Geogit Peter Original

8/6/2019 Geogit Peter Original

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A STUDY ON RISK AVERSION THROUGH PORTFOLIO CONSTRUCTION

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Member sree narayana pillai institute of management and technology

A study on Risk Aversion Through Portfolio Construction

GEOJIT BNP PARIBAS LTD

Ernakulam

A project Report submitted to the Kerala UniversityIn partial fulfillment of the Requirements for the award Of the Degree of

Master of Business Administration

BY

Rekha.M.R

S4MBA

Under the Guidance of

Mr.S.Gopinathan

MEMBER SREE NARAYANA PILLAI INSTITUTE OF MANAGEMENTAND TECHNOLOGY

2009-2011


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INTRODUCTION


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INTRODUCTION

Investing in securities such as shares debentures and bonds is profitable as well as

exciting It is indeed rewarding. But involves a great deal of risk and calls for scientific

knowledge as well as artistic skill. In such investments, both rational as well as emotional

responses are involved. Investing in financial securities is now considered to be one of the best

avenues for investing ones savings while it is acknowledged to be one of the most risky

avenues of investment.

It is rare to find investors investing their entire savings in a single security. Instead of

they tend to invest in group of securities. Such a group of securities is called portfolio. Creation

of portfolio helps to reduce risk without sacrificing returns. Portfolio management deals with the

analysis of individual securities as well as with the theory and practice of optimally combining

securities into portfolios. An investor who under stands the fundamental principles and analytical

aspects of portfolio management has better chance of success. An investor considering

investment in securities is faced with a problem of choosing from among a large number of

securities. His choice depends upon the risk return characteristics of individual securities. He

would attempt to choose the most desirable securities and like to allocate his funds over this

group of securities. Again he is faced with the problem of deciding which securities to hold and

how much invest in each. The investor faces an infinite number of possible portfolios or group of

securities. The risk and return nature of portfolio differ from those individual securities

combining from a portfolio. The investor tries to choose the optimal portfolio taking in to

consideration the risk return characteristics of all possible portfolios. As the economic and

financial environment keeps changing, the risk return characteristics of individual securities as

well as portfolios also change. This calls for periodic review and revision of investment

portfolios of investors.

An investor invests his funds in a portfolio expecting to get a good return consistent with

the risk that he has to bear. The return realized from the portfolio has to be measured and the

performance of the portfolio has to be evaluated.


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It is evident that rational investment activity involves creation of an investment portfolio.

Portfolio management comprises all the process involved in the creation and maintenance of an

investment portfolio. It deals specially with security analysis , portfolio analysis, portfolio

selection, portfolio revision and portfolio evaluation it also make use of analytical techniques of

analysis and conceptual theories regarding rational allocation of funds. Portfolio management is

a complex process which tries to make investment activity more rewarding and less risky.

A portfolio is a group of securities held together as investment. Investors invest their

funds in a portfolio of securities rather than in a single security because they are risk averse. By

constructing a portfolio, investors attempt to spread risk by not putting all their eggs in to one

basket. Thus diversification of ones holdings is intended to reduce risk in investment.Security analysis provides the investor with a set of worthwhile or desirable securities.

From this set of securities an indefinitely large number of portfolios can be constructed by

choosing different sets of securities and also by varying the portion of investment in each

security. Each individual security has its own risk-return characteristics which can be measured

and expressed quantitatively. Each individual security has its own risk-return characteristics

which can be measured and expressed quantitatively. Each portfolio constructed by combining

the individual securities has its own specific risk and return characteristics which are not just the

aggregate of the individual security characteristics. The return and risk of each portfolio has to be

calculated mathematically and expressed quantitatively.

Portfolio analysis phase of portfolio management consists of identifying the range of

possible portfolios that can be constituted from a given set of securities and calculating their

return and risk for further analysis.

Portfolio analysis provides the input for the next phase in portfolio management which is

portfolio selection. The goal of portfolio construction is to generate a portfolio that provides the

highest returns at a given level of risk. A portfolio having this characteristic is known as an

efficient portfolio. The inputs from portfolio analysis can be used to identify the set of efficient

portfolios. From this efficient set of portfolios, the optimal portfolio has to be selected for

investment.


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STATING THE PROBLEM

Risk arises where there is possibility of variation between expectations and realization

with regard to an investment. The risk in holding securities such as shares, debentures etc are of

two types. The first group comprises factors that are external to a company that affect large

number of securities simultaneously. Second group includes those factors which are internal to

companies and affect only those particular companies. The study basically aimed to avert those

risks by constructing a suitable portfolio.

OBJECTIVE OF THE STUDY

y

To construct a portfolio with minimum risk.y Ascertain the risk-return relationship.

y To ascertain the volatility of shares in the market.

y To identify the top companies in each sector.

IMPORTANCE OF THE STUDY

y It helps the researcher to construct a diversified portfolio.

y Provide an insight on return and risk analysis.

y The study helps to identify the growth potential of each sector.

SCOPE OF THE STUDY

The goal of portfolio construction is to generate a portfolio that provides the highest

returns at a given level of risk. In a highly volatile market it is very essential to follow an

efficient portfolio in order to avert the risk. The study mainly covers the volatility and risk return

characteristics of shares through various techniques. It has taken six sectors for the study, which

are having high growth potential.

PERIOD OF STUDY


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The study covers a period from 03-05-2010 to 12-06-2010

LIMITATIONS OF THE STUDY

y The company Geojit BNP Paribas Financial Services Ltd is highly centralized in nature

so it was very difficult to get strategic information from the organization.

y Research wing of the company is operating in the head office. So frequent contact with

them was not possible.

y Data were collected only on the basis of NSE trading.

RESEARCH METHODOLOGY

A research design is the arrangement of condition for collecting and analysis of data in a

manner that aim to combine relevance to the research purpose with economy in procedure. The

research design adopted for the study is descriptive in nature.

For the research top six industries have been taken.

1. Automotive Industry.

2. Banking Industry.

3. Information Technology industry.

4. Real Estate Industry

5. Telecom Industry.

6. Pharmaceuticals Industry.


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Tools used for the study:-

1. Earning Per share (E.P.S.)

This ratio helps in the assessment of the profitability of a firm from a standard point of

equity share holders. This measures the profit available to the equity share holders.

E.P.S= Net profit available to equity share holders Number of equity shares issued.

2. Price earning ratio (P.E.Ratio)

The price earning ratio expresses the relationship between the market price of a share and the

E.P.S.

P.E. Ratio= Market price per equity share Earning per share

3. Beta valueBeta value measures the volatility of a share. The systematic risk of a security is measured bythis statistical tool.Beta = NXY - X.Y NX^2 - (X)^2

4. Alpha Value

Alpha measures, the unsystematic risk of the company. It indicates the extra returnearned by the stock over and above the market return. If alpha is positive, then scrip will havehigher return. If alpha is zero, then return depends on the market return.

Alpha = Stock return ( Beta * Market return)

5. Sharpe indexThe selection and evaluation of portfolio is on the basis of the Sharpes performance

index. Sharpes performance index gives us a single value to be used for the performance

ranking of various funds or portfolio. When compared to the other ratios for selection shapers

ratio is the only ratio giving importance to risk as well as return. The risk premium is the

difference between the portfolios average rate of return and the risk less rate of return. The

standard deviation of the portfolio indicates the risk. This index assigns the highest value to the

assets ie, portfolio, that have the best risk adjusted rate of return. The formula for calculating the

sharpes performance index is as follows.

Sharpe index = Portfolio return- Risk Free rate Standard deviation of population


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INDUSTRY PROFILE


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INDUSTRY PROFILE

A stock market or equity market is a private or public market for the trading of company stock

and derivatives of company stock at an agreed price; these are securities listed on a stock

exchange as well as those only traded privately.

The Amsterdam Stock exchange orAmsterdam Beurs is also said to have been the first stock

exchange to introduce continuous trade in the early 17th century. The size of the stock market is

estimated about $51 trillion. The world derivatives market has been estimated at about $480

trillion face or nominal value, 30 times the size of the U.S. economy, and 12 times the size of the

entire world economy. It must be noted though that the value of the derivatives market, because

it is stated in terms of notional values, and cannot be directly compared to a stock or fixed

income security, which traditionally refers to an actual value. Many such relatively illiquid

securities are valued as marked to model, rather than actual market price.

The stocks are listed and traded on stock exchanges which are entities a corporation or

mutual organization specialized in the business of bringing buyers and sellers of stocks and

securities together. The stock market in the United States includes the trading of all securitieslisted on the NYSE, the NASDAQ, the Amex, as well as on the many regional exchanges,

e.g.OTCBB and Pink Sheets. Europian examples of stock exchanges include the London

stockexcange, the Deutsche Borse and the Paris Bourse, now part of Euronext.

The National Stock exchange of India Limited (NSE), is a Mumbai-Based stock exchange. It

is the largest stock exchange in India and the third largest in the world in terms of volume of

transactions. Though a number of other exchanges exist, NSE and the Bombay Stock Exchange

are the two most significant stock exchanges in India, and between them are irresponsible for the

vast majority of share transactions.

NSE is mutually- owned by a set of leading financial institutions, banks, insurance

companies and other financial intermediaries in India but its ownership and management operate


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as separate entities. As of2006, the NSE VSAT terminals, 2799 in total, cover more than 1500

cities across India. In October2007, the equity market capitalization of the companies listed on

the NSE was US$ 1.46 trillion, making it the second largest stock exchange in South Asia. NSE

is the third largest Stock Exchange in the world in terms of the number of traders in equities. It is

the second fastest growing stock exchange in the world with a recorded growth of 16.6%.

The Bombay Stock Exchange Limited is the oldest stock exchange in Asia. It is also the

biggest stock exchange in the world in terms of listed companies with 4,800 listed companies as

ofAugust 2007. It is located at Dalal Street, Mumbai, India. In October2007, the equity market

capitalization of companies listed on the BSE was US$ 1.61 trillion, making it the largest stock

exchange in South Asia and the tenth largest in the world.The Bombay Stock Exchange was established in 1875. Around 4,800 Indian companies list

on the stock exchange, and it has a significant trading volume. The BSE SENSEX (SENSitive

indEX) , also called the BSE 30, is a widely used market index in India and Asia. Though

many other exchange exist, BSE and the National Stock Exchange of India account for most of

the trading in shares in India.


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COMPANY PROFILE


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COMPANY PROFILE

It all started in the year 1987 when Mr. C.J. George and Mr. Ranajit Kanjilal founded Geojit as a

partnership firm. In 1993, Mr.Ranajit Kanjilal retired from the firm and Geojit became the

proprietary concern of Mr. C .J. George. In 1994, it became a Public Limited Company named

Geojit Securities Ltd. The Kerala State Industrial Development Corporation Ltd. (KSIDC), in

1995, became a co-promoter of Geojit by acquiring a 24 percent stake in the company, the only

instance in India of a government entity participating in the equity of a stock broking company.

The year 1995 also saw Geojit being listed on the leading regional stock exchanges. Geojit listed

at The Stock Exchange, Mumbai (BSE) in the year2000. Companys wholly owned subsidiary,

Geojit Commodities Limited, launched Online Futures Trading in agri-commodities, precious

metals and energy futures on multiple commodity exchanges in 2003. This was also the year

when the company was renamed as Geojit Financial Services Ltd. (GFSL). The Board consists of

professional directors; including a Kerala Government nominee. With effect from July 2005, the

company is also listed at The National Stock Exchange (NSE). Company is a charter member of

the Financial Planning Standards Board of India and is one of the largest DepositoryParticipant(DP) brokers in the country.

On 31st December2007, the company closed its commodities business and surrendered

its membership in the various commodity exchanges held by Geojit Commodities Ltd. Global

banking major BNP Paribas took a stake in the year2007 to become the single largest

shareholder. Consequently, Geojit Financial Services Limited has been renamed as Geojit BNP

Paribas Financial Services Ltd.


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Leading retail financial services player:

Geojit BNP Paribas today is a leading retail financial services company in India with a

growing presence in the Middle East. The company rides on its rich experience in the capital

market to offer its clients a wide portfolio of savings and investment solutions. The gamut of

value-added products and services offered ranges from equities and derivatives to Mutual Funds,

Life & General Insurance and third party Fixed Deposits. The needs of over460000 clients are

met via multichannel services - a countrywide network of500 offices, phone service, dedicated

Customer Care centre and the Internet.

Geojit BNP Paribas has membership in, and is listed on, the National Stock Exchange

(NSE) and the Bombay Stock Exchange (BSE). In 2007, global banking major BNP Paribas

joined the companys other major shareholders - Mr. C.J.George, KSIDC (Kerala State Industrial

Development Corporation) and Mr.Rakesh Jhunjhunwala when it took a stake to become the

single largest shareholder.

At the forefront of the many fruitful associations between Geojit BNP Paribas and BNP

Paribas is their joint venture, namely, BNP Paribas Securities India Private Limited. This JV was

created exclusively for domestic and foreign institutional clients. An industry first was achieved

when Geojit BNP Paribas became the first broker in India to offer full Direct Market

Access(DMA) on NSE to the JVs institutional clients.

A strong brand identity and extensive industry knowledge coupled with BNP Paribas

international expertise gives Geojit BNP Paribas a competitive advantage.

Expanding range of online products and services:


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Geojit BNP Paribas has proven expertise in providing online services. In the year2000,

the company was the first stock broker in the country to offer Internet Trading. This was

followed by integrating the first Bank Payment Gateway in the country for Internet Trading, and

many other industry firsts. Riding on this experience, and harnessing BNP Paribas Personal

Investors expertise as the leading online broker in Europe, is helping the company to rapidly

expand its business in this segment. Presently, clients can trade online in equities, derivatives,

currency futures, mutual funds and IPOs, and select from multiple bank payment gateways for

online transfer of funds. Strategic B2B agreements with Axis Bank and Federal Bank enables the

respective banks clients to open integrated 3-in-1 accounts to seamlessly trade via a

sophisticated Online Trading platform.

Further, deployment of BNP Paribas state-of-the-art globally accepted systems and

processes is already scaling up the sales of Mutual Funds and Insurance.

Wide range of products and services:

Certified financial advisors help clients to arrive at the right financial solution to meet

their individual needs. The wide range of products and services on offer includes -

Equities, Derivatives, Currency Futures, Custody Accounts, Mutual Funds, Life Insurance &

General Insurance, IPOs, Portfolio Management Services, Property Services, Margin Funding,

Loans against Shares

A growing footprint:

With a presence in almost all the major states of India, the network of500 offices across

300 cities and towns presently covers Andhra Pradesh, Bihar, Chattisgarh, Goa, Gujarat,

Haryana, Jammu & Kashmir, Karnataka, Kerala, Madhya Pradesh, Maharashtra, New Delhi,

Orissa, Punjab, Rajasthan,Tamil Nadu & Pondicherry, Uttar Pradesh, Uttarakhand and West

Bengal.


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MANAGING DIRECTORS OF THE COMPANY

Mr. Satish Menon Director (Operations)

Mr. A. Balakrishnan Chief Technology Officer

Mr. K. Venkitesh National Head - Distribution

Mr. Stefan Groening Director (Planning and Control)

Mr. Jean-Christophe G Director (Marketing)

Mr. Binoy .V.Samuel Chief Financial Officer

Mrs. Jaya Jacob Alexander Chief of Human Resources

Name Designation

Mr. A. P. Kurian Non - Executive & Independent Chairman

Mr. C. J. George Managing Director & Chief Promoter

Mr. Manoj Joshi Non - Executive & Independent Director

Mr. Mahesh Vyas Non - Executive & Independent DirectorMr. Rakesh Jhunjhunwala Non - Executive Director)

Mr. Ramanathan Bupathy Non - Executive & Independent Director

Mr. Punnoose George Non - Executive Director

Mr. Olivier Le Grand Non - Executive Director

Mr. Pierre Rousseau Non - Executive Director


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LITERATURE REVIEW


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PORTFOLIO MANAGEMENT

Individual securities have risk return characteristics of their own. The future return

expected from a security is variable and this variability of returns is termed risk. It is rare to find

investors investing their entire wealth in a single security. This is because most investors have an

aversion to risk. It is hoped that if money is invested in several securities simultaneously, the loss

in one will be compensated by the gain in others. Thus, holding more than one security at a time

is an attempt to spread and minimize risk by not putting all our eggs in one basket.

Most investors thus tend to invest in a group of securities rather than a single security.Such a group of securities held together as an investment is what is known as a portfolio. The

process of creating such a portfolio is called diversification. It is an attempt to spread and

minimize the risk in investment. This is sought to be achieved by holding different types of

securities across different industry groups.

From a given set of securities, any number of portfolios can be constructed. A rational

investor attempts to find the most efficient of these portfolios. The efficiency of each portfolio

can be evaluated on in terms of the expected return and risk of the portfolio as such. Thus,

determining the expected return and risk of different portfolios is a primary step in portfolio

management. This step is designated as portfolio analysis.

EXPECTED RETURN OF A PORTFOLIO

As a first step in portfolio analysis, an investor needs to specify the list of securities

eligible for selection or inclusion in the portfolio. Next he has to generate the risk-return

expectations for these securities. These are typically expressed as the expected rate of return

(mean) and the variance or standard deviation of the return.


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The expected return of a portfolio of assets is simply the weighted average of the return of the

individual securities held in the portfolio. The weight applied to reach return is the fraction of the

portfolio invested in that security.

RISK OF A PORTFOLIO

The variable of return and standard deviation of return are alternative statistical measures

that are used for measuring risk in investment. These statistics measure the extent to which

returns are expected to vary around an average overtime. The calculation of variance of a

portfolio is a little more difficult than determining its expected return. The variance or standard

deviation of an individual security measures the risk ness of a security in absolute sense. Forcalculating the risk of a portfolio of securities, the risk ness of each security within the context of

the overall portfolio has to be considered. This depends on their interactive risk, i.e. how the

returns of a security move with the returns of other securities in the portfolio and contribute to

the overall risk of the portfolio.

Covariance is the statistical measure that indicates the interactive risk of a security

relative to others in a portfolio of securities. In other words, the way security returns vary with

each other affects the overall risk of the portfolio.

REDUCTION OF PORTFOLIO RISK THROUGH DIVERSIFICATION

The process of combining securities in a portfolio is known as diversification. The aim of

diversification is to reduce total risk without sacrificing portfolio return. In the example

considered above, diversification has helped to reduce risk. The portfolio standard deviation of

17-09 is lower than the standard deviation of either of the two securities taken separately, which

were 50 and 30 respectively.


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To understand the mechanism and power of diversification, it is necessary to consider the impact

of covariance or correlation on portfolio risk more closely. We shall examine three cases: (a)

when security returns are perfectly positively correlated, (b) when security returns are perfectly

negatively correlated, and (c) when security returns are not correlated.

PORTFOLIOS WITH MORE THAN TWO SECURITIES.

So far we have considered a portfolio with only two securities. The benefits for

diversification increase as more and more securities with less than perfectly positively correlated

returns are included in the portfolio. As the number of securities added to a portfolio increases,the standard deviation of the portfolio becomes smaller and smaller. Hence, an investor can

make the portfolio risk arbitrarily small by including a large number of securities with negative

or zero correlation in the portfolio.

But, in reality, no securities show negative or even zero correlation. Typically, securities

show some positive correlation that is above zero but less than the perfectly positive value (+ 1).

As a result, diversification (that is, adding securities to a portfolio) results in some reduction in

total portfolio risk but not in complete elimination of risk. Moreover, the effects of

diversification are exhausted fairly rapidly. That is, most of the reduction in portfolio standard

deviation occurs by the time the portfolio size increases to 25 or30 securities. Adding securities

beyond this size bring about only marginal reduction in portfolio standard deviation.

Adding securities to a portfolio reduces risk because securities are not perfectly positively

correlated. But the effects of diversification are exhausted rapidly because the securities are still

positively correlated to each other though not perfectly correlated. Had they been negatively

correlated, the portfolio risk would have continued to decline as portfolio size increased. Thus,

in practice, the benefits of diversification are limited.

The total risk of an individual security comprises two components; the market related risk

called systematic riskand the unique risk of that particulars security called unsystematic risk.

By combining securities into a portfolio the unsystematic risk specific to different securities is


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cancelled out. Consequently, the risk of the portfolio as a whole is reduced as the size of the

portfolio increases. Ultimately when the size of the portfolio reaches a certain limit, it will

contain only the systematic risk of securities included in the portfolio. The systematic risk,

however, cannot be eliminated. Thus, a fairly large portfolio has only systematic risk and has

relatively little unsystematic risk. That is why there is no gain in adding securities to a portfolio

beyond a certain portfolio size.


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TOP FIVE COMPANIES IN EACH INDUSTRIES ON THE BASIS OF THE

E.P.S. AND P/E RATIO ARE THE FOLLOWING

I. AUTOMOTIVE

No. COMPANY NAME E.P.S. P.E/ RATIO

1 Hero Honda motors ltd 64.20 22.00

2 Maruthi Suzuki 42.20 25.10

3 Tata Motors 10.70 31.80

4 Mahindra & mahindra 30.80 22.60

5 Ashok Layland 1.50 21.20

II. BANKING


1 Axis bank ltd 48.90 16.70

2 H.D.F.C. 50.90 29.40

3 ICICI bank 32.30 23.40

4 Bank of Boroda 59.20 7.40

5 Union bank 33.20 7.00


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III. INFORMATION TECHNOLOGY

IV. REAL ESTATE


1 H.D.I.L. 30.10 8.402 GMR Infrastructures ltd 14.90 13.70

3 Parsvnath developers 6.10 13.70

4 Unitech 3.60 22.90

5 DLF ltd 9.10 38.80


1 Infosys technologies ltd 97.60 18.70

2 Tata consultancy services ltd 22.50 17.60

3 Mphasis ltd 21.10 19.40

4 Wipro 20.30 18.90

5 Tech Mahindra ltd 81.00 9.10


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V. TELECOM

VI. PHARMACEUTICALS


1 Bharti Airtel 40.80 19.80

2 Tata Teliservices (Maharashtra) ltd 0.00 0.00

3 Reliance(R.com) 9.50 32.90

4 Idea Cellullar 3.30 24.10

5 Tata Communications ltd 11.70 40.40


1 Glenmark Pharmaceuticals ltd 11.42 20.31

2 Lupin ltd 50.10 16.80

3 Cipla ltd 9.90 26.40

4 Wockhardt ltd 3.77 37.69

5 Glaxo Smithline Pharma ltd 54.02 22.81


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BETA VALUE AND MARKET CAPITALIZATION OF THE

30 COMPANIES IN SIX INDUSTRIES

TABLE SHOWING THE BETA VALUE & MARKET CAPITALIZATION

AUTOMOTIVE INDUSTRY

Sl.No Company Name Beta Value Market Capitalization

(Rs. Cr.)

1 Hero Honda Motors ltd 0.48 28215.61

2 Maruthi Suzuki India 0.69 30595.18

3 Tata Motors 1.16 17501.29

4 Mahindra & Mahindra 1.06 19447.70

5 Ashok Layland 0.82 4230.35

Interpretation

In this Automotive Industry Maruthi Suzuki India show less volatility and high marketcapitalization when compared to the other companies in the same industry. So Maruthi Suzuki

India is selected for he portfolio construction.


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CHART SHOWING BETA VALUE OF AUTO MOTIVE INDUSTRY

0

0.2

0.4

0.6

0.8

1

1.2

Beta value

Herohondamotors ltd

MaruthiSuzuki India

ltd

Tata Motorsltd

Mahindra &Mahindra

Ashoklayland

Company Name

Se

Se

Se


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CHART SHOWING MARKET CAPITALIZATION OF AUTO MOTIVE

INDUSTRY

0

5000

10000

15000

20000

25000

30000

35000

Market

Capitalization

Herohonda

motors ltd

Maruthi

Suzuki India

ltd

Tata Motors

ltd

Mahindra &

Mahindra

Ashok

layland

Company Name

Series3

Series2

Series1


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BANKING INDUSTRY

Sl. No. Company name Beta Value Market Capitalization

(Rs. Cr.)

1 Axis bank ltd 1.00 29444.56

2 HDFC bank ltd 1.00 63786.36

3 ICICI Bank ltd 1.60 83983.29

4 Bank Of Baroda 0.87 15984.69

5 Union Bank of India 0.79 11706.16

Interpretation

In This banking industry HDFC bank shows the average volatility and high market capitalization

when compared to the other companies in the same industry. So HDFC bank is selected for the

port folio construction.


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CHART SHOWING BETA VALUE OF BANKING INDUSTRY

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

Beta value

Axis bank

ltd

HDFC bank

ltd

ICICI bank

ltd

Bank of

Boroda

Union bank

of India

C0mpany name

Se

Se


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CHART SHOWING MARKET CAPITALIZATION OF BANKING INDUSTRY

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

Market

capitalization

Axis bank

ltd

HDFC bank

ltd

ICICI bank

ltd

Bank of

Boroda

Union bank

of India

Company name

Series

Series


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TABLES SHOWING THE BETA VALUE & MARKET

CAPITALIZATION

INFORMATION TECHNOLOGY INDUSTRY

Sl. No. Company Name Beta Value Market Capitalization

(Rs. Cr.)


2 Tata Consultancy services ltd 0.90 77681.27

3 Mphasis ltd 0.67 8540.92

4 Wipro ltd 0.94 56227.40

5 Tech Mahindra ltd 0.92 9008.63

Interpretation

In this information technology industry Infosys technologies ltd shows the less volatility

and high market capitalization when compared to the other companies in the same industry. So

Infosys technologies ltd is selected for the portfolio construction.


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CHART SHOWING BETA VALUE OF INFORMATION TECHNOLOGY

INDUSTRY

0

0.1

0.20.3

0.4

0.5

0.6

0.7

0.80.9

1

Beta value

Infosys

technologies

ltd

Tata

consultancy

services ltd

Mphasis ltd Wipro ltd Tech

Mahindra ltd

Company name

Series3

Series2Series1


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CHART SHOWING MARKET CAPITALIZATION OF INFORMATION

TECHNOLOGY INDUSTRY

0

20000

40000

60000

80000

100000

120000

Beta value

Infosys

technologies

ltd

Tata

consultancy

services ltd

Mphasis ltd Wipro ltd Tech

Mahindra ltd

Company name

Series3

Series2

Series1


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TABLE SHOWING THE BETA VALUES & MARKET CAPITALIZATION

REAL ESTATE INDUSTRY


(Rs. Cr.)

1 H.D.I.L 1.84 6945.10

2 GMR Infrastructure ltd 1.25 25075.85

3 ParsvnathDevelopers 1.33 1547.79

4 Unitech 1.67 16836.05

5 DLF ltd 1.55 55252.35

Interpretation

In this real estate industry DLF ltd shows the average volatility and high market

capitalization when compared to the other companies in the same industry. So DLF ltd is

selected for the portfolio construction .


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CHART SHOWING BETA VALUE OF REAL ESTATE INDUSTRY

0

0.2

0.4

0.6

0.8

1

1.2

1.41.6

1.8

2

Beta value

H.D.I.L GMR

infrasture

ltd

Parsvnath

developers

Unitech DLF ltd

Company name

Series2

Series1


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CHART SHOWING MARKET CAPITALIZATION OF REAL ESTATE

INDUSTRY

0

10000

20000

30000

40000

50000

60000

Market

capitalization

H.D.I.L GMR

infrasture

ltd

Parsvnath

developers

Unitech DLF ltd

Company name

Series2

Series1


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TELECOM INDUSTRY

Sl.No Company Name Beta Value Market Capitalization

(Rs.Cr.)

1 Bharti Airtel ltd 0.93 153678.50

2 Tata Teleservices (Maharashtra) ltd 1.25 7304.22

3 Reliance 1.49 64449.02

4 Idea Cellular 1.11 24645.72

5 Tata communications 1.05 13487.63

Interpretation

In this telecom industry Bharti Airtel ltd shows the less volatility and high market

capitalization when compared to the other companies in the same industry. So Bharti Airtel is

selected for the portfolio construction.


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CHART SHOWING THE BETA VALUE OF TELECOM INDUSTRY

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

Beta value

Bharti Airtel ltd Tata teleservices

ltd

Reliance

communication

ltd

Idea cel lu lar l td Tata

communications

ltd

Company name

Series3

Series2

Series1


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CHART SHOWING MARKET CAPITALIZATION OF TELECOM

INDUSTRY

0

20000

40000

60000

80000

100000

120000

140000

160000

market capitalization

Bharti Airtel ltd Tata teleservices

ltd

Reliance

communication

ltd

Idea cellular l td Tata

communications

ltd

Company name

Series3

Series2

Series1


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39



PHARMACEUTICAL INSTUSTRIES


(Rs.Cr.)

1 Glenmark Pharmaceuticals ltd 0.77 5821.62

2 Lupin ltd 0.42 7012.87

3 Cipla ltd 0.50 20309.54

4 Wockhardt ltd 0.66 1558.43

5 Glaxo Smithline Pharma ltd 0.07 10435.89

Interpretation

In this pharmaceuticals industry Cipla ltd shows the average volatility and high market

capitalization when compared to the other companies in the same industry. So Cipla ltd is

selected for the portfolio construction.


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CHART SHOWING BETA VALUE OF PHARMACEUTICALS INDUSTRY

0

0.10.2

0.3

0.4

0.5

0.60.7

0.8

Beta value

Glenmark

Pharmaceuticals

ltd

Lupin l td Cipla l td Wockhardt l td Glaxo Smithline

Pharma ltd

Company name

Series3

Series2

Series1


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CHART SH0WING MARKET CAPITALIZATION OFPHARMACEUTICALS INDUSTRY

0

5000

10000

15000

20000

25000

Market capitalization

Glenmark

Pharmaceuticals

ltd

Lupin ltd Cipla ltd Wockhardt ltd Glaxo Smithline

Pharma ltd

Company name

Series3

Series2Series1


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TABLE SHOWING SECURITIES SELECTED FOR THE PORTFOLIO

CONSTRUCTION WITH ITS BETA VALUE AND MARKET

CAPITALIZATION RATE

Sl. No. Company Name Beta Market Capitalization

1 Maruthi Suzuki India ltd 0.69 30595.18

2 HDFC Bank ltd 1.00 63786.36

3 Infosys Technologies ltd 0.70 104639.90

4 DLF ltd 1.55 55252.35


6 Cipla ltd 0.50 20309.54

Interpretation

Among those companies selected for the port folio construction DLF LTD shows the

high beta value and Cipla ltd shows the low beta value. On the basis of market capitalization

Bharti Airtel ranks first and Infosys Technologies ltd holds the second position. Most of the

companies selected for the portfolio are top companies in each industry.


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SECURITY ALPHA VALUE

Alpha measures, the unsystematic risk of the company. It indicates the extra return earned by the

stock over and above the market return. If alpha is positive, then scrip will have higher return. If

alpha is zero, then return depends on the market return.

Alpha = Stock return ( Beta * Market return)


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TABLE SHOWING SECURITIES SELECTED FOR THE PORTFOLIOCONSTRUCTION WITH ITS ALPHA VALUE

Sl. No. Company Name Alpha

1 Maruthi Suzuki India ltd -0.1235

2 HDFC bank ltd 0.8400

3 Infosys Technologies ltd -0.4350

4 DLF ltd 0.2672

5 Bharti Airtel ltd 0.9405

6 Cipla ltd 0.5450

Interpretation

On the basis of the alpha value only two companies ie, Maruthi Suzuki India ltd and Infosys

Technologies ltd have the negative value. It shows that those two companies earning below the

market return but all other companies shows the positive alpha value that means those companies

have return higher than the market. Over all the major part of the portfolio securities have the

more return than the market return.


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TABLE SHOWING THE SYSTEMATIC RISKAND UNSYSTEMATIC RISKOFSELECTED COMPANIES FOR PORTFOLIO CONSTRUCTI8ON

Interpretation

From the above table it is clear that DLF ltd has the maximum systematic risk and

unsystematic risk. The minimum systematic risk and unsystematic risk is to Cipla ltd.

Sl.No. Company Name Beta ^2 Unsystematic

Risk

Systematic Risk

1 Maruthi Suzuki India ltd 0.4761 6.4080 1.3150

2 HDFC bank ltd 1.0000 9.6008 2.7500

3 Infosys Technologies ltd 0.4900 5.4830 1.4113

4 DLF ltd 2.4025 12.5845 10.5300

5 Bharti airtel ltd 0.8649 5.2750 5.6400

6 Cipla ltd 0.2500 3.785 1.2850


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PORTFOLIO CONSTRUCTION

Portfolio construction and selection is done by adopting the following format:

1. Five securities namely,Maruthi Suzuki India ltd,HDFC bank, Infosys technologies

ltd,DLF ltd,Bharti Airtel and Cipla ltd are grouped together to form a portfolio.

2. Constructed four different portfolio by changing the weight of each for the purpose of

fund allocation.

3. Apply the Sharp Index to each of the portfolio

4. Select that portfolio which has the highest Sharp


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THE PORTFOLIO CONSTRUCTION IS ON THE BASIS OF FOUR

CRITERIA

By giving equal weight to each security in the portfolio

By giving weight to each security based on P/E Ratio.

By giving weight to each security based on E.P.S.

By giving weight to each security on the basis of risk adjusted rate of return.

Portfolio 1 (By giving equal weight to each security in the portfolio)

TABLE SHOWING THE CALCULATI8ON OF PORTFOLIO BETA

Sl. No. Company Name Beta Weight Weight * Beta


2 HDFC bank ltd 1.00 0.166 0.166

3 Infosys technologies ltd 0.70 0.166 0.1162

4 DLF ltd 1.55 0.166 0.2573

5 Bharti Airtel 0.93 0.166 .0.1544

6 Cipla ltd 0.50 0.166 0.0830

Total 1 0.8914


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TABLE SHOWING THE CALCULATION OF PORTFOLIO ALPHA

TABLE SHOWING THE CALCULATION OF PORTFOLIO UNSYSTEMATICRISK No Company Name Unsystematic

Risk

Weight Weight^2*

UnsystematicRisk


2 HDFC bank ltd 9.6008 0.166 0.2645


4 DLF ltd 12.5845 0.166 0.3460

5 Bharti Airtel 5.2750 0.166 0.1450

6 Cipla ltd 3.7850 0.166 0.1040

Sl. No. Company Name Alpha Weight Weight * Alpha

1 Maruthi Suzuki India ltd -0.1235 0.166 -0.2050

2 HDFC bank ltd 0.8400 0.166 0.1394

3 Infosys technologies ltd -0.4350 0.166 -0.0722

4 DLF ltd 0.2672 0.166 0.0443

5 Bharti Airtel 0.9405 0.166 0.1561

6 Cipla ltd 0.5450 0.166 0.0905

Total 1 0.1531


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MEASURING THE PORTFOLIO RISKAND RETURN

Portfolio return = Portfolio alpha + (portfolio beta * Market return)

= 0.1531+ (0.8914 * 31.5)

= 28.2322

Portfolio risk = Systematic risk + Unsystematic risk= ( Beta ^2*Market Variance)+Unsystematic risk

= 0.7946*6.556+1.1875

= 6.3969


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PORTFOLIO 2 (BY GIVING WEIGHT TO EACH SECURITY BASED ONP/E RATIO

TABLE SHOWING THE CALCULATION OF PORTFOLIO WEIGHT

No. Company name P/E ratio Weight


2 HDFC bank ltd 29.40 0.1894


4 DLF ltd 38.80 0.2500


6 Cipla ltd 26.40 0.1701

Total 155.20 1


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TABLE SHOWING THE CALCULATION OF PORTFOLIO BETA

No. Company name Beta Weight Weight* Bet


2 HDFC ltd 1.00 0.1894 0.1894


4 DLF ltd 1.55 0.2500 0.3875

5 Bharti Airtel 0.93 0.1275 0.1186

6 Cipla ltd 0.50 0.1701 0.0850

Total 0.9630


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No Company Name Alpha Weight Weight *

Alpha

1 Maruthio Suzuki Indialtd

-0.1235 0.1424 -0.1758

2 HDFC bank ltd 0.8400 0.1894 0.1590


4 DLF ltd 0.2672 0.2500 0.0668

5 Bharti Airtel ltd 0.9405 0.1275 0.1199

6 Cipla ltd 0.5450 0.1701 0.0927

Total 1 0.2103


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TABLE SHOWING THE CALCULATION OF PORTFOLIO UNSYSTEMATICRISK

No. Company Name Unsystematic

Risk

weight Weight^2*Unsystematic

risk

1 Maruthio Suzuki Indialtd

6.4080 0.1424 0.1299

2 HDFC bank ltd 9.6008 0.1894 0.3444


4 DLF ltd 12.5845 0.2500 0.7865


6 Cipla ltd 3.7850 0.1701 0.1095

Total 1 1.5353


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MEASURING PORTFOLIO RISKAND RETURN

Portfolio return = Portfolio alpha+ (portfolio beta*Market return)

=0.2103+(0.9630*31.5)

=30.54

Portfolio risk = Systematic risk + Unsystematic risk= (beta^2*Market variance) + Unsystematicrisk

= 0.9273*6.556+1.5353

= 7.6151


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Portfolio 3 (By giving weight to each security based on E.P.S)


No. Company Name E.P.S. Weight


2 HDFC bank ltd 50.90 0.2032


4 DLF ltd 9.10 0.0363


6 Cipla ltd 9.90 0.0395

Total 250.50 1


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No. Company Name Beta Weight Weight*Beta


2 HDFC bank ltd 1.00 0.2032 0.2032


4 DLF ltd 1.55 0.0363 0.0563


6 Cipla ltd 0.50 0.0395 0.0198

Total 1 0.8195


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No. Company Name Alpha weight Weight*Alpha


2 HDFC bank ltd 0.8400 0.2032 0.1706


4 DLF ltd 0.2672 0.0363 0.0097


6 Cipla ltd 0.5450 0.0395 0.0215

Total 1 0.1646


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No. Company Name UnsystematicRisk

Weight Weight^2*UnsystematicRisk

1 Maruthi Suzuki Indialtd

6.4080 0.1684 0.1817

2 HDFC bank ltd 9.6008 0.2032 0.3964

3 Infosys technologiesltd

5.4830 0.3896 0.8323

4 DLF ltd 12.5845 0.0363 0.0166


6 Cipla ltd 3.7850 0.0395 0.0059

Total 1 1.5727


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= 0.1646 + ( 0.8195*31.5)

= 25.98

Portfolio risk = Systematic risk + Unsystematic risk

= (beta^2*Market variance) + Unsystematicrisk

= (0.6716*6.556)+1.5727

= 5.9755


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Portfolio 4 (By giving weight to each security on the basis of risk adjusted rate ofreturn)


No. Company name Return(Ri)

S.D. RiskFreeRate(Rf)

Ri RfS.D.

Weight

1 Maruthi SuzukiIndia ltd

-2.512 2.7788 6.75 -1.1995 1.286

2 HDFC bank ltd 13.1620 3.5111 6.75 0.5201 -0.55

3 InfosysTechnologies ltd

-14.73 2.6256 6.75 -3.1159 3.337

4 DLF ltd 28.67 4.8068 6.75 0.9485 -1.016

5 Bharti Airtel ltd -4.644 3.3034 6.75 -1.0441 1.1185

6 Cipla ltd 21.76 2.2529 6.75 2.9574 -3.1680

-0.9335 1


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No. Company Name Beta Weight Weight*Beta


2 HDFC bank ltd 1.00 -0.55 -0.55


4 DLF ltd 1.55 -1.016 -1.5748


6 Cipla ltd 0.50 -3.1680 -1.584

Total 0.5543


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No. Company Name Alpha Weight Weight*Alpha


2 HDFC bank ltd 0.8400 -0.55 -0.462

3 Infosys Technologies ltd -0.4350 3.337 -1.4516

4 DLF ltd 0.2672 -1.016 -0.2715


6 Cipla ltd 0.5450 -3.1680 -1.7266

Total -1.5670


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No. Company Name UnsystematicRisk

Weight Weight^2*Unsystematicrisk


2 HDFC bank ltd 9.6008 -0.55 -5.2804


4 DLF ltd 12.5845 -1.016 -12.9904


6 Cipla ltd 3.7850 -3.1680 -11.9908

Total 4.5327


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= -1.5670+ (0.5543*31.5)

= 15.8935

Portfolio risk = Systematic risk + Unsystematic risk

= (beta^2*Market variance) + Unsystematicrisk

=(0.3072*6.556)+4.5327

=6.5467

PORTFOLIO EVALUATION AND SELECTION

The selection and evaluation is on the basis of the Sharpes performance index. Sharpes

performance index gives us a single value to be used for the performance ranking of various

funds or portfolio. When compared to the other ratios for selection shapers ratio is the only ratio

giving importance to risk as well as return. The risk premium is the difference between the

portfolios average rate of return and the risk less rate of return. The standard deviation of the

portfolio indicates the risk . This index assigns the highest value to the assets ie, portfolio ,that

have the best risk adjusted rate of return . The formula for calculating the sharpes performance

index is as follows.

Sharpe index = Portfolio return- Risk Free rate Standard deviation of population


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TABLE SHOWING THE CALCULATION OF THE SHARPESPERFORMANCE RATIO

Portfolio Return RiskFreeRate

TotalRisk

S.D. Ri RfS.D

Rank

1 28.23 6.75 6.3969 0.604 35.56 II

2 30.54 6.75 7.6151 0.604 39.39 I

3 25.98 6.75 5.9755 0.604 31.83 III

4 15.89 6.75 6.5467 0.604 15.13 IV

Interpretation

On the basis of Sharpes performance ratio portfolio-2 is selected as the best alternative among

the four portfolios this indicates that the performance of the second portfolio is superior as

compared with other portfolios. Therefore, the portfolio-2 is selected.


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CHART SHOWING THE BEST PORTFOLIO USING SHARPESPERFORMANCE INDEX

0

5

10

15

20

25

30

35

40

45

Sharpe's

performance

ratio

1 2 3 4

Portfolios

Series2

Series1


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FINDINGS

1. Among those companies selected for the port folio construction DLF LTD shows the high

beta value and Cipla ltd shows the low beta value. On the basis of market capitalization Bharti

Airtel ranks first and Infosys Technologies ltd holds the second position. Most of the companies

selected for the portfolio are top companies in each industries.

2. On the basis of the alpha value only two companies ie, Maruthi Suzuki India ltd and Infosys

Technologies ltd have the negative value. It shows that those two companies earning below the

market return but all other companies shows the positive alpha value that means those companies

have return higher than the market. Over all the major part of the portfolio securities have the

more return than the market return.

3. DLF ltd has the maximum systematic risk and unsystematic risk. The minimum systematic

risk and unsystematic risk is to Cipla ltd.

4. We can reduce the risk by selecting a suitable portfolio, we cant avid the risk fully.

5. A share having high beta value shows its high volatility. Similarly a share having low beta

value shows low volatility.

6. The trader can effectively use the strategy for return enhancement provided he has the correct

market information.

7. It has been found that all the strategies applied on historical data of the period of the studywere able to reduce the loss that rose from price risk substantially.


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SUGGESTIONS

1. An investor should always prefer a diversified portfolio, through this he can compensate the

loss incurred in one sector by the profit gained in from another sector.

2. If there are two portfolios with the same expected return, the investor would prefer the one

with the lower risk.

3. If there are two portfolios with the same risk, the investor would prefer the one with the higher

expected return.

4. An unscientific investment always ends in loss. So be aware of the market fluctuations and

respond accordingly.

5. Investor should also consider his risk free return like treasury bills etc.

6. Most of the investors are not aware of the trends in market. So the broking institutions should

come forward and give valuable advice to them regarding the matter of investment.


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CONCLUSION

The objective of constructing a portfolio and revising it periodically is to earn maximum

returns with minimum risk. The portfolio can ensure a high return with a minimum risk. But the

investor has to constantly monitor the portfolio to ensure that it continues to be optimal. As the

economy and financial markets are dynamic, the changes take place almost daily. As time

passes, securities which were once attractive may cease to be so. New securities with promises of

high returns and low risk may emerge. The investor now has to revise the portfolio in the light of

the developments in the market. The portfolio developed through this research can ensure

maximum return with the present economic conditions.


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BLIOGRAPHY

Books

1. Kevin.S, Security Analysis & Portfolio Management, PHI Learning private Limited, New

Delhi, 2006

2. Gorden.E & Natarajan.K, Financial market & Services, Himalaya Publishing House, Mumbai,

2003

3. Dr.K.G.C.Nair & Dr.Jayan, HigherAccounting, Chand Publications, Trivandrum, 2003

4. Potti.L.R, Quantitative techniques, Yamuna Publications, Thiruvananthapuram, 2005

5. Potti. L.R, Research Methodology, Yamuna publications, Thiruvananthapuram, 2007

Websites

1.www.nseindia.com

2.www.geojitbnpparibas

Geogit Peter Original

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