Professional Documents
Culture Documents
on
A study on Portfolio Management
at
Angel Stock Broking Pvt Ltd .
Submitted in partial fulfillment of the
Requirements for the award of the Degree
of
MASTER OF BUSINESS ADMINISTRATION
Submitted By
Naresh
13BK1E00
CHAPTER I
INTRODUCTION
INTRODUCTION
PORTFOLIO MANAGEMENTINTRODUCTION
Stock exchange operations are peculiar in nature and most of the Investors
feel insecure in managing their investment on the stock market because it is difficult for an
individual to identify companies which have growth prospects for investment.
Further due to volatile nature of the markets, it requires constant reshuffling of portfolios
to capitalize on the growth opportunities. Even after ident ifyi ng the growth orien ted
companies and their securit ies, the tradi ng practices are also complicated,
making it a difficult task for investors to trade in all the exchange and follow up
on post trading formalities. Investors choose to hold groups of securities rather than single
security that offer the greater e x p e c t e d
returns.
They
believe
that
LITERATURE
REVIEW
REVIEW OF LITERATURE
PORTFOLIO:
A portfolio is a collection of securities since it is really desirable to invest the
entire funds of an individual or an institution or a single security, it is essential that every security
be viewed in a portfolio context. Thus it seems logical that the expected return of the portfolio.
Portfolio analysis considers the determine of future risk and return in holding various blends of
individual securities
Portfolio expected return is a weighted average of the expected return of the individual
securities but portfolio variance, in short contrast, can be something reduced portfolio risk is
because risk depends greatly on the co-variance among returns of individual securities.
Portfolios, which are combination of securities, may or may not take on the aggregate
characteristics of their individual parts. Since portfolios expected return is a weighted average of
the expected return of its securities, the contribution of each security the portfolios expected
returns depends on its expected returns and its proportionate share of the initial portfolios
market value. It follows that an investor who simply wants the greatest possible expected return
should hold one security; the one which is considered to have a greatest expected return. Very
few investors do this, and very few investment advisors would counsel such and extreme policy
instead, investors should diversify, meaning that their portfolio should include more than one
security.
OBJECTIVES OF PORTFOLIOMANAGEMENT:
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.
Secondary objectives:
Return From the angle of securities can be fixed income securities such as:
(a) Debentures partly convertibles and non-convertibles debentures debt with tradable Warrants.
(b) Preference shares
(c) Government securities and bonds
(d) Other debt instruments
(2) Variable income securities
(a) Equity shares
(b) Money market securities like treasury bills commercial papers etc.
The typical objectives sought by investors are current income, capital appreciation,
and safety of principle. The relative importance of these objectives should be specified further
the constraints arising from liquidity, time horizon, tax and special circumstances must be
identified.
2) choice of the asset mix :
The most important decision in portfolio management is the asset mix decision very broadly;
this is concerned with the proportions of stocks (equity shares and units/shares of equityoriented mutual funds) and bonds in the portfolio.
The appropriate stock-bond mix depends mainly on the risk tolerance and investment
horizon of the investor.
Risk:
Risk is uncertainty of the income /capital appreciation or loss or both. All investments are
risky. The higher the risk taken, the higher is the return. But proper management of risk involves
the right choice of investments whose risks are compensating. The total risks of two companies
may be different and even lower than the risk of a group of two companies if their companies are
offset by each other.
The unsystematic risks are mismanagement, increasing inventory, wrong financial policy,
defective marketing etc. this is diversifiable or avoidable because it is possible to eliminate or
diversify away this component of risk to a considerable extent by investing in a large portfolio of
securities. The unsystematic risk stems from inefficiency magnitude of those factors different
form one company to another.
RETURNS ON PORTFOLIO:
Each security in a portfolio contributes return in the proportion of its investments in
security. Thus the portfolio expected return is the weighted average of the expected return, from
each of the securities, with weights representing the proportions share of the security in the total
investment. Why does an investor have so many securities in his portfolio? If the security ABC
gives the maximum return why not he invests in that security all his funds and thus maximize
return? The answer to this questions lie in the investors perception of risk attached to
investments, his objectives of income, safety, appreciation, liquidity and hedge against loss of
value of money etc. this pattern of investment in different asset categories, types of investment,
etc., would all be described under the caption of diversification, which aims at the reduction or
even elimination of non-systematic risks and achieve the specific objectives of investors
RISK ON PORTFOLIO :
The expected returns from individual securities carry some degree of risk. Risk on the
portfolio is different from the risk on individual securities. The risk is reflected in the variability
of the returns from zero to infinity. Risk of the individual assets or a portfolio is measured by the
variance of its return. The expected return depends on the probability of the returns and their
weighted contribution to the risk of the portfolio. These are two measures of risk in this context
one is the absolute deviation and other standard deviation. Most investors invest in a portfolio of
assets, because as to spread risk by not putting all eggs in one basket. Hence, what really matters
to them is not the risk and return of stocks in isolation, but the risk and return of the portfolio as a
whole. Risk is mainly reduced by Diversification.
Normally, the higher the risk that the investor takes, the higher is the return. There
is, how ever, a risk less return on capital of about 12% which is the bank, rate charged by the
R.B.I or long term, yielded on government securities at around 13% to 14%. This risk less return
refers to lack of variability of return and no uncertainty in the repayment or capital. But other
risks such as loss of liquidity due to parting with money etc., may however remain, but are
rewarded by the total return on the capital. Risk-return is subject to variation and the objectives
of the portfolio manager are to reduce that variability and thus reduce the risky by choosing an
appropriate portfolio.
is according to the modern approach diversification should not be quantity that should be related
to the quality of scripts which leads to quality of portfolio.Experience has shown that beyond the
certain securities by adding more securities expensive.
Simple diversification reduces:
An assets total risk can be divided into systematic plus unsystematic risk, as shown below:
Systematic risk (undiversifiable risk) + unsystematic risk (diversified risk) =Total risk =Var
(r).
Unsystematic risk is that portion of the risk that is unique to the firm (for example, risk due to
strikes and management errors.) Unsystematic risk can be reduced to zero by simple
diversification.
Simple diversification is the random selection of securities that are to be added to a
portfolio. As the number of randomly selected securities added to a portfolio is increased, the
level of unsystematic risk approaches zero. However market related systematic risk cannot be
reduced by simple diversification. This risk is common to all securities.
2. equity stock analysis: under this method the probable future value of a share of a
company is determined it can be done by ratios of earning per share of the company and
price earning ratio
EPS ==
MARKET PRICE
E.P.S (earnings per share)
One can estimate trend of earning by EPS, which reflects trends of earning quality of company,
dividend policy, and quality of management.
Price earning ratio indicate a confidence of market about the company future, a high rating is
preferable
INVESTMENT DECISIONS
Definition of investment:
According to F. AMLING Investment may be defined as the purchase by an individual or
an Institutional investor of a financial or real asset that produces a return proportional to the risk
assumed over some future investment period. According to D.E. Fisher and R.J. Jordon, Investment
is a commitment of funds made in the expectation of some positive rate of return. If the investment
is properly undertaken, the return will be commensurate with the risk of the investor assumes.
Concept of Investment:
investment is the allocation of monetary resources to assets that are expected to yield some gain or
positive return over a given period of time. Investment is a commitment of a persons funds to derive
future income in the form of interest, dividends, rent, premiums, pension benefits or the appreciation
of the value of his principal capital.
Many types of investment media or channels for making investments are available.
Securities ranging from risk free instruments to highly speculative shares and debentures are
available for alternative investments.
All investments are risky, as the investor parts with his money. An efficient investor with
proper training can reduce the risk and maximize returns. He can avoid pitfalls and protect his
interest.
There are different methods of classifying the investment avenues. A major classification
is physical Investments and Financial Investments. They are physical, if savings are used to acquire
physical assets, useful for consumption or production.
tractors or harvesters are useful in agricultural production. A few useful physical assets like cars,
jeeps etc., are useful in business.
Many items of physical assets are not useful for further production or goods or create income
as in the case of consumer durables, gold, silver etc. among different types of investment, some are
marketable and transferable and others are not. Examples of marketable assets are shares and
debentures of public limited companies, particularly the listed companies on Stock Exchange, Bonds
of P.S.U., Government securities etc. non-marketable securities or investments in bank deposits,
provident fund and pension funds, insurance certificates, post office deposits, national savings
certificate, company deposits, private limited companies shares etc.
asset allows a determination of the relative attractiveness of the asset. Each asset must be value on its
individual merit.
Requirement of portfolio:
1. Maintain adequate diversification when relative values of various securities in the portfolio
change.
2. Incorporate new information relevant for return investment.
3. Expand or contrast the size of portfolio to absorb funds or with draw funds.
4.Reflect changes in investor risk disposition.
.Qualitiles For successful Investing:
Contrary thinking
Patience
Composure
Flexibility
Openness
The former theory implies that a consumer is capable of assigning to every commodity or
combination of commodities a number representing the amount of degree of utility associated
with it. Were as the latter theory, implies that a consumer needs not be liable to assign numbers
that represents the degree or amount of utility associated with commodity or combination of
commodity. The consumer can only rank and order the amount or degree of utility associated
with commodity.
In an uncertain environment it becomes necessary to ascertain how different individual
will react to risky situation. The risk is defined as a probability of success or failure or risk could
be described as variability of out comes, payoffs or returns. This implies that there is a
distribution of outcomes associated with each investment decision. Therefore we can say that
there is a relationship between the expected utility and risk. Expected utility with a particular
portfolio return. This numerical value is calculated by taking a weighted average of the utilities
of the various possible returns. The weights are the probabilities of occurrence associated with
each of the possible returns.
