under t$e
ur/ie% o# rice contro" tend to "ose1 On t$e %$o"e, it !e!rs t$!t ! mi"d "e/e" o# in#"!tion is
&ood #or t$e stoc. m!r.et1
Interest R!te
Interest r!tes /!r) %it$ m!turit), de#!u"t ris., in#"!tion r!te, roduc;i/it) o# c!it!",
seci!" #e!tures, !nd so on1 A rise in interest r!tes deresses coror!te ro#it!bi"it) !nd !"so
"e!ds to !n incre!se in t$e discount r!te !"ied b) eJuit) in/estors, bot$ o# %$ic$ $!/e !n
!d/erse im!ct on stoc. rices1 On t$e ot$er $!nd, ! #!"" in interest r!tes imro/es coror!te
ro#it!bi"it) !nd !"so "e!ds to ! dec"ine in t$e discount r!te !"ied b) eJuit) in/estors, bot$
o# %$ic$ $!/e ! #!/our!b"e im!ct on stoc. rices1
'!"!nce o# P!)ments, Fore5 Reser/es, !nd E5c$!n&e R!tes>
2;
T$e b!"!nce o# !)ments de#icit de"etes t$e #ore5 reser/es o# t$e countr) !nd $!s !n
!d/erse im!ct on t$e e5c$!n&e r!teP on t$e ot$er $!nd ! b!"!nce o# !)ments sur"us
!u&ments t$e #ore5 reser/es o# t$e countr) !nd $!s ! #!/our!b"e im!ct on t$e e5c$!n&e r!te1
In#r!structur!" F!ci"ities !nd Arr!n&ements>
In#r!structur!" #!ci"ities !nd !rr!n&ements si&ni#ic!nt") in#"uence industri!"
er#orm!nce1 More seci#ic!""), t$e #o""o%in& !re imort!nt>
AdeJu!te !nd re&u"!r su") o# e"ectric o%er !t ! re!son!b"e t!ri##1
A %e"" de/e"oed tr!nsort!tion !nd communic!tion s)stem Fr!i"%!) tr!nsort!tion,
ro!d net%or., in"!nd %!ter%!)s, ort #!ci"ities, !ir "in.s, !nd te"ecommunic!tions
s)stemG1
An !ssured su") o# b!sic industri!" r!% m!teri!"s "i.e stee", co!", etro"eum
roducts, !nd cement1
Resonsi/e #in!nci!" suort #or #i5ed !ssets !nd %or.in& c!it!"1
Sentiments>
T$e sentiments o# consumers !nd businessmen c!n $!/e !n imort!nt be!rin& on
economic er#orm!nce1 6i&$er consumer con#idence "e!ds to $i&$er e5enditure on
bi&&tic.et items1 6i&$er business con#idence &ets tr!ns"!ted into &re!ter business in/estment
t$!t $!s ! stimu"!tin& e##ect on t$e econom)1 T$us, sentiments in#"uence consumtion !nd
in/estment decisions !nd $!/e ! be!rin& on t$e !&&re&!te dem!nd #or &oods !nd ser/ices1
2C
INDUSTRY ANALYSIS
T$e objecti/e o# t$is !n!")sis is to !ssess t$e rosects o# /!rious industri!"
&rouin&s1 Admitted"), it is !"most imossib"e to #orec!st e5!ct") %$ic$ industri!" &rouin&s
%i"" !reci!te t$e most1 Yet c!re#u" !n!")sis c!n su&&est %$ic$ industries $!/e ! bri&$ter
#uture t$!n ot$ers !nd %$ic$ industries !re "!&ued %it$ rob"ems t$!t !re "i.e") to ersist #or
%$i"e1
Concerned %it$ t$e b!sics o# industr) !n!")sis, t$is section is di/ided into t$ree !rts>
Industr) "i#e c)c"e !n!")sis
Stud) o# t$e structure !nd c$!r!cteristics o# !n industr)
Pro#it otenti!" o# industries> Porter mode"1

INDUSTRY LIFE CYCLE ANALYSIS>
M!n) industries economists be"ie/e t$!t t$e de/e"oment o# !"most e/er) industr)
m!) be !n!")sed in terms o# ! "i#e c)c"e %it$ #our %e""8de#ined st!&es>
Pioneerin& st!&e>
Durin& t$is st!&e, t$e tec$no"o&) !nd or t$e roduct is re"!ti/e") ne%1 Lured b)
romisin& rosects, m!n) entrereneurs enter t$e #ie"d1 As ! resu"t, t$ere is .een, !nd o#ten
c$!otic, cometition1 On") ! #e% entr!nts m!) sur/i/e t$is st!&e1
R!id Gro%t$ St!&e >
In t$is st!&e #irms, %$ic$ sur/i/e t$e intense cometition o# t$e ioneerin& st!&e,
%itness si&ni#ic!nt e5!nsion in t$eir s!"es !nd ro#its1
2B
M!turit) !nd St!bi"is!tion St!&e >
Durin& t$e st!&e, %$en t$e industr) is more or "ess #u"") de/e"oed, its &ro%t$ r!te is
com!r!b"e to t$!t o# t$e econom) !s ! %$o"e1
4it$ t$e s!ti!tion o# dem!nd, encro!c$ment o# ne% roducts, !nd c$!n&es in
consumer re#erences, t$e industr) e/entu!"") enters t$e dec"ine st!&e, re"!ti/e to t$e
econom) !s ! %$o"e1 In t$is st!&e, %$ic$ m!) continue inde#inite"), t$e industr) m!) &ro%
s"i&$t") durin& roserous eriods, st!&n!te durin& norm!" eriods, !nd dec"ine durin&
recession!r) eriods 1
STUDY T6E STRUCTURE @ C6ARACTERISTICS OF AN INDUSTRY>
Since e!c$ industr) is uniJue, ! s)stem!tic stud) o# its seci#ic #e!tures !nd
c$!r!cteristics must be !n inte&r!" !rt o# t$e in/estment decision rocess1 Industr) !n!")sis
s$ou"d #ocus on t$e #o""o%in&>
I. Structure of the Industry and nature of Competition
T$e number o# #irms in t$e industr) !nd t$e m!r.et s$!re o# t$e to #e% F#our to #i/eG
#irms in t$e industr)1
Licensin& o"ic) o# t$e &o/ernment
Entr) b!rriers, i# !n)
Pricin& o"icies o# t$e #irm
De&ree o# $omo&eneit) or di##erenti!tion !mon& roducts
Cometition #rom #orei&n #irms
Com!rison o# t$e roducts o# t$e industr) %it$ substitutes in terms o# Ju!"it), rice,
!e!", !nd #unction!" er#orm!nce1
2A
II. Nature and Prospect of Demand
M!jor customer !nd t$eir reJuirements
3e) determin!nts o# dem!nd
De&ree o# c)c"ic!"it) in dem!nd
E5ected r!te o# &ro%t$ in t$e #oresee!b"e #uture1
III. Cost, Efficiency, and Profitability

Proortions o# t$e .e) cost e"ements, /iD1 r!% m!teri!"s, "!bour, uti"ities, @ #ue"
Producti/it) o# "!bour
Turno/er o# in/entor), recei/!b"es, !nd #i5ed !ssets
Contro" o/er rices o# oututs !nd inuts
'e$!/iour o# rices o# inuts !nd oututs in resonse to in#"!tion!r) ressures
Gross ro#it, oer!tin& ro#it, !nd net ro#it m!r&ins1
Return on !ssets, e!rnin& o%er, !nd return on eJuit)1
IV. Technology and esearch
De&ree o# tec$no"o&ic!" st!bi"it)
Imort!nt tec$no"o&ic!" c$!n&es on t$e $oriDon !nd t$eir im"ic!tions
Rese!rc$ !nd de/e"oment out"!)s !s ! ercent!&e o# industr) s!"es
Proortion o# s!"es &ro%t$ !ttribut!b"e to ne% roducts 1
P!"IT P!TENTI#$ #ND IND%STIES& P!TE '!DE$
Mic$!e" Porter $!s !r&ued t$!t t$e ro#it otenti!" o# !n industr) deends on t$e
combined stren&t$ o# t$e #o""o%in& #i/e b!sic cometiti/e #orces>
T$re!t o# ne% entr!nts
Ri/!"r) !mon& t$e e5istin& #irms
Pressure #rom substitute roducts
7E
'!r&!inin& o%er o# bu)ers
'!r&!inin& o%er o# se""ers
COMPANY ANALYSIS
Com!n) !n!")sis is t$e #in!" st!&e o# t$e #und!ment!" !n!")sis, %$ic$ is to be done
to decide t$e com!n) in %$ic$ t$e in/estor s$ou"d in/est1 T$e Econom) An!")sis ro/ides
t$e in/estor ! bro!d out"ine o# t$e rosects o# &ro%t$ in t$e econom)1 T$e Industr) An!")sis
$e"s t$e in/estor to se"ect t$e industr) in %$ic$ t$e in/estment %ou"d be re%!rdin&1
Com!n) An!")sis de!"s %it$ estim!tion o# t$e Ris.s !nd Returns !ssoci!ted %it$ indi/idu!"
