CHAPTER-1

INTRODUCTION

INTRODUCTION
Managing investments in equities requires time, knowledge, experience and constant
monitoring of stock markets. Portfolio management services (PMS) gives a helping hand to
people who need help to manage their investments. When we invest in PMS, you own
individual securities unlike a mutual fund investor, who owns units of the entire fund. We have
the freedom and flexibility to tailor our portfolio to address personal preferences and financial
goals. (PMS) is a method of investing used by wealthy investors and companies who want
exposure to a variety of products such as equities, fixed income, gold and structured products.
The business of portfolio management has never been an easy one. Juggling the limited choices
at hand with the twin requirements of adequate safety and sizeable returns is a task fraught with
complexities. Given the unpredictable nature of the share market, it requires solid experience
and strong research to make the right decision. In the end it boils down to making the right
move in the right direction at the right time. That's where the expert comes in. Portfolio
management service providers advise clients on buying or selling shares, derivatives or other
type of securities. Depending on the type of PMS, the manager can also buy or sell securities
on behalf of the clients. An entity needs to be registered with the Securities and Exchange
Board of India as a portfolio manager. An investor individually owns the securities in a PMS
portfolio, unlike a mutual fund where investors only own units of the fund and not the actual
securities.

In this project Portfolio Management I basically studied the investment strategies and gains
through knowledge about various options available to the investors. I studied various gains and
insights about the various investment strategies and how an ideal portfolio should be
maintained so as to serve their needs and anticipated gains of investors.
Accordingly I have formulated the questionnaire as so to understand the psychology of the
people and what are the various factors that inspire them to invest in different options available.
For every investor that portfolio evaluation and construction is an important aspect. With the
help of evaluation of the portfolio an investor can check his risk and minimize or maximize
according to its risk appetite and returns that he want to make from the portfolio. Saving is an
important part of the economy of any nation. With savings invested in various options available
to the people, the money acts as the driver for growth of the country. Thus a complete
understanding of factors which are related to investment decision including risk appetite and
liquidity requirements is required.

CHAPTER-2
INDUSTRY PROFILE

INDUSTRY PROFILE: STOCK MARKET

Stock market is a market where trading of company stocks, other securities and derivatives
takes place. Stock exchanges are corporations or mutual organizations, which are specialized in
trading stocks and securities. All sorts of company stocks are enrolled in the stock exchanges,
operating in a particular country. Some of the stock markets in India are listed below: a. Bangalore Stock Exchange
b. Mumbai (Bombay) Stock Exchange
c. Calcutta Stock Exchange
d. Delhi Stock Exchange
e. Madras Stock Exchange
f. National Stock Exchange

History
Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years
ago. The earliest records of security dealings in India are meagre and obscure. By 1830's
business on corporate stocks and shares in Bank and Cotton presses took place in Bombay.
Though the trading list was broader in 1839, there were only half a dozen brokers recognized
by banks and merchants during 1840 and 1850. The 1850's witnessed a rapid development of
commercial enterprise and brokerage business attracted many men into the field and by 1860
the number of brokers increased to 60. In 1860-61 the American Civil War broke out and cotton
supply from United States of Europe was stopped; thus, the 'Share Mania' in India begun. The
Number of brokers increased to about 200 to 250. However, at the end of the American Civil
War, in 1865, a disastrous slump began (for example, Bank of Bombay Share which had
touched Rs 2850 could only be sold at Rs. 87). At the end of the American Civil War, the
brokers who thrived out of Civil War In 1874, found a place in a street (now appropriately
called as Dalal Street) where they would conveniently assemble and transact business. In 1887,
they formally established in Bombay, the "Native Share and Stock Brokers' Association"
(which is alternatively known as The Stock Exchange"). In 1895, the Stock Exchange
acquired a premise in the same street and it was inaugurated in 1899. Thus, the Stock Exchange
at Bombay was consolidated. A new phase in the Indian stock markets began in the 1970s,
Foreign Exchange Regulation Act (FERA) that led to divestment of foreign equity by the
Multinational companies, which created a surge in retail investing. A new set of economic and
financial sector reforms that began in the early 1990s gave further impetus to the growth of the
stock markets in India. Towards This end, several measures were taken to streamline the
processes and systems including setting up an efficient market infrastructure to enable Indian
finance to grow and further mature.
An INTERNET based stock trading was still in its fancy in INDIA and had the potential to
really benefit the, investor with its ability to offer greater Speed and Transparency, at a much
lower cost. The traditional trading system is where investors have to contact their brokers for
accessing the real time data. And that's the reason why common people were completely out of
the picture in the traditional trading system. Now things have completely changed. Internet has
changed the whole scenario - just click the Mouse button and you are done.

Structure and size of the markets

Today India has two national exchanges, the Bombay Stock Exchange (BSE) and the National
Stock Exchange (NSE). Each has fully electronic trading platforms with around 9400
participating broking outfits. Foreign brokers account for 29 of these. There are some 9600
companies listed on the respective exchanges with a combined market capitalization near
$125.5bn. Any market that has experienced this sort of growth has an equally substantial
demand for highly efficient settlement procedures. In India 99.9% of the trades, according to
the National Securities Depository, are settled in dematerialized form in a T+2 rolling
settlement environments. In addition, trades are guaranteed by the National Clearing
Corporation of India Ltd (NSCCL) and Bank of India Shareholding Ltd (BOISL), Clearing
Corporation houses of NSE and BSE respectively. The main functions of the Clearing
Corporation are to work out:
(a) What counter parties owe and
(b) What counter parties are due to receive on the settlement date?
Furthermore, each exchange has a Settlement Guarantee Fund to meet with any unpredictable
situation and a negligible trade failure of 0.003%. The Clearing Corporation of the exchanges
assumes the counter-party risk of each member and guarantees settlement through a fine-tuned
risk management system and an innovative method of online position monitoring. It also
ensures the financial settlement of trades on the appointed day and time irrespective of default
by members to deliver the required funds and/or securities with the help of a settlement
guarantee fund.

BOMBAY STOCK EXCHANGE (BSE)

The Bombay Stock Exchange Limited

(Formerly, the Stock Exchange, Mumbai; popularly called
The Bombay Stock Exchange, or BSE) is the oldest stock
exchange in Asia. It is also the biggest stock exchange in
the world in terms of listed companies with 4,800 listed
companies as of August 2007. It is located at Dalal Street,
Mumbai, India. On 31 December 2007, the equity market
capitalization of the companies listed on the BSE was US$
1.79 trillion, making it the largest stock exchange in South
Asia and the tenth largest in the world. The Bombay Stock
Exchange was established in 1875. Around 4,800 Indian
companies list on the stock exchange, and it has a
significant trading volume. The BSE SENSEX (SENSitive
indEX), also called the "BSE 30", is a widely used market
index in India and Asia. Though many other exchanges
exist, BSE and the National Stock Exchange of India
account for most of the trading in shares in India. The BSE
Index, SENSEX, is India's first stock market index that
enjoys an iconic stature, and is tracked worldwide. It is an
index of 30 stocks representing 12 major sectors. The set
of companies which make up the index has been changed
only a few times in the last twenty years.
These companies account for around one-fifth of the market capitalization of the BSE. The
SENSEX is constructed on a 'free-float' methodology, and is sensitive to market sentiments
and market realities. Apart from the SENSEX, BSE offers 21 indices, including 12 sectoral
indices. BSE has entered into an index cooperation agreement with Deutsche Brse. This
agreement has made SENSEX and other BSE indices available to investors in Europe and
America. Moreover, Barclays Global Investors (BGI), the global leader in ETFs through its
iShares brand, has created the 'iShares BSE SENSEX India Tracker' which tracks the
SENSEX. The ETF enables investors in Hong Kong to take an exposure to the Indian equity
market.
8

BSE also has a wide range of services to empower investors and facilitate smooth
transactions:

Investor Services: The Department of Investor Services redresses grievances of

investors. BSE was the first exchange in the country to provide an amount of Rs.1
million towards the investor protection fund; it is an amount higher than that of any
exchange in the country. BSE launched a nationwide Investor Awareness Programme'Safe Investing in the Stock Market' under which 264 programmes were held in more
than 200 cities.

The BSE On-line Trading (BOLT): BSE On-line Trading (BOLT) facilitates on-line
screen based trading in securities. BOLT is currently operating in 25,000 Trader

Workstations located across over 450 cities in India.

BSEWEBX.com: In February 2001, BSE introduced the world's first centralized
exchange-based Internet trading system, BSEWEBX.com. This Initiative enables

investors anywhere in the world to trade on the BSE Platform.

Surveillance: BSE's On-Line Surveillance System (BOSS) monitors on a real time
basis the price movements, volume positions and members' positions and real-time
measurement of default risk, market reconstruction and generation of cross market

alerts.
BSE Training Institute: BTI imparts capital market training and certification, in
collaboration with reputed management institutes and universities. It offers over 40
courses on various aspects of the capital market and financial sector.

NATIONAL STOCK EXCHANGE (NSE)

9

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. NSE
is mutually-owned by a set of leading financial
institutions, banks, insurance companies and other
financial intermediaries in India but its ownership
and management operate as separate entities.

Our Group
NSCCL- National Securities Clearing Corporation Ltd.
NCCL- National Commodity Clearing Limited
NSETECH- NSE InfoTech Services Limited
IISL- India Index Services & Products Ltd.
NSDL- National Securities Depository Ltd.

10

CHAPTER-3
COMPANY PROFILE

11

OVERVIEW
Founded in 1994, SMC Group is one of Indias leading financial services and investment
solutions providers and has been rated as Indias Best Equity & Best Currency Broker and
Broking house with the largest Distribution Network, (Source: BSE IPF and D&B Equity
Broking Awards 2012, 2011 & 2010 and Bloomberg-UTV Financial Leadership Awards 2012
& 2011). A blend of extensive experience, diverse talent and client focus has made us achieve
this landmark. Over the years, SMC has expanded its operations domestically as well as
internationally. Existing network includes regional offices at Mumbai, Kolkata, Chennai,
Ahmedabad, Jaipur, Hyderabad, Bangalore plus a growing network of 43 branches & 2500+
registered sub-brokers and authorized persons spread across 500+ cities and towns in India.
They offer a diverse range of financial services which includes institutional and retail brokerage
of equity, derivatives, commodities, currency, online trading, depository services, distribution
of IPOs ,mutual funds, fixed deposits & bonds, dedicated desk for NRIs and institutional
clients, insurance broking(both life & general), clearing services, margin financing, investment
banking, portfolio management, wealth advisory & research. They have a workforce of more
than 2500 employees and over 20000 registered associates/ service providers serving the
financial needs of a large base of investors efficiently. They are also amongst the first financial
firms in India to expand operations in the lucrative gulf market, by acquiring license for
broking and clearing member with (DGCX).

12

The SMC Advantage:

Large avenues of investment solutions and financial services under one roof
Personalized solution and attention offered to each investor
Research support and timely advice by our high-tech research wing
An extensive network of branch offices
A perfect blend of latest technology and rich experience
Honesty, transparency and fairness imbibed in our dealings
Providers of one of the best trading platforms in terms of speed, convenience and risk
management to trade in NSE (Cash, F&O, Currency), BSE(Cash, F&O), NCDEX, MCX,
NMCE, ICEX, ACE, USE, NSEL, NCDEX SPOT, MCX-SX & DGCX.

13

SMC PROMOTERS
Mr. SUBHASH CHANDRA AGGARWAL

He is the Chairman and Director of SMC Global Securities Limited & Co founder of the
SMC Group.
Fellow member of the Institute of Chartered Accountants in India (ICAI)
He has an experience of more than 23 years in stock broking & capital market.
Chairman, Capital Market Committee of the Associated Chambers of Commerce and
Industry of India (ASSOCHAM)
He is a part of an expert group constituted by Ministry of Corporate Affairs to review the
existing Cost Accounting rules and standards.
He has actively participated in conferences and seminars on securities and commodities
market.
It is through his leadership skills that SMC received several accolades
His effort have led to the diversification of group business from stock broking and arbitrage
to commodity broking, IPOs & mutual fund distribution, insurance products, merchant
banking, wealth management & advisory services.

Mr. MAHESH. C. GUPTA

He is the Vice Chairman & Managing Director of SMC Global Securities Limited & Co
founder of the SMC Group.
Fellow member of the Institute of Chartered Accountants in India (ICAI)
He has an experience of more than 23 years in Securities Market.
He has actively participated in conferences and seminars on securities and commodities
market.
14

CORPORATE ETHOS

VISION
To be a global major in providing complete investment solutions, with relentless focus on
investor care, through superior efficiency and complete transparency.
VALUES

Passion: Helping people achieve financial goals.

Integrity: Being ethical builds trust.
Relationship: One transaction, lifetime relationship.
Innovation: Being ahead with Research and Technology.
Trustworthy: Keeping promise every time.

15

SMC Approach

CREDENTIALS

Best Equity Broking House in India (Source: BSE IPF - D&B Equity Broking

Awards, 2012 & 2010)

Best Equity Broking house in Derivative Segment in India (Source: BSE IPF-D&B

Equity Broking Awards, 2012)

Best Currency Broker in India (Source: Bloomberg - UTV Financial Leadership

awards, 2012 & 2011)

Broking House with the Largest Distribution Network in India (Source: BSE IPF-

D&B Equity Broking Awards, 2012, 2011 & 2010)

Best Equity Research Analyst in IPO segment and Best Commodity Research
Analyst- Viewer's Choice (Source: Zee Business India's Best Market Analyst Awards,

2012)
Learning and Talent Technology Excellence Award by Star News HR and
16

Leadership Awards, 2012

Indias Best Wealth Management Company (Source: Business Sphere, 2011)
Fastest Growing Retail Distribution Network in financial services (Source: Business

Sphere, 2010)
Major Volume Driver award from BSE for 3 consecutive years (2006-07, 2005-06
& 2004-2005) 11

Memberships & Registrations

Trading member of NSE (Cash, F&O, Currency), BSE (Cash, F&O), NCDEX, MCX,

NMCE, UCX, ICEX, ACE, USE, NSEL, NCDEX SPOT, MCX-SX & DGCX
Clearing Member in NSE (F&O, Currency), BSE (F&O), MCX, NCDEX, NMCE,

ICEX, ACE, USE, NSEL, UCX, NCDEX SPOT, MCX-SX & DGCX
Depository Participant with CDSL, NSDL & Comtrack (SEBI approved Qualified

Depository Participant (QDP))

Category 1 Merchant banker, Registered with SEBI
17

Corporate Insurance Broker for Life & General Insurance, Registered with IRDA

Distributor of IPOs & Mutual Funds, Registered with AMFI

Portfolio Management Services (PMS), Registered with SEBI
Non-Banking Financial Company (NBFC), Registered with RBI

PRODUCTS AND SERVICES

SWOT ANALYSIS
SWOT analysis is a structured planning method used to evaluate the Strengths, Weaknesses,
Opportunities, and Threats involved in a project or in a business venture. A SWOT analysis can
18

be carried out for a product, place, industry or person. It involves specifying the objective of
the business venture or project and identifying the internal and external factors that are
favourable and unfavourable to achieving that objective. Setting the objective should be done
after the SWOT analysis has been performed. This would allow achievable goals or objectives
to be set for the organization.

Strengths: characteristics of the business that give it an advantage over others

Weaknesses: are characteristics that place the team at a disadvantage relative to others
Opportunities: elements that the project could exploit to its advantage
Threats: elements in the environment that could cause trouble for the business.

Identification of SWOTs is important because they can inform later steps in planning to achieve
the objective. First, the decision makers should consider whether the objective is attainable,
given the SWOTs. If the objective is not attainable a different objective must be selected and
the process repeated.
The usefulness of SWOT analysis is not limited to profit-seeking organizations. SWOT
analysis may be used in any decision-making situation when a desired end-state (objective) has
been defined. Examples include: non-profit organizations, governmental units, and individuals.
SWOT analysis may also be used in pre-crisis planning and preventive crisis management.
SWOT analysis may also be used in creating a recommendation during a viability study/survey.
SWOT Analysis
Strengths

Wide range of innovative financial services

Strong PE arm.
State of art I.T infrastructure
Strong international tie-ups
Workforce of over 4000 employees and over 7500 financial advisors
Customer base of over 7 million in over 450 cities.
Employees are highly empowered.
Strong communication network.
Management philosophy and commitment to maximize shareholders returns
Upgraded product design and development facilities to develop new products and aid

diversification.
Ongoing activities to support up gradation of operational performance and rise in
productivity
19

Team of talented and committed professionals available to improve companys

performance weakness.
Good co-operation between employees.
Number 1 registrar and transfer agent in India.
Number 1 dealer of investment products in India

Weakness

Less penetration in India in terms of client base

Competition from cheap agents and brokerage firms
High employee turnover.

Opportunity

Growing rural market

Earning Urban Youth
Educating people about the benefits of investments to increase target audience
Large amount of population wants to do investment but scared because of less
knowledge

Threats

Stringent Economic measures by Government and RBI

Entry of foreign finance firms in Indian Market
Increasing number of local players.
Constant pressure to be cost competitive to meet customer expectations.
Relentless pressure to maintain profitability.
New Rules From the government (e.g. Taxes)

20

CHAPTER-4
LITERATURE REVIEW

The extensive review of literature is aimed at improving our understanding of

theoretical

and

practical

concepts

underpinning

the

process

of

project

portfolio selection. During the literature review, the main academic and practical
areas pertinent to our research question have been identified, examined, and
presented in the next sections:
a. Relevant definitions
21

b. Strategies for project portfolio selection

c. Decision making process supporting project portfolio selection
d. Project categorization facilitating project portfolio selection
f. Project portfolio selection models or methods
h. Challenges in project portfolio selection

1. Relevant Definitions
Project Portfolio Selection Process
Project portfolio selection has become increasingly popular during the past
decade. More recent literature has been dedicated to the subject. Both
academics and practitioners literature review reveals that selecting projects and
optimizing the project portfolio that best align with the organizations strategic
priorities is the essential focus of project portfolio selection (see literature
review). As explained previously, this dissertation focuses on the process of
project portfolio selection as project portfolio management or partial element
of project portfolio management. Therefore, the following definition by PMI
(2006) of project portfolio selection process is relevantly applicable and
adaptable:
Project

portfolio

management

or

project

portfolio

selection

is formally

defined as a dynamic decision process whereby a businesss list of active projects

is constantly updated, revised. In this process new projects are evaluated, selected
and prioritized; existing projects may be accelerated, killed, or de-prioritized
and resources are allocated and reallocated to active projects (Cooper et al., 2001b).
Many scholars and practitioners (e.g. Dye & Pennypacker, 1999; Sommer, 1999;
Cooper

et

al.,

2001a)

claim

that

decision-making,

prioritization

and

reprioritization, strategic alignment and realignment, allocation and reallocation of

22

resources are the ongoing processes of project portfolio management. APM

(2006) defines:
O Process as a set of interrelated resources and activities which transform inputs into
outputs.
In addition, as a guide, PMI (2006) defines:
O

Project as a temporary endeavour undertaken to create a unique product, service,

or result,
O Portfolio as a collection of projects or programs (whether interdependent or not)
and other work that are grouped together to facilitate the effective management
of that work to meet strategic business objectives; adding that projects and
programs are known as portfolio component

2. Strategies for Project Portfolio Selection

2.1. What is a right project portfolio?
Addressing the vital question which projects are worth of time, cost and
investment performance? is strategic to any organizations in their selection and
management

of

project

portfolio.

Both

academic

researchers

and

practitioners highlight the importance of project selection and prioritization

process in project portfolio management (Cooper et al., 1997a, 1997b, 1998;
Archer & Ghasemzhadeh, 1999; Dye & Penny packer, 1999; Sommer, 1999;
Artto et al., 2004; Morris & Jamieson, 2004; PMI, 2006). They argued that
cooperative efforts made in order to select the right mix of projects require
consideration of internal capabilities and external possibilities (Mintzberg et al.,
1998) and leverage of strategic resources (Hamel & Prahalad, 1993 and Kendall
& Rollins, 2003) for the benefits of individual projects and overall project
portfolios.
23

Literature

in

Project

Portfolio

Management

increasingly

discussed

the

requirements that a project portfolio must meet in order to achieve the

corporate strategy. All literature (Ghasemazadeh et al, 1999; Sommer, 1999;
Rdulescu1 & Rdulescu, 2001; Cooper et al., 2001b; Yelin, 2005; Better &
Glover, 2006; and PMI, 2006) shared the same common critical requirements
including:
a. Alignment with corporate strategy: this is a very important criterion for achieving
corporate

strategy. As

discussed

above,

strategy

is implemented by projects

so if these projects are not aligned with strategy they will not contribute to the
implementation of strategy. Cooper et al. (2000) argued that corporate strategy must
be reflected in the project portfolio and resource allocation to projects.
b.

Maximizing the value: resources of organization are limited, the target of

organization is to utilize them effectively to achieve the maximum value of project

portfolio. Normally, the organization used financial indicators such as NPV, ROI.
Sometimes, such as in weighted scoring model, organization can pre-develop
criteria to score and rank the project based on the maximum score of portfolio.
However, according to Blomquist & Mller (2006), the later method lacks
acceptance because it is poorly crafted or outdated criteria.
c. Balancing:

like

financial

investment,

project

portfolio

requires balanced

(Cooper et al., 2000). The main purpose is balancing risk and return; long and short
term benefits, time-to-completion, competitive impact and others.

