ABSTRACT

The finance industry has had an enviable contribution to the whole Global Business
Market. For every type of Business we need many resources which are useful for the
development of Business. Finance is one of the most important resources to start a business or to
develop a Business. So, the first and foremost important resource is finance to start and to face
the competition in the Business Market.

In this competitive world every individual needs money to run to lead his life
successfully. So, he follows different techniques to save his income in order to face future risks
and uncertainties.

Investing in securities is one of the ways where an individual mostly like to adopt as
a source of income, because securities are those which may give him more returns and they are
also more risky.

Keeping in mind all the above this project work done for INDIABULLS, to know the
market position and a keen study is done on securities by taking 6 sectors with six companies
with their annual returns and companies information which is required is collected from their
company sites and magazines and successfully completed
ANALYSIS & PORTFOLIO MANAGEMENT.

the project titled SECURITY

TABLE OF CONTENTS
Contents

Page numbers

List of tables

List of graphs

iii

Chapter 1
1.1 Introduction

1.2 Need for the study

1.3 Objectives of study

1.4 Scope

1.5 Methodology

1.6 Limitations

Chapter 2
Review of literature

Chapter 3
Company profile

41

Chapter 4
Data analysis

45

Chapter 5
5.1 Findings

70

5.2 Conclusions

71

5.3 Suggestions

73

Bibliography

74

List of tables
TABLE

PARTICULARS

PAGE NO.

4.1

CALCULATION OF RETURN OF ICICI

45

4.2

CALCULATION OF RETURN OF HDFC

46

4.3

CALCULATION OF RETURN OF ITC

47

4.4

CALCULATION OF RETURN OF COLGATE & PALMOLIVE

4.5

CALCULATION OF RETURN OF CIPLA

4.6

CALCULATION OF RETURN OF RANBAXY

50

4.7

CALCULATION OF STANDARD DEVIATION OF ICICI

51

4.8

CALCULATION OF STANDARD DEVIATION OF HDFC

52

4.9

CALCULATION OF STANDARD DEVIATION OF ITC

53

4.10

CALCULATION OF STANDARD DEVIATION OF

COLGATE&PALMOLIVE

54

4.11

CALCULATION OF STANDARD DEVIATION OF CIPLA

55

4.12

CALCULATION OF STANDARD DEVIATION OF RANBAXY

56

4.13

CORRELATION BETWEEN HDFC & ICICI

57

48

49

4.14

58
CORRELATION BETWEEN ITC & COLGATE&PALMOLIVE

4.15

CORRELATION BETWEEN CIPLA & RANBAXY

59

4.16

CORRELATION BETWEEN CIPLA& HDFC

60

4.17

STANDARD DEVIATION

61

i
4.18

AVERAGE

62

4.19

CORRELATION COEFFICIENT

63

4.20

PORTFOLIO WEIGHTS

67

4.21

PORTFOLIO RETURN RP

68

4.22

PORTFOLIO RISK

69

ii
LIST OF GRAPHS

GRAPH

PARTICULARS

PAGE No.

4.1
4.2
4.3
4.4

STANDARD DEVIATION
AVERAGE
PORTFOLIO RETURN
PORTFOLIO RISK

iii

61
62
68
69

CHAPTER-1
INTRODUCTION

1.1 INTRODUCTION
Portfolio management and investment decision as a concept came to be
familiar with the conclusion of second world war when thing can be in the stock market can be
liberally ruined the fortune of individual, companies ,even government s it was then discovered
that the investing in various scripts instead of putting all the money in a single securities yielded
weather return with low risk percentage, it goes to the credit of HARY MERKOWITZ, 1991
noble laurelled to have pioneered the concept of combining high yielded securities with these
low but steady yielding securities to achieve optimum correlation coefficient of shares.

Portfolio management refers to the management of portfolios for others by professional

investment managers it refers to the management of an individual investors portfolio by
professionally qualified person ranging from merchant banker to specified portfolio company.

Definition by SEBI
A portfolio management is the total holdings of securities belonging to any person.
Portfolio is a combination of securities that have returns and risk characteristics of their own;
port folio may not take on the aggregate characteristics of their individual parts.
Thus a portfolio is a combination of various assets and /or instruments of
investments. Combination may have different features of risk and return separate from those of
the components. The portfolio is also built up of the wealth or income of the investor over a
period of time with a view to suit is return or risk preference to that of the portfolio that he holds.
The portfolio analysis is thus an analysis is thus an analysis of risk return characteristics of
individual securities in the portfolio and changes that may take place in combination with other
securities due interaction among them and impact of each on others. Security analysis is only a
tool for efficient portfolio management; both of them together and cannot be dissociated.
Portfolios are combination of assets held by the investors.
These combination may be various assets classed like equity and debt or of different issues
like Govt. bonds and corporate debts are of various instruments like discount bonds, debentures
and blue chip equity nor scripts of emerging Blue chip companies.
Portfolio analysis includes portfolio construction, selection of securities revision of
portfolio evaluation and monitoring of the performance of the portfolio. All these are part of the
portfolio management.

The traditional portfolio theory aims at the selection of such securities that would fit in
will with the asset preferences, needs and choices of the investors. Thus, retired executive invests
in fixed income securities for a regular and fixed return. A business executive or a

young

aggressive investor on the other hand invests in and rowing companies and in risky ventures.
The modern portfolio theory postulates that maximization of returns and minimization of
risk will yield optional returns and the choice and attitudes of investors are only a starting point
for investment decisions and that vigorous risk returns analysis is necessary for optimization of
returns. Portfolio analysis includes portfolio construction, selection of securities, and revision of
portfolio evaluation and monitoring of the performance of the portfolio. All these are part of the
portfolio management.
1.2 NEED OF STUDY

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 & investment decision to examine

the role process and merits of effective investment management and decision.

1.3 OBJECTIVES

To study the investment decision process.

To analysis the risk return characteristics of sample scripts.

Ascertain portfolio weights.

To construct an effective portfolio which offers the maximum return for minimum risk.

1.4 SCOPE

Sample size : 5 years

To ascertain risk, return and weights.

