INTRODUCTIOTO PORTFOLIO MANAGEMENT

Portfolio management and investment decision as a concept came to be familiar with the conclusion of second world war when thing can be in the stock market can be liberally ruined the fortune of individual, companies ,even government s it was then discovered that the investing in various scripts instead of putting all the money in a single securities yielded weather return with low risk percentage, it goes to the credit of HARYMERKOWITZ, 1991 noble laurelled to have pioneered the concept of combining high yielded securities with these low but steady yielding securities to achieve optimum correlation coefficient of shares. Portfolio management refers to the management of portfolios for others by professional investment managers it refers to the management of an individual investors portfolio by professionally qualified person ranging from merchant banker to specified portfolio company.

Definition by SEBI:
A portfolio management is the total holdings of securities belonging to any person. Portfolio is a combination of securities that have returns and risk characteristics of their own; port folio may not take on the aggregate characteristics of their individual parts. Thus a portfolio is a combination of various assets and /or instruments of investments. Combination may have different features of risk and return separate from those of the components. The portfolio is also built up of the wealth or income of the investor over a period of time with a view to suit is return or risk preference to that of the port folio that he holds. The portfolio analysis is thus an analysis is thus an analysis of risk return characteristics of individual securities in the portfolio and changes that

may take place in combination with other securities due interaction among them and impact of each on others. Security analysis is only a tool for efficient portfolio management; both of them together and cannot be dissociated. Portfolios are combination of assets held by the investors. These combination may be various assets classed like equity and debt or of different issues like Govt. bonds and corporate debts are of various instruments like discount bonds, debentures and blue chip equity nor scripts of emerging Blue chip companies. Portfolio analysis includes portfolio construction, selection of securities revision of portfolio evaluation and monitoring of the performance of the portfolio. All these are part of the portfolio management The traditional portfolio theory aims at the selection of such securities that would fit in will with the asset preferences, needs and choices of the investors. Thus, retired executive invests in fixed income securities for a regular and fixed return. A business executive or a young aggressive investor on the other hand invests in and rowing companies and in risky ventures. The modern portfolio theory postulates that maximization of returns and minimization of risk will yield optional returns and the choice and attitudes of investors are only a starting point for investment decisions and that vigorous risk returns analysis is necessary for optimization of returns. Portfolio analysis includes portfolio construction, selection of securities, and revision of portfolio evaluation and monitoring of the performance of the portfolio. All these are part of the portfolio management.

IMPORTANCE & NEED OF STUDY

Portfolio management or investment helps investors in effective and efficient management of their investment to achieve this goal. The rapid growth of capital markets in India has opened up new investment avenues for investors. The stock markets have become attractive investment options for the common man. But the need is to be able to effectively and efficiently manage investments in order to keep maximum returns with minimum risk. Hence this study on PORTFOLIO MANAGEMENT & INVESTMENT DECISION to examine the role process and merits of effective investment management and decision.

OBJECTIVES
To study the investment decision process. To analysis the risk return characteristics of sample scripts. Ascertain portfolio weights.

To construct an effective portfolio which offers the maximum return

for minimum risk

METHODOLOGY
Primary source Information gathered from interacting with Mr. Prabakar in the Class room. And the data from the textbooks and other magazines. Secondary source: Daily prices of scripts from news papers

SCOPE
Duration Period 2 months Sample size : 5 years To ascertain risk, return and weights.

LIMITATION:
Only two samples have constructing a portfolio. been selected for

Share prices of scripts of 5 years period was

taken.

REVIEW OF LITERATURE
PORTFOLIO:
A portfolio is a collection of securities since it is really desirable to invest the entire funds of an individual or an institution or a single security, it is essential that every security be viewed in a portfolio context. Thus it seems logical that the expected return of the portfolio. Portfolio analysis considers the determine of future risk and return in holding various blends of individual securities Portfolio expected return is a weighted average of the expected return of the individual securities but portfolio variance, in short contrast, can be something reduced portfolio risk is because risk depends greatly on the co-variance among returns of individual securities. Portfolios, which are combination of securities, may or may not take on the aggregate characteristics of their individual parts. Since portfolios expected return is a weighted average of the expected return of its securities, the contribution of each security the portfolios expected returns depends on its expected returns and its proportionate share of the initial portfolios market value. It follows that an investor who simply wants the greatest possible expected return should hold one security; the one which is considered to have a greatest expected return. Very few investors do this, and very few investment advisors would counsel such and extreme policy instead, investors should diversify, meaning that their portfolio should include more than one security.

OBJECTIVES OF PORTFOLIOMANAGEMENT
The main objective of investment portfolio management is to maximize the returns from the investment and to minimize the risk involved in investment. Moreover, risk in price or inflation erodes the value of money and hence investment must provide a protection against inflation.

Secondary objectives: The following are the other ancillary objectives:

Regular return. Stable income. Appreciation of capital. More liquidity. Safety of investment. Tax benefits. Portfolio management services helps investors to make a wise choice between alternative investments with pit any post trading hassles this service renders optimum returns to the investors by proper selection of continuous change of one plan to another plane with in the same scheme, any portfolio management must specify the objectives like maximum returns, and risk capital appreciation, safety etc in their offer.

Return From the angle of securities can be fixed income securities such as:
(a) Debentures partly convertibles and non-convertibles debentures debt with tradable Warrants. (b) Preference shares (c) Government securities and bonds (d) Other debt instruments (2) Variable income securities (a) Equity shares (b) Money market securities like treasury bills commercial papers etc. Portfolio managers has to decide up on the mix of securities on the basis of contract with the client and objectives of portfolio

NEED FOR PORTFOLIO MANAGEMENT:

Portfolio management is a process encompassing many activities of investment in assets and securities. It is a dynamic and flexible concept and involves regular and systematic analysis, judgment and action. The objective of this service is to help the unknown and investors with the expertise of professionals in investment portfolio management. It involves construction of a portfolio based upon the investors objectives, constraints, preferences for risk and returns and tax liability. The portfolio is reviewed and adjusted from time to time in tune with the market conditions. The evaluation of portfolio is to be done in terms of targets set for risk and returns. The changes in the portfolio are to be effected to meet the changing condition. Portfolio construction refers to the allocation of surplus funds in hand among a variety of financial assets open for investment. Portfolio theory concerns itself with the principles governing such allocation. The modern

view of investment is oriented more go towards the assembly of proper combination of individual securities to form investment portfolio. A combination of securities held together will give a beneficial result if they grouped in a manner to secure higher returns after taking into consideration the risk elements. The modern theory is the view that by diversification risk can be reduced. Diversification can be made by the investor either by having a large number of shares of companies in different regions, in different industries or those producing different types of product lines. Modern theory believes in the perspective of combination of securities under constraints of risk and returns

PORTFOLIO MANAGEMENT PROCESS:

Investment management is a complex activity which may be broken down into the following steps:

1) Specification of investment objectives and constraints:

The typical objectives sought by investors are current income, capital appreciation, and safety of principle. The relative importance of these objectives should be specified further the constraints arising from liquidity, time horizon, tax and special circumstances must be identified.

2) choice of the asset mix :

The most important decision in portfolio management is the asset mix decision very broadly; this is concerned with the proportions of stocks (equity shares and units/shares of equity-oriented mutual funds) and bonds in the portfolio. The appropriate stock-bond mix depends mainly on the risk tolerance and investment horizon of the investor.

10

ELEMENTS OF PORTFOLIO MANAGEMENT:

Portfolio management
of

is
the

on-going

process

involving
constraints

the
and

following basic tasks:

Identification preferences. Strategies are to be developed and implemented in tune with investment policy formulated. Review and monitoring of the performance of the portfolio. Finally the evaluation of the portfolio investors objectives,

Risk:
Risk is uncertainty of the income /capital appreciation or loss or both. All investments are risky. The higher the risk taken, the higher is the return. But proper management of risk involves the right choice of investments whose risks are compensating. The total risks of two companies may be different and even lower than the risk of a group of two companies if their companies are offset by each other.

SOURCES OF INVESTMENT RISK: Business risk:

As a holder of corporate securities (equity shares or debentures), you are exposed to the risk of poor business performance. This may be caused by a variety of factors like heightened competition, emergence of new technologies, development of substitute products, shifts in consumer preferences, inadequate supply of essential inputs, changes in governmental policies, and so on.

Interest rate risk:

The changes in interest rate have a bearing on the welfare on investors. As the interest rate goes up, the market price of existing firmed income securities falls, and vice versa. This happens because the buyer of a fixed income security would not buy it at its par value of face value o its

11

fixed interest rate is lower than the prevailing interest rate on a similar security. For example, a debenture that has a face value of RS. 100 and a fixed rate of 12% will sell a discount if the interest rate moves up from, say 12% to 14%.while the chances in interest rate have a direct bearing on the prices of fixed income securities, they affect equity prices too, albeit some what indirectly.

The two major types of risks are:

Systematic or market related risk. Unsystematic or company related risks. Systematic risks affected from the entire market are (the problems, raw material availability, tax policy or government policy, inflation risk, interest risk and financial risk). It is managed by the use of Beta of different company shares. The unsystematic risks are mismanagement, increasing inventory, wrong financial policy, defective marketing etc. this is diversifiable or avoidable because it is possible to eliminate or diversify away this component of risk to a considerable extent by investing in a large portfolio of securities. The unsystematic risk stems from inefficiency magnitude of those factors different form one company to another.

RETURNS ON PORTFOLIO:
Each security in a portfolio contributes return in the proportion of its investments in security. Thus the portfolio expected return is the weighted average of the expected return, from each of the securities, with weights representing the proportions share of the security in the total investment. Why does an investor have so many securities in his portfolio? If the security ABC gives the maximum return why not he invests in that security all his funds and thus maximize return? The answer to this questions lie in the investors perception of risk attached to investments, his objectives of income, safety, appreciation, liquidity and hedge against loss of value of money etc. this pattern of investment in different asset categories, types of investment, etc., would all be described under the caption of diversification, which aims at the reduction

12

or even elimination of non-systematic risks and achieve the specific objectives of investors

RISK ON PORTFOLIO :
The expected returns from individual securities carry some degree of risk. Risk on the portfolio is different from the risk on individual securities. The risk is reflected in the variability of the returns from zero to infinity. Risk of the individual assets or a portfolio is measured by the variance of its return. The expected return depends on the probability of the returns and their weighted contribution to the risk of the portfolio. These are two measures of risk in this context one is the absolute deviation and other standard deviation. Most investors invest in a portfolio of assets, because as to spread risk by not putting all eggs in one basket. Hence, what really matters to them is not the risk and return of stocks in isolation, but the risk and return of the portfolio as a whole. Risk is mainly reduced by Diversification. RISK AND RETURN ANALYSIS: All investment has some risk. Investment in shares of companies has its own risk or uncertainty; these risks arise out of variability of yields and uncertainty of appreciation or depreciation of share prices, losses of liquidity etc The risk over time can be represented by the variance of the returns. While the return over time is capital appreciation plus payout, divided by the purchase price of the share.

13

Normally, the higher the risk that the investor takes, the higher is the return. There is, how ever, a risk less return on capital of about 12% which is the bank, rate charged by the R.B.I or long term, yielded on government securities at around 13% to 14%. This risk less return refers to lack of variability of return and no uncertainty in the repayment or capital. But other risks such as loss of liquidity due to parting with money etc., may however remain, but are rewarded by the total return on the capital. Risk-return is subject to variation and the objectives of the portfolio manager are to reduce that variability and thus reduce the risky by choosing an appropriate portfolio. Traditional approach advocates that one security holds the better, it is according to the modern approach diversification should not be quantity that should be related to the quality of scripts which leads to quality of portfolio. Experience has shown that beyond the certain securities by adding more securities expensive.

Simple diversification reduces:

An assets total risk can be divided into systematic plus unsystematic risk, as shown below:

Systematic risk (undiversifiable risk) + unsystematic risk (diversified risk) =Total risk =Var (r).

14

Unsystematic risk is that portion of the risk that is unique to the firm (for example, risk due to strikes and management errors.) Unsystematic risk can be reduced to zero by simple diversification. Simple diversification is the random selection of securities that are to be added to a portfolio. As the number of randomly selected securities added to a portfolio is increased, the level of unsystematic risk approaches zero. However market related systematic risk cannot be reduced by simple diversification. This risk is common to all securities.

Persons involved in portfolio management: Investor:

Are the people who are interested in investing their funds?

Portfolio managers:
Is a person who is in the wake of a contract agreement with a client, advices or directs or undertakes on behalf of the clients, the management or distribution or management of the funds of the client as the case may be.

Discretionary portfolio manager:

Means a manager who exercise under a contract relating to a portfolio management exercise any degree of discretion as to the investment or management of portfolio or securities or funds of clients as the case may be .The relation ship between an investor and portfolio manager is of a highly interactive nature The portfolio manager carries out all the transactions pertaining to the investor under the power of attorney during the last two decades, and increasing complexity was witnessed in the capital market and its trading procedures in this context a key (uninformed) investor formed ) investor found him self in a tricky situation , to keep track of market movement ,update his knowledge, yet stay in the capital market and make money , there fore in looked forward to resuming help from

15

portfolio manager to do the job for him .The portfolio management seeks to strike a balance between risks and return. The generally rule in that greater risk more of the profits but S.E.B.I. in its guidelines prohibits portfolio managers to promise any return to investor. Portfolio management is not a substitute to the inherent risks associated with equity investment.

Who can be a portfolio manager?

Only those who are registered and pay the required license fee are eligible to operate as portfolio managers. An applicant for this purpose should have necessary infrastructure with professionally qualified persons and with a minimum of two persons with experience in this business and a minimum net worth of Rs. 50lakhs. The certificate once granted is valid for three years. Fees payable for registration are Rs 2.5lakhs every for two years and Rs.1lakhs for the third year. From the fourth year onwards, renewal fees per annum are Rs 75000. These are subjected to change by the S.E.B.I. The S.E.B.I. has imposed a number of obligations and a code of conduct on them. The portfolio manager should have a high standard of integrity, honesty and should not have been convicted of any economic offence or moral turpitude. He should not resort to rigging up of prices, insider trading or creating false markets, etc. their books of accounts are subject to inspection to inspection and audit by S.E.B.I... The observance of the code of conduct and guidelines given by the S.E.B.I. are subject to inspection and penalties for violation are imposed. The manager has to submit periodical returns and documents as may be required by the SEBI from time-to- time.

Functions of portfolio managers:

16

Advisory role: advice new investments, review the existing ones, identification of objectives, recommending high yield securities etc. Conducting market and economic service: this is essential for recommending good yielding securities they have to study the current fiscal policy, budget proposal; individual policies etc further portfolio manager should take in to account the credit policy, industrial growth, foreign exchange possible change in corporate laws etc.

Financial analysis: he should evaluate the financial statement of company in order to understand, their net worth future earnings, prospectus and strength.

Study of stock market : he should observe the trends at various stock exchange and analysis scripts so that he is able to identify the right securities for investment

Study of industry: he should study the industry to know its future prospects, technical changes etc, required for investment proposal he should also see the problems of the industry.

Decide the type of port folio: keeping in mind the objectives of portfolio a portfolio manager has to decide weather the portfolio should comprise equity preference or partly shares, debentures, money convertibles, non-convertibles convertibles,

market, securities etc or a mix of more than one type of proper mix ensures higher safety, yield and liquidity coupled with balanced risk techniques of portfolio management. A portfolio manager in the Indian context has been Brokers (Big brokers) who on the basis of their experience, market trends, Insider trader, helps the limited knowledge persons. Registered merchant bankers can acts as portfolio managers Investors must look forward, for qualification and performance and ability and research base of the portfolio managers.

Techniques of portfolio management:

As of now the under noted technique of portfolio management: are in vogue in our country

17

1. equity portfolio: is influenced by internal and external factors

the internal factors effect the inner working of the companys growth plans are analyzed with referenced to Balance sheet, profit & loss a/c (account) of the company. Among the external factor are changes in the government policies, Trade cycles, Political stability etc.

2. equity stock analysis: under this method the probable future

value of a share of a company is determined it can be done by ratios of earning per share of the company and price earning ratio EPS = PROFIT AFTER TAX NO: OF EQUITY SHARES PRICE EARNING RATIO = MARKET PRICE

E.P.S (earnings per share) One can estimate trend of earning by EPS, which reflects trends of earning quality of company, dividend policy, and quality of management. Price earning ratio indicate a confidence of market about the company future, a high rating is preferable

The

following

points

must

be

considered

by

portfolio

managers while analyzing the securities.

1. Nature of the industry and its product: long term trends of industries, competition with in, and out side the industry, Technical changes, labour relations, sensitivity, to Trade cycle. 2. Industrial analysis of prospective earnings, cash flows, working capital, dividends, etc. 3. Ratio analysis: Ratio such as debt equity ratios current ratios net worth, profit earning ratio, return on investment, are worked out to decide the portfolio. The wise principle of portfolio management suggests that Buy when the market is low or BEARISH, and sell when the market is rising or BULLISH. Stock market operation can be analyzed by: a) Fundamental approach :- based on intrinsic value of shares

18

b) Technical approach:-based on Donjons theory, Random walk

theory, etc. Prices are based upon demand and supply of the market. i. Traditional approach assumes that ii. Objectives are maximization of wealth and minimization of risk. iii. Diversification reduces risk and volatility. iv. Variable returns, high illiquidity; etc. Capital Assets pricing approach (CAPM) it pays more weight age, to risk or portfolio diversification of portfolio.

Diversification of portfolio reduces risk but it should be based on certain assessment such as:
Trend analysis of past share prices, Valuation of intrinsic value of company (trend-marker moves are known for their Uncertainties they are compared to be high, and low prompts of wave market trends are constituted by these waves it is a pattern of movement based on past). The following rules must be studied while cautious portfolio manager before decide to invest their funds in portfolios. 1. Compile the financials of the companies in the immediate past 3 years such as turn over, gross profit, net profit before tax, compare the profit earning of company with that of the industry average nature of product manufacture service render and it future demand ,know about the promoters and their back ground, dividend track record, bonus shares in the past 3 to 5 years ,reflects companys commitment to share holders the relevant information can be accessed from the RDC(registrant 2. of companies)published financial results financed quarters, journals and ledgers. Watch out the highs and lows of the scripts for the past 2 to 3 years and their timing cyclical scripts have a tendency to repeat their performance ,this hypothesis can be true of all other financial , 3. The higher the trading volume higher is liquidity and still higher the chance of speculation, it is futile to invest in such shares whos daily movements cannot be kept track, if you want to reap rich returns keep investment over along horizon and it will offset the wild intra day

19

trading fluctuations, the minor movement of scripts may be ignored, we must remember that share market moves in phases and the span of each phase is 6 months to 5 years. a. Long term of the market should be the guiding factor to enable you to invest and quit. The market is now bullish and the trend is likely to continue for some more time. b. UN tradable shares must find a last place in portfolio apart from return; even capital invested is eroded with no way of exit with no way of exit with inside.

How at all one should avoid such scripts in future?

(1) Never invest on the basis of an insider trader tip in a company which is not sound (insider trader is person who gives tip for trading in securities based on prices sensitive up price sensitive un published information relating to such security). (2) Never invest in the so called promoter quota of lesser known company (3) Never invest in a company about which you do not have appropriate knowledge. (4) Never at all invest in a company which doesnt have a stringent financial record your portfolio (4) Shuffle the portfolio and replace the slow moving sector with active ones , investors were shatter when the technology , media, software , stops have taken a down slight. (5) Never fall to the magic of the scripts dont confine to the blue chip companys, look out for other portfolio that ensure regular dividends. (6) In the same way never react to sudden raise or fall in stock market index such fluctuation is movement minor corrections in stock market held in consolidation of market their by reading out a weak player often taste on wait for the dust and dim to settle to make your move .

PORT FOLIO MANAGEMENT AND DIVESIFICATOIN:

Combinations of securities that have high risk and return features make up a portfolio. Portfolios may or may not take on the aggregate characteristics of individual part, portfolio analysis takes various

20

components of risk and return for each industry and consider the effort of combined security. Portfolio selection involves choosing the best portfolio to suit the risk return preferences of portfolio investor management of portfolio is a dynamic activity of evaluating and revising the portfolio in terms of portfolios objectives. It may include in cash also, even if one goes bad the other will provide protection from the loss even cash is subject to inflation the diversification can be either vertical or horizontal the vertical diversification portfolio can have script of different companys with in the same industry. In horizontal diversification one can have different scripts chosen from different industries. CEMENT INDUSTRY ACC CEMENT JK CEMENT ULTRA TECH BIRLA CEM VISHNU CEM PRIYA CEM RAM CO CEM .TEXTILE INDUSTRY RELILANCE INDUSTRIES GARDEN SILK MILLS NECP TEXTILE BOMBAY DEYING GRASIM INDUSTRIES BORODA RAYON CHESLIND TEXTILE

Horizontal Diversification TISCO MANUFACTURING ACC GARDEN TEXTILE INFOSYS BSES LTD (SOFTWARE) (POWER)

ULTRA TECH (CONSTRUCTION) It should be an adequate diversification looking in to the size of portfolio. Traditional approach advocates the more security one holds in a portfolio , the better it is according to modern approach diversification should not be quantified but should be related to the quality of scripts which

21

leads to the quality and portfolio subsequently experience can show that beyond a certain number of securities adding more securities become expensive.

Investment in a fixed return securities in the current market scenario which is passing through a an uncertain phase investors are facing the problem of lack of liquidity combined with minimum returns the important point to both is that the equity market and debt market moves in opposite direction .where the stock market is booming, equities perform better where as in depressed market the assured returns related securities market out perform equities. It is cyclic and is evident in more global market keeping this in mind an investor can shift from fixed income securities to equities and vise versa along with the changing market scenario , if the investment are wisely planned they , fetch good returns even when the market is depressed most , important the investor must adopt the time bound strategy in differing state of market to achieve the optimum result when the aim is short term returns it would be wise for the investor to invest in equities when the market is in boom & it could be reviewed if the same is done. Maximum of returns can be achieved by following a composite pattern of investment by having, suitable investment allocation strategy among the available resources. Never invest in a single securities your investment can be Equities:-primary and secondary market. Mutual Funds Bank deposits Fixed deposits & bonds and the tax saving schemes The different areas of fixed income are as:Fixed deposits in company Bonds Mutual funds schemes

1. 2. 3. 4.

allocated in the following areas:

22

with an investment strategy to invest in debt investment in fixed deposit can be made for the simple reason that assured fixed income of a high of 14-17% per annum can be expected which is much safer then investing a highly volatile stock market, even in comparison to banks deposit which gives a maximum return of 12% per annum, fixed deposit s in high profile esteemed will performing companies definitely gives a higher return.

BETA:
The concept of Beta as a measure of systematic risk is useful in portfolio management. The beta measures the movement of one script in relation to the market trend*. Thus BETA can be positive or negative depending on whether the individual scrip moves in the same direction as the market or in the opposite direction and the extent of variance of one scrip vis--vis the market is being measured by BETA. The BETA is negative if the share price moves contrary to the general trend and positive if it moves in the same direction. The scrips with higher BETA of more than one are called aggressive, and those with a low BETA of less than one are called defensive. It is therefore it is necessary, to calculate Betas for all scrips and choose those with high Beta for a portfolio of high returns.

23

INVESTMENT DECISIONS
Definition of investment:
According to F. AMLING Investment may be defined as the purchase by an individual or an Institutional investor of a financial or real asset that produces a return proportional to the risk assumed over some future investment period. According to D.E. Fisher and R.J. Jordon, Investment is a commitment of funds made in the expectation of some positive rate of return. If the investment is properly undertaken, the return will be commensurate with the risk of the investor assumes.

Concept of Investment:
Investment will generally be used in its financial sense and as such investment is the allocation of monetary resources to assets that are expected to yield some gain or positive return over a given period of time. Investment is a commitment of a persons funds to derive future income in the form of interest, dividends, rent, premiums, pension benefits or the appreciation of the value of his principal capital. Many types of investment media or channels for making investments are available. Securities ranging from risk free instruments to highly speculative shares and debentures are available for alternative investments. All investments are risky, as the investor parts with his money. An efficient investor with proper training can reduce the risk and maximize returns. He can avoid pitfalls and protect his interest. There are different methods of classifying the investment avenues. A major classification is physical Investments and Financial Investments. They are physical, if savings are used to acquire physical

24

assets, useful for consumption or production.

Some physical

assets like ploughs, tractors or harvesters are useful in agricultural production. A few useful physical assets like cars, jeeps etc., are useful in business.

The investment process may be described in the following stages:

Investment policy:
The first stage determines and involves personal financial affairs and objectives before making investment. It may also be called the preparation of investment policy stage. The investor has to see that he should be able to create an emergency fund, an element of liquidity and quick convertibility of securities into cash. This stage may, therefore be called the proper time of identifying investment assets and considering the various features of investments.

investment analysis:
After arranging a logical order of types of investment preferred, the next step is to analyze the securities available for investment. The investor must take a comparative analysis of type of industry, kind of securities etc. the primary concerns at this stage would be to form beliefs regarding future behavior of prices and stocks, the expected return and associated risks

.Investment valuation:
Investment value, in general is taken to be the present worth to the owners of future benefits from investments. The investor has to bear in mind the value of these investments. An appropriate set of weights have to be applied with the use of forecasted benefits to estimate the value of the investment assets such as stocks, debentures, and bonds and other assets. Comparison of the value with the current market price of the assets allows a determination of the relative attractiveness of the asset allows a determination of the relative attractiveness of the asset. Each asset must be value on its individual merit.

25

Portfolio construction and feed-back:

Portfolio construction requires knowledge of different aspects of securities in relation to safety and growth of principal, liquidity of assets etc. In this stage, we study, determination of diversification level, consideration of investment timing selection of investment assets, allocation of invest able wealth to different investments, evaluation of portfolio for feed-back.

INVESTMENT DECISIONS- GUIDELINES FOR EQUITY INVESTMENT

Equity shares are characterized by price fluctuations, which can produce substantial gains or inflict severe losses. Given the volatility and dynamism of the stock market, investor requires greater competence and skill-along with a touch of good luck too-to invest in equity shares. Here are some general guidelines to play to equity game, irrespective of weather you aggressive or conservative. Adopt a suitable formula plan. Establish value anchors. Assets market psychology. Combination of fundamental and technical analyze. Diversify sensibly. Periodically review and revise your portfolio.

Requirement of portfolio:
1. Maintain adequate diversification when relative values of various securities in the portfolio change. 2. Incorporate new information relevant for return investment. 3. Expand or contrast the size of portfolio to absorb funds or with draw funds. 4.Reflect changes in investor risk disposition.

Qualitiles For successful Investing:

Contrary thinking Patience

26

Composure Flexibility Openness

INVESTORS PORTFOLIO CHOICE:

An investor tends to choose that portfolio, which yields him maximum return by applying utility theory. Utility Theory is the foundation for the choice under uncertainty. Cardinal and ordinal theories are the two alternatives, which is used by economist to determine how people and societies choose to allocate scare resources and to distribute wealth among one another. The former theory implies that a consumer is capable of assigning to every commodity or combination of commodities a number representing the amount of degree of utility associated with it. Were as the latter theory, implies that a consumer needs not be liable to assign numbers that represents the degree or amount of utility associated with commodity or combination of commodity. The consumer can only rank and order the amount or degree of utility associated with commodity. In an uncertain environment it becomes necessary to ascertain how different individual will react to risky situation. The risk is defined as a probability of success or failure or risk could be described as variability of out comes, payoffs or returns. This implies that there is a distribution of outcomes associated with each investment decision. Therefore we can say that there is a relationship between the expected utility and risk. Expected utility with a particular portfolio return. This numerical value is calculated by taking a weighted average of the utilities of the various possible returns. The weights are the probabilities of occurrence associated with each of the possible returns.

27

MARKOWITZ MODEL
THE MEAN-VARIENCE CRITERION Dr. Harry M.Markowitz is credited with developing the first modern portfolio analysis in order to arrange for the optimum allocation of assets with in portfolio. To reach this objective, Markowitz generated portfolios within a reward risk context. In essence, Markowitzs model is a theoretical framework for the analysis of risk return choices. Decisions are based on the concept of efficient portfolios. A portfolio is efficient when it is expected to yield the highest return for the level of risk accepted or, alternatively, the smallest portfolio risk for a specified level of expected return. To build an efficient portfolio an expected return level is chosen, and assets are substituted until the portfolio combination with the smallest variance at the return level is found. At this process is repeated for expected returns, set of efficient portfolio is generated.

ASSUMPTIONS:
1. Investors consider each investment alternative as being represented by a probability distribution of expected returns over some holding period. 2. Investors maximize one period-expected utility and posses utility curve, which demonstrates diminishing marginal utility of wealth. 3. Individuals estimate risk on the risk on the basis of the variability of expected returns. 4. Investors base decisions solely on expected return and variance or returns only.

28

5. For a given risk level, investors prefer high returns to lower return similarly for a given level of expected return, Investors prefer risk to more risk. Under these assumptions, a single asset or portfolio of assets is considered to be efficient if no other asset or portfolio of assets offers higher expected return with the same risk or lower risk with the same expected return.

THE SPECIFIC MODEL

In developing his model, Morkowitz first disposed of the investment behavior rule that the investor should maximize expected return. This rule implies that the non-diversified single security portfolio with the highest return is the most desirable portfolio. Only by buying that single security can expected return be maximized. The single-security portfolio would obviously be preferable if the investor were perfectly certain that this highest expected return would turn out be the actual return. However, under real world conditions of uncertainty, most risk adverse investors join with Markowitz in discarding the role of calling for maximizing expected returns. As an alternative, Markowitz offers the expected returns/variance of returns rule. Markowitz has shown the effect of diversification by reading the risk of securities. According to him, the security with covariance which is either negative or low amongst them is the best manner to reduce risk. Markowitz has been able to show that securities which have less than positive correlation will reduce risk without, in any way bringing the return down. According to his research study a low correlation level between securities in the portfolio will show less risk. According to him, investing in a large number of securities is not the right method of investment. It is the right kind of security which brings the maximum result.

CONSTRUCTION OF THE STUDY

Purpose of the study:

29

The purpose of the study is to find out at what percentage of investment should be invested between two companies, on the basis of risk and return of each security in comparison. These percentages helps in allocating the funds available for investment based on risky portfolios.

Implementation of study:
For implementing the study,8 securitys or scripts constituting the Sensex market are selected of one month closing share movement price data from Economic Times and financial express from Jan 3rd to 31st Jan 2008. In order to know how the risk of the stock or script, we use the formula, which is given below: Standard deviation = Variance variance n t =1 Where (R-R) ^2=square of difference between sample and mean. n=number of sample observed. After that, we need to compare the stocks or scripts of two companies with each other by using the formula or correlation co-efficient as given below. Co-variance (COVAB) = 1/n (RA-RA) (RB-RB) t =1 Correlation-Coefficient (P AB) = (COV AB) --------------------(Std. A) (Std. B) _

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

Where (RA-RA) (RB-RB) = Combined deviations of A&B (Std. A) (Std B) =standard deviation of A&B COVAB= covariance between A&B n =number of observation. The next step would be the construction of the optimal portfolio on the basis of what percentage of investment should be invested when two securities and stocks are combined i.e. calculation of two assets portfolio weight by using minimum variance equation which is given below.

30

FORMULA

(Std. b) ^2 pab (Std. a) (Std. b) Xa =------------------- ------------------------(Std. a) ^2 + (std. b) ^2 2pab (Std. a) (Std. b)

Where Std. b= standard deviation of b Std. a = standard deviation of a Pab= correlation co-efficient between A&B The next step is final step to calculate the portfolio risk (combined risk) ,that shows how much is the risk is reduced by combining two stocks or scripts by using this formula: p= X1^21^2+X2^22^2+2(X1)(X2)(X12)1 Where X1=proportion of investment in security 1. X2=proportion of investment in security 2. 1= standard deviation of security 1. 2= standard deviation of security 2. X12=correlation co-efficient between security 1&2. p=portfolio risk

31

COMPANY PROFILE
ARIHANT CAPITAL MARKETS LIMITED Introduction
Arihant Capital Markets Limited is a leading financial intermediary established in 1994. Arihant is managed by a team of experienced and qualified professionals across all the Levels of management. The company is promoted by Mr. Ashok Kumar Jain, a Chartered Accountant having more than 20 years of experience in capital markets. Arihant has been on a growth path under his able leadership and rich experience. He has been our guide all throughout our success path. His values of integrity and transparency have been inculcated in over the years Arihant has played a successful role in client's wealth creation. In the Process Arihant also refined itself, as an investment advisor and is poised to provide Complete Investment Management Solutions Arihant's values of integrity and transparency in all its transactions are embedded deep into roots helps it to provide excellent services, steady growth and complete satisfaction to all its clients. Arihant strongly believes that success is only the end result of client's growth. Arihant has followed a consistent growth path and is established as one of the leading broking houses of the country with the support and confidence of clients, Investors, employees and associates.

Services
Over the period of time Arihant has acquired memberships of National Stock Exchange (NSE), Bombay Stock Exchange (BSE), National Securities Depositories Limited (NSDL), Central Depository Services Ltd.

32

(CDSL), National Commodities Exchange (NCDEX), Multi Commodities Exchange (MCX) and also registered with SEBI for Portfolio Management Services (PMS).Over the period of time Arihant has acquired memberships of National Stock Exchange (NSE), Bombay Stock Exchange (BSE), National Securities Depositories Limited (NSDL), Central Depository Services Ltd. (CDSL), National Commodities Exchange (NCDEX), Multi Commodities Exchange (MCX) and also registered with SEBI for Portfolio Management Services (PMS)

VISION
To be a leader in setting standards for quality, investor satisfaction and to enhance the wealth of our investors.

PHILOSOPHY
Integrity and transparency in all transactions. Providing research. Providing personalized services to all investors, institutions, business associates. Achieving success through client's growth. investment solutions based on quality and unbiased

33

MILE STONES

34

RESOURCES

35

People...Arihant

has

always

invested

in

quality

human

resources

continuously striving to provide Best services to valued clientele. Arihant's strong pool consists of a team of 200+ Professionals including CAs, CS. MBAs. Engineers. Arihant's professionals are fully geared towards achieving excellence in the field of equity research, investment advisory, derivative strategies, efficient execution, customer relationship and back office Operations.

Infrastructure...
In its efforts to continuously provide value added services Arihant has adopted latest technology and offers excellent execution and post sales support at all branches. Arihant'sWeb enabled back office operations enables clients to have online information about their transactions. Arihant ensures continuous information flow to clients on their mobile phones through SMS and on their desktops through email and chat. Arihant uses latest Software for market analysis in order to ensure continuous information flow to clients.Arihant also provides trading terminals at client's location through CTCL technology providing live trading at their ownlocations.

Network...
Arihant has a strong network of 150+ branches/business associates providing services to a more than 50000+ number of active retail clients across the country. Arihant provides complete investment solutions to clients offering a gamut of products and services. All branches are equipped to provide complete advisory to clients for investments in equities, derivatives, commodities, mutual funds and bonds.

RESEARCH
Fundamental Equity Research

36

Arihant has a strong team of analysts covering large cap, mid cap & small cap companies across sectors. Arihant research team is credited with the discovery of a number of multi-Baggers creating immense wealth for investors. Arihant's research reports have clarity, Accuracy, in-depth coverage and the latest information about companies.

Technical Equity Research

Arihant provides technical analysis on various securities and markets on website as well as on e-mail to valued clientele. Arihant also provides "On line market commentary" to make the intra day trading more profitable and for minimizing the risk of investors. Arihant's analysts' team keeps minute-to-minute track of the market and broadcasts buy and sell recommendations on the basis of market momentum. Arihant's research team sends trading and investment call alerts on daily basis on mobile phones. This facility is available free of cost to all investors, associates and active traders.

ABOUT MANAGEMENT
Arihant is managed by a team of experienced and qualified professionals across all the levels of management. The company is promoted by Mr. Ashok Kumar Jain, a Chartered Accountant. The company currently employs more than 200+ professionals dedicatedly Working in equity research, risk management, marketing and wealth management.

KEY PERSONNEL
M. AshokJain, Chairman Arihant has been on a growth path under his able leadership and rich experience. He is a Chartered Accountant aged 50 years having more than 20 years of experience in capital markets. He has been our guide all throughout our success path. His values of integrity and transparency have been inculcated in all our employees. He always innovates new ideas, adapt latest technology so as to provide quality and unbiasedinvestmentsolutiontotheinvestors.

37

Ms Anita Gandhi, Head Institutional Business A Chartered Accountant having overall 12 years experience in FinancialServices and 6 Years of experience in the Manufacturing Industry. She is with the organization since June, 2002. She is instrumental in setting up Mutual Funds Distribution and Research wing of the company. She is overall in-charge of the Institutional business of the Company.

Mr.ArpitAgrawal,HeadEquityResearch A Chartered Accountant with an experience of 5 years in Financial Services, Management Consulting and Financial Audit. He joined Arihant in Nov 2008 and played an important role in new technology initiatives, business development and equity research. He is presently handling portfolio management and investment advisory division of the company.

MrRakeshGarg,CTO His administrative and technical skills help us to continuously improve our operations and provide excellent services to all our clients. A Company Secretary by profession, he has been in the forefront of our technology drive ensuring completely web-enabled back-office providing prompt services to our clients.

38

About ARIHANT PMS

Arihant is a SEBI re gistere Portfolio Ma ger d na Fund Ma gem by Qualified Portfolio Ma ge unde na ent na r r supervision of expe rienced investm nt com ittee e m Discre tiona sche e where funds a m na d on a ry m re a ge discretiona ba ry sis Consistent perform nce tra re a ck cord m than 12 yea of ore rs a dvising clients in e quity a equity rela products nd ted

PMS Low Cost

Personalized Investment approach More Flexibility with fund manager improving returns Small corpus enhancing return

39

Mutual Funds High Cost

Standard investment approach Lack of flexibility reducing returns Large corpus negative return

40

What you get?

: t

Professional Management

specialist investment team through disciplined investment process, who look over the portfolios constantly, reacting instantly to changes and taking investment decisions on your behalf. These decisions are based on many years of experience, a deep understanding of the market and the latest, most comprehensive investment research. Continuous Monitoring investment decisions. Hassle Free Operation complete portfolio transparency.

: You are always informed abou

: High standards of service an

41

EQUITY BROKING BSE AND NSE

Arihant provides online trading facility to retail clients, High Net worth Individuals (HNI's ). Through branches, sub-brokers, franchisees and remises. All its offices are connected to the exchange through leased line or VSAT technology. Arihant also uses CTCL technology to provide trading terminals at investors home or office. Arihant has appointed experienced and NCFM CERTIFIED dealers at all its branches making "share trading just a phone call away' for valued clientele. Arihant's trading facilities are supported by equity research input which are available online as well as offline. Arihantensures complete client satisfaction by a routine audit of service standards.

DERIVATIVES (FUTURES AND OPTIONS)

Arihant offers online derivative trading facilities. Arihant provides support in terms of recommending trading strategies for derivatives and monitoring of positions of clients. Arihant has a derivative research team, which keeps working on new trading strategies on a continuous basis. Arihant team is able to provide clients with the best possible derivative products in the constantly expanding market. FUTURES A Future is financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. The futures markets are characterized by the ability to use very high leverage relative to stock markets

42

ADVISORY SERVICES
On Investments in Equity On both primary and secondary markets On both local and offshore On mutual funds Port folio management services On Commodities & Currencies On Arbitrage Opportunities Financial planning services

MARCHANT BANKING SERVICES

Arihants Merchant Banking Division is strongly positioned to offer perfect financial solutions to your business. We are registered with SEBI as Category I Merchant Banker. At Arihant we believe that meeting our clients needs requires an in-depth knowledge and understanding of the financial markets, thorough knowledge of industry dynamics, individual strategic issues and competitive challenges. Our merchant banking team comprises of leading professionals who deliver high-quality strategic advice and creative financing solutions to our clients including capital issues, corporate and financial restructuring, private equity, mergers and acquisitions. Situations range from determining the appropriate capital structure for a leveraged buy-out, advising a company on a merger, structuring the Initial public offering of a subsidiary or managing a reverse book building. We have a devoted team and office in Mumbai which is exclusively dedicated to financial services offerings. This office houses the Merchant banking and allied financial services such as research, HNI services. Our large retail base and nation-wide presence supplements the specialized Merchant Banking activities. Our association with institutional investors and companies via research route augments business acquisition and execution for Investment Banking services.

43

Our approach is characterized by an emphasis on developing strong relationships with clients through: Long-term commitment Understanding the needs and businesses of our clients Focusing on adding value through the generation of new ideas for business development and in the structuring, negotiation and execution of transactions Building close working relationships at all levels

DEPOSITORY SERVICES
Arihant is a depository participant with National Securities Depositories Limited(NSDL) and Central Depository Services Limited(CDSL).Arihant offers depository facility at attractive rates to investors and traders. The depository operations are net enabled and user friendly. Arihant gives complete support to clients in dematerialization of their physical shares. Holding statements are regularly sent to clients and are also available on emails.

UNIQICNESS OF ARIHANTH
At Arihant, you can enjoy a personal relationship with our executives. You will benefit from an outstanding service, up-to-date technology, comprehensive financial products And services, complete guidance and support. That is not it. We make constant endeavor to understand your needs and make every effort to fulfill them. We strongly believe that our clients growth is strongly correlated to our growth.

Personal Relationship
At Arihant we believe that it is not just the product or service that we are offering, it is a relationship we are building with our clients. Being a client you deserve a personal relationship based on trust, reliability, understanding and respect. This relationship is the underpinning from which we will support you in meeting your financial objective. Our clients growth is our objective.

44

Unbiased and comprehensive Research

We can help you make more informed decisions through our in-depth, unbiased research. Whether you want help managing your own portfolio or want us to manage it for you, youll get investment guidance and portfolio planning thats right for you. Our research team will offer excellent investment opportunities, will help you identify significant market trends, and will make sure that the information reaches you at the earliest. We will provide you an integrated approach of fundamental and technical research. Short-term, long-term or intraday trading, whatever your investment objective, we will meet your needs. Our solitary objective is to help you achieve your goals.

Nationwide branch/franchisee network

Our offices are scattered all over the country. Get individualized assistance and personal guidance by visiting one of our nationwide branches or franchisee near you. Our executive will guide you about all the products and services we offer to help you meet your investment needs. Whatever you require, well cater to your need.

Potent Trading and Service tools

We have made transacting with markets convenient for you. You can seize potential market opportunities with our online trading tools. Whether you are at office, at home, on a holiday or on the move, with our online services you can - trade, view your trade orders and bill summary, subscribe for IPO, view your DP holdings from wherever you want1[1]. Our internet trading portal gives you continuous flow of market information and investment opportunities. We have sophisticated, state-of- the-art order routing technology which allows speedy and accurate execution of your orders. We offer full Backoffice support through internet. All this is for you to make informed decisions on time and with convenience

45

Excellent service and complete support

Were here for you. On the phone, through email, or one-on-one through personal service. No matter what level of support you need, our executives are always ready to assist you. We have always been known to provide quality and genuine information. To make our dealings convenient for you, we offer doorstep servicei[2] to our valued clients whether it is regarding collection of payments.

BOARD OF DIRECTORS
Size and Composition of the Board: The current policy of your Company is to have an optimum combination of executive and Non executive directors, with not less than 50 per cent consisting of no executivedirectorsto maintain the independence of the Board, and to separate the Board functions of governance and management. Besides, with an Executive Director as the head of the Board, half of the Board members are independent directors. This is aptly in conformity with the provisions of the amended clause 49. The Board, at present consists of 6members and the Board believes that the current sizeis appropriate, based on the Companys present circumstances The composition of the Board and the number of outside directorships held by each of the Directors is given in the table below:

Mr. Ashok Kumar Jain Executive 3 Mr. Sunil Kumar Jain NonNon-

Executive 3 Mr. Ashish

Maheshwari

Executive 1Mr. Achilles Rathi Independent 1 Mr. Pramod Devpura Independent NIL Mr. Rakesh Jain Independent NIL .

DATA ANALYSIS
46

Calculation of return of ICICI

Year Beginning price(Rs) 2004 2005 2006 2007 2008 141.45 297.90 375.00 587.70 892.00 Ending price(Rs) 295.45 371.35 585.05 891.5 1238.7 7.50 7.50 8.50 8.50 10.00 Dividend(Rs)

Return=Dividend+(Ending Price-Beginning price) Beginning Price Return(2004)= Return(2005) 7.50+(295.45-141.45) * 100 141.45 = 7.50+(371.35-297.90) 297.90
*

114.17%

100

= 27.17%

Return(2006)

8.50+(585.05-375) 375

* 100

=58.28%

Return(2007)

8.50+(891.5-587.70) 587.70

* 100

=53.13%

Return(2008)

10.00+(1238.7-892) 892

* 100

=39.98%

CALCULATION OF RETURN OF HDFC

47

Year 2004 2005 2006 2007 2008

Beginning Price 358.5 645.9 771 1195 1630

Ending price 645.55 769.05 1207 1626.9 2877.75

Dividend 3 3.50 4.50 5.50 7.00

Return = Dividend+(Ending Price-Beginning price) Beginning Price Return(2004) = 3+(645.55-358.5) 358.5 =80.9%

*100

Return(2005)

3.50+(769.05-645.9) 645.9 4.50+(1207-771) 771

* 100

=19.60%

Return(2006)

* 100

=57.13%

Return(2007)

5.00+(1626.9-1195) 1195.9

* 100

=36.6%

Return(2008)

7.00+(2877.75-1630) 1630

* 100

=76.97%

Calculation of return of WIPRO

48

Year

Beginning price(Rs)

Ending price(Rs) 1736.05 748.8 463.35 605.9 525.65

Dividend(Rs)

2004 2005 2006 2007 2008

1630.60 1752.00 755.00 462.00 603.00

1.00 29.00 5.00 5.00 8.00

Return=Dividend+(Ending Price-Beginning price) Beginning Price Return(2004) = 1.00+(1736.05-1630.60) 1630.60 = 8.184%

* 100

Return(2005)

= 29.00+(748.8-1752.00) 1752.00 = 5.00+(463.35-755.00) 755.00 = 5.00+(605.9-462.00) 462.00 603.00

* 100

-55.60%

Return(2006)

* 100

-37.96%

Return(2007) Return(2008)

* 100

= 32.23% = -11.5%

= 8.00+(525.65-603.00)

* 100

Calculation of return of ITC

49

Year

Beginning price(Rs)

Ending price(Rs) 983.5 1310.75 142.1 176.1 209.45

Dividend(Rs)

2004 2005 2006 2007 2008

667 990 1318.95 142 176.5

15 20 31.80 2.65 3.10

Return=Dividend+(Ending Price-Beginning p Beginning Price Return (2004) =15+(983.5-667) * 667 100 = 49.7%

Return (2005) =20+ (1310.75-990) 990

100

34.4%

Return (2006) = 31+(142.1-1318.95)

100 = 86.87%

1318.95 Return (2007) = 2.65+(176.1-142) 142 100 = 25.8%

Return (2008) =3.10+(209.45-176.5) 176.5

100 = 20.45

Calculation of return of COLGATE&PALMOLIVE

50

Year

Beginning price(Rs)

Ending price(Rs) 159.7 179.1 269.15 388.45 382.1

Dividend(Rs)

2004 2005 2006 2007 2008

133.65 161.5 179.2 270.5 390.9

6.75 6.75 7.25 6.00 11.25

Return=Dividend+(Ending Price-Beginning p Beginning Price Return (2004) =6.75+(159.7-133.65) * 100 = 133.65 24.5%

Return (2005) =6.75+(179.1-161.5) * 161.5

100 = 13.58

Return (2006) =

7.25+(269.15-179.2)
179.2

100 = 54.2

Return (2007) =6.00+(388.45-270.5) 270.5

100 =

45.8

Return (2008)=11.25+(382.1-390.9) * 100 = 0.62 390.9

Calculation of return of CIPLA

51

Year

Beginning price(Rs)

Ending price(Rs) 1371.05 317.8 448 251.35 212.65

Dividend(Rs)

2004 2005 2006 2007 2008

898.00 1334.00 320.00 447.95 251.5

10.00 3.00 3.50 2.00 2.00

Return=Dividend+(Ending Price-Beginning price) Beginning Price Return (2004) =10.00+(1375.05-898.00) 898.00 = 54.23%

* 100

Return (2005)

= 3.00+(317.8-1334.00) 1334 = 3.50+(448-320.00) 320

* 100

= -75.95%

Return (2006)

* 100

41.09%

Return (2007)

2.00+(251.35-447.95) 447.95 2.00+(212.65-251.5) 251.5

* 100

= -43.44%

Return (2008)

* 100

= -14.65%

Calculation of return of RANBAXY

52

Year

Beginning price(Rs)

Ending price(Rs) 1095.25 1251.15 362.75 391.8 425.5

Dividend(Rs)

2004 2005 2006 2007 2008

598.45 1109.00 1268 363 391

15.00 17.00 14.50 8.50 8.50

Return=Dividend+(Ending Price-Beginning price) Beginning Price Return (2004) = 15.00+(1095.25-598.45) 598.45 Return (2005) = 85.52%

* 100

= 17.00+ (1251.15-1109.00) * 100 = 1109 = 14.50+ (362.75-1268.00) 1268.00 8.50+ (391.8-363) * 100 363 8.50+ (425.5-391.00) * 100 391.00 =

14.35%

Return (2006)

* 100

-70.24%

Return (2007)

10.27%

Return (2008)

10.99%

Calculation of return of MAHENDRA&MAHENDRA

53

Year

Beginning price(Rs)

Ending price(Rs) 388.8 545.45 511.6 908.45 861.95

Dividend(Rs)

2004 2005 2006 2007 2008

113.45 392.55 547.10 514.80 913.00

5.50 9.00 13.00 10.00 11.50

Return=Dividend+(Ending Price-Beginning p Beginning Price Return (2004) =5.50+ (388.8-113.45) * 100 = 113.45 247.55%

Return (2005)=9.00+(545.45-392.55) * 100 = 41.24% 392.55 Return (2006) = 13.00+ (511.6-547.10)

100 = _-4.11%

547.10 Return (2007) =10.00+ (908.45-514.80) 514.50 100 = 78.41%

Return (2008) =11.50+(861.95-913.00) * 100 = -4.3% 913.00

Calculation of return of BAJAJ AUTO

54

Year

Beginning price(Rs)

Ending price(Rs) 1136.3 1131.2 2001.1 2619.15 2627.9

Dividend(Rs)

2004 2005 2006 2007 2008

502 1125.05 1149.00 2016.00 2648.65

14.00 25.00 25.00 40.00 40.00

Return=Dividend+(Ending Price-Beginning p Beginning Price Return (2004) =14.00+ (1136.3 -502) * 502
Return (2005) =25.00+ (1131.2-1125.05) * 1125.05

100 =

129.14%

100 = 2.77%

Return (2006) = 25.00+ (2001.1-1149.00) * 100 = _76.34%

1149.00 Return (2007) =40.00+ (2619.15-2016.00) 2016.00 Return (2008)=40.00+(2627.9-2648.65) 2648.65 100 = 31.9%

* 100 = 0.726%

Calculation of standard deviation of ICICI

55

_ Year 2004 2005 2006 2007 2008 Return (R) 114.7 27.17 58.28 53.13 39.98 293.26 _ Average (R) = R N = 293.26 5 R 58.652 58.652 58.652 58.652 58.652

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

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

= 58.652

_ Variance = 1 (R-R)
2

N-1

Standard Deviation =

Variance

1 5-1 =

(11905.379)

34.846

Calculation of standard deviation of HDFC

56

_ Year 2004 2005 2006 2007 2008 Return (R) 80.9 19.60 57.13 36.6 76.97 271.2 _ Average (R) = R = 271.2 = 54.24 N 5 _ Variance = 1 (R-R) N-1
2

_ R-R 26.66 -34.64 2.89 -17.64 22.73

_ ( R-R )2 710.75 1199.92 8.3521 311.16 516.65 2476.8

R 54.24 54.24 54.24 54.24 54.24

Standard Deviation =

Variance

1 5-1

(2476.8)

24.88

Calculation of standard deviation of WIPRO

57

_ Year 2004 2005 2006 2007 2008 Return (R) 8.184 -55.60 -37.96 32.23 -11.5 -64.646 R -12.93 -12.93 -12.93 -12.93 -12.93

_ R-R 21.114 -42.67 -25.03 45.16 1.43

_ ( R-R )2 445.81 1820.73 626.5 2039.4 2.0449 4934.5

_ Average (R) = R = -64.646 = -12.93 N 5 _ Variance = 1/n-1 (R-R) 2 = Variance

Standard Deviation

1
4

(4934 5)

= 35.12

Calculation of standard deviation of ITC

58

_ Year 2004 2005 2006 2007 2008 Return (R) 49.7 34.4 -86.87 25.8 20.4 43.43 _ Average (R) = R N Variance = = 43.43 5 __ 1 (R-R) 2 N- 1 = R 8.686 8.686 8.686 8.686 8.686

_ R-R 41.04 25.714 -95.556 17.114 11.714

_ ( R-R )2 1682.14 661.209 9130.94 293.88 137.21 11905.379

8.686

Standard Deviation =

Variance

1 (11905.379) 5-1 54.55

__

S.D

Calculation of standard deviation of COLGATE&PALMOLIVE

_ Year Return R _ R-R _ ( R-R )2

59

(R)

2004 2005 2006 2007 2008

24.5 13.58 54.2 45.8 0.62 138.7

27.74 27.74 27.74 27.74 27.74 27.74

-3.24 -14.16 26.46 18.06 -27.12

10.5 200.5 700.13 326.16 735.5 1972.79

__ Average R = R N = 27.74 __ Variance = 1 (R-R) 2 N-1

138.7 5

Standard Deviation =

Variance

1
4

(1972.79

= 22.2

Calculation of standard deviation of CIPLA

60

Year Return (R) 2004 2005 2006 2007 2008 54.23 -75.95 41.09 -43.44 -14.65 -38.72 _ Average (R) = R = n

_ R -7.744 -7.744 -7.744 -7.744 -7.744

_ R-R 61.974 -68.206 48.834 -35.696 -6.906

_ ( R-R )2 3840 4652 2384 1274 47.692 12197.692

-38.72 = 5 _

-7.744

Variance = 1/n-1 (R-R)2 Standard Deviation = Variance _

1 4

(12197.692)

=55.22

Calculation of standard deviation of RANBAXY

61

_ Year 2004 2005 2006 2007 2008 Return (R) 85.52 14.35 -70.24 10.27 10.99 50.89 R 10.18 10.18 10.18 10.18 10.18

_ R-R 75.34 4.17 -80.42 0.09 0.81

_ ( R-R )2 5676 17.39 6467 0.0081 0.6561 12161

_ Average (R) = R n Variance = = 50.89 5 = 10.18

1 (R-R) n-1 Variance

Standard Deviation =

1(12161) 4
= 55.13

Calculation of standard deviation of MAHENDRA&MAHENDRA

62

_ Year 2004 2005 2006 2007 2008 Return (R) 247.45 41.24 -4.11 78.41 -4.3 358.79 __ Average R = R n = 358.79 5 1 n-1 =71.758 __ Variance = (R-R) 2 R 71.758 71.758 71.758 71.758 71.758

_ R-R 175.79 -30.52 -75.868 6.652 -76.058

_ ( R-R )2 30902.8 931.47 5755.95 44.25 5784.82 43419.3

Standard Deviation =

Variance

1 4

(43419.3

= 104.186

Calculation of standard deviation of BAJAJ AUTO

63

_ Year 2004 2005 2006 2007 2008 Return (R) 129.14 2.77 76.34 31.9 0.726 240.876 R 48.175 48.175 48.175 48.175 48.175

_ R-R 80.965 -45.405 28.165 -16.275 -47.449

_ ( R-R )2 6555.3 2061.6 793.3 264.9 2251.4 11926.5

__ Average R = R N 240.876 5 __ Variance = 1 (R-R) 2 N-1 = 48.175

Standard Deviation =

Variance

1 4 54.6

(11926.5

Correlation between HDFC & ICICI

64

DEVIATIONOFHDFC Year ___ RA-RA 2004 2005 2006 2007 2008 26.66 -34.64 2.89 -17.64 22.73

DEVIATION OF ICICI __ RB-RB 56.048 -31.482 -0.372 -5.522 -18.672

COMBINED ___

DEVIATION ___

(RA-RA ) (RB-RB) 1494.24 1090.5 -1.075 97.41 -424.4 2256.675

n Co-variance (COVAB ) =1/n (RA-RA) (RB-RB) t=1 Co-variance (COVAB )=1/5 (2256.675)

=451.335 Correlation Coefficient (PAB) = COV AB (Std. A) (Std. B) = 451.335 (24.88) (34.846)

= 0.5206

Correlation

between WIPRO& SATYAM

65

DEVIATION Year WIPRO ___ 2004 2005 2006 2007 2008 RA-RA 21.114 -42.67 -25.03 45.16 1.43

OF

DEVIATION SATYAM __ RB-RB 15.176 -4.694 62.996 -49.994 -23.484

OF

COMBINED ___

DEVIATION ___

(RA-RA ) (RB-RB) 320.426 200.30 1576.79 2257.73 33.582 4388.83 n

Co-variance(COVAB )=1/n

(RA-RA) (RB-RB) t=1

Co-variance(COVAB )=1/5

(4388.83)

=877.766 Correlation Coefficient (PAB) = COV AB (Std. A) (Std. B) = 877.766 (35.123) (42.63)

=0.586

Correlation between ITC&COLGATE -PALMOLIVE

-

66

DEVIATIONOF ITC Year ___ RA-RA 2004 2005 2006 2007 2008 41.04 25.714 -95.556 17.114 11.714

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

OF

COMBINED ___

DEVIATION ___

(RA-RA ) (RB-RB) -132.97 -364.1 -2528.4 309.07 -317.68 -3034.08

n Co-variance(COVAB )=1/n (RA-RA) (RB-RB) t=1 Co-variance(COVAB )=1/5 (-3034.08)

=-606.816 Correlation Coefficient (PAB) = COV AB (Std. A) (Std. B)

- 606.816 (54.55) (22.21) - 0.5008

Correlation between CIPLA & RANBAXI

67

DEVIATION 0F Year CIPLA ___ 2004 2005 2006 2007 2008 RA-RA 61.974 -68.206 48.834 -35.696 -6.906

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

OF

COMBINED ___

DEVIATION ___

(RA-RA ) (RB-RB) 4669.12 -284.42 -3927.23 -3.213 -5.59 448.667

n Co-variance(COVAB )=1/n (RA-RA) (RB-RB) t=1 Co-variance(COVAB )=1/5 = 448.667 89.7334

Correlation Coefficient (PAB) = COV AB (Std. A) (Std. B)

89.7334 (55.22)(55.13) =0.0295

Correlation between BAJAJ AUTO &MAHENDRA

-

68

DEVIATIONOF Year BAJAJ ___ 2004 2005 2006 2007 2008 RA-RA 80.965 -45.405 28.165 -16.275 -47.449

DEVIATION OF M&M ___ RB-RB 175.79 -30.52 -75.868 6.652 -76.058

COMBINED ___

DEVIATION ___

(RA-RA ) (RB-RB) 14232.84 1385.76 -1909.22 -108.26 3608.87 17210

n Co-variance(COVAB )=1/n (RA-RA) (RB-RB) t=1 Co-variance(COVAB )=1/5 (17210)

=3442 Correlation Coefficient (PAB) = COV AB (Std. A) (Std. B)

3442 (54.60) (104.586) 0.605

Correlation

between HDFC&WIPRO

69

DEVIATION Year HDFC ___ 2004 2005 2006 2007 2008 RA-RA 26.06 -34.64 2.89 -17.64 22.73

OF

DEVIATION WIPRO __ RB-RB 21.114 -42.67 -25.03 45.16 1.43

OF

COMBINED ___

DEVIATION ___

(RA-RA ) (RB-RB) 550.23 1478.1 -72.34 -796.6 32.50 1191.89 n

Co-variance(COVAB )=1/n

(RA-RA) (RB-RB) t=1

Co-variance(COVAB )=1/5

(1191.89)

=238.38 Correlation Coefficient (PAB) = COV AB (Std. A) (Std. B) 238.38 (24.88) (35.123)

=0.273

Correlation

between BAJAJ& ITC

70

DEVIATION Year BAJAJ ___ 2004 2005 2006 2007 2008 RA-RA 80.965 -45.405 28.165 -16.275 -47.449

OF

DEVIATION OF ITC __ RB-RB 41.04 25.714 -95.556 17.114 11.714

COMBINED ___

DEVIATION ___

(RA-RA ) (RB-RB) 3322.80 -1167.54 -2691.33 -278.53 -555.82 -1370.42 n

Co-variance(COVAB )=1/n

(RA-RA) (RB-RB) t=1

Co-variance(COVAB )=1/5

(-1370.42)

=-274.08 Correlation Coefficient (PAB) = COV AB (Std. A) (Std. B) - 274.08 (54.60) (54.55) =-0.092

Correlation

between CIPLA& HDFC

71

DEVIATION Year CIPLA ___ 2004 2005 2006 2007 2008 RA-RA 61.974 -68.206 48.834 -35.696 -6.906

OF

DEVIATION OF HDFC __ RB-RB 26.06 -34.64 2.89 -17.64 22.73

COMBINED ___

DEVIATION ___

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

Co-variance(COVAB )=1/n

(RA-RA) (RB-RB) t=1

Co-variance(COVAB )=1/5

(4591.54)

=918.31 Correlation Coefficient (PAB) = COV AB (Std. A) (Std. B) 918.31 (55.22) (24.88) =0.668

Correlation

between RANBAXY&WIPRO

72

DEVIATION Year RANBAXY ___ 2004 2005 2006 2007 2008 RA-RA 75.34 4.17 -80.42 0.09 0.81

OF

DEVIATION WIPRO __ RB-RB 21.114 -42.67 -25.03 45.16 1.43

OF

COMBINED ___

DEVIATION ___

(RA-RA ) (RB-RB) 1590.73 -177.93 2012.91 4.0644 1.158 3430.93 n

Co-variance(COVAB )=1/n

(RA-RA) (RB-RB) t=1

Co-variance(COVAB )=1/5

(3430.93)

=686.19 Correlation Coefficient (PAB) = COV AB (Std. A) (Std. B) = 686.19 (55.13)(35.123) = 0.354

Correlation

between CIPLA&BAJAJ

73

DEVIATION Year CIPLA ___ 2004 2005 2006 2007 2008 RA-RA 61.974 -68.206 48.834 -35.696 -6.906

OF

DEVIATION OF BAJAJ __ RB-RB 80.965 -45.405 28.165 -16.275 -47.449

COMBINED ___

DEVIATION ___

(RA-RA ) (RB-RB) 5017.72 3096.90 1375.41 580.95 327.68 10398.70 n

Co-variance(COVAB )=1/n

(RA-RA) (RB-RB) t=1

Co-variance(COVAB )=1/5

(10398.70)

=2079.74 Correlation Coefficient (PAB) = COV AB (Std. A) (Std. B) 2079.74 (55.22)(54.60) 0.690

STANDARD DEVIATION
COMPANY STANDARED

74

ITC COL-PAL BAJAJ M&M HDFC ICICI RANBAXY WIPRO CIPLA

DEVIATION 54.55 22.21 54.60 104.186 24.88 34.846 55.13 35.123 55.22

Standared deviation

10 2 10 0 8 0 6 0 4 0 2 0
C IT O C L -P A L B A J A J M & M H D F C IC R A IC N B I A X Y W IP R O C IP L A

S rie e s2

AVERAGE

COMPANY ITC

AVERAGE 8.686

75

COLGATE&PALMOLIVE BAJAJ M&M HDFC ICICI RANBAXY WIPRO CIPLA

27.74 48.175 71.758 54.24 58.652 10.18 -12.93 -7.744

80 70 60 50 40 30 20 10 0 -10 -20 1

IT C COLGAT E&PALM OLIVE BAJAJ M&M HDFC ICIC I RANBAX Y WIPRO CIPLA

CORRELATION COEFFICIENT

COMPANY HDFC&ICICI ITC&COLGATE BAJAJAUTO&MAHINDRA CIPLA&RANBAXY HDFC&WIPRO

R 0.5206 0.5008 0.605 0.0295 0.0273

76

COLGATE&SATYAM BAJAJ&ITC CIPLA&HDFC RANBAXY&WIPRO CIPLA&BAJAJ

0.30 -0.09 0.668 0.354 0.690

0 9 .6 0 5 .3 4 0 6 .6 8 0 9 .0
1

C L & AA IP A B J J RNA YW A B X& I P O R C L & DC IP A H F B J J IT AA& C C L AE S OG T & AYM TA H F & I R D C WP O C L & A B IP A R N A Y X B J J UO AAA T & M HN R A I D A

0 .3 0 23 .0 7 0 25 .0 9 0 0 .6 5 0 08 .5 0 0 26 .5 0

PORTFOLIO WEIGHTS
HDFC&ICICI Formula:

(Std.b) 2 p ab (std.a )(std.b) (std.a) 2 + (std.b) 2 -2 pab (std.a) (std.b) 1X

77

Where X =

HDFC

ICICI = = = 24.88 34.85 0.5206

Std.a Std.b p X
ab

= (34.85) 2 (0.5206) (24.88 )(34.85) (24.88) 2 + (34.85) 2 - 2 (0.5206) (24.88) (34.85) =1 X = 0.8199 0.1801

X X X
a b

PORTFOLIO WEIGHTS
ITC&COLGATE:
Formula: X = (Std.b) 2 p ab (std.a )(std.b) (std.a) 2 + (std.b) 2 -2 pab (std.a) (std.b) = X 1X =

Where

ITC

78

X Std.a Std.b p X

= = = =

COLGATE 54.55 22.21 0.5008

ab

(22.21) 2 (0.5008) (54.55 )(22.21) (54.55) 2 + (22.21) 2 - 2 (0.5008) (54.55) (22.21) 1 X 0.0503

X X X

= =

= 0.9497

PORTFOLIO WEIGHTS
CIPLA&RANBAXY:
Formula: X = (Std.b) 2 p ab (std.a )(std.b) (std.a) 2 + (std.b) 2 -2 pab (std.a) (std.b) X = X X 1X = =

Where

a b

CIPLA RANBAXY

79

Std.a Std.b p X

= = =

55.22 55.13 0.0295

ab

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

X X X

= =

0.49916

0.50084

PORTFOLIO WEIGHTS
BAJAJ AUTO&MAHENDRA:
Formula: X X = = X X Std.a Std.b p
ab

(Std.b) 2 p ab (std.a )(std.b) (std.a) 2 + (std.b) 2 -2 pab (std.a) (std.b) 1X

a b a

Where

= = = = =

BAJAJ AUTO MAHENDRA 54.60 104.186 0.605

80

= (104.19) 2 o.605 (54.60) (104.19) (54.60) 2 + (104.19) 2 - 2 (0.605) (54.60) (104.19) = =

b

X X

1X 1.6206 -0.6206

Two Portfolios

Correlatio COMPANY n Coefficie nt 0.5206 0.5008 0.605 0.0295 Xa

COMPANY Xb

PORTFOLI Rp

PORTFOLO p 31.14 22.77 49.43 171.22

O RETURN RISK

ICICI&HDFC ITC&COLGATE CIPLA&RANBAXI M&M &BAJAJ

0.8199 0.0563 0.49916 1.6206

..0.1801 0.9497 0.50084 -0.620 __ __

114.24 26.835 1.2335 122.61

PORTFOLIO RETURN

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

PORTFOLIORISK= ___________________________________ p= X1^21^2+X2^22^2+2(X1)(X2)(X12)12

Portfolio return Rp
ICICI&HDFC ITC&COLGATE CIPLA&RANBAXI M&M &BAJAJ 114.24 26.835 1.234 122.61

81

PORTFOLIO RETURN

ICICI&HDFC WIP&RAN ITC&COL CIPLA&RAN M&M&BAJAJ

Portfolio risk
ICICI&HDFC ITC&COLGATE CIPLA&RANBAXI M&M &BAJAJ 31.14 22.77 49.43 171.22

82

PORTFOLIO RISK

ICICI&HDFC WIP&SAT ITC&COL CIPLA&RAN M&M&BAJAJ

CONCLUSIONS
ICICI&HDFC
The combination of ICICI and HDFC gives the proportion of ICICI and HDFC, based on the

investment is 1.1801 and 0.8199 for HDFC is 24.88.

standard deviations The standard deviation for ICICI is 34.846 and for

83

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

ITC & COLGATE PALMOLIVE

The combination of ITC and COLGATE gives the proportion of

investment is 0.0563 and 0.50084 for ITC and COLGATE, based on the standard deviations The standard deviation for ITC is 54.55 and for COLGATE is 22.2. Hence the investor should invest their funds more in COLGATE when compared to ITC as the risk involved in COLGATE is less than ITC as the standard deviation of COLGATE is less than that of ITC.

CIPLA&RANBAXY
The combination of CIPLA and RANBAXY gives the proportion of investment is 0.49916 and 0.50084 for CIPLA RANBAXY is 55.13. When compared and RANBAXY, based on the standard deviations The standard deviation for CIPLA is 55.22 and for to both the risk is almost same, hence the risk is same when invested in either of the security.

MAHENDRA & BAJAJ AUTO

The combination of M&M and BAJAJ AUTO gives the proportion of investment is 1.6206 and 0.6206 for M&M and BAJAJ AUTO, based on the standard deviations The standard deviation for M&M is 104. 186 and for BAJAJ AUTO is 54.6. Hence the investor should invest their funds more in BAJAJ AUTO when compared to M&M as the risk involved in BAJAJ AUTO is less than M&M as the standard deviation of BAJAJ AUTO is less than that of M&M.

84

CONCLUSIONS FOR CORRELATION

In case of perfectly correlated securities or stocks, the risk can be reduced to a minimum point. In case of negatively correlative securities the risk can be reduced to a zero.(which is companys risk) but the market risk prevails the same for the security or stock in the portfolio.

As the study shows the following findings for portfolio construction;

Investor would be able to achieve when the returns of shares and debentures Resultant portfolio would be known as diversified portfolio. Thus portfolio construction would address itself to three major via., selectivity, timing and diversification In case of portfolio management, negatively correlated assets are most profitable . Correlation between the BAJAJ & ITC are negatively correlated which means both the combinations of portfolios are at good position to gain in future . Investors may invest their money for long run, as both the combinations are most suitable portfolios. A rational investor would constantly examine his chosen portfolio both for average return and risk.

BIBLIOGRAPHY
BOOKS 1. DONALDE, FISHER & RONALD J.JODON
SECURITIES ANALYSIS AND PORTFOLIO MANAGEMENT,6 TH EDITION

85

2. V.K.BHALLA INVESTMENTS MANAGEMENT S. CHAND PUBLICATION. 3.V.A.AVADHANI. INVESTMENT MANAGEMENT

Website
4. WWW. Investopedia.com 5.www.nseindia.com 6.www.bseindia.com. 7.www.arihantcapital.com

Newspapers& magazine
9. DAIRY NEWS PAPERS. ECONOMIC TIME, FINANCIAL EXPRES.ETC

APPENDICES
Implementation of study:
For implementing the study,8 securitys or scripts constituting the sensex market are selected of one month closing share movement price data From Economic Times and financial express from Jan 3rd to 31st Jan 2008.

86

In order to know how the risk of the stock or script, we use the formula, which is given below.. _________ Standard deviation= Variance= (1/n-1) t=1 _ Where (R-R)2 = square of difference between sample and mean n= number of sample observed variance n _ (R-R)2

After that we need to compare the stocks or scripts of two companies with each other by using the formula or correlation coefficient as given below. n t=1 Correlation-Coefficient (PAB ) = (COVAB ) (std.A) ( std.B) Where (RA-RA)(RB-RB) = Combined deviation of A&B (std.A)(std.B) deviation of A&B COVAB = Covariance between A&B n= number of observations. __ __

Covariance [COVAB] =1/n (RA-RA) (RB-RB)

The next step would be the construction of the optimal portfolio on the basis of what percentage of investment should be invested when two securities and stocks are combined i.e. calculation of two assets portfolio weight by using minimum variance equation which is given below. FORMULA Xa (Std. b) ^2 pab (Std. a) (Std. b) =------------------- ---------------------------------(Std. a) ^2 + (std. b) ^2 2pab (Std. a) (Std. b)

87

Where Std. b= standard deviation of b Std. a = standard deviation of a Pab= correlation co-efficient between A&B The next step is final step to calculate the portfolio risk (combined risk) ,that shows how much is the risk is reduced by combining two stocks or scripts by using this formula: _________________________________p= X1^21^2+X2^22^2+2(X1)(X2)(X12)12 Where X1=proportion of investment in security 1. X2=proportion of investment in security 2. 1= standard deviation of security 1. 2= standard deviation of security 2. X12=correlation co-efficient between securities p=portfolio risk.

88