s$!res1
T$e stoc. rice $!s been #ound on deend on t$e intrinsic /!"ue o# t$e com!n)Hs
s$!re to t$e e5tent o# !bout :EK !s er m!n) rese!rc$ studies1 Gr!$!rm !nd Dodd in t$eir
boo. on H securit) !n!")sisH $!/e de#ined t$e intrinsic /!"ue !s It$!t /!"ue %$ic$ is justi#ied b)
t$e #!ct o# !ssets, e!rnin& !nd di/idendsI1 T$ese #!cts !re re#"ected in t$e e!rnin& otenti!" i#
t$e com!n)1 T$e !n!")st $!s to roject t$e e5ected #uture e!rnin&s er s$!re !nd discount
t$em to t$e resent time, %$ic$ &i/es t$e intrinsic /!"ue o# s$!re1 Anot$er met$od to use is
t!.in& t$e e5ected e!rnin&s er s$!re !nd mu"ti")in& it b) t$e industr) !/er!&e rice
e!rnin& mu"ti"e1
') t$is met$od, t$e !n!")st estim!te t$e intrinsic /!"ue or #!ir /!"ue o# s$!re !nd
com!re it %it$ t$e m!r.et rice to .no% %$et$er t$e stoc. is o/er/!"ued or under/!"ued1
T$e in/estment decision is to bu) under /!"ued stoc. !nd se"" o/er/!"ued stoc.1
A1 Fin!nci!" !n!")sis>
S$!re rice deends !rt") on its intrinsic %ort$ #or %$ic$ #in!nci!" !n!")sis #or !
com!n) is necess!r) to $e" t$e in/estor to decide %$et$er to bu) or not t$e s$!res o# t$e
com!n)1 T$e soundness !nd intrinsic %ort$ o# ! com!n) is .no%n on") suc$ !n!")sis1 An
in/estor needs to .no% t$e er#orm!nce o# t$e com!n), its intrinsic %ort$ !s indic!ted b)
7(
some !r!meters "i.e boo. /!"ue, EPS, PIE mu"ti"e etc1 !nd come to ! conc"usion %$et$er
t$e s$!re is ri&$t") riced #or urc$!se or not1 T$is, in s$ort is s$ort imort!nce o# #in!nci!"
!n!")sis o# ! com!n) to t$e in/estor1
Fin!nci!" !n!")sis is !n!")sis o# #in!nci!" st!tement o# ! com!n) to !ssess its
#in!nci!" $e!"t$ !nd soundness o# its m!n!&ement1 IFin!nci!" st!tement !n!")sisI in/o"/es !
stud) o# t$e #in!nci!" st!tement o# t$e com!n) to !scert!in its re/!i"in& st!te o# !##!irs !nd
t$e re!sons t$ereo#1 Suc$ ! stud) %ou"d en!b"e t$e ub"ic !nd in/estors to !scert!in %$et$er
one com!n) is more ro#it!b"e t$!n t$e ot$er !nd !"so to st!te t$e c!use !nd #!ctors t$!t !re
rob!b") resonsib"e #or t$is1
Met$od or De/ices o# Fin!nci!" !n!")sis
T$e term H#in!nci!" st!tementH !s used in modern business re#ers to t$e b!"!nce s$eet,
or t$e st!tement o# #in!nci!" osition o# t$e com!n) !t ! oint o# time !nd income !nd
e5enditure st!tementP or t$e ro#it !nd "oss st!tement o/er ! eriod1
Interret t$e #in!nci!" st!tementP it is necess!r) to !n!")De t$em %it$ t$e object o#
#orm!tion o# oinion %it$ resect to t$e #in!nci!" condition o# t$e com!n)1 T$e #o""o%in&
met$ods o# !n!")sis !re &ener!"") used1
(1 Com!r!ti/e st!tement1
21 Trend !n!")sis
71 Common8siDe st!tement
91 Found #"o% !n!")sis
:1 C!s$ #"o% !n!")sis
;1 R!tio !n!")sis
T$e s!"ient #e!tures o# e!c$ o# t$e !bo/e stes !re discussed be"o%1
72
(1 Com!r!ti/e st!tement >
T$e com!r!ti/e #in!nci!" st!tements !re st!tements o# t$e #in!nci!" osition !t
di##erent eriods o# time1 An) st!tements re!red in ! com!r!ti/e #rom %i"" be co/ered in
com!r!ti/e st!tements1 From r!ctic!" oint o# /ie%, &ener!""), t%o #in!nci!" st!tements
Fb!"!nce s$eet !nd income st!tementG !re re!red in com!r!ti/e #rom #or #in!nci!" !n!")sis
urose1 Not on") t$e com!rison o# t$e #i&ures o# t%o eriods but !"so be re"!tions$i
bet%een b!"!nce s$eet !nd in come st!tement en!b"es on det$ stud) o# #in!nci!" osition !nd
oer!ti/e resu"ts1
T$e com!r!ti/e st!tement m!) s$o%>
F(G Abso"ute #i&ures FRuee !mountsG
F2G C$!n&es in !bso"ute #i&ures i1e1, incre!se or decre!se in !bso"ute #i&ures1
F7G Abso"ute d!t! in terms o# ercent!&e1
F9G Incre!se or decre!se in terms o# ercent!&es1
21 Trend An!")sis>
T$e #in!nci!" st!tement m!) be !n!")Ded b) comutin& trends o# series o#
in#orm!tion1 T$is met$od determines t$e direction u%!rd or do%n%!rds !nd in/o"/es t$e
comut!tion o# t$e ercent!&e re"!tions$i t$!t e!c$ st!tement item be!rs to t$e s!me item in
b!se )e!r1 T$e in#orm!tion #or ! number o# )e!rs is t!.en u !nd one )e!r, &ener!"") t$e #irst
)e!r, is t!.en !s ! b!se )e!r1 T$e #i&ures o# t$e b!se )e!r !re t!.en !s (EE !nd trend r!tio #or
ot$er )e!rs !re c!"cu"!ted on t$e b!sis o# b!se )e!r1
T$ese tend in t$e c!se o# GPM or s!"es turno/er !re use#u" to indic!te t$e e5tent o#
imro/ement or deterior!tion o/er ! eriod o# time in t$e !sects considered1 T$e trends in
77
di/idends, EPS, !sset &ro%t$, or s!"es &ro%t$ !re some e5!m"es o# t$e trends used to stud)
t$e oer!tion!" er#orm!nce o# t$e com!nies1
Procedure for calculating trends&
FIG One )e!r is t!.en !s ! b!se )e!r &ener!""), t$e #irst or t$e "!st is t!.en !s b!se
)e!r1
FIIG T$e #i&ures o# b!se )e!r !re t!.en !s (EE1
FIIIG Trend ercent!&es !re c!"cu"!ted in re"!tion to b!se )e!r1 I# ! #i&ure in ot$er
)e!r is "ess t$en t$e #i&ure in b!se )e!r t$e trend ercent!&e %i"" be "ess t$en
(EE !nd it %i"" be more t$!n t$e (EE it #i&ure is more t$!n t$e b!se )e!r
#i&ures1 E!c$ )e!rHs #i&ure is di/ided b) t$e b!se )e!rs #i&ure1
71 Common8siDe st!tement>
T$e common8siDe st!tements, b!"!nce s$eet !nd income st!tement !re s$o%n in
!n!")tic!" ercent!&e1 T$e #i&ures !re s$o%n !s ercent!&es o# tot!" !ssets,Q tot!" "i!bi"ities
!nd tot!" s!"es1 T$e tot!" !ssets !re t!.en !s (EE !nd di##erent !ssets !re e5ressed !s !
ercent!&e o# t$e tot!"1 Simi"!r"), /!rious "i!bi"ities !re t!.en !s ! !rt o# tot!" "i!bi"ities1
T$ere st!tements !re !"so .no%n !s comonent ercent!&e or (EE ercent st!tements bec!use
e/er) indi/idu!" item is st!ted !s ! ercent!&e o# t$e tot!" (EE1 T$e s$ortcomin&s in
com!r!ti/e st!tements !nd trend ercent!&es %$ere c$!n&es in terms cou"d not be com!red
%it$ t$e tot!"s $!/e been co/ered u1 T$e !n!")sis is !b"e to !ssess t$e #i&ures in re"!tion to
tot!" /!"ues1
T$e common siDe st!tement m!) be re!red in t$e #o""o%in& %!)1
FiG T$e tot!" o# !ssets or "i!bi"ities !re t!.en !s (EE
FiiG T$e indi/idu!" !ssets !re e5ressed !s ! ercent!&e o# tot!" !ssets, i1e1, (EE !nd
di##erent "i!bi"ities !re c!"cu"!ted in re"!tion to tot!" "i!bi"ities1 For e5!m"e, i# tot!"
79
!ssets !re RS1: "!.$s !nd in/entor) /!"ue is Rs1:E,EEE, t$en it %i"" be (EK o# tot!"