In addition, Levine (2005) added some more requirements for the project
portfolio that include:
Appropriate to organizations value and culture;
Directly or indirectly contribute to cash flow;
Most efficiently utilize the resources (capital,

human

resource,

physical);
Projects not only contribute to short term business but also long-term
development.
24

Through literature review, it is evidently argued that PPM is a bridge between

strategy and operation and enables organizations to transform the organizations
vision into realities or successfully implement their corporate strategies (Morris &
Jamieson, 2004; and Dey, 2006). For instance, growth in every organization is
resulted from its set of successful projects generating new products, services
( Englund & Graham, 1999). Cleland (1999) argued that projects are building
block in designing and implementing corporate strategy. Sharing this opinion,
Wheelwright & Clark (1992) identified the importance of the right set of projects
in project portfolio for a companys future or market growth overtime. However,
it is not easy to evaluate the rightness of the project portfolio in aspect of
contributing to corporate strategy since strategies are dynamic and change over
time. The concept of strategy itself is also ambiguous and abstract. Kendall &
Rollins (2003) says that strategic objectives of a business can take many forms such
as improving profitability, increasing market share, compliance with mandated
regulations or improving services, penetrating new market.
From strategy perspective, Dietrich & Lehtonen (2005) argued that the success
of project portfolio is ultimately judged through the achievement of the sustainable
competitive advantage. Nevertheless, it is not easy to achieve a right project portfolio
in reality. Literature shows the following problems in selecting its project portfolio:
Firstly, projects have conflicts in objectives; some are tangible and some intangible
so it is not easy to compare and select (Archer & Ghasemzhadeh, 1996 and
Ghasemzhadeh & Archer, 2000). Secondly, there are uncertainties associated with
project parameters, cost, and risk (Rdulescu1 & Rdulescu, 2001). It is challenging
to select right projects which contribute to successful implementation of the
corporate strategy. Thirdly, some projects are highly inter-independent. This
means

the organization cannot compare one project to the others but a set of

projects to the others (Ghasemzadeh et al., 1999).

2.2. Systemic Approach to Project Portfolio Selection
In order to ensure successful selection of right project portfolio(s) to sustain
organizations

competitive

advantages,

systemic

approach

should

be
25

captured in project portfolio selection. This systemic approach is understood as

harmony involvement of three main factors, namely people or decision makers;
selection tools, techniques, and models; and selection process or framework
(Archer and Ghasemzadeh, 2000 and Cooper et al., 2000, 2001a, 2001b). These
are discussed in details in sections 2.3, 2.6 and 2.7 respectively.
Furthermore,

the

systemic

approach

requires

active

adaptation

of

best

practices derived from academic research or professional practices in the sector

or industry such as Bottom-Up or Top-Down Approach to Strategy Formulation,
Balanced

Scorecard,

Weighted

Scoring

Models,

etc.;

and

proactive

development of signature process defined as processes which are idiosyncratic

and unique to individual organizations are the secret to sustainable competitive
advantage (Gratton & Ghoshal, 2006, p. 5)

3. Decision Making Process Supporting Project Selection

Considering and integrating financial and strategic benefits of each project under
uncertainty representing risks and within the framework of the organizations
strategic

objectives

are

directed

at

increasing

the

effective allocation

of

resources to a set of competing project proposals. These consideration and

integration require systemic processes of decision-making that assists in the
selection of portfolio projects.
Recent research in this context convincingly argued that a systemic decisionmaking process is desired to include a logical framework with a consistent series of
activities at different stages insolated by proper usage of tools and techniques; and
full participation of decision agents or actors (Archer and Ghasemzadeh, 2000 and
Cooper et al., 2000, 2001a).
Figure 8: The Process of Making Decision

26

Source: Ullman (2006)

Besides, Cooper et al. (2001b) claimed that the portfolio decision process
encompasses or overlaps a number of decision-making processes within the
business; and added that these processes include periodic reviews of all
projects in the total portfolio; making Go/Kill decisions on individual
projects, developing a new product strategy and making strategic decision on
resource allocation. Supporting this discussion, Ullman (2006) argued that the
decision making process entails consciously or unconsciously addressing the
following five key questions:
a. Which is the best alternative?
b. What is the risk that our decision will not turn out as we expect?
c. Do we know enough to make a good decision yet?
d. Is there buy-in for the decision?
e. What do we need to do next to feel confident about our decision,
within the scope of our limited resources?
Apparently, a critical feature facilitating project selection is that agents or actors
with roles and responsibilities but logical frameworks or models make decisions
(Archer and Ghasemzadeh, 1999; Englund & Graham, 1999; and Meredith &
Mantel-Jr, 2000). Depending on the types, sizes and structures of business
organizations, decision agents are key individuals or teams of certain management
members.
For example, in the conceptual framework for the field of entrepreneurship
research, Shane and Venkataraman (2000) laid emphasis on the influence of
individuals

on

the

existing,

discovery

and exploitation

of

entrepreneurial
27

opportunities. Decisions to exploit these entrepreneurial opportunities are made

by individuals with differences in considerations taken into expected value, costs
of resources and opportunity costs; perception; risk-bearing willingness; and
optimism.
On the contrary to individual decision making, there often exist inevitable
conflicts in team decision making due to a wide diversity of team members social,
cultural and educational background; knowledge, skills and experiences; and power
and relationship within the organization. Amason (1996) suggested encouraging
cognitive

conflicts

(known

as

functional,

task

oriented

and

focused

on

judgmental differences about how best to achieve common objectives, p.127)

and restraining affective conflicts (understood as dysfunctional, emotional and
focused on personal incompatibilities or disputes, p.129) to a certain extent for top
management teams to produce higher-quality decisions with higher levels of
consensus and affective acceptance.
More importantly, decision agents inclusive of individuals or teams should be
empowered or hold certain roles and responsibilities during participation in the
process of decision making to select project portfolio. Besides primarily discussing
strengths and drawbacks of decision making techniques of ranking options for
selection of projects, Frame (1994) recommended 5 general rules for selecting
projects that lead to success, two of which are interrelated to each other referring
to agents making decisions on project selection. These agents representing a
variety of stakeholders and key project personnel constitute a project selection
team.

Similarly, Levine (2005) suggests a selection team which is called project

portfolio

team

or

project

portfolio

management

governance

council.

This

governance council should be composed of high levels of key leaders and

managers such as Chief Executive Officer, Chief Operating Officer, Chief
Financial Officer and other senior officers. It is constituted in order to bridge the gap
between operation management and project management. Its main role and
responsibility is to ensure the smooth loop of communication of data and information
for making rational decision on portfolio contents.
However, it is arguable that how much time available these busy key leaders and
28

managers share for detailed analysis, preparation and presentation of facts and figures
in the process of selecting projects. Gardiner and Carden (2004) claim that the
selection and nurturing process should be more advantageously

done

when

this

process can get the involvement and participation of people at lower levels
especially in large and mature organizations. Furthermore, the interesting results of
study done by Blomquist & Mller (2006) showed the significant roles and
responsibilities of middle managers in program and portfolio management e.g.
identifying business opportunities, look for synergies between projects, plan
for and select required resources before project execution, etc.
4. Project Categorization Facilitating Project Portfolio Selection
It is advisable to select the right balance and mix of projects to maximize the value of
the portfolio in respect of scope, scarce resources, and contribution to the short-term
and long-term development strategy of the organizations (Cooper et al., 1997a,
1997b; Archer & Ghasemzadeh, 1999; Chien, 2002; and

PMI,

2006).

They

stated that different types of projects that are interrelated and in alignment with
organization strategies should be compared and selected. Hence, it is necessary and
beneficial to classify projects for the purpose of facilitating the process of selecting
and prioritizing projects in project portfolio management (Wheelwright & Clark,
1992; Cooper et al., 1998; Englund & Graham, 1999; Archibald, 2004; and Crawford
et al., 2005).
Based on the degree of change in the product and the degree of change in the
manufacturing, Wheelwright & Clark (1992) categorized projects into five types as
follows:
a. Derivative: ranging from cost-reduced versions of existing products to add-ons or
enhancements for an existing production process,
b.

Breakthrough:

involving

significant

changes

to

existing

products and

processes,
c. Platform: offering fundamental improvements in cost, quality, and performance
over preceding generations,
d. R&D: is the creation of the know-how and know-why of new materials and
technologies
e. Alliances and partnerships: formed to pursue any type of project above.
29

Relevantly, Atlantic Global (2007) introduced the following categories:

Based on competitive advantage, projects are categorized:
a. Tactical: delivering competitive advantage today,
b. Administrative: delivering concurrently promised service levels and
supporting existing strategic projects,
c. Strategic: delivering competitive advantage in the future
d. Innovation: smaller and experimental projects delivering possible competitive
advantage tomorrow
e. Future vision: contingent upon strategic and innovation projects
Based on level of importance, projects are categorized:
a. mission-critical: essential to successful delivery
b. highly-desirable: important but not essential
c. desirable: projects that do not belong to the two above
On the contrary, some other authors propose a categorization system for
organizations to review and redesign their project categorization system. For
instance, upon reviewing the system presented by Shenhar and Widerman (1996,
1997), Youker (1999, 2000) discussed characteristics of projects and four basic
ways

to

establish

system

of

categorizing

projects,

namely geographical

location, industrial sector, stage of the project life cycle, and product of the
project. Similarly, Crawford et al. (2004) recommended the project categorization
model consisting of two separate components:
a. purposes of categorization systems
b. project attributes
Besides, PMI (2006) suggested three activities to categorize projects for project
portfolio selection: identify strategic categories based on the strategic plan, compare
projects and programs to these categorization criteria, and group each project or
program into only one category. Primarily based on the work by Yorker (1999)
and

Crawford

et

al.

(2004),

Archibald

(2004) developed and proposed a

globally agreed project categorization system which is intended for the right
application of project management methods and best practices for each project
30

category, one of which serves project selection and prioritization.

5. Project Portfolio Selection Methods and Models
Selection tools and techniques are used to facilitate evaluating qualitative and
quantitative indicators of an individual project or a set of projects, whose results
are consulted by the selection team for their decision making on project
portfolio selection. Selection tools and techniques are grouped into methods or
approaches such as financial methods (e.g. Net Present Value -NPV, Internal Rate
of Return IRR), strategic approaches (e.g. strategic buckets) or they are
integrated into models which are often categorized into 2 main types: numeric and
nonnumeric such as scoring models (e.g. weighted factor scoring model) or
checklists (e.g. Yes / No questions) (Evans & Souder, 1998; Meredith & MantelJr, 2000 and Cooper et al, 2001a; Taylor, 2006).
There exist many discussions on methods and models for project portfolio
selection in the literature. For instance, Taylor (2006) discussed good models which,
whether nonnumeric or numeric, should have six basic characteristics as follows:
realism, capability, flexibility, ease of use, cost-effectiveness, ease of computerization.
The first five characteristics were suggested by Souder (1973) and the sixth one was
added by Meredith & Mantel-Jr (2000). Besides, in the discussion on choosing a
project selection model, Meredith & Mantel-Jr (2000) provided three explanations
for their preference for weighted scoring models: first, the models enable
selection teams to make key decisions on supporting or rejecting the projects
based on the organizations multiple objectives; second, they are easily adapted
to changes in either management philosophy or environment; and third, they do
not suffer from bias towards the short run, inherent in profitability models.
Furthermore, Archer & Ghasemzadeh (1999) did the extensive review on project
portfolio selection tools and techniques. They presented the advantages and
disadvantages of each group of selection tools and techniques. For instance, the
advantages of comparative approach include ease of understanding, ease of
use, and allowing integration of quantitative and qualitative analysis; and their
disadvantages are no explicit consideration of risks, repetition of entire process
31

when adding or deleting new projects, difficulty in use when involving a large
number of projects for comparison; and incapability to identify really good projects.
These tools and techniques are then integrated into their project portfolio selection
framework as follows:Table 3: Selection Tools Integrated in the Selection Framework
Selection stage

Potential Tools / Methodologies

Manually applied criteria, strategic focus, champion,
feasibility study

Pre-screening

Decision trees, uncertainty estimates, NPV, ROI,

Individual

project Resource Request estimates, Ad hoc techniques (e.g.

analysis
Screening

profiles)
Portfolio AHP, Constrained Optimization, Scoring Models,

selection

Sensitive Analysis
Matrix

Portfolio adjustment

displays,

sensitivity

analysis,

project

management techniques, data collection

Source: Adapted from Archer & Ghasemzadeh (1999)

In addition, Graves and Ringuest (2003) contributed considerable literature review
on models and methods for project selection inclusive of two main streams:
traditional

management

science

stream

and

financial

modeling stream. The

authors presented the limitations and their suggested solutions of the models and
methods that are related to mathematical programming (e.g. goal programming or
multi-objective programming with binary or integer
variables); decision theory (e.g. static or stochastic conditions for decisions made
at one time or several times on selecting projects to form a new portfolio or
adding new projects to an existing portfolio); and finance (e.g. liner or non-linear
optimization of portfolio
Cooper

et

al.

(2001b)

evidently

discussed

the

popularity

and

dominance

(dominating decision process) of tools, techniques, methods and models for project
selection and portfolio management. The results of their survey interestingly
32

show that first, organizations tend to use different combinations of tools, techniques,
methods and models instead of any one alone to better select and manage their
project portfolio (e.g. combination of financial methods and strategic approach);
second, though financial methods are popularly used, they produce poorest
performing

portfolios;

and

finally, organizations with the best performance

portfolios rely on strategic approach rather than financial methods.

In the interest of ensuring time, cost, scope and quality of any investment project;
the tools, techniques, methods, and models reviewed in this section are concerned
with financial analysis, strategic fit analysis and risk analysis. Lefley & Morgan
(1998) and Rad & Levin (2006) claimed that utilization of project selection tools
and

techniques

should

collaboratively

take

into consideration of important

aspects of strategy, resources, and risk. Moreover, depending on the objectives of

the business, different levels of importance shared amongst these three aspects
should be emphasized in the multifaceted process of project portfolio selection
hence suitable sets of tools and techniques are deployed to avoid or limit their
own drawbacks (Archer & Ghasemzadeh, 1999; Dye & Pennnypacker, 1999;
Cooper et al., 2001b; and Rad & Levin, 2006). Another critical factor that should
be considered when adapting tools, techniques, methods and models is the
availability, accuracy, reliability (bias) and up-to-datedness of data input for analysis.
This is more challenging for new organizations or organizations moving to new
business industry

where

there

are

lacks

of

database,

information

and

experiences (Rdulescu1 & Rdulescu, 2001).

Following is the presentation of typical tools, techniques, methods, and models
that are widely discussed in our literature search. More discussion on these and
others can be further studied in the work by Evans & Souder (1998); Archer
& Ghasemzadeh (1999); Dye & Pennnypacker (1999); Meredith & Mantel-Jr
(2000); Cooper et al. (2001a); Frame (2003); Graves and Ringuest (2003); Martino
(2003); Rad & Levin (2006); PMI (2006); and Taylor (2006).
Financial or Economic Models: The models in this category are similar to
models that can be used for conventional financial investment decisions.
Computation approaches and methods can be used (e.g. break even analysis,
33

discounted cash flow, etc.) as well as financial ratios (e.g. Productivity Index).
Thus, these models rely on available, reliable financial data, which might not
always be the case in organisations (Cooper et al. 2001).
Scoring Models and Checklists: Unlike the models described previously, scoring
models and checklists typically rely on subjective assessments of variables instead
of factual financial data. Hence, domain knowledge is required to assess the
portfolio on a variety of these characteristics, which can be very useful and
efficient in the early phases of portfolio analysis (Cooper et al. 2001).
Probabilistic Financial Models: These models rely on facts again similar to
the models in the first category. However, these models, to which belong, among
others, Monte Carlo simulation, decision tree analysis and options pricing theory,
include the notion of uncertainty and risk (Cooper et al. 2001).
Behavioural Approaches: These models comprised by this category can be
utilised to achieve a consensus amongst a group of participants. This category
includes models such as the Modified Delphi Method, for example (Cooper et al.
2001).
Mathematical Optimisation Procedures: These models aim at finding the
optimal set of portfolio elements in order to maximise a certain objective (e.g.
profit), which is subject to a set of resource constraints. They contain diverse
mathematical approaches based on game theory, probability theory and
mathematical programming (Cooper et al. 2001).
Decision Support Systems: Mathematical Optimisation Procedures do not allow
the decision maker to get involved during the process of finding a solution.
Decision Support Systems try to be more flexible in this regard. A DSS is
essentially a mathematical model that allows management intervention (Cooper
et al. 2001).
Mapping Approaches: This category comprises models that consider certain
34

performance indicators simultaneously in order to visualise the current status of

the portfolio. Hereby, a matrix or plot can be created. The approach developed by
the Boston Consulting Group (BCG) is probably the most popular one (Henderson
2006).

Parkhe

(1991)

further

distinguished

between

standardised

and

customised mapping approaches. The BCG matrix is an example of a standardised

approach. The models in this subcategory compare one or more fixed internal
variables

against

one

or

more

fixed

external

variables (Avlonitis

and

Papastathopoulou 2006). Contrarily, customised approaches are flexible in the

choice of variables used to create the matrix or plot..

35

CHAPTER-5
PORTFOLIO MANAGEMENT

INTRODUCTION
A Portfolio Management refers to the science of analyzing the strengths, weaknesses,
opportunities and threats for performing wide range of activities related to the ones portfolio
for maximizing the return at a given risk. It helps in making selection of Debt Vs Equity,
Growth Vs Safety and various other tradeoffs.
Major tasks involved with Portfolio Management are as follows.

Taking decisions about investment mix and policy

Matching investments to objectives
Asset allocation for individuals and institution
Balancing risk against performance
36

There are basically two types of portfolio management in case

of mutual and exchange-traded funds including passive and active.

Passive management involves tracking of the market index or index investing.

Active management involves active management of a funds portfolio by manager or
team of managers who take research based investment decisions and decisions on
individual holdings.

Portfolio: In terms of mutual fund industry, a portfolio is built by buying additional bonds,
mutual funds, stocks, or other investments. If a person owns more than one security, he has an
investment portfolio. The main target of the portfolio owner is to increase value of portfolio by
selecting investments that yield good returns. As per the modern portfolio theory, a diversified
portfolio is one, which includes different types or classes of securities and reduces the
investment risk. It is because any one of the security may yield strong returns in any economic
climate.
Facts about Portfolio

There are many investment vehicles in a portfolio.

Building a portfolio involves making wide range of decisions regarding buying or
selling of stocks, bonds, or other financial instruments. Also, one needs to make

decision regarding the quantity and timing of the buy and sell.
Portfolio Management is goal-driven and target oriented.
There are inherent risks involved in the managing a portfolio.

Applications of Portfolio Management

It involves management of complete group or subset of software applications in a portfolio.
These applications are considered as investments as they involve development (or acquisition)
37

costs and maintenance costs. The decisions regarding making investments in modifying the
existing application or purchasing new software applications make up an important part of
application portfolio management.
1. Product Portfolio Management: The product portfolio management involves grouping
of major products that are developed and sold by businesses into (logical) portfolios.
These products are organized according to major line-of business or business segment.
The management team actively manages the product portfolios by taking decisions
regarding the development of new products, modifying existing products or
discontinues any other products.
2. Project Portfolio Management: It is also referred as an initiative portfolio
management where initiative portfolio involves a defined beginning and end; precise
and limited collection of desired results or work products; and management team for
executing the initiative and utilizing the resources.

OBJECTIVES OF PMS

38

BENEFITS OF PMS

Transparency: At most times the rationale behind your investments is a matter of concern.
With PMS our Portfolio Managers will always keep you apprised of the reason behind
investment decisions, plus you are always kept up-to-date on the allocation and distribution
of your funds.

Scientific Investment Decisions: PMS provides a scientific and disciplined basis for
investing. Besides, you have the flexibility of making investment decisions after speaking
to our Research Team.

39

Learn while you earn: The Consultative Investment Approach of PMS gives you an
opportunity to learn the nuances, understand the rationale and details behind every

investment decision.
Expertise: Traditional investment options do not provide a team of dedicated investment
consultants. PMS will provide you exclusive access to the Research Desk and their
Proprietary Research Reports. An experienced team of portfolio managers ensure your
portfolio is tracked, monitored, and optimized at all times.

DISADVANTAGES OF PMS
PMS does not disclose the portfolio as much as MFs.
There have also been* cases where PMS Managers have misused the money.

TYPES OF PMS
PMS can be broadly categorized under the following types 1. Discretionary PMS Where the investment is at discretion of the fund manager & client
has no intervention in the investment process.
2. Non-Discretionary or Advisory PMS Under this service, the portfolio manager only
suggests the investment ideas. The choice as well as the timings of the investment decisions
rest solely with the investor. However the execution of the trade is done by the portfolio
manager.

TYPES OF INVESTMENT STRATEGIES

Aggressive Investment Strategy: If the aim of the investor is capital growth, then he needs to
place higher percentage of his assets in equities rather than in safer debt securities.
Defensive Investment Strategy: A low risk/low return investment portfolio amongst old age
people.
40

Balanced Investment Strategy: Combines the merits and demerits of both Aggressive and
Defensive investment strategy.

FEES IN A PMS
Portfolio management services either have a fixed, profit-sharing or hybrid fee structure. In a
fixed-fee structure, the manager charges a set fee every quarter or on the corpus. It is levied
irrespective of the returns generated by a portfolio. Then, there is the profit-sharing model,
where the fee paid by an investor is a percentage of profits. This is usually a large chunk,
around 20-25% of profits. A hybrid model combines both, although charges are less.

How to Select an Optimal Portfolio

An optimal stock portfolio refers to a stock portfolio that incorporates the stocks configured in
such a manner that they yield the optimal return statistically possible at a given level of risk
accepted by an investor. The modern portfolio theory stresses on the optimal portfolio concept
by assuming that the investors try to minimize risk obsessively while looking for the highest
return possible. As per this theory, investors should make rational decisions for achieving
maximum returns at their acceptable level of risk. The working of the optimal portfolio can be
easily understood by looking at the chart below. The optimal-risk portfolio is generally found in
the middle of the curve. If one goes further higher up the curve, it will mean taking more risk
proportionately for achieving lower incremental return. Similarly if one goes at lower end of
the curve, it will mean low risk/low return.

41

How to build a Profitable Portfolio

Portfolio management is basically an approach of balancing risks and rewards. Investors should
keep the following tips in mind while deciding about the right portfolio blend.

Goals: You should be clear about your goals as an investor. The objective of the
portfolio management should be clear if one wants to accumulate wealth by good

returns or to hold on his investments.

Risk Tolerance: As an investor one should know how to handle the fluctuations of ever
changing volatile market. It is important to know the ways for tolerating the risks and
subsequent rise and fall of net worth. If you are not capable of handling the pressure of
sharp decline in the values of tour investments then you should try to invest in more

stable funds/stocks.
Know your investments: It is recommended to invest in the stocks/funds of the
businesses and industries that you are aware of. You should know the activities of the
companies and procure knowledge about the sector you are investing in. This way you
would be able to know if the company will continue to be successful. The performance

of the specific business or industry cannot be easily predicted with certainty.

When to Buy/Sell: In order to succeed in the stock markets, it is very important to
know when to buy or when to sell. You should do every purchase with a purpose, and

constantly re-assess that purpose as per the prevailing market and other conditions.
Measuring Return on Investment (ROI): The performance of the portfolio is
measured by the return on investment (ROI). The individuals can successfully formulate
42

a logical money-management strategy by knowing the probability of returns received by

each dollar invested.
ROI = (Gains Cost)/Cost
The ROI can change depending on the improvement or worsening of the market
conditions. It also depends on the kind of assets or securities held by the investor. In

general, the higher potential ROI involves higher risk and vice versa.
Measuring Risk: The risk tolerance of the person determines the pace of his/her
returns. The risks and rewards are in essence interrelated to each other where tolerance
of the risks tends to influence or even dictate the rewards. An investor whose goal is to
maintain his/her current assets instead of growing them, he/she will keep only safe and

secure investments in the portfolio.

Diversification of the portfolio: The diversification of the portfolio is required to
minimize the risks and maximizes the returns in the long term. It is preferred to
diversify your portfolio however; one should take care to avoid over-diversifying. The
diversified portfolio led to smoothing of peak-and-valley pricing effects caused by the
fluctuations in the normal market and in surviving long term market downturns. The

over diversification can become counterproductive so it needs to be avoided.

Avoiding the gambling: As an investor, one should avoid portfolio that relies on highrisk, high-return investments. It is because; the higher speculative investment can lead
to conditions where investor may require selling his holdings prematurely at a loss due
to liquidity crisis and expected returns wont materialize.

Stock Portfolio Management

A stock portfolio management refers to the management of investment decisions for a stock
portfolio and it is usually performed by stock management professional due to its complex
nature. The stock portfolio managers are the experts in the field of stocks and well suited for
making decisions for those who want to manage their own investment.
Stock Portfolio Management Software
There are many stock portfolio management softwares available that are designed for effective
implementation of the portfolio strategies by using the available resources. Some of the popular
stock portfolio management softwares are mentioned below.
Portfolio Manager
43

1. Portfolio Manager is basically a personal stock portfolio management system that enables the
traders to track the sold and bought stocks along with any related dividends by investing
minimal time and effort. Traders can maintain a complete stock trading diary without need to
update a spreadsheet continually. This information is of utmost importance for improving the
trading strategy.
2. Traders can view the performance of their portfolio anytime throughout the year. Traders can
have the knowledge of their current status of their portfolio by analyzing the statistics on open
trades as well as historical trades.
3. With portfolio managers, traders can generate easy to use reports without any hassle and
paperwork. It also allows them to make savings by avoiding the accountant fees.
Advantages of Portfolio Manager
I. Easy to use wizards that allows quick and simplified data entry
II. Auto or manual stock price update and management of multiple Portfolios
III. Ensures data security as the portfolio is stored on individuals PC only.
IV. Tracking of all the stock transactions and related dividends
V. Enables the traders to sell shares for gaining maximum tax benefits
VI. Facility of optional accounts that allows the traders to track total used and available funds
VII. Incorporates the information regarding the trading plan like disaster stops targets etc.
VIII. Allows the traders to maintain Trade diary for storing any extra information
IX. Generates quick and easily available reports.

PERSONAL STOCK MONITOR

44

Personal Stock Monitor is basically a portfolio management system by CollabInvest(sm) and

Integrated Trading. It allows the traders to manage all of their investment accounts, holdings
and watch lists in one place. Traders can work together with their friends in real time. It also
allows the traders to do tracking, trading and research more opportunities quickly. Investors can
make quick and better decisions by easily available analysis.
Personal Stock Monitor provides following benefits for the investors.
I. New stock screener support
II. Portfolio management and reports
III. Script extensions and customization
IV. Technical analysis with custom indicators
V. Up-to-the-minute news and research
VI. Streaming real-time quotes and charts
VII. Easy chart and portfolio sharing
45

VIII. Receive trade confirmations

IX. Alerts, including email and SMS

INVESTAR

Investar is a Stock Portfolio Management Software that offers wide range of benefits for
anyone who likes to invest in Indian Stock Market including Portfolio Managers, Broker,
Chartered Accountant, Technical Analyst, Short-Term/Long-Term Trader, Day Trader, student,
and any other individual Investor.

Benefits for Traders

Traders can get new Stock Ideas daily and analyze the fundamentals for selecting the

stocks for investing.

Traders can make correct decisions about buying or selling by analyzing the Technical

aspects.
Enables the traders to import transactions effortlessly from the broker and continuously
track the portfolio.
46

Traders can utilize the portfolio technical view for keeping track of the technical

pictures of all the Portfolio Holdings.

Traders can improve his/her buy/sell timings with the help from portfolio Buys/Sells on

the Chart.
Traders can utilize effective Money Management principles by applying Portfolio Alerts
and Stop Losses.

MODERN PORTFOLIO THEORY

Understanding the risky behaviour of asset and their pricing in the market is critical to various
investment decisions, be it related to financial assets or real assets. This understanding is
mostly developed through the analysis and generalization of the behaviour of individual
investors in the market under certain assumptions. The two building blocks of this analysis and
generalization are:
(I) theory about the risk-return characteristics of assets in a portfolio (portfolio theory)
(II) generalization about the preferences of investors buying and selling risky assets
(equilibrium models).
Both these aspects are discussed in detail in this chapter, where our aim is to provide a brief
overview of how finance theory treats stocks (and other assets) individually, and at a portfolio
level. We first examine the modern approach to understanding portfolio management using the
trade-off between risk and return and then look at some equilibrium asset-pricing models. Such
models help us understand the theoretical underpinning and (hopefully predict) the dynamic
movement of asset prices.

DIVERSIFICATION AND PORTFOLIO RISKS

The age-old wisdom about not putting all your eggs in one basket applies very much in the
case of portfolios. Portfolio risk (generally defined as the standard deviation of returns) is not
the weighted average of the risk (standard deviation) of individual assets in the portfolio. This
gives rise to opportunities to eliminate the risk of assets, at least partly, by combining risky
assets in a portfolio. To give an example, consider a hypothetical portfolio with say, ten stocks.
Each of these stocks has a risk profile, a simple and widely used indicator of which is the
standard deviation of its returns. Intuitively, the overall risk of the portfolio simply ought to be
an aggregation of individual portfolio risks, in other words, portfolio risk simply ought to be a
weighted average of individual stock risks. Our assertion here is that the risk of the portfolio is
usually much lower. Why? As we shall see in the discussion here, this is largely due to the
47

interrelationships that exist between stock price movements. These so-called covariances
between stocks, could be positive, negative, or zero. An example of two IT services stocks,
reacting favourably to a depreciation in the domestic currencyas their export realizations
would rise in the domestic currencyis one of positive covariance. If however, we compare
one IT services company with another from the metals space, say steel, which has high foreign
debt, then a drop in the share price of the steel company (as the falling rupee would increase the
debt-service payments of the steel firm) and rise in share price of the IT services company,
would provide an example of negative covariance. It follows that we would expect to have zero
covariance between stocks whose movements are not related.

THREE GOALS IN PORTFOLIO MANAGEMENT

There are three common denominators across businesses when it comes to portfolio
Management: three macro or high level goals the goal you wish to emphasize most will in turn
influence your choice of portfolio methods. These three broad or macro goals are:

Goal # 1: Maximizing the Value of the Portfolio

A variety of methods can be used to achieve this goal, ranging from financial models through to
scoring models. Each has its strengths and weaknesses. The end result of each method is a
rank-ordered or prioritized list of Go and Hold projects, with the projects at the top of the
list scoring highest in terms of achieving the desired objectives: the value in terms of that
objective is thus maximized.
Net Present Value (NPV): The simplest approach is merely to calculate the NPV of each
project on a spreadsheet; and then rank all projects according to their NPV. The Go projects are
at the top of the list continuing adding projects down the list until you run out of resources.
Logically this method should maximize the NPV of your portfolio. Additionally, each project
team usually determines the NPV for their project as part of their business case or capital
appropriations request so youre using a number thats already available. Fine in theory....
but: The NPV method ignores probabilities and risk; it assumes that financial projections are
accurate (they usually are not!); it assumes that only financial goals are important for
example, that strategic considerations are irrelevant; and it fails to deal with constrained
resources the desire to maximize the value for a limited resource commitment, or getting the
most bang for the limited buck. A final objection is more subtle: the fact that NPV assumes an
48