MARKOWITZ MODEL
THE MEAN-VARIENCE CRITERION
Dr. Harry M.Markowitz is credited with developing the first modern portfolio
analysis in order to arrange for the optimum allocation of assets with in portfolio. To reach this
objective, Markowitz generated portfolios within a reward risk context. In essence, Markowitzs
model is a theoretical framework for the analysis of risk return choices. Decisions are based on
the concept of efficient portfolios.
A portfolio is efficient when it is expected to yield the highest return for the level of risk
accepted or, alternatively, the smallest portfolio risk for a specified level of expected return. To
build an efficient portfolio an expected return level is chosen, and assets are substituted until the
portfolio combination with the smallest variance at the return level is found. At this process is
repeated for expected returns, set of efficient portfolio is generated.
ASSUMPTIONS:
1. Investors consider each investment alternative as being represented by a probability
distribution of expected returns over some holding period.
2. Investors maximize one period-expected utility and posses utility curve, which
demonstrates diminishing marginal utility of wealth.
3. Individuals estimate risk on the risk on the basis of the variability of expected returns.
4. Investors base decisions solely on expected return and variance or returns only.
5. For a given risk level, investors prefer high returns to lower return similarly for a given
level of expected return, Investors prefer risk to more risk.
Under these assumptions, a single asset or portfolio of assets is considered to
be efficient if no other asset or portfolio of assets offers higher expected return with the same
risk or lower risk with the same expected return.
THE SPECIFIC MODEL
In developing his model, Morkowitz first disposed of the investment behavior rule
that the investor should maximize expected return. This rule implies that the non-diversified
single security portfolio with the highest return is the most desirable portfolio. Only by buying
that single security can expected return be maximized. The single-security portfolio would
obviously be preferable if the investor were perfectly certain that this highest expected return
would turn out be the actual return. However, under real world conditions of uncertainty, most
risk adverse investors join with Markowitz in discarding the role of calling for maximizing
expected returns. As an alternative, Markowitz offers the expected returns/variance of returns
rule.
Markowitz has shown the effect of diversification by reading the risk of securities.
According to him, the security with covariance which is either negative or low amongst them is
the best manner to reduce risk. Markowitz has been able to show that securities which have less
than positive correlation will reduce risk without, in any way bringing the return down.
According to his research study a low correlation level between securities in the portfolio will
show less risk. According to him, investing in a large number of securities is not the right method
of investment. It is the right kind of security which brings the maximum result.
For implementing the study,8 securitys or scripts constituting the Sensex market are
selected of one month closing share movement price data from Economic Times and financial
express from Jan 3rd to 31st Jan 2009.
In order to know how the risk of the stock or script, we use the formula, which is given
below:
-----------Standard deviation =
variance
n
Variance
= (1/n-1) (R-R) ^2
t =1
---------------------
(Std. A) (Std. B)
Where
___________________________________
p= X1^21^2+X2^22^2+2(X1)(X2)(X12)1
Where
X1=proportion of investment in security 1.
X2=proportion of investment in security 2.
1= standard deviation of security 1.
2= standard deviation of security 2.
X12=correlation co-efficient between security 1&2.
RESEARCH GAP
Portfolio management or investment helps investors in effective and efficient management of
their investment to achieve this goal. The rapid growth of capital markets in India has opened up
new investment avenues for investors.
The stock markets have become attractive investment options for the common man.But the need
is to be able to effectively and efficiently manage investments in order to keep maximum returns
with minimum risk.
Hence this study on PORTFOLIO MANAGEMENT to examine the role process and merits
of effective investment management and decision.
OBJECTIVES:
HYPOTHESIS
HYPOTHESIS - 1
H0 : - There is no impact of dividends on the investments of the investors
H1:- There is an impact of Dividends on the investment of the investors
HYPOTHESIS - 2
H0 : - There is no affect of the construction of the portfolio while investing in any securities
H1:- There is affect of the construction of the portfolio while investing in any securities
HYPOTHESIS - 3
H0 : - There is no impact of risk and return analysis of the securities in the portfolio
H1:- There is an impact of risk and return analysis of the securities in the portfolio
HYPOTHESIS - 4
H0 : - Ascertaining the portfolio weight may not have good results in the portfolio selected
H1 : - Ascertaining the portfolio weight may have good results in the portfolio selected
HYPOTHESIS - 5
H0 : - The covariance of the selected scrips may mot influence the selected portfolio
H1 : - The covariance of the selected scrips may influence the selected portfolio
METHODOLOGY:
Primary source
The analysis is totally on the historical data so there is no primary data for this study
Secondary source
Daily prices of scripts from news papers, websites and some information from textbooks
SCOPE
Duration Period 45days
Sample size : 5 years
To ascertain risk, return and weights.