1.5 METHODOLOGY

Primary source

Information gathered from interacting with Mr.B.SATISH in the class room. And the
data from the textbooks and other magazines.

Secondary source

Daily prices of scripts from news papers

1.6 LIMITATIONs

Only six samples have been selected for constructing a portfolio.

Share prices of scripts of 5 years period was taken.

CHAPTER -2
REVIEW OF LITERATURE

A portfolio is a collection of investments held by an institution or a private individual. In

building up an investment portfolio a financial institution will typically conduct its own
investment analysis, whilst a private individual may make use of the services of a financial
advisor or a financial institution which offers portfolio management services. Holding a portfolio
is part of an investment and risk-limiting strategy called diversification. By owning several
assets, certain types of risk (in particular specific risk) can be reduced. The assets in the portfolio
could include stocks, bonds, options, warrants, gold certificates, real estate, futures contracts,
production facilities, or any other item that is expected to retain its value.
Portfolio management involves deciding what assets to include in the portfolio, given the
goals of the portfolio owner and changing economic conditions. Selection involves deciding

what assets to purchase, how many to purchase, when to purchase them, and what assets to
divest. These decisions always involve some sort of performance measurement, most typically
expected return on the portfolio, and the risk associated with this return (i.e. the standard
deviation of the return). Typically the expected returns from portfolios, comprised of different
asset bundles are compared.
The unique goals and circumstances of the investor must also be considered. Some investors are
more risk averse than others. Mutual funds have developed particular techniques to optimize
their portfolio holdings.

Thus, portfolio management is all about strengths, weaknesses, opportunities and threats in
the choice of debt vs. equity, domestic vs. international, growth vs. safety and numerous
other trade-offs encountered in the attempt to maximize return at a given appetite for risk.

Aspects of Portfolio Management

Basically portfolio management involves

A proper investment decision making of what to buy & sell

Proper money management in terms of investment in a basket of

assets so as to satisfy the asset preferences of investors.

Reduce the risk and increase returns.

ELEMENTS

Portfolio Management is an on-going process involving the following basic tasks.

Identification of the investors objective, constrains and preferences which

help formulated the invest policy.

Strategies are to be developed and implemented in tune with invest policy

formulated. This will help the selection of asset classes and securities in each class
depending upon their risk-return attributes.

Review and monitoring of the performance of the portfolio by continuous

overview of the market conditions, companys performance and investors circumstances.

Finally, the evaluation of portfolio for the results to compare with the

targets and needed adjustments have to be made in the portfolio to the emerging
conditions and to make up for any shortfalls in achievements (targets).

SCHEMATIC DIAGRAM OF STAGES IN PORTFOLIO MANAGEMENT

Specification and quantification of investor objectives, constraints, and preferences
Portfolio policies and strategies
Capital market expectations
Relevant economic, social, political sector and security considerations
Monitoring investor related input factors
Portfolio construction and revision asset allocation, portfolio optimization, security selection,
implementation and execution
Monitoring economic and market input factors
Attainment of investor objectives
Performance measurement

Process of portfolio management

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

1. IDENTIFY GOALS AND OBJECTIVES

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

2. DETERMINE OPTIMAL INVESTMENT MIX

Once the Investment Profile Questionnaire is completed, investors optimal investment

mix or asset allocation will be determined. An asset allocation represents the mix of
investments (cash, fixed income and equities) that match individual risk and return needs.
This step represents one of the most important decisions in your portfolio construction,
as asset allocation has been found to be the major determinant of long-term portfolio
performance.

3. CREATE A CUSTOMIZED INVESTMENT POLICY STATEMENT

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

4. SELECT INVESTMENTS

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

5. MONITOR PROGRESS

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

6. REASSESS NEEDS AND GOALS

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

RISK

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

loss of both. All investments are risky. The higher the risk taken, the higher is the return. But
proper management of risk involves the right choice of investments whose risks are
compensation.

RETURN

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

PORTFOLIO RISK

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

RETURN ON PORTFOLIO

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

RISK RETURN RELATIONSHIP

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

TYPES OF RISKS
Risk consists of two components. They are
1.

Systematic Risk

2.

Un-systematic Risk

1.SYSTEMATIC RISK

Systematic risk refers to that portion of total variability in return caused by factors affecting the
prices of all securities. Economic, Political and sociological changes are sources of systematic
risk. Their effect is to cause prices of nearly all individual common stocks and/or all individual
bonds to move together in the same manner.

i.

Market Risk

Variability in return on most common stocks that are due to basic sweeping changes in investor
expectations is referred to as market risk. Market risk is caused by investor reaction to tangible
as well as intangible events.

ii.

Interest rate-Risk

Interest rate risk refers to the uncertainty of future market values and of the size of future
income, caused by fluctuations in the general level of interest rates.

iii.

Purchasing-Power Risk

Purchasing power risk is the uncertainty of the purchasing power of the amounts to be received.
In more events everyday terms, purchasing power risk refers to the impact of or deflation on an
investment.

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

Unsystematic risk that portion of risk that is unique or peculiar to a firm or an industry, above
and beyond that affecting securities markets in general. Factors such as management capability,
consumer preferences, and labor strikes can cause unsystematic variability of return for a
companys stock.

Business Risk

i.

Business risk is a function of the operating conditions faced by a firm and the variability these
conditions inject into operating income and expected dividends.
Business risk can be divided into two broad categories
a.
b.

Internal Business Risk

External Business Risk

a. Internal business risk is associated with the operational efficiency of the firm. The
operational efficiency differs from company to company. The efficiency of operation is
reflected on the companys achievement of its pre-set goals and the fulfillment of the
promises to its investors.
b. External business risk is the result of operating conditions imposed on the firm by
circumstances beyond its control. The external environments in which it operates exert some
pressure on the firm. The external factors are social and regulatory factors, monetary and
fiscal policies of the government, business cycle and the general economic environment
within which a firm or an industry operates.

ii.