all-or-nothing investment decision, whereas in new product projects, the decision process is an
incremental.
Expected Commercial Value (ECV): This method seeks to maximize the value or commercial
worth of your portfolio, subject to certain budget constraints, and introduces the notion of risks
and probabilities. The ECV method determines the value or commercial worth of each project
to the corporation, namely its expected commercial value. The calculation of the ECV is based
on a decision tree analysis, considers the future stream of earnings from the project, the
probabilities of both commercial success and technical success, along with both
commercialization costs and development costs.
This ECV model has a number of attractive features: it recognizes that the Go/Kill decision
process is an incremental one (the notion of purchasing options); all monetary amounts are
discounted to today (not just to launch date), thereby appropriately penalizing projects that are
years away from launch; and it deals with the issue of constrained resources, and attempts to
maximize the value of the portfolio in light of this constraint. The major weakness of the
method is the dependency on extensive financial and other quantitative data. Accurate estimates
must be available for all projects future stream of earnings; for their commercialization (and
capital) expenditures; for their development costs; and for probabilities of success estimates
that are often unreliable, or at best, simply not available early in the life of a project. A second
weakness is that the method does not look at the balance of the portfolio at whether the
portfolio has the right balance between high and low risk projects, or across markets and
technologies. A third weakness is that the method considers only a single financial criterion for
maximization.
Productivity Index (PI): The productivity index is similar to the ECV method described
above, and shares many of ECVs strengths and weaknesses. The PI tries to maximize the
financial value of the portfolio for a given resource constraint.
The Productivity Index is the following ratio:
PI = ECV * Pts/ R&D
Here, the definition of expected commercial value is different than that used above. In the
Productivity Index, the expected commercial value (ECV) is a probability-adjusted NPV. More
specifically, it is the probability-weighted stream of cash flows from the project, discounted to
the present, and assuming technical success, less remaining R&D costs. There are various ways
to adjust the NPV for risks or probabilities: via employing a risk adjusted discount rate used; or
49

by applying probabilities to uncertain estimates in calculating the NPV; or via Monte Carlo
simulation to determine NPV.
This risk-adjusted NPV is then multiplied by Pts, the probability of technical success, and
divided by R&D, the R&D expenditure remaining to be spent on the project (note that R&D
funds already spent on the project are sunk costs and hence are not relevant to the prioritization
decision). Projects are rank ordered according to this productivity index in order to arrive at the
preferred portfolio, with projects at the bottom of the list placed on hold.
SCORING MODELS AS PORTFOLIO TOOLS
Scoring models have long been used for making Go/Kill decisions at gates. But they also have
applicability for project prioritization and portfolio management. Projects are scored on each of
a number of criteria by management. Typical main criteria include:

Strategic alignment
Product advantage
Market attractiveness
Ability to leverage core competencies
Technical feasibility
Reward vs. risk.

The Project Attractiveness Score is the weighted addition of the item ratings, and becomes the
basis for developing a rank ordered list of projects (using the six criteria listed above; projects
are ranked until there are no more resources, in this case measured by FTE people).
Scoring models generally are praised in spite of their limited popularity. Research into project
selection methods reveals that scoring models produce a strategically aligned portfolio and one
that reflects the businesss spending priorities; and they yield effective and efficient decisions,
and result in a portfolio of high value projects

Goal # 2: A Balanced Portfolio

The second major goal is a balanced portfolio a balanced set of development projects in terms
of a number of key parameters. The analogy is that of an investment fund, where the fund
manager seeks balance in terms of high risk versus blue chip stocks; and balance across
industries, in order to arrive at an optimum investment portfolio.
50

Visual charts are favoured in order to display balance in new product project portfolios. These
visual representations include portfolio maps or bubble diagrams an adaptation of the four
quadrant BCG (star; cash cow; dog; wildcat) diagrams which have seen service since the 1970s
as strategy models as well as more traditional pie charts and histograms.
A casual review of portfolio bubble diagrams will lead some to observe that these new models
are nothing more than the old strategy bubble diagrams of the 70s! Not so. Recall that the
BCG strategy model, and others like it (such as the McKinsey/GE model), plot business units
on a market attractiveness versus business position grid. Note that the unit of analysis is the
SBU an existing business, whose performance, strengths and weaknesses are all known. By
contrast, todays new product portfolio bubble diagrams, while they may appear similar, plot
individual new product projects future businesses or what might be.

Traditional Charts for Portfolio Management

There are numerous parameters, dimensions or variables across which one might wish to seek a
balance of projects. As a result, there are an endless variety of histograms and pie charts which
help to portray portfolio balance. Some examples:

Timing a key issue in the quest for balance. One does not wish to invest strictly in short
term projects, nor totally in long term ones. Another timing goal is for a steady stream
of new product launches spread out over the years constant new news, and no
sudden log-jam of product launches all in one year. A histogram captures the issue of
timing and portrays the distribution of resources to specific projects according to years

of launch.
Another timing issue is cash flow. Here the desire is to balance ones projects in such a
way that cash inflows are reasonably balanced with cash outflows in the business. Some
companies produce a timing histogram which portrays the total cash flow per year from

all projects in the portfolio over the next few years (not shown).
A project type is yet another vital concern. What is your spending on genuine new
products versus product renewals (improvements and replacements), or product
extensions, or product maintenance, or cost reductions and process improvements? And
what should it be? Pie charts effectively capture the spending split across project types
actual versus desired splits. Markets, products and technologies provide another set of
dimensions across which managers seek balance. The question faced is: do you have the
appropriate split in R&D spending across your various product lines? Or across the
markets or market segments in which you operate? Or across the technologies you
51

posses? Pie charts are again appropriate for capturing and displaying this type of data.

Goal # 3: Building Strategy into the Portfolio

Strategy and new product resource allocation must be intimately connected. Strategy becomes
real when you start spending money. Until one begins allocating resources to specific activities
for example, to specific development projects strategy is just words in a strategy document.
The mission, vision and strategy of the business is made operational through the decisions it
makes on where to spend money. For example, if a businesss strategic mission is to grow via
leading edge product development, then this must be reflected in the mix of new product
projects underway projects that will lead to growth (rather than simply to defend) and
products that really are innovative. Similarly, if the strategy is to focus on certain markets,
products or technology types, then the majority of projects and spending should be focused on
such markets, products or technologies.

Linking Strategy to the Portfolio: Approaches

Two broad issues arise in the desire to achieve strategic alignment in the portfolio of projects:

Strategic fit: The first is: are all your projects consistent with your businesss
strategy? For example, if you have defined certain technologies or markets as key
areas to focus on, do your projects fit into these areas are they in bounds or out of
bounds?

Spending breakdown: The second is: does the breakdown of your spending reflect
your strategic priorities? In short, when you add up the areas where you are
spending money, are these totally consistent with your stated strategy?

There are two ways to incorporate the goal of strategic alignment:

I. Bottom up building strategic criteria into project selection tools: here strategic fit is
achieved simply by including numerous strategic criteria into the Go/Kill and
prioritization tools; and
AI. Top-down Strategic Buckets method: this begins with the businesss strategy and then
52

moves to setting aside funds envelopes or buckets of money destined for different
types of projects
Bottom Up Strategic Criteria Built into Project Selection Tools: Not only are scoring
models effective ways to maximize the value of the portfolio, they can also be used to ensure
strategic fit. One of the multiple objectives considered in a scoring model, along with
profitability or likelihood of success, can be to maximize strategic fit, simply by building into
the scoring model a number of strategic questions. In the scoring model displayed, two major
factors out of five are strategic; and of the 19 criteria used to prioritize projects, six, or almost
one-third, deal with strategic issues. Thus, projects which fit the businesss strategy and boast
strategic leverage are likely to rise to the top of the list. Indeed, it is inconceivable how any off
strategy projects could make the active project list at all: this scoring model naturally weeds
them out.

Top Down Strategic Approach Strategic Buckets Model: While strategic fit can be
achieved via a scoring model, a top down approach is the only method designed to ensure that
the eventual portfolio of projects truly reflects the stated strategy for the business: that where
the money is spent mirrors the businesss strategy. The Strategic Buckets model operates from
the simple principle that implementing strategy equates to spending money on specific projects.
Thus, setting portfolio requirements really means setting spending targets. The method
begins with the businesss strategy, and requires the senior management of the business to make
forced choices along each of several dimensions choices about how they wish to allocate their
scarce money resources. This enables the creation of envelopes of money or buckets.
Existing projects are categorized into buckets; then one determines whether actual spending is
consistent with desired spending for each bucket. Finally projects are prioritized within buckets
to arrive at the ultimate portfolio of projects one that mirrors managements strategy for the
business. Sounds simple, but the details are a little more complex: Senior management first
develops the vision and strategy for the business. This includes defining strategic goals and the
general plan of attack to achieve these goals a fairly standard business strategy exercise.
Next, they make forced choices across key strategic dimensions. That is, based on this strategy,
the management of the business allocates R&D and new product marketing resources across
categories on each dimension. Some common dimensions are:

Strategic goals: Management is required to split resources across the specified strategic
53

goals. For example, what percent should be spent on Defending the Base? On

Diversifying? On Extending the Base? and so on.

Product lines: Resources are split across product lines: e.g., how much to spend on
Product Line A? On Product Line B? On C? A plot of product line locations on the

product life cycle curve is used to help determine this split.

Project type: What percent of resources should go to new product developments? To

maintenance-type projects? To process improvements? To fundamental research? etc.

Familiarity Matrix: What should be the split of resources to different types of markets
and to different technology types in terms of their familiarity to the business? You can
use the familiarity matrix proposed by Roberts technology newness versus market

newness to help split resources.

Geography: What proportion of resources should be spent on projects aimed largely at
North America? At Latin America? At Europe? At the Pacific? Or at global?

THE SIX STEPS OF PORTFOLIO MANAGEMENT

54

Set portfolio
objective

Formulate an
investment
strategy

Learn the basics

principles of
finance

Have a game
plan for portfolio
revision

Protect portfolio when

appropriate

Evaluate
Performance

55

What does Capital Asset Pricing Model (CAPM) mean?

The model was introduced by Jack Treynor (1961, 1962), William Sharpe (2964), John Litner
(1965), and Jan Mossin (1966) independently building on the earlier work of Harry
Markowitz on diversification and modern Portfolio Theory.
Sharpe, Markowitz and Merton miller jointly received the Nobel Memorial Prize in
Economics for this contribution to the field of financial economics. A model that describes the
relationship between risk and expected return and that is used in the pricing of risky
securities.

The general idea behind CAPM is that investor needs to be compensated in two ways: time
value of money and risk. The Time value of money is represented by the risk free (rf) rate in
the formula and compensates the investors for placing money in any investment over a period
of time. The other half of the formula represents risk and calculates the amount of
compensation the investor needs for taking on additional risk. This is calculated by taking a
risk measure (beta) that compares the returns of the assets to the market over a period of time
and to the market premium (Rm-rf). The CAPM says that the expected return of a security or
a portfolio equals the rate on a risk free security plus a risk premium. If this expected return
does not meet or beat the required return, then the investment should not be undertaken.
56

Assumptions of CAPM
All Investors:
1) Aim to maximize economic utility
2) Are rational and risk free
3) Are price takers, i.e., they cannot influences prices.
4) Can lend and borrow unlimited under the risk free rate of interest.
5) Trade without transaction or taxation costs.
6) Deals with securities that are all highly divisible into small parcels.
7) Assume all information is at the same time available to all investors.
8) Perfect competitive Markets.