!ssets1
F:E,EEE 5 (EEG 0 F:,EE,EEEG
91 Fund #"o% !n!")sis>
T$e oer!tion o# business in/o"/es t$e con/ersion o# c!s$ in to non8c!s$ !ssets, %$ic$
!re reco/ered in to c!s$ #orm1 T$e st!tement s$o%in& sources !nd uses o# #unds o# #unds is
roer") .no%n !s HFunds F"o% St!tementH1
T$e c$!n&es reresentin& t$e Hsources o# #undsH in t$e business m!) be issue o#
debentures, incre!se in net %ort$P !ddition to #unds, reser/es !nd sur"us, re"!tion o#
e!rnin&s1
C$!n&es s$o%in& t$e Huses o# #undsH inc"ude>
!G Addition to !ssets 8 Fi5ed !nd Current
bG Addition to in/estments1
cG Decre!sin& in "i!bi"ities b) !)in& o## "o!ns !nd creditors1
dG Decre!se in net %ort$ b) incurrin& o# "o!ns, %it$dr!%!" o# #unds #rom business
!nd !)ment o# di/idends1
:1 C!s$ F"o% !n!")sis>
C!s$ #"o% is used #or on") c!s$ in#"o% !nd out#"o%1 T$e c!s$ #"o%s !re re!red #rom
c!s$ bud&ets !nd oer!tion o# t$e com!n)1 In c!s$ #"o%s on") c!s$ !nd b!n. b!"!nce !re
in/o"/ed !nd $ence it is ! n!rro%er term t$!n t$e concet o# #unds #"o%s1 T$e c!s$ #"o%
st!tement e5"!ins $o% t$e di/idends !re !id, $o% #i5ed !ssets !re #in!nced1 T$e !n!")sis
$!d to .no% t$e re!" c!s$ #"o% osition o# com!n), its "iJuidit) !nd so"/enc), %$ic$ !re
re#"ected in t$e c!s$ #"o% osition !nd t$e st!tements t$ereo#1
7:
;1 R!tio !n!")sis>
T$e r!tio is one o# t$e most o%er#u" too"s o# #in!nci!" !n!")sis1 It is t$e rocess o#
est!b"is$in& !ndR interretin& /!rious r!tios FJu!ntit!ti/e re"!tions$i bet%een #i&ures !nd
&rous o# #i&uresG1 It is %it$ t$e $e" o# r!tios t$!t t$e #in!nci!" st!tements c!n be !n!")Ded
more c"e!r") !nd decisions m!de #rom suc$ !n!")sis1
R!tio !n!")sis %i"" be me!nin&#u" to est!b"is$ re"!tions$i re&!rdin& #in!nci!"
er#orm!nce, oer!tion!" e##icienc) !nd ro#it m!r&ins %it$ resect to com!nies o/er !
eriod o# time !nd !s bet%een com!nies %it$ in t$e s!me industr) &rou1
T$e r!tios !re con/enient") c"!ssi#ied !s #o""o%s>
!G '!"!nce s$eet r!tios or osition st!tement r!tios1
FIG Current r!tio
FIIG LiJuid r!tio FAcid test r!tioG
IIIG Debt to eJuit) r!tio
FI=G Asset to eJuit) r!tio
F=G C!it!" &e!rin& r!tio
F=IG R!tio o# current !sses to #i5ed !ssets etc1,
bG Pro#it @ "oss A"e r!tios or re/enue0income st!tement r!tios>
FIG Gross ro#it r!tio
FIIG Oer!tin& r!tio
FIIIG Net ro#it r!tio
FI=G E5ense r!tio
F=G Oer!tin& ro#it r!tio
F=IG Interest co/er!&e
7;
cG Comosite r!tios0 mi5ed or inter st!tement r!tios>
FIG Return on tot!" resources
FIIG Return on eJuit)
FIIIG Turno/er o# #i5ed !ssets
FI=G Turno/er o# debtors
F=G Return on s$!re$o"ders #unds
F=IG Return on tot!" resources
TEC6NICAL ANALYSIS
Tec$nic!" !n!")sis in/o"/es ! stud) o# m!r.et8&ener!ted d!t! "i.e rices !nd /o"umes
to determine t$e #uture direction o# rice mo/ement1 Tec$nic!" !n!")sis !n!")ses intern!"
m!r.et d!t! %it$ t$e $e" o# c$!rts !nd &r!$s1 Subscribin& to t$e Hc!st"es in t$e !irH !ro!c$,
t$e) /ie% t$e in/estment &!me !s !n e5cercise in !ntici!tin& t$e be$!/iour o# m!r.et
!rtici!nts1 T$e) "oo. !t c$!rts to underst!nd %$!t t$e m!r.et !rtici!nts $!/e been doin&
!nd be"ie/e t$!t t$is ro/ides ! b!sis #or redictin& #uture be$!/iour1
De#inition>
I T$e tec$nic!" !ro!c$ to in/estin& is essenti!"") ! re#"ection o# t$e ide! t$!t rices
mo/e in trends %$ic$ !re determined b) t$e c$!n&in& !ttitudes o# in/estors to%!rd ! /!riet)
o# economic, monet!r), o"itic!" !nd s)c$o"o&ic!" #orces1 T$e !rt o# tec$nic!" !n!")sis8 #or it
is !n !rt 8 is to identi#) trend c$!n&es !t !n e!r") st!&e !nd to m!int!in !n in/estment osture
unti" t$e %ei&$t o# t$e e/idence indic!tes t$!t t$e trend $!s been re/ersed1I
8M!rtin <1 Prin&
7C
C$!rtin& tec$niJues in tec$nic!" !n!")sis>
Tec$nic!" !n!")sis uses ! /!riet) o# c$!rtin& tec$niJues1 T$e most ou"!r ones !re>
T$e Do% t$eor),
'!r !nd "ine c$!rts,
T$e oint !nd #i&ure c$!rt,
T$e mo/in& !/er!&es "ine !nd
T$e re"!ti/e stren&t$ "ine1
T$e Do% t$eor)
I T$e m!r.et is !"%!)s considered !s $!/in& t$ree mo/ements, !"" &oin& !t t$e s!me
time1 T$e #irst is t$e n!rro% mo/ement #rom d!) to d!)1 T$e second is t$e s$ort s%in&,
runnin& #rom t%o %ee.s to ! mont$ or moreP t$e t$ird is t$e m!in mo/ement, co/erin& !t
"e!st #our )e!rs in its dur!tion1I
8 C$!r"es 61DO4
T$e Do% T$eor) re#ers to t$ree mo/ements !s>
F!G D!i") #"uctu!tions t$!t !re r!ndom d!)8to8d!) %i&&"esP
FbG Second!r) mo/ements or corrections t$!t m!) "!st #or ! #e% %ee.s to some
mont$sP
FcG Prim!r) trends reresentin& bu"" !nd be!r $!ses o# t$e m!r.et1
'!r !nd "ine c$!rts
T$e b!r c$!rt is one o# t$e most sim"est !nd common") used too"s o# tec$nic!" !n!")sis,
deicts t$e d!i") rice r!n&e !"on& %it$ t$e c"osin& rice1 It !"so s$o%s t$e d!i") /o"ume o#
tr!ns!ctions1 A "ine c$!rt s$o%s t$e "ine connectin& successi/e c"osin& rices1
7B
Point !nd #i&ure c$!rt >
On ! oint !nd #i&ure c$!rt on") si&ni#ic!nt rice c$!n&es !re recorded1 It e"imin!tes
t$e time sc!"e !nd sm!"" c$!n&es !nd condenses t$e recordin& o# rice c$!n&es1
Mo/in& !/er!&e !n!")sis>
A mo/in& !/er!&e is c!"cu"!ted b) t!.in& into !ccount t$e most recent HnH
obser/!tions1 To identi#) trends tec$nic!" !n!")sis use mo/in& !/er!&es !n!")sis1
Re"!ti/e stren&t$ !n!")sis>
T$e re"!ti/e stren&t$ !n!")sis is b!sed on t$e !ssumtion t$!t t$e rices o# some
securities rise r!id") durin& t$e bu"" $!se but #!"" s"o%") durin& t$e be!r $!se in re"!tion to
t$e m!r.et !s ! %$o"e1 Tec$nic!" !n!")sts me!sure re"!ti/e stren&t$ in di##erent %!)s1 !
sim"e !ro!c$ c!"cu"!tes r!tes o# return !nd c"!ssi#ies securities t$!t $!/e suerior
$istoric!" returns !s $!/in& re"!ti/e stren&t$1 More common"), tec$nic!" !n!")sts "oo. !t
cert!in r!tios to jud&e %$et$er ! securit) or, #or t$!t m!tter, !n industr) $!s re"!ti/e stren&t$1
TEC6NICAL INDICATORS>
In !ddition to c$!rts, %$ic$ #orm t$e m!inst!) o# tec$nic!" !n!")sis, tec$nici!ns !"so
use cert!in indic!tors to &!u&e t$e o/er!"" m!r.et situ!tion1 T$e) !re>
're!dt$ indic!tors
M!r.et sentiment indic!tors
'READT6 INDICATORS>
7A
(1 T$e Ad/!nce8Dec"ine "ine>
T$e !d/!nce dec"ine "ine is !"so re#erred !s t$e bre!dt$ o# t$e m!r.et1 Its
me!surement in/o"/es t%o stes>
!1 C!"cu"!te t$e number o# net !d/!nces0 dec"ines on ! d!i") b!sis1
b1 Obt!in t$e bre!dt$ o# t$e m!r.et b) cumu"!tin& d!i") net !d/!nces0 dec"ines1
21 Ne% 6i&$s !nd Lo%s>
A su"ement!r) me!sure to !ccom!n) bre!dt$ o# t$e m!r.et is t$e $i&$8"o%
di##erenti!" or inde51 T$e t$eor) is t$!t !n e5!ndin& number o# stoc.s !tt!inin& ne% $i&$s
!nd ! d%ind"in& number o# ne% "o%s %i"" &ener!"") !ccom!n) ! r!isin& m!r.et1 T$e re/erse
$o"ds true #or ! dec"inin& m!r.et1
MAR3ET SENTIMENT INDICATORS>
(1 S$ort8Interest R!tio>
T$e s$ort interest in ! securit) is sim") t$e number o# s$!res t$!t $!/e been so"d
s$ort but )et bou&$t b!c.1
T$e s$ort interest r!tio is de#ined !s #o""o%s>
/o"ume tr!din& d!i") A/er!&&e
s$ort so"d s$!res o# number Tot!"