Financial Risk

Financial risk is associated with the way in which a company finances its activities. Financial
risk is avoided risk to the extent that management has the freedom to decide to borrow or not to
borrow funds. A firm with no debit financing has no financial risk

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

Return
Standard Deviation
Coefficient of correlation

Markowitz model is also called as a Full Covariance Model. Through this model the investor
can find out the efficient set of portfolio by finding out the trade off between risk and return,
between the limits of zero and infinity. According to this theory, the effect of one security
purchase over the effects of the other security purchase is taken into consideration and then the
results are evaluated. Markowitz had given up the single stock portfolio and introduced
diversification. The single stock portfolio would be preferable if the investor is perfectly certain
that his expectation of highest return would turn out to be real. In the world of uncertainty, most
of the risk averse investors would like to join Markowitz rather than keeping a single stock,
because diversification reduces the risk.
A portfolio is efficient when it is expected to yield the highest return for the level of risk

accepted or, alternatively the smallest portfolio risk for a specified level of expected return level
chosen, and asset are substituted until the portfolio combination expected returns, set of efficient
portfolio is generated.

Assumptions
The Markowitz model is based on several assumptions regarding investor behavior:

1.

Investors consider each investment alternative as being represented by a

probability distribution of expected returns over some holding period.

2.
Investors maximize one period-expected utility and possess utility curve,
which demonstrates diminishing marginal utility of wealth.
3.
Individuals estimate risk on the basis of variability of expected return.
4.
Investors base decisions solely on expected return and variance of return
only.
5.

For a given risk level, investors prefer high returns to lower returns.

Similarly for a given level of expected return, investors prefer less risk to more risk.

Under these assumptions, a single asset or portfolio of assets is considered to be efficient if no

other asset or portfolio of assets higher expected return with the same expected return.

THE SPECIFIC MODEL

In developing this model, Markowitz first disposed of the investor behavior rule that the
investor should maximize expected return. This rule implies non-diversified single security

analysis portfolio with the highest expected return is the most desirable portfolio. Only by
buying that single security portfolio would obviously be preferable if the investor were perfectly
certain that this highest expected return would turn out to 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 the expected returns. As an alternative, Markowitz
offers the expected returns/variance rule.

Markowitz has shown the effect of diversification by regarding the risk of securities. According
to him, the security with the 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 with out, 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 that brings the maximum results.

Henry Markowitz has given the following formula for a two-security portfolio and three
security portfolios.

= (x1)2 (1)2 + (X2)2 (2)2 + 2(X1)(X2)(r12)(1) (2)

= (x1)2(1)2+(X2)2(2)2 + (X3)2(3)2 +2(X1)(X2)(r12)(1) (2)+ 2(X1)(X3)(r13)(1)

(3)+ 2(X2)(X3)(r23)(2) (3)

p = Standard deviation of the portfolio return

X1= proportion of the portfolio invested in security 1

X2= proportion of the portfolio invested in security 2
X3= proportion of the portfolio invested in security 3
1= standard deviation of the return on security 1
2= standard deviation of the return on security 2
3= standard deviation of the return on security 3
r12= coefficient of correlation between the returns on securities 1 and 2
r13= coefficient of correlation between the returns on securities 1 and 3
r23= coefficient of correlation between the returns on securities 2 and 3

CAPITAL ASSET PRICING MODEL: (CAPM)

The CAPM is a model for pricing an individual security (asset) or a portfolio. For
individual security perspective, the security market line (SML) is used and its relation to
expected return and systematic risk (beta) to show how the market must price individual
securities in relation to their security risk class. The SML enables us to calculate the reward-torisk ratio for any security in relation to that of the overall market. Therefore, when the expected
rate of return for any security is deflated by its beta coefficient, the reward-to-risk ratio for any
individual security in the market is equal to the market reward-to-risk ratio, thus:

Individual securitys / beta =

Reward-to-risk ratio

Markets securities (portfolio)

Reward-to-risk ratio

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

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

Where:

is the expected return on the capital asset

is the risk-free rate of interest

(the beta coefficient) the sensitivity of the asset returns to market

returns, or also

,
is the expected return of the market

is sometimes known as the market premium or risk premium (the difference

between the expected market rate of return and the risk-free rate of return).
Beta measures the volatility of the security, relative to the asset class. The equation is saying that
investors require higher levels of expected returns to compensate them for higher expected risk.
We can think of the formula as predicting a security's behavior as a function of beta:
CAPM says that if we know a security's beta then we know the value of r that investors
expect it to have.

Assumptions of CAPM

All investors have rational expectations.

There are no arbitrage opportunities.
Returns are distributed normally.
Fixed quantity of assets.
Perfectly efficient capital markets.
Investors are solely concerned with level and uncertainty of future wealth
Separation of financial and production sectors. Thus, production plans are

Risk-free rates exist with limitless borrowing capacity and universal

The Risk-free borrowing and lending rates are equal.

No inflation and no change in the level of interest rate exists.
Perfect information, hence all investors have the same expectations about

fixed.
access.

security returns for any given time period.

Shortcomings Of CAPM

The model assumes that asset returns are (jointly) normally distributed

random variables. It is however frequently observed that returns in equity and other
markets are not normally distributed.

The model assumes that the variance of returns is an adequate

measurement of risk.

The model does not appear to adequately explain the variation in stock

returns.

The model assumes that given a certain expected return investors will

prefer lower risk (lower variance) to higher risk and conversely given a certain level of
risk will prefer higher returns to lower ones.

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

The model assumes that there are no taxes or transaction costs.

The market portfolio consists of all assets in all markets, where each asset

is weighted by its market capitalization. This assumes no preference between markets and
assets for individual investors, and that investors choose assets solely as a function of
their risk-return profile. It also assumes that all assets are infinitely divisible as to the
amount which may be held or transacted.

The market portfolio should in theory include all types of assets that are
held by anyone as an investment (including works of art, real estate, human capital...)
Unfortunately, it has been shown that this substitution is not
innocuous and can lead to false inferences as to the validity of the
CAPM, and it has been said that due to the in observability of the
true market portfolio, the CAPM might not be empirically testable.

The efficient frontier

The CAPM assumes that the risk-return profile of a portfolio can be optimized - an optimal
portfolio displays the lowest possible level of risk for its level of return. Additionally, since each
additional asset introduced into a portfolio further diversifies the portfolio, the optimal portfolio

must comprise every asset, with each asset value-weighted to achieve the above. All such
optimal portfolios, i.e., one for each level of return, comprise the efficient frontier.
A line created from the risk-reward graph, comprised of optimal
portfolios.

