CHAPTER- 1 INTRODUCTION

Introduction to Financial system: Financial system is that part of economy, which includes all the financial institutions and markets involved in Moving savings from savers to borrowers; and Transferring, sharing & insuring risks. A nation consists of three economic units basically-Government, Industry and Household These units may perform various activities due to which they may be facing surplus or deficit budgetary situations. Industry: Industry sector may be able to generate funds from their activities and use them for various investment decisions like expansion, diversification, modernization, replacement etc. Government: Government needs fund for financing public expenditure involved is quite high, it generally is in deficit budgetary situation. Individuals: Individual/household sector requires funds for meeting basic necessities as well as for expenditure on luxury items. They however may have been surplus funds in the form of saving. Importance of financial system: Financial system acts as such a channel, which allows funds to move from people, who lack productive investment opportunities (i.e. savers) to those have such opportunities. By doing so the financial system contributes to higher production and efficiency in the economy. It also improves the well-being of consumers by allowing them to time their purchases better. Financial institutions and financial markets are the two Components of financial system. Both of these further consists of the organized and unorganized sector

Financial institutions: 1. Regulatory and promotional institutionsThe two major regulatory and promotional institutions in India are Reserve Bank of India (RBI) and Securities Exchange Board of India (SEBI)

Both RBI &SEBI administer, legislate, supervise, mentor, control and discipline the entire financial system. The reigns of financial institutions lie in the hands of RBI, while the financial markets are monitored by SEBI. Both of these have several policies, procedure and guidelines, which are changed from time to time so as to set the financial system in the right direction in, order it to contribute towards healthy functioning of the economy. 2. Banking institutions: Banking institutions are the depositors and lenders of money and have been categorized on the basis of the function being performed by them. The basic categories are Commercial banks - Their function is to act as depositors of public savings and function with profit motive. They accept deposits and lend them to those in need for a charge called interest which is their profit. Cooperative banks- Cooperative banks are a part of cooperative institutions which are based principles of cooperation and mutual help. They accept deposits and lend short-term and long term credit at reasonable rate of interest. Developmental banks they are set-up for the purpose of promoting certain sectors of the economy and cater to those only for e.g. NABARD (National Bank for Agriculture & Rural Development), set-up for providing agriculture credit and development of the rural sector of the economy. Non banking finance companies-These are privately owned financial intermediaries, which are engaged in accepting and disbursing funds. They are categorized into various types depending on the fund based activities performed by them. The most common of them are

1. Investment Companies- which provide loans for personal as well as commercial purpose and charge a higher rate of interest as compared to banks. Inspite of the interest rate charged being higher they are popular due to the hassle free procedure of providing loans on which no security is sought as compared to commercial banks which provide secured loans. They also provide higher interest on deposits accepted by them as compared to commercial banks. 2. Housing companies- housing companies provide loan for the purpose of house construction in lieu of a charge or interest for different time periods. This loan is a secured loan and involves hypothecation of the land or building against it. Housing companies in India include Housing and Urban Development Corporation (HUDCO), State Housing Finance Societies (SHFS), Housing Development and Finance Corporation (HDFC), other than these LIC, GIC, UTI also have entered into the area of housing finance. All these institutions are monitored and controlled by a committee set-up by RBI.

3. Lease Financing- A lease may be defined as a contractual arrangement in which lessor (one who owns the asset) provides the asset for the use to the lassee (who requires the asset) in return for a periodic payment (rentals) with or without further payment called premium. After the end of the lease period the equipment goes back to the lessor. So there is a separation of ownership and economic use of the asset. Major leasing companies in India are Infrastructure Leasing and Financial Services Ltd.(IL&FS),ICICI, Industrial Reconstruction Bank of India (IRBI), LIC, GIC,IFC,HDFC, some State Industrial Investment Corporations(SIICS).

4. Hire purchase companies hire purchase is a system under which term loan is provided for purchase of goods or services and is then amortized in installments as laid down through a contract, under the contract the ownership of asset is transferred to the owner once the contract of loan is signed. Commercial banks, IDBI, ICICI, SFCs, NSIC etc. are involved in such financing.

5. Specialized financial institutions- they include EXIM bank providing loans for Export Import, NABARD- National Bank for Agriculture and Rural Development, Tourism & Finance Corporation of India. Technology Development and Information Company of India ltd.
3

6. Investment institutions like Unit Trust of India providing portfolio management services, Life Insurance Corporation providing cover for risks other than life. 7. State level institutions- they include State Financial Corporation (SFCs), which provide credit within the state and State Industrial Development Corporation (SIDCs) providing state industrial credit.

Financial markets: 1. Capital market: These are market where securities of life greater than one year are traded. They can be further subdivided into a. Primary market It is a market where securities are floated for the first time. It consists of New issue market, Euro issue market and Private placements b. Secondary market- It is a place where securities which have already been issued are traded. It is made up of Securities exchange, STCI (Securities Trading Corporation of India) and OTCEI (Over The Counter Exchange of India) 2. Money market: these are the markets where securities having life of less than one year are traded. It is also divided into a. Primary market- It is made-up of new issues of instruments like T-Bills, Commercial Papers, Certificates of Deposits, Gift Edged Securities, Call money and reports etc. b. Secondary market-which includes Discount and Finance House of India. Major Stock Exchanges of India Bombay stock exchange Bombay stock exchange (BSE) was established in 1875. It was starts as The Native Share & Stock Brokers Association and over the years it has become the premier stock exchange of the country. It is first stock exchange to have obtained permanent recognition in 1956 from the government of India under the securities contracts (Regulation) Act1956. Departments of BSE Investor Services: The Department of Investor Services redresses grievances of investors. BSE was the first exchange in the country to provide an amount of Rs.1 million towards the investor protection fund; it is an amount higher than that of any exchange in the

country. BSE launched a nationwide investor awareness programme- 'Safe Investing in the Stock Market' under which 264 programmers were held in more than 200 cities. The BSE On-line Trading (BOLT): BOLT facilitates on-line screen based trading in securities. BOLT is currently operating in 25,000 Trader Workstations located across over 359 cities in India. BSEWEBX.com: In February 2001, BSE introduced the world's first centralized exchangebased Internet trading system, BSEWEBX.com. This initiative enables investors anywhere in the world to trade on the BSE platform. Surveillance: BSE's On-Line Surveillance System (BOSS) monitors on a real-time basis the price movements, volume positions and members' positions and real-time measurement of default risk, market reconstruction and generation of cross market alerts. BSE Training Institute: BTI imparts capital market training and certification, in collaboration with reputed management institutes and universities. It offers over 40 courses on various aspects of the capital market and financial sector. More than 20,000 people have attended the BTI programme National Stock Exchange NSE was set-up in November 1992. It was recognized as a stock exchange in April 1993. In June 1994 a Whole Debt Market (WDM) segment was started and in November 1994 the capital market (Equities) segment commenced its operation. The operations of the derivatives segment commenced from June 2000. NSE & Its Subsidiaries National Securities Clearing Corporation Ltd (NSCCL) NSCCL was established in August 1995 as a wholly owned subsidiary of NSE. The objective of NSCCL was to bring & sustain confidence in clearing & settlement of securities, to promote & maintain, short consistent settlement cycles; to provide country risk guarantee and to operate a tight risk containment system.

NSE IT LTD NSEIT a 100% subsidiary of National Stock Exchange of India limited is the information technology arm of the largest stock exchange of the country. It has the major focus on providing top-of- the line products, services and solutions in the area of trading, broker front-end and back office, clearing & settlement, web-based trading, risk management, treasury management, asset-liability management, banking, insurance etc. India Index Services & Products Ltd. (IISL) IISL is a joint venture between NSE & CRISIL limited. it was set-up in may 1998, to provide a variety of indices and index related services and products for the Indian capital market. National securities depository limited (NSDL) NSE along with Industrial Development Bank of India (IDBI) & Unit Trust of India (UTI) set-up the National Securities Depository Limited (NSDL), the first depository in India so as to solve the problems related to trading in physical securities. Dot Ex International Limited Dot Ex International Limited was set-up as a joint venture between L-flex Solutions Ltd. & NSEIT. Ltd. Dot Ex was formed to provide a world-class internet trading platform which allows members of NSE to offer online trading facilities to their customers. Popular Indian indices NSEs S &P CNX NIFTY S & P CNX NIFTY is comprised of 50 stocks and represents 23 sectors of the economy. NIFTY is computed using weighted average market average market capitalization method. The base period is november3, 1995 and its value is 1000. BSE Sensex-Bombay stock exchange sensitive index BSE is comprised of 30 stocks and represents 12 sectors of the economy. It is a value weighted index with base period as 1978 w. e. f. sep 1,2003 the free float, government and promoter holdings as well as locked-in-shares are excluded for calculating market capitalization of the companies and it called Free Float Cap. Weighing.
6

Depository participant (DP) A DP is one with whom an investor needs to open an account to deal in electronic form. While the depository can be compared to a bank, DP is like a branch of the bank with which an investor can have an account. Total Depository Participants in India are 76. Brokers Brokers are registered members of the stock exchanges through whom investors transact. There are about 10,000 brokers in India. Qualification 1. Must be a citizen of India, of an age not less than 21 years and education of not less than graduates 2. The broker must be having a minimum net-worth which varies from exchange to exchange, and a minimum experience of two years in this business. 3. Should not have been convicted of any offence involving fraud, dishonesty, cheating etc., and not compounded with creditors or declared insolvent. 4. Should not be doing any other business and not connected with any company or corporation as employee/director etc. 5. Not a defaulter on any other exchange. Broker operations 1. New issue marketing, underwriting, etc. 2. Client and institutional brokering business for earning brokerage. 3. Jobbing business giving two way quotations and earning profit through margin between bid and offer rates. 4. Arbitrage business- trading as between two or more stock exchange to take advantage of price differential as profit. 5. Portfolio management of the clients funds.

ABOUT THE COMPANY Nellai Capital Market Services Nellai Capital Market Service has been established in the year 1997. It is one of the stock broking company. The proprietor of this company is Mr. S. Selvam, dealer for NSE. Mr. C. Thiruvangadhanathan, dealer for BSE. Services provided by the company is NSE, BSE, F&O, MCX, NCDEX, IPO, Mutual Funds, Portfolio Management Services and Home Trading, There are around 600 active investors. There are six branches in Palayamkottai, Town, Sankarankovil, Ambasamudram, Vallioor, Kayal and N.G.O A colony. Corporate managers: Motilal Oswal Securities Ltd. (MOSL) BSE trading has been held or registered here under the control of Motilal Oswal Securities Ltd. (MOSL) at Mumbai. Motilal Oswal Securities Ltd. (MOSL) was founded in 1987. Focus on customer-first-attitude, ethical and transparent business practices, respect for professionalism, research-based value investing and implementation of cutting-edge technology has enabled us to blossom into an almost 2000 member team. It had a network spread over 576 cities and towns comprising 1,257 Business Locations operated by Business Partners. As at September 30th, 2009, there are 5, 80,667 registered customers Coimbatore capital ltd NSE trading has been held or registered under the constituent of Coimbatore capital ltd (1994).Coimbatore Capital is a financial services provider, operating as a stock broker, depository participant, mutual funds distributor, IPO distributor and insurance agent. It is also a depository participant with National Securities Depository Limited. It is also a dealer in the over the counter exchange of India Limited. A subsidiary of Coimbatore Capital is a member of inter connected stock exchange of India Limited. It has 26 NSE trading terminals across Tamilnadu & Pondicherry. C-Cap NSE trading network is one of the largest network in India and through this network serves over 35000 retail clients.

ABOUT THIS PROJECT There are many investment avenues available for investors today. Different people have different motives for investing. For most investors their interest in investment is an expectation of some positive rate of return. But investors cannot overlook the fact that risk is inherent in any investment. Risk varies with the nature of return commitment. Generally, investment in equity is considered to be more risky than investment in debentures & bonds. A closer look at risk reveals that some are uncontrollable (systematic risk) and some are controllable (unsystematic risk). Risk can be categorized into two types. The risk that cannot be diversified away like interest rate risk and recession is known as systematic risk. Unsystematic risk is stock specific and can be diversified away. Scarcities in raw material supply, labour strike, and management inefficiency are all problems specific to a company and are internal in nature. These negative factors can make the share price fall sharply but can be avoided if well thought. An investment in the shares of certain other companies with sound management can help minimize this risk. The capital asset pricing model, in essence, predicts the relationship between the risk of an assets and its expected return. Capital asset pricing model (CAPM) CAPM postulates that in a perfect market, where shares are correctly priced, every security will give a return commensurate with risk. Beta is a measure of the risk. The market risk is different from the risks of individual scrips comprising the market. Capital Market Line (CML) relates to the total risk of the market. But Security Market Line (SML) refers to the risk, which is undiversifiable market related risk. Capital Market Line: the CML defines the relationship between total risk and expected return for portfolios consisting of risk-free asset and the market return. Security Market Line: the SML defines the relationship between systematic risk (beta) and expected return for individual securities consisting of risk-free asset and market return. Portfolio: the portfolio is a collection of securities. The investor can create a portfolio from his or her own risk-preferred combination.
9

Efficient portfolio: Portfolios which have returns that are perfectly positively correlated with the market portfolio are referred to as efficient portfolio. Estimation period: The estimation period is two years February 2008 to December 2009. Market index: In this project S&P CNX Nifty has been taken as a market index. Risk-free return: The return on a zero-beta portfolio is the best estimate of the risk-free rate. The average return from different banks on two year term deposit has been taken as a risk free return. The securities selected from repeatedly invested securities in power, oil & gas, cement and steel sector in Nellai capital market services for the period of 2008-09. Present Scenario of Core-Infrastructure Industries Cement India, being the second largest cement producer in the world after China with a total capacity of 151.2 Million Tonnes (MT), has got a huge cement industry. With the government of India giving boost to various infrastructure projects, housing facilities and road networks, the cement industry in India is currently growing at an enviable pace. More growth in the Indian cement industry is expected in the coming years. It is also predicted that the cement production in India would rise to 236.16 MT in 2011. It's also expected to rise to 262.61 MT in 2012. Steel India is currently the fifth largest steel-producing nation in the world with production of over 54 million tonnes (MT). Being a core sector, steel industry tracks the overall economic growth in the long term. Also, steel demand, being derived from other sectors like automobiles, consumer durables and infrastructure, its fortune is dependent on the growth of these user industries. The Indian steel sector enjoys advantages of domestic availability of raw materials and cheap labour. Finished (carbon) Steel production increased by 4.5 per cent (provisional) during April-May 2008-09 against an increase of 5.6 per cent during the same period of 2007-08.

10

Electricity India is the 6th largest consumer of electricity in the world. The rapidly growing economy is energy hungry and the deficit between demand and supply is growing. Revenue losses due to power failure are growing at an alarming rate of 11.9% in last 5 years. Power development is the key to the economic development. Electricity generation increased by 1.7 per cent during April-March 2008-09 against 9.0 per cent during the same period in 2007-08. Oil & gas India, having the oldest petroleum industry in the world is also the fifth largest energy consumer with oil and gas forming large portion of its requirements. Majority of the supplies are sourced from overseas (more than 75 per cent) and consequently it is the ninth largest importer of the crude oil. Crude oil production saw a growth of 2.1 per cent during April-May 2008-09 against () 0.1 per cent during the same period of 2007-08.

11

ASSUMPTIONS OF THIS PROJECT 1. To make research more convenient rate of return has be calculated by below formula without consideration of dividends Ending price Rate of return = Beginning price 2. There are no taxes or transaction costs involved in buying and selling assets. 3. The investors have two-period time horizon (2008 2009). 4. All investments are infinitely divisible, which it is possible to buy or sell fractional shares of any asset or portfolio. 5. There is no inflation or any change in interest rates. 6. The investors are price-takers. 7. Investor holds efficient portfolios higher expected returns involve higher risk. Beginning price

12

CHAPTER- 2

OBJECTIVES To understand the risk-return relationship for market portfolio Assessing portfolio performance To understand the risk- return relationship for an individual security/asset Identification of under and overvalued assets.

13

CHAPTER- 3

RESEARCH METHODOLOGY Research design: Analytical research Analytical research: The researcher has to use facts or information already available and analyze these to make a critical evaluation of the material. Nature of data: Secondary data Secondary data: Data, which have already been collected by someone else and which have already been passed through the statistical process. Data source Secondary data collected from National Stock Exchange, Reserve Bank of India and Bombay stock exchange websites. Tools used for analysis Mean Standard deviation Variance Covariance Sharpe ratio Treynor ratio Mean: This is simply call as mean or arithmetic average. It is found by summing all the observations and dividing the sum by number of observation. x Mean = n Standard deviation (SD): Standard Deviation is an indicator of the 'spread' of the data (dispersion of a distribution). If mean is taken as the measure of central tendency of
14

distribution, standard deviation tells us how much each value on an average is 'away' from the mean value (square-root of mean of squared deviations from the mean).

Variance: This is the mean of the squares of deviations of individual returns around their average value. (x - x) M= n-1 Covariance: Covariance is an absolute measure of the extent to which two sets of numbers move together over time, that is, how often they move up or down. (Ri Ri) (Rm-Rm) Cov (Ri,Rj) = n-1 Probability: Probability is basically the chance of happening or non-happening of an event. P (A) Probability = N Sharpe ratio: The Sharpe measure reflects the excess return earned on a portfolio per unit of its total risk (standard deviation) RP - R F Sharpe ratio = SD (RP) Treynor ratio: The Treynor measure of portfolio performance relates the excess return on a portfolio to the portfolio beta (systemic risk). RP - RF Treynor = P Tools used for presentation: Tables Chart for CML: capital market line depicts the risk-return relationship for efficient portfolios.
2

15

Charts for SML: security market line depicts the risk-return relationship for individual securities. Procedure for selection of companies: The 30 companies have been selected from repeatedly invested companies in power, oil & gas, steel and cement sectors in Nellai capital market services for the past two years. Company selection procedure for portfolios: From the alphabetically arranged 30 companies, 10 companies are randomly selected through lottery method. Lottery method: In which individual units are picked from the whole group.

16

CHAPTER -4 DATA ANALYSIS AND INTERPRETATION

Capital asset pricing model (CAPM) Elements of the model: I) II) Capital market line (CML) Security market line(SML) To apply the CAPM estimates of the following factors those determine the CAPM line Risk-free rate Market risk premium ( ERM- RF) Beta

17

RISK- FREE RATE OF RETURN The return on a zero-beta is the best estimate of the risk-free rate. The average return from different banks on two year term deposit has been taken as a risk free return. x Mean = n Table 4.1.1 Interest rate in different banks on 730 days Term deposits S. no 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 Name of the Banks ABN Amro Allahabad Bank Andhra Bank AXIS Bank Bank of Baroda Bank of India Bank of Maharashtra Bank of Rajasthan Barclays Canara Bank Catholic Syrian Bank Central Bank of India Centurion Bank of Punjab Citi Bank Corporation Bank Dena Bank Deutsche Bank Development Credit Bank Ltd. Dhanalakshmi Bank Federal Bank HDFC Bank HSBC Bank ICICI Bank IDBI Bank Indian Bank Indian Overseas Bank IndusInd Bank ING Vysya Bank Jammu & Kashmir Bank Karnataka bank Karur Vysya Bank Kotak Oriental Bank of Commerce Punjab National Bank
18

Interest rate per annual 5.75 6 6 6.5 6.5 6 5.75 6.5 6.25 6.25 7.25 5.5 6 6.25 5.5 6.5 4.5 7.25 7.25 7.25 6 4.75 6.25 6.5 6 6 7 5.25 6.75 8 7.75 5.75 6 6.5

35 36 37 38 39 40 41 42 43 44 45 46 47 48

South Indian Bank Standard Chartered Bank State Bank of Bikaner and Jaipur State Bank of Hyderabad State Bank of India State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank of Travancore Syndicate Bank UCO bank Union Bank of India Vijaya Bank YES Bank Mean Risk-free return = 6.385 Risk- free returns for one month = 0.53%

7.75 7.5 7.5 7.5 6 7.5 7.25 5.75 5.75 6.25 6.5 5 6.5 6.5

Interpretation: From the above table it shows that without any risk (beta = 0) the investor can earn 0.53 % per month.

Capital Market Line (CML) The relationship between risk and return is depicted by the straight line R f. the equation for this line, called the capital market line (CML), is: E (Rj) = RF+ j Where E (Rj)= expected return on portfolio j RF = risk-free rate j = slope of the capital market line = standard deviation of portfolio j

Given that the market portfolio has an expected return of E (R m) and standard deviation of m, the slope of the CML can be obtained as follows: E (Rm) Rf = m Market Value: From the daily S&P CNX NIFTY value Monthly average value calculated. Market Return:
19

Ending value Beginning value Return on S&P CNX NIFTY = Beginning value Estimation of Expected Market Return: The expected market return can be calculated by P (A) Probability = N Expected market return = Return x Probability Standard deviation: x 100

20

Table 4.2.1 calculation of standard deviation and expected return for the market portfolio Month 2008- Jan 2008-Feb 2008-Mar 2008-Apr 2008-May 2008-Jun 2008-Jul 2008-Aug 2008-Sep 2008-Oct 2008-Nov 2008-Dec 2009-Jan 2009-Feb 2009-Mar 2009-Apr 2009-May 2009-Jun 2009-Jul 2009-Aug 2009-Sep 2009-Oct 2009-Nov Monthly S&P CNX NIFTY value 5756.354348 5201.569048 4769.497222 4651.905 5028.6625 4463.788095 4124.604348 4417.1175 4206.685714 3210.2225 2834.787222 2895.797619 2854.3625 2804.328846 2802.2725 3359.829412 3957.9625 4436.386364 4343.097826 4571.109524 4814.0875 4994.1075 4953.5375 -9.64 -8.31 -2.47 8.1 -11.2 -7.6 7.1 -4.8 -23.7 -11.7 2.15 -1.4 -1.8 -0.07 19.9 17.8 12.09 -2.1 5.25 5.32 3.74 -0.81 4.02 0.043478 0.043478 0.043478 0.043478 0.043478 0.043478 0.043478 0.043478 0.043478 0.043478 0.043478 0.043478 0.043478 0.043478 0.043478 0.043478 0.043478 0.043478 0.043478 0.043478 0.043478 0.043478 0.043478 -0.41913 -0.3613 -0.10739 0.352174 -0.48696 -0.33043 0.308696 -0.2087 -1.03043 -0.5087 0.093478 -0.06087 -0.07826 -0.00304 0.865217 0.773913 0.525652 -0.0913 0.228261 0.231304 0.162609 -0.03522 0.174783 92.82066 68.96219 6.07301 65.7016 125.3134 57.67412 50.49029 22.98577 561.4221 136.7578 4.646836 1.944206 3.219684 0.004141 396.235 317.0412 146.3048 4.386293 27.62188 28.36257 14.02991 0.646975 16.20588 Monthly Return on S&P CNX NIFTY % (x) Probability Return x probability

( x - x)2

2009-Dec 5152.868182 Mean market return = (- 0.00565) E (RM) = (- 0.00565) %

Standard deviation for market return = 9.833 Interpretation: The above table shows that, at market portfolio total risk 9.833, the market expected rate of return for one month is -0.00565 percent. The market portfolio would give return less than risk-free rate, this shows that the CML will move to negative direction. Table 4.3.1.a Selected securities for individual portfolio-1
21

The securities for individual portfolio -1 randomly selected through lottery method Individual portfolio -1 S. no 1 2 3 4 5 6 7 8 9 10 Securities Chettinad Cement Corporation Ltd Bharat Petroleum Corporation. Ltd Power Finance Corporation Hindustan Petroleum Corporation Ltd. Mangalam Cement Ltd Jindal Steel & Power Ltd. NCL Industries Limited Electro Steel Castings Ltd Jaiprakash Hydro-Power Limited Visa Steel Limited Cov (RA, RM) i = 2m (RA RA) (RM-RM) Cov (RA, RM) = n-1

(RM RM) 2 m
2

= n- 1

Expected return E (R1) =

RF + 1

Table 4.3.1.b Calculation of standard deviation, beta and expected return for individual portfolio-1 Calculation of monthly portfolio value (Annexure- 1) Month Jan -08 Feb-08 Mar-08 Monthly value of portfolio 1 12296.67 4036.178 3630.209 Return % -67.18 -10.05 Market return -9.64 -8.31
22

( x1- x1)

(RM-RM) -9.63 -8.3

(R2-R2) (RM - RM) 613.4363 54.63178

(RM - RM) 92.7369 68.89

4057.76 43.32459

Apr-08 3692.7 1.72 May-08 3898.253 5.566 Jun-08 3436.935 -11.834 Jul-08 3205.396 -6.73 Aug-08 3420.543 6.712 Sep-08 2997.11 -12.38 Oct-08 2099.838 -29.94 Nov-08 1933.321 -7.929 Dec-08 2138.955 10.64 Jan-09 2229.025 4.21 Feb-09 2447.303 9.79 Mar-09 2430.503 -0.686 Apr-09 2872.092 18.168 May-09 3391.069 18.07 Jun-09 4064.142 19.84 Jul-09 4406.992 8.43 Aug-09 4841.751 9.87 Sep-09 3774.228 -22.05 Oct-09 2526.18 -33.0676 Nov-09 2523.398 -0.11015 Dec 09 2750.173 8.986923 Mean return = - 3.48 Beta for portfolio-1= 1.218 = (-0.028)

27.01451 81.76841 69.85344 10.63211 103.7986 79.26343 700.2269 19.83671 199.16 59.09101 176.0574 7.7821 468.4944 464.2203 544.0338 141.8978 177.9911 344.9251 875.6579 11.32977 155.3274

-2.47 8.1 -11.2 -7.6 7.1 -4.8 -23.7 -11.7 2.15 -1.4 -1.8 -0.07 19.9 17.8 12.09 -2.1 5.25 5.32 3.74 -0.81 4.02

-2.46 8.11 -11.19 -7.59 7.11 -4.79 -23.69 -11.69 2.16 -1.39 -1.79 -0.06 19.91 17.81 12.1 -2.09 5.26 5.33 3.75 -0.8 4.03

-12.786 73.33539 93.5242 24.74865 72.43781 42.64538 626.8801 52.06542 30.48279 -10.685 -23.7509 -0.16738 430.9466 383.7302 282.2268 -24.8963 70.1754 -98.9896 -110.968 -2.69278 50.22606

6.0516 65.7721 125.22 57.6081 50.5521 22.9441 561.22 136.66 4.667 1.932 3.204 0.0036 396.408 317.196 146.41 4.3681 27.6676 28.4089 14.0625 0.64 16.2409

Standard deviation of portfolio -1 = 20.02

Expected return E (R1) = (- 0.03056) % Interpretation: When compare with market portfoilo, total risk of Individual portfolio-1 increased to 20.02, the expected rate of return decreased to 0.03056 percent. This shows that there is a negative relationship exists between risk and return. The beta 1.218 indicates that returns on portfolio-1 would change by 1.218 percent with 1 percent change in the returns on market portfolio (represented by S&P CNX NIFTY). Table 4.3.2.a Selected securities for individual portfolio-2 Individual portfolio -2 S. no 1 2 3 4 5 Securities Bil Power Limited Acc Ltd Bharat petroleum corporation. Ltd Gujarat State Petronet Limited Tata Steel Limited
23

6 7 8 9 10

Oil & Natural Gas Corpn Ltd Jsw Steel Limited Msp Steel & Power Limited Visa Steel Limited Bhushan Steel Limited Cov (RA, RM) i = 2m (RA RA) (RM-RM)

Cov (RA, RM)

= n-1

(RM RM) 2 2m = n- 1 Expected return E (R1) = RF + 1

24

Table 4.3.2.b Calculation of standard deviation, beta and expected return for individual portfolio-2 Monthly value of Return Month portfolio % 2 Jan -08 6,345.16 Feb-08 5,548.33 -12.56 Mar-08 4,957.16 -10.65 Apr-08 4,874.06 -1.676 May-08 5,084.40 4.315 Jun-08 4,783.77 -5.912 Jul-08 4,297.21 -10.17 Aug-08 4,559.75 6.109 Sep-08 4,216.66 -7.524 Oct-08 3,023.22 -28.30 Nov-08 2,659.52 -12.03 Dec-08 2,429.61 -8.645 Jan-09 2,436.69 0.292 Feb-09 2,490.57 2.21 Mar-09 2,490.93 0.0141 Apr-09 3,037.80 21.95 May-09 3,624.10 19.30 Jun-09 4,342.72 19.83 Jul-09 4,250.34 -2.127 Aug-09 4,887.90 15.00 Sep-09 5,349.61 9.446 Oct-09 5,740.44 7.306 Nov-09 5,479.48 -4.55 Dec-09 5,905.46 7.77 Mean return = 0.408829 Market return -9.64 -8.31 -2.47 8.1 -11.2 -7.6 7.1 -4.8 -23.7 -11.7 2.15 -1.4 -1.8 -0.07 19.9 17.8 12.09 -2.1 5.25 5.32 3.74 -0.81 4.02 (R2-R2) (RM- RM) 124.87 91.83 5.129 31.68 70.74 80.30 40.53 37.99 680.18 145.41 -19.56 0.163 -3.23 0.024 428.98 336.45 234.98 5.301 76.75 48.168 25.86 3.97 29.68227

( x1- x1) 168.14 122.41 4.348 15.26 39.96 111.93 32.498 62.94 824.36 154.73 81.97 0.014 3.25 0.16 464.23 356.88 377.14 6.43 212.90 81.67 47.57 24.55 54.25

(RM-RM) -9.63 -8.3 -2.46 8.11 -11.19 -7.59 7.11 -4.79 -23.69 -11.69 2.16 -1.39 -1.79 -0.06 19.91 17.81 12.1 -2.09 5.26 5.33 3.75 -0.8 4.03

(RM-RM) 92.74 68.89 6.052 65.77 125.22 57.608 50.552 22.944 561.21 136.66 4.666 1.93 3.20 0.0036 396.41 317.2 146.41 4.3681 27.67 28.409 14.063 0.64 16.241

Standard deviation of individual portfolio-2 =12.15 Beta for individual portfolio -2 = 1.15 = (-0.028) Expected return E (R2) = 0.1898 % Interpretation: When compare with market portfolio, total risk of Individual portfolio-2 increased to 12.15, the expected rate of return increased to 0.1898 percent. This shows that individual portfolio-2 better performed than market. The beta 1.15 indicates that returns on portfolio-2 would change by 1.15 percent with 1 percent change in the returns on market portfolio (represented by S&P CNX NIFTY). Table 4.3.3.a
25

Selected securities for individual portfolio-3 Individual portfolio -3 S. no 1 2 3 4 5 6 7 8 9 10 Securities NTPC Limited Petronet Lng Limited Dalmia Cement (Bharat) Ltd Ambuja Cements Ltd Jk Cement Limited Jindal steel & power ltd. Power Grid Corporation Of India Ltd Electro steel Castings Ltd NCL Industries Limited Chettinad Cement Corporation Ltd

Cov (RA, RM) i = 2m (RA RA) (RM-RM) Cov (RA, RM) = n-1

(RM RM) 2 2m = n- 1 Expected return E (R1) = RF + 1

26

Table 4.3.3.b Calculation of standard deviation beta and expected return for individual portfolio-3 Month Jan -08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Monthly value of portfolio 3 12,253.84 3,927.04 3,489.46 3,563.60 3,789.60 3,413.97 3,157.85 3,315.71 2,836.72 1,849.26 1,642.16 1,781.19 1,835.96 2,011.39 2,066.57 2,502.42 2,980.14 3,616.50 3,896.71 4,261.57 3,146.12 1,939.20 1,928.62 2,028.50 Return % -67.95 -11.14 2.125 6.342 -9.91 -7.50 4.99 -14.45 -34.81 -11.199 8.467 3.075 9.56 2.74 21.09 19.09 21.35 7.75 9.36 -26.17 -38.36 -0.545 5.178 Market return -9.64 -8.31 -2.47 8.1 -11.2 -7.6 7.1 -4.8 -23.7 -11.7 2.15 -1.4 -1.8 -0.07 19.9 17.8 12.09 -2.1 5.25 5.32 3.74 -0.81 4.02 (R2-R2) (RM - RM) 612.12 56.067 -16.02 87.018 61.817 23.639 66.74 48.180 720.70 79.62 27.765 -10.37 -24.96 -0.428 507.27 418.14 311.47 -25.364 72.331 -116.124 -127.405 -3.07402 38.552

( x1- x1)

(RM-RM) -9.63 -8.3 -2.46 8.11 -11.19 -7.59 7.11 -4.79 -23.69 -11.69 2.16 -1.39 -1.79 -0.06 19.91 17.81 12.1 -2.09 5.26 5.33 3.75 -0.8 4.03

(RM-RM) 92.7369 68.89 6.0516 65.7721 125.2161 57.6081 50.5521 22.9441 561.2161 136.6561 4.6656 1.9321 3.2041 0.0036 396.4081 317.1961 146.41 4.3681 27.6676 28.4089 14.0625 0.64 16.2409

4040.5 45.63 42.41 115.13 30.52 9.70 88.11 101.174 925.52 46.390 165.23 55.687 194.41 50.85 649.14 551.21 662.60 147.28 189.09 474.67 1154.28 14.77 91.51

Mean return = -3.92795 Standard deviation for individual portfolio-4 =21.16 Beta for individual portfolio-3= 1.3065 = (-0.028) Expected return E (R2) = RF + 2 = (-0.06248) % Interpretation: When compare with market portfolio, total risk of Individual portfolio-3 increased to 21.16, the expected rate of return decreased to 0.06248 percent. This shows that there is a negative relationship exists between risk and return. The beta 1.3065 indicates that returns on portfolio-2 would change by 1.3065 percent with 1 percent change in the returns on market portfolio (represented by S&P CNX NIFTY). Table 4.3.4.a
27

Selected securities for individual portfolio-4 Individual portfolio -4 S. no 1 2 3 4 5 6 7 8 9 10 Securities Madras Cements Ltd Hindustan Petroleum Corporation Ltd. India Cements Ltd Jaiprakash Hydro-Power Limited Chennai Petroleum Corporation Limited Steel Authority of India Ltd Bhushan Steel Limited Mangalam Cement Ltd Power Finance Corporation Jindal Steel & Power Ltd. Cov (RA, RM) i = 2m (RA RA) (RM-RM) Cov (RA, RM) = n-1

(RM RM) 2 2m = n- 1 Expected return E (R1) = RF + 1

28

Table 4.3.4.b Calculation of standard deviation beta and expected return for individual portfolio-4 Month Jan -08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Monthly value of portfolio 4 17,513.1 8,432.20 7,493.93 7,359.17 7,310.21 6,693.37 6,310.73 6,600.94 5,829.94 2,364.12 2,213.87 2,120.73 2,044.45 2,186.60 2,238.46 2,772.13 3,505.41 4,374.32 4,631.45 5,302.02 4,575.39 3,405.18 3,332.67 3,552.38 Return % -51.85 -11.13 -1.80 -0.67 -8.44 -5.72 4.599 -11.68 -59.45 -6.36 -4.21 -3.60 6.95 2.37 23.84 26.45 24.79 5.88 14.48 -13.7 -25.58 -2.13 6.59 ( x1- x1)2 2296.72 51.83 4.536 10.64 20.341 3.199 72.70 60.096 3082.6 5.89 0.078 0.109 118.4 39.69 771.11 922.93 824.59 96.158 338.80 95.586 468.65 3.23 110.69 Market return -9.64 -8.31 -2.47 8.1 -11.2 -7.6 7.1 -4.8 -23.7 -11.7 2.15 -1.4 -1.8 -0.07 19.9 17.8 12.09 -2.1 5.25 5.32 3.74 -0.81 4.02 (RM-RM) -9.63 -8.3 -2.46 8.11 -11.19 -7.59 7.11 -4.79 -23.69 -11.69 2.16 -1.39 -1.79 -0.06 19.91 17.81 12.1 -2.09 5.26 5.33 3.75 -0.8 4.03 (R2-R2) (RM- RM) 461.51 59.75 -5.24 26.46 50.47 13.58 60.62 37.13 1315.29 28.37 -0.60 -0.46 -19.48 -0.378 552.9 541.06 347.46 -20.49 96.82 -52.11 -81.18 -1.44 42.398 (RM-RM) 92.736 68.89 6.0516 65.772 125.22 57.608 50.552 22.944 561.22 136.66 4.6656 1.9321 3.2041 0.0036 396.41 317.19 146.41 4.3681 27.668 28.409 14.06 0.64 16.24

Mean return = - 3.92795 Standard deviation of individual portfolio -4 =20.67 Beta of individual portfolio-4 = 1.607 = (-0.028) Expected return E (R2) = RF + 2 = (-0.04876) % Interpretation: When compare with market, total risk of Individual portfolio-4 increased to 20.67, the expected rate of return decreased to 0.04876 percent. This shows that there is a negative relationship exists between risk and return. The beta 1.607 indicates that returns on portfolio2 would change by 1.607 percent with 1 percent change in the returns on market portfolio (represented by S&P CNX NIFTY). Table 4.3.5.a
29

Selected securities for individual portfolio-5 Individual portfolio -5 S. no 1 2 3 4 5 6 7 8 9 10 Securities Chennai Petroleum Corporation Limited Ambuja Cements Ltd Jsw Steel Limited Gujarat State Petronet Limited Tata Steel Limited Power Grid Corporation Of India Ltd Steel Authority of India Ltd Jaiprakash Hydro-Power Limited Tata Steel Limited NCL Industries Limited

Cov (RA, RM) i = 2m (RA RA) (RM-RM) Cov (RA, RM) = n-1

(RM RM) 2 2m = n- 1 Expected return E (R1) = RF + 1

30

Table 4.3.5.b Calculation of standard deviation beta and expected return for individual portfolio-5 Month Jan -08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Monthly value of portfolio 5 3,874.92 3,651.22 3,188.59 3,138.96 3,671.05 3,440.70 2,794.59 2,790.85 2,354.83 1,420.44 1,140.44 1,164.32 1,050.85 985.44 954.24 1,309.07 1,653.30 2,136.97 2,080.30 2,348.83 2,528.68 2,710.78 2,709.23 2,945.21 Return % -5.78 -12.7 -1.5565 16.95 -6.27 -18.78 -0.134 -15.62 -39.68 -19.7 2.094 -9.75 -6.22 -3.17 37.18 26.30 29.25 -2.652 12.908 7.66 7.201 -0.057 8.710 Market return -9.64 -8.31 -2.47 8.1 -11.2 -7.6 7.1 -4.8 -23.7 -11.7 2.15 -1.4 -1.8 -0.07 19.9 17.8 12.09 -2.1 5.25 5.32 3.74 -0.81 4.02 (R2-R2) (RM - RM) 58.19337 107.4064 4.493146 135.2824 73.23556 144.577 -2.87232 76.12761 946.4044 233.5946 3.940536 13.92265 11.62522 0.206167 734.9739 463.5284 350.717 6.10672 66.47695 39.37287 25.9925 0.261778 34.01415

( x1- x1)

(RM-RM) -9.63 -8.3 -2.46 8.11 -11.19 -7.59 7.11 -4.79 -23.69 -11.69 2.16 -1.39 -1.79 -0.06 19.91 17.81 12.1 -2.09 5.26 5.33 3.75 -0.8 4.03

(RM-RM) 92.736 68.89 6.0516 65.772 125.22 57.608 50.552 22.944 561.22 136.66 4.67 1.9321 3.2041 0.0036 396.41 317.2 146.41 4.3681 27.67 28.41 14.06 0.64 16.24

36.5169 167.46 3.3360 278.253 42.83 362.84 0.1632 252.59 1595.96 399.3 3.328 100.33 42.179 11.807 1362.7 677.37 840.123 8.54 159.72 54.57 48.044 0.1071 71.24

Mean return = 0.269986 Standard deviation for individual portfolio-5 =17.214 Beta for individual portfolio- 5 = 1.64 = (-0.028) Expected return E (R5) = 0.048 % Interpretation: When compare with market, total risk of Individual portfolio-5 increased to 17.214, the expected rate of return increased to 0.048 percent. This portfolio better performed than market. The beta 1.607 indicates that returns on portfolio-2 would change by 1.607 percent with 1 percent change in the returns on market portfolio (represented by S&P CNX NIFTY). Table 4.3.6.a
31

Selected securities for individual portfolio-6 Individual portfolio -6 S. no 1 2 3 4 5 6 7 8 9 10 Securities Madras Cements Ltd Mangalam Cement Ltd Jindal steel & power ltd. India Cements Ltd Gail(India) Ltd Dalmia Cement (Bharat) Ltd NCL Industries Limited Ambuja Cements Ltd Chettinad Cement Corporation Ltd Bil Power Limited

Cov (RA, RM) i = 2m (RA RA) (RM-RM) Cov (RA, RM) = n-1

(RM RM) 2 2m = n- 1 Expected return E (R1) = RF + 1

32

Table 4.3.6.b Calculation of standard deviation beta and expected return for individual portfolio-6 Month Jan -08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Monthly value of portfolio 6 16,487.48 7,779.37 7,008.67 6,943.52 6,813.87 6,204.27 5,812.67 6,015.67 5,361.37 2,013.84 1,775.41 1,933.18 1,884.49 2,063.59 2,103.30 2,552.80 3,021.15 3,682.98 4,003.17 4,405.81 3,294.35 2,070.70 2,042.66 2,044.75 Return % -52.82 -9.907 -0.93 -1.87 -8.95 -6.32 3.49 -10.88 -62.44 -11.84 8.89 -2.519 9.503902 1.924 21.37 18.346 21.907 8.69 10.058 -25.23 -37.14 -1.35 0.102 ( x1- x1)2 2233.12 18.8925 21.4457 13.6401 11.4641 0.56445 81.9543 28.2611 3235.03 39.4301 208.712 9.25202 226.936 56.0244 725.331 571.539 754.444 203.180 243.936 386.78 997.51 17.693 32.066 Market return -9.64 -8.31 -2.47 8.1 -11.2 -7.6 7.1 -4.8 -23.7 -11.7 2.15 -1.4 -1.8 -0.07 19.9 17.8 12.09 -2.1 5.25 5.32 3.74 -0.81 4.02 (RM-RM) -9.63 -8.3 -2.46 8.11 -11.19 -7.59 7.11 -4.79 -23.69 -11.69 2.16 -1.39 -1.79 -0.06 19.91 17.81 12.1 -2.09 5.26 5.33 3.75 -0.8 4.03 (R2-R2) (RM - RM) 455.0752 36.07639 -11.3922 29.95231 37.88797 5.702369 64.36585 25.4642 1347.426 73.40553 31.20528 -4.22798 -26.9653 -0.4491 536.2157 425.7816 332.3525 -29.7911 82.15318 -104.823 -118.438 -3.36503 22.82062 (RM-RM ) 92.736 68.89 6.0516 65.772 125.2161 57.608 50.552 22.944 561.21 136.66 4.6656 1.9321 3.2041 0.0036 396.41 317.19 146.41 4.3681 27.667 28.409 14.06 0.64 16.24

Standard deviation of individual portfolio-6 =21.44 Beta = 1.49 = (-0.028) = (-0.07032) % E (R6) = RF+5 Interpretation: When compare with market, total risk of Individual portfolio-6 increased to 17.214, the expected rate of return decreased to 0.07032 percent. This portfolio better performed than market. The beta 1.49 indicates that returns on portfolio-2 would change by 1.49 percent with 1 percent change in the returns on market portfolio (represented by S&P CNX NIFTY).

33

ASSESSING PORTFOLIO PERFORMANCE USING SHARPE RATIO AND TREYNOR RATIO Performance measure: For evaluating the performance of a portfolio it is necessary to consider both risk and return. There are two techniques used to measure the portfolio performance Sharpe measure: RP - R F Sharpe ratio Treynor measure: RP - RF Treynor = P Table 4.4.1.a Consolidated table s. no 1 2 3 4 5 6 7 Particulars Market portfolio Individual portfolio -1 Individual portfolio -2 Individual portfolio -3 Individual portfolio -4 Individual portfolio -5 Individual portfolio-6 Mean -0.0056 -3.47612 0.409 -4.39 -3.93 0.27 -5.56 Standard deviation 9.833 20.02 12.15 21.16 20.67 17.214 21.44 Expected rate of return -0.00565 -0.03056 0.1898 -0.06248 -0.04876 0.048 -0.07032 Beta 1 1.218 1.15 1.3065 1.607 1.64 1.49 = SD (RP)

34

Table 4.4.1.b Assessing portfolio performance S. no 1 2 3 4 5 6 7 Interpretation: Market portfolio: Poor relative performance exists in the market portfolio. (Sharpe ratio < 0, Treynor index < 0).Both the Sharpe Ratio and the Treynor index are greater for the market than for the individual portfolio1, 3, 4 &6. These individual portfolios are underperformed the market. But portfolio 2 & 5 are better performed the market. Particulars Market portfolio Individual portfolio -1 Individual portfolio -2 Individual portfolio -3 Individual portfolio -4 Individual portfolio -5 Individual portfolio-6 Sharpe Ratio -0.05447 -0.20011 -0.00996 -0.23251 -0.21577 -0.0151 -0.28405 Treynor index -0.5356 -3.2891 -0.10522 -3.76579 -2.77536 -0.15854 -4.08725

35

Table 4.4.2.a Capital market line s. no 1 2 3 4 5 6 7 8 Particulars Market portfolio Individual portfolio -1 Individual portfolio -2 Individual portfolio -3 Individual portfolio -4 Individual portfolio -5 Individual portfolio-6 Risk-free return Standard deviation 9.833 20.02 12.15 21.16 20.67 17.214 21.44 0 Expected rate of return -0.00565 -0.03056 0.1898 -0.06248 -0.04876 0.048 -0.07032 0.53

Exhibit 4.4.2.a Capital Market Line (CML)

Inference: There is a negative relationship between risk and return of the market portfolio. The efficient portfolios are the portfolio 2 (return =0.1898) & 5 (return=0.048) because these two portfolios are nearer to the CML when compare to others.

36

Security Market Line (SML) The SML depicts the relationship between the expected rate of return and systematic risk for individual securities, because it deals with individual securities. There is a linear relationship between their expected return and their covariance with the market portfolio. This relationship, called the security market line (SML), is as follows: im i = 2m E (Ri)=Rf + E (Rm) - Rf x i In words, the SML relationship says:
Expected return on security i= risk-free return + market risk premium x Beta of security i

Beta calculation: The beta calculated from the monthly average share price (Annexure III).

37

Table 4.5.1 Estimation of expected rate of return for the securities of individual portfolio- 1 Individual portfolio -1
RF RM

s. no 1 2 3 4 5 6 7 8 9 10

Securities Chettinad Cement Corporation Ltd Bharat petroleum corporation. Ltd Power Finance Corporation Hindustan Petroleum Corporation Ltd. Mangalam Cement Ltd Jindal steel & power ltd. Ncl Industries Limited Electro steel Castings Ltd Jaiprakash Hydro-Power Limited Visa Steel Limited 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 -0.0057 -0.0057 -0.0057 0.0057 -0.0057 -0.0057 -0.0057 -0.0057 -0.0057 -0.0057

Beta 0.09 0.42 0.85 0.44 1.32 1.67 1.31 1.75 1.97 1.75

Expected return % ER =RF + (RM-RF) 0.482813 0.309794 0.084345 0.299308 -0.162076 -0.345581 -0.156833 -0.387525 -0.502871 -0.387525

Interpretation: From the above table shows that Chettinad cement corporation ltd has low risk and high expected return when compared to other securities. The Jaiprakash Hydro-Power Limited has high risk and less return. This clearly shows that the negative relationship between risk & return.

38

Table 4.5.2 Estimation of expected rate of return for the securities of individual portfolio- 2 Individual portfolio -2
RF RM

s. no 1 2 3 4 5 6 7 8 9 10

Securities Bil power Limited Acc Ltd Bharat petroleum corporation. Ltd Gujarat State Petronet Limited Tata Steel Limited Oil & Natural Gas Corporation Ltd Jsw Steel Limited Msp Steel & Power Limited Visa Steel Limited Bhushan Steel Limited 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 -0.0057 -0.0057 -0.0057 0.0057 -0.0057 -0.0057 -0.0057 -0.0057 -0.0057 -0.0057

Beta 1.06 0.73 0.42 1.22 1.87 0.79 2.26 1.6 1.75 1.42

Expected return% ER =RF + (RM-RF) -0.025758 0.147261 0.309794 -0.109646 -0.450441 0.115803 -0.654918 -0.30888 -0.387525 -0.214506

Interpretation: From the above table shows that Bharat petroleum corporation ltd has low risk and high expected return when compared to other securities. Jsw Steel Limited has high risk and less return.

39

Table 4.5.3 Estimation of expected rate of return for the securities of individual portfolio- 3 Individual portfolio -3
RF RM

s. no 1 2 3 4 5 6 7 8 9 10

Securities NTPC limited Petronet Lng Limited Dalmia Cement (Bharat) Ltd Ambuja Cements Ltd Jk Cement Limited Jindal steel & power ltd. Power Grid corporation of India ltd Electro steel castings ltd Ncl industries limited Chettinad cement corporation ltd 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 -0.0057 -0.0057 -0.0057 0.0057 -0.0057 -0.0057 -0.0057 -0.0057 -0.0057 -0.0057

Beta 0.46 1.35 1.48 0.78 1.7 1.67 0.59 1.75 1.31 0.09

Expected return% ER =RF + (RM-RF) 0.288822 -0.177805 -0.245964 0.121046 -0.36131 -0.345581 0.220663 -0.387525 -0.156833 0.482813

Interpretation: From the above table shows that Chettinad cement corporation ltd has low risk and high expected return when compared to other securities. The highest risk and lowest return present in Electro steel Castings Ltd has high risk and less return.

40

Table 4.5.4 Estimation of expected rate of return for the securities of individual portfolio- 4 Individual portfolio -4
RF s. no Securities RM Beta Expected return % ER =RF + (RM-RF)

1 2 3 4 5 6 7 8 9 10

Madras Cements Ltd Hindustan Petroleum Corporation Ltd India Cements Ltd Jaiprakash hydro-power limited Chennai Petroleum Corporation Ltd. Steel Authority of India Bhushan Steel Limited Mangalam Cement Ltd Power Finance Corporation Jindal steel & power ltd.

0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53

-0.0057 -0.0057 -0.0057 0.0057 -0.0057 -0.0057 -0.0057 -0.0057 -0.0057 -0.0057

1.74 0.44 0.93 1.97 0.09 0.119 1.42 1.32 0.85 1.67

-0.382282 0.299308 0.042401 -0.502871 0.482813 0.4676083 -0.214506 -0.162076 0.084345 -0.345581

Interpretation: From the above table shows that Chennai petroleum corporation ltd, has low risk and high expected return when compared to other securities. The high risk and low return present in Madras cement ltd.

41

Table 4.5.5 Estimation of expected rate of return for the securities of individual portfolio- 5 Individual portfolio -5 s. no 1 2 3 4 5 6 7 8 9 10
RF RM

Securities Chennai Petroleum Corporation Limited Ambuja Cements Ltd Jsw Steel Limited Gujarat State Petronet Limited Tata Steel Limited Power Grid Corporation of India Ltd Steel Authority of India Jaiprakash Hydro-Power Limited Tata Steel Limited NCL Industries Limited 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 -0.0057 -0.0057 -0.0057 0.0057 -0.0057 -0.0057 -0.0057 -0.0057 -0.0057 -0.0057

Beta 0.09 0.78 2.26 1.22 1.87 1.15 0.11 9 1.97 1.97 1.31

Expected return ER =RF + (RM-RF) 0.482813 0.121046 -0.654918 -0.109646 -0.450441 -0.072945 0.4676083 -0.502871 -0.502871 -0.156833

Interpretation: From the above table shows that Chennai petroleum corporation ltd. has low risk and high expected return when compared to other securities. Here high risk and less return present in Jsw Steel Limited.

42

Table 4.5.6 Estimation of expected rate of return for the securities of individual portfolio- 6 Individual portfolio -6 s. no 1 2 3 4 5 6 7 8 9 10 Securities Madras Cements Ltd Mangalam Cement Ltd Jindal Steel & Power Ltd. India Cements Ltd Gail (India)Ltd Dalmia Cement (Bharat) Ltd NCL Industries Limited Ambuja Cements Ltd Chettinad Cement Corporation Ltd Bilpower Limited RF 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 RM -0.0057 -0.0057 -0.0057 0.0057 -0.0057 -0.0057 -0.0057 -0.0057 -0.0057 -0.0057 Beta 1.74 1.32 1.67 0.93 0.95 1.48 1.31 0.78 0.09 1.06 Expected return ER =RF + (RM-RF) -0.382282 -0.162076 -0.345581 0.042401 0.021 -0.245964 -0.156833 0.121046 0.482813 -0.025758

Interpretation: From the above table shows that Chettinad cement corporation ltd has low risk and high expected return when compared to other securities. Here the madras cements has high risk and less return.

43

Table 4.6.1.a Security market line for cement sector S. no 1 2 3 4 5 6 7 8 9 10 11 Securities Acc Ltd Ambuja Cements Ltd Chettinad Cement Corporation Ltd Dalmia Cement (Bharat) Ltd India Cements Ltd Jk Cement Limited Madras Cements Ltd Mangalam Cement Ltd Ncl Industries Limited Market portfolio Risk-Free Return Beta 0.73 0.78 0.09 1.48 0.93 1.7 1.74 1.32 1.31 1 0 Expected return 0.147261 0.121 0.483 -0.246 0.042 -0.361 -0.382 -0.162 -1.157 -0.00565 0.53

Exhibit 4.6.1.a Security Market Line (SML) for cement sector

Inference: There is a negative relationship between risk and return for securities of cement sector. Except NCL Industries, other securities are moving with SML.

Table 4.6.1.b Security market line for Oil & gas sector S. no Securities 1 Bharat petroleum Corpn. Ltd 2 Chennai Petroleum Corporation Limited
44

Beta 0.42 1.52

Expected return 0.3098 0.48

3 4 5 6 7 8 9

Gail (India) Limited Gujarat State Petronet Limited Hindustan Petroleum Corporation Ltd. Oil & Natural Gas Corpn Ltd Petronet Lng Limited Market portfolio Risk-Free Return

0.95 1.22 0.44 0.79 1.35 1 0

0.021 -0.1096 0.299 0.116 -0.178 -0.00565 0.53

Exhibit 4.4.6.1.b Security Market Line (SML) Oil & gas sector

Inference: There is a negative relationship between risk and return for securities of oil & gas sector. Except Chennai Petroleum Corporation, other securities are moving with SML.

Table 4.6.1.c Security market line for Steel sector S. no 1 2 3 4 5 6 7 Securities Bhushan Steel Limited Electrosteel Castings Ltd Jindal Steel & Power ltd. Jsw Steel Limited MSP Steel & Power Limited Tata Steel Limited Visa Steel Limited
45

Beta 1.42 1.75 1.67 2.26 1.6 1.87 1.75

Expected return 0.2145 -0.389 -0.346 -0.655 -0.3089 -0.45 -0.39

8 9 10

Steel authority of india Market portfolio Risk-free return

0.119 1 0

0.468 -0.00565 0.53

Exhibit 4.4.6.1.c Security market line for Steel sector

Inference: There is a negative relationship between risk and return for securities of steel sector. Except Bhushan Steel, other securities are moving with SML.

Table 4.6.1.d Security market line for Power sector S. no 1 2 3 4 5 6 7 8 Securities Bilpower Limited Gujarat industries Power Co. Ltd Jaiprakash Hydro-Power Limited NTPC Limited Power Finance Corporation Power Grid Corporation of India Ltd Market portfolio Risk-free return Beta 1.06 1.41 1.97 0.46 0.85 0.59 1 0 Expected return -0.02576 -0.225 -0.503 0.289 0.084 0.221 -0.00565 0.53

Exhibit 4.6.1.d Security market line for Power sector

46

Inference: There is a negative relationship between risk and return of the individual securities of power sector. All securities are moving with SML.

47

IDENTIFICATION OF UNDER- AND OVER VALUED ASSETS The individual assets/ securities and portfolio are priced correctly; they lie exactly on the SML Alpha: The vertical distance between the fair return predicted by the SML and return actually expected by an investor is called the alpha (). Under value assets: The security which has positive alpha is mispriced and undervalued asset. Over value assets: The security which has negative alpha is mispriced and overvalued asset. Fairly priced assets: The security which has zero alpha is fairly priced asset.

48

TABLE 4.7.1 SECTOR WISE IDENTIFICATION OF UNDER-AND OVER-VALUED ASSETS Cement sector: S. no 1 2 3 4 5 6 7 8 9 Securities Acc Ltd Ambuja Cements Ltd Chettinad Cement Corporation Ltd Dalmia Cement (Bharat) Ltd India Cements Ltd Jk Cement Limited Madras Cements Ltd Mangalam Cement Ltd NCL Industries Limited Actual return 0.46 -0.74 -0.04 -3.39 -2.58 0.82 -4.4 0.66 -1.43 Expected return from SML 0.147261 0.121 0.483 -0.246 0.042 -0.361 -0.382 -0.162 -1.157 alpha 0.312739 -0.861 -0.523 -3.144 -2.622 1.181 -4.018 0.822 -0.273 Decision from alpha fairly priced over priced over priced over priced over priced under priced over priced under priced fairly priced

Interpretation: Hold NCL industries ltd & ACC ltd are fairly priced securities, so it can be hold. Buy The investor can buy under priced securities like Jk Cement Limited, Mangalam Cement Ltd. Sell The investor can sell over priced securities like Chettinad Cement Corporation Ltd, Dalmia Cement (Bharat) Ltd India Cements Ltd and Madras Cements Ltd.

49

Table 4.7.2 Sector wise identification of under-and over-valued assets Oil & gas sector S. no 1 2 3 4 5 6 7 Securities Bharat Petroleum Corporation. Ltd Chennai Petroleum Corporation Limited GAIL (India) Limited Gujarat State Petronet Limited Hindustan Petroleum Corporation Ltd. Oil & Natural Gas Corpn Ltd Petronet Lng Limited Interpretation: Hold Gail (India) Limited, Oil & Natural Gas Corporation Ltd, Petronet Lng Limited are fairly priced securities, so it can be hold. Buy The investor can buy under priced securities like Bharat Petroleum Corporation. Ltd , Gujarat State Petronet Limited, Hindustan Petroleum Corporation Ltd. Sell The investor can sell over priced securities like Chennai Petroleum Corporation Limited
Actual return

1.84 -0.71 0.19 1.51 1.24 0.5 0.27

Expecte d return from SML 0.3098 0.48 0.021 -0.1096 0.299 0.116 -0.178

alpha 1.5302 -1.19 0.169 1.6196 0.941 0.384 0.448

Decision from alpha under priced over priced fairly priced under priced under priced fairly priced fairly priced

50

Table 4.7.3 Sector wise identification of under-and over-valued assets Steel sector S. no 1 2 3 4 5 6 7 8 Securities Bhushan Steel Limited Electro Steel Castings Ltd Jindal Steel & Power Ltd. Jsw Steel Limited Msp Steel & Power Limited Tata Steel Limited Visa Steel Limited Steel Authority of India
Actual return

2.12 -0.59 -4.69 2.5 -0.89 0.64 0.26 0.69

Expected return from SML 0.2145 -0.389 -0.346 -0.655 -0.3089 -0.45 -0.39 0.468

alpha 1.9055 -0.201 -4.344 3.155 -0.5811 1.09 0.65 0.222

Decision from alpha under priced fairly priced over priced under priced over priced under priced under priced fairly priced

Interpretation: Hold Electro steel Castings Ltd and sail are fairly priced securities, so it can be hold. Buy The investor can buy under priced securities like Bhushan Steel Limited, Jsw Steel Limited, Tata Steel Limited And Visa Steel Limited. Sell The investor can sell over priced securities like Jindal Steel & Power Ltd, Msp Steel & Power Limited.

51

Table 4.7.4 Sector wise identification of under-and over-valued assets Power sector: S. no 1 2 3 4 5 6 Securities Bil Power Limited Gujarat Industries Power co. Ltd Jaiprakash Hydro-Power Limited NTPC Limited Power Finance Corporation Power Grid Corporation of India Ltd Actual return -0.79 0.58 0.73 -0.31 1.05 -0.58 Expected return alpha from SML -0.02576 -0.76424 -0.225 0.805 -0.503 1.233 0.289 -0.599 0.084 0.966 0.221 -0.801 Decision from alpha over priced under priced under priced over priced under priced over priced

Interpretation: From the above table the investor can take two decisions. Buy The investor can buy under priced securities like Gujarat Industries Power co. ltd, Jaiprakash Hydro-Power Limited and Power Finance Corporation. Sell The investor can sell over priced securities like Bil power Limited, NTPC Limited & Power Grid Corporation Of India Ltd.

52

CHAPTER -5 FINDINGS 1. From the capital market line, there is a negative relationship exists between risk and return of market portfolio. 2. Poor relative performance exists in the market portfolio. (Sharpe ratio<0, Treynor index< 0) both the Sharpe and Treynor index are greater for the market than for the individual portfolio 1, 3, 4 &6. These individual portfolios are underperformed the market. But portfolio 2 & 5 better performed the market. The portfolio 2 & 5 are efficient portfolios. 3. From the security market line, there is a negative relationship exists between risk and return of individual securities. 4. Under priced securities in Cement sector are Mangalam cements, Jk cements. 5. Under priced securities in Steel sector are Bhushan steel, Jsw steel, Tata steel, Visa steel. 6. Under priced securities in Oil & Gas sector are Bharat petroleum, Gujarat state Petronet, Hindustan petroleum. 7. Under priced securities in Power sector are Gujarat industries, Jaiprakash Hydro Power, Power Finance Corporation. 8. Over priced securities in Cement sector are Chettinad cement, Dalmia cements, India cements, Madras Cements, and Ambuja Cements. 9. Over priced securities in Steel sector are Jindal steel, Msp steel, over priced securities in Oil & Gas sector are Chennai petroleum. 10. Over priced securities in Power sector BIL power, NTPC, Power Grid Corporation. 11. Fairly priced securities in Cement sector are Acc, NCL Industries. 12. Fairly priced securities in Steel sector are Electro Steel, Steel Authority of India. 13. Fairly priced securities in Oil & gas sector are GAIL, Oil & Natural gas Corporation, Petronet Lng ltd. There is no fairly priced security present in Power sector.

53

CHAPTER -6 CONCLUSION

When seeing overall market condition the study tells that, the investors who need better return may choose the security which has below- market risk (beta) in Cement, Steel, oil &Gas and Power sectors. The investors can earn positive rate of return by efficient portfolio management.

54

BIBLIOGRAPHY Books referred: Prasanna Chandra (2006), investment analysis and portfolio management, Tata McGraw-Hill Publishing Company Limited, New Delhi, Page no-272-274,130136,244-248 Donald E. Fischer Ronald J. Jordan (2006) Security analysis and portfolio management, dorling Kindersley(india) pvt. Ltd, New Delhi Page no-649-655,77-101 Market Hirschery , John Nofsinger (2008) investment analysis and behavior, Tata McGraw-Hill Publishing Company Limited, New Delhi, Page no-122-149 M Y Khan P K Jain(2007) Financial Management, Tata McGraw-Hill Publishing Company Limited, New Delhi,Page no 3.0-3.5 Kvs. Sarma (2006), Statistics made simple, Prentice- hall of india private limited, Easten economy edition, Page no -111 Websites: www.moneycontrol.com www.bseindia.com www.nseindia.com www.sebi.gov.in www.capitalmarket.com www.trendwatch.com http://en.wikipedia.org/wiki/Primary_market http://www.investopedia.com/terms/s/shortselling.asp

55