PORTFOLIO MANAGEMENT

•Collection of assets
•Need for portfolio management.
•Types of risk- systematic and unsystematic.
Steps in portfolio management
1. identification of objectives.
2. Portfolio strategy
3. Selection of asset mix
4. Portfolio execution.
5. Portfolio revision
6. Portfolio evaluation
PORTFOLIO ANALYSIS

TRADITIONAL APPROACH
Risk can be measured on each security through
standard deviation. And security having lowest
standard deviation must be selected.
MODERN APPROACH
Includes combination of securities to form a portfolio.
Relationship among different securities
COMBINATION OF 2 SECURITIES
Combination of 2 or more securities decreases the risk
of the investor.
Calculation of expected return of portfolio is done as
follows
risk of portfolio= wi x ri
wi= weights of funds employed in security i.
ri= expected return of security I
n= total numbr of securities.
Covariance

For knowing riskiness of each of the securities we need

covariance.
Cov(security x & y)= ( rx-Rx)(ry-Ry)/n
rx- return on security x
ry- return on security y
Rx- expected return on x
Ry- expected return on y
n- total numbr of securities.
If cov positive- rate of return of x& y move together
If cov negative- inverse movements.
If cov 0- securities are independent
CORRELATION COEFFICIENT

r(xy)= cov xy/ x y

r (xy)- correlation coefficient between x and y
x- standard deviation of X
y- standard deviation of Y
R (xy) varies from -1 to +1
Variance of portfolio
= 2 p= w2 x 2 x + w2 y 2 y+ 2 wx wy r(xy) x y
 expected return 
X 15% 50%
Y 20% 30%
sol.
Risk of portfolio= (.4 x .15)+ (.60 x .20)
= 18%
Variance of portfolio
= (.4)2 (50) 2 +(.6) 2 (30) 2 + 2x .4 x .6x 50x 30 x (-0.45)
= 400 +324 -324
= 400
p= 20
CASE STUDY OF WIPRO AND ITC

Calculated the return on portfolio of ITC and wipro.

AVERAGE RETURN OF WIPRO
Average Return = (R)/N
Average Return = 14.13/5 = 2.83
  Opening Closing
share price share price (P1-P0)/
  Year (P0) (P1) (P1-P0) P0*100
2002-
2003 1,700.60 1233.45 -467.15 -27.47
2003-
2004 1,233.45 1361.20 127.75 10.36
2004-
2005 1,361.20 2,012 650.8 47.87
2005-
2006 670.95 559.7 -111.25 -16.58
2006-
2007 559.70 559.40 -0.3 -0.05
 
TOTAL RETURN 14.13
 ITC LTD:

Opening Closing
share price share price (P1-P0)/
Year (P0) (P1) (P1-P0) P0*100
2002-2003 696.70 628.25 -68.45 -9.82
2003-2004 628.25 1043.10 414.85 66.03
2004-2005 1043.10 1342.05 298.95 28.66
2005-2006 1342.05 2932 1589.95 118.47
2006-2007 195.15 151.15 -44 -22.55
 
TOTAL RETURN 180.79

Average Return = 180.79/5 = 36.16

CALCULATION OF STANDARD DEVIATION:
 
WIPRO
Standard Deviation2 = Variance
Variance = 1/n (R-R)2

Year Return (R) Avg. Return (R) (R-R) (R-R)2

2002-2003 -27.47 2.83 -30.29 917
2003-2004 10.36 2.83 7.53 57
2004-2005 47.87 2.83 45.04 2029
2005-2006 -16.58 2.83 -19.41 377
2006-2007 -0.05 2.83 -2.88 8
  
TOTAL 3388

Variance = 677.6
Standard Deviation =26
ITC
Year Return (R) Avg. Return (R) (R-R) (R-R)2
2002-2003 -9.82 36.16 -45.98 2114.16
2003-2004 66.03 36.16 29.87 892.22
2003-2004 28.66 36.16 -7.5 56.25
2004-2005 118.47 36.16 82.31 6775
2005-2006 -22.55 36.16 -58.71 3447

  
TOTAL 13284

Variance = 1/n (R-R)2 = 1/5 (13284) = 2656.8

 Standard Deviation = Variance = 2656.8 = 51.54
CALCULATION OF CORRELATION :
 Covariance (COV ab) = 1/n (RA-RA)(RB-RB)
Correlation Coefficient = COV ab/a*b
 

YEAR (rA-RA) (rB-RB) (rA-RA) (rB-RB)

2002-2003 -16.024 -10.89 174.50
2002-2003 -26.574 -46.94 1,247.38
2003-2004 -3.684 -8.7 32.05
2004-2005 -34.724 -26.98 936.85
2005-2006 81.006 93.53 7,576.49
  
TOTAL 9,967.28

Covariance (COV ab) = 1/5-1 (9967.28) = 2491.82

 
Correlation Coefficient = COV ab/a*b
 a= 26 ;  b = 51.54
= 2491.82/(26) (51.54)
 = positively correlated
PORTFOLIO RISK
ITC (a) & WIPRO (b):
 
a = 51.54
b = 26.00
nab = 0.02
 Wa= 2/3
Wb= 1/3


RP 2 = (2/3)2(51.54)2+(1/3)2(26.00)2+2(51.54)(26.00)*(26.00)*(2/3)*(1/3)
 

= 1281

 
Wipro (a) & ITC (b):
 
sa = 33.09
sb = 56.09
Wa = 2/3
Wb= 1/3
Nab = 0.98
  

RP2 = (2/3)2(49.57)2+(1/3)2(0.51.54)2+2(49.57)(51.54)*(0.98)*(2/3)*(1/3)
 

= 2505
Rp= 50.04