Security Analysis & Portfolio Karvykirankumar

INTRODUCTION

NEED & IMPORTANCE:

Economic liberalization has accelerated the pace of development in the securities

market, which has undergone a sea change during the last 2 decades. In India, the role of

securities market in mobilizing & channel sing private capital for the economic

development of the country has increased over the year and securities market itself has

undergone structural transformation with the introduction of computerized online trading

& interconnected market system.

Over the years as investment in securities gathered momentum, the investment

decisions were more often made by the whims & fancies of the investors & rumors heard

rather than by rational analysis. Only recent security analysis & Portfolio management

has emerged as a separate academic discipline in India. Portfolio theory that deals with

the rational investment decision-making process has now become an integral part of

financial literature.

Investing in securities such as shares, debenture & bonds is profitable well as

exiting. It is indeed rewarding but involves a great risk if risky & need artistic skill.

Investing in financial securities is now considered 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; they tend to invest in a group of securities. Such group of securities is called a

portfolio. Creation of a portfolio helps to reduce risk without sacrificing returns. Portfolio

management deals with the analysis of individual securities as well as with the theory &

practice of optimally combining securities into portfolio.

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OBJECTIVES OF THE STUDY

1. How to analyze securities and Portfolio Management

2. To study the investment pattern and it’s related risk & return

3. To assist the investors to choose wisely between the alternative

investment

4. To understand, analyze and select the best portfolio of securities

5. To strike the balance between costs of funds, risk and returns.

SCOPE OF STUDY :

This study covers markowitz model. The study covers the calculation of Return

on between the different securities in order to find out at what percentage funds should

be invested among the companies in the different securities(means Portfolio). Also the

study includes the calculation of individual standard deviation of securities and ends at

the calculation of weights of individual securities involved in the portfolio .these

percentages help in allocating the funds available for investment based on risky

portfolios.

RESEARCH METHODOLOGY

PRIMARY SOURCE OF DATA :

Primary source of data is the data which needs the personal efforts of collecting

and which are not readily available.

Primary data is the first hand information, which has been collected directly from

the company Financial Analyst’s and Investors.

SECONDARY DATA :

Companies Annual Reports

Information from web sites

Publication(News Papers, Magazines)

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Information provided by Hyderabad Stock Exchange.

Text Books

Period of Study

For different companies, financial data has been collected from the year 2004-05 TO

2008-09.

Selection of Companies

Companies selected for analysis are:-

GE

Infosys

Indian Tobacco Corporation (ITC)

Hero Honda

Reliance

Limitation of the study

This study has been conducted purely to understand portfolio management for

investor.

For study purpose 5 companies have been taken for calculations.

Study is limited to period from 2004-05-2008-09

Data collection was strictly confined to secondary source. No primary data

associated with the project.

There was a constraint with regard to time allocated for the research study, a

period of one and half month i.e., from Apr 1st to May 15th 2010.

Detailed study of the topic was not possible due to limited size of the project

The availability of information in the form of annual reports and price fluctuations

of the companies was a big constraint to the study.

INTRODUCTION

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KARVY COMPUTERSHARE PVT LIMITED

Historical Background:

The birth of Karvy was on a modest scale in 1981. It began with the vision and

enterprise of a small group of practicing Chartered Accountants who founded the flagship

company …Karvy Consultants Limited. We started with consulting and financial

accounting automation, and carved inroads into the field of registry and share accounting

by 1985. Since then, we have utilized our experience and superlative expertise to go from

strength to strength…to better our services, to provide new ones, to innovate, diversify

and in the process, evolved Karvy as one of India’s premier integrated financial service

enterprise.

Thus over the last 20 years Karvy has traveled the success route, towards building

a reputation as an integrated financial services provider, offering a wide spectrum of

services. And we have made this journey by taking the route of quality service, path

breaking innovations in service, versatility in service and finally…totality in service.

Our highly qualified manpower, cutting-edge technology, comprehensive

infrastructure and total customer-focus has secured for us the position of an emerging

financial services giant enjoying the confidence and support of an enviable clientele

across diverse fields in the financial world.

Our values and vision of attaining total competence in our servicing has served as the

building block for creating a great financial enterprise, which stands solid on our

fortresses of financial strength - our various companies.With the experience of years of

holistic financial servicing behind us and years of complete expertise in the industry to

look forward to, we have now emerged as a premier integrated financial services

provider.

And today, we can look with pride at the fruits of our mastery and experience –

comprehensive financial services that are competently segregated to service and manage

a diverse range of customer requirements.

PROFILE OF KARVY FINANCIAL POLICY’S:

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It is an undisputed fact that the stock market is unpredictable and yet enjoys a

high success rate as a wealth management and wealth accumulation option. The

difference between unpredictability and a safety anchor in the market is provided by in-

depth knowledge of market functioning and changing trends, planning with foresight and

choosing one’ s options with care. This is what we provide in our Stock Broking

services.

We offer services that are beyond just a medium for buying and selling stocks and

shares. Instead we provide services which are multi dimensional and multi-focused in

their scope. There are several advantages in utilizing our Stock Broking services, which

are the reasons why it is one of the best in the country.

We offer trading on a vast platform; National Stock Exchange, Bombay Stock

Exchange and Hyderabad Stock Exchange. More importantly, we make trading safe to

the maximum possible extent, by accounting for several risk factors and planning

accordingly. We are assisted in this task by our in-depth research, constant feedback and

sound advisory facilities. Our highly skilled research team, comprising of technical

analysts as well as fundamental specialists, secure result-oriented information on market

trends, market analysis and market predictions. This crucial information is given as a

constant feedback to our customers, through daily reports delivered thrice daily; The Pre-

session Report, where market scenario for the day is predicted, The Mid-session Report,

timed to arrive during lunch break, where the market forecast for the rest of the day is

given and The Post-session Report, the final report for the day, where the market and the

report itself is reviewed. To add to this repository of information, we publish a monthly

magazine “ Karvy ; The Finapolis & rdquo;, which analyzes the latest stock

market trends and takes a close look at the various investment options, and products

available in the market, while a weekly report, called “ Karvy Bazaar

Baatein”, keeps you more informed on the immediate trends in the stock market.

In addition, our specific industry reports give comprehensive information on various

industries. Besides this, we also offer special portfolio analysis packages that provide

daily technical advice on scrips for successful portfolio management and provide

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customized advisory services to help you make the right financial moves that are

specifically suited to your portfolio.

Our Stock Broking services are widely networked across India, with the number

of our trading terminals providing retail stock broking facilities. Our services have

increasingly offered customer oriented convenience, which we provide to a spectrum of

investors, high-networth or otherwise, with equal dedication and competence.

But true to our spirit, this success is not our final destination, but just a platform to

launch further enhanced quality services to provide you the latest in convenient,

customer-friendly stock management. Over the years we have ensured that the trust of

our customers is our biggest returns. Factors such as our success in the Electronic custody

business has helped build on our tradition of trust even more. Consequentially our retail

client base expanded very fast.

KARVY ALLIANCES:


Karvy Computershare Private Limited is a 50:50 joint venture of Karvy

Consultants Limited and Computershare Limited, Australia. Computer share Limited is

world's largest -- and only global -- share registry, and a leading financial market services

provider to the global securities industry.

The joint venture with Computer share, reckoned as the largest registrar in the

world, servicing over 60 million shareholder accounts for over 7,000 corporations across

eleven countries spread across five continents. Computer share manages more than 70

million shareholder accounts for over 13,000 corporations around the world.

Karvy Computer share Private Limited, today, is India's largest Registrar and

Share Transfer Agent servicing over 300 corporates and mutual funds and 16 million

investors.


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Mutual Fund Services Issue Registry Corporate Shareholder Services We have

traversed wide spaces to tie up with the world’s largest transfer agent, the leading

Australian company, Computershare Limited. The company that services more than 75

million shareholders across 7000 corporate clients and makes its presence felt in over 12

countries across 5 continents has entered into a 50-50 joint venture with us.

With our management team completely transferred to this new entity, we will aim

to enrich the financial services industry than before. The future holds new arenas of client

servicing and contemporary and relevant technologies as we are geared to deliver better

value and foster bigger investments in the business. The worldwide network of

Computershare will hold us in good stead as we expect to adopt international standards in

addition to leveraging the best of technologies from around the world.

MUTUAL FUND SERVICES

Excellence has to be the order of the day when two companies with such similar

ideologies of growth, vision and competence, get together. www.karisma.karvy.com

We have attained a position of immense strength as a provider of across-the-board

transfer agency services to AMCs, Distributors and Investors.

Nearly 40% of the top-notch AMCs including prestigious clients like Deutsche

AMC and UTI swear by the quality and range of services that we offer. Besides

providing the entire back office processing, we provide the link between various Mutual

Funds and the investor, including services to the distributor, the prime channel in this

operation.

Carrying the ‘limitless' ideology forward, we have explored new dimensions in

every aspect of Mutual Fund servicing right from volume management, cost effective

pricing, delivery in the least turnaround time, efficient back-office and front-office

operations to customized service. We have been with the AMCs every step of the way,

helping them serve their investors better by offering them a diverse and customized range

of services. The ‘first to market' approach that is our anthem has earned us the reputation

of an innovative service provider with a visionary bent of mind.

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http://www.karisma.karvy.com/

http://www.karvy.com/aboutUs/kcpl.htm#CSS

http://www.karvy.com/aboutUs/kcpl.htm#IR

http://www.karvy.com/aboutUs/kcpl.htm#MFS

Our service enhancements such as ‘Karvy Converz', a full-fledged call center, a

top-line website (www.karvymfs.com), the ‘m-investor' and many more, creating a

galaxy of customer advantages. www.karvymfs.com

ISSUE REGISTRY

In our voyage towards becoming the largest transaction-processing house in the

Indian Corporate segment, we have mobilized funds for numerous corporate, Karvy has

emerged as the largest transaction-processing house for the Indian Corporate sector. With

an experience of handling over 700 issues, Karvy today, has the ability to execute

voluminous transactions and hard-core expertise in technology applications have gained

us the No.1 slot in the business. Karvy is the first Registry Company to receive ISO 9002

certification in India that stands testimony to its stature

Karvy has the backing of skilled human resources complemented by requisite

technological packages to ensure a faster processing capability. Karvy has the benefit of a

good synergy between depositories and registry that enables faster resolution to related

customer queries. Apart from its unique investor servicing presence in all the phases of a

public Issue, it is actively coordinating with both the main depositories to develop special

models to enable the customer to access depository (NSDL, CDSL) services during an

IPO.

Our trust-worthy reputation, competent manpower and high-end technology and

infrastructure are the solid foundations on which our success is built.

http://karisma.karvy.com

CORPORATE SHAREHOLDER SERVICES

Karvy has been a customer centric company since its inception. Karvy offers a

single platform servicing multiple financial instruments in its bid to offer complete

financial solutions to the varying needs of both corporate and retail investors where an

extensive range of services are provided with great volume-management capability.

