Chapter 2METHODOLOGY OF THE PROJECT

A project report on Portfolio Management of CNX Midcap Companies at BMA Wealth Creators Ltd, Bangalore on the basis of optimum portfolio preparation. The portfolio optimization is totally a calculative work. The basicmethodology that I have undergone for this project is as follows:

Problem Statement:The main problem is whether investment in CNX Midcap companies is more rewarding or not. And if securities are more rewarding, can it be possible to prepare portfolio from the Midcap companies.

Objectives: To prepare portfolio, which is barometer of market, provide maximum return at a given risk leval. To evaluate the CNX Midcap companies, whether they are given good return in selected portfolio or demanded by the customer in the market.

Research Design:Project is totally based on analytical research. It is prepared on more structured way to find out problem question. Under such descriptive research I have gone through calculative study for target price deciding and risk and return for optimum portfolio preparation.

Data Collection MethodThe data are collected from the secondary sources.

Source of Data:For portfolio preparation, which needs various prices of Midcap securities. Such prices are collected from historical data of www.nseindia.com. And after deriving such prices, for evaluating risk return trade-off, formulas are taken from Securities Analysis and Portfolio Management authored by Punithavathy Pandian.

Sampling:I have mainly concentrated on convenience sampling. Following companiesare selected based on historical data of NSE Midcap companies which gave good returns in past year and reported good volumes in trading. So selected companies are as follows:

Sr.NoName of companyIndustry

1LIC Housing Finance Ltd.Finance

2IDBI Bank Ltd.Bank

3Titan industries Ltd.Jewelers & Watches

4Indian Hotels Co. Ltd.Hotels

5India Cements Ltd.Cement

6Thermax Ltd.Electrical Equipments

7GVK Power & Infrastructures Ltd.Electrical Equipments

8Punj Lloyd Ltd.Construction

9Cadila Healthcare Ltd.Pharmaceuticals

10Adani Power Ltd.Power

Analysis Techniques: Optimum portfolio preparation Finding expected risk and return of each securities and CNX Midcap Index. Beta, correlation, covariance of securities to the market. Systematic and unsystematic risk of each securities. Finding cutoff rate for selection of securities and on that basis finding weights of securities for investment in portfolio for optimization.

Chapter 3

PORTFOLIO MANAGEMENT

Individual securities have risk-return characteristics of their own. Portfolio, which iscombination of securities, may or may not take on the aggregate characteristics oftheir individual parts. Portfolio analysis considers the determination of future riskand return in holding various blends of individual securities.

Under portfolio, risk defines as the standard deviation around the expected return.The simple fact that securities carry differing degrees of expected risk leads mostinvestors to the notion of holding more than one securities at a time, in an attemptto spread risks by not putting all their eggs into one basket.

Diversification of ones holdings is intended to reduce risk in an economy in whichever assets returns are subject to some degree of uncertainty. Most investors hope that if they hold several assets, even if one goes bad, the other will provide some protection from an extreme loss. Best diversification comes through holding large numbers of securities scattered across industries.

CNX MidcapThe medium capitalized segment of the stock market is being increasingly perceived as an attractive investment segment with high growth potential. The primary objective of the CNX Midcap Index is to capture the movement and be a benchmark of the midcap segment of the market.

Method of ComputationCNX Midcap is computed using free float market capitalization* weighted method w.e.f. February 26, 2010, wherein the level of the index reflects the free float market value of all the stocks in the index relative to a particular base period. The method also takes into account constituent changes in the index and importantly corporate actions such as stock splits, rights, etc without affecting the index value.

Base Date and ValueThe CNX Midcap Index has a base date of Jan 1, 2003 and a base value of 1000.

Criteria for Selection of Constituent StocksThe constituents and the criteria for the selection judge the effectiveness of the index. Selection of the index set is based on the following criteria : All the stocks, which constitute more than 5% market capitalization of the universe (after sorting the securities in descending order of market capitalization), shall be excluded in order to reduce the skewness in the weightages of the stocks in the universe. After step (a), the weightages of the remaining stocks in the universe is determined again. After step (b), the cumulative weightage is calculated. After step (c) companies which form part of the cumulative percentage in ascending order unto first 75 percent (i.e. upto to 74.99 percent) of the revised universe shall be ignored. After, step (d), all the constituents of S&P CNX Nifty shall be ignored. From the universe of companies remaining after step (e) i.e. 75th percent and above, first 100 companies in terms of highest market capitalization, shall constitute the CNX Midcap Index subject to fulfillment of the criteria mentioned below.Trading InterestAll constituents of the CNX Midcap Index must have a minimum listing record of 6 months. In addition, all candidates for the Index are also evaluated for trading interest, in terms of volumes and trading frequency.

Financial PerformanceAll companies in the CNX Midcap Index have a minimum track record of three years of operations with a positive net worth.

OthersA company which comes out with an IPO will be eligible for inclusion in the index, if it fulfills the normal eligibility criteria for the index for a 3 month period instead of a 6 month period.

*CNX Midcap Index was computed using market capitalization weighted method from the launch date till February 25, 2010.

Selection of Companies:Few companies are selected in the portfolio from the CNX Midcap Index. The reason behind selection from the Midcap is that there is large number of securities in market, which gives higher return apart from Nifty or Sensex. Now a days some of the investor does not know even about the name of Midcap companies, hence they are not considering such securities in their portfolio, which can more reward oriented.Here out of CNX Midcap 100 Index, 9 companies are selected from the differentsectors. Such companies are reported a good volume as well as return in past few months. Such companies are;

Sr.No Name of company Industry

1LIC Housing Finance LtdFinance

2IDBI Bank LtdBank

3Titan industries LtdJewelers & Watches

4Indian Hotels Co. Ltd.Hotels

5India Cements LtdCement

6Thermax LtdElectrical Equipments

7GVK Power & Infrastructures LtdElectrical Equipments

8Punj Lloyd Ltd.Construction

9Cadila Healthcare LtdPharmaceuticals

10Adani Power LtdPower

Chapter 4

ANALYSIS & FINDINGS

Now this companies which I have selected, are they really going to offer theinvestor a good return. So for that, investor should have to find out the risk andreturn profile of each securities, how they are moving as the change in CNXMidcap index. So once it found than the investor must evaluate such securities bySharpe optimum portfolio model, which will say what should be the size of yourportfolio as well as weight of investment for particular securities. So Risk andreturn of such securities are as follows.

CompanyRiiVar.2Syst RiskUnsys. Risk (e2)Corr to MktCov to Mkt

LIC Hous.9.3510.3840.0131.1570.150.74-0.59

IDBI Bank 11.8420.90.0121.5290.811.28-0.47

Titan ind.39.0477.1470.3161.05251.10.6150.5

Indian Hotel-2.1540.308-0.2961.1670.090.75-0.65

India Cem.15.4731.7310.1120.6172.990.212.79

Thermax-3.9430.534-0.1271.2550.290.87-0.58

GVK Power-4.3850.589-0.1221.1250.350.70-0.34

Punj Lloyd -21.771.518-0.3241.532.301.291.02

Cadila10.6150.4570.0980.1090.210.010.20

Adani Power12.1681.210.0670.7811.460.361.13

CNX Midcap6.9810.741-10.54----

Where: Ri = expected return of the stock i = Standard deviation = = Expected change in the rate of return on stock i associated with a 1% change in the market return.

Disclosure:1. Above all data are calculated on the basis of prices of each securities from 4th January 2010 to 31st December 2010.2. Cov. to Market indicates covariance between securities and CNX Midcap index.3. Corr. to Market indicates correlation between securities and CNX Midcap index.4. All the above details are shown in the annexure. VARIANCE AND RETURN

SIMPLE SHARPE PORTFOLIO OPTIMIZATION

The construction of an optimal portfolio is simplified if a single number measuresthe desirability of including a stock in the optimal portfolio. The desirability of anystocks directly related to its excess return-to-beta ratio. If stocks are ranked byexcess return to beta (from highest to lowest), the ranking represents thedesirability of any stocks inclusion in a portfolio. The number of stocks selecteddepends on unique cutoff rate such that all stocks with higher ratio of (Ri Rf)/iwill be included and all stocks with lower ration excluded.