57

AN IDEAL & A BALANCED PORTFOLIO

An ideal portfolio depends upon a number of factors such as your country of residence and
investment, your investment time horizon and your propensity for reading market news and
keeping up -to-date on your holdings. Investors diversify their capital into many different
investment vehicles for the primary reason of minimizing their risk exposure. Specially,
diversification allows investors to reduce their exposure to what is referred to as unsystematic
risk, which can be said to be the risk associated with a particular company or industry.
Investors are unable to diversify away systematic risk, such as the risk of an economic
recession dragging down the entire stock market, but academic research has shown that a well
diversified equity portfolio can effectively reduce unsystematic risk to near- zero levels,
While Still maintaining the same expected return level a portfolio with excess risk would
have.
In other words, while investors must accept greater systematic risk for potentially higher
returns (known as the risk-returned trade-off), they generally do not enjoy increased return
potential for bearing unsystematic risk. The more equities you hold in your portfolio, the
lower your unsystematic risk exposure. A portfolio of 10 stocks, particularly those of various
sectors or industries, is much less risky than a portfolio of two. Of course the transaction cost
of holding more stocks can add up, so it is generally optimal to hold the minimum number of
stocks necessary to effective remove their unsystematic risk exposure. What is this number?
There is no consensus answer, but there is a reasonably certain range.
Predominant research in the area was conducted prior to the revolution of online investing
(When commission & transaction costs were very much higher), and most research papers put
the number in the 20-30 range. More recent research suggest that investors taking advantage
of the low transaction cost afforded by online brokers can best optimize their portfolio by
holding closer to 50 stocks, but again there is no consensus. Keep in mind that these assertion
are based on past, historical data of the overall stock market, and therefore does not guarantee
that the market will exhibit the same characteristics during the next 20 yrs as it did in the past
20 yrs.
58

As a general rule of Thumb, however, most investors hold 15-20 stocks at the very least in
their portfolio.
The table below gives a general guide to the plans that are appropriate for

different life stages

Life stage

Primary Need

Young and Single

Young and Just
Married

Asset creation
Asset creation &
Protection

Married with kids

Middle aged with

grown up kids

Childrens education,
Asset creation and
protection
Planning for retirement
& asset protection

Life Insurance
Product
Wealth Creation Plan
Wealth creation and
mortgage protection
plans
Education insurance,
Mortgage protection &
wealth creation plans
Retirement solution &
mortgage protection

Across all life- stages

Health plans

Health Insurance

How to make asset allocation work for you?

Adding diversity to your portfolio, or asset allocation, helps you to control risk and meet
your financial goals. You may not realize it, but you probably already practice asset
allocation. Thats what youre doing if you buy bonds when interest rate seems high, or you
sell stocks when the equity market feels risky.
But while we may practice a rudimentary form of asset allocation, most of us dont get all
we can form the approach. Asset allocation can help investor to control risk, to match a
portfolio with specific financial goals, to increase the predictability of returns and more.

The Principles behind asset allocation are simple:

First, history shows that not all classes of assets move up and down at the same time.
59

One year, Stocks of large companies may generate the best returns, while in another it

will be government bonds or even a bank certificate of deposit.

History also tells us that some asset classes are far more valuable than others. They
may go from big gains one year to big losses the next, while the performance of less
volatile counterparts remains within a much narrower range.

How to determine your ideal Asset Allocation?

Figuring out your ideal asset allocation is very personal thing, and there is no right answer.
When determining your asset allocation, the two most important factors are your risk
tolerance level and your investment time horizon.

Risk tolerance level is your willingness to bear the risk potentially losing some or all
of your money in exchange for higher potential returns. For example, an aggressive
investor, or one with a high risk tolerance, is more likely to risk losing money on order
to get better result. Its important to be truthful to yourself when considering your risk
tolerance level because the last thing you want to do is prematurely sell your

investment in a panic.
Investment time horizon is the expected number of months or years you will be
investing for retirement that is 35 years away, you would afford to take more risk
because you can ride out the down periods. On the other hand, you want less risk if
you are a retiree or if you are saving for a short- term goal.

Balancing Risk and Reward

One way to help you determine your ideal asset allocation is to first look at how much you
need to have and how soon. Also, you need to determine if could afford to wait a few more
years if you dont achieve your goal within the target deadline. For example, Let us assume
you need to save Rs 10, 00,000 for a down payment in 5 yrs, and can afford to save Rs 12,000
a month for the next 60 months. If you calculate these numbers, your investment must have a
combined average annual return of 12% per year. This requires an aggressive portfolio, but 5
years is a short time and you could lose some or all of your money.
Your Possible Alternatives Are
1. Extend your time horizon. For example, you can save Rs 10, 00,000 by adding Rs
12,000 per month to an investment portfolio that has as combined average annual
60

return of 5% in 6 years.
2. Increase your monthly contribution. For example you save Rs. 10, 00, 00 by adding
Rs. 15, 000 per month to an investment portfolio that has a combined average annual
return of 5% in 5 years.
Now that you understand what portfolio rate of return need to be at, you could more
realistically decided your asset allocation. For example; if you are shooting for a 5% rate of
return, you could construct a conservative portfolio. However, if you are shooting for a 12%
rate of return, you will have to be more aggressive.

Mutual Funds v/s Portfolio Management Services

61

Mutual Funds

Pool money from large number of investors

Stocks owned by the fund in its name

Use management expertise to provide returns as per the common investment policy

Can be close-ended and open-ended

Close-ended: Fund matures after prescribed period
Open-ended: Fund has infinite lifetime (theoretically)

Portfolio Management Services

One to one agreement between investors and Portfolio Manager

Customized portfolio as per the risk profile of investors and hence accordingly
individualized investment decisions

Bank account and stocks are held under investors name

Can be sold at market value at any time

Regular report on investor portfolio value is provided to investors

Expertise of Portfolio Manager (fundamental and technical) in making investment

decision

Mutual Funds
Common policy and strategy for all

PMS
Customized policy and strategy for

the investors under one scheme

each investor
62

One-size-fits-all philosophy

Match individual risk appetite with

No say in investment decisions

investments decisions
Will have say in investments
through agreed Investment Policy

Transactions

usually

in

huge

Statement
Transaction volume depends on

volumes

client portfolio size (usually far less

Prices of the securities are affected

than of MFs)
Prices more or less remain the same

by the huge volume of buy/sell

Government has benefited MFs

Individual capital gain tax are not

with capital gain tax waiver in their

waived

transactions
However, capital gains at the sell of

No further taxation

the units are taxed

Tailored and beneficial for small

Appropriate for active investors

investors

willing

to

investments

make

fairly

large

and

hence

need

Usually trade in market at below-

customized services
Dont trade as MFs

NAV values
Market price of units is below the

Market Value of investment (while

value of underlying asset

selling) is same as the value of

underlying asset

63

CHAPTER-6
RESEARCH METHODOLOGY

RESEARCH OBJECTIVES:
To compare performance of different stocks in a Portfolio.
To compare the return of a portfolio using different investment ways.
To develop a new investment way in portfolios.
64

 To compare the different portfolios being maintained.

Tools and techniques are used for the stock selection and to manage the risk and
return on the portfolio.
Major things to be considered are the sector preference for the selection of the
stock because diversification should be into different sectors so as to maximize the
return and taking advantage of whole economy related environment and news.
Stock selection will be based on the Fundamental analysis and Beta for the stock
selection.
Portfolio beta will be calculated to measure the effect of diversification by
comparing it with beta of individual stocks.
Capital Asset Pricing Model will be used vis--vis to manage the risk and
selection of stock as well.
Standard deviation will be calculated for estimating the historical volatility of a
stock.
Correlation is calculated to measure how two securities move in relation to each
other.

SCOPE OF STUDY
Portfolio Management is a process encompassing many activities of investment in assets and
securities. It is a dynamic and flexible concept and involves regular and systematic analysis,
judgment and action. The objective of this service is to help the unknown and investors with
the expertise of professional in investment portfolio management. It involves construction of
a portfolio based upon the investors objectives, constraints preferences for risk and returns
and tax liability. The portfolio is reviewed and adjusted from time to time in tune with the
market conditions. The evolution of portfolio is to be done in terms of targets set for risks
and returns. The changes in the Portfolio are to be effected to meet the changing condition.
Portfolio construction refers to the allocation of surplus fund in hand among a variety of
financial asset open for investment. Portfolio theory concerns itself with the principles
governing such allocation. The modern view of investment is oriented more go towards the
assembly of proper combination of individual securities to form investment portfolio. A
combination of securities held together will give a beneficial result if they grouped in a
manner to secure higher returns after taking into consideration the risk elements.

65

The modern theory is the view that by diversification risk can be reduced. Diversification can
be made by the investors either by having a large numbers of shares of companies in different
regions, in different industries or those producing different types of product lines. Modern
theory believes in the perspective of combination of securities under constraints of risk and
returns

AREA OF STUDY
The investors have the stock markets to invest and it offers a lot of various securities to invest
into, the investor with the help of an effective portfolio mix will be able to diversify his
investment and thus will maximize the returns on his investment and minimize the risk of the
investment. The need of the study is to have an investment and portfolio combination which
will effectively and efficiently manage the investment of the investors for a better return and
lower risk. The main objective of investment portfolio management is to maximize the
returns from the investment and to minimize the risk involved in investment. Moreover, risk
in price or inflation erodes the value of money and hence investment must provide a
protection against inflation. Portfolio management services helps investors to make a wise
choice between alternative investment with pit any post trading hassles this service renders
optimum returns by proper selection of continues change of one plan to another plane with
the same scheme, any portfolio management must specify the objectives like maximum
returns, and risk capital appreciation, safety etc. in their offer.

RESEARCH DESIGN: Exploratory

DATA COLLECTION
Stock Selection criteria: In this project I have taken stocks from five different sectors that
are IT, Steel, Telecom, Banking and Pharmaceuticals.

Individual Stock Analysis

The First important step is the analysis of Individual stocks wherein I have taken into
account five different stocks from five different industries
66

My focus in this part of the analysis was not just on the stocks of a particular sector
but rather it was also on the optimum diversification of my Portfolio so that in any

market conditions my Portfolio would give good returns.

In order to analyze the effect of diversification of my portfolio I have collected daily
closing prices of the shares of the following five industries for a period ranging from
1st July to 31st July.

SECTOR
Heavy Electricals

COMPANY
BHEL

Banking

ICICI Bank

Pharmaceuticals

Sun Pharma

Telecom

Bharti Airtel

IT

Wipro

MEASURES OF ANALYSIS
CALCULATION OF BETA & STANDARD DEVIATION OF INDIVIDUAL STOCKS:
The beta is a measure of a stocks price volatility in relation to the rest of the market. In other
words it explains how does the stocks price move relative to the overall market.

67

The number is calculated using regression analysis. The whole market, which for this purpose
is considered the NIFTY 50, is assigned a beta of 1. There is no single index used to calculate
beta, although the NIFTY 50 is probably the most common proxy for the market as a whole.

Stocks that have a beta greater than 1 have greater price volatility than the overall
market and are more risky.

Stocks with a beta of 1 fluctuate in price at the same rate as the market.

Stocks with a beta of less than 1 have less price volatility than the market and are less
risky.

The beta of a portfolio is the weighted sum of the individual asset betas, according to the
proportions of the investments in the portfolio.
Portfolio beta describes relative volatility of an individual securities portfolio, taken as a
whole, as measured by the individual stock betas of the securities making it up.
Standard deviation is a statistical measurement that sheds light on historical volatility. For
example, a volatile stock will have a high standard deviation while the deviation of a stable
blue chip stock will be lower. A large dispersion tells us how much the return on the fund is
deviating from the expected normal returns.

68

CHAPTER-7
DATA ANALYSIS OF A PORTFOLIO
USING VARIOUS MODELS

69

STOCK 1: Bharat Heavy Electricals Limited

70

71

Stock2: ICICI BANK

72

73

Stock

3:

SUN PHARMA

74

75

Stock4: BHARTI AIRTEL

76

77

78

Stock5: WIPRO

79

80

BETA OF THE PORTFOLIO

81

EXPECTED RETURN USING CAPM MODEL

No matter how much we diversify our investments, its impossible to get rid of all the risk. As
investors, we deserve a rate of return that compensates us for taking on risk.
The capital asset pricing model (CAPM) helps us to calculate investment risk and what return
on investment we should expect.
Risk free rate - Generally, return on government bonds, interest rates on fixed deposits for one
year, 365-day T-Bills, and so on serve as a good proxy for the risk free rate prevailing in the
market.
For the purpose of computation in the present study, risk-free rate was used as on 31 July 2014,
which was recorded as 8.72%
Market rate of return - Arithmetic mean of BSE SENSEX market return is considered for 10
years based on market economic situation after 1991.

82

APPLYING CAPM MODEL FORMULAE TO THE PORTFOLIO

WEIGHTED EXPECTED RATE OF RETURN USING CAPM=13.22

83

COVARIANCE

AND

CORRELATION

BETWEEN

DIFFERENT

STOCKS
Covariance calculations can give an investor insight into how two stocks might move together
in the future. Looking at historical prices, we can determine if the prices tend to move with
each other or opposite each other. This allows us to predict the potential price movement of a
two-stock portfolio.
Covariance measures how two variables move together. It measures whether the two move in
the same direction (a positive covariance) or in opposite directions (a negative covariance).
In the stock market, a strong emphasis is placed on reducing the risk amount taken on for the
same amount of return. When constructing a portfolio, an analyst will select stocks that will
work well together. This usually means that these stocks do not move in the same direction.
Covariance can tell how the stocks move together, but to determine the strength of the
relationship, we need to look at the correlation.
While both measures reveal whether two variables are positively or inversely related, the
correlation provides additional information by telling you the degree to which both variables
move together.
The correlation will always have a measurement value between -1 and 1, and adds a strength
value on how the stocks move together.

If the correlation is 1, they move perfectly together, and

If the correlation is -1, the stocks move perfectly in opposite directions.
If the correlation is 0, then the two stocks move in random directions from each
other.

84

85

SHARPE RATIO

The Sharpe ratio tells us whether a portfolio's returns are due to smart investment decisions or a
result of excess risk. 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. A negative
Sharpe ratio indicates that a risk-less asset would perform better than the security being
analyzed.
The ex-ante Sharpe ratio formula is:

Expected portfolio return = 13.22

Risk free rate = 8.72%
Portfolio Standard Deviation = 4.363
Portfolio Sharpe Ratio = (Expected market return risk free rate)/portfolio standard deviation
= (13.22-8.72)/4.363
= 4.5/4.363
= 1.031
My Portfolios Sharpe Ratio = 1.031

86

ANALYSIS OF THE PORTFOLIO

COMPANY NAME

BETA

STD DEVIATION

BHEL

0.776

14.59

ICICI Bank

1.782

9.11

Sun Pharma

-0.171

5.8

Bharti Airtel

-0.243

8.2

Wipro

-0.155

8.52

Portfolio Beta = 0.3978

Standard deviation of portfolio= 4.363
Weighted average standard deviation= 9.244
Reduction of risk = (9.244-4.363) = 4.881
Weighted expected return using CAPM Model= 13.22
Portfolios Sharpe Ratio = 1.031

COVARIANCE & CORRELATION

COMPANY

COVARIANCE

CORRELATION

BHEL/ICICI

1.929

0.335

BHEL/Sun Pharma

1.138

0.310

BHEL/AIRTEL

0.678

0.131

BHEL/ WIPRO

0.538

0.100

ICICI/Sun Pharma

-0.644

-0.281

ICICI/AIRTEL

-0.065

-0.020

ICICI/ WIPRO

-0.059

-0.018

Sun Pharma/ AIRTEL

-0.517

-0.250

Sun Pharma/ WIPRO

-0.307

-0.143

AIRTEL / WIPRO

0.564

0.186

INTERPRETATION OF THE RESULTS

87

 Portfolio's beta gives a measure of its overall market risk. In my portfolio the overall
beta for the portfolio is 0.3978, which is less than the beta for individual securities.
Hence diversification reduces volatility, or systematic risk.
Portfolio standard deviation is the standard deviation of a portfolio of investments. It
is a measure of variability of the expected returns from a portfolio. Owing to the
diversification benefits; standard deviation of a portfolio of investments should be
lower than the weighted average of the standard deviations of the individual
investments.
In my Portfolio the portfolio standard deviation is 4.36%. The less than perfect
correlation has reduced the standard deviation from 9.24% to 4.36% which indicates a
reduction in risk: the benefit of diversification.
Weighted expected return using CAPM Model for my portfolio is 13.22. This shows
that by investing in this portfolio that I have created, an investor can expect a return of
13.22% which is quite good.
The Co variance and Correlation figures shown in the table above indicate that the
portfolio is well diversified as many stock pairs show negative and low degree of
correlation. This usually means that these stocks do not move in the same direction and
hence the portfolio is well diversified.
Portfolios Sharpe Ratio is 1.031 which means that the better is the risk-adjusted
performance of the portfolio.

88

LIMITATIONS

Portfolio management service is a huge business today. There is stiff competition which makes
89

it difficult for the investor to choose a good manager. However, this can be sorted out by taking
his previous history and performance into account. One limitation faced, is the authority given
to the manager to have control over your investments. When we ourselves, manage and trade,
it's a different scenario altogether. However, trusting a portfolio management advisor is
difficult and risky as well. There are many known cases of churning, where the consultant
shifts investment from one fund to another. Some investors restrict this practice by limiting the
commission to the consultant depending on his performance; however, if there is a loss, it
wouldn't matter much to them. All in all, the professional brokers are very efficient and the
process and detailing is strong, since the amount invested is big.

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CONCLUSIONS AND SUGGESTIONS

CONCLUSIONS
91

Diversification reduces volatility, or systematic risk.

Standard deviation of a portfolio of investments should be lower than the weighted

average of the standard deviations of the individual investments.

Diversification benefits in reduction in risk.

The more the Weighted expected return using CAPM Model, the better are the

results
If stocks do not move in the same direction then the portfolio is well diversified.
A Sharpe Ratio of 1 or better is considered good, 2 and better is very good, and 3 and
better is considered excellent.

SUGGESTIONS
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Start early: the younger you are, the less likely you are to have burdensome financial
obligations: a spouse, children and mortgage, for example. That means you can allocate
a small portion of your investment portfolio to higher risk investments, which may
return higher yields. If you start investing as early as possible, your stocks will have

more time to build value.

Diversify: Select stocks across a broad spectrum of market categories. This is best
achieved in an index fund. Invest in conservative stocks with regular dividends, stocks
with long-term growth potential, and a small percentage of stocks with better returns,
along with higher risk potential. If you're investing in individual stocks, don't put more
than 4% of your total portfolio into one stock. That way, if a stock or two suffers a
downturn, your portfolio won't be too adversely affected.

Keep Costs to a Minimum: Invest with a discount brokerage firm. Another reason to
consider index funds when beginning to invest is that they have low fees. Because
you'll be investing for the long-term, don't buy and sell regularly in response to market
ups and downs. This saves you commission expenses and management fees, and may
prevent cash losses when the price of your stock declines.

Discipline and Regular Investing: Make sure that you put money into your
investments on a regular, disciplined basis. This may not be possible if you lose your
job, but once you find new employment, continue to put money into your portfolio.

Asset Allocation and Re-Balance: Assign a certain percentage of your portfolio

to growth stocks dividend paying stocks, index funds and stocks with a higher risk, but
better returns.

Tax Considerations: You pay taxes on the amount of money withdrawn from a tax
deferred retirement account.

The Bottom Line: Disciplined, regular, diversified investment in a tax free and smart
portfolio management can build a significant nest egg for retirement. A portfolio with
tax liability, dividends and the sale of profitable stock can provide cash to supplement
employment or business income. Managing your assets by re-allocation and keeping
costs, such as commissions and management fees, low, can produce maximum returns.
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BIBLIOGRAPHY
NEWS PAPERS
The economic times
Business standard
Mint

WEBSITES
www.wikipedia.com
www.investopedia.com
www.moneycontrol.com
www.portfoliomanagment.com
www.managmentparadise.com
www.rbi.org
www.scribd.com
www.smctradeonline.com
www.nseindia.net

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Annexure
http://www.nseindia.com/products/content/equities/indices/cnx_nifty.html
http://www.stableinvestor.com/2012/10/huge-returns-given-by-nifty-50stocks.html
http://www.topstockresearch.com/HISTORY/INDIAN_STOCKS/CEMENT_
AND_CEMENT_PRODUCTS/ACC_LtdFiveYearChart.html#charts
http://en.wikipedia.org/wiki/CNX_Nifty
https://www.scribd.com/doc/56171089/A-Study-of-Best-Performing-Scriptsof-Nifty-in-Last-5-Year-in-Banking-Sector
http://www.nseindia.com/content/indices/ind_cnx_nifty.pdf
http://moneyexcel.com/8790/nifty-50-performance-last-15-years
http://www.moneycontrol.com/nifty/nse/nifty-live
http://www.moneyworks4me.com/best-index/nse-stocks/top-nifty50companies-list/page/3
http://www.motilaloswal.com/Broking/Markets/Index-Weightage
http://ournifty.com/nse-nifty-stocks-weight-how-to-use.html
http://ournifty.com/50-stocks-nse-nifty-index-list-along-their-short-termtrend.html

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