r!tio interest S$ort =
9E
21 PUT I CALL RATIO>
Anot$er indic!tor monitored b) contr!r) tec$nic!" !n!")sis is t$e ut 0 c!"" r!tio1
Secu"!tors bu) c!""s %$en t$e) !re bu""is$ !nd bu) uts %$en t$e) !re be!ris$1 Since
secu"!tors !re o#ten %ron&, some tec$nic!" !n!")sts consider t$e ut 0 c!"" r!tio !s ! use#u"
indic!tor1 T$e ut 0 c!"" r!tio is de#ined !s>
urc$!sed c!""s o# Number
urc$!sed uts o# Numbers
r!tio C!"" Put 0 =
71 Mutu!"8Fund LiJuidit)>
I# mutu!" #und "iJuidit) is "o%, it me!ns t$!t mutu!" #unds !re bu""is$1 So constr!ins
!r&ue t$!t t$e m!r.et is !t, or ne!r, ! e!. !nd $ence is "i.e") to dec"ine1 T$us, "o% mutu!"
#und "iJuidit) is considered !s ! be!ris$ indic!tor1
Con/erse") %$en t$e mutu!" #und "iJuidit) is $i&$, it me!ns t$!t mutu!" #unds !re
be!ris$1 So constr!ins be"ie/e t$!t t$e m!r.et is !t, or ne!r, ! bottom !nd $ence is oised to
rise1 T$us, $i&$ mutu!" #und "iJuidit) is considered !s ! bu""is$ indic!tion1
9(
RANDOM 4AL3 T6EORY>
Fund!ment!" !n!")sis tries to e/!"u!te t$e intrinsic /!"ue o# t$e securities b) stud)in&
t$e /!rious #und!ment!" #!ctors !bout Econom), Industr) !nd com!n) !nd b!sed on t$is
in#orm!tion, it c!te&ories t$e securities !s %it$er under/!"ued or o/er$!u"ed1 Tec$nic!"
!n!")sis be"ie/es t$!t t$e !st be$!/iour o# stoc. rices &i/es !n indic!tion o# t$e #uture
be$!/iour !nd t$!t t$e stoc. rice mo/ement is Juite order") !nd r!ndom1 'ut, ! ne% t$eor)
.no%n !s R!ndom 4!". T$eor), !sserts t$!t s$!re rice mo/ements reresent r!ndom %!".
r!t$er t$!n !n order") mo/ement1
Accordin& to t$is t$eor), !n) c$!n&e in t$e stoc. nces IS t$e resu"t o# in#orm!tion
!bout cert!in c$!n&es in t$e econom), industr) !nd com!n)1 E!c$ rice c$!n&e is
indeendent o# ot$er rice c$!n&es !s e!c$ c$!n&e is c!used b) ! ne% iece o# in#orm!tion1
T$ese c$!n&es in stoc.Hs rices re/e!"s t$e #!ct t$!t !"" t$e in#orm!tion on c$!n&es in t$e
econom), industr) !nd com!n) er#orm!nce is #u"") re#"ected in t$e stoc. rices i1e1, t$e
in/estors %i"" $!/e #u"" .no%"ed&e !bout t$e securities1 T$us, t$e R!ndom 4!". T$eor) is
b!sed on t$e $)ot$esis t$!t t$e Stoc. M!r.ets !re e##icient1 6ence, "!ter it is .no%n !s
E##icient M!r.et 6)ot$esis1
EFFICIENT MAR3ET 6YPOT6ESIS
T$is t$eor) resuoses t$!t t$e stoc. M!r.ets !re so cometiti/e !nd e##icient in
rocessin& !"" t$e !/!i"!b"e in#orm!tion !bout t$e securities t$!t t$ere is Iimmedi!te rice
!djustmentI to t$e c$!n&es in t$e econom), industr) !nd com!n)1 T$e E##icient M!r.et
6)ot$esis mode" is !ctu!"") concerned %it$ t$e seed %it$ %$ic$ in#orm!tion is
incoror!ted into t$e securit) rices1
92
T$e E##icient M!r.et 6)ot$esis $!s t$ree Sub8$)ot$esis>8
4e!.") E##icient> 8
T$is #orm o# E##icient M!r.et 6)ot$esis st!tes t$!t t$e current rices !"re!d) #u"")
re#"ect !"" t$e in#orm!tion cont!ined in t$e !st rice mo/ements !nd !n) ne% rice c$!n&e is
t$e resu"t o# ! ne% iece o# in#orm!tion !nd is not re"!tedS Indeendent o# $istoric!" d!t!1
T$is #orm is ! direct reudi!tion o# tec$nic!" !n!")sis1
Semi8Stron&") E##icient>8
T$is #orm o# E##icient M!r.et 6)ot$esis st!tes t$!t t$e stoc. rices not on") re#"ect
!"" $istoric!" in#orm!tion but !"so re#"ect !"" ub"ic") !/!i"!b"e in#orm!tion !bout t$e com!n)
!s soon !s it is recei/ed1 So, it reudi!tes t$e #und!ment!" !n!")sis b) im")in& t$!t t$ere is
no time &! #or t$e #und!ment!" !n!")st in %$ic$ $e c!n tr!de #or suerior &!ins, !s t$ere is
!n immedi!te rice !djustment1
Stron&") E##icient>8
T$is #orm o# E##icient M!r.et 6)ot$esis st!tes t$!t t$e m!r.et 8c!nnot be be!ten b)
usin& bot$ ub"ic") !/!i"!b"e in#orm!tion !s %e"" !s ri/!te or insider in#orm!tion1
'ut, e/en t$ou&$ t$e E##icient M!r.et 6)ot$esis reudi!tes bot$ Fund!ment!" !nd
Tec$nic!" !n!")sis, t$e m!r.et is e##icient recise") bec!use o# t$e or&!niDed !nd s)stem!tic
e##orts o# t$ous!nds o# !n!")sts undert!.in& Fund!ment!" !nd Tec$nic!" !n!")sis1 T$us, t$e
!r!do5 o# E##icient M!r.et 6)ot$esis is t$!t bot$ t$e !n!")sis is reJuired to m!.e t$e
m!r.et e##icient !nd t$ereb) /!"id!te t$e $)ot$esis1

97
C6APTER N 7
PORTOFOLIO MANAGEMENT
99
PORTFOLIO MANAGEMENT
Concet o# Port#o"io>
Port#o"io is t$e co""ection o# #in!nci!" or re!" !ssets suc$ !s eJuit) s$!res, debentures,
bonds, tre!sur) bi""s !nd roert) etc1 ort#o"io is ! combin!tion o# !ssets or it consists o#
co""ection o# securities1 T$ese $o"din&s !re t$e resu"t o# indi/idu!" re#erences, decisions o#
t$e $o"ders re&!rdin& ris., return !nd ! $ost o# ot$er consider!tions1
Port#o"io m!n!&ement
An in/estor considerin& in/estment in securities is #!ced %it$ t$e rob"em o#
c$oosin&1 #rom !mon& ! "!r&e number o# securities1 6is c$oice deends uon t$e ris. return
c$!r!cteristics o# indi/idu!" securities1 6e %ou"d !ttemt to c$oose t$e most desir!b"e
securities !nd "i.e to !""oc!te $is #unds o/er $is &rou o# securities1 A&!in $e is #!ced %it$ t$e
rob"em o# decidin& %$ic$ securities to $o"d !nd $o% muc$ to in/est in e!c$1
T$e in/estor #!ces !n in#inite number o# ossib"e ort#o"io or &rou o# securities1 T$e
ris. !nd return c$!r!cteristics o# ort#o"ios di##er #rom t$ose o# indi/idu!" securities
combinin& to #orm ! ort#o"io1 T$e in/estor tries to c$oose t$e otim!" ort#o"io t!.in& into
consider!tion t$e ris.8return c$!r!cteristics o# !"" ossib"e ort#o"ios1
As t$e economic !nd #in!nci!" en/ironment .ees t$e c$!n&in& t$e ris. return
c$!r!cteristics o# indi/idu!" securities !s %e"" !s ort#o"io !"so c$!n&e1 An in/estor in/ests $is
#unds in ! ort#o"io e5ectin& to &et ! &ood return %it$ "ess ris. to be!r1
Port#o"io m!n!&ement concerns t$e construction @ m!inten!nce o# ! co""ection o#
in/estment1 It is in/estment o# #unds in di##erent securities in %$ic$ t$e tot!" ris. o# t$e
9:
Port#o"io is minimiDed %$i"e e5ectin& m!5imum return #rom it1 It rim!ri") in/o"/es
reducin& ris. r!t$er t$!t incre!sin& return1 Return is ob/ious") imort!nt t$ou&$, !nd t$e
u"tim!te objecti/e o# ort#o"io m!n!&er is to !c$ie/e ! c$osen "e/e" o# return b) incurrin& t$e
"e!st ossib"e ris.1
FEATURES OF PORTFOLIO MANAGEMENT
T$e objecti/e o# ort#o"io m!n!&ement is to in/est in securities in suc$ ! %!) t$!t one
m!5imiDes oneHs return !nd minimiDes ris.s in order to !c$ie/e oneHs in/estment objecti/e1
IG S!#et) o# t$e in/estment> t$e #irst imort!nt objecti/e in/estment s!#et) or minimiD!tion o#
ris.s is o# t$e imort!nt objecti/e o# ort#o"io m!n!&ement1 T$ere !re m!n) t)es o# ris.s1
4$ic$ !re !ssoci!ted %it$ in/estment in eJuit) sQoc.s, inc"udin& suer stoc.1 T$ere is no
suc$ t$in& c!""ed ?ero8ris. in/estment1 Moreo/er re"!ti/e") "o% 8 ris. in/estment &i/es
corresondin& "o%er returns1
2G St!b"e current returns> Once in/estment s!#et) is &u!r!nteed, t$e ort#o"io s$ou"d )ie"d !