Step 1 Ranking Securities Excess return to beta ratio = (Ri Rf) / iRi = Expected return on stock iRf = Return on a riskless asset"i = Expected change in the rate of return on stock i associated with a 1% changein the market returnCurrent Risk Free Rate 8.25%CompanyReturn %(Ri Rf)iUnsys Risk(Ri Rf)/iRank

Titan39.0530.791.05250.47129.2751

Cadila10.622.3650.1090.202421.6972

Thermax15.477.2230.6192.87811.7073

Adani12.173.9180.7801.712855.01664

IDBI bank11.843.5921.529-0.4732.3495

LIC Hous.9.3511.1011.157-0.58830.95156

Ind Hotels-2.154-10.4041.167-0.653-8.9157

India cem.-3.943-12.1931.255-0.5797-9.7158

GVK-4.385-12.6351.125-0.3479-11.239

Punj Lloyd-21.77-30.021.531.018-19.6210

As seen above table here Excess returns to beta ratio are already ranked fromhighest to lowest. So selecting the optimal portfolio involves the comparison of (Ri Rf)/ i with C*. Here we have to find out cutoff rate, which helps in selectingsecurities in our optimum portfolio. And securities whose excess return to betaratio is lower than the cutoff rate, are excludes from our portfolio.

Step 2 Establishing Cutoff Rate:For a portfolio of i stock, C is given by:

FORMULA

Where:2m =Variance in the market index 2ei = Variance of a stocks movement that is not associated with the movement ofthe market index; that is the stocks unsystematic risk.

Company(Ri Rf)/i((Ri - Rf)*i)/ 2

((Ri -Rf)*i)/ 2

(i2 / 2) C

Titan29.2750.6340.6349.09710.058

Cadila21.6971.2341.86411.9810.136

Thermax11.7071.4873.33512.0020.245

Adani5.01662.0905.44526.4030.193

IDBI bank2.3496.77612.22926.530.433

LIC Hous.0.95158.6620.88132.0460.619

Ind Hotels-8.915-128.48-107.5935.688-2.879

India cem.-9.715-53.59-161.1836.703-4.198

GVK-11.23-40.92-202.10936.754-5.257

Punj Lloyd-19.62-19.93-222.0337.175-5.629

All securities, whose excess return-to-beta ratio is above the cutoff rate, areselected and all whose ratios are below are rejected..

The value of C* is computed from the characteristics of all of the securities thatbelong in the optimum portfolio. So here first 6 companies are those whoseexcess return to beta ratio are more than Ci. Now to determine C*, we will take thelast securities as per ranked which is proving our condition i.e. excess return tobeta more than that of Ci. So the cutoff rate will be (C*) = 0.619

Step 3 Arriving at the Optimal Portfolio

Once we know which securities are to be included in the optimum portfolio, wemust calculate the percent invested in each securities. The percentage invested ineach securities is:

FORMULA

The second expression determines the relative investment in each securities, andthe first expression simply scales the weights on each securities so that they sumto 1 (ensure full investment).

Company(Ri Rf)/ii / 2

Z

Weight%

Titan29.2750.02060.590.0272.7

Cadila21.6970.521610.9940.49749.7

Thermax11.7070.20782.3030.10410.4

Adani5.01660.53361.3460.10610.6

IDBI bank2.3491.88633.2620.14814.8

LIC Hous.0.95157.86272.6180.11811.8

INVESTMENT WEIGHTAGE OF THE PORTFOLIO

Risk and Return of Optimum Portfolio.There are six securities in optimum portfolio. So following formulas are used tofind out risk and return profile for the securities.

CompanyRiiVar.2Syst RiskUnsys. Risk (e2)Corr to MktCov to Mkt

LIC Hous.9.3510.3840.0131.1570.150.74-0.59

IDBI Bank 11.8420.90.0121.5290.811.28-0.47

Titan ind.39.0477.1470.3161.05251.10.6150.5

Thermax-3.9430.534-0.1271.2550.290.87-0.58

Cadila10.6150.4570.0980.1090.210.010.20

Adani Power12.1681.210.0670.7811.460.361.13

CNX Midcap6.9810.741-10.54----

Where: Ri = expected return of the stock i = Standard deviation = = Expected change in the rate of return on stock i associated with a 1% change in the market return.Disclosure:1. Above all data are calculated on the basis of prices of each securities from 4th January 2010 to 31st December 2010.2. Cov. to Market indicates covariance between securities and CNX Midcap index.3. Corr. to Market indicates correlation between securities and CNX Midcap index.4. All the above details are shown in the annexure.

Markowitz Risk Return:Return of the portfolio: Rp = Xi2 i2Variance of the portfolio:

Formula

CompanySD iEx.ReturnWeight XiXi2i2Xi2 i2

TITAN7.14739.0470.0270.00072951.079611.054269

CADILA0.45710.6150.4970.2470090.2088495.275655

THERMAX1.731215.4730.1040.0108162.9970531.609192

ADANI0.313312.1680.1060.0112360.0981571.289808

IDBI0.900311.8420.1480.0219040.810541.752616

LIC0.38369.3510.1180.0139240.1471491.103418

Expected Return of the portfolio: 12.084%

ParticularsCovarianceParticularsCorrelation

Cov12Cor12

Cov13Cor13

Cov14Cor14

Cov15Cor15

Cov16Cor16

Cov23Cor23

Cov24Cor24

Cov25Cor25

Cov26Cor26

Cov34Cor34

Cov35Cor35

Cov36Cor36

Variance of Portfolio:Risk of portfolio:

Chapter 5LIMITATIONS OF PROJECT

Because of the insufficient time, I have chosen only six companies which are giving good return. But in market there are lots of securities which offering more return as comparing with selected securities. So, that could not be find out from the overall point of view best investment opportunities in selected companies from that sector.

Securities are chosen only on the basis of research done on various websites and trade volumes.

As the study is depending on the information from the different sources, the reliability of study is depending on the reliability of information.

It is an all equity portfolio, other investment options like bonds, cash are not included.

Technical and fundamental analysis of stocks is not performed, as the stocks are chosen based on trading volumes.

Chapter 6SUGGESTION

Investors can also analysis the shareholding pattern of different companies. The experts in stock market speak that if foreign institutional investors and mutual funds hold high percentage in total companys share holding, company has good potential for growth. Because FIIs and MFs have good research techniques to observer the companies financial performance and thats why they are willing to invest for particular companies in India.

While preparing the portfolio, the investors should consider Midcap companies also, if they are providing good returns. The portfolio of the investors should be diversified in such a way that it consist the whole market behavior i.e. it should have qualities of Largecap, Smallcap as well as Midcap companies.

Chapter 7CONCLUSION

So as per my problem statement, yes investment in CNX Midcap companies are safe and more reward oriented. All the companies belonging to Midcap have only one reason i.e. they have issued less number of shares. Even the prices of such securities are above the companies of SENSEX and Nifty.

The companies, which are selected as per optimum portfolio, have performed well in recent past. The optimum portfolio gives return around 14% while risk is around 1.3. So it is more beneficial as compare to other investment avenues.

The Midcap companies like Titan, LIC Housing Finance and thermax have given very good return in past, so investment in these stocks will be more beneficial for long time investments.

Chapter 8BIBLIOGRAPHY

Books: Securities Analysis and Portfolio Management, By Punithavathy Pandian Securities Analysis and Portfolio Management, NCFM document

Websites:www.nseindia.com

CHAPTER-9FORMULEA USED