Today, Karvy is recognized as a company that can exceed customer expectations which is

the reason for the loyalty of customers towards Karvy for all his financial needs. An

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http://karisma.karvy.com/

http://www.karvymfs.com/

opinion poll commissioned by “The Merchant Banker Update” and conducted by the

reputed market research agency, MARG revealed that Karvy was considered the “Most

Admired” in the registrar category among financial services companies.

We have grown from being a pure transaction processing business, to one of

complete shareholder solutions.

KARVY GLOBAL SERVICES LIMITED

The specialist Business Process Outsourcing unit of the Karvy Group. The legacy

of expertise and experience in financial services of the Karvy Group serves us well as we

enter the global arena with the confidence of being able to deliver and deliver well.

Here we offer several delivery models on the understanding that business needs are

unique and therefore only a customized service could possibly fit the bill. Our service

matrix has permutations and combinations that create several options to choose from.

Be it in re-engineering and managing processes or delivering new efficiencies, our

service meets up to the most stringent of international standards. Our outsourcing models

are designed for the global customer and are backed by sound corporate and operations

philosophies, and domain expertise. Providing productivity improvements, operational

cost control, cost savings, improved accountability and a whole gamut of other

advantages.

We operate in the core market segments that have emerging requirements for

specialized services. Our wide vertical market coverage includes Banking, Financial and

Insurance Services (BFIS), Retail and Merchandising, Leisure and Entertainment, Energy

and Utility and Healthcare.

Our horizontal offerings do justice to our stance as a comprehensive BPO unit and

include a variety of services in Finance and Accounting Outsourcing Operations, Human

Resource Outsourcing Operations, Research and Analytics Outsourcing Operations and

Insurance Back Office Outsourcing Operations. www.karvyglobal.com

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http://www.karvyglobal.com/

KARVY COMTRADE LIMITED

At Karvy Commodities, we are focused on taking commodities trading to new

dimensions of reliability and profitability. We have made commodities trading, an

essentially age-old practice, into a sophisticated and scientific investment option Here we

enable trade in all goods and products of agricultural and mineral origin that include

lucrative commodities like gold and silver and popular items like oil, pulses and cotton

through a well-systematized trading platform.

Our technological and infrastructural strengths and especially our street-smart

skills make us an ideal broker. Our service matrix is holistic with a gamut of advantages,

the first and foremost being our legacy of human resources, technology and infrastructure

that comes from being part of the Karvy Group

Our wide national network, spanning the length and breadth of India, further

supports these advantages. Regular trading workshops and seminars are conducted to

hone trading strategies to perfection. Every move made is a calculated one, based on

reliable research that is converted into valuable information through daily, weekly and

monthly newsletters, calls and intraday alerts. Further, personalized service is provided

here by a dedicated team committed to giving hassle-free service while the brokerage

rates offered are extremely competitive.

Our commitment to excel in this sector stems from the immense importance that

commodities broking has to a cross-section of investors – farmers, exporters,

importers, manufacturers and the Government of India itself.

www.karvycomtrade.com

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http://www.karvycomtrade.com/

QUALITY POLICY

To achieve and retain leadership, Karvy shall aim for complete customer

satisfaction, by combining its human and technological resources, to provide superior

quality financial services. In the process, Karvy will strive to exceed Customer's

expectations.

QUALITY OBJECTIVES

As per the Quality Policy, Karvy will :

Build in-house processes that will ensure transparent and harmonious

relationships with its clients and investors to provide high quality of services.

Establish a partner relationship with its investor service agents and vendors that

will help in keeping up its commitments to the customers.

Provide high quality of work life for all its employees and equip them with

adequate knowledge & skills so as to respond to customer's needs.

Continue to uphold the values of honesty & integrity and strive to establish

unparalleled standards in business ethics.

Use state-of-the art information technology in developing new and innovative

financial products and services to meet the changing needs of investors and

clients.

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OVERVIEW:

KARVY is a premier integrated financial services provider, and ranked among

the top five in the country in all its business segments, services over 20 million individual

investors in various capacities, and provides investor services to over 300 corporates,

comprising the who's who of Corporate India.

KARVY covers the entire spectrum of financial services such as Stock broking,

Depository Participants, Distribution of financial products like mutual funds, bonds, fixed

deposit, Merchant Banking & Corporate Finance, Insurance Broking, Commodities

Broking, Realty Services, Personal Finance Advisory Services, placement of equity,

IPO’s, among others. Karvy has a professional management team and ranks among the

best in technology, operations, and more importantly, in research of various industrial

segments.

At Karvy Commodities, we are focused on taking commodities trading to new

dimensions of reliability and profitability. We have made commodities trading, an

essentially age-old practice, into a sophisticated and scientific investment option. Here

we enable trade in all goods and products of agricultural and mineral origin that include

lucrative commodities like gold and silver and popular items like oil, pulses and cotton

through a well-systematized trading platform.

Our technological and infrastructural strengths and especially our street-smart

skills make us an ideal broker. Our service matrix is holistic with a gamut of advantages,

the first and foremost being our legacy of human resources, technology and infrastructure

that comes from being part of the Karvy Group.

Our wide national network, spanning the length and breadth of India, further

supports these advantages. Regular trading workshops and seminars are conducted to

hone trading strategies to perfection. Every move made is a calculated one, based on

reliable research that is converted into valuable information through daily, weekly and

monthly newsletters, calls and intraday alerts.

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SECURITY ANALYSIS.

Security analysis examines the industries and securities of individual companies.

Primarily to develop value and return expectations for securities and thus to distinguish

overpriced securities from under priced ones, with the evolution of portfolio theory and

new methods of addressing investment management issues, the job of financial analysis

has become more demanding.

The process of investment management beings with as evaluation of the available

investment opportunities, the financial analyst must have clear picture and of the current

state of capital markets and the various classes of fixed income and equity avenues of

investment. He should be able to design a framework for evolution of risk return profile

of various securities.

Today money flows effortlessly into those avenues, which offer higher returns.

These developments have transformed the task of security analysis calling for application

of scientific tools and techniques.

Portfolio management involves investing through a rational decision making process in

which the investors attempt to select portfolio of securities that meet predetermine levels

of return based on their capacity to bear risk.

INVESTMENT

Physical investment is the current product set aside during a given period to be

used for future production--in other words, an addition to the stock of capital goods. As

measured by the national income and product accounts, private domestic investment

consists of investment in residential and nonresidential structures, producers' durable

equipment, and the change in business inventories. Financial investment is the purchase

of a financial security.

Investment in human capital is spending on education, training, health services,

and other activities that increase the productivity of the workforce. Investment in human

capital is not treated as investment by the national income and product accounts.

Characteristics of investment are Return, Risk, Safety, and Liquidity. Risk and

return of an investment are related. Normally, the higher the risk, the higher is the return.

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The safety of an investment implies the certainty of return of capital without loss

of money or time. Every investment which is easily saleable and marketable, without loss

of money and time is said to processes liquidity, some investment like company

deposited, bank deposits, post office deposits, NSE, NSS etc are not marketable. Some

investment instruments like preference shares and debentures and marketable but there

are no buyers in many cases and hence there liquidity is negligible. Equity shares of

company listed open stock exchanges are easily marketable through stock exchange.

Hence an investor generally prefers liquidity for his investment, safety of his

funds, good return with minimum risk and maximum return.

RETURN

The amount of money that you receive as a percentage of an initial investment: For

example, if you initially invested $100 in a one-year investment, and in a year your

investment had grown to $110, the return on would be $10, or 10%.

Single period Return

It refers to a situation where an investor is concerned with return form a single period.

MULTI-PERIOD RETURN

It refers to situation where more than single period returns are under

consideration. Investor is concern with computing the return per period, over a longer

period.

EX-POST RETURN

They properly measure the returns generated by an investment, one must consider

both the price changed and cash flow derived from the investment during the period it

was held.

EX-ANTE RETURN

The majority of investors tend to emphasize the return they expect from a security

while making investment decisions and the expected return of a security. This enable

investor to lock into future prospects from an investment and the measurement of returns

form expectations of benefits in known as ex-ante returns.

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RISK:

One of the investment terms you hear most often is also one of the hardest to

define — risk. Not only does risk mean different things to different people, your own

definition will probably change during your lifetime. Every investment holds some

degree of risk, even a Treasury bill. Here are three “risk” considerations you should

review when planning your investments.

In futures trading Risk, is the probability of loss of trading capital. Market risk

may be one of the things considered by fundamental traders but it is not all of it. Market

risk if it exists in futures, may not be considered at all by technical traders who base there

decisions on price action. Prices move first and fundamentals come second.

SECURITY ANALYSIS

It refers to the analysis of trading securities from the point of view of their prices,

return and risk. All invest are risky and the expected return is related to risk.

The securities available to an investor for investment are numerous and of various

types. The shares of over 7000 companies are listed in stock exchanges of the country.

Securities classified into ownership securities such as equity shares and preferences

shares and creditor ship securities such as debentures and bonds. Recently a number of

new securities such as Convertible debentures, Deep discount bonds, Zero coupon bonds,

Flexi bonds, Floating rate bonds, Global depository receipts, Euro currency bonds etc.,

are issued to rise funds for their projects by companies from which investor has to

chooses those securities that is worthwhile to be included in his investment portfolio.

This calls for detailed analysis of the available securities.

Security analysis is the phase of the portfolio management process. It examines

the risk return characteristics of individual securities. A basic strategy in securities

investment is to buy under priced securities and sell over priced securities. But the

problem is how identifying such securities in other words ‘Mis-priced’ securities’. This is

what security analysis is all about.

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The security market emerges out of the new issues made by companies,

government, local bodies and public undertakings. All securities are in the form of IOU’s

except those of ownership shares. Securities of more than one year come into categories

of capital and stock market.

TRADING:

The market in securities is influenced by the forces of supply and demand that

determine volume of trading. Turnover and also the price: The volume of trading is

reflected in the number of deal per day hours, numbers of days in a year in which the

company share is traded or the number of shares traded in a day or a year.

The main constituents of and players in the market are as follows.

a) Investment traded such as equity and preference shares in the category of

ownership capital and debentures, bonds and p.s.u bonds and government

securities in the category of debt capital. A number of new investments like

warrants, zero coupon bonds etc are also being issued at present.

b) The institution or players in the market are the issuers of capital namely corporate

units, government and semi-government bodies and public sector undertakings

that are the major borrowers, the investors and intermediaries such as bank,

financial institution and brokers. More recently, a number of mutual funds, FFI’s,

NRI’s, and OCB’s have also started as players in the market.

c) Intermediaries are brokers, merchant bankers, financial investment, financial and

investment consultancy firm etc., these are active both primary and secondary

market.

MARKET ANALYSIS:

The security market analysis refers to the analysis of market and securities traded

price trends and other indicators.

VALUATION:

The basic objective of market analysis is to know the fair valuation of shares for

buying and selling. The market comprises of various securities whose price change from

day and from time to time. The investors should have information of fair prices for

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making their decisions of buying and selling. It is, therefore Necessary to make security

valuation an important part of market analysis.

The valuation analysis in particular has to components, namely, the market

valuation at macro level & the individual security valuation at micro level. The macro

level analysis is done with help of suitable price indices of the leading scrip’s in the

market and their price-earnings ratio. The BSE national index of securities price has 100

scrip’s in it and their P/E ratio, Represents the market valuation of securities, these are

published by the BSE on a daily basis. As regards the individual security valuation, the

intrinsic value is basis on which over valuation or under valuation is judged. It is

determined by expected to the present time by a suitable discount rate. But in actual

practice this method is not followed.

The methods of valuation are

i) Discounted value of future income streams or dividends

ii) No. of years of payback period. This methods used in the form of P/E ratio.

THEORETICAL FRAMEWORK:

a) The first theoretical tool is the savings investment theory saving promote capital

formation and economic growth through increase in output and incomes of the

country. The mobilization of savings for capital formation is through capital

market comprising the new issues market and stock market.

b) Secondly, market behavior depends on the players and their role in trading.

Analysis of market price behavior is thus possible though the number of buyers

and sellers available and information in the market. The capital market efficiency

theory, Random Walk Theory and many other theories explain how prices

behavior in the market. To explain why share price fluctuate and what the fair

prices are, theses theories are used. The theory of Trend Walker’s explains the

market trends as set by a few trend setters or leaders followed by a mass of trend

walkers.

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c) Third theoretical tool in investment analysis is fundamental analysis that explains

why prices are what they are. The market price & indidvual share prices are

explained by fundamental factors namely. Economy, industry and company

analysis. In security valuation the most important tools is the ratio analysis or

examination of balance sheet of a company whose share is being examined. This

enables us to locate the undervalued shares and overvalued shares and to decide

what shares s to buy and what share to sell.

d) Fourth theoretical tool is technical analysis, which is an analysis of the price

behavior of aggregate market and of individual share with help of charts on price.

Trading volume theories in this analysis. This explains the price behavior.

e) Lastly, Risk Return Analysis, which are two major characteristic of any

investment. In this, the choice of scrip’s is decided by an analysis of risks

involved in relation to the return in the background of marker risk and marker

return. Portfolio theory provides the linkage of market to investment. An efficient

portfolio is to be developed by minimize the risks and maximize the returns.

A brief explain of these theories are given bellow:

FUNDAMENTAL ANALYSIS:

Fundamental analysis is a stock valuation method that uses financial analysis to

predict price movement (compare to technical analysis).

Fundamental analysis attempts to analyze the company's operations and the

market in which the company is operating to understand the stability and growth potential

of a company. It is presumed that this will be reflected in the stock price. Another

application of fundamental analysis presumes that the market is indeed somewhat

efficient, but some stocks (perhaps because they are small and therefore not closely

watched) are either over- or undervalued. This use of fundamental analysis can be viewed

as a type of arbitrage.

Sometimes earnings multiples, such as the P/E ratio, are used to determine value,

where cash flows are relatively stable and predictable. The obvious caveat is that the P/E

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ratio is ultimately not an objective measure, because it must be interpreted. A high P/E

ratio might be an overvalued stock, or it might be a company with high potential for

growth. Other techniques include discounted cash flow, book value, and dividend yield

analysis.

The analysis of Economy, Industry and company fundamentals constitute the main

activity in the fundamental approach to security analysis. A company belongs to an

industry and the industry operates within the economy. As such industry and economy

factors affect the performance of the company. These factors are:-

Economy wide factors such as growth rate of the economy, inflation rate, and

foreign exchange rate etc. that affect all companies.

Industry wide factors such as demand supply gap in the industry the emergence of

substitute products, changes in government policy relating to industry.

Company specific factors such as age of it plant, the quality management, brand

image of its product etc.

Fundamental analysis involves three steps:

1) Economy analysis

2) Industry analysis

3) Company analysis

ECONOMY ANALYSIS :

The performance of a company depends on the performance of the economy. It

the economy is booming income rise and demand fro goods will increase, if the economy

is in recession, the performance of the company will be generally bad. Investors are

concerned with those variables in the economy, which affect the performance of the

company in which they tend to invest. Those are:-

GROWTH RATE NATIONAL INCOME :

The rate of growth of the national economy is an important variable. GNP (Gross

national product), NNP (Net national income) and GDP (Gross domestic product) are the

difference measures indicates growth rate of the economy. These estimates are made

19

available by government. An economy typically passes through different phases, such as

depression, recovery boom and recession.

During a depression, demand is low and declining. Inflation is often high and so is

interest rate. During the recovery stage, the economy beings to revive after a depression,

Demand picks up landing to more investment in the economy. In the boom phase,

investment and production are maintained at a high level to satisfy high demand. In

recession stage, the economy slowly beings to experience a downturn in demand,

production, employment etc., and the profits also decline.

INFLATION :

Inflation prevailing in the economy has considerable impact. Higher rates of

inflation upset business plans, lead to cost escalation and result in a squeeze on profit

margins, High rates of inflation in an economy are likely to affect the performance of

companies. Inflation is measured both in terms of wholesale prices through wholesale

price index (WPI) and in terms of retail prices through consumer price Index

INTEREST RATE:

Interest rate determines the cost and availability of credit for companies operating

in an economy. A low interest rate stimulates investment by making credit available

easily and cheaply. Higher interest rate results in higher cost of production, which may

lead to lower profitability and lower demand.

An investor has to evaluate and consider the other factors like government revenue,

expenditure, deficits, exchange rate, and infrastructure economic and political stability

for a good performance of the economy.

INDUSTRY ANALYSIS:

An investor ultimately invests his money in the securities of one or more specific

companies. The performance of companies would be influenced by the fortunes of the

industry to which it belongs. An industry is generally described as a homogenous group

of companies. As industry is defined as “A group of firm products, which serve the same

need to a common set of buyers”:

20

Market experts believe that each poll has a stage and the decline stage. Even industry has

a life cycle theory.

(i) The pioneering stage

(ii) The Expansion stage

(iii) The stagnation stage

(iv) The Decay stage

Technological advances in one country can affect the growth of another industry.

All these stages give an insight into merited of invest in a given industry at a given time.

An industry usually exhibits low profitability in the pioneering stages, high profitability

in the growth or expansion stage, and medium but steady profitability in the stagnation or

maturity stage and declining profitability in the decay stage.

COMPANY ANALYSIS:

It is the final stage of fundamental analysis. It deals with the estimation of return

and risk of individual shares. In company analysis, the analyst tries to forecast the future

earnings of the company. The level, trend and stability of earning of a company, however

depend upon a number of factors concerning the operations of the company.

TECHNICAL ANALYSIS:

A method of evaluating securities by relying on the assumption that market data,

such as charts of price, volume, and open interest, can help predict future (usually short-

term) market trends. Unlike fundamental analysis, the intrinsic value of the security is not

considered. Technical analysts believe that they can accurately predict the future price of

a stock by looking at its historical prices and other trading variables. Technical analysis

assumes that market psychology influences trading in a way that enables predicting when

a stock will rise or fall. For that reason, many technical analysts are also market timers,

who believe that technical analysis can be applied just as easily to the market as a whole

as to an individual stock.

21

DOW THEORY:

Dow Theory is based on the philosophy that the market prices reflect every

significant factor that affects supply and demand - volume of trade, fluctuations in

exchange rates, commodity prices, bank rates, and so on. In other words, the daily closing

price reflects the psychology of all players involved in a particular marketplace - or the

combined judgment of all market participants.

The goal of the theory is to determine changes in the major trends or movements

of the market. Markets tend to move in the direction of a trend once it becomes

established, until it demonstrates a reversal. Dow Theory is interested in the direction of a

trend and doesn't offer any forecasting ability for determining the ultimate duration of a

trend.

Much of today's technical analysis is based on Dow's original "trend following' system -

Classification of a trend

Principles of confirmation or divergence

Use of volume to confirm trends

Use of percentage retrenchment

Recognition of major bull and bear markets

Signaling the large central section of important market moves

Dow Theory has been successful in identifying 68% the major trends over the

years

The three trends are:

Uptrend: successively higher peaks (highs) and higher troughs (lows)

Downtrend: successively lower peaks and troughs

Sideways Channel: peaks and troughs don't successively rise or fall.

22

ELLIOT WAVE THEORY:

Interprets market actions in terms of recurrent price structures, in other words that

market cycles are composed of two major types of waves, Impulse waves and Corrective

waves. These waves are fractal in nature, meaning that market structures are built from

similar patterns on larger or smaller scales. Therefore the wave can be counted on a long-

term yearly market chart as well as short-term hourly market chart.

EFFICIENT MARKET THEORY:

The (now largely discredited) theory that all market participants receive and act

on all of the relevant information as soon as it becomes available, If this were strictly

true, no investment strategy would be better than a coin toss. Proponents of the efficient

market theory believe that there is perfect information in the stock market. This means

that whatever information is available about a stock to one investor is available to all

investors (except, of course, insider information, but insider trading is illegal). Since

everyone has the same information about a stock, the price of a stock should reflect the

knowledge and expectations of all investors. The bottom line is that an investor should

not be able to beat the market since there is no way for him/her to know something about

a stock that isn’t already reflected in the stock's price. Proponents of this theory do not try

to pick stocks that are going to be winners; instead, they simply try to match the market's

performance. However, there is ample evidence to dispute the basic claims of this theory,

and most investors don't believe it.

23

PORTFOLIO MANAGEMENT

INTRODUCTION:-

Many times the investors go on acquiring assets in an adhoc & unplanned manner

& the result is high risk, low return profile that they may face. All such assets of financial

nature such as gold, silver, real estate, building, insurance policies, Post Office certificate,

NSC or NSS would constitute his portfolio & the wise investor not only plans his

portfolio as per risk return profile or preferences but manages his portfolio efficiently so

as to secure the highest return for the lowest risk possible at that level of investment. This

is in short the Portfolio Management.

The basic principle is that the higher the risk, the higher is the return & investor

should have clear perception of elements of risk & return when he makes investments.

Risk return analysis is essential for the investment & portfolio management. An investor

considering investment in securities is faced with the problem of choosing from among a

large number of securities. He would attempt to choose the most desirable securities &

like to allocate his funds over group of securities. As the economic and financial

environment keep changing the risk return characteristics of individual securities as well

as portfolio also change.

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

with the risk that he has to beat. Portfolio management comprises all the processes

involved in the creation & maintenance of an investment portfolio. It deals specifically

with Security Analysis, Portfolio Analysis, Selection, and Revision & Evaluation.

Portfolio Management is a complex process, which tries to make investment activity

more rewarding & less risky.

RISK OF PORTFOLIO MANAGEMENT:

There was a time when portfolio management was an exotic term. The scenario

has changed drastically. It is now a familiar term and is widely practiced in India. The

theories and concepts relating to portfolio management now find their way to the front

pages financial newspapers and the cover pages of investment journals in India.

24

Indian capital markets have become active. The Indian stock markets are steadily

moving towards higher efficiency, with rapid computerization, increasing market

transparency, better infrastructure, better customer service etc. The markets are mutual

funds have been set up the country since 1987. With this development investment in

securities has gained considered momentum.

Professional portfolio management backed by competent research began to be

practiced by mutual funds, investment consultant and big brokers. The Securities

Exchange Board of India (SEBI), The Stock Market Regulatory body in India is

supervising the whole process.

With the advent of computer the whole process of portfolio management has

become quite easy. The computer can absorb large volumes of data perform

computations accurately and quickly give out results in desired form.

The trend towards liberalization and globalization of the economy has promoted free flow

of capital across international border. Portfolio now include not only domestic securities

but also foreign securities such as Options and Future in the field of investment

management and trading in derivation securities, their valuation etc., have broadened its

scope.

PORTFOLIO THEORIES

MARKOWITZ THEORY;

Markowitz approach determines for the investor the efficient set of portfolio through

3 important variables, i.e., Standard Deviation, Covariance and Co-efficient of

Correlation. Markowitz model is called the “Full Covariance Model”. Through this

method, the investor can with the use of computer, find out the efficient set of portfolio

by finding out the trade off between risk and return between the limits of zero to infinity.

According to this theory, the effects of one security purchase over the effects of the other

security purchase are taken into consideration and then the results are evaluated.

25

ASSUMPTION UNDER MARKOWITZ THEORY;

Markowitz theory is based on the modern portfolio theory under several assumptions.

The assumptions are:-

1. The market is efficient and all investors have in their knowledge all the facts about

the stock market and so on investor can continuously make superior returns either by

predicting past behavior of stocks through technical analysis the intrinsic value of

shares. Thus all investors are in equal category.

2. All investor before making any investment have a common goal. This is the

avoidance of risk because they are risk avers.

3. All investors would like to earn the maximum rate of return that they can achieve

from their investments.

4. The investors base their decisions on he expected rate of return of an investment. The

expected rate of return can be found out by finding out the purchase price of a

security divided by the income per year and by adding annual capital gains. It is also

necessary to know the standard deviation of the rate of return, which is begin offered

on the investment. The rate of return and standard deviation are important parameters

for finding out whether investment is worthwhile for a person.

5. Markowitz brought out the theory that it was useful insight to find out how the

security returns are correlated to each other. By combining the assets in such way that

they give the lowest risk maximum returns could be brought out by the investor.

6. From the above it is clear that investor assumes that while making an investment he

will combine his investments in such a way that he gets a maximum return and is

surrounded by minimum risk.

7. The investor assumes that greater or larger the return that he achieves on his

investments, the higher the risk factor that surrounds him. On the contrary when risks

are low the return can also be expected to be below.

8. The investor can reduce his risk if he adds investments to his portfolio.

9. An investor should be able to get higher for each level of risk “by determining the

efficient set of securities.

26

THE SHARPE INDEX MODEL:

The investor always likes to purchase a combination of stock that provides he highest

return and has lowest risk. He wants to maintain a satisfactory reward to risk ratio.

Traditionally analysis paid more attention to the return aspect of the stocks. Now a day’s

risk has received increased attention and analysts are providing estimates of risk as well

as return.

Sharp has developed a simplified model to analyze the portfolio. He assumed that the

return of a security is linearly related to a single index like the market index. Strictly

speaking, the market index should consist of all the securities trading on the exchange.

In the absence of it, a popular index can be treated as a surrogate for the market index.

SINGLE INDEX MODEL:

Casual observation of the stock prices over a period of time reveals that most of the

stock prices move with the market index. When sensex increases, stock prices also tend

to increase and vice- versa. This indicates that some underlying factors affect the market

index as well as the stock prices. Stock prices are related to the market index and the

relationship could be used to estimate the return on stock. Towards this purpose, the

following equation can be used.

R j= ai+ ai Rm+e iWhere R = Expected return on security I

a i = Intercept of the straight line or alpha co-efficient

a i = Slope of straight line or beta co-efficient

Rm = The rate of return on marker index

ei = Error team

27

CORNER PORTFOLIO

The entry or exit of a new stock in the portfolio generates a series of corner portfolio.

In a one stock portfolio, itself is the corner portfolio. In a two stock portfolio, the

minimum attainable risk (variance) and the lowest return would be the corner portfolio.

As the member of stocks increases in a portfolio, the corner portfolio would be the one

with lowest return and risk combination.

SHARPE’S OPTIMAL PORTFOLIO

Sharpe has provided a model for the selection of appropriate securities in a portfolio.

The selection of any stock is directly related to its excess return – beta ration.

Ri−Rf / a iWhere, Ri = The expected return on stock i

Rf = The return on a risk less asset

a i = The expected change in the rate of return on stock I associated with

one unit changer in the market return.

The excess return is the difference between the expected return on the stock and the

risk less rate of interest such as the rate offered on the government security or Treasury

bill. The excess return to beta ratio measures the additional return on security (excess of

the risk less asset return) per unit of systematic risk or non-diversifiable risk. This ratio

provides a relationship between potential risk and reward.

The steps for finding out the stocks to be included in the optimal portfolio are given

below:

1. Finding out the “excess return to beta” ratio for each stock under consideration.

2. Rank them from the highest to the lowest

3. Proceed to calculate C for all the stocks according to the ranked order using the

following formula.

Ci=σ2m N ( (Ri−Rf )βi /σ 2ei )/1+σ 2 N βi /σ2ei

4. The calculated values of Ci start declining after a particular Ci and that point is

taken as the cut-off point and that stock ratio is the cut-off ratio.

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CAPITAL ASSET PRICE THEORY:

We have seen that diversifiable risk can be eliminated by diversification. The

remaining risk portion is the un-diversifiable risk i.e., market risk. As a result, investors

are interested in knowing the systematic risk when they search for efficient portfolios.

They would like to have assets with low beta coefficient i.e., systematic risk. Investors

would opt for high beta co-efficient only if they provide high rate of return. The risk were

averse nature of the investors is the underlying factor for this behavior. The capital asset

pricing theory helps the investors top understand and the risk and return relationship of

the securities. It also explains how assets should be priced in the capital market.

THE CAPM THEORY:

Markowitz, William Sharpe, John Lintner and Jan Mossin provided the basis

structure for the CAPM model. It is a model of linear general equilibrium return. In the

CAPM theory, the required rate of return of an asset is having a linear relationship with

asset’s beta value i.e., undiversifiable or systematic risk.

ASSUMPTIONS:

1. An individual seller or buyer cannot affect the price of a stock. This assumption is

the basic assumption of the perfect competitive market.

2. Investors make their decisions only on the basis of the expected returns, standard

deviations and covariance’s of all pairs of securities.

3. Investors are assumed to have homogenous expectations during the decision

making period.

4. The investor can lend or borrow any amount of funs at the risk less rate of

interest. The risk less rate of interest is the rate of interest offered for the treasury

bills or government securities.

5. Assets are infinitely divisible, according to this assumption, investor could buy

and quantity of share i.e., they can even buy ten rupees worth of Reliance Industry

shares.

6. There is no transaction cost i.e., no cost involved in buying and selling of stocks.

29

7. There is no personal income tax. Hence, the investor is indifferent to the form of

return either gain or dividend.

8. Unlimited quantum if short sales are allowed. Any amount of shares an individual

can sell short.

LENDING AND BORROWING:

Here, it is assumed that the investor could borrow or lend any amount of money at

risk less rate of interest. When this opportunity is given to the investors, they can mix risk

free assets with the risk assets in a portfolio to obtain in desired rate of risk return

combination.

The expected return on the combination of risky and risk free combination

Rp = RfXf + Rm(1 – Xf)

Where, Rp = Portfolio return

Xf = The proportion of funds invested in risk free assets

1 – Xf = The proportion of funds invested in risk assets.

Rf = Risk free rate of return

Rm = Return on risky assets

This formula can be used to calculate the expected returns for different situation like

mixing risk less assets with risky assets, investing only in the risky asset and mixing the

borrowing with risk assets.

THE CONCEPT

According to CAPM, all investors hold only the market portfolio and risk less

securities. The market portfolio is a portfolio comprised of all stocks in the market. Each

asset is held in proportion to its market value to the all risky assets. For example, if

Reliance Industry share represents 20% of all risky assets, then the market portfolio of

the individual investor contains 20% of Reliance Industry shares. At this stage, the

investor has the ability to borrow or lend any amount of money at the risk less rate of

interest. The efficient frontier of the investor is given in figure.

30

The figure shows the efficient of the investor. The investor prefers any point

between B & C because, with the same level of risk they face on line BA, they are liable

to get superior profits. The ABC lines show the investor’s portfolio of risky assets. The

investors can combine risk less asset either by lending or borrowing. This is shown in

figure,

The line RfS represent all possible combination of risk less and risky asset. The ‘S’

portfolio does not represent any risk less asset but the line RfS gives the combination of

both. The portfolio along the path RfS is called lending portfolio i.e., some money is

invested in the risk less asset or may b deposited in the bank for a fixed rate of interest if

it crosses the point S, it becomes borrowing portfolio. Money is borrowed and invested in

the risky asset. The straight lines are called Capital Market Line (CML). It gives the

desirable set of investment opportunities between risk free and risky investments. The

CML represents linear relationship between the required rates of return for efficient

portfolio and their standard deviations.

E (R p)=R f +(Rm−Rf )

σm×σ p

E(Rp) = Portfolio’s expected rate of return

Rm = Expected return on market portfolio

σm = Standard deviation of market portfolio

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σ p = Standard deviation of the portfolio

For a portfolio on the capital market line, the expected rate of return in excess of the

risk free rate is in proportion to the standard deviation of the market portfolio. The slope

of the line gives the price of the risk. The slope equals the risk premium for the market

portfolio Rm – Rf divided by the risk or standard deviation of the market portfolio. Thus,

the expected return of an efficient portfolio is

Expected return = Price of time + (Price of risk X amount of risk)

Price of time is the risk free rate of return. Price of risk is the premium amount higher and

above the risk free return.

SECURITY MARKET LINE:

The Capital Market Line measures the risk-return relationship of an efficient

portfolio. But, it does not show the risk- return trade off for other portfolio and individual

securities. Inefficient portfolios lie below the capital market line and the risk-return

relationship cannot be established with the help of his capital market line. Standard

deviation includes the systematic and unsystematic risk. Unsystematic risk can be

diversified and it is not related to the market. If the unsystematic risk is eliminated, then

the matter of concern is systematic risk alone. This systematic risk could be measured by

beta. The beta analysis is useful for individual securities and portfolio whether efficient

or inefficient.

When an additional security is added to the market portfolio, an additional risk is

also added to it. The variance of a portfolio is equal to the weighted sum of the

covariance of the individual securities in the portfolio. If we add an additional security to

the market portfolio, its marginal contribution to the variance of the market is the

covariance between the security’s return and market portfolio’s return. If the security is

included, the covariance between the security and the market measures the risk. Dividing

it by standard deviation of market portfolio Cov lm/σm can standardize covariance.

This shows the systematic risk of the security, and then the expected return of the security

is given by the equation.

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Ri−Rf=Rm−Rfσm

Cov V im /σm

This equation can be rewritten as follows:

Ri−Rf=Cov im

σ2m

[Rm−R f ]

The first term of the equation is nothing but the beta coefficient of the stock. The

beta coefficient of the equation of SML is same as the beta of the market (Single index)

model. In equilibrium, all efficient and inefficient portfolio lie along the security market

line, The SML line helps to determine the expected return for a given security beta. In

other words, when betas are given, we can generate expected returns for the given

securities. This is explained in figure. If we assume the expected market risk premium to

be 8% and the risk free rate of return to be 7%, we can calculate expected return for A, B,

C and D securities using the formula.

E (Ri )=Rf +β1 [E (Rm−Rf ) ]

MARKET IMPERFECTION AND SML:

Information regarding the share price and market condition may not be

immediately available to all investors; imperfect information may effect the valuation of

securities. In a market with perfect information, all securities should lie on SML. Market

imperfections would lead to a band to SML rather than a single line. Market

imperfections after the width of the SML to a band, if imperfections were more, the width

also would be larger.

Empirical tests of the CAPM:

In the CAPM, beta is use to estimate the systematic risk of the security and reflects

the future volatility of the stock in relation to the market. Future volatility of the stock is

estimated only through historical data. Historical data are used to plot the regression line

or the characteristics line and calculate beta. If historical betas are stable over a period of

time, they would be good proxy for their ex-ante or expected risk.

33

Robert A. levy, Marshall E. Blume and other studied the question of beta stability in-

depth. Levy calculated betas for the both individual securities and portfolios. His study

results have provided the following conclusions.

1. The betas of individuals stocks are unstable; hence the past betas for the

individual securities stocks estimators of future risk.

2. The betas of portfolio of ten or more randomly selected stocks are reasonably

stable, hence he past portfolio betas are good estimators of future portfolio

volatility. This is because of the errors in the estimate of individual securities

betas tending to offset one another in a portfolio.

Various researchers have attempted to find out the validity of the model by

calculating beta and realized rate of return. They attempted to test (1) whether the

intercept is equal to Rf i.e., risk free rate of interest or the interest for treasury bills (2)

whether the line is linear and pass through the beta = 1 being the required rate of return of

the market. In general, the studies have showed the following results.

1. The studies generally showed a significant positive relationship between the

expected return and the systematic risk. But the slope of the relationship is usually

less than that of predicted by the CAPM.

2. The risk and return relationship appears to be linear. Empirical studies give no

evidence of significant curvature in the risk/return relationship.

3. The attempt of the researchers to access the relative importance of the market and

company risk has yielded results. The CAPM theory implies that unsystematic

risk is not relevant, but unsystematic and systematic risks are positively related to

security returns. Higher returns are needed to compensate both the risks. Most of

the observed relationship reflects statistical problems rather than the true nature of

capital market.

34

4. According to Richard Roll, the ambiguity of the market portfolio leaves the

CAPM untreatable. The practice of using indices, as proxies is loaded with

problems. Different indices yield different betas for the same security.

5. If the CAPM were completely valid, it should apply to all financial assets

including bonds. But, when bonds are introduced into the analysis, they do not all

on the security market line.

PRESENT VALIDITY OF CAPM

The CAPM is greatly appealing at an intellectual level, logical and rational.

The basic assumptions on which the model is built raise, some doubts in the minds of the

investors. Yet, investment analysis has been more creative in adapting CAPM for their

uses.

1. The CAPM focuses on the market risk, makes the investors to think about the

risky ness of the assets in general CAPM provides basic concept, which is

truly fundamental values.

2. The CAPM has been useful in the selection of securities and portfolio.

Securities with higher returns are considered to be undervalued and attractive

for buy. The below normal excepted return yielding securities are considered

to be overvalued and suitable for sale.

3. In the CAPM, it has been assumed that investors consider only the market

risk. Given the estimate of the risk free rate, the beta of the firm, stock and the

required market rate of return, one can find out the expected returns for a

firm’s security. This expected return could be used as an estimate of the cost

of retained earnings.

4. Even through CAPM has been regarded as fuseful tools to financial analysis;

it has it won critics too. They point out, when the model is ex-ante; the inputs

also should be ex-ante, i.e. based on the expecat5ions of the f8re. Empirical

test and analysis have used ex-post i.. Past data only:

5. The historical data regarding the market return, risk free rate of return and

betas vary differently for different periods. The various methods used to

estimate these inputs also affect the beta value. Since the inputs cannot be

35

estimated precisely, the expected return found out through the CAPM model

is also subjected to criticism.

ARBITRAGE PRICING THEORY:

Arbitrage pricing theory is one of the tools used by the investors and portfolio

managers. The capital asset pricing theory explains the returns of the securities on the

basis of their respective bets. According to the previous model, the investor chooses the

investment on the basis of expected return and variance. The alternative model deployed

in asset pricing by Stephen Ross is known as Arbitrage Pricing Theory. The APT

explains the nature of equilibrium in the asset pricing in a less complicated manner with

fewer assumptions compare to CAPM.

The Assumptions:

1. The investors have homogeneous expectations.

2. The investor are risk averse and utility maxi misers

3. Perfect competition prevails in the market and there is no transaction cost.

The APT theory does not assume:

a) Single period investment horizon

b) No taxes

c) Investors can borrow and lend at risk free rate of interest and

d) The selection of the portfolio is based on the mean and variance analysis.

These assumptions are present in CAPM theory.

ARBITRAGE PORTFOLIO:

According to the APT theory an investor tries to find out the possibility to

increase returns from his portfolio without increasing the funds in the portfolio. He also

likes to keep the risk at the same level.

For example, the investor holds A, B and C securities and he wants to change in

proportion of securities can be denoted by X, Xalignl ¿ b ¿¿¿ andXC . The increase in the investment

in security A could be carried out only if he reduces the proportion of investment either in

B or C because it has already stated that the investor tries to earn more income without

36

increasing his financial commitment. Thus, arbitrage portfolio. If X indicates the change

in proportion,

ΔX A+ΔXB+ΔXC=0

The factor sensitivity indicates the responsiveness of a security’s return to a particular

factor. The sensitiveness of securities to any factor is the weighted average of the

sensitivities of the securities, weighted being the changes made in the proportion. For

example, bA, bB and bC are sensitive in an arbitrage portfolio the sensitive become zero.

b A ΔX A+bB ΔXB+bC ΔXC=0

EFFECT ON PRICE:

To buy stock A and B, the investor has to sell stock C. The buying pressure on

stock A and B would lead to increase in their prices. Conversely selling of stock C will

result in fall in the price of the stock C. With the low price there would be rise in the

expected return of stock C. For example, it the stock C price Rs. 100 per share has earned

12% return, at Rs. 80 per share the return would be 12/80*100=15%.

At the same time, return rates would be declining in stock A and B with the

rise in price. This buying and selling activity will continue until all arbitrage possibilities

are eliminated. At this juncture, there exists an approximate linear relationship between

expected return and sensitivities.

THE APT MODE:

According to Stephen Ross, returns of the securities are influenced by a

number of macroeconomic factors. The macro economic factors are growth rate of

industrial production, rate of inflation, spread between long return and short-term interest

rate and the arbitrage theory is represented by the equation:

R1=λ0+λ1bi1+λ jbi j

Ralignl ¿ 1 ¿¿¿= Average expected return

λ1= Sensitivity of return to bi1

37

bi1= The beta co-efficient relevant to the particular factor

The equation is derived from the model

R1=α 1+b11 I 1+b12 I 2 .. . .. .. .+b y I j+e j

THE CONSTANTS OF THE APT EQUATION:

The existence of the risk asset yields a risk free rate of return that is a constant.

The asset does not have sensitivity to the factor for example, the industrial production.

If bi = 0

R = λ0+λ i0

Ri=λoRi=λ I

In other words, λo is equal to the risk free rate of return. If the single factor portfolio’s

sensitivity is equal to one i.e., b i=1 then

Ri=λ0= λ1

This can be written as

Ri=λ0+λ1

Ri−λ0= λ1

Thus,λ i is expected excess return over the risk free rate return for a portfolio with unit

sensitivity to the factor. The excess return is known as Risk premium.

FACTORS AFFECTING THE RETURN:

The specification of the factors is carried out by much financial analysis, Chen,

Roll and Ross have taken four Marco economic variable and tested them. According to

them the factor are inflation, the term structure of interest rates, risk premiums and

industrial production. Inflation affects the discount rate or the required rate of return and

the size of the future cash flows. The short-term inflation is measured by monthly

percentage changes in the consumer price index. The interest rate on long-term bonds and

short-term bonds differ. This difference affects the value of payments in future relative to

short-term payment. The difference between the return on the high-grade bonds and low

38

grade (more risky) bonds indicates the market’s reaction to risk. The industrial

production represents the business cycle. Changes in the industrial production have an

impact on the expectations and opportunities of the investor. The real value of the cash

flow is also affected by it.

Burmeister and McElroy have estimated the sensitive with some other factors. They are

given bellow:-

Default risk

Time premium

Deflation

Change in expected sales

The market returns not due to the first four variables.

The default risk is measured by the difference between the return on long term

government bonds and the return on long term bonds issued by corporate plus one-half of

one percent. Time premium is measure by the return on long term government bonds

minus one moth Treasury bill rate one month ahead. Deflation is measured by expected

inflation at the beginning of the month minus actual inflation during the month.

According to them, the first four factors accounted 25% of the variation in the

standard and poor composite index and all the four co-efficient were significant.

Salmon Brothers identification five factors in their fundamental factor model Inflation is

the only common factor identified by others. The other factors are given below:-

Growth rate in gross nation a product

Rate of interest

Rate of change in oil prices

Rate of change in defense spending

APT and CAPM

The simplest form of APT model is consistent with the simple form of the CAPM

model, when only one factor is taken into consideration, the APT can be stated as.

Ri−λ0+bi λ I

It is similar to the capital market line equation:

39

Ri=Rf β i+(Rm−RF ) , Which is similar to CAPM model

APT is more general and less restrictive than CAPM, in APT, the investor has no need to

hold the market portfolio because it does not make use of the market portfolio concept.

The portfolios are constructed on the basis of the factors eliminate arbitraged profits.

APT is based on the law of one price to hold for all possible portfolio combinations.

The APT model takes on to account of the impact of numerous factors on the

security. The |Macro economic factors are taken into consideration and it is closer to

reality then CAPM.

The market portfolio is well defined conceptually. In APT model, factors are

not well specified. Hence, the investor finds it difficult to establish equilibrium

relationship. The well defined market portfolio is a significant advantage of the CAPM

leading to the wide usage of the model in the stock market.

The factors that have impact on one group of securities may not affect other group

securities. There is a lack of constituency in the measurement of the APT model. Further,

the influences of the factors are not independent of each other. It may be difficult to

identify the influence corresponds exactly to each factor. Apart from this, not all variable

that exerts influence on factor measurable.

40

PORTFOLIO MANAGEMENT CONCEPTUAL FRAME WORK

Portfolio analysis believes in the maximization of return through a combination of

securities. The modern portfolio theory discusses the relationship between different

securities and then draws inter-relationship of risks between them. It is not necessary to

achieve success only by trying to get all securities of minimum risk. The theory states

that by combining a security of low risk with another security of high risk, success can be

achieved by an investor in making a choice of investment outlets.

AVERAGE RETURN’S OF THE COMPANY:

S. No. Security Average1 Infosys 44.24

2 Reliance 43.053 Hero Honda 34.544 GE 32.405 ITC 5.76

Average Return = R−−

=Ri /N

Where R−−

= Average Return

Ri = Return of the Security I for the year T

N = Number of Years

Based on above average return of securities of Infosys is earning higher return and ITC is

earning lowest return. Other securities are earning medium rage returns such are

Reliance, GE and Hero Honda.

41

STANDARD DEVIATION OF THE COMPANIES:

S. No. Security Average1 Infosys 109.93

2 Reliance 108.373 Hero Honda 107.534 GE 63.505 ITC 37.43

S .D=1/n−1 (R−R )2

T = 1

Based on above calculations Standard deviations like that GE is highest and ITC is

lower, where other securities are having medium standard deviation.

CORRELATION CO-EFFICIENT BETWEEN THE SECURITIES:

Security Infosys ITC GE Reliance Hero HondaInfosys 1 -0.3306 0.9297 0.7686 -0.0039ITC 1 -0.0706 0.2618 -0.4278GE 1 0.8100 0.3490Reliance 1 0.0606Hero Honda 1

Formula:

Correlation Co-efficient

(nΔ ab)=COV (ab )/σa .σb

Where COV (ab) = 1/n−1(RA−RA )(RB−RB

42

PORTFOLIO WEIGHTS:

S.NO PORTFOLIO CORRELATION WEIGHT OF A

WEIGHT OF B

1 Infosys & ITC -0.3306 0.1773 0.82272 Infosys & GE 0.9297 0.6000 0.40003 Infosys & Reliance 0.7686 -0.2418 1.24184 Infosys & Hero Honda -0.0039 0.4961 0.50395 ITC & GE -0.0706 0.8797 0.12036 ITC & Reliance 0.2618 0.8328 0.16727 ITC & Hero Honda -0.4278 0.8096 0.19048 GE & Reliance 0.8100 -0.3373 1.33739 GE & Hero Honda 0.3490 0.4830 0.517010 Reliance & Hero Honda 0.0606 0.7549 0.2451

Formula:

Weight of a (Wa) = σb (σb−nabσa) /(σa2+σb2 )−(2nab .σa .σb )

Weight of b (Wb) = 1 – Wa

PORTFOLIO RISK:

S.NO COMBINATION PORTFOLIO RISK

1 GE & Reliance 27.11

2 ITC & Hero Honda 23.38

3 Infosys & ITC 30.43

4 ITC & GE 34.60

5 ITC & Reliance 35.46

6 Infosys & Reliance 48.52

7 Reliance & Hero Honda 56.07

8 Infosys & Hero Honda 76.17

9 GE & Hero Honda 89.26

10 Infosys & GE 107.13

43

Formula:

σp=√σa2Wa2+σb2Wb2+2.nab .σa .σb .WaWb

Where:

σa= S tan drard deviation of Securitiy aσb= S tan drad deviation of Security bWa= Weight of Security aWb=Weight of Security bnab = Correlation Coeffient between Secutiry a∧bσp= Portfolio Risk

PORTFOLIO RETURN:


1 ITC & GE 8.96

2 ITC & Hero Honda 11.233 ITC & Reliance 11.99

4 Infosys & ITC 12.58

5 GE & Hero Honda 33.50

6 Infosys & Hero Honda 39.357 Infosys & GE 39.50

8 Reliance & Hero Honda 40.95

9 Infosys & Reliance 42.74

10 GE & Reliance 46.60

44

Formula:

Rp = (Ra X Wa) + (Rb X Wb)

Where:

Ra = Average Return of Security a

Rb = Average Return of Security b

Wa = Weight of Security a

Wb = Weight of Security b

Rp = Portfolio Return

PORTFOLIO RISK & RETURN:


Portfolio Return

1 GE & Reliance 27.11 46.62

2 ITC & Hero Honda 23.38 11.23

3 Infosys & ITC 30.43 12.58

4 ITC & GE 34.60 8.96

5 ITC & Reliance 35.46 11.99

6 Infosys & Reliance 48.52 42.74

7 Reliance & Hero Honda 56.07 40.95

8 Infosys & Hero Honda 76.17 39.35

9 GE & Hero Honda 89.26 33.50

10 Infosys & GE 107.13 39.50

45

PORTFOLIO SELECTION, REVISION & EVALUATION

PORTFOLIO SECTION:

Portfolio analysis provides the input for next phase in portfolio management,

which is portfolio selection. The proper goal of portfolio construction is to generate a

portfolio that provides the highest returns at a given level of risk. The inputs from

portfolio analysis can be used to identify the set of efficient portfolios. From this the

optimal portfolio must be selected for investment. Harry Markowitz portfolio theory

provides both the conceptual framework and analytical tools for determining the optimal

portfolio in a disciplined and objective way.

So, out of the various combinations (related to five companies), the optimal

portfolio is GE & Reliance, as this portfolio has minimum risk of 27.112% with

maximum return of 46.63%. Hence, I can say that it is better to invest in these portfolios.

PORTFOLIO REVISION:

Economy and financial markets are dynamic, change take place almost daily. As

time passes securities which were once attractive may lease to be so. New securities with

promise of high return and low risk may emerge. The investor now has to revise his

portfolio in the light of developments in the market. This leads to purchase of some new

securities and sale of some of the existing securities and their proportion in the portfolio

changes as a result of the revision.

The revision has to be scientifically and objectively so as to ensure the optimality of the

revised portfolio, it important as portfolio analysis and selection.

PORTFOLIO EVALUATION:

The objective of constructing a portfolio and revising I t periodically is to earn

maximum returns with minimum risk. Portfolio evaluation is the process, which is

concerned with assessing the performance of the portfolio over a selected period of time

in terms of returns and risk. This involves quantities measurement of actual return

realized. Alternative measures of performance evaluation have been developed by

investor and portfolio managers for their use.

46

It provides a mechanism for identifying weakness in the investment process and

improving them. The portfolio management process is an on going process to portfolio

construction, continues with portfolio revision and evaluation. The evaluation provides

the necessary feedback for better designing of portfolio the next time and around.

Superior performance is achieved thorough continual refinement of portfolio

management skills.

CALCULATION OF AVERAGE RETURNS OF COMPANIES

INFOSYS:

Year Dividend Opening Share price

(P0)

Closing Share price

(P1)

D+(P1 – P0) D+(P1-P0)/P0*100

2004-052005-062006-072007-082008-09

4.5010.0020.0027.00129.50

2925.008189.804094.553557.854040.30

9676.004082.903735.454263.355037.90

6755.50-4096.90-339.10732.501127.10

230.95-50.02-8.2820.5927.90

Total Return 221.14

Returns are calculated as below:

Return of 01-02

= (D+P1-P0)/P0*100 = (4.5+9676.00-2925.00)/2925.00*100 = 230.95

Return of 02-03

= (D+P1-P0)/P0*100 = (10+4082.90-8189.80)/8189.80*100 = -50.02

Return of 03-04

= (D+P1-P0)/P0*100 = (20+3735.45-4094.55)/4095.55*100 = -8.28

Return of 04-05

= (D+P1-P0)/P0*100 = (27+4263.35-3557.85)/3557.85*100 = 20.59

Return of 05-06

= (D+P1-P0)/P0*100 = (129.5+5037.9-4040.3)/4040.3*100 = 27.90

Average Return = 221.14/5 = 44.23

47

ITC ( Indian Tobacco Corporation):

Year Dividend Opening Share Price

(PO)

Closing Share Price(PI)

D+(PI – PO) D+(PI – PO) /PO*100

2004-05 7.49 963 715.00 -240.51 -24.282005-06 10.37 787 814.40 37.77 4.802006-07 13.62 814.85 696.65 -104.58 -12.832007-08 15.00 705.05 632.85 -57.20 -08.112008-09 20.00 629.50 1049.90 440.40 69.96

Total Returns 28.84


Return of 01-02

= (D+P1-P0)/P0*100 = (7.49+715-963)/963*100 = -24.98

Return of 02-03

= (D+P1-P0)/P0*100 = (10.37+814.4-787)/787*100 = 4.80

Return of 03-04

= (D+P1-P0)/P0*100 = (13.62+696.65-814.85)/814.85*100 = -12.83

Return of 04-05

= (D+P1-P0)/P0*100 = (15+632.85-705.05)/705.05*100 = -8.11

Return of 05-06

= (D+P1-P0)/P0*100 = (20+1049.90-629.5)/629.5*100 = 69.96

Average Return = 28.84/5 = 5.76

48

GE:

Year Dividend Opening Share price (P0)

Closing Share price (P1)

D+(P1 – P0) D+(P1-P0)/P0*100

2004-052005-062006-072007-082008-09

2.277.991.183.004.01

1622.004074.45243.05256.75176.95

4813.75233.90267.65191.90301.45

3194.02-3832.56

25.78-61.85128.51

196.92-94.0610.61-24.0972.65

Total Return 162.03


Return of 01-02

= (D+P1-P0)/P0*100 = (2.27+4813.75-1922)/1922.00*100 = 196.92

Return of 02-03

= (D+P1-P0)/P0*100 = (7.99+233.9-4074.45)/ 4074.45*100 = -94.06

Return of 03-04

= (D+P1-P0)/P0*100 = (1.18+267.65-243.05)/ 243.05*100 = 10.61

Return of 04-05

= (D+P1-P0)/P0*100 = (3+191.9-256.75)/ 256.75*100 = -24.09

Return of 05-06

= (D+P1-P0)/P0*100 = (4.01+301.45-176.9)/ 176.9*100 = 72.65

Average Return = 162.03/5 = 32.40

49

RELIANCE:



D+(P1 – P0) D+(P1-P0)/P0*100

2004-052005-062006-072007-082008-09

3.654.256.295.005.25

130.40325.90389.45300.95276.45

291.25390.90300.70285.00527.20

164.5069.25-82.46-10.95256.00

126.1521.25-21.17-3.6492.60

Total Return 215.19


Return of 01-02

= (D+P1-P0)/P0*100 = (3.65+291.25-130.40)/ 130.40*100 = 126.15

Return of 02-03

= (D+P1-P0)/P0*100 = (4.25+300.7-325.9)/ 325.9*100 = 21.25

Return of 03-04

= (D+P1-P0)/P0*100 = (6.29+300.7-389.45)/ 389.45*100 = -21.17

Return of 04-05

= (D+P1-P0)/P0*100 = (5+285-300.95)/ 300.95*100 = -3.64

Return of 05-06

= (D+P1-P0)/P0*100 = (5.25+527.20-276.45)/ 276.45*100 = 92.60

Average Return = 215.19/5 = 43.04

50

HERO HONDA:



D+(P1 – P0) D+(P1-P0)/P0*100

2004-052005-062006-072007-082008-09

2.003.0017.0018.0020.00

875.251000.20140.00362.35188.40

920140.35333.70196.40438.45

46.25-857.85196.70-148.95268.05

5.34-85.66150.50-40.83143.33

Total Return 172.71


Return of 01-02

= (D+P1-P0)/P0*100 = (2+920-875.25)/ 875.25*100 = 5.34

Return of 02-03

= (D+P1-P0)/P0*100 = (3+140.35-1000.20)/ 1000.20*100 = -85.66

Return of 03-04

= (D+P1-P0)/P0*100 = (17+333.7-140)/ 140*100 = 150.50

Return of 04-05

= (D+P1-P0)/P0*100 = (19+196.40-362.35)/ 362.35*100 = -40.83

Return of 05-06

= (D+P1-P0)/P0*100 = (20+438.45-188.40)/ 188.40*100 = 143.33

Average Return = 172.71/5 = 34.542

51

CALCULATION OF STANDARD DEVIATIONS

INFOSYS:

Year Return (R)Avg. Rtn. ( R ) R−R (R−R )2

2004-05

2005-06

2006-07

2007-08

2008-09

230.95-50.02-8.2820.5927.90

44.2444.2444.2444.2444.24

185.76-94.26-52.52-23.65-16.34

34506.788884.952758.35559.32266.99

(R) = 221.14 (R−R )2 46976.39

Average Return = (R)/N = 221.14/5 = 44.24

Variance = 1/N – 1 (R−R )2 = 1/5 – 1 (46976.39) = 11744.10

Standard Deviation = √11744. 10 = 108.37

ITC (Indian Tobacco Corporation):


2004-05

2005-06

2006-07

2007-08

2008-09

-24.984.80-12.83-8.1169.96

5.765.765.765.765.76

-30.74-0.96-18.59-13.8764.20

944.950.92345.59192.384121.64

(R) = 28.84 (R−R )2 5605.48


Variance = 1/N – 1 (R−R )2 = 1/5 – 1 (5605.48) = 1401.37

Standard Deviation = √1401.37 = 37.43

GE:


52

2004-05

2005-06

2006-07

2007-08

2008-09

196.92-94.0610.61-24.0972.65

32.4032.4032.4032.4032.40

164.52-126.46-21.79-56.4940.25

27066.8315992.13474.803191.121620.06

(R) = 162.03 (R−R )2 48344.94


Variance = 1/N – 1 (R−R )2 = 1/5 – 1 (48344.94) = 12086.24

Standard Deviation = √12086 .24 = 109.93

RELIANCE:


2004-05

2005-06

2006-07

2007-08

2008-09

126.1521.25-21.17-3.6492.60

43.4043.4043.4043.4043.40

83.11-21.79-64.21-46.6849.56

6907.27474.804112.922179.022456.19

(R) = 215.19 (R−R )2 16130.20


Variance = 1/N – 1 (R−R )2 = 1/5 – 1 (16130.20) = 4032.50

Standard Deviation = √4032 .50 = 63.50

HERO HONDA:


2004- 5.34 34.54 -29.20 852.64

53

052005-

062006-

072007-

082008-09

-85.66150.50-40.8143.33

34.5434.5434.5434.54

-120.20115.96-75.34108.79

14448.0413446.725676.1211835.26

(R) = 172.71 (R−R )2 46258.78


Variance = 1/N – 1 (R−R )2 = 1/5 – 1 (46258.78) = 11564.70

Standard Deviation = √11564. 70 = 107.53

54

CALCULATION OF CORRELATIONS

1. CORRELATION BETWEEN INFOSYS & ITC

Year RA−RA RB−RB (RA−RA ) (RB−RB )2004-052005-062006-072007-082008-09

185.70-94.26-52.52-23.65-16.34

-30.74-0.96-18.59-13.8764.20

-5710.2690.50976.35328.03

-1049.03

(RA−RA ) (RB−RB ) -5364.41

COVARIANCE (COVab) = 1/n-1 (RA−RA ) (RB−RB ) = 1/5-1(-5364.41) = -1341.10

σa=108 .37 σb=37 . 43

Correlation Coefficient (n ~ab) = COVab/σa .σb

= -1341.10/108.37*37.43 = -0.3306

2.CORRELATION BETWEEN INFOSYS & GE


185.70-94.26-52.52-23.65-16.34

164.52-126.46-21.79-56.4940.25

30561.2411920.121144.411335.99-657.69

(RA−RA ) (RB−RB ) 44304.37

COVARIANCE (COVab) = 1/n-1 (RA−RA ) (RB−RB ) = 1/5-1(44304.37) = 11076.02

σa=108 .37 σb=109 . 93


= 11076.02/108.37*109.93 = 0.9297

55

3.CORRELATION BETWEEN INFOSYS & RELIANCE


185.70-94.26-52.52-23.65-16.34

83.11-21.79-64.21-46.6849.56

15438.512053.933372.311103.98-809.81

(RA−RA ) (RB−RB ) 21158.92


σa=108 .37 σb=63 . 50


= 5289.73/108.37*63.50 = 0.7686

4.CORRELATION BETWEEN INFOSYS & HERO HONDA


185.70-94.26-52.52-23.65-16.34

-29.2-120.2115.96-75.34108.79

-5424.1911330.05-6090.221781.80-1777.63

(RA−RA ) (RB−RB ) -180.20


σa=108 .37 σb=107 . 53


= -45.05/108.37*107.53 = -0.0039

56

5.CORRELATION BETWEEN ITC & GE


-30.74-0.96-18.59-13.8764.20

164.52-126.46-21.79-56.4940.25

-5057.34121.40405.08783.522584.05

(RA−RA ) (RB−RB ) -1163.29


σa=37 .43σb=109.93


= -290.82/37.43*109.93= -0.0706

6.CORRELATION BETWEEN ITC & RELIANCE


-30.74-0.96-18.59-13.8764.20

83.11-21.79-64.21-46.6849.56

-2554.8020.92

1193.66647.453181.75

(RA−RA ) (RB−RB ) 2488.98


σa=37 .43σb=63 .50


= 622.25/37.43*63.50= 0.2618

58

7.CORRELATION BETWEEN ITC & HERO HONDA


-30.74-0.96-18.59-13.8764.20

-29.2-120.2115.96-75.34108.79

897.61115.39

-2155.701044.976984.32

(RA−RA ) (RB−RB ) -6886.60


σa=37 .43σb=107 .53


= -1721.65/37.43*107.53= -0.4278

8.CORRELATION BETWEEN GE & RELIANCE


164.52-126.46-21.79-56.4940.25

83.11-21.79-64.21-46.6849.56

13673.262755.561399.142336.951944.79

(RA−RA ) (RB−RB ) 22459.70


σa=109 .93 σb=63 . 50


= 5614.93/109.93*63.50= 0.8100

59

9.CORRELATION BETWEEN GE & HERO HONDA


164.52-126.46-21.79-56.4940.25

-29.2-120.2115.96-75.34108.79

-4803.9815200.50-2526.774255.964378.80

(RA−RA ) (RB−RB ) 16504.50


σa=109 .93 σb=107 . 53


= 4126.12.93/109.93*107.53 = 0.3490

10.CORRELATION BETWEEN RELIANCE & HERO HONDA


83.11-21.79-64.21-46.6849.56

-29.2-120.2115.96-75.34108.79

-2426.812619.16-7445.793516.875391.63

(RA−RA ) (RB−RB ) 1655.06


σa=63 .50σb=107 .53


= 413.76/63.50*107.53 = 0.0606.

60

CALCULATION OF PORTFOLIO WEIGHTS:

FORMULA: Xa=σb (σb−nab .σa )/σa2+σb2−2nab .σa.σb

Xb = 1 – Xa

1. CALCULATION OF WEIGHT OF INFOSYS & ITCWhere, Xa = INFOSYS, Xb = ITC

Xa = 37.43(37.43 – (-0.3306)108.37)/108.372+37.432-(2*0.3306*108.37*37.43)

= 2742.01/15467.08 = 0.1733

Xb = 1 – Xa = 1 – 0.1733 = 0.8277

Xa = 17.33%, Xb = 82.27%

2. CALCULATION OF WEIGHT OF INFOSYS & GEWhere, Xa = INFOSYS, Xb = GE

Xa = 109.93(109.93– (-0.9297)108.37)/108.372+109.932-(2*-0.9297*108.37*109.93)

= 1008.98/1677.42 = 0.60

Xb = 1 – Xa = 1 – 0.60 = 0.40

Xa = 60%, Xb = 40%

3. CALCULATION OF WEIGHT OF INFOSYS & RELIANCEWhere, Xa = INFOSYS, Xb = RELIANCE

Xa = 63.50(63.50– (-0.7686)108.37)/108.372+63.502-(2*0.7686*108.37*63.50)

= -1256.8671/5198.0728 = -0.2418

Xb = 1 – Xa = 1 – 0.2418 = 1.2418

Xa = -24.18%, Xb = 124.18%

4. CALCULATION OF WEIGHT OF INFOSYS & HERO HONDA

Where, Xa = INFOSYS, Xb = HERO HONDA

61

Xa = 107.53(107.53–(-0.0039)108.37)/108.372+107.532 – (2*-0.0039*108.37*107.53)

= 11608.15/23397.64 = 0.4961

Xb = 1 – Xa = 1 – 0.4961 = 0.5039

Xa = 49.61%, Xb = 50.39%

5. CALCULATION OF WEIGHT OF ITC & GE

Where, Xa = ITC, Xb = GE

Xa = 109.93(109.93–(-0.0706)37.43)/37.432+109.932 – (2*-0.0706*37.43*109.93)

= 12375.1013/14066.6026 = 0.8797

Xb = 1 – Xa = 1 – 0.8797 = 0.1203

Xa = 87.97%, Xb = 12.03%

6. CALCULATION OF WEIGHT OF ITC & RELIANCE

Where, Xa = ITC, Xb = RELIANCE

Xa = 63.50(63.50–(0.2618)37.43)/37.432+63.502 – (2*0.2618*37.43*63.50)

= 3410.0025/4094.6383= 0.8328

Xb = 1 – Xa = 1 – 0.8328= 0.1672

Xa = 83.28%, Xb = 16.72%

7. CALCULATION OF WEIGHT OF ITC & HERO HONDAWhere, Xa = ITC, Xb = HEOR HONDA

Xa = 107.53(107.53–(-0.4278)37.43)/37.432+107.532 – (2*- 0.4278*37.43*107.53)= 13284.25/16407.36 = 0.8096

Xb = 1 – Xa = 1 – 0.8096 = 0.1904

Xa = 80.96%, Xb = 19.04%

8. CALCULATION OF WEIGHT OF GE & RELIANCE

62

Where, Xa = GE, Xb = RELIANCE

Xa = 63.50(63.50–(-0.81)109.93)/109.932+63.502 – (2*-0.81*109.93*63.50)

= -1621.9996/4808.3558 = -0.3373

Xb = 1 – Xa = 1 – (-0.3373) = 1.3373

Xa = -33.73%, Xb = 133.73%

9. CALCULATION OF WEIGHT OF GE & HERO HONDAWhere, Xa = GE, Xb = HERO HONDA

Xa = 107.53(107.53–(0.3490)109.93)/109.932+107.532 – (2*0.3490*109.93*107.53)

= 11148.71/14767.38 = 0.7549

Xb = 1 – Xa = 1 – (0.7549) = 0.2451

Xa = 75.49%, Xb = 24.51%

10. CALCULATION OF WEIGHT OF RELIANCE & HERO HONDA Where, Xa = RELIANCE, Xb = HERO HONDA

Xa = 107.53(107.53–(0.0606)63.50)/63.502+107.532 – (2*0.0606*63.50*107.53)

= 11158.71/14767.38= 0.7549

Xb = 1 – Xa = 1 – 0.7549 = 0.2451

Xa = 75.49%, Xb = 24.51%

CALCULATION OF PORTFOLIO RISK:

FORMULA:

σp=√σa2Wa2+ab2Wb2+2nab.σa .WaWb

Where σa = Standard Deviation of Security a

σb = Standard Deviation of Security b



63

nab = Correlation Coefficient between Security a & b

σp = Portfolio Risk

1. INFOSYS & ITCσa=108 .37 , σb=37 .43 , Wa = 0.1773, Wb = 0.8227, nab = -0.3306

σp = 108.372*0.17732+37.432*0.82272 + 2(-0.3306*108.37*37.43*0.1773*0.8227)

=√926 . 21=30 . 4338

2. INFOSYS & GEσa=108 .37 , σb=109 . 93 , Wa = 0.60, Wb = 0.40, nab = 0.9297

σp = 108.372 * 0.602 + 109.932 * 0.402 + 2(0.9297*108.37*109.93*0.60*0.40)

=√11477. 69=107 .1340

3. INFOSYS & RELIANCEσa=108 .37 , σb=63 .50 , Wa = -0.2418, Wb = 1.2418, nab = 0.7686

σp = 108.372 * 0.24182 + 63.502 * 1.24182 + 2(0.7686*63.50*-0.2418*1.2418)

=√235 . 060=48 .5289

4. INFOSYS & HERO HONDAσa=108 .37 , σb=107 . 53 , Wa = 0.4961, Wb = 0.5039, nab = -0.0039

σp = 108.372*0.49612+107.532*0.50392+2(-0.0039*108.37*107.53*0.4961*0.5039)

=√5803 . 25=76 . 17

5. ITC & GEσa=37 . 43 , σb=109 .93 , Wa = 0.8797, Wb = 0.1203, nab = -0.0706

σp = 37.432*0.87972+109.932*0.12032+2(-0.0706*37.43*109.93*0.8797*0.1203)

=√1197 .6028=34 . 6064

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6. ITC & RELIANCEσa=37 . 43 , σb=63 .50 , Wa = 0.8328, Wb = 0.1672, nab = 0.2618

σp = 37.432*0.83282+63.502*0.16722+2(0.2618*37.43*63.50*0.8328*0.1672)

=√1257 . 68=35 . 4639

7. ITC & HERO HONDAσa=37 . 43 , σb=107 .53 , Wa = 0.8096, Wb = 0.1904, nab = -0.4278

σp = 37.432*0.80962+107.532*0.19042+2(-0.4278*37.43*107.53*0.8096*0.1904)

=√805 . 94=28 .38

8. GE & RELIANCEσa=109 .93 , σb=63 .50 , Wa = -0.3373, Wb = 1.3373, nab = 0.81

σp = 109.932*-0.33732+63.502*1.33732+2(0.81*109.93*63.50*-0.3373*1.3373)

=√735 . 339=27 . 1172

9. GE & HERO HONDAσa=109 .93 , σb=107 . 53 , Wa = 0.4830, Wb = 0.5170, nab = 0.3490

σp = 109.932*0.48302+107.532*0.51702+2(0.3490*109.93*107.53*0.4830*0.5170)

=√7968 . 01=89 . 26

10. RELIANCE & HERO HONDAσa=63 .50 , σb=107 .53 , Wa = 0.7549, Wb = 0.2451, nab = 0.0606σp = 63.502*0.75492+107.532*0.24512+2(0.0606*63.50*107.53*0.7549*0.2451)

=√3144 . 45=56 . 07

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Calculation of Portfolio Return:

Rp = (Ra * Wa) + (Rb * Wb)Where,

Ra = Average Return of Security a

Rb = Average Return of Security b



Rp = Portfolio ReturnPortfolio’s Ra Wa Rb Wb Rp= (Ra*Wa)+

(Rb*Wb)INFOSYS & ITCINFOSYS & GEINFOSYS & RELIANCEINFOSYS & HERO HONDAITC & GEITC & RELIANCEITC & HERO HONDAGE & RELIANCEGE & HERO HONDARELIANCE & HERO HONDA

44.2444.2444.2444.245.765.765.7632.4032.4043.04

0.17330.60-0.24180.49610.87970.83280.8096-0.33730.48300.7549

5.7632.4043.0434.5432.4043.0434.5443.0434.5434.54

0.82270.401.24180.50390.12030.16720.19041.33730.51700.2451

12.582539.504040.749839.358.964811.993211.2346.6233.5040.95

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FINDINGS:

1. A business that has a high return on equity is more likely to be one that is capable

of generating cash internally. For the most part, the higher a company’s return on

equity compared to its industry, the better.

2. The above chat indicates that, in the year 2008 the return on equity of Hero Honda

(3.37) and GE (5.79) are having higher ROE when we comparing the other

companies like Infosys (0.91), ITC (0.48), and, Reliance (0.42) having very low

returns.

3. A company that boasts a higher gross profit margin than its competitors and

industry is more efficient. Investors tend to pay more for businesses that have

higher efficiency ratings than their competitors, as these businesses should be able

to make a decent profit as long as overhead costs are controlled [overhead refers

to rent, utilities, etc.].

4. The above chart explains that Infosys, GE, ITC companies are getting higher

returns where as Reliance and Hero Honda are getting minimum returns when

comparing the other securities.

5. A higher debt/equity ratio generally means that a company has been aggressive in

financing its growth with debt. This can result in volatile earnings as a result of

the additional interest expense.

6. Generally, a Debt-Equity ratio of 1:1 is considered satisfactory ratio. Infosys and

GE are having better the ratio, ITC and Reliance are having low ratio than the

other companies in this group.

7. The EPS of Infosys in 2008 is 87.86, Hero Honda – 48.64, GE – 38.21, ITC –

5.95, and Reliance – 65.08, in these companies the Infosys having the good EPS.

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SUGGESTIONS:

Before investing in shares, and should look at type of shares, you want to but and the way

in which you want to deal on the stock market.

Three main routes for investing in shares:

Invest your capital in a single company

Invest your capital in a number of different companies, a portfolio of shares.

Invest indirectly and spread your risk through collective investment such as

investment trust and unit trust.

Investing in Shares

Public companies issues share, which allow investors to buy a part of a particular

company share ownership entitles you to part of the company profits if dividends are

paid.

Shares may be classified in a range from conservative to speculative. Blue chip is

often used to describe the highest quality and shares as they are shares in companies with

a proven track record, producing profits in good times and bad. They usually set the level

of the market. All shares are affected by share market fluctuation. Individual share prices

also vary based on supply and demand from sellers and buyers.

Information about shares listed on the stock exchange is printed largely daily in

newspapers.

You can buy and sell shares listed on the stock exchange through a stockbroker.

When you buy a lot of shares, you receive a CHESS statement of holdings from the

company, showing the number of shares you own and the date you bought them.

As a share holder you have to say in the company’s future through voting rights,

you will be kept informed about the company, through its annual reports and other

correspondence.

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CONCLUSION:

Before investing in shares you should look at the type of shares you want to buy and the

way in which you want to deal on the stock market. The main routes for investing in

shares are;.

Invest your capital in a number of different companies ( a portfolio of shares)

Invest indirectly and spread your risk through collectively investment

From the study of Derivatives at Karvy it is clear that derivatives play a vital role in

the International financial market. Derivative emerged as a hedging instrument but it is used for

speculation and arbitration too. It does not focus any individual. Hence individual

investors are affecting due to the arbitration and speculation as the risk is transferred. There

exchange should have arbitration and investor grievances redressed mechanism operative from all parts

of the region. Hence Karvy - The Securities provide a wonderful service to the individual

investors too by providing services like advisory services.

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BIBLIOGRAPHY

Books Referred

1. Mutual Funds in India Marketing Strategies and Investment Practices 2nd Edition By H.Sadhak

2. How Portfolio frame- Work By Albert J. Fredman, Russ Wiles 97th Edition.

3. Investment Manageent By V.AAvadhani

4. Indian securitys market A Guide for Industry Professionals & Intelligent Investors By Sundar Sankaran

Data for the study obtained by browsing following sites

www.Amfiindia.com

www.networth.com

www.Indiamart.com

wwwIndiainfoline.com

www.Mutualfunds.com

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Security Analysis & Portfolio Karvykirankumar

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