ste!d) current income1 T$e current returns s$ou"d !t "e!st m!tc$ t$e oortunit) cost o# t$e
#unds o# t$e in/estor1 4$!t %e !re re#errin& to $ere is current income b) o# interest or
di/idends, not c!it!" &!ins1
7G Areci!tion in t$e /!"ue o# c!it!"> A &ood ort#o"io s$ou"d !reci!te in /!"ue in order to
rotect t$e in/estor #rom erosion in urc$!sin& o%er due to in#"!tion1 In ot$er %ords, !
b!"!nce ort#o"io must consist i# cert!in in/estment, %$ic$ tends to !reci!te in re!" /!"ue
!#ter !djustin& #or in#"!tion1
9G M!r.et!bi"it)> A &ood ort#o"io consists o# in/estment, %$ic$ c!n be m!r.eted %it$out
di##icu"t)1 I# t$ere !re too m!n) un"isted or in!cti/e s$!re in )our ort#o"io, )ou %i"" #!ce
9;
rob"ems in enc$!sin& t$em, !nd s%itc$in& #rom one in/estment to !not$er1 It is desir!b"e to
in/est in com!nies "isted on m!jor stoc. e5c$!n&es, %$ic$ !re !cti/e") tr!ded1
:G LiJuidit)> T$e ort#o"io s$ou"d ensure t$!t t$ere !re enou&$ #unds !/!i"!b"e !t t$e s$ort
notice to t!.e o# t$e in/estorHs "iJuidit) reJuirements1
;G T!5 P"!nnin&> Since t!5!tion is !n imort!nt /!ri!b"e in tot!" "!nnin&, ! &ood ort#o"io
s$ou"d "et its o%ner enjo) #!/or!b"e t!5 s$e"ter1 T$e ort#o"io s$ou"d be de/e"oed
considerin& income t!5, but c!it!" &!ins, &i#t t!5 too1 4$!t ! &ood ort#o"io !ims !t is t!5
"!nnin&, not t!5 e/!sion or t!5 !/oid!nce1
Functions o# Port#o"io M!n!&er
T$e m!in #unctions o# ort#o"io m!n!&er !re
Ad/isor) ro"e>
6e !d/ises ne% in/estments, re/ie% o# e5istin& ones, identi#ic!tion o# objecti/es,
recommendin& $i&$ )ie"d securities etc,1
Conductin& M!r.et !nd Economic Sur/e)s>
T$ere is essenti!" #or recommendin& $i&$ )ie"din& securities, t$e) $!/e to stud) t$e
current $)sic!" roerties, bud&et roos!"s, industri!" o"icies etc,1 Furt$er ort#o"io
m!n!&er s$ou"d t!.e into !ccount t$e credit o"ic), industri!" &ro%t$, #orei&n e5c$!n&e
osition, c$!n&es in coror!te "!%s etc,1
Fin!nci!" An!")sis
9C
6e s$ou"d e/!"u!te t$e #in!nci!" st!tements o# ! com!n) in order to underst!nd t$eir
net %ort$, #uture e!rnin&s, rosects !nd stren&t$s1
Stud) o# Stoc. M!r.et
6e s$ou"d see t$e trends o# !t /!rious stoc. e5c$!n&es !nd !n!")se scrits, so t$!t $e
is !b"e to identi#) t$e ri&$t securities #or in/estments1
Stud) o# Industr)
To .no% its #uture rosects, tec$no"o&ic!" c$!n&es etc,1 reJuired #or in/estment
roos!"s $e s$ou"d !"so #oresee t$e rob"ems o# t$e industr)1
Decide t$e t)e o# Port#o"io
3eein& in t$e mind t$e objecti/es o# ! ort#o"io, t$e ort#o"io m!n!&er $!/e to
decide %$et$er t$e ort#o"io s$ou"d comrise eJuit), re#erence s$!res, debentures
con/ertib"e, non8con/ertib"e or !rt") con/ertib"e, mone) m!r.et securities etc,1 or ! mi5 o#
more t$!t1 one t)e1
A &ood ort#o"io m!n!&er s$ou"d ensure t$!t
T$ere is otimum mi5 o# ort#o"ios i1e1 securities 1
To stri.e ! b!"!nce bet%een t$e cost o# #unds !nd t$e !/er!&e return on in/estments
'!"!nce is struc. !s bet%een t$e #i5ed income ort#o"ios !nd di/idend be!rin&
securities
Port#o"ios o# /!rious industries !re di/ersi#ied 10 To decide t$e t)e o# in/estment
Port#o"ios !re re/ie%ed eriodic!"") #or better m!n!&ement !nd returns 10 An) ri&$t or
bonus rosects in ! com!n) !re t!.en into !ccount
'etter t!5 "!nnin& is t$ere
LiJuidit) !ssets !re m!int!ined 10 Tr!ns!ction cost !re minimiDed
PORTFOLIO MANAGEMENT PROCESS>
9B
Port#o"io m!n!&ement IS ! com"e5 !cti/it), %$ic$ m!) be bro.en do%n into t$e
#o""o%in& stes>
(1 Seci#ic!tion o# in/estment Objecti/es !nd Constr!ints>8
T$e #irst ste in t$e ort#o"io m!n!&ement rocess is to seci#) oneHs in/estment
objecti/es !nd constr!ints1 T$e common") st!ted in/estment &o!"s !re>
!G Income
bG Gro%t$
cG St!bi"it)
T$e constr!ints !risin& #rom "iJuidit), time $oriDon, t!5 !nd seci!" circumst!nces
must be identi#ied1
21 C$oice o# Asset mi5>
T$e most imort!nt decision in ort#o"io m!n!&ement is t$e !sset mi5 decision1 =er)
bro!d"), t$is is concerned %it$ t$e roortions o# Hstoc.sH !nd HbondsH in t$e ort#o"io1
71 Formu"!tion O# Port#o"io Str!te&)>
Once ! cert!in !sset mi5 is c$osen, !n !rori!te ort#o"io str!te&) $!s to be
$!mmered out1 T%o bro!d c$oices !re !/!i"!b"e !n !cti/e ort#o"io str!te&) or ! !ssi/e
ort#o"io str!te&)1 An !cti/e ort#o"io str!te&) stri/es to e!rn suerior ris..!djusted returns b)
resortin& to m!r.et timin&, or sector rot!tion, or securit) se"ection, or some combin!tion o#
t$ese1 A !ssi/e ort#o"io str!te&), on t$e ot$er $!nd, in/o"/es $o"din& ! bro!d") di/ersi#ied
ort#o"io !nd m!int!inin& ! re8determined "e/e" o# ris. e5osure1
91 Se"ection o# Securities>
9A
Gener!""), in/estors ursue !n !cti/e st!nce %it$ resect to securit) se"ection1 For
stoc. se"ection, in/estors common") &o b) #und!ment!" !n!")sis !nd 0 or tec$nic!" !n!")sis1
T$e #!ctors t$!t !re considered in se"ectin& bonds !re )ie"d to m!turit), credit r!tin&, term to
m!turit), t!5 s$e"ter !nd "iJuidit)1
:1 Port#o"io E5ecution>
T$is is t$e $!se o# ort#o"io m!n!&ement %$ic$ is concerned %it$ im"ementin& t$e
ort#o"io "!n b) bu)in& !nd 0 or se""in& seci#ied securities in &i/en !mounts1
;1 Port#o"io Re/ision1
T$e /!"ue o# ! ort#o"io !s %e"" !s its comosition 8 t$e re"!ti/e roortions o# stoc.
!nd bond comonents 8 m!) c$!n&e !s stoc.s !nd bonds #"uctu!te1 In resonse to suc$
c$!n&es, eriodic reb!"!ncin& o# t$e ort#o"io is reJuired1 T$is rim!ri") in/o"/es ! s$i#t #rom
stoc.s to bonds or /ice /ers!1 In !ddition, it m!) c!"" #or sector rot!tion !s %e"" !s securit)
s%itc$es1
C1 Per#orm!nce E/!"u!tion>
T$e er#orm!nce o# ! ort#o"io s$ou"d be e/!"u!ted eriodic!"")1 T$e .e) dimensions
o# ort#o"io er#orm!nce e/!"u!tion !re ris. !nd return !nd t$e .e) issue is %$et$er t$e
ort#o"io return is commensur!te %it$ its ris. e5osure1
:E
A PORTFOLIO MANAGEMENT 6AS 'EEN C6ARACTERI?ED
Tr!dition ort#o"io t$eor)
Modern ort#o"io t$eor)
Tr!dition ort#o"io t$eor)
T$is t$eor) !ims !t t$e se"ection o# suc$ securities t$!t %ou"d #it in %e"" %it$ t$e !sset
re#erences, needs !nd c$oices o# in/estor1 T$us, ! retired e5ecuti/e in/est in #i5ed income
securities #or ! re&u"!r !nd #i5ed return1 A business e5ecuti/e or ! )oun& !&&ressi/e in/estor
on t$e ot$er $!nd in/ests in ne% !nd &ro%in& com!nies !nd in ris.) /entures 1
Modern ort#o"io t$eor)
T$is t$eor) su&&ests t$!t t$e tr!dition!" !ro!c$ to ort#o"io !n!")sis, se"ection !nd
m!n!&ement m!) )ie"d "ess t$!n otim!" resu"t t$!t ! more scienti#ic !ro!c$ is needed
b!sed on estim!tes o# ris. !nd return o# t$e ort#o"io !nd !ttitudes o# t$e in/estor to%!rds !
ris. return tr!de o## ste!min& #rom t$e !n!")sis o# t$e indi/idu!" securities1
In t$is re&!rd Indi! !#ter &o/ernment o"ic) o# "iber!"iD!tion $!s un"e!s$ed #orei&n
m!r.et #orces1 Forces t$!t $!/e ! direct im!ct on t$e c!it!" m!r.ets1 An indi/idu!" in/estor
c!nHt e!si") monitor t$ese com"e5 /!ri!b"es in t$e securities m!r.et bec!use o# "!c. o# time,
in#orm!tion !nd .no%8$o%1 T$!t is %$en in/estors "oo. in to !"tern!ti/e in/estment otions1
Once suc$ otion is mutu!" #unds1 'ut in t$e recent times in/estor $!s "ot #!it$ in t$is t)e
in/estment !nd $!s turned to%!rds ort#o"io in/estment1
:(
4it$ ort#o"io in/estment &!inin& ou"!rit) it $!s em$!siDed on $!/in& ! roer
ort#o"io t$eor) to meet t$e needs o# t$e in/estor !nd oer!te in t$e c!it!" m!r.et usin&
t$rou&$ scienti#ic !n!")sis !nd b!c.ed b) deend!b"e m!r.et in/esti&!tions to minimiDe ris.
!nd m!5imiDe returns1
T$e scienti#ic !n!")sis o# ris. !nd return is modern ort#o"io t$eor) !nd M!r.o%itD
"!id t$e #ound!tion o# t$is t$eor) in (A:(1 6e be&!n %it$ t$e sim"e obser/!tion t$!t since
!"most !"" in/estors in/ests in se/er!" securities r!t$er t$!t in just one, t$ere must be some
bene#it #rom in/estin& in ! ort#o"io o# se/er!" securities1
:2
SE'I GUIDELINES TO T6E PORTFOLIO MANAGERS>
On Ct$ <!nu!r) (AA7 securities e5c$!n&e bo!rd o# Indi! issued re&u"!tions to t$e
ort#o"io m!n!&ers #or t$e re&u"!tion o# ort#o"io m!n!&ement ser/ices b) merc$!nt b!n.ers1
T$e) !re !s #o""o%s>
Port#o"io m!n!&ement ser/ices s$!"" be in t$e n!ture o# in/estment or consu"t!nc)
m!n!&ement #or !n !&reed #ee !t c"ientHs ris.
T$e ort#o"io m!n!&er s$!"" not &u!r!ntee return direct") or indirect") t$e #ee s$ou"d not
be deended uon or it s$ou"d not be return s$!rin& b!sis 1
=!rious terms o# !&reements, #ees, disc"osures o# ris. !nd re!)ment s$ou"d be mentioned
1
C"ientHs #unds s$ou"d be .et se!r!te") in c"ient %ise !ccount, %$ic$ s$ou"d be subject to
!udit1
M!n!&er s$ou"d reort c"ients !t inter/!"s not e5ceedin& ; mont$s 1
Port#o"io m!n!&er s$ou"d m!int!in $i&$ st!nd!rd o# inte&rit) !nd not desire !n) bene#it
direct") or indirect") #orm c"ientHs #unds 1
T$e c"ient s$!"" be entit"ed to insect t$e documents 1
Port#o"io m!n!&er s$ou"d m!int!in $i&$ st!nd!rd o# inte&rit) !nd not desire !n) bene#it
direct") or indirect") #orm c"ientHs #unds 1
T$e c"ient s$!"" be entit"ed to insect t$e documents 1
Port#o"io m!n!&er s$!"" not in/est #unds be"on&in& to c"ients in b!d"! #in!ncin&, bi""s
discountin& !nd "endin& oer!tions 1
C"ient mone) c!n be in/ested in mone) !nd c!it!" m!r.et instruments 1
Sett"ement on termin!tion o# contr!ct !s !&reed in t$e contr!ct1
C"ientHs #unds s$ou"d be .et in ! se!r!te b!n. !ccount oened in sc$edu"ed commerci!"
b!n. 1
Purc$!se or S!"e o# securities s$!"" be m!de !t re/!i"in& m!r.et rice 1
Port#o"io m!n!&ers %it$ $is c"ient !re #iduci!r) in n!ture1 6e s$!"" !ct bot$ !s !n !&ent
!nd trustee #or t$e #unds recei/ed1
:7
PORTFOLIO SELECTION
Port#o"io !n!")sis ro/ides t$e inut #or t$e ne5t $!se in ort#o"io m!n!&ement,
%$ic$ is ort#o"io se"ection1 T$e roer &o!" o# ort#o"io construction is to &et $i&$ returns !t
! &i/en "e/e" o# ris.1 T$e inuts #rom ort#o"io !n!")sis c!n be used to identi#) t$e set o#
e##icient ort#o"ios1 From t$is set o# ort#o"ios, t$e otim!" ort#o"io $!s to be se"ected #or
in/estment1
MAR3O4IT? MODEL
6!rr) M1 M!r.o%itD is credited %it$ introducin& ne% concet o# ris. me!surement
!nd t$eir !"ic!tion to t$e se"ection o# ort#o"ios1 6e st!rted %it$ t$e ide! o# ris. !/ersion o#
in/estors !nd t$eir desire to m!5imiDe e5ected return %it$ t$e "e!st ris.1
M!r.o%itD used m!t$em!tic!" ro&r!mmin& !nd st!tistic!" !n!")sis in order to
!rr!n&e #or 1t$e otimum !""oc!tion o# !ssets %it$in ort#o"io1 To re!c$ t$is objecti/e,
M!r.o%itD &ener!ted ort#o"ios %it$in ! re%!rd8ris. conte5t1 In ot$er %ords, $e considered
t$e /!ri!nce in t$e e5ected returns #rom in/estments !nd t$eir re"!tions$i to e!c$ ot$er in
constructin& ort#o"ios1 In essence, M!r.o%itDHs mode" is ! t$eoretic!" #r!me%or. #or t$e
!n!")sis o# ris. return c$oices1 Decisions !re b!sed on t$e concet o# e##icient ort#o"ios1
A ort#o"io is e##icient %$en it is e5ected to )ie"d t$e $i&$est return #or t$e "e/e" o#
ris. !cceted or, !"tern!ti/e"), t$e sm!""est ort#o"io ris. or ! seci#ied "e/e" o# e5ected
return1 To bui"d !n e##icient ort#o"io !n e5ected return "e/e" is c$osen, !nd !ssets !re
substituted unti" t$e ort#o"io combin!tion %it$ t$e sm!""est /!ri!nce !t t$e return "e/e" is
#ound1 As t$is rocess is ree!ted #or ot$er e5ected returns, set o# e##icient ort#o"ios is
&ener!ted1
:9
Assumtions
T$e M!r.o%itD mode" is b!sed on se/er!" !ssumtions re&!rdin& in/estor be$!/iour>
iG In/estors consider e!c$ in/estment !"tern!ti/e !s bein& reresented b) !
rob!bi"it) distribution o# e5ected returns o/er some $o"din& eriod1
iiG In/estors m!5imise one eriod8e5ected uti"it) !nd ossess uti"it) cur/e,
%$ic$ demonstr!tes diminis$in& m!r&in!" uti"it) o# %e!"t$1
iiiG Indi/idu!"s estim!te ris. on t$e b!sis o# t$e /!ri!bi"it) o# e5ected returns1
i/G In/estors b!se decisions so"e") on e5ected return !nd /!ri!nce For st!nd!rd
de/i!tionG o# returns on")1
/G For ! &i/en ris. "e/e", in/estors re#er $i&$ returns to "o%er returns1 Simi"!r"),
#or ! &i/en "e/e" o# e5ected return, in/estor re#er "ess ris. to more ris.1
Under t$ese !ssumtions, ! sin&"e !sset or ort#o"io o# !ssets is considered to be
Ie##icientI i# no ot$er !sset or ort#o"io o# !ssets o##ers $i&$er e5ected return %it$ t$e s!me
For "o%erG ris. or "o%er ris. %it$ t$e s!me For $i&$erG e5ected return1
MAR3O4IT? DI=ERSIFICATION
M!r.o%itD ostu"!ted t$!t di/ersi#ic!tion s$ou"d not on") !im !t reducin& t$e ris. o# !
securit) b) reducin& its /!ri!bi"it) or st!nd!rd de/i!tion but b) reducin& t$e co/!ri!nce or
inter!cti/e ris. o# t%o or more securities in ! ort#o"io1
As b) combin!tion o# di##erent securities, it is t$eoretic!"") ossib"e to $!/e ! r!n&e o#
ris. /!r)in& #rom Dero to in#init)1 M!r.o%itD t$eor) o# ort#o"io di/ersi#ic!tion !tt!c$ed
imort!nce to st!nd!rd de/i!tion to reduce it to Dero, i# ossib"e1
::
CAPITAL MAR3ET T6EORY
T$e CAPM %!s de/e"oed in mid8(A;E, t$e mode" $!s &ener!"") been !ttributed to
4i""i!m S$!re, but <o$n Linter !nd <!n Mossin m!de simi"!r indeendent deri/!tions1
ConseJuent"), t$e mode" is o#ten re#erred to !s S$!re8Linter8Mossin FSLMG C!it!" Asset
Pricin& Mode"1 T$e CAPM e5"!ins t$e re"!tions$i t$!t s$ou"d e5ist bet%een securities
e5ected returns !nd t$eir ris.s in terms o# t$e me!ns !nd st!nd!rd de/i!tions !bout securit)
returns1 'ec!use o# t$is #ocus on t$e me!n !nd st!nd!rd de/i!tion t$e CAPM is ! direct
e5tension o# t$e ort#o"io mode"s de/e"oed b) M!r.o%itD !nd S$!re1
C!it!" M!r.et T$eor) is !n e5tension o# t$e ort#o"io t$eor) o# M!r.o%itD1 T$is is !n
economic mode" describes $o% securities !re riced in t$e m!r.et "!ce1 T$e ort#o"io t$eor)
e5"!ins $o% r!tion!" in/estors s$ou"d bui"d e##icient ort#o"io b!sed on t$eir ris. return
re#erences1 C!it!" Asset Pricin& Mode" FCAPMG incoror!tes ! re"!tions$i, e5"!inin&
$o% !ssets s$ou"d be riced in t$e c!it!" m!r.et1
ASSUMPTIONS OF CAPITAL MAR3ET T6EORY
T$e CAPM rests on ei&$t !ssumtions1 T$e #irst : !ssumtions !re t$ose t$!t under"ie
t$e e##icient m!r.et $)ot$esis !nd t$us under"ie bot$ modern ort#o"io t$eor) FMPTG !nd t$e
CAPM1 T$e "!st 7 !ssumtions !re necess!r) to cre!te t$e CAPM #rom MPT1 T$e ei&$t
!ssumtions !re t$e #o""o%in&>
(G T$e In/estorHs objecti/e is to m!5imise t$e uti"it) o# termin!" %e!"t$1
2G In/estors m!.e c$oices on t$e b!sis o# ris. !nd return1
7G In/estors $!/e $omo&eneous e5ect!tions o# ris. !nd return1
9G In/estors $!/e identic!" time $oriDon1
:G In#orm!tion is #ree") !nd simu"t!neous") !/!i"!b"e to in/estors1
;G T$ere is ! ris.8#ree !sset, !nd in/estors c!n borro% !nd "end un"imited !mounts !t t$e
ris.8#ree r!te1
CG T$ere !re no t!5es, tr!ns!ction costs, restrictions on s$ort r!tes or ot$er m!r.et
imer#ections1
BG Tot!" !sset Ju!ntit) is #i5ed, !nd !"" !ssets !re m!r.et!b"e !nd di/isib"e1
:;
:C
C6APTER N 9
PORTFOLIO ANALYSIS
:B
PORTFOLIO ANALYSIS
A Port#o"io is ! &rou o# securities $e"d to&et$er !s in/estment1 In/estors in/est t$eir
#unds in ! ort#o"io o# securities r!t$er t$!n in ! sin&"e securit) bec!use t$e) !re ris. !/erse1
') constructin& ! ort#o"io, in/estors !ttemts to sre!d ris. b) not uttin& !"" t$eir e&&s into
one b!s.et1 Port#o"io $!se o# ort#o"io m!n!&ement consists o# identi#)in& t$e r!n&e o#
ossib"e ort#o"ios t$!t c!n be constituted #rom ! &i/en set o# securities !nd c!"cu"!tin& t$eir
return !nd ris. #or #urt$er !n!")sis1
Indi/idu!" securities in ! ort#o"io !re !ssoci!ted %it$ cert!in !mount o# Ris. @
Returns1 Once ! set o# securities, t$!t !re to be in/ested in, !re identi#ied b!sed on Ris.8
Return c$!r!cteristics, ort#o"io !n!")sis is to be done !s ne5t ste !s t$e Ris. @ Return o# t$e
ort#o"io is not ! sim"e !&&re&!tion o# Ris. @ Returns o# indi/idu!" securities but, some%$!t
"ess or more t$!n t$!t1 Port#o"io !n!")sis considers t$e determin!tion o# #uture Ris. @ Return
in $o"din& /!rious b"ends o# indi/idu!" securities so t$!t ri&$t combin!tions &i/in& $i&$er
returns !t "o%er ris., c!""ed E##icient Port#o"ios, c!n be identi#ied so !s to se"ect !n otimum
one out o# t$ese e##icient ort#o"ios c!n be se"ected in t$e ne5t ste1
:A
E5ected Return o# ! Port#o"io >
It is t$e %ei&$ted !/er!&e o# t$e e5ected returns o# t$e indi/idu!" securities $e"d in
t$e ort#o"io1 T$ese %ei&$ts !re t$e roortions o# tot!" in/est!b"e #unds in e!c$ securit)1
i i
n
( I
R 5 R

=
=
R
P
L E5ected return o# ort#o"io
N

L No1 o# Securities in Port#o"io
-
I
L Proortion o# In/estment in Securit) i1
R
i
L E5ected Return on securit) i
;E
Ris. Me!surement
T$e st!tistic!" too" o#ten used to me!sure !nd used !s ! ro5) #or ris. is t$e st!nd!rd
de/i!tion1
N
( i
2
EFrGG 8 Fri
=
=
2
N
2
EFrGG 8 ri F G F ce =!ri!n =
G F =!ri!nce 6ere
2
=
P L is t$e rob!bi"it) o# securit)
N L Number o# securities in ort#o"io
ri L E5ected return on securit) i
;(
C6APTER :
PRACTICAL STUDY OF SOME SELECTED SCRIPS
;2
PORTFOLIO 8 A PORTFOLIO N '
'6EL SATYAM COMPUTERS
RELIANCE ENERGY 4IPRO
CROMPTION GREA=ES <INDAL STEEL
CALCULATION OF RETUN AND RIS3>
N
R
FRiG E RETURN E-PECTED
i

=
;7
PORTFOLIO8A
'6ARA T 6EA=Y ELECTRONICS LIMITED F'6ELG>
DATE S6ARE PRICE F-G F-8-HG F-8-HG
2
90702EEB 2,EAB 8;21EE 7B991EE
70702EEB 2,EAA19: 8;E1:: 7;;;17E
2A0202EEB 2,2B2 (221EE (9BB91EE
2B0202EEB 2,7271;E (;71;E 2;C;91A;
2C0202EEB 2,2;21AE (E21AE (E:BB19(
2;0202EEB 2,(BE1:: 2E1:: 92217E
2:0202EEB 2,EB:1(E 8C91AE :;(E1E(
220202EEB 2,E:B1B: 8(E(1(: (E27(172
2(0202EEB 2,EA21E: 8;C1A: 9;(C12E
2E0202EEB 2,(2912E 87:1BE (2B(1;9
E-PECTED RETURN L 2(,;EC0(E L 2,(;E L-T
F-8-HG
2
L B(,A(E1(:
RIS3 L B(,A(E1(: L 2B;12E


;9
RELIANCE ENERGY
DATE S6ARE PRICE F-G F-8-HG F-8-HG
2
90702EEB (,:(E 8C917C ::7E1AE
70702EEB (,9B:1:: 8AB1;2 AC2:1AE
2A0202EEB (,:;B 8(;192 2;A1;2
2B0202EEB (,;EE1CE (;1:7 2C7129
2C0202EEB (,;7(17: 9C1(B 222:1A:
2;0202EEB (,;AC12: ((71EB (2CBC1EA
2:0202EEB (,;221CE 7B1:7 (9B91:;
220202EEB (,:::1AE 82B12C CAA1(A
2(0202EEB (,:A:1E: (E1BB ((B17C
2E0202EEB (,:C:1;: 8B1:2 C21:A
E-PECTED RETURN L (:,B920(E L (,:B9 L-T
F-8-HG
2
L 77,2BC192
RIS3 L 77,2BC192 L 2B;12E
;:
CROMPTON GREA=ES
DATE S6ARE PRICE F-G F-8-HG F-8-HG
2
90702EEB 7E2 8B1A2 CA1;;
70702EEB 7EA1A: 8E1AC E1A:
2A0202EEB 7(9 719B (21EB
2B0202EEB 72;1(E (:1(B 27E12B
2C0202EEB 72;1:: (:1;7 2991(9
2;0202EEB 7((1BE E1BB E1CC
2:0202EEB 2AA17E 8((1;2 (7:1(9
220202EEB 2AC1B: 8(71EC (CE1A;
2(0202EEB 7EB1CE 82122 91A:
2E0202EEB 7(21;E (1;B 21B(
E-PECTED RETURN L 7,(EA0(E L 7(E1A L-T
F-8-HG
2
L BB(1C2
RIS3 L BB(1C2 L 2A1;A
;;
PORTFOLIO 8 '
SATYAM COMPUTERS
DATE S6ARE PRICE F-G F-8-HG F-8-HG
2
90702EEB 9E; 82A1:; BC71:E
70702EEB 9((1A: 8271;( ::C12E
2A0202EEB 979 8(19( (1AC
2B0202EEB 99;1BE ((12: (2;19:
2C0202EEB 97C1(E (1:: 217A
2;0202EEB 99A1C: (912E 2E(1:E
2:0202EEB 9:E17E (91C: 2(C192
220202EEB 97B1BE 712: (E1:7
2(0202EEB 9:B12E 221;: :(21BE
2E0202EEB 9221:E 8(71E; (CE197
E-PECTED RETURN L 9,7:;0(E L 97:1; L -T
F-8-HG
2
L 2,;C91(B
RIS3 L 2;C91(B L :(1C(
;C
4IPRO
DATE S6ARE PRICE F-G F-8-HG F-8-HG
2
90702EEB 9(C 8(91(7 (AA1:2
70702EEB 9(A1CE 8(E1A7 ((A17;
2A0202EEB 97: 91E2 (;12E
2B0202EEB 99;19: (:1B7 2:E197
2C0202EEB 97A1AE A12C B;1E7
2;0202EEB 9991(: (71:7 (B21A7
2:0202EEB 97A1:: B1A7 CA1;;
220202EEB 92219E 8B127 ;C1;:
2(0202EEB 97(1;: (1E2 (1E:
2E0202EEB 9((17E 8(A177 7C719;
E-PECTED RETURN L 9,7E;0(E L 97E1; L -T
F-8-HG
2
L (7, C;12C
RIS3 L (7C;12C L 7C1EA
;B
<INDAL STEEL
DATE S6ARE PRICE F-G F-8-HG F-8-HG
2
90702EEB (,EEC 8C71B; :9:91:;
70702EEB (,E(919E 8;;17; 99E21AA
2A0202EEB (,E;2 8(A12( 7;B1B7
2B0202EEB (,ECA1BE 8E1A; E1A(
2C0202EEB (,E;71:: 8(C12( 2A;1E(
2;0202EEB (,EA71:: (21CA (;71C(
2:0202EEB (,((C1EE 7;129 (7(71CE
220202EEB (,((:19: 791;A (2E71C9
2(0202EEB (,(921;E ;(1B9 7B291BE
2E0202EEB (,((21C: 7(1AA (E271;B
E-PECTED RETURN L (E,BEB0(E L (EBE1B L -T
F-8-HG
2
L (B,E:21A9
RIS3 L (BE:21A9 L (7917;
;A
PORTFOLIO8A
T6E RIS3 AND RETURN OF EAC6 COMPANY
IN PORTFOLIO A IS >
SL 1No COMPANY RETURN RIS3
( '6EL 2(;E 2B;12E
2 RELIANCE ENERGY (:B9 2B;12E
7 CROMPTON GREA=ES 7(E1A 2A1;A
PORTFOLIO8'
T6E RIS3 AND RETURN OF EAC6 COMPANY
IN PORTFOLIO ' IS >
SI1 No COMPANY RETURN RIS3
( SATYAM COMPUTERS 97:1; :(1C(
2 4IPRO 97E1; 7C1EA
7 <INDAL STEEL (EBE1B (7917;
CE
INTERPERATION
From t$e !bo/e #i&ures, it is c"e!r t$!t in tot!" t$ere is ! $i&$ return on ort#o"io A com!nies
%$en com!red %it$ ort#o"io ' com!nies1 'ut !t t$e s!me time i# %e com!re t$e ris. it is
c"e!r t$!t ris. is "ess #or com!nies in ort#o"io ' %$en com!red %it$ ort#o"io A
com!nies1 As er t$e M!r.o%itD !n e##icient ort#o"io is one %it$ *Minimum ris.,
m!5imum ro#it+ t$ere#ore, it is !d/is!b"e #or !n in/estor to %or. out $is ort#o"io in suc$ !
%!) %$ere $e c!n otimiDe $is returns b) e/!"u!tin& !nd re/isin& $is ort#o"io on !
continuous b!sis1
C(
C6APTER N ;
CONCLUSIONS
C2
CONCLUSIONS
Port#o"io is co""ection o# di##erent securities !nd !ssets b) %$ic$ %e c!n s!tis#) t$e b!sic
objecti/e IM!5imiDe )ie"d minimiDe ris.1 Furt$erH %e $!/e to remember some imort!nt
in/estin& ru"es1
In/estin& ru"es to be remembered1
DonHt secu"!te un"ess itHs #u""8time job
'e%!re o# b!rbers, be!utici!ns, %!iters8o# !n)one 8brin&in& &i#ts o# inside
in#orm!tion or tis1
'e#ore bu)in& ! securit), its better to #ind out e/er)t$in& one c!n !bout t$e com!n),
its m!n!&ement !nd cometitors, its e!rnin& s!nd ossibi"ities #or &ro%t$1
DonHt tr) to bu) !t t$e bottom !nd se"" !t t$e to1 T$is c!nHt be done8e5cet b) "i!rs1
Le!rn $o% to t!.e )our "osses !nd c"e!n")1 DonHt e5ect to be ri&$t !"" t$e time1 I# )ou
$!/e m!de ! mist!.e, cut )our "osses !s Juic.") !s ossib"e
DonHt bu) too m!n) di##erent securities1 'etter $!/e on") ! #e% in/estments t$!t c!n
be %!tc$ed1
M!.e ! eriodic re!r!is!" o# !"" )our in/estments to see %$et$er c$!n&in&
de/e"oments $!/e !"tered rosects1
Stud) )our t!5 osition to .no%n %$en )ou se"" to &re!test !d/!nt!&es1
A"%!)s .ee ! &ood !rt o# )our c!it!" in ! c!s$ reser/e1 Ne/er in/est !"" )our #unds1
DonHt tr) to be j!c.8o##8!""8in/estments1 Stic. to #ie"d )ou .no%n best1
Purc$!sin& stoc.s )ou do not underst!nd i# )ou c!nHt e5"!in it to ! ten )e!r o"d, just
donHt in/est in it1
O/er di/ersi#)in&> T$is is t$e most o/erso"d, o/erused, "o&ic8de#)in& concet !mon&
stoc.bro.ers !nd re&istered in/estment !d/isors1
Not reco&niDin& di##erence bet%een /!"ue !nd rice> T$is &oes !"on& %it$ t$e #!i"ure
to comute t$e intrinsic /!"ue o# ! stoc., %$ic$ !re sim") t$e discounted #uture
e!rnin&s o# t$e business enterrise1
F!i"ure to underst!nd Mr1 M!r.et> <ust bec!use t$e m!r.et $!s ut ! rice on !
business does not me!n it is %ort$ it1 On") !n indi/idu!" c!n determine t$e /!"ue o# !n
in/estment !nd t$en determine i# t$e m!r.et rice is r!tion!"1
F!i"ure to underst!nd t$e im!ct o# t!5es> A"so .no%n !s t$e sorro%s o#
comoundin&, just !s comoundin& %or.s to t$e in/estorHs "on&8term !d/!nt!&e, t$e
burden o# t!5es bec!use # e5cessi/e tr!din& %or.s !&!inst bui"din& %e!"t$
Too muc$ #ocus on t$e m!r.et %$et$er or not !n indi/idu!" in/estment $!s merit !nd
/!"ue $!s not$in& to do %it$ t$!t t$e o/er!"" m!r.et is doin& 111
C7
'I'ILOGRAP6Y
IN=ESTMENT MANAGEMENT

'Y =131 '6ALLA1

SECURITY ANALYSIS @ PORTFOLIO MANAGEMENT

'Y E1 FISC6ER @ <1

<ORDAN1
4441'SEINDIA1COM1
4441NSEINDIA1COM1
4441MONEYCONTROL1COM1
DALAL STREET MAGNA?INE1
'USINESS TODAY MAGA?INE1
FINANCIAL E-PRESS1
'USINESS LINE 1

C9