Portfolio Mgmt - Merfin India Ltd

8/22/2019 Portfolio Mgmt - Merfin India Ltd

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INDEX

UNIT I:

INTRODUCTION

NEED OF THE STUDY

OBJECTIVES OF THE STUDY

RESEARCH METHODOLOGY

SCOPE OF THE STUDY

LIMITATIONS OF THE STUDY

REVIEW OF LITERATURE

UNIT II:

COMPANY PROFILE

UNIT III:

DATA ANALYSIS

INTERPRETATIONS

UNIT IV:

FINDINGS

CONCLUSIONS AND SUGGESTIONS

APPENDIX:

BIBLIOGRAPHY


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UNIT - I

INTRODUCTION


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INTRODUCTION TO PORTFOLIO:

The portfolio analysis begins where the security analysis ends and this fact has

important consequences for investors. Portfolio, where are combinations of securitiesmay or may not take on the aggregate characteristics of there individual parts.

Portfolio analysis considers the determination of future risk and return in holding

various blends of individual securities. Portfolio expected return is a weighted average

of the expected return of individual securities but portfolio variances, in sharp

contrast, can be something less than a weighted average of security variances. As a

result an investor can some times reduce portfolio risk by adding another security

with grater individual risk that any other security in the portfolio. This seemingly

curious result occurs because risk depends greatly on the covariance among return of

individual securities. We will show how on investor can reduce expected risk through

diversification, why this risk reduction result from proper diversification, and how the

investor may estimate the expected return and expected risk level of a given portfolio

of assets.

Portfolio Management:

Portfolio management portfolio is combination of assets held by the investors. This

combination may be of various assets classes like equity and debt and of different

issues like government bonds and corporate debt or of various instruments like

discounts, bonds, warrants, debenture, and chip equity or scraps of emerging blue-

chip companies.

Process of investment:

Portfolio management is a complex activity which may be broken down into

the Followings steps:

1]. Specification of investment objectives and constraints.

2]. Choice of asset mix.

3]. Formulation of portfolio strategy.


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4]. Selection of securities.

5]. Portfolio execution.

6]. Portfolio rebalancing.

7]. Portfolio performance.

1. SPECIFIC INVESTMENT OBJECTIVE AND CONSTRAINS:

The objective of an investment program consist of safety of principal, liquidity,

income, stability adequate income, purchasing power stability, appreciation, freedom

from management of investment, legality and transferability.

a) Safety of principal:

The investor, to be certain of the safety of principal, should carefully review

the economic and industry trends before choosing the types of investments. Errors are

avoidable and, therefore, to ensure safety of principal, the investor should consider

diversification of assets. Adequate diversification involves mixing investments

commitments by industry, geographically, by management, by finance type and by

maturities. A proper combination of these factors would reduce losses. Diversification

to a great extent helps in proper investment programmers but it must be reasonably

accomplished and should not be out to extremes.

b) Liquidity:

Even investor requires a minimum liquidity in his investments to meet

emergencies. Liquidity will be ensuring if the investor buys a proportion of readily

saleable securities out of his total portfolio. He may, therefore, keep a small

proportion of cash, fixed deposits and units which can be immediately made liquid

like stock and property or real estate cannot be ensure immediate liquidity.

c) Income stability:

Regularity of income at a consistent rate is necessary in any investment

pattern. Not only stability, it is also important to see that income is adequate after


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taxes. It is possible to find out some good security which pays practically all their

earnings in dividends.

d) Appreciation and purchasing power stability:

Investors should balance their portfolios to fight against any purchasing power

instability. Investors should judge price level inflation, explore the possibility of gain

and loss in the investments available to them, limitations of personal and family

consideration. The investors should also try and forecast which securities will

possibly appreciate. A purchase of property at the right time will lead to appreciation

in time. Growth stocks will also appreciation over time. These, however, should be

thoughtfully and not in manner of speculation or gamble.

e) Legality and freedom from care:

All investments should be approved by law. Law relating to minors, estate, trust,

shares and insurance are studied. Illegal securities will bring out many problems for

the investor. One way being free from care is to invest in securities like unit t trust of

India, life insurance corporation or savings certificates. The management of securities

is then left to care of the trust that diversifies the investments according to safety,

stability and liquidity with the consideration of their investment policy. The identity

of legal securities and investments in such security will also help in the investor in

avoiding many problems.

f) Tangibility:

Intangible securities have many times lost their values due to price level inflation,

confiscatory laws or social collapse. Some investor prefers to keep a part of their

wealth invested in tangible proprieties like buildings, machinery, and land. It may,

however, be consider that tangible propriety does not yield an income apart from the

direct satisfaction of the possession or propriety.

2. Choice of the asset mix:

The most important decision in portfolio Management is the mix decision. Very

broadly, this is concerned with the proportions of stocks (equity shares and

units/shares of equity oriented mutual funds) and bonds (fixed income investment


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vehicles in general) in the portfolio. The appropriate stock-bound mix depends

mainly on the risk tolerance and investment horizon of investor.

3. Formulation of portfolio strategy:

Once a certain asset mix is chosen, an appropriate portfolio strategy has to be

hammered out. Two broad choices are Available: an active portfolio strategy strives

or a passive strategy. An active portfolio strategy strives to earn superior risk-adjusted

returns by resorting to market timing, or sector rotation, or security selection, or some

combination of these. A passive portfolio strategy, on the other hand, involves

holding a broadly diversified portfolio and maintaining a pre-determined level of risk

exposure.

4. Selection of securities:

Generally, investors pursue an active stance with Respect to security selection. For

stock selection investor commonly go by fundamental analysis or technical analysis

the factor that are concerned in selecting bound or fixed income instrument are yield

to maturity credit rating term to maturity tax shelter and liquidity.

5. Portfolio Execution:

This is the phase of portfolio management which is concerned with

implementing the portfolio plan by buying and or selling specified Securities in given

amounts. Through often glossed over in portfolio management decisions, these

important practical state that has a bearing on investment result.

6. Portfolio revision:

The value of a portfolio as well as its composition the relative proportions of

stock and bond components may change as prices of Stocks and bonds fluctuate of

course the fluctuation in stock is often the dominant factor underlying this change. In

response to such changes periodical rebalancing of the portfolio is required. These

primary involve a shift to bonds are vice-versa. In additional, it may call for sector

rotation as well as security switches.


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7. Performance revolution:

The performance of a portfolio should be evaluated periodically the key dimension of

portfolio performance evaluation are risk and return and the key issue is weather the

portfolio return is commensurate with its risk exposure. Such a review may provide

useful feedback to improve the quality of portfolio management process on a

continuing basis.

Portfolio diversification:

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

your 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. You might invest in the stocks of companies belonging to other industrygroups. You might allocate to different categories of stocks, such as growth, value, or

income stocks. You might include bonds and cash investments in your asset allocation

decisions. Potential bond categories include government, agency, municipal and

corporate bonds. You might also diversify by investing in foreign stocks and bonds.

Diversification requires you to invest din securities whose investment returns do not

move together. In other words, their investment returns have a low correlation. The

correlation coefficient is used to measure the degree that returns of two securities are

related. For example, two stocks whose returns move in lockstep have a coefficient of

+1.0. Two stocks whose returns move in exactly the opposite direction have a

correlation of -1.0. To effectively diversify, you should aim to find investments that

have a low or negative correlation.

As you increase the number of securities in your portfolio, you reach a point where

youve likely diversified as much as reasonably possible. Financial planners vary in


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their views on how many securities you need to have a fully diversified portfolio.

Some say it is 10 to 20 securities. Others say it is closer to 30 securities.

Mutual funds offer diversification at a lower cost. You can buy no-load mutual funds

from an online broker. Often, you can buy shares fund directly from the mutual fund,

avoiding a commission altogether.

Asset allocation:

Asset allocation is the process of spreading your investment across the three major

asset classes of stocks, bonds, and cash. Asset allocation is a very important part ofyour investment decision-making. Professional financial planner frequently point out

that asset allocation decisions are responsible for most of your investment return.

Asset allocation begins with setting up an initial allocation. First, you should

determine your investment profile. Specifically, this requires you to assess you

investment horizon, risk tolerance, and financial goals:

Investment horizon:

Also called time horizon your investment horizon is the number of years you have to

save for a financial goal. Since youre likely to have more than one goal, this means

you will have more than one investment horizon. For example, saving for your five-

year-daughters college has an investment horizon of 12 years. Saving for your

retirement in 30 tears has an investment horizon of 30 year. When you retire, you will

want to have saved a lump sum that is large enough to generate earnings every year

until you die.

Risk tolerance:

Your risk tolerance is a measure of your willingness to accept a higher degree of risk

in exchange for the chance to earn a higher rate of return. This is called the risk-return

trade-Off. Some of us, naturally, are conservative investor, while others are

aggressive investors.


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As a general rule, the younger you are, the higher your risk tolerance and the more

aggressive you can be. As a result, you can afford to allocate a higher percentage of

your investments to securities with more risk. These include aggressive growth stocks

and the mutual funds that invest in them. A more Aggressive allocation is viable

because you have more time to recover form a poor year of investment returns.

Financial goal:

Your financial goal are also an important consideration in deciding on an initial

allocations a general rule, younger and aggressive investors allocate 70%to 100%of

their portfolios to stocks, with the remainder in bonds and cash. Conservative

investors allocate 40%to60% in stocks, 30% to50%in bonds, and the remainder in

cash.

Moderate investor allocate somewhere between the allocation of aggressive and

conservative to make an initial allocation, you need to build a portfolio of individual

securities, mutual funds, or both. In general, mutual funds provide more

diversification benefit for the buck.

How you choose to precisely allocate among the major asset classes depends, in part,

on other factors. For example, if example, if interest rates are expected to rise, you

might allocate a greater percentage to money market mutual funds, adsorb other bank

deposits. If rates are headed lower, you may choose to allocate more to stocks or

bonds.

Financial planners suggest that you rebalance, or reallocate, your portfolio from time

to time. They differ in their views on how often you should reallocate. It may be once

a year or it may be every three to six months. At a minimum, reallocation lets you up

date any changes in your investment profile, or to take advantage of a change in

interest rates. Rebalancing often involves nothing more than a fine-tuning of your

current allocations. For example, a conservative investor may decide to shift 5%of her

portfolio form stocks to cash to take advantage of higher rates that money market

funds may be offering.

Risk


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Risk and uncertainty are an integral part of an investment decision. Technically risk

can be defined as a situation where the possible consequences of the decision that is to

be taken are known. Uncertainty is generally defined to apply to situation where the

probabilities cannot be estimated. However, risk and uncertainty are used

interchangeably.

Risk is composed of demands that bring inn the variations in return of income.

The main forces contributing to risk are price and interest. Risk is also influenced by

external and internal considerations. External risks are uncontrollable and broadly

affect the investment. These external risks are called systemic risk. Risk due to

internal environment of a firm or those effecting particular industry are referred to as

unsystematic risk.

Systematic Risk

It is non-diversification risk and is associated with the securities market as well as the

economic, sociologic, political, and legal consideration of price of all securities in

economy. The effect of these factors is put pressure on all securities in such a way

that the price of all stock will move in same direction. For example, during a boom

period prices of all securities will and indicate that the economy is moving toward

prosperity.

Systematic risk further divided into

-Market Risk

-Interest Risk

-Purchasing power Risk

Market Risk:

Source of risk: market risk is referred to as stock variability due to changes in

investors attitudes and expectations. The investors reaction towards tangible and

intangible events is chief cause affecting market risk. The first set, that is, the

tangible events has a real basis but the intangible events are based on a

psychological basis or reaction to expectations or realities.


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Market risk triggers off through real events comprising political, social and economic

reasons. The initial decline or risk in market price will create an emotional

instability of investors and causes a fear of loss are creating an undue confidence,

relating possibility of profit. The reaction to loss will culminate in excessive selling

and pushing prices down towards declaim in prices rather than increase in prices.

Market risks cannot be eliminated while financial risks can be reduced.

Through diversification also, market risk can be reduced but not eliminated because

prices of all stocks moves together and any equity stock investor will be faced by the

risk of a downwards market and declaim in security prices.

Market risk cannot be eliminated while financial risks can be reduced.

Through diversification also, marker risk can be reduced but not eliminated because

prices of all stock moves together and equity stock investor will be faced by the risk

of a download market and decline in security prices.

Interest Rate Risk

There are four types of movements in prices of stocks in the market. These

may be termed as

1. long-term

2. cyclical(bulls and bears markets)

3. intermediate or within the cycle and

4. Short-term.

The prices of securities will rise or fall, depending on the change in interest rate the

longer the maturity period of a security the higher the yield on an investment and

lower the fluctuations in price. Short-term interest rates fluctuate at a great speed and

are now more volatile the long-term securities but their changes have a similar effect

price. Traditionally investor could attempt to forecast cyclical swings in interest rates

and prices merely by forecasting up and downs in general business activity. Some of

the factors that are responsible complicated analysis are the difference between actual

and expected inflation in monitory policy and industrial recessions in the economy. If


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interest rate could be calculated and forecast accurately, investor would buy and sell

securities with confidence.

Interest rate risk can also be reduced by analyzing the different kinds of securities

available for investment. A government bond or a bond issued by the financial

institution like IDBI is a risk less bond. Even if government bonds give a slightly low

rate of interest, in the long run they are better for a conservative investor because he is

assured of his return. Then the price of securities in the private corporate sector will

fall and interest rate will increase. The direct effect of increasing in the level of

interest rate will raise the price of securities.

Purchasing power Risk:

Purchasing power risk is also known as inflation risk. This risk arises out of change in

prices of goods and services and technically it covers both inflation and deflation

periods. During last two decades, it has been seen that inflationary have been

continuously affecting the Indian economy. Therefore, in India purchasing power risk

is associated with inflation and rising prices in the economy.

Inflation in India has been eithercost push ordemand pull. This type of inflation

has been seen when costs of production rise or when there is demand for product but

there is no smooth supply and consequently prices rise. In India, the cost push

inflation has led to enormous problem as rise in prices of raw material has greatly

increased costs of production. The increase in costs of production has shown a rising

in wholesale price index and consumer price index. A rising trend in price index

reflects a price spiral in economy

All investors should have an approximate estimate in their minds before investing

their funds of the expected return after making an allowance for purchasing power

risk the allowance for raise in prices can be made through a check list of the cost of

living index. The behavior of purchasing power risk can in some ways be compared to

interest rate risk. They have a systematic influence on the price of both stocks and

bonds if the consumer price index in a country shows a constant increasing of 4% and

suddenly jumps to 5% in the next year the required rate of return will also have to be

adjusted with an upward revision. Such change in the process will affect governmentsecurities corporate bonds and common stocks.


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Unsystematic Risk:

It is unique to a firm or industry. It does not affect an average investor. Unsystematic

risk is caused by factor like labor strikes, irregular disorganized policies, the

consumer preferences. These factors are independent of prices mechanism operating

in the securities market. The problems of both systematic and unsystematic risk are

inherent in industries dealing with basic raw materials as well as in consumer goods

industries. The important of unsystematic risk arises out of the uncertain surrounding

a particular firm or Industry due to the factory like labor strikes consumer preference

and management policies. The uncertainties directly effect the financing and

operating environment of the firm. Unsystematic risk can owing to these

considerations be said to complement the systematic risk forces.

Broadly Unsystematic risk can be classified into:

-Business risk

-Financial risk

Business Risk

Every corporate organization has its own objectives and goals and aims at

particulars gross profit and operating income and also expects to provide a certain

level of dividend income to its shareholders. It also hopes to plough back some

profits. Once it identifies its operating level of earnings, the degree of variation from

this operating level would measure business risk. For example, if operating income is

expected to be15 % in year business risk will be low if the operating income varies

between and 14 and 16%. If the operating income is as low, as 10% or as high as18%

it would be said that the business risk is high.

Business risk is also associated with risks directly affecting the internal

environment of the firm and those of circumstances beyond its control. The former is

classified as internal business risk and the latter as external business risk. Within these

two broad categories of risk, the firm operates.

Internal business risk may be represented by firms limiting environment with

in which conducts its business. It is the frame work with in which the firm conducts


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its business drawing its efficiency largely from the constraints with in which its

functions. Internal risk will be of differing degrees in each firm and the degree to

which each firm achieves its goals and attainment level is reflected in its operating

efficiency

External risks of the business are due to many factors. Some of factors that can

be summarized are:-

Business cycle: some industries moves automatically with the business cycle,

others move counter-cyclically;

Demographic factors: such as geographical distribution of population by age,

group and race;

Political policies: change in decisions, topping of state government to some

extent affect the working of an industry;

Monetary policy: reserve bank of Indias policies with regard to monetary

and fiscal policies may also affect revenues through an affect on cost as well

as availability of funds.

Environment: the economic environment of the economy also influences the

firm and costs and revenues.

Financial Risk:

Financial risk in company is associated with method through which it plans its

financial structure. If the capital structure of a company tends to make earning

unstable, the company may fail financially. How a company raises funds to finance its

needs and growth will have an impact ion its future earnings and consequently on the

stability of earnings. Debts financing provides a low cost source of funds to a

company, at the same time providing financial leverage for the common stock

holders. As long as the earnings of the company are higher than the cost of borrowed

funds, the earnings per shares of common stock are increased. Unfortunately, large

amount of debt financing also increases the variability of the returns of the common


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stock holders and thus increases their risk. It is found that variation in returns is the

financial risk.

Financial risk and business risk are somewhat related. While business risk is

concerned with an analysis of the incomes statements between revenues and earnings

before interest and taxes (EBIT), financial risk can be stated as being between

earnings before interest and taxes (EBIT) and earnings before taxes (EBT).

Investors attitude towards return and risk

Before concluding the discussion on risk and its measurements, let us turn

back to the investors attitude towards risk and return. Understanding and measuring

return and risk is fundamental to the investment process and increases an awareness

of the investment problem. Most investors are risk averse. They must be aware of

risk in different investment whether they are confronted with high, moderate or low

risk and the kinds of risks investment are exposed to before making their investment.

To have a higher return, the investor should be able to accept the fact that he has to be

faced with greater risk. In commercial bank and life insurance saving, most of the

risks are low but purchasing power risk. The investor has to decide for himself

whether he would like to choose a group of securities which will give him 15%return

with 10% risk or a return of 25% with 20% risk.


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RISK RETURNS OF VARIOUS INVESTMENT ALTERNATIVES

Management

decision

Investment Mutual

risk

Business

risk

Interest

risk

Purchasing

power risk

High Growth commonstock

High High Low Low

High Speculativecommon stock

High High Low Low

Moderate Blue cheeps(highquality commonstock)

Moderate High Low Low

Moderate Convertiblepreferred stock

Moderate Moderate Low Low

Low Convertibledebentures

Moderate Moderate Low Low

Low Corporate bonds Low Low High High

Low Governmentbonds

Low Low High High

Low Short-term(government

bonds)

Low Low Low High

Low Money marketfunds

Low low Low High


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NEED OF THE STUDY

Investing has been an activity confined to the rich and business class in the

past. This can be attributed to the fact that availability of invisible funds is a pre-

requisite to deployment of funds .But, today, we find that investment has Become a

house hold word and is very popular with people e from all walks of Life.

Increasing popularity of investments can be attributed to the following factors:

1. Increase in working population, larger family incomes and consequent higher

Savings;

2. Provision of tax incentives in respect of investments in specified channels;

3. Increase in tendency of people to hedge against inflation;

4. Availability of large and attractive investment alternatives;

5. Increase in investment related publicity;

6. Ability of investments to provide income and capital gains etc.


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OBJECTIVES OF THE STUDY:

To construct three portfolios of public sector units, public limited companiesand foreign collaboration and find their ex-post return and risk for the period of three

year.

To make a comparative study of the risk-adjusted measure of portfolio

performance using the sharpes and Treynors performance index under total risk and

market risk situations, by taking ex-post returns for a period of three years.

Learning objectives:

1. Calculate the total return, return relative, and cumulative wealth index.

2. Compute the arithmetic, mean, and geometric mean of a return series.

3. Explain the rationale for using standard deviation as the principle measure of

Risk.

4. Measure the expected return and risk of a security.


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RESEARCH METHODOLOGY

Using a model consisting of two modules has carried out the work. The first moduleinvolves the selection of portfolio and the second module involved evaluation of

portfolios performance.

MODULE-1

Securities selection and portfolio construction has been made by taking scrips Public

Sector Units, public limited companies and foreign collaboration units. Equal weight

age has been given to industries like shipping, oil & gas and power growth orientedindustries like pharmaceuticals, banking and FMCG and technology oriented

industries like software and telecommunications.

MODULE-2

Portfolio performance was evaluated by ranking holding periods return under total

risk and market risk situation (measured by standard deviation and Beta coefficient)

for the period of three years.


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SCOPE OF THE STUDY

The study of optimization portfolio risk & returns has been fulfilled within the

effective study of different portfolio according to the companys information.

This study also delivers the enumeration of different levels of analysis &

strategy implementation.

The software companies like Wipro provided the update data to the effective

study.

Some of the data has been grabbed from the outer sources which are not

provided by the companies.

This study has been put partial concentration on companys revenues as they

did not provide the optimum information.

The optimum information has been studied for giving an effective out comes

by the minimum resources.

Some of the study has been done externally due to non availability of

sufficient data by the company.


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LIMITATIONS OF THE STUDY

The work has been carried out under the following limitations:

The all portfolio consists of riskily assets there are no risk-free assets.

Risky assets consists of equity shares and where as risk-free assets consists of

investments in the saving bank account, deposits, treasury bills, bonds, etc

The holding period for risky assets was for I yr i.e. shares were assumed to be

purchased at the first day and sold at the second consecutive day and average

return for I yr is considered.

An equal no of shares i.e. I (one) share of each script is assumed to be

purchased form the secondary market.

Return on the saving bank account is considered as benchmark rate of return.

The entire portfolio has been held constant for the whole period of the three

years.


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THEORETICAL ARTICLES

Measurement of Risk:

The risk of a portfolio can be measured by using the following measure of risk.

Variability

Investment risk is associated with the variability of rates of return. The more variable

is the return, the more risky the investment. The total variance is the rate of return on

a stock around the expected average, which includes both systematic and

unsystematic risk.

The total risk can be calculated by using the standard deviation. The standard

deviation of a set of numbers is the squares root of the square of deviation around the

arithmetic average.

Symbolically, the standard deviation be expressed as-

Where,

ri is the mean return of the portfolio and

rit is the return from the portfolio for a particular year


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SHARPES PERFORMANCE INDEX

William Sharpes measure of portfolio performance is also known as reward tovariability ratio (RVAR). It is simply the ratio of reward, which is defined as realized

portfolio returns in excess of the risk free rate, to the variability of return measured by

the standard deviation relation to total risk assumed by the investor. The measure can

be defined follows:-

Rp-rf

RVAR =

Where,

rp =the average return for the portfolio (P) during it HPR

rf= risk free rate of return during HPR

= the standard deviation of the portfolio (P) during HPR


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CAPITAL MARKET LINE

Capital market shows the conditions prevailing in the capital market in terms ofexpected return and risk. It depicts the equilibrium condition that prevails in the

market for efficient portfolios consisting of the portfolio of risky assets or risk free

asset or both. All combination of risky and risk free portfolio are bounded by the

capital market line, and all investors will end up with portfolio somewhere on the

capital market line. The capital market is usually derived under the assumptions that

there exists a risk a risk-less asset available for investment.

It is further assumed that investor can borrow or lend as much as desired at the risk

free rate (rf). Given this opportunity, investors can then mix the risk free assets with a

portfolio or risky assets to obtain the desired risk return combination. Using the

capital market line can graphically represent Sharpes measure for portfolios. The

vertical axis represents the return on the portfolios and the horizontal axis represents

the standard deviation for returns. The vertical intercept is rf. RVAR measures the

slope of the line form rf to the portfolio being evaluated. The steeper the line, the

higher the slope (RVAR) and the better the performance


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TREYNORS PERFORMNCE INDEX

The measure is also referred to as reward to volatility ratio (RVOL). Treynor soughtto relate return on a portfolio to its risk. He distinguished between total risk and

systematic risk assuming that the portfolio is well diversified. In measuring the

portfolio performance Treynor introduced the concept of characteristic line.

The slope of the characteristics measures the relative volatility of the portfolios

returns. The slope of this line is the beta co-efficient which is measure of the volatility

(or responsiveness) of the portfolios returns in relation to those of the market index.

Treynors ratio is the realized portfolios return in excess of the risk-free to the

volatility of return as measured by the portfolio beta

RVOT = rp - rfBp

Average excess return of portfolio (P)= --------------------------------------------

Systematic risk for portfolio

Where,

rp =the average return for the portfolio (P) during it HPR

rf= risk free rate of return during HPR

bp= beta portfolio


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SECURITY MARKET LINE

The security market line indicates the risk-return trade-off for portfolios andindividual securities. Treynor extended his analysis to identify the component of risk

that will be compensated by the market. It is known as systematic risk and is

commonly measured by the beta.

Beta is a measure of risk that applies to all assets and portfolios whether

efficient or inefficient. Security market line specifies the relationship between

expected return and risk for all assets and portfolios whether efficient or inefficient.

The security market is obtained by taking the risk (beta) on the horizontal axis and

portfolio return on the vertical axis. The security market line can be graphically

shown as follows.


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Beta

Beta is a market risk measure employed primarily in the equity markets. It measures

the systematic risk of a single instrument or an entire portfolio. William Sharpe(1964) first used the notion in his landmark paper introducing the capital asset pricing

model (CAPM). The name beta was applied later. Beta describes the sensitivity of

an instrument or portfolio to broad market movements.

The stock market (represented by an index such as the S&P 500 or 100) is assigned a

beta of 1.0. By comparison, a portfolio (or instrument) which has a beta of 0.5 will

tend to participate in broad market moves, but only half as much as the market

overall. A portfolio (or instrument) with a beta of 2.0 will

Tend to benefit or suffer from broad market moves twice as much as the market

overall.

The formula for beta is

XY- (X) (Y)

nX2 (X) 2

Where X is the market return

And Y is the security return

Both quantities are calculated using simple returns. Beta is generally estimated

form historical price time series. For example, 60 trading days of simple returns might

be used with sample estimators for covariance and variance. It is possible to construct

negative beta portfolios. Approaches include.

Beta is sometimes used as a measure of a portfolios market risk. This can be

misleading because beta does not capture specific risk. Because of specific risk. A

portfolio can have a low beta, but still be highly volatile.


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Its price fluctuations would simply have a low correlation with those of the overall

market. It is said that a security or portfolio having higher beta will perform well

provided market has to go up i.e., market index.

UNIT - II

COMPANY PROFILE


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INDIAN STOCK MARKET AN OVERVIEW

CAPITAL MARKET IN INDIA

Indian markets have recently thrown open a new avenue for retail investors and

traders to participate in: commodity derivatives. For those who want to diversify their

portfolios beyond shares, bonds and real estate, commodities are the best option. Till

some months ago, this wouldn't have made sense. For retail investors could have done

very little to actually invest in commodities such as gold and silver or oilseeds in the

futures market. This was nearly impossible in commodities except for gold and silver

as there was practically no retail avenue for punting in commodities. Whatever it may

be , with the setting up of three multi-commodity exchanges in the country, retail

investors can now trade in commodity futures without having any physical stocks

Commodities actually offer immense potential to become a separate asset class for

market-savvy investors, arbitrageurs and speculators. Retail investors, who claim to

understand the equity markets may find commodities an unfathomable market. But

commodities are easy to understand as far as fundamentals of demand and supply are

concerned. Retail investors should understand the risks and advantages of trading in

commodities futures before taking a leap. Historically, pricing in commodities futures

has been less volatile compared with equity and bonds, thus providing an efficient

portfolio diversification option.

Like any other market, the one for commodity futures plays a valuable role in

information pooling and risk sharing. The market mediates between buyers and sellers

of commodities, and facilitates decisions related to storage and consumption of

commodities. In the process, they make the underlying market more liquid

The trading of commodities consists of direct physical trading and derivatives trading.

The commodities markets have seen an upturn in the volume of trading in recent

years. In the five year up to 2010, the value of global physical exports of commodities

increased by 17% while the notional value outstanding of commodity OTC(over the

counter) derivatives increased more than 500% and commodity derivative trading on

exchanges more than 200%.


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The notional value outstanding of banks OTC commodities derivatives contacts

increased 27% in 2010 to $9.0 trillion. OTC trading accounts for the majority of

trading in gold and silver. Overall, precious metal accounted for 8% of OTC

commodities derivatives trading in 2010, down from their 55% share a decade earlier

as trading in energy derivatives rose.

Global physical and derivatives trading of commodities on exchanges increased more

than a third in 2010 to reach 1,684 million contacts. Agricultural contracts trading

grew by 32% in 2010, energy 29% and industrial metals by 30%. Precious metals

trading grew by 3% with higher volume in New York being partially offset by

declining volume in Tokyo. Over 40% of quarter in China. Trading on exchanges in

China and India has gained in importance in recent years due to their emergence as

significant commodities consumers and producers.

Present scenario

Todays commodity market is a global market place not only for agricultural

products, but also currencies and financial instruments such as Treasury bonds and

securities futures. Its a diverse marketplace of farmers, exporter, importers,

manufacturers and speculators. Modern technology has transformed commodities into

a global marketplace where a Kansas farmer can match a bid from a buyer in Europe.

The 2008 global boom in commodity prices- for everything from coal to corn was

fueled by heated demand from the likes of China and India, plus unbridled speculation

in forward markets.

The bubble popped in the closing months of 2008 across the board. As a result,

farmers are expected to face a sharp drop in crop prices, after years of record revenue.

Other commodities, such as steel, are also expected to tumble due to lower demand.

This will be a rare positive for manufacturing industries, which will experience a drop

in some input costs, partly offsetting the decline in downstream demand.

The Indian broking industry is one of the oldest trading industries that have been

around even before the establishment of BSE in 1875.


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Inception- The roots of a stock market in India began in the 1860s during the

American Civil War that led to a sudden surge in the demand for cotton from

India resulting in setting up of a number of joint stock companies that issued

securities to raise finance.

Bubble burst- The early stock market saw a boom till 1865, and then in Jul

1865, what was then used to be called the share mania ended with burst of the

stock market bubble. In the aftermath of the crash, banks, on whose building

steps share brokers used to gather to seek stock tips and share news,

disallowed them to gather there, thus forcing them to find a place of their own,which later turned into the Dalal Street. A group of about 300 brokers formed

the stock exchange in Jul 1875, which led to the formation of a trust in 1887

known as the Native Share and Stock Brokers Association

Beginning of a new phase- A new phase in the Indian stock markets began in

the 1970s, with the introduction of Foreign Exchange Regulation Act (FERA)

that led to divestment of foreign equity by the multinational companies, which

created a surge in retail investing.

Growth supporting factors-The early 1980s witnessed another surge in stock

markets when major companies such as Reliance accessed equity markets for

resource mobilization that evinced huge interest from retail investors. A new

set of economic and financial sector reforms that began in the early 1990s

gave further impetus to the growth of the stock markets in India.

Setting up of SEBI- the Securities and Exchange Board of India (SEBI),

which was set up in 1988 as an administrative arrangement, was given

statutory powers with the enactment of the SEBI Act, 1992. The broad

objectives of the SEBI include-

o to protect the interests of the investors in securities

o to promote the development of securities markets and to regulate the

securities markets


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Incorporation of NSE- NSE was incorporated in Nov 1992 as a tax

paying company, the first of such stock exchanges in India, since stock

exchanges earlier were trusts, being run on no-profit basis. NSE was

recognized as a stock exchange under the Securities Contracts

(Regulations) Act 1956 in Apr 1993. It commenced operations in

wholesale debt segment in Jun 1994 and capital market segment (equities)

in Nov 1994. The setting up of the National Stock Exchange brought to

Indian capital markets several innovations and modern practices and

procedures such as nationwide trading network, electronic trading, greater

transparency in price discovery and process driven operations that had

significant bearing on further growth of the stock markets in India. To

speed the securities settlement process, The Depositories Act 1996 was

passed that allowed for dematerialization (and dematerialization)

of securities in depositories and the transfer of securities through

electronic book entry. The National Securities Depository Limited

(NSDL) set up by leading financial institutions, commenced operations in

Oct 1996.

Despite passing through a number of changes in the post liberalization period,

the industry has found its way towards sustainable growth. A stock Broker is a

regulated professional who buys and sells shares and other securities through

market makers or Agency Only Firms on behalf of investors. To work as a

broker a certificate of registration from SEBI is mandatory after satisfying all

the terms and conditions.

FINANCIAL MARKETS

The financial markets have been classified as

Cash market (spot market) largest traded, the spot market or cash market is a

commodities or securities market in which goods are sold for cash and

delivered immediately. Derivatives market after cash market, the derivatives

markets are the financial markets for derivatives. The market can be divided


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into two that for exchange traded derivatives and that for over-the-counter

derivatives.

Debt market - The bond market (also known as the debt, credit, or fixed

income market) is a financial market where participants buy and sell debt

securities.

Commodities market after commodities market, Commodity markets are

markets where raw or primary products are exchanged. These raw

commodities are traded on regulated commodities exchanges, in which they

are bought and sold in standardized contracts.

PARTICIPANTS IN FINANCIAL MARKET

There are two basic financial market participant categories, Investor vs. Speculator

and Institutional vs. Retail. Action in financial markets by central banks is usually

regarded as intervention rather than participation.

Supply side vs. demand side

A market participant may either be coming from the Supply Side, hence supplying

excess money (in the form of investments) in favor of the demand side; or coming

from the Demand Side, hence demanding excess money (in the form of borrowed

equity) in favor of the Supply Side. This equation originated from Keynesian

Advocates. The theory explains that a given market may have excess cash; hence the

supplier of funds may lend it; and those in need of cash may borrow the funds

supplied. Hence, the equation: aggregate savings equals aggregate investments.

The demand side consists of: those in need of cash flows (daily operational needs);

those in need of interim financing (bridge financing); those in need of long-term funds

for special projects (capital funds for venture financing).

The supply side consists of: those who have aggregate savings (retirement funds,

pension funds, insurance funds) that can be used in favor of demand side. The origin

of the savings (funds) can be local savings or foreign savings. So much pensions or

savings can be invested for school buildings; orphanages; (but not earning) or for roadnetwork (toll ways) or port development (capable of earnings).
http://en.wikipedia.org/wiki/Commodities_exchangehttp://en.wikipedia.org/wiki/Commodities_exchange


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The earnings go to owner (Savers or Lenders) and the margin goes to the banks.

When the principal and interest are added up, it will reflect the amount paid for the

user (borrower) of the funds. Thus, an interest percentage for the cost of using the

funds.

Investor vs. Speculator

Investor

An investor is any party that makes an Investment.

However, the term has taken on a specific meaning in finance to describe the

particular types of people and companies that regularly

purchase equity ordebtsecurities for financial gain in exchange forfunding an

expanding company. Less frequently the term is applied to parties who purchase real

estate,currency,commodityderivatives,personal property, or otherassets.

Speculation

Speculation, in the narrow sense of financial speculation, involves the buying,

holding, selling, and short-selling of stocks, bonds, commodities, currencies,

collectibles, real estate, derivatives or any valuable financial instrument to profit from

fluctuations in its price as opposed to buying it for use or for income via methods such

as dividends or interest. Speculation or agiotage represents one of three market roles

in western financial markets, distinct from hedging, long term investing and arbitrage.

Speculators in an asset may have no intention to have long term exposure to that asset.

Institutional vs. Retail

Institutional investor

An institutional investor is an investor, such as a bank, insurance company, retirement

fund, hedge fund, or mutual fund, that is financially sophisticated and makes large

investments, often held in very large portfolios of investments. Because of their

sophistication, institutional investors may often participate in private placements ofsecurities, in which certain aspects of the securities laws may be inapplicable.
http://en.wikipedia.org/wiki/Investmenthttp://en.wikipedia.org/wiki/Investmenthttp://en.wikipedia.org/wiki/Financehttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Fundinghttp://en.wikipedia.org/wiki/Real_estatehttp://en.wikipedia.org/wiki/Real_estatehttp://en.wikipedia.org/wiki/Real_estatehttp://en.wikipedia.org/wiki/Currencyhttp://en.wikipedia.org/wiki/Currencyhttp://en.wikipedia.org/wiki/Commodityhttp://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Personal_propertyhttp://en.wikipedia.org/wiki/Personal_propertyhttp://en.wikipedia.org/wiki/Assetshttp://en.wikipedia.org/wiki/Assetshttp://en.wikipedia.org/wiki/Investmenthttp://en.wikipedia.org/wiki/Financehttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Fundinghttp://en.wikipedia.org/wiki/Real_estatehttp://en.wikipedia.org/wiki/Real_estatehttp://en.wikipedia.org/wiki/Currencyhttp://en.wikipedia.org/wiki/Commodityhttp://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Personal_propertyhttp://en.wikipedia.org/wiki/Assets


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Retail investor

A retail investor is an individual investor possessing shares of a given security. Retailinvestors can be further divided into two categories of share ownership.

1. A Beneficial Shareholder is a retail investor who holds shares of their

securities in the account of a bank or broker, also known as in Street Name.

The broker is in possession of the securities on behalf of the underlying

shareholder.

2. A Registered Shareholder is a retail investor who holds shares of theirsecurities directly through the issuer or its transfer agent. Many registered

shareholders have physical copies of their stock certificates.


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PROFILE OF THE COMPANY MERFIN INDIA LIMITED

NSE Membership

HSE Membership

BSE Membership

The company was incorporated in 1995 with main objects of carrying Finance,

Leasing, and capital Market activities such as Brokerage of various stocks exchanges,

to act as various intermediaries of capital market. The company has obtained NationalStocks Exchange membership in February 1996 and commenced its trading activities

at present. It has six branches through out Andhra Pradesh having around 30 trading

terminals.

It has been doing trading for various clients, sub brokers both for equity and debt,

market scripts like Bonds, Debenture etc. The company is also acting as a sub-

broker\dealer in Bombay Stoke Exchange the company in growing year after year in

times of clients branches and turnover of the securities.

Merfin Systems is an industry-leading innovator of value-added paper systems. Since

1984, Merfin has served the away- from home industry in North America with

strong partnerships with our customers, employees and suppliers. With a full line of

paper products for the hygienic and food service markets, we fulfill our mission of

Innovation, Quality and Excellence for the customers we serve. Through Buckeye

Technologies, our parent company, we have manufacturing operations in the United

States. Canada, Brazil and Germany.


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ABOUT US

Merfin India ltd is one of the Indias leading wealth management, capitalmarkets and advisory companies, with offices in 7 states and territories and total client

assets of approximately Rs. 500 Crores.

Merfin India ltd offers a broad range of services to private clients, small

businesses, and institutions and corporations, organizing its activities into two

interrelated business segments - Global Markets & Investment Banking Group and

Global Wealth Management, which is comprised of Global Private Client and Global

Investment Management.

As an investment bank, it is a leading National trader and underwriter of

securities and derivatives across a broad range of asset classes and serves as a

strategic advisor to corporations, governments, institutions and individuals

worldwide.

Were growing our business by helping clients grow theirs.

Our client relationships are among our greatest competitive assets. We

deepen and enrich these relationships through disciplined growth, innovation, and

seamless execution. Corporate Governance Merfin India ltd demonstrates its

commitments to clients and shareholders through the firm's emphasis on excellence,

integrity and ethical behavior. We maintain a strong and engaged board of

independent directors to oversee our business practices and make recommendations

for improvement, if needed. With the exception of our CEO, all members of our board

are independent.


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Corporate Citizenship:

Merfin India ltd is committed to corporate social responsibility. We implement a

range of initiatives to help ensure that the communities in which we live and work arethriving with opportunities.

Company Overview

Merfin India ltd through its subsidiaries, offers capital markets services, investment

banking and advisory services, wealth management, investment management,

insurance, banking and related products and services on a global basis, including:

Securities origination, brokerage, dealer and related activities in:

Equities

Futures

Fixed income

Forwards

Mutual funds

Commodities

Swaps

Currencies

Options

Other derivatives

Investment banking

Securities origination


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Strategic advisory services, including:

Mergers and acquisitions

Strategic valuation

Other corporate finance and advisory activities

Private equity and other principal investing activities

Securities clearance, settlement, financing and services, including prime brokerage

Wealth management products and services, including financial, retirement and

generational planning Banking, trust, lending and related services, including:

Mortgage loans

Trust

Commercial loans

Deposit-taking

Securities-based loans

Cash management

Insurance and annuity products and annuity underwriting

Investment management and investment advisory services

Global investment research encompassing:

Equities

Economics

Fixed income

Equity strategy


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Equity-linked securities

Wealth management strategy

Strategic Positioning

Merfin India ltd has positioned itself to be the preeminent global investment

bank, wealth management and advisory company, an essential partner to its clients.

Key facets of this positioning include:

1) Delivering value-added advice, products and services to clients with unmatched

levels of quality and integrity

2) Investing in opportunities for growth and diversification that take advantage of the

firm's strengths and global client franchise

3) Operating with discipline and focus throughout the firm to ensure that the

appropriate resources are committed to each business opportunity

4) Managing risk and capital to ensure efficient deployment of, and appropriate

returns on, stockholders' equity

5) Developing employee talent and leadership to its full potential to achieve superior

results


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UNIT - III

DATA ANALYSIS AND

INTERPRETATIONS


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PORTFOLIO II NSE CODE

PORTFOLIO1 NSE CODE

BANK OF INDIA BANKINDIA

BHEL HEL

HLL HINDLEVER

M&M M&M

SCI SCI

SATYAM COMPUTER SAYTAMCOMP

VSNL VSNL

GLAXO GLAXO

SAIL SAIL

IBP IBP


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TATA POWER TATAPOWER

ITC ITC

ESCORTS ESCORTS

UTI BANK UTIBANK

WIPRO WIPRO

BHRATI BHRATI

DRREDDYS DRREDDY

IPCL IPCL

TISCO TISCO

PORTFOLIO III NSECODE


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ING VYSYA VYSY ABANK

ABB ABB

CADILA CADILA

MICO BOSH MICO

GE SHIPPING GESHIP

HUGHES SOFTWARE HUGHESSOFT

TATA TELECOM TATATELECM

NICOLAS PHARMA NICOLASPIR

ONGC ONGC

ESSAR STEEL ESSARGUJ


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MODULE I

HOLDING PERIOD RETURNS

All the investment is made at a certain period of time. Holding period returnsenables an investor to know his returns during that period of time. It can be computed

by using the formula:-

Holding period returns (HPR) =

(Todays closing price-Yesterdays closing price)

________________________________________

Yesterdays closing price

Holding period returns are used for comparative criterion. Holding period returns can

be compared for making an assessment of relative returns.


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Portfolio I for 2009-10

Name of the

script

Face

value

Dividend

declared (%)

Dividend

Amount

Market price

where%Return on

dividend

%return

on

Total

Return

BANK OFINDIA

10 00 10.5 0 -17.42 -17.42

BHEL 10 40 4 128.7 3.11 40.62 43.729

HLL 1 300 3 222.2 1.35 5.84 7.1901

M&M 10 0 0 119.2 0.00 8.11 8.11

SCI 10 0 0 30.0 0.00 98.11 98.11

SATHYAMCOM

2 0 0 243.7 0.00 41.24 41.24

VSNL 10 0 0 286.2 0.00 -20.27 -20.27

GLAXO 10 0 7 417.8 1.68 -3.18 -1.504

IBP 10 100 10 294.3 3.40 119.95 123.35

SAIL 10 0 0 5.7 0.00 -3.98 -3.98


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Return27.855


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Name of the

script

Face

value

Dividend

declaredDividend

Amount

Market

price

%Return

on

%return

on

Total

Return

BANK OFINDIA

10 30 3 26.5 11.32 89.32 100.6

BHEL 10 40 4 180.8 2.21 24.99 27.2

HLL 1 300 3 227.25 1.32 -39.47 -38.15

M&M 10 55 5.5 112.8 4.88 -6.52 -1.644

SCI 10 0 0 72.55 0.00 -20.9 -20.9

SATHYAMCOM

2 110 2.2 257 0.86 -28.55 -27.69

VSNL 10 85 8.5 188.5 4.51 -88.61 -84.1

GLAX 10 70 7 342.7 2.04 -6.5 -4.457

IBP 10 140 14 891.35 1.57 -13.95 -12.38

SALI 10 0 0 5.65 0.00 71.74 71.74


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Return: 1.026


Name of the

script

Face

value

Dividend

declaredDividend

Amount

Market

price where

%Return

on

%return

on

Total

Return

BANK OFINDIA

10 10 1 39.35 2.541 49.06 51.601

BHEL 10 30 3 223.65 1.341 107.1 108.44

HLL 1 300 3 149.15 2.011 8.43 10.441

M&M 10 90 9 99.1 9.082 164.23 173.31

SCI 10 0 0 51.25 0.000 109.51 109.51

SATHYAMCOM

2 140 2.8 173.65 1.612 67.29 68.902

VSNL 10 45 4.5 74.3 6.057 59.51 65.567

GLAXO 10 100 10 294.7 3.393 77.02 80.413

IBP 10 0 0 199.8 0.000 123.8 123.8

SAIL 10 0 0 9.05 0.000 153.06 153.06


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Return: 94.505

PORTFOLIO II FOR 2009-10

Name of the scriptFace

value

Dividend

declaredDividend

Amount

Market

price where

%Return

on

%return

on

Total

Return

UTI INDIA 10 0 0 23.7 0.000 63.82 63.82

TATA POWER 10 0 0 103.1 0.000 18.92 18.92

ITC 10 0 0 625 0.000 -10.19 -10.19

ESORTS 10 10 1 77.1 1.297 -10.17 -8.873

VARUNSHIPPING 10 0 0 11.55 0.000 6.63 6.63

WIPRO 2 50 1 1268.45 0.079 58.71 58.789

BHARTI 10 0 0 44.35 0.000 -13.12 -13.12

DR.REDDY 5 0 0 914.95 0.000 22.24 22.24

IPCL 10 0 0 54.15 0.000 52.26 52.26

TISCO 10 0 0 115.75 0.000 -7.8 -7.8


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Return: 18.268


Name of the

script

Face

value

Dividend

declaredDividend

Amount

Market price

where%Return

on dividend

%return

on security

Total

Return

UTI BANK 10 22 2.2 40.7 5.40541 2.23 7.6354

TATA POWER 10 65 6.5 114.05 5.69925 2.27 7.9693

ITC 10 0 0 706.3 0 -8.61 -8.61


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ESORTS 10 10 1 61.15 1.63532 -48.74 -47.105

VARUNSHIPPING

10 0 0 11.7 0 -21.4 -21.4

WIPRO 2 50 1 1690 0.05917 -22.58 -22.521

BHARTHI 10 20 2 38.9 5.14139 -23.04 -17.899

DR.REDDY 5 100 5 1096.1 0.45616 -13.5 -13.044

IPCL 10 22.5 2.25 87.5 2.57143 8.47 11.041

TISCO 10 80 8 97.85 8.17578 35.9 44.076

Return: -5.9856



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value

Dividend

declaredDividend

Amount

Market

price where

%Return

on

%return

on

Total

Return

UTI BANK 10 25 2.5 39.9 6.26566 150.56 156.83

TATA POWER 10 70 7 114.1 6.13497 128.11 134.24

ITC 10 200 20 625.9 3.1954 54.68 57.875

ESOCRTS 10 0 0 35.25 0 76.54 76.54

VARUNSHIPPING 10 6 0.6 9.2 6.52174 105.49 112.01

WIPRO 2 200 4 1231.2 0.32489 21.35 21.675

BHARTHI 10 60 6 29.1 20.6186 183.36 203.98

DR.REDDY 5 100 5 914.95 0.54648 14.92 15.466

IPCL 10 25 2.5 83.85 2.98151 89.2 92.182

TISCO 10 100 10 135.1 7.40192 112.82 120.22


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Return: 99.102

PORTFOLIO III FOR 2009-10

Name of the

script

Face

value

Dividend

declared

(%)

Dividend

Amount

Market

price where

purchased

%Return

on

dividend

%return

on

security

Total

Return

INGVYSA 10 35 3.5 112.2 3.11943 89.95 93.069

ABB 10 0 0 238.9 0 16.72 16.72


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CADILA 5 0 0 124 0 11.282 11.28

MICOBOSH 100 0 0 2709 0 -4.06 -4.06

GESHIPPING 10 0 0 25.3 0 22.45 22.45

HUGHES 5 40 2 593.25 0.33713 -40.45 -40.113

TATATELECOM 10 0 0 56.4 0 139.1 139.1

NICOLASPHARMA 10 0 0 295.75 0 -0.047 -0.047

ONGC 10 140 14 125.65 11.1421 87.97 99.112

ESSAR STEEL 10 0 0 125.65 0 87.97 87.97


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Return 42.548



value

Dividenddeclared

(%)

Dividend

Amount

Marketprice where

purchased

%Returnon

dividend

%returnon

security

TotalReturn

ING VYSA 10 40 3.5 247.25 1.41557 4.77 6.1856

ABB 10 60 6 263.9 2.27359 12.77 15.044

CADILA 5 70 3.5 129.55 2.70166 -3.31 -0.6083

MICO BOSH 100 40 40 2387.35 1.6755 47.45 49.125

GESHIPPING 10 40 4 30.75 13.0081 25.99 38.998

HUGHES 5 40 2 277.7 0.7202 -28.22 -27.5

TATATELECOM 10 25 2.5 171.9 1.45433 47.45 48.904

NICOLASPHARMA 10 105 10.5 271.05 3.87382 -24.88 -21.006

ONGC 10 130 13 329.6 3.94417 13.43 17.374

ESSAR STEEL 10 0 0 329.6 0 13.43 13.43


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Return 13.995



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value

Dividend

declared

Dividend

Amount

Market

price where

%Return

on

%return

on

Total

Return

ING VYSA 10 40 3.5 247.25 1.41557 76.28 77.696

ABB 10 60 6 263.9 2.27359 106.67 108.94

CADILA 5 70 3.5 129.55 2.70166 144.09 146.04

MICOBOSH 100 40 40 2387.35 1.6755 138.36 140.04

GESHIPPING 10 40 4 30.75 13.0081 135.6 148.61

HUGHES 5 40 2 277.7 0.7202 117.65 118.37

TATATELCOM 10 25 2.5 171.9 1.45433 96.37 97.824

NICOLASPHARMA 10 105 10.5 271.05 3.87382 -24.88 -21.006

ONGC 10 130 13 329.6 3.94417 95.26 99.204

ESSAR STEEL 10 0 0 329.6 0 95.26 95.26


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Return 101.1727


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EX-POST PORTFOLIO RETURNS

YEAR PORTFOLIO-I PORTFOLIO- II PORTFOLIO- III

2010 27.85 18.26 42.54

2011 1.02 -5.98 13.99

2012 94.5 99.1 101.17

RI 41.1233333 37.12666667 52.567


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MODULE -II

PORTFOLIO PERFORMANCE EVALUATION

Calculation of standard deviation of returns

PORTFOLIO - I

YEAR Return Di=r-ri Di*di S.D

2010 27.85 -13.273 176.18

2011 1.02 -40.103 1608.3 48.133

2012 94.5 53.377 2849.1

Ri= 41.123 4633.5


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PORTFOLIO II


2010 18.26 -18.867 355.95

2011 -5.98 -43.107 1858.2 55.022

2012 99.1 61.973 3840.7

Ri= 37.127 6054.8

PORTFOLIO III


2010 45.54 -8.0267 64.427

2011 13.99 -39.577 1566.3 44.141

2012 101.17 47.603 2266.1

Ri= 53.567 3896.8


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SHARPE PERFORMANCE MEASURE

Portfolio

s

Avg

portfolio

Return (rp)

in %

Risk

free

Rate

(rf)%

Excess

Return

(rp-rf)

Standard

Deviation

Sharpes

Ratio

rp-rf/Ranking

I 41.128 5.25 35.878 48.13 0.745 2

II 37.128 5.25 31.878 55.02 0.579 3

III 52.57 5.25 47.32 44.14 1.072 1

INTERPRETATION

In this we have the three portfolios .In the three portfolios every Portfolio has

given some profits. But according to the sharps methods we have to select the

portfolios gives more returns that portfolios we have select that.

Thats why we have selected the third portfolio. Because the third portfolio

gives more Returns.


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TREYNORS PERFORMANCE MEASURE

CALCULATION OF BETA

Beta for portfolio I

Year Avg market return X X2 Avg stock return Y XY

2009-5.683

32.2927.855 158.3

2010--8.827

77.911.025 -9.0477

2011-72.886

5890.123.38 7334.4

Beta=1.05261

INTERPRETATION

In this we have the three years portfolios. In the three portfolios

Every Portfolio has given some profits at the same time some risks. But according To

the treynors methods we have to select the portfolios gives less risks that Portfolios

we have select that. Thats why we have selected the second portfolio. Because the

second portfolio gives the less risks.


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Beta for portfolio II


2009-10

5.68332.29

618.267 103.81

2010-11

-8.82777.91

6-5.985 52.83

2011-12

76.035780.

699.102 7534.7

72.8865890.

8111.38 7691.4

Beta= 1.210018

INTERPRETATION

This we have the three years portfolios. In the three portfolios

Every Portfolio has given some profits at the same time some risks. But according To

the treynors methods we have to select that portfolio which gives less risks that

Portfolios we have select that. Thats why we have selected the second portfolio.

Because the second portfolio gives the less risks. In the portfolio2 overall

Performances risks is the some more high. Beta is always the less the 1.but in this

Portfolio risk is 1.2 is their.


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Beta for portfolio III


2009-10

5.68332.29

642.548 241.8

2010-11

-8.82777.91

613.99 -123.49

2011-12

76.035780.

6101.17 7692.1

72.8865890.

8157.71 7810.4

Beta= 0.965732

INTERPRETATION;

This we have the three years portfolios. In the three portfolios Every Portfolio

has given some profits at the same time some risks. But according To the treynors

methods we have to select that portfolio which gives less risks that Portfolios we have

select that. Thats why we have selected the second portfolio. Because the second

portfolio gives the less risks. In the portfolio2 overall Performance risks are the some

more high. Beta is always the less the 1.but in this Portfolio risk is 0.9is their. In the

three portfolios the third portfolio is better.


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TREYNORS PERFORMANCE INDEX

Portfolios Portfolio AvgReturn (rp)Riskfree

Rate rf

Beta Riskpremium

Tnrp-rf\ Ranking

I 41.128 5.251.05

235.878

34.1046

2

II 37.128 5.25 1.21 31.87826.345

53

III 52.57 5.250.96

547.32

49.0363

1

INTERPRETATION

Every portfolio gives the some of the returns and risks. But every Customer think the

we wants gets the more returns at the same time in the while Getting the returns we

have the some of the risks is their. According treynors we Want the select the

portfolio which gives the less risk that is we have to select. Beta is always =1.so in

that we portfolios gives the


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HOLDING PERIOD RETURNS

In the year 2009 NSE INDEX gained 5.58% return during the same year portfolio I,II

and III has registered a growth of 27.85, 94.50 respectively. Return wise portfolio IIIemerges as best portfolio subsequently PI and PII.

During the year 2010 the NSE INDEX registered a negative growth rate of -8.82

during the same year portfolio I II and III has registered return of 18.26, -5.98 and

99.10 respectively. Return wise portfolio III performs well and portfolio I and II

occupying subsequent position.

In the year 2011 the NSE INDEX shows a fabulous growth rate of 76.88 andportfolio I, II and III performed el by 42.54, 13.29 and 101.17 and portfolio III

emerged as best portfolio subsequently portfolio I and II

OVERALL PERFORMANCE

The overall performance of the market and the portfolios can be shown by taking the

arithmetic average of return. For the previously said of three years market has

registered growth rate of 24.58. Arithmetic average of portfolio I II and III are 41.128,37.12 and 52.57 respectively. Portfolio III emerges as best performer.


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SHARPES PERFORMANCE MEASURE

Sharpes performance measure gives the appropriate return per unit of risk as

measured by standard deviation. The reward of variability ratios computed has shown

the ex-post return of per unit of risk for the three portfolios for the period of three

years.

The rate of risk of portfolio II is high deviation by 55.02 by an average return of

37.12, similarly the portfolio I has a deviation of 48.13 with a return of 41.128 and

portfolio III with a deviation of 44.14 with an average return of 55.57.Portfolio III has

a standard deviation of 48.13 with an average return of 55.57. Using 5.25 as return on

saving bank account as a proxy for the risk free rate and substituting there value in

Sharpes evaluation portfolio I gives a slope of 0.745, in portfolio I gives a reward of

35.87(41.128-5.25) for bearing a risk of 48.13 making the sharpes ratio to 0.745. For

every additional 1% risk and investor has as additional pf 0.745 returns for above

portfolio.

Portfolio II gives a return of 37.12 while the standard deviation was 55.02 using 5%

return on the saving bank account as proxy market sharpes ratio to o.579. Therefore

for every additional 1% risk investor will earn an additional 0.579 of return. And

portfolio II with a return of 52.57 with a standard deviation marking Sharpes ratio to

1.072 as additional return.

OVERALL PERFORMANCE

Overall performances of the portfolios are 41.12, 37.12 and 52.57

respectively. The risk free rate was 5.25. Investing in three portfolios during the same

period provided a risk premium of 35 .87, 31.87, and 47.32 respectively.

For every 1% of additional risk an investor will earn o.745, 0.579 and 1.07 of

return. Portfolio III outperformed by 1.072 compared with other two portfolios. The

investor will earn on return per unit of beta of 34.10, 26.34 and 49.036 by ranking the

portfolio shows that portfolio III performs well as compared with other two portfolios.


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TREYNORS PERFORMANCE MEASURE

Treynors performance measure gives appropriate return per unit of risk as

measured by the beta coefficient. Portfolio I, II and III provided a return of 41.12%,

37.12% and 52.57% with 1.05% 1.21% and 0.965% as beta coefficient respectively.

Treynors ratio for the three portfolios above the risk free rate of 5.25%was

34.16%26.34%, 49.036% respectively.

Investing in portfolio I II and III provides risk premium of 35.87, 31.87 and

47.32 for bearing a risk of beta of 1.052, % 1.21% and 0.965% respectively. Thus an

investor will earn a return per unit of beta of 34.16% 26.34% and 49.03%

respectively. Portfolio III emerging as the best performer, portfolio I and II occupies

the subsequent position.


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UNIT - IV

FINDINGS,

CONCLUSIONS & SUGGESTIONS


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FINDINGS

1. The comparison of total return between bank of India and BHEL are showing

much difference where the bank of India has -72.42 & BHEL 43.729.

2. The market price value in the year 2010-2011 is higher of Dr. Reddys and

Wipro follows with 2nd place.

3. The ITC & Wipro has showed the similar dividend declared and this is the

highest compare to other companies.

4. The average portfolio return of portfolio-3 is more than portfolio 1&2.

5. The excess return (rp-rf) of portfolio 3 is higher compare to portfolio 1 &

portfolio 2.

6. The Beta value of portfolio 2 (1.210018) is more than portfolio 1(1.0526) &

portfolio 3 (0.965732).

7. The over all performance of the portfolio are 41.12, 37.12, 52.57 respectively.


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CONCLUSIONS AND SUGGESTIONS

1. Among the three portfolios I, II and III portfolio III gives a highest return with

a proportionate risk of 44.14% with a return of 52.57%.

2. The portfolios II gives the lowest returns because of the proportionate risk is

high i.e. 55.02% and the return is very low i.e. 37.12%.

3. The portfolio I gives minimum returns among the portfolio II &III the

proportionate risk is 48.13% and the average portfolio return is 41.12%.

4. Portfolio III has outperformed in both Sharpes and Treynors measure.

5. It is advisable to invest in portfolio III i.e. foreign collaboration securities in

long run and portfolio II i.e. public limited companies in short run because the

later is more correlated with the market index.

6. Diversification of portfolios in various projects or securities may reduce high

risk and it provides the high wealth to the shareholders.

7. Beta is used to evaluate the risk proper measurement of beta may reduce thehigh risk and it gives the high risk premium.

8. High risk free rate higher the return, lower risk free rate lower the return,

according to risk free rate of return will decide.

9. Lower beta, standard deviation higher return. This value will effect on

investment.

10. I was use two methods for calculating return, first method is traditional and

second method is technical method, which is formulated by expects in

portfolio management by using of second method can estimate correct return.

11. But according to my project portfolio III is given higher return, I will go for

investment in portfolio III.


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APPENDIX


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BIBLIOGRAPHY

Prasanna Chandra (Security Analysis and Portfolio

Management)

Avadhani (Security Analysis and Portfolio

Management)

Francis and Taylor (Investment management)

Francis (Investment analysis and management)

Preeti Singh (Investment management)

Sharp W.FAlexabder G.J.Bailey : (Investments)

Sandhak.h (Mutual Fund in India)

Graham and Dodd Security Analysis, McGraw Hill

WEB SITES

www.Sharekhan.com

www.indiainfoline.com

www.amfiindia.com

www.Merfin India ltd.com
http://www.sharekhan.com/http://www.sharekhan.com/

Portfolio Mgmt - Merfin India Ltd

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