TITLE: Risk Management and Survilleance

COMPANY NAME : Angel Broking Ltd

Submitted by

Students Name: Mohd Asif Anis

Class: MBA (IB)

Enrolment no: A7002008092

Specialization: Finance

Under guidance of:

Industry Guides : Himanshu Singh Faculty Guide Prof. Anil

Sharma

Designation: Financial Advisor ABS, Lucknow

Organization: Angel Broking

(SUMMER INTERNSHIP REPORT IN PARTIAL FULFILLMENT OF THE AWARD OF FULL TIME

MASTERS IN BUSINESS ADMINISTRATION (2008-10)

AMITY BUSINESS SCHOOL

AMITY UNIVERSITY UTTAR PRADESH LUCKNOW

1| Page
 Student’s Certificate

Certified that this report is prepared based on the dissertation report

undertaken by me in Angel Broking ,under the able guidance of Mr
Anil Sharma in partial fulfillment of the requirement for award of
degree of master of business Administration from Amity University
Uttar Pradesh .

Date :30/07/09

Signature Signature
Name ; Mohd Asif Anis prof Anil Sharma
Enrollment :A7002008092 Faculty guide

Signature
Prof R.P Singh
Director A.B.S

2| Page
 Certificate of faculty Guide

This is to certify that mr Mohd Asif Anis student of MBA 3rd

semester of amity university ,Uttar Pradesh has under gone a
dissertation report under myb guidance. The report entitled “Risk
management in portfolio selection has been completed by the student
to my entire satisfaction.

Date: 30/07/09

Prof Anil Sharma

Faculty Guide

3| Page
 DECLARATION

I here by declare that this dissertation report submitted by me to

Amity Business school in my own and it has not been submitted to
any other university or published at any time before .

Mohd Asif Anis

Place :Lucknow
Date :30/07/09

4| Page
5| Page
 ACKNOWLEDGEMENT

I am highly indebted to Mr. Ejaