A COMPREHENSIVE PROJECT REPORT ON

PORTFOLIO CONSTRUCTION, COMPARISION & EVALUATION

Submitted to

C K SHAH VIJAPURWALA INSTITUTE OF MANAGEMET

IN PARTIAL FULFILLMENT OF THE REQUIREMENT OF THE AWARD FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION Under

Gujarat Technological University

UNDER THE GUIDANCE OF

NIRAV MAJMUDAR Submitted by

NIKESH SHAH Enrollment No: 097050592048 VIHANG SHAH Enrollment No: 097050592058

M.B.A-SEMESTER IV

C. K. Shah Vijapurwala Institute of Management

M.B.A-PROGRAMME Affiliated to Gujarat Technological University Ahmedabad April 2011

PREFACE

The Professional training is the internal part of a MBA Program. It helps the students understand practical aspects of Business Management in a better way as a part of our MBA program at C K Shah Vijapurwala Institute of Management.

We were required to undertake a detailed study of the Portfolio Construction, Comparison & Evaluation using Sharpes single index model & CAPM (capital asset pricing model).

It helped us to apply theoretical knowledge into practical experience about constructing the different portfolio with the help of the Sharpe & CAPM model. Looking at the Indian stock Market Imperial Portfolio construction has one of the best way for diversifying the risk & getting maximum returns from the stocks.

To be a Master of Business Administration students is a matter of pride because we are in a field, which helps us to develop from a normal human being into a disciplined, and dedicated professional. One has to be a good learner to sharper knowledge in the particular field to achieve and attain the desired goals and heights. Along with general training, we have conducted a research to gain an understanding about the Capital Market and detail study on sectorial whom have highest contribution of the GDP. To find about the Portfolio construction, comparison and evaluation we used research on highest contribution of top 3 sectors in India .We had learned lot during our comprehensive project and we hope this will be helpful and useful.

ACKNOWLEDGEMENT

We have been able to prepare our report successfully and acknowledge a special thanks to all those people without whose support it was impossible for us to make the project report. It has been an enriching experience for us to undergo our Comprehensive Project which would have not been possible without the goodwill and support of the people around.

We would hereby take this opportunity to show our gratitude towards all my mentors for what we have learnt during our training. A good response, feedback and co-operation given by whole staff helped us in gaining knowledge and solving our queries.

Motivation and co-operation are the main two pillars on which the success of any project relies. So first of all we would like to thank core faculty and our project guide MR.NIRAV MAJMUDAR who made us aware about the project and motivated us to work on the guidelines of this unique, new and knowledge based project. He has guided us at each and every stage of the project. He has been enthusiastically involved in every aspects of the project. Overall we are highly indebted to him for all the knowledge, guidance and motivation that He has provided us throughout our project.

We would like to thanks our honorable Director Dr. Rajesh Khajuria who provided us the permission for the Comprehensive Project and also for guiding. We would also like to thank our faculty members and staff of the institute who co-cordially helped us about morally and provided us all the academic and other information required for this project.

DECLARATION

I Mr. VIHANG SHAH & Mr. NIKESH SHAH hereby declare that the report for Comprehensive Project entitled Portfolio Construction, Comparision &

Evaluation is a result of our own work and our indebtedness to other work
publications, references, if any, have been duly acknowledged.

PLACE: BARODA DATE: VIHANG SHAH

NIKESH SHAH

EXECUTIVE SUMMARY

Master of Business Administration student is a matter of pride because we are in a field, which helps us to develop from a normal human being into a disciplined, and dedicated professional. One has to be a good learner to sharper knowledge in the particular field to achieve and attain the desired goals and heights. Being M.B.A finance students and the interest area towered the financial Market we are taking the topic of Portfolio construction, comparison & evaluation for the research purpose. From this research we actually fulfill our purpose of how the individual investee will look towards the Financial Market and how he/she invest money in financial market.

In this topic our objective is to find out how we can make investment by taking top three GDP contribution sectors and compare the return by applying the Sharpe Single Index model & CAPM (Capital Asset Pricing Model) to beat the market return.

For finding out the return of the Portfolio we are taking the individual sector for investing the money. We are taking the top three GDP contribution sector and taking them for investment purpose to find out the return. We are taking the closing price of each security listed in each sector from 01-01-2008 to 31-122010 and match them with the closing price of the Nifty index prices. After this we are finding the year wise average return, beta, systematic risk, unsystematic risk, standard deviation, and average return of the market

After finding the inputs for the Sharpe & CAPM Model we put them in to the table and find out the proportion of the interment by Sharpe single index model and underpriced/overprice from the CAPM model. And from this conclusion we invest the one lakh rupees in each sector at the end of the year, hold them for a year and sale those at the end of the next year and find out the gain by investing into the Portfolio. And compare that portfolio with the return by both Sharpe Single Index model & CAPM model.

Completion of the comparison of the portfolio we can compare them with the Sharpe, Treynor, Jenson ratios. Form the evaluation ratios we find that the individual Portfolio is differ from different ratios and they evaluate differently. Also apart from the evaluation tool the individual portfolio will differ from the ability of the fund manager & also from the prediction ability of the Portfolio Manager.

TABLE OF CONTENT
SR. NO. 01 1.1 1.2 1.3 1.4 PARTICULARS PART 1 GENERAL INFORMATION About the Industry World Market Indian Market Growth of the industry PAGE NOS. 01 02 10 13 21

PART 2 PRIMARY STUDY 2.1 Introduction of the Study 2.1.1Literature Review 2.1.2Background of the Study 2.1.3Problem Statement 2.1.4Objectives of the Study

24

25 27 32 32

2.2

Research Methodology 2.2.1Research Design 2.2.2Source of Data 2.2.3Sampling Frame 2.2.4Population 2.2.5Stastical tool 2.2.6Stastical Technique

34 35 35 35 35 35

3 4 5 6

Data Analysis and Interpretation Results and Findings Limitations of the Study Conclusions

36 56 58 61

LIST OF TABLES

TABLE NOS. 01

PARTICULARS Financial deepening beckons in India Indias Stock Markets International Market: Comparision Sector wise GDP Contribution Closing Price of the Ganesh Housing Finance sector & Nifty Inputs of Sharpe & CAPM

PAGE NO. 19

02

20 23 37 39

03 04 05

40 06

42 07 Cut off of Sharpe portfolio of 2009 43 08 Investment through Sharpe 44 09 10 11 12 13 CAPM MODEL Selection through CAPM Model Investment through CAPM Model Comparison through CAPM Model comparison Sheet of Sharpe & CAPM Evaluation through Sharpe, Jenson & Treynor ratios 45 46 49 51 53 14

LIST OF DIAGRAMS

TABLE NOS. 01

PARTICULARS Sharpe Portfolio, 2009

PAGE NO. 47

02 03

CAPM Portfolio, 2009 Comparison of Sharpe & CAPM in 2009

50

52

04

Evaluation through Sharpe, Jenson & Treynor ratios 54

05

Comparison with Nifty Return

55

PART-I: GENERAL INFORMATION

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Part I General Information

1.1 About the Industry

An Overview of Capital Markets

The capital market is a financial market for medium and long-term capital, used by firms and the state to finance investments and other expenditures. Examples include the market for long-term loans called the bond market and the stock market, the market for equity capital.

In capital market we deal with issues like the role of the capital markets, the major capital markets in the US, the initial public offerings and the role of the venture capital in capital markets, financial innovation and markets in derivative instruments, the role of securities and the exchange commission, the role of the federal reserve system, role of the US Treasury and the regulatory requirements on the capital market.

The market where investment funds like bonds, equities and mortgages are traded is known as the capital market. The financial instruments that have short or medium term maturity periods are dealt in the money market whereas the financial instruments that have long maturity periods are dealt in the capital market.

Capital Markets is often regarded as a securities market, and the participants are divided into the capital market investors, borrowers and intermediaries. The investors, which are also known as capital providers render capital for investment purposes.

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The role of intermediaries, also called the facilitators is to ensure the balance between capital supply and demand when they conduct transactions in the cash flows of capital demand to improve information and trade execution.

In most developed countries, capital markets are stronger and more dynamic. The weakness of these markets in developing countries hinders the formation of savings and is a serious obstacle to development, forcing them to engage in international capital markets.

The contracts are carried out individually between the two parties and their obligations are generally not transferable. And there is financial intermediation, where a commercial bank acts as the intermediary between the borrower and issuer.

The short term market can be divided into three main segments: interbank money market, public debt market and the market for corporate debt.

The interbank money market (which also covers the inter-bank bond market) is an important segment of the money market, built exclusively by banks, including the issuing bank. It is a market for large volume of daily transactions and high liquidity.

Source:http://www.bukisa.com/articles/442796_capital-markets-anoverview#ixzz1KgqtH7su

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 Role of the Capital Market

The main function of the capital market is to channelize investments from the investors who have surplus funds to the investors who have deficit funds. The different types of financial instruments that are traded in the capital markets are equity instruments, credit market instruments, insurance instruments, foreign exchange instruments, hybrid instruments and derivative instruments. The money market instruments that are traded in the capital market are Treasury Bills, federal agency securities, federal funds, negotiable certificates of deposits, commercial paper, bankers' acceptance, repurchase agreements, Eurocurrency deposits, Eurocurrency loans, futures and options.

The capital market in the US is very advanced and uses very modern technologies in its operation. The capital market instruments are either traded in the Over-the Counter markets or in the exchanges. The New York Stock Exchange is the oldest and the most prominent exchange in the US capital Market.

Initial Public Offering and the role of Venture Capital in the capital market

The companies raise their long term capital through the issue of shares that are floated in the capital market in the form of Initial Public Offering. The Venture Capital is the funds that are raised in the capital market via the specialized operators. This is also a very important source of finance for the innovative companies.

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 Markets in Derivatives

The derivatives like the options, futures, credit derivatives etc are traded in the capital markets.

Emerging Capital Markets

Emerging Capital Markets are financial markets that reside in the low or middle income economies or where the ratio of investable market capitalization to GNP is low. Such parameters to classify the financial market are set by the International Finance Corporation.

The emerging capital market nations have a large population size but a very low share of the world GNP. Out of 155 of the Emerging Market Nations only 81 have equity markets. Although the world equity market has grown from below $3.0 trillion in 1980 to above $31 trillion in 1999, the emerging capital market economies have grown only by 12.5%.

As far as the equity market is concerned, the IFC has listed 7 countries which have a market capitalization below $100 million. China, Taiwan and Korea are the largest emerging equity markets. Although the size of the emerging equity market is very small, more number of domestic companies participates in these markets as compared to the equity markets of the developed countries.

Capital Market Analyst

The Capital Market Analyst is required to have extensive knowledge of finances, risk management products and financial markets. The capital market analyst should have strong analytical and presentation skill. He should also be capable of negotiating.
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The following is the list of functions by the capital market analyst.

The capital market analyst is supposed to assist his clients in the different capital market transactions and financing structures. The capital market analyst is also responsible for assessing the structures and the financial products.

The capital market analyst analyzes financing and the financial risk management proposals.

The capital market analyst negotiates the finance related agreements. The capital market analyst analyzes the financial risk management products which includes the derivatives and thereby keeps the financial market under close watch. The capital market analyst should be skilled in collecting and documenting the business requirements. The capital market analyst is also responsible for issuing the earnings estimates for companies. The earnings estimate is basically the estimate of the earnings per share. The earnings estimate has gained prominence in Wall Street.

Source: http://www.economywatch.com/market/capital-market/

The difference between capital markets and money markets .In order to understand what the differences between things are you first need to understand what each of the items is.

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What is capital market?

Basically the capital market is a type of financial market, it includes the stocks and bonds market as well. But in general the capital market is the market for securities where either companies or the government can raise long term funds. One way that the companies or the government raise these long term funds is through issuing bonds, which is where a person buys the bond for a set price and allows the government or company to borrow their money for a certain time period but they are promised a higher return for allowing them to borrow the money, the higher return is paid through interest that accrues on the money that the government or company borrows.

Another way that the companies or government can raise money in the capital market is through the stock market, most of the time you don't see the government as a part of the stock market, but it can actually happen so we need to include them. But how the stock market works is that the companies decide to sell shares of their stock, which is basically ownership in the company, to ordinary people and other companies, as a way to raise money. The people who buy the stock are usually given dividends each year, if the company has agreed to pay out dividends, so that is another possible return on their investment.

The capital market actually consists of two markets. The first market is the primary market and it is where new issues are distributed to investors, and the secondary market where existing securities are traded. Both of these markets are regulated so that fraud does not occur and in the United States the U.S. Securities and Exchange Commission is in charge of regulating the capital market.

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What is the money market?

Basically the money market is the global financial market for short-term borrowing and lending and provides short term liquid funding for the global financial system. The average amount of time that companies borrow money in a money market is about thirteen months or lower. Some of the more common types of things used in the money market are certificates of deposits, bankers' acceptance, repurchase

agreements and commercial paper to name a few.

Basically what the money market consists of is banks that borrow and lend to each other, but other types of finance companies are involved in the money market. What usually happens is the finance companies fund themselves by issuing large amounts of asset backed commercial paper that is secured by the promise of eligible assets into an asset backed commercial paper conduit. Your most common examples of these are auto loans, mortgage loans, and credit card receivables.

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What is the difference?

i) Basically the difference between the capital markets and money markets is that capital markets are for long term investments, companies are selling stocks and bonds in order to borrow money from their investors to improve their company or to purchase assets. Whereas money markets are more of a short term borrowing or lending market where banks borrow and lend between each other, as well as finance companies and everything that is borrowed is usually paid back within thirteen months.

ii) Another difference between the two markets is what is being used to do the borrowing or lending. In the capital markets the most common thing used is stocks and bonds, whereas with the money markets the most common things used are commercial paper and certificates of deposits.

Source:http://www.businessknowledgesource.com/investing/the_differenc e_between_capital_markets and money markets 024885.html

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1.2 World Market

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1.2 World Market

Global Market Economy Current Scenario

During last one-decade capital markets around the globe witnessed a series of developments in terms of its movements, volatility and capitalization. Despite the bearishness in the first half of 2003 due to war on terrorism, epidemic outbreaks, and economic

sluggishness, the markets in the advanced economies received substantial benefits in terms of rise in Gross Domestic Product (GDP). For example, in high-Income Countries, the market capitalization as a percentage of GDP was as high as 103.9%, where as in low-income countries it was at 18.3% (For India, it was 23.1% as against the worlds percentage at 90.7). A number of initiatives undertaken to attract cross border Investments through liberalized trade policies, globalised economic reforms, portfolio investments ranging from

24% to 100% of the paid-up capital with repatriation facility in certain cases were the prime factors of Asia now being in focus in the capital market. At present the Foreign Institutional Investors (FIIs) are concentrating in the emerging markets due to the fact that the rate of return on investment as well inflation rate in the emerging economies are slightly higher than the market to which they belong.

World Trade

The trade volume of the world is estimated at 3% for 2003, which is less the growth rate 3.2% for the year2002. A sharp rise in oil prices has surged the commodity prices. Consumer goods prices in the advanced countries reached around 1.8% as compared to 1.5% in 2002 whereas it is 5% in developing countries for both of the years.
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Increase in the volume of trade is one of the potential causes for development of capital market of the economy. Ongoing discussions among the member countries of the World Trade Organization (WTO) have to be taken into account for overall development and integration of global capital markets.

World stock market & Bullion Market

The sharp fall of US dollar as against the Euro, Sterling and yen have brought worries to the international investors in the US market and therefore there was lesser demand for US securities. This situation made US to start investing elsewhere in the global market. As a result the Asian countries received substantial increase in the foreign exchange reserves. The evolution of Euro currency due to the coordinate efforts of member countries set a classic example of how common currency can stabilize the economic growth. In the bullion market, Gold is now commanding at its very high in its 13 years of track record and other metals like silver and platinum are showing an upward trend.

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1.3 Indian Capital market

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1.3 Indian Capital market

Meaning of Capital Market

Capital Market may be defined as a market dealing in medium and longterm funds. It is an institutional arrangement for borrowing medium and long-term funds and which provides facilities for marketing and trading of securities. So it constitutes all long-term borrowings from banks and financial institutions, borrowings from foreign markets and raising of capital by issue various securities such as shares debentures, bonds, etc.

The market where securities are traded known as Securities market. It consists of two different segments namely primary and secondary market.

The primary market deals with new or fresh issue of securities and is, therefore, also known as new issue market;

Whereas the secondary market provides a place for purchase and sale of existing securities and is often termed as stock market or stock exchange.

1) PRIMARY MARKET The Primary Market consists of arrangements, which facilitate the procurement of long term funds by companies by making fresh issue of shares and debentures. You know that companies make fresh issue of shares and/or debentures at their formation stage and, if necessary, subsequently for the expansion of business. It is usually done through
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private placement to friends, relatives and financial institutions or by making public issue. 2) SECONDARY MARKET The secondary market known as stock market or stock exchange plays an equally important role in mobilizing long-term funds by providing the necessary liquidity to holdings in shares and debentures. It provides a place where these securities can be encased without any difficulty and delay. It is an organized market where shares, and debentures are traded regularly with high degree of transparency and security. In fact, an active secondary market facilitates the growth of primary market as the investors in the primary market are assured of a continuous market for liquidity of their holdings. The major players in the primary market are merchant bankers, mutual funds, financial institutions, and the individual investors; and in the secondary market you have all these and the stockbrokers who are members of the stock exchange who facilitate the trading.

After having a brief idea about the primary market and secondary market let see the difference between them.

DISTINCTION BETWEEN PRIMARY MARKET AND SECONDARY MARKET

The main points of distinction between the primary market and secondary market are as follows:

1. Function: While the main function of primary market is to raise longterm funds through fresh issue of securities, the main function of secondary market is to provide continuous and ready market for the existing long-term securities.

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2. Participants: While the major players in the primary market are financial institutions, mutual funds, underwriters and individual investors, the major players in secondary market are all of these and the stockbrokers who are members of the stock exchange.

3. Listing Requirement: While only those securities can be deal within the secondary market, which have been approved for the purpose (listed), there is no such requirement in case of primary market.

4. Determination of prices: In case of primary market, the prices are determined by the management with due compliance with SEBI requirement for new issue of securities. But in case of secondary market, the price of the securities is determined by forces of demand and supply of the market and keeps on fluctuating.

History of Indian Capital Markets

The history of the Indian capital markets and the stock market, in particular can be traced back to 1861 when the American Civil War began. The opening of the Suez Canal during the 1860s led to a tremendous increase in exports to the United Kingdom and United States.

Several companies were formed during this period and many banks came to the fore to handle the finances relating to these trades. With many of these registered under the British Companies Act, the Stock Exchange, Mumbai, came into existence in 1875. It was an unincorporated body of stockbrokers, which started doing business in the city under a banyan tree. Business was essentially confined to company owners and brokers, with very little interest evinced by the general public. There had been much fluctuation in the stock market on

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account of the American war and the battles in Europe. Sir Premchand Roychand remained a kingpin for many years.

Sir Phiroze Jeejeebhoy was another who dominated the stock market scene from 1946 to 1980. His word was law and he had a great deal of influence over both brokers and the government. The planning process started in India in 1951, with importance being given to the formation of institutions and markets. The Securities Contract Regulation Act 1956 became the parent regulation after the Indian Contract Act 1872, a basic law to be followed by security markets in India. To regulate the issue of share prices, the stock markets have had many turbulent times in the last 140 years of their existence. The imposition of wealth and expenditure tax in 1957 by Mr. T.T.Krishnamachari, the then finance minister, led to a huge fall in the markets. The dividend freeze and tax on bonus issues in 1958-59 also had a negative impact. War with China in 1962 was another memorably bad year, with the resultant shortages increasing prices all round. This led to a ban on forward trading in commodity markets in 1966, which was again a very bad period, together with the introduction of the Gold Control Act in 1963. The markets have witnessed several golden times too. Retail investors began participating in the stock markets in a small way with the dilution of the FERA in 1978. Multinational companies, with operations in India, were forced to reduce foreign share holding to below a certain percentage, which led to a compulsory sale of shares or issuance of fresh stock. There was no free pricing and their formula was very conservative. The next big boom and mass participation by retail investors happened in 1980, with the entry of Mr. Dhirubhai Ambani. Dhirubhai can be said to be the Father of modern capital markets. The Reliance public issue and subsequent issues on various Reliance companies generated huge interest. The general public was so unfamiliar with share certificates that Dhirubhai is rumored to have distributed them to educate people. Mr. V.P. Singhs fiscal budge t in 1984 was path breaking for it started the era of liberalization. The
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removal of estate duty and reduction of taxes led to a swell in the new issue market and there was a deluge of companies in 1985. Mr. Manmohan Singh as Finance Minister came with a reform agenda in 1991. This history shows us that retail investors are yet to play a substantial role in the market as long-term investors. Investors who hold shares in limited companies and mutual fund units are about 20-30 million. Those who participated in secondary markets are 2-3 million. Capital markets will change completely if they grow beyond the cities and stock exchange centers reach the Indian villages. Both SEBI and retail participants should be active in spreading market wisdom and empowering investors in planning their finances and understanding the markets.

Indias capital markets have experienced sweeping changes since the beginning of the last decade. Its market infrastructure has advanced while corporate governance has progressed faster than in many other emerging market economies. But in contrast to several developed countries and Asian economies, Indias capital markets are still shallow, implying that further reforms are needed to make India a world-class financial centre. At nearly 40% of GDP, the size of Indias government bond segment is comparable to many other emerging market economies.

India boasts a dynamic equity market. The sharp rise in Indias stock markets since 2003 reflects its improving macroeconomic fundamentals. However, the large size of insider holdings and the small presence of institutional investors belie these impressive figures. Innovative products such as securitized debt and fund products based on alternative assets are starting to break ground. But an enabling environment is not yet in place and there remains an overriding need to increase domestic investors knowledge regarding the merits and risks of capital market investing

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(Table-1) Financial deepening beckons in India

Improving macroeconomic fundamentals, a sizeable skilled labor force and greater integration with the world economy have increased Indias global competitiveness, placing the country on the radar screens of investors the world over. The global ratings agencies Moodys and Fitch have awarded India investment grade ratings, indicating comparatively low sovereign risks. These positive dynamics have led to a sustained surge in Indias equity markets since 2003, attracting sizeable capital from foreign investors. Net cumulative portfolio flows from 2003-2006 (Bonds and equities) amounted to USD 35 bn. Moreover, Indias stock market has outperformed world indices in recent years. And, despite its increasing correlation with world markets in recent years, India still offers diversification in global portfolios.

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(Table-2) Indias Stock Markets

The bond market is dominated by government bonds. Government bond issuances, resulting from persistently high fiscal deficits, as well as specific regulatory requirements, have underpinned the supply and demand conditions in Indias debt capital markets. Nearly 90% of total domestic bonds outstanding are government issuances (i.e. Treasury bills, notes and bonds), squeezing out corporate and other marketable debt securities. Initiatives to lift the corporate bond market from its nascent stages have been slow to progress, leaving companies unable to realize their optimum capital structure as a result. And unlike the derivative instruments that are available for equities, those for fixed income instruments (e.g. options in interest rates) in the organized exchanges have failed to take off, limiting the price discovery in the secondary markets. We believe that Indias economic transformation is irreversible.

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1.4 Growth of the Stock Market

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1.4 Growth of the Stock Market

Despite the international disturbances like Iraq war, SARS, Bird flu in Asia, terrorism threats and other natural calamities, capital market has shown steady growth in 2003. There was an increased demand for the Asian equities. The favorable liquidity conditions and macro environment factors accelerated further growth in Asian markets. Indian sensex rose to 80% outperforming all the major global indices. European markets have also shown remarkable progress. Currently factors are encouraging FIIs to think about the investment proposals in other countries. Another interesting factor in the global scenario is that the cross border capital flow is largely flowing from FIIs in the private sectors as compared to public sectors of developing economies. There are few countries in the world, which received higher turnover-ratio than India. The FIIs investment in India as on June 2003 was at US $ 17.39 billion with 509 registered FIIs. India stood 1 9th place in terms of capitalization . In terms of turnover-ratio, India ranked 7th in position. Emerging Economies: The year 2003 was the year for emerging economies. These economies undertook a number of initiatives in relation to their fiscal and economic policies, which have contributed, substantially to the stability of the world economy. The current fiscal year 2004 is a year of prospects and promises for higher economic growth and fruitful activity in the capital market. Lower exchange reserves and it has been predicted that the largest economies in 2050 would be China, India, Russia and Japan. China showed strong growth of indication with a real GDP at 8.7%. It has a market capitalization of 220 billion dollars Nearly 20 out of 25 emerging country economies stock prices rose by 25% and amongst eight countries it was more than 75%. Further, currencies of these countries appreciated against the US dollar.

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(Table-3) International Market: Comparision

Particulars USA UK Japan Germany Singa pore No.of Listed 5.685 1,701 3,058 715 434 968 1,235 5,650 Hong kong China India

Companies Market Capitalisaton ($) Market Capitalisaton Ratio (%) Turnover ($) Turnover Ratio (%) 25,371 202.5 2,721 135.4 1,573 71 1,233 140.5 56 39.3 211 43.5 333 67.6 197 165 113 126.2 47 35.4 114.7 271.9 40.9 27.4 11,052 1,864 2,126 686 102 463 463 131

Source:S&P Emerging stock Market Fact Book

The above table in general reveals that in terms of market turnover ratio, there are very few countries, which have higher turnover ratio than India. The data on the number of listed companies in India as at the end of March, 2003 is 9,413 companies, whereas data of S & P took into account only 5,650 companies. Therefore, if the entire market were taken into consideration, the performance of position of India will be prospectively better. Economies of the different countries are intensifically integrating by converging their legislations in accordance with the global economies. World is experiencing a new and ever expected fast growth with key economic factors like, low cost of transportation.

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PART: II PRIMARY STUDY

2.1 Introduction of the study

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2.1 Introduction of the study

2.1.1 Literature Review

Sharpe (1966) analyzed 34 open-end mutual funds over period from 1954-63. His major finding is that the capital market is highly efficient and that managers concentrate on evaluating risk and providing diversification rather than focusing on evaluating incorrectly priced securities. Michel Jensen (1968) in his analysis also based on 115 funds from period 1955-64 shows that on average the mutual funds net of expenses are not able to predict the security prices well enough to outperform the passive benchmark. He has also shown that there was very little evidence that any individual fund was able to perform significantly better than if a portfolio was picked at random. Treynor and Mazuy (1966) in their studies, of 57 actively managed funds in the period from 1953 to 1962, show that an investor in mutual fund is completely depended on the fluctuations in the general market. They suggest that an improvement in the rate of return of a mutual fund will be more due to managers ability to indentify underpriced industries rather than outguess the market turns. Hendrickson and Merton (1981) derive a market timing test in accordance with CAPM framework. However, there is a main difference in contrast to Jensens formulation of the model. Henriksson and Mertons parametric test permits to indentify the contribution from micro as well as macro forecasting abilities to a portfolio return using as the only data excess returns on the market as well as on the portfolio. Henriksson (1984) has also set out on his own and evaluated a performance of open-end mutual funds and found no empirical results that would support the hypothesis that mutual funds managers follow a strategy what would successfully enable them to time return on the market portfolio. Treynor in his article describes a new performance measure that can be used in the analysis of individual trusts, pension and mutual funds. His self-criticism points out however that the certain assumption has to be made - consistent investment policy of the
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investors. As it is quite dubious assumption in turn it reflects negatively on the measure.

Grinblatt and Titman (1989) assess gross returns based on a sample of mutual fund quarterly holdings from 1975 to 1984. They specify that the sample is not subject to survivorship bias and consists of data comprised of net returns. They conducted performance tests over their sample chosen and found indication that the risk-adjusted gross returns of some funds were significantly positive. Grinblatt and Titman (1992), over a sample of monthly returns for 279 funds and period from 1974 to 1984, have evaluated yet again the performance of mutual funds. They have analyzed how the mutual fund performance relates to past performance using a multiple portfolio benchmark tests. They found evidence that there are differences in the performance between mutual funds persistence over time and that this persistence is consistent with the ability of fund managers to earn abnormal returns. Further in their studies Grinblatt and Titman (1994) specify that the Jensens measure is biased if the fund and benchmark returns are not jointly normal or are nonlinear.

Source: http://pure.au.dk/portal-asb-student/files/7309/Final.pdf

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2.1.2 Background of the study

Sharpes Single Index Model

The foundation of Modern Portfolio Theory was laid by Markowitz in 1951. He began with the simple premise that since almost all investors invest in multiple securities rather than one, there must be some benefit in investing in a portfolio of securities. He measured riskiness of a portfolio through variability of returns and showed that investment in several securities reduced this risk. His work won him the Nobel Prize for Economics in 1990. Markowitzs work was extended by Sharpe in 1964, Lintner in 1965 and Mossin in 1966. Sharpe shared the Nobel Prize for Economics in 1990 with Markowitz and Miller for his contribution to the Capital Asset Pricing Model (CAPM). This model breaks up the riskiness of each security into two components - the market related risk which cannot be diversified called systematic risk measured by the beta coefficient and another component which can be eliminated through diversification called unsystematic risk. Single Index Model The Markowitz model is extremely demanding in its data needs for generating the desired efficient portfolio. It requires N(N+3)/2 estimates (N expected returns + N variances of returns + N*(N-1 )/2 unique covariances of returns). Because of this limitation the single index model with less input data requirements has emerged. The Single index model requires 3N+2 estimates (estimates of alpha for each stock, estimates of beta for each stock, estimates of variance for each stock, estimate for expected return on market index and an estimate of the variance of returns on the market index to use the Markowitz optimization framework. The single index model assumes that comovement between stocks is due to movement in the index. The basic equation underlying the single index model is:

36

Ri = ai + b*Rm
Where, Ri = Return on the stock ai = Component of security is that is independent of market performance b = Coefficient that measures expected change in Ri given a change in Rm Rm = Rate of return on market index The term ai in the above equation is usually broken down into two elements ai which is the expected value of ai and ei which is the random element of ai the single index model equation, therefore, becomes:

Ri = ai + b*Rm + ei

Single index model has been criticized because of its assumption that stock prices move together only because of common co-movement with the market. Many researchers have found that there are influences beyond the market, like industry-related factors, that cause securities to move together. Empirical evidence, however, reveal that the more complex models have not been able to consistently outperform the single index model in terms of their ability to predict ex-ante co-variances between stock returns.

37

 Capital Asset Pricing Model CAPM

What Does Capital Asset Pricing Model - CAPM Mean? A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities.

The general idea behind CAPM is that investors need to be compensated in two ways: time value of money and risk. The time value of money is represented by the risk-free (Rf) rate in the formula and compensates the investors for placing money in any investment over a period of time. The other half of the formula represents risk and calculates the amount of compensation the investor needs for taking on additional risk. This is calculated by taking a risk measure (beta) that compares the returns of the asset to the market over a period of time and to the market premium (Rm-Rf). The Capital Asset Pricing Model (CAPM) is a theory based upon the above theory of portfolio selection. The basic premise is that in capital markets people are rewarded for bearing risk. Any asset is priced in equilibrium so that if the asset is risky people receive a higher rate of return than they would receive if they held a risk free asset. This higher rate of return is called a risk premium. But the market does not reward people for bearing unnecessary risk, risk that can be avoided by diversification. The risk premium on an asset

38

is thus not related to its standalone risk, but rather to its contribution to an efficiently diversified portfolio.

39

CAPM ASSUMPTIONS
The CAPM is often criticized as being unrealistic because of the assumptions on which it is based, so it is important to be aware of these assumptions and the reasons why they are criticized. The assumptions are as follows:

Investors hold diversified portfolios

This assumption means that investors will only require a return for the systematic risk of their portfolios, since unsystematic risk has been removed and can be ignored.

Single-period transaction horizon

A standardized holding period is assumed by the CAPM in order to make comparable the returns on different securities. A return over six months, for example, cannot be compared to a return over 12 months. A holding period of one year is usually used.

Investors can borrow and lend at the risk-free rate of return

This is an assumption made by portfolio theory, from which the CAPM was developed, and provides a minimum level of return required by investors. The risk-free rate of return corresponds to the intersection of the security market line (SML) and the y-axis. The SML is a graphical representation of the CAPM formula.

40

 Perfect capital market

This assumption means that all securities are valued correctly and that their returns will plot on to the SML. A perfect capital market requires the following: that there are no taxes or transaction costs; that perfect information is freely available to all investors who, as a result, have the same expectations; that all investors are risk averse, rational and desire to maximize their own utility; and that there are a large number of buyers and sellers in the market. Overpricing/Under pricing and the SML

In the CAPM world, there is no such thing as overpricing/underpricing. Every asset is correctly priced, and is positioned on the SML. For practical realworld purposes, however, we can compare an assets given price or expected return relative to what it should be according to the CAPM, and in that context we talk about over/under pricing.

41

2.1.3 Problem Statement

Can we construct a Equity Portfolio to beat the Indian Stock Market?

2.1.4 Objective of the Study

1. To construct Portfolio using Sharpe Single index Model & Capital Asset Pricing Model.

2. To evaluate constructed portfolios using Sharpe Ratio, Treynor Ratio & Jensen Ratio.

3. To compare the portfolios derived using Sharpe Single index Model & CAPM.

42

2.2 Research Methodology

43

2.2 Research Methodology

2.2.1 Research Design
Descriptive research can be either quantitative or qualitative. It can involve collections of quantitative information that can be tabulated along a continuum in numerical form, such as scores on a test or the number of times a person chooses to use a-certain feature of a multimedia program, or it can describe categories of information such as gender or patterns of interaction when using technology in a group situation. Descriptive research involves gathering data that describe events and then organizes, tabulates, depicts, and describes the data collection (Glass & Hopkins, 1984). It often uses visual aids such as graphs and charts to aid the reader in understanding the data distribution. Because the human mind cannot extract the full import of a large mass of raw data, descriptive statistics are very important in reducing the data to manageable form. When in-depth, narrative descriptions of small numbers of cases are involved, the research uses description as a tool to organize data into patterns that emerge during analysis. Those patterns aid the mind in comprehending a qualitative study and its implications.

Descriptive studies report summary data such as measures of central tendency including the mean, median, mode, deviance from the mean, variation, percentage, and correlation between variables. Survey research commonly includes that type of measurement, but often goes beyond the descriptive statistics in order to draw inferences.

44

2.2.2 Sources of Data

We are taking the secondary data of the top GDP contribution sectors securities form the National stock exchange. We take the data of the closing price of the securities from the date 01-01-2008 to 21-4-2011. The source is mention below about the data.

http://nseindia.com/content/equities/eq_historicaldata.htm/eq_scrphistdata.ht m

2.2.3 Sampling Frame

Top3 GDP contribution Sector wise companies listed in National Stock Exchange.

2.2.4 Population
All the securities listed in stock exchange of India.

2.2.5 Statistical tool

Average Return Ri for Individual year, Beta of the Stock i.e. , Standard Deviation of Nifty for individual year ,Risk free Rate for individual year Rf, Excess Return i.e. Ri-Rf, Systematic Risk: m2
_

, Standard Deviation of

Security for individual year ,Unsystematic Risk: 2 _ 2*m2

2.2.6 Statistical technique

We are using the Microsoft Excel for calculation of the above findings.

45

3 Data Analysis & Interpretation

46

3 Data Analysis & Interpretation

Following are findings of the Percentage contribution of scripts listed in Nifty to Indias GDP.

(Table 4) Sector wise GDP Contribution

Industry Equity Capital Percentage contribution in Nifty 0.087932549 0.389519162 Contribution to India's GDP in % 2 7

ELECTRICAL EQUIPMENT CEMENT AND CEMENT PRODUCTS CEMENT AND CEMENT PRODUCTS BANKS TELECOMMUNICATION SERVICES ELECTRICAL EQUIPMENT REFINERIES OIL EXPLORATION/PRODUCTION PHARMACEUTICALS CONSTRUCTION GAS CEMENT AND CEMENT PRODUCTS COMPUTERS SOFTWARE FINANCE HOUSING BANKS

423,816,750 1,877,402,020

3,046,612,130

0.632104255

4,032,084,690 37,969,519,800

0.836567892 7.877830844

3.3 1.5

4,895,200,000 3,615,421,240 18,966,678,160

1.015645121 0.750119493 3.935163863

2 4.2 10

1,605,842,714 3,394,502,566 12,684,774,000 916,820,010

0.333176646 0.704283782 2.631808471 0.19021976

2 11 15 7

1,346,219,552 2,858,553,370 4,552,365,640

0.279310615 0.593086245 0.944514617

6 7 3.3

47

AUTOMOBILES 2 AND 3 WHEELERS ALUMINIUM DIVERSIFIED BANKS TELECOMMUNICATION SERVICES FINANCIAL INSTITUTION COMPUTERS SOFTWARE CIGARETTES STEEL AND STEEL PRODUCTS

399,375,000

0.08286143

1,913,433,052 2,181,441,805 11,137,408,530 31,000,952,090

0.3969948 0.452600655 2.310764553 6.432008039

3 5.2 3.3 1.5

12,960,901,040 2,867,676,165 3,795,325,160 930,781,836

2.689098691 0.594979022 0.787445555 0.193116529

4.94 6 1 3

Interpretation

From the above Data we are finding the sector wise contribution to Indias GDP for finding out the highest contribution of the sectors for constructing the portfolio taking top sectors for investing the money in Stock Market. After finding the Contribution we are taking top 3 sectors for constructing the Portfolio. They are:-

I. II. III.

FINANCE SECTOR POWER SECTOR CONSTRUCTION SECTOR

48

After deciding the sectors, we are taking the closing Price of Script Of Finance, Power & construction sector and comparing it with nifty Closing Prices From 01-01-2008 to 31-12-2010.

(Table 5) Closing Price of the Ganesh Housing Finance sector & Nifty Symbol Date Close Price 293.9 327.8 308.35 297.5 298.55 292.25 310.6 325.8 328.5 311.25 317.55 321 321.1 312.05 324.3 320 320 320 371.75 0.1154 -0.059 -0.035 0.0035 -0.021 0.0628 0.0489 0.0083 -0.053 0.0202 0.0109 0.0003 -0.028 0.0393 -0.013 0 0 0.1617 Daily Returns NIFTY Date 17/03/08 18/03/08 19/03/08 24/03/08 25/03/08 26/03/08 27/03/08 28/03/08 31/03/08 1/4/2008 2/4/2008 3/4/2008 4/4/2008 7/4/2008 8/4/2008 9/4/2008 10/4/2008 11/4/2008 15/04/08 4503.1 4533 4574 4609.9 4877.5 4828.9 4830.3 4942 4734.5 4739.6 4754.2 4771.6 4647 4761.2 4709.7 4747.1 4733 4777.8 4879.7 0.00664 0.00903 0.00785 0.05806 -0.01 0.00029 0.02314 -0.042 0.00107 0.00309 0.00366 -0.0261 0.02458 -0.0108 0.00794 -0.003 0.00947 0.02132 Close Daily Returns

GANESHHOUC GANESHHOUC GANESHHOUC GANESHHOUC GANESHHOUC GANESHHOUC GANESHHOUC GANESHHOUC GANESHHOUC GANESHHOUC GANESHHOUC GANESHHOUC GANESHHOUC GANESHHOUC GANESHHOUC GANESHHOUC GANESHHOUC GANESHHOUC GANESHHOUC

17-Mar-08 18-Mar-08 19-Mar-08 24-Mar-08 25-Mar-08 26-Mar-08 27-Mar-08 28-Mar-08 31-Mar-08 1-Apr-08 2-Apr-08 3-Apr-08 4-Apr-08 7-Apr-08 8-Apr-08 9-Apr-08 10-Apr-08 11-Apr-08 15-Apr-08

49

After taking the closing price of the stock we find the inputs for the Sharpe & CAPM Model. They are: Average Return Ri for Individual year Beta of the Stock i.e. Standard Deviation of Nifty for individual year Risk free Rate for individual year Rf Excess Return i.e. Ri-Rf Systematic Risk: m2 _ Standard Deviation of Security for individual year Unsystematic Risk: 2 _ 2*m2

(Table 6) Inputs of Sharpe & CAPM

Inputs Return Beta Std Deviation Risk Free Rate Excess Return Systematic Risk Std. Dev of Security Unsystematic Risk 2008 -0.007776705 0.682456951 0.027544601 0.000164384 -0.007941089 0.000353365 0.048151029 0.001965157 2009 0.00443137 0.60578012 0.02186029 0.00019178 0.00423959 0.00017536 0.04309 0.00168138 2010 0.002199841 1.284266789 0.01023431 0.000205479 0.001994362 0.000172754 0.033280987 0.00093487

50

We are taking 25 scripts of Finance, 14scripts of Power & 9 Scripts of Construction. The lists of them are as under, we done the same interpretation as mention above foe all 48 Scripts.

Symbol Symbol power

NTPC SURANATELE POWERGRID PTC GVKPIL TATAPOWER TORNTPOWER BILPOWER JINDALSTEL HONDAPOWER
LICHSGFIN

Finance
SRTRANSFIN SHIVTEX TFL SHRIRAMCIT GRUH MOTOGENFIN SUNDARMFIN BAJAUTOFIN GANESHHOUC LLOYDFIN

APIL
TCIFINANCE

INDLMETER
GICHSGFIN

MSPL
CHOLADBS

HBLPOWER
PFC

GPIL BILPOWER KALPATPOWR

DEWANHOUS SREINTFIN VIDEOIND TFCILTD

51

IFCI IDFC VLSFINANCE KOTAKBANK HDFC MAGMA

Symbol construction
HCC CANDC ACE ITDCEM ANSALHSG PETRONENGG MAYTASINFR CCCL ERAINFRA

After Finding the input for Sharpe we them into table to find out the cut-off Price for taking the scripts into the Portfolio.

52

Symbol

Mean Ri

Risk Free Rate Rf 0.0002 0.0002 0.0002 0.0002 0.0002 0.0002 0.0002 0.0002 0.0002 0.0002 0.0002 0.0002 0.0002 0.0002 0.0002 0.0002 0.0002 0.0002

Excess Return Ri-Rf

Beta

Unsystematic( Risk std square*Beta square)

Systematic Risk

Excess Return to beta

RiRf*Bi/unsys.

cumulative

Bi2/unsys

cumu

Ci

LLOYDFIN LICHSGFIN PFC SHRIRAMCIT MOTOGENFIN HDFC KOTAKBANK DEWANHOUS IFCI IDFC TFCILTD VIDEOIND VLSFINANCE MAGMA GICHSGFIN GRUH TCIFINANCE TFL

-0.003 0.00055 0.00033 0.00016 -8E-05 -0.0012 -0.0015 -0.0009 -0.0023 -0.0023 -0.0015 -0.0033 -0.0023 -0.002 -0.0019 -0.0019 -0.0037 -0.0035

-0.0032 0.00038 0.00016 -8E-06 -0.0002 -0.0013 -0.0016 -0.0011 -0.0025 -0.0024 -0.0016 -0.0035 -0.0025 -0.0022 -0.0021 -0.0021 -0.0039 -0.0036

-0.003 1.183 0.842 0.257 0.737 1.286 1.328 0.818 1.503 1.466 0.64 1.113 0.777 0.625 0.449 0.405 0.607 0.557

0.002677 0.001112 0.000728 0.000372 0.002317 0.000676 0.001078 0.0015 0.001378 0.001374 0.00103 0.001232 0.001305 0.002129 0.000529 0.00122 0.002109 0.00253

0.000378 0.001063 0.000538 5.14E-05 0.000416 0.001254 0.001338 0.000508 0.001714 0.001631 0.000311 0.00094 0.000463 0.000307 0.000153 0.000133 0.00022 0.00024

1.05501 0.00033 0.00019 -3E-05 -0.00033 -0.00102 -0.00123 -0.0013 -0.00164 -0.00165 -0.00256 -0.00313 -0.0032 -0.00344 -0.0046 -0.00512 -0.00641 -0.00653

0.00352 0.409635 0.188549 -0.00533 -0.07684 -2.50667 -2.00521 -0.58019 -2.69671 -2.57656 -1.01844 -3.14312 -1.47816 -0.63134 -1.75059 -0.68848 -1.11918 -0.79972

0.0035 0.4132 0.6017 0.5964 0.5195 -1.987 -3.992 -4.573 -7.269 -9.846 -10.86 -14.01 -15.49 -16.12 -17.87 -18.56 -19.68 -20.47

0.003336 1259.241 973.4317 177.3287 234.1475 2446.125 1636.055 446.4477 1639.903 1564.073 398.2533 1005.265 462.4298 183.4581 380.6927 134.5489 174.6983 122.459

0.00334 1259.24 2232.68 2410 2644.15 5090.28 6726.33 7172.78 8812.68 10376.8 10775 11780.3 12242.7 12426.2 12806.9 12941.4 13116.1 13238.6

0.0035 0.2101 0.2217 0.2093 0.1715 -0.405 -0.6478 -0.7029 -0.9362 -1.0983 -1.1719 -1.3949 -1.4894 -1.5294 -1.6498 -1.6972 -1.7778 -1.8344

53

SREINTFIN SRTRANSFIN CHOLADBS

-0.0054 -0.0022 -0.0061

0.0002 0.0002 0.0002

-0.0055 -0.0024 -0.0062

0.811 0.348 0.627

0.001672 0.00057 0.001656

0.000499 9.2E-05 0.000302

-0.00684 -0.00692 -0.00996

-2.69052 -1.47006 -2.36672

-23.17 -24.64 -27

393.4011 212.4927 237.5629

13632 13844.5 14082

-2.0208 -2.1189 -2.2866

(Table 7) Cut off of Sharpe portfolio of 2009

54

Interpretation

1.

From the Above table we interpret the steps for finding out the stocks included in the optimal portfolio are given below.

2.

Find out the Excess return to beta ratio for each stock under construction.

3.

Rank them from highest to the Lowest.

4. rank order.

Proceed to calculate Ci for all the stocks according to the

5.

The cumulated values of Ci start deciding after a particular Ci and that is taken as the cutoff point and that stock is the cut off ratio

(Table 8) Investment through Sharpe

Symbol Mean Ri Risk Free Rate Rf Excess Return Ri-Rf Beta Unsystematic( Risk std square*Beta square) 0.0026766 0.0011123 0.0007281 Systematic Risk Excess Return to beta

LLOYDFIN LICHSGFIN PFC

-0.002988 0.0005494 0.0003274

0.000164 0.000164 0.000164

-0.003153 0.000385 0.000163

-0.00299 1.183485 0.841859

0.0003778 0.0010627 0.0005377

1.0550083 0.0003253 0.0001937

RiRf*Bi/unsys. 0.00352 0.4096352 0.1885493

Cumu

Bi2/unsys

cumu

Ci

C*

Zi

total

Prop

0.00352 0.413155 0.601704

0.003336 1259.241 973.4317

0.003336 1259.245 2232.676

0.00352 0.210092 0.221727

0.22173 0.22173 0.22173

-0.9303 -235.57 -256.16

-492.661 -492.661 -492.661

0.001888 0.478167 0.519945

55

Interpretation
The eights Colum is the expected excess return on particular stock based on the expected performance of optimum port folio. The eights column is the expected excess return on individual stock. Thus we believe that a particular stock will perform better than the expected return based on its relationship to optimal portfolio. We would add the stock to the Portfolio.

After determining the securities tube selected, we should find out how much should be invested in each security. After doing above calculation we calculate the CAPM model for taking the security into the Portfolio.

(Table 9) CAPM MODEL

Symbol Mean Ri Beta Rm Risk Free Rate Rf 0.0002 0.0002 0.0002 0.0002 Rm-Rf Rf/Bi (Rm-Rf) Estimated Under prised/Over prised

LLOYDFIN LICHSGFIN PFC SHRIRAMCIT

-0.003 0.00055 0.00033 0.00016

0.7 1.18 0.84 0.26

-0.002 -0.002 -0.002 -0.002

-0.002 -0.002 -0.002 -0.002

-0.002 -0.003 -0.002 -6.00E04 -0.002 -0.003 -0.003 -0.002 -0.003 -0.003 -0.001 -0.002 -0.002

-0.001 -0.002 -0.002 -4.00E-04

Overpriced Underpriced Underpriced Underpriced

MOTOGENFIN HDFC KOTAKBANK DEWANHOUS IFCI IDFC TFCILTD VIDEOIND VLSFINANCE

-8.00E-05 -0.0012 -0.0015 -0.0009 -0.0023 -0.0023 -0.0015 -0.0033 -0.0023

0.74 1.29 1.33 0.82 1.5 1.47 0.64 1.11 0.78

-0.002 -0.002 -0.002 -0.002 -0.002 -0.002 -0.002 -0.002 -0.002

0.0002 0.0002 0.0002 0.0002 0.0002 0.0002 0.0002 0.0002 0.0002

-0.002 -0.002 -0.002 -0.002 -0.002 -0.002 -0.002 -0.002 -0.002

-0.001 -0.003 -0.003 -0.002 -0.003 -0.003 -0.001 -0.002 -0.002

Underpriced Underpriced Underpriced Underpriced Underpriced Underpriced Overpriced Overpriced Overpriced

56

MAGMA GICHSGFIN GRUH

-0.002 -0.0019 -0.0019

0.62 0.45 0.41

-0.002 -0.002 -0.002

0.0002 0.0002 0.0002

-0.002 -0.002 -0.002

-0.001 -0.001 -9.00E04 -0.001 -0.001

-0.001 -8.00E-04 -7.00E-04

Overpriced Overpriced Overpriced

TCIFINANCE TFL

-0.0037 -0.0035

0.61 0.56

-0.002 -0.002

0.0002 0.0002

-0.002 -0.002

-0.001 -0.001

Overpriced Overpriced

CAPM model suggests that whether the stock is overpriced or overpriced, by comparing between expected and actual return of the respective stock. If the expected return of security calculated according to CAPM is lower than the actual or estimated return offered by the security, the security will be considered to be underpriced. On the contrary, security will be considered to be overprized when the expected return o the security according to CAPM formulation is higher than the actual return offered by the security.

(Table 10) Selection through CAPM Model

Symbol

Mean Ri

Beta

Rm

Risk Free Rate Rf

Rm-Rf

Rf+Bi (Rm-Rf)

Estimated

Underpriced/ Overpriced

LICHSGFIN

0.00055

1.18349

-0.00206

0.000164384

-0.00222

-0.00263

-0.00247

Underpriced

PFC

0.00033

0.84186

-0.00206

0.000164384

-0.00222

-0.00187

-0.00171

Underpriced

SHRIRAMCIT

0.00016

0.25683

-0.00206

0.000164384

-0.00222

-0.00057

-0.00041

Underpriced

MOTOGENFIN

-8E-05

0.73653

-0.00206

0.000164384

-0.00222

-0.00164

-0.00147

Underpriced

HDFC

-0.0012

1.28575

-0.00206

0.000164384

-0.00222

-0.00286

-0.0027

Underpriced

57

KOTAKBANK

-0.0015

1.32803

-0.00206

0.000164384

-0.00222

-0.00295

-0.00279

Underpriced

DEWANHOUS

-0.0009

0.81842

-0.0020

0.000164384

-0.00222

-0.00182

-0.00166

Underpriced

IFCI

-0.0023

1.50308

-0.0020

0.000164384

-0.00222

-0.00334

-0.00318

Underpriced

IDFC

-0.0023

1.46617

-0.00206

0.000164384

-0.00222

-0.00326

-0.0031

Underpriced

On the Basis of Sharpe Model: After deciding the Portfolio scripts we make the year wise portfolio taking the closing price of year 2008 and invest 1Lakh Rs. & then we are selling those scripts at the end of the year 2009. This means that we make investment at the end of the year hold that securities for 1year and find out the returns at the end of year.

(Table 11) Investment through CAPM Model

Symbol Mean Ri Rf Ri-Rf Beta Un sys Sys. Excess Return to beta LLOYDFIN LICHSGFIN PFC NTPC -0.003 0.0005 0.0003 0.0002 0.0002 0.0002 0.0002 0.0002 -0.003 0.0004 0.0002 5.00E-05 0.7 1.183 0.842 0.843 0.0027 0.0011 0.0007 0.0003 0.0004 0.0011 0.0005 0.0005 -0.00451 0.00033 0.00019 0.000057

Ri-

cumulative Bi2/unsys cumu

Ci

C*

58

Rf*Bi/unsys -0.82417 0.40964 0.18855 0.13707 -0.8242 -0.4145 -0.226 0.1371 182.911 182.91 1259.24 1442.2 973.432 2415.6 2388.77 2388.8 -0.72 -0.2 -0.08 0.048 0.222 0.222 0.222 0.048

Zi

total

Prop

Buy Amt

Buy Price 1.25 231 133 181

Units

Sale Price 2.5

Sale Amt Returns

-59.1 -236 -256 -135

-492.7 -492.7 -492.7 -135

0.12 0.48 0.52

12004 47817 51994

9603 207 391 554

24009

1 2.483 0.964 0.305

803 2.00E+05 261 1.00E+05 236 1.00E+05

1 1.00E+05

Interpretation
From the above table we make the investment of 1Lakh Rs on the basis of

proportion investing in each sector with the closing price of 2008 and hold them for the year 2009, at the end of the year 2009 we sale them and earn some profit.

(Diagram 1) Sharpe Portfolio, 2009

59

Interpretation
After determine the securities to be selected we should find out how much should invested in each security. The percentage of return on investment is interpret from the above diagram that we should get 100% return in Lloyd finance ,248% return in LIC housing finance , 96% return in PFC and 30% return in NTPC.we also interpret that there is no negative return in the year 2009.

On the Basis of CAPM Model After deciding the Portfolio scripts we make the year wise portfolio taking the closing price of each year to invest 1Lakh Rs. & then we are selling those scripts at the end of the next year this means that we had make and investment at the end of the year hold that securities for 1year and find out the returns at the end of each year.

60

61

(Table 12) Comparison through CAPM Model

Symbol Mean Ri Beta Rm Risk Free Rate Rf 0.00016 0.00016 0.00016 0.00016 0.00016 0.00016 0.00016 0.00016 0.00016 RmRf Rf+Bi(RmRf) Estimated Remarks Buy Amt cl price units cl price Sale Amt Returns

LICHSGFIN PFC SHRIRAMCIT MOTOGENFIN HDFC KOTAKBANK DEWANHOUS IFCI IDFC

0.000549 0.000327 0.000157 -7.7E-05 -0.00115 -0.00146 -0.0009 -0.00231 -0.00225

1.1835 0.8419 0.2568 0.7365 1.2857 1.328 0.8184 1.5031 1.4662

-0.0021 -0.0021 -0.0021 -0.0021 -0.0021 -0.0021 -0.0021 -0.0021 -0.0021

-0.002 -0.002 -0.002 -0.002 -0.002 -0.002 -0.002 -0.002 -0.002

-0.0026 -0.0019 -0.0006 -0.0016 -0.0029 -0.003 -0.0018 -0.0033 -0.0033

-0.002 -0.002 -4E-04 -0.001 -0.003 -0.003 -0.002 -0.003 -0.003

Underpriced Underpriced Underpriced Underpriced Underpriced Underpriced Underpriced Underpriced Underpriced

11111 11111 11111 11111 11111 11111 11111 11111 11111

230.5 133.1 345.6 2959 1486 357.5 86.35 21.6 66.8

48.2 83.48 32.15 3.755 7.475 31.08 128.7 514.4 166.3

803 261 393 5201 2676 807 188 54.4 154

38698 21826 12637 19529 20002 25080 24236 27984 25665

2.483 0.964 0.137 0.758 0.8 1.257 1.181 1.519 1.31

NTPC SURANATELE POWERGRID PTC GVKPIL TATAPOWER TORNTPOWER BILPOWER

0.000213 0.000103 -2.7E-05 -0.00054 -0.0014 -0.00135 -0.00131 -0.00144

0.8431 0.5382 0.8599 0.7335 1.1647 1.0372 0.8614 0.852

-0.0021 -0.0021 -0.0021 -0.0021 -0.0021 -0.0021 -0.0021 -0.0021

0.00016 0.00016 0.00016 0.00016 0.00016 0.00016 0.00016 0.00016

-0.002 -0.002 -0.002 -0.002 -0.002 -0.002 -0.002 -0.002

-0.0019 -0.0012 -0.0019 -0.0016 -0.0026 -0.0023 -0.0019 -0.0019

-0.002 -0.001 -0.002 -0.001 -0.002 -0.002 -0.002 -0.002

Underpriced Underpriced Underpriced Underpriced Underpriced Underpriced Underpriced Underpriced

14286 14286 14286 14286 14286 14286 14286 14286

180.6 22.05 83.15 68.75 22.25 749.2 74.15 111.8

79.1 647.9 171.8 207.8 642.1 19.07 192.7 127.8

236 38.6 110 113 46.5 1381 323 181

18640 24976 18924 23460 29823 26343 62171 23106

0.305 0.748 0.325 0.642 1.088 0.844 3.352 0.617

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Interpretation
From the above table we have make the investment of 1Lakh Rs on the basis of proportion investing in each sector with the closing price of 2008 and hold them for the year 2009, at the end of the year 2009 we sale them and earn some profit.

(Diagram 2) CAPM Portfolio, 2009

Interpretation
The CAPM model postulates every security is expected to earn a return commensurate with its risk as measured by the beta. CAPM establish a linear relation relationship between the expected return and systematic risk of al assets. This relation can be used to evaluate the pricing of asset in making investment. We also interpret that Torentpower Company is the best company in terms of return.

After doing above calculation we compare the Sharpe & CAPM model for taking the security into the Portfolio.

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Symbol

Amt Buy

CLOSING PRICE2008

UNITS

CLOSING PRICE2009

Sale Amt

Return

Symbol

Amt Buy

Close price

units

Close price

Sale Amt

Return

LLOYDFIN LICHSGFIN PFC NTPC

12004.4 47816.7 51994.5 100000

1.25 230.5 133.1 180.6

9603 207.4 390.6 553.7

2.5 803 261 236

24009 2E+05 1E+05 1E+05

1 2.483 0.964 0.305

LICHSGFIN PFC SHRIRAMCIT MOTOGENFIN HDFC KOTAKBANK DEWANHOUS IFCI IDFC

11111 11111 11111 11111 11111 11111 11111 11111 11111

230.5 133.1 345.55 2959.2 1486.4 357.5 86.35 21.6 66.8

48.2 83.48 32.15 3.755 7.475 31.08 128.7 514.4 166.3

802.8 261.45 393 5201.1 2675.8 806.95 188.35 54.4 154.3

38698.48 21825.69 12636.86 19529.07 20002.09 25080.03 24235.99 27983.54 25665.34

2.48286 0.96431 0.13732 0.75762 0.80019 1.2572 1.18124 1.51852 1.30988

NTPC SURANATELE POWERGRID PTC

14286 14286 14286 14286 14286

180.6 22.05 83.15 68.75 22.25

79.1 647.9 171.8 207.8 642.1

235.65 38.55 110.15 112.9 46.45

18640.25 24975.7 18924.49 23459.74 29823.43

0.30482 0.7483 0.32471 0.64218 1.08764

64

GVKPIL

TATAPOWER TORNTPOWER BILPOWER

14286 14286 14286

749.15 74.15 111.75

19.07 192.7 127.8

1381.5 322.7 180.75

26343.19 62171.27 23106.42

0.84402 3.35199 0.61745

(Table 13) comparison Sheet of Sharpe & CAPM

65

(Diagram 3) Comparison of Sharpe & CAPM in 2009

Interpretation
From the above Bar Diagram we conclude that the above three securities were same in both the model and Return will same by comparing with both model.

Now, Portfolio Evaluation using Sharpe, Treynor & Jensen Ratios.

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(Table 14) Evaluation through Sharpe, Jenson & Treynor ratios

Symbol Average Return LLOYDFIN 0.003866 0.12 0.000464 0.0382 0.0002 0.004583 0.52957 0.06357 0.0647 0.00132 0.00367 0.001946 0.00581 PROP TOTAL std Rf wi*std Beta WI*beta Sharpe Treynor Rm-Rf B*Rm-Rf Jensen

LICHSGFIN

0.005767

0.4782

0.002758

0.0356

0.0002

0.017031

0.92803

0.44376

0.09818

0.002

0.00558

0.005174

0.01094

PFC

0.003168

0.5199

0.001647

0.028

0.0002

0.014544

0.74749

0.38865

0.05241

0.00107

0.00298

0.002225

0.00539

NTPC

0.001305

0.001305

0.0206

0.0002

0.02063

0.58096

0.58096

0.01961

0.00075

0.00111

0.000647

0.00195

Total

0.056788

2.78605

1.47694

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68

(Diagram 4) Evaluation through Sharpe, Jenson & Treynor ratios

69

Interpretation
From the above bar diagram we interpret that by using the Sharpe, Treynor & Jenson ratios. Sharpes index measures the Risk premium of the portfolio relative to the total Amount of Risk in the Portfolio. This Risk Premium is the difference between the portfolios average rate of return & the riskless rate of return. The standard Deviation of the portfolio indicates the risk. Treynor index measures the funds performance in relation to the market performance. The ideal funds return rises at a faster rate than the general market performance when the Market is moving upwards and its rate of return declines slowly then the market return, in the decline. Jenson index measures the Managers predictive ability. Successful prediction of security price would enable the Manager to earn higher returns than the ordinary investor expects to earn in given level of Risk.

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Finally we are comparing the Sharpe single index model portfolio & CAPM Model Portfolio with Nifty Returns.

(Diagram 5) Comparison with Nifty Return

Interpretation
From the above Bar Diagram we interpret that the Return of Sharpe & CAPM Portfolio is higher than the nifty return. So, sectorial Investment is much better than nifty return.

71

4 Results & Findings

72

4 Results & Findings

From the above data analysis we find the certain things which discuses below.

1) We are taking the highest contribution of the GDP sector and taking them for the investment in Portfolio. 2) After selecting sectorial we take each security listed in sector and find the closing price and match it with the Nifty closing price. 3) We also find out the average return, Beta, Standard Deviation, risk free rate of return systematic risk, unsystematic risk, and average return of the market. 4) After finding the inputs for CAPM &Sharpe Model we put those values into the table & deciding the proportions i.e. C* for investing into the securities with Sharpe model & taking undervalue securities in to the portfolio. 5) Deciding the security we invested 1lakh rupees in each sector for one year and sale them at the end of the year and find out that how much return we get from those securities. 6) After measuring the return from the portfolio, we compare the returns of the sectors by comparing with both return from Sharpe single index model & CAPM model. 7) Doing the all the above matter we can evaluate those securities by the Sharpe, Treynor & Jenson ratios to find out the actual performance of the portfolio. 8) And finally after evaluation we match those returns with the nifty returns and find out that we can actually beat the market return or not by investing in different sectors.
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74

5 Limitations of the study

75

5 Limitations of the study

(1) Limitations of Sharpes Model
1). A tradeoff to simplifying Markowitzs Model is that it ignores much of the information that is contained in the covariance matrix, and hence accuracy of the optimization is sacrificed. Although this is an apparent tradeoff, Sharpe explains that his analysis would indicate that accuracy is not sacrificed to a large extent. His analysis, which he points out is not conclusive, would indicate that the Diagonal Model is still able to represent the relationships among securities well (Sharpe 292).

2). In Insignificant Betas and the Efficacy of the Sharpe Diagonal Model for Portfolio Selection, Frankfurter and Lamoureux point out that the selection algorithm of Sharpes model has the tendency to select securities with the l owest s. When a securitys is statistically indistinguishable from zero, it essentially means that the performance of the security has a very low to no relationship with the performance of the market. The issue is that the relationship between the market and each individual security is supposed to indirectly measure each securitys covariance with all the other securities in the portfolio. Thus, the question arises whether the model is still viable if it is selecting securities that have very low s and in turn have no relation to the market (Frankfurter and Lamoureux 853). To improve the performance of Sharpes model, the two of them propose a simple heuristic of excluding any stock with an insignificant from the set of stocks that would be analyzed by the model.

76

3). Markowitzs model, Sharpes Diagonal Model is a single point in time analysis. This deterministic model does not take into account uncertainty in the s over a period of time. As a result, it makes the optimization valid for one point in time. This is not very practical for investors who are interested in long term investments.

4). Sharpe was able to develop a simplified and more practical model in response to Markowitzs full covariance model. However there are still many limitations to the model that could be resolved through modifications and heuristics as shown in Frankfurter and Lamoureuxs article.

(2) Limitations of the CAPM

1).The model makes unrealistic assumptions.

2).The parameters of the model cannot be estimated precisely. Definition of a market index Firm may have changed during the 'estimation' period.

3).The model does not work well if the model is right, there should be a linear relationship between returns and betas. The only variable that should explain returns is betas.

4).The reality is that the relationship between betas and returns is weak. Other variables (size, price/book value) seem to explain differences in returns better.

77

6 Conclusions

78

6 Conclusions

1).From all the above study we conclude that we can beat the market return by investing the money into the top three GDP contribution sectors with using the Sharpe & CAPM model.

2).We find that the no of securities in CAPM model were high as compare to the Sharpe single index model. So the Sharpe model is investing the money in less no of securities as compare to CAPM model. and the risk is more diversify in CPAM rather than in Sharpe Model.

3).But the comparison of both Sharpe single index model & CAPM model we find that the some securities were same in both the model & will generate the same return.

4).So we suggest that both the model are good for measuring the risk & return of the portfolio.

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Bibliography (APA Format)

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2.

Reilly/Brown, Investments- Analysis and Portfolio Management, Cengage Learning Latest Edition.

3.

Zvi Bodied, Alex Kane, Alan J Marcus and Pitabas Mohanty, Investments Tata McGraw Hill Latest Edition.

4.

M. Rangnatham and R.

Madhumathi, Investment

Analysis and Portfolio Management Pearson Latest Edition.

5.

Fischer and Jordon, Security analysis and Portfolio Management Pearson Latest Edition.

6.

Prasanna Chandra, Investment Analysis and Portfolio Management Tata McGraw Hill Latest Edition

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