The optimal portfolios plotted along the curve have the highest
expected return possible for the given amount of risk.

Because the unsystemic risk is diversifiable, the total risk of a portfolio can be viewed as beta.

Note 1: The expected market rate of return is usually measured by looking at the arithmetic
average of the historical returns on a market portfolio.
Note 2: The risk free rate of return used for determining the risk premium is usually the
arithmetic average of historical risk free rates of return and not the current risk free rate of
return.
Measuring

the

Expected

Return

and

Standard

Deviation

of

Portfolio

The expected return on a portfolio is the weighted average of the returns of individual assets,
where each asset's weight is determined by its weight in the portfolio.
The formula is:
E (Rp) = [WaX E (Ra)] + [WaX E (Ra)]

Where

E= is stands for expected

Rp= Return on the portfolio
Wa= Weight of asset n where n my stand for asset a, betc.
Ra= Return on asset n where n may stand for asset a, betc

The portfolio standard deviation ( p) measure the risk associated with the expected return of the
portfolio.
The formula is p = wa2 2 + wa2 2 + 2wawbrab a b

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

Portfolio diversification
Diversification

occurs

when

different

assets

make

up

portfolio.

The benefit of diversification is risk reduction; the extent of this benefit depends upon how the
returns of various assets behave over time. The market rewards diversification. We can lower risk
without sacrificing expected return, and/or we can increase expected return without having to
assume more risk. Diversifying among different kinds of assets is called asset allocation.
The diversification can either be vertical or horizontal.
In vertical diversification a portfolio can have scripts of different companies within the same
industry. In horizontal diversification one can have different scripts chosen from different
industries.

An important way to reduce the risk of investing is to diversify your investments.

Diversification is akin to "not putting all your eggs in one basket."
For example: If portfolio only consisted of stocks of technology companies, it would likely face
a substantial loss in value if a major event adversely affected the technology industry.
There are different ways to diversify a portfolio whose holdings are concentrated in one industry.
We can invest in the stocks of companies belonging to other industry groups. We can allocate our
portfolio among different categories of stocks, such as growth, value, or income stocks. We can
include bonds and cash investments in our asset-allocation decisions. We can also diversify by
investing

in

foreign

stocks

and

bonds.

Diversification requires us to invest in securities whose investment returns do not move

together. In other words, the investment returns have a low correlation. The correlation
coefficient is used to measure the degree to which returns of two securities are related. As we
increase the number of securities in our portfolio, we reach a point where likely diversified as
much as reasonably possible. Diversification should neither be too much or too less. It should be
adequate according to the size of the portfolio.

The Efficient Frontier and Portfolio Diversification

The graph on the shows how volatility increases the risk of loss of principal, and how this risk
worsens as the time horizon shrinks. So all other things being equal, volatility is minimized in
the portfolio.
If we graph the return rates and standard deviations for a collection of securities, and for all
portfolios we can get by allocating among them. Markowitz showed that we get a region
bounded by an upward-sloping curve, which he called the efficient frontier.
It's clear that for any given value of standard deviation, we would like to choose a portfolio that
gives you the greatest possible rate of return; so we always want a portfolio that lies up along the
efficient frontier, rather than lower down, in the interior of the region. This is the first important
property of the efficient frontier: it's where the best portfolios are.

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

THE FOUR PILLARS OF DIVERSIFICATION

a.

The yield provided by an investment in a portfolio of assets will be closer

to the Mean Yield than an investment in a single asset.

b.
When the yields are independent - most yields will be concentrated around
the Mean.
c.

When all yields react similarly - the portfolio's variance will equal the

variance of its underlying assets.

d.
If the yields are dependent - the portfolio's variance will be equal to or less

than the lowest

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

PORTFOLIO PERFORMANCE EVALUATION

A Portfolio manager evaluates his portfolio performance and identifies the sources of strengths

and weakness. The evaluation of the portfolio provides a feed back about the performance to
evolve better management strategy. Even though evaluation of portfolio performance is
considered to be the last stage of investment process, it is a continuous process. There are
number of situations in which an evaluation becomes necessary and important.

Evaluation has to take into account:

Rate of returns, or excess return over risk free rate.

Level of risk both systematic (beta) and unsystematic and residual risks

through proper diversification.

Some of the models used to evaluate portfolio performance are:

Sharpes ratio
Treynors ratio
Jensens alpha

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

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

Treynors ratio
The Treynor ratio is a measurement of the returns earned in excess of that which could have
been earned on a risk less investment.
The Treynor ratio is also called reward-to-volatility ratio. It relates excess return over the riskfree rate to the additional risk taken; however systematic risk instead of total risk is used. The
higher the Treynor ratio, the better is the performance under analysis.
Treynors ratio = (Average Return of the Portfolio - Average Return of the Risk-Free Rate) / Beta
of the Portfolio
Like the Sharpe ratio, the Treynor ratio (T) does not quantify the value added, if any, of active
portfolio management. It is a ranking criterion only. A ranking of portfolios based on the Treynor
Ratio is only useful if the portfolios under consideration are sub-portfolios of a broader, fully
diversified portfolio. If this is not the case, portfolios with identical systematic risk, but different
total risk, will be rated the same.

Jensens alpha
An alternative method of ranking portfolio management is Jensen's alpha, which quantifies the
added return as the excess return above the security market line in the capital asset pricing
model. Jensen's alpha (or Jensen's Performance Index) is used to determine the excess return of a
stock, other security, or portfolio over the security's required rate of return as determined by the
Capital Asset Pricing Model. This model is used to adjust for the level of beta risk, so that riskier
securities are expected to have higher returns. The measure was first used in the evaluation of
mutual fund managers by Michael Jensen in the 1970's.
To calculate alpha, the following inputs are needed:

The realized return (on the portfolio),

The market return,

The risk-free rate of return, and

The beta of the portfolio.

Rjt - Rft = j + j (RMt - Rft)

Where

Rjt = average return on portfolio j for period oft

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

Portfolio management in India:

In India, portfolio management is still in its infancy. Barring a few Indian banks, and foreign
banks and UTI, no other agency had professional portfolio managementuntil1987. After the
setting up of public sector Mutual Funds, since 1987, professional portfolio management, backed
by competent research staff became the order of the day. After the success of mutual funds in
portfolio management, a number of brokers and investment consultants some of whom are also
professionally qualified have become portfolio managers. They have managed the funds of
clients on both discretionary and non-discretionary basis.

The recent CBI probe into the operations of many market dealers has revealed the unscrupulous
practices by banks, dealers and brokers in their portfolio operations. The SEBI has then imposed
stricter rules, which included their registration, a code of conduct and minimum infrastructure,
experience and expertise etc.
The guidelines of SEBI are in the direction of making portfolio management a responsible
professional service to be rendered by experts in the field.

PORTFOLIO ANALYSIS
Portfolio analysis includes portfolio construction, selection of securities,
revision of portfolio evaluation and monitoring the performance of the portfolio. All these are
part of subject of portfolio management which is a dynamic concept. Individual securities have
risk-return characteristics of their own. Portfolios, which are combinations of securities may or

may not take on the aggregate characteristics of their individuals parts.

Portfolio analysis considers the determination of future risk and return in holding various
blends of individual securities. As we know that expected return from individual securities
carries some degree of risk. Various groups of securities when held together behave in a different
manner and give interest payments and dividends also, which are different to the analysis of
individual securities. A combination of securities held together will give a beneficial result if
they are grouped in a manner to secure higher return after taking into consideration the risk
element.
There are two approaches in construction of the portfolio of securities. They are

Traditional approach

Modern approach

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

Determining the objectives of the portfolio

Selection of securities to be included in the portfolio

MODERN APPROACH
Modern approach theory was brought out by Markowitz and Sharpe. It is the combination
of securities to get the most efficient portfolio. Combination of securities can be made in many
ways. Markowitz developed the theory of diversification through scientific reasoning and
method. Modern portfolio theory believes in the maximization of return through a combination
of securities. The modern approach discusses the relationship between different securities and
then draws inter-relationships of risks between them. Markowitz gives more attention to the
process of selecting the portfolio. It does not deal with the individual needs.

CHAPTER-3
COMPANY PROFILE

COMPANY PROFILE

India Bulls Financial Services is one of Indias leading and fastest growing financial services
firms. It is a major player in the capital markets dealing with securities broking, margin lending,
depository services, equity research services, and commodities trading. It also provides credit
services like loan against shares, mortgage and consumer finance. It is constantly tapping new

business areas to drive growth.

India Bulls Financial Services Ltd. (IBFSL) established one of the first in-house developed
trading platforms in India. It expanded its service offerings to include Equity, F&O, wholesale
Debt, Mutual fund, IPO distribution and Equity Research. It ventured into Insurance distribution
and commodities trading. It has always focused on brand building and the franchise model for
expanding its business. It came out with its Initial Public Offer (IPO) in September 2004 and it
gradually emerged as a market leader in securities brokerage industry with 43% of online share
trading. In the financial year 2006-07 it was included in the prestigious Morgan Stanley Capital
International Index (MSCI).

India Bulls Financial Services Ltd has given us an opportunity to do an internship project for the
company. The goals of this project have been clearly defined. The various goals are as follows,

Client acquisition
Revenue generation
Mapping the Risk Profile of Clients
Coordination with the back office
Client servicing and Retention
Understanding the Media Sector
Studying the patterns of the derivatives market

Change is occurring at an accelerating rate; today is not like yesterday, and

tomorrow will be different from today. For Businesses, change is the only constant. Firms that do
not change and adjust themselves to the market trends will go out of business in no time.

Continuing todays strategy is risky; so is turning to a new strategy. Therefore, tomorrows

successful companies will have to heed three certainties:

Global forces will continue to affect everyones business and personal life.
Technology will continue to advance and amaze us.
There will be a continuing push toward deregulation of the economic sector.

These three developments globalization, technological advances, and deregulation spell endless
opportunities. Globalization is characterized by the increases in the flow of goods and services,
capital, technology and information, as well as the mobility of individuals across borders. In
simple terms it is the integration of one country with the rest of the world in all economic
spheres. The process of globalization can be seen in terms of trade in goods and services, trade in
finance and Foreign Direct Investment. Since 1990, Indias financial system has become more
exposed to the global bonding of the financial, IT and telecommunications industries whose
linkages keep widening, deepening and growing. Indias fitful, ambivalent attempts at
privatization and opening to private participation in the provision of infrastructure services have
also contributed to reciprocal intrusions with the global financial system impinging on Indias
capital markets and vice-versa. The dotcom and telecom bubbles have burst, but the financial
connections they created have remained intact. One outcome has been the creeping but relentless
internationalization of Indias financial system, regardless of domestic popular or political
preferences. The choice of a sheltered domestically protected alternative to a globally connected
financial system no longer exists.
India emerges from autarchic isolation into unwitting global prominence, its key systems
political, economic, social, financial, institutional and markets consumer, producer, commodity,

factor and financial are being exposed to the hot influences of globalization some subtle, others
quite rampantly in-your-face. Being perhaps the most tactile, open and nonphysical, Indias
financial system and market have felt the earliest and greatest pressure to accommodate and
adapt to globalization more quickly than other systems and markets.

BOARD OF DIRECTORS

1. Prof. P. V. Narasimham

Public Interest Director

2. Shri V. Shankar

Managing Director

3. Dr. S. D. Israni

Public Interest Director

4. Dr. M. Y. Khan

Public Interest Director

5. Mr. P. J. Mathew

Shareholder Director

6. M. C. Rodrigues

Shareholder Director

7. Mr. M. K. Ananda Kumar

Shareholder Director

8. Mr. T.N.T Nayar

Shareholder Director

9. Mr. K. D. Gupta

Shareholder Director

10. Mr. V. R. Bhaskar Reddy

Shareholder Director

11. Mr. Jambu Kumar Jain

Trading Member Director

CHAPTER-4
DATA ANALYSIS

DATA ANALYSIS
Calculation of return of ICICI
Year

Beginning
price(Rs)

Ending
price(Rs)

Dividend(Rs)

2005
2006
2007
2008
2009

141.45
297.90
375.00
587.70
892.00

295.45
371.35
585.05
891.5
1238.7

7.50
7.50
8.50
8.50
10.00

Table 4.1
Return = Dividend + (Ending Price-Beginning price) 100
Beginning Price

Return (2005) = 7.50+(295.45-141.45) * 100

141.45

= 114.17%

Return (2006) = 7.50+(371.35-297.90) * 100

297.90

= 27.17%

Return (2007) = 8.50+(585.05-375)

375

* 100

= 58.28%

Return (2008) = 8.50+(891.5-587.70) * 100

587.70

= 53.13%

Return (2009) = 10.00+(1238.7-892) * 100

892

= 39.98%

Calculation of return of HDFC

Year
2005
2006
2007
2008
2009

Beginning
Price
358.5
645.9
771
1195
1630

Ending price

Dividend

645.55
769.05
1207
1626.9
2877.75

3
3.50
4.50
5.50
7.00

Table 4.2

Return

Dividend + (Ending Price-Beginning price) 100

Beginning Price

Return (2005)

3+(645.55-358.5)
358.5

* 100

= 80.9%

Return (2006)

3.50 + (769.05-645.9) * 100

645.9

= 19.60%

Return (2007)

4.50+(1207-771)
771

= 57.13%

Return (2008)

5.00+(1626.9-1195) * 100
1195.9

Return (2009)

7.00+(2877.75-1630) * 100
1630

= 76.97%

* 100

36.6%

Calculation of return of ITC

Year

Beginning
price(Rs)

Ending
price(Rs)

Dividend(Rs)

2006
2007
2008
2009
2010

667
990
1318.95
142
176.5

983.5
1310.75
142.1
176.1
209.45

15
20
31.80
2.65
3.10

Table 4.3

Return

Dividend + (Ending Price-Beginning price) 100

Beginning Price

Return(2005)

15 + (983.5-667)
667

Return(2006) =

20+ (1310.75-990)
990

* 100

*100

49.7%

34.4%

Return(2007)

31+ (142.1-1318.95)*100 =
1318.95

Return(2008)

2.65+ (176.1-142) * 100

86.87%

25.8%

3.10+(209.45-176.5) *100 =
176.5

20.45

142
Return(2009)

Calculation of return of COLGATE & PALMOLIVE

Year

Beginning
price(Rs)

Ending
price(Rs)

Dividend(Rs)

2005
2006
2007
2008
2009

133.65
161.5
179.2
270.5
390.9

159.7
179.1
269.15
388.45
382.1

6.75
6.75
7.25
6.00
11.25

Table 4.4
Return

Return(2005)

Return(2006) =

Dividend + (Ending Price-Beginning price) 100

Beginning Price

6.75+(159.7-133.65)
133.65
6.75+ (179.1-161.5) *
161.5

* 100

100

= 24.5%

= 13.58

Return(2007)

7.25+(269.15-179.2)
179.2

* 100

= 54.2

Return(2008)

6.00+(388.45-270.5) * 100
270.5

= 45.8

Return(2009)

11.25+(382.1-390.9) * 100
390.9

= 0.62

Calculation of return of CIPLA

Year

Beginning
price(Rs)

Ending
price(Rs)

Dividend(Rs)

2005
2006
2007
2008
2009

898.00
1334.00
320.00
447.95
251.5

1371.05
317.8
448
251.35
212.65

10.00
3.00
3.50
2.00
2.00

Table 4.5

Return

Dividend + (Ending Price-Beginning price) 100

Beginning Price

Return(2005)

10.00+(1375.05-898.00) * 100 =
898.00

Return(2006)

3.00+(317.8-1334.00) * 100
1334

54.23%

= -75.95%

Return(2007)

3.50+(448-320.00)
320

Return(2008)

2.00+(251.35-447.95) * 100
447.95

Return(2009)

* 100

2.00+(212.65-251.5) * 100
251.5

41.09%

= -43.44%

= -14.65%

Calculation of return of RANBAXY

Year

Beginning
price(Rs)

Ending
price(Rs)

Dividend(Rs)

2005
2006
2007
2008
2009

598.45
1109.00
1268
363
391

1095.25
1251.15
362.75
391.8
425.5

15.00
17.00
14.50
8.50
8.50

Table 4.6
Return

Dividend + (Ending Price-Beginning price) 100

Beginning Price

Return(2005)

15.00+(1095.25-598.45) * 100
598..45

85.52%

Return(2006)

17.00+(1251.15-1109.00) * 100
1109

14.35%

Return(2007) =

14.50+(362.75-1268.00) * 100
1268.00

-70.24%

Return(2008) =

8.50+(391.8-363) * 100
363

10.27%

Return(2009) =

8.50+(425.5-391.00) * 100
391.00

10.99%

Calculation of standard deviation of ICICI

Year

Return (R)

2005
2006
2007
2008
2009

114.7
27.17
58.28
53.13
39.98
293.26

_
R
58.652
58.652
58.652
58.652
58.652

_
R-R
56.048
-31.482
-0.372
-5.522
-18.672

Table 4.7
_
Average (R) =

Variance =

Standard Deviation =

R
N

= 293.26 = 58.65
5

_
1 (R-R) 2
n-1

Variance

1
4 (11905.379)

_
( R-R )2
3486.6
991.11
0.138384
30.492
348.64
4856.98

34.846

Calculation of standard deviation of HDFC

Year

Return (R)

2005
2006
2007
2008
2009

80.9
19.60
57.13
36.6
76.97
271.2

_
R

_
R-R

_
( R-R )2

54.24
54.24
54.24
54.24
54.24

26.66
-34.64
2.89
-17.64
22.73

710.75
1199.92
8.3521
311.16
516.65
2476.8

Table 4.8
_
Average (R) = R = 271.2 = 54.24
N

Variance =

_
1 (R-R) 2
n-1

Standard Deviation =

Variance

1 (2476.8)
5-1
24.88

Calculation of standard deviation of ITC

Year

_
R

Return
(R)
49.7
34.4
-86.87
25.8
20.4
43.43

2005
2006
2007
2008
2009

_
R-R

8.686
8.686
8.686
8.686
8.686

_
( R-R )2

41.04
25.714
-95.556
17.114
11.714

1682.14
661.209
9130.94
293.88
137.21
11905.379

Table 4.9
_
Average (R) = R
N

Variance =

Standard Deviation

S.D

43.43
5

_
1 (R-R) 2
n-1

Variance

1
(11905.379)
5-1

= 8.686

54.55

Calculation of standard deviation of COLGATE&PALMOLIVE

Year

Return
(R)
24.5
13.58
54.2
45.8
0.62
138.7

2005
2006
2007
2008
2009

R-R

( R-R )2

27.74
27.74
27.74
27.74
27.74
27.74

-3.24
-14.16
26.46
18.06
-27.12

10.5
200.5
700.13
326.16
735.5
1972.79

Table 4.10
__
Average R =

R
N

variance

Standard Deviation

138.7 = 27.74
5
1
n-1

_
(R-R )2

Variance

1 (1972.79)
4

22.2

Calculation of standard deviation of CIPLA

Year

Return (R)

2005

54.23

_
R
-7.744

_
R-R
61.974

_
( R-R )2
3840

2006

-75.95

-7.744

-68.206

4652

2007

41.09

-7.744

48.834

2384

2008

-43.44

-7.744

-35.696

1274

2009

-14.65

-7.744

-6.906

47.692

-38.72

12197.692

Table 4.11
_
Average (R) = R
N

Variance

= -38.72 = -7.744
5

_
= 1/n-1 (R-R)2

Standard Deviation =

Variance
=
=

1 (12197.692)
4
55.22

Calculation of standard deviation of RANBAXY

Year

Return (R)

2005
2006
2007

85.52
14.35
-70.24

_
R
10.18
10.18
10.18

_
R-R
75.34
4.17
-80.42

_
( R-R )2
5676
17.39
6467

2008
2009

10.27
10.99
50.89

10.18
10.18

0.09
0.81

0.0081
0.6561
12161

Table 4.12
_
Average (R) = R = 50.89 = 10.18
N
5
Variance

Standard Deviation

_
= 1 (R-R) 2
n-1

Variance

1
4

(12161)

55.13

Correlation between HDFC & ICICI

Year
2005
2006
2007
2008
2009

DEVIATIONOFHDFC
___
RA-RA

DEVIATION OF ICICI
__
RB-RB

26.66
-34.64
2.89
-17.64
22.73

56.048
-31.482
-0.372
-5.522
-18.672

COMBINED DEVIATION
___
___
(RA-RA ) (RB-RB)
1494.24
1090.5
-1.075
97.41
-424.4
2256.675

Table 4.13
n
__
__
Co-variance (COVAB ) = 1/n (RA-RA) (RB-RB)
t=1

Co-variance (COVAB ) = 1/5 (2256.675)

=

451.335

Correlation Coefficient (PAB) =

COV AB
(Std. A) (Std. B)

451.335
(24.88) (34.846)

0.5206

Correlation between ITC&COLGATE - PALMOLIVE

DEVIATIONOF ITC
Year
___
RA-RA
2005
2006
2007
2008
2009

Table 4.14

41.04
25.714
-95.556
17.114
11.714

DEVIATION OF
COLGATEPALMOLIVE
__
RB-RB
-3.24
-14.16
26.46
18.06
-27.12

COMBINED DEVIATION
___
___
(RA-RA ) (RB-RB)
-132.97
-364.1
-2528.4
309.07
-317.68
-3034.08

n
__
__
Co-variance (COVAB ) = 1/n (RA-RA) (RB-RB)
t=1

Co-variance(COVAB )

= 1/5 (-3034.08)
= -606.816

Correlation Coefficient (PAB)

COV AB
(Std. A) (Std. B)

= -

606.816
(54.55) (22.21)

= - 0.5008

Correlation between CIPLA & RANBAXI

Year
2005
2006
2007
2008
2009

DEVIATION 0F
CIPLA
___
RA-RA
61.974
-68.206
48.834
-35.696
-6.906

DEVIATION OF
RANBAXI
__
RB-RB
75.34
4.17
-80.42
0.09
0.81

Table 4.15
Co-variance (COVAB )

n
__
__
= 1/n (RA-RA) (RB-RB)
t=1

COMBINED DEVIATION
___
___
(RA-RA ) (RB-RB)
4669.12
-284.42
-3927.23
-3.213
-5.59
448.667

Co-variance(COVAB )

= 1/5 (448.667)
= 89.7334

Correlation Coefficient (PAB) =

COV AB
(Std. A) (Std. B)
89.7334
(55.22)(55.13)

= 0.0295

Correlation between CIPLA& HDFC

Year
2005
2006
2007
2008
2009

DEVIATION OF
CIPLA
___
RA-RA
61.974
-68.206
48.834
-35.696
-6.906

DEVIATION OF HDFC

COMBINED DEVIATION

__
RB-RB
26.06
-34.64
2.89
-17.64
22.73

___
___
(RA-RA ) (RB-RB)
1615.04
2362.66
141.13
629.68
-156.97
4591.54

Table 4.16

Co-variance (COVAB )

Co-variance(COVAB )

n
__
__
= 1/n (RA-RA) (RB-RB)
t=1

= 1/5 (4591.54)
=

Correlation Coefficient (PAB) =

918.31
COV AB

(Std. A) (Std. B)
=

918.31
(55.22) (24.88)

0.668

STANDARD DEVIATION
COMPANY

STANDARED DEVIATION

ITC
COLEGATEPALMOLIVE
HDFC
ICICI
RANBAXY
CIPLA
Table 4.17

54.55
22.21
24.88
34.846
55.13
55.22

.
Graph 4.1
AVERAGE

COMPANY

AVERAGE

ITC

8.686

COLGATE&PALMOLIVE
HDFC
ICICI
RANBAXY
CIPLA

27.74
54.24
58.652
10.18
-7.744

Table 4.18

Graph 4.2

CORRELATION COEFFICIENT
COMPANY

HDFC&ICICI
ITC&COLGATE
CIPLA&RANBAXY
CIPLA&HDFC

0.5206
0.5008
0.0295
0.668

Table 4.19

PORTFOLIO WEIGHTS
HDFC&ICICI
Formula

Xa

(Std.b) 2

p ab (std.a ) (std.b)
(std.a) + (std.b) 2 - 2 pab (std.a) (std.b)
2

Xb

Where X a

1Xa
=

HDFC

ICICI

Std.a

24.88

Std.b

34.85

p ab

= 0.5206

Xa

(34.85) 2

(0.5206) (24.88 )(34.85)

(24.88) + (34.85) 2 - 2 (0.5206) (24.88) (34.85)
2

Xb

1Xa

Xa

0.8199

Xb

0.1801

PORTFOLIO WEIGHTS
ITC&COLGATE
Formula:

Xa

(Std.b) 2

p ab (std.a ) (std.b)
(std.a) + (std.b) - 2 pab (std.a) (std.b)
2

Xb

Where X a

Std.a

1Xa
=

ITC

COLGATE
54.55

Std.b

22.21

p ab

0.5008

Xa

Xb

1Xa

Xa

0.0503

Xb

0.9497

(22.21) 2 (0.5008) (54.55 )(22.21)

(54.55) 2 + (22.21) 2 - 2 (0.5008) (54.55) (22.21)

PORTFOLIO WEIGHTS
CIPLA&RANBAXY
Formula

Xa

(Std.b) 2

p ab (std.a ) (std.b)
(std.a) + (std.b) - 2 pab (std.a) (std.b)
2

Xb

Where X a

1Xa
=

CIPLA

RANBAXY

Std.a
Std.b

=
=

55.22
55.13

p ab

0.0295

Xa =
Xb =

(55.13) 2 0.0295 (55.22) (55.13

(55.22) 2 + (55.13) 2 - 2 (0.0295) (55.22) (55.13)
1Xa

Xa

0.49916

Xb

0.50084

Two Portfolios

Correlation
Coefficient

COMPANY Xa

COMPANY Xb

PORTFOLIO
RETURN Rp

PORTFOLO
RISK

p
ICICI&HDFC
ITC&COLGATE
CIPLA&RANBAXI

0.5206
0.5008
0.605

0.8199
0.0563
0.49916

..0.1801
0.9497
0.50084

114.24
26.835
1.2335

Table 4.20

PORTFOLIO RETURN

PORTFOLIO RISK=

__
__
( Rp)=(Ra)(Xa) + (Rb) (Xb)

___________________________________

p =

X1^21^2+X2^22^2+2(X1)(X2)(X12)12

31.14
22.77
49.43

Portfolio return Rp

ICICI&HDFC
ITC&COLGATE
CIPLA&RANBAXI

114.24
26.835
1.234

Table 4.21

.
Graph 4.3

Portfolio risk
ICICI&HDFC
ITC&COLGATE
CIPLA&RANBAXI
Table 4.22

Graph 4.4

31.14
22.77
49.43

CHAPTER-5
FINDINGS , CONCLUSIONS
AND
SUGGESSIONS

FINDINGS
As the study shows the following findings for portfolio construction

Investor would be able to achieve when the returns of shares and debentures

Resultant portfolio would be known as diversified portfolio .

Thus Portfolio construction would be addressed itself to three major via.

Selectivity, timing and diversification

Incase of portfolio management negatively correlated assets are most profitable.

Investors may invest their money for long run as the both combinations are most suitable
portfolios.

A rational investor would constantly examine his chosen portfolio both for average
return and risk.

CONCLUSION
ICICI&HDFC

The combination of ICICI and HDFC gives the proportion of

investment is 1.1801 and 0.8199 for ICICI and HDFC, based on the
standard deviations The standard deviation for ICICI is 34.846 and for
HDFC is 24.88.

Hence the investor should invest their funds more in HDFC when
compared to ICICI as the risk involved in HDFC is less than ICICI as the
standard deviation of HDFC is less than that of ICICI.

ITC & COLGATE PALMOLIVE

The combination of ITC and COLGATE gives the proportion of investment is 0.0563
and 0.50084 for ITC and COLGATE, based on the standard deviations The standard
deviation for ITC is 54.55 and for COLGATE is 22.2.

Hence the investor should invest their funds more in COLGATE when compared to ITC
as the risk involved in COLGATE is less than ITC as the standard deviation of
COLGATE is less than that of ITC.

CIPLA&RANBAXY

The combination of CIPLA and RANBAXY gives the proportion of investment is

0.49916 and 0.50084 for CIPLA and RANBAXY, based on the standard deviations The
standard deviation for CIPLA is 55.22 and for RANBAXY is 55.13. When compared

to

both the risk is almost same, hence the risk is same when invested in either of the
security.

SUGGESTIONS

Select your investments on economic grounds

Public knowledge is no advantage.

Buy stock with a disparity and discrepancy between the situation of the firm and the

expectation and appraisal of the public

Buy stocks in companies with potential for surprises.
Take advantage of volatility before reaching a new equilibrium

Dont put your trust in only one investment. It is like putting all eggs in one basket.

This will help lessen the risk in long term .

The investor must select the right advisory body which is has sound knowledge about the

product which they are offering.

Professionalized advisory is the most important feature to the investor.
Professionalized research, analysis which will be helpful for reducing any kind of risk to
over come.

BIBLIOGRAPHY

BIBLIOGRAPHY
BOOKS
1.

DONALDE, FISHER & RONALD J.JODON

SECURITIES ANALYSIS AND PORTFOLIO MANAGEMENT,6TH EDITION

2.

V.K.BHALLA

INVESTMENTS MANAGEMENT S. CHAND PUBLICATION.

3.V.A.AVADHANI.
INVESTMENT MANAGEMENT

Website
4.WWW. Investopedia.com

5.www.nseindia.com
6.www.bseindia.com.

Newspapers& magazine
7. DAILY NEWS PAPERS.ECONOMIC TIMES, FINANCIAL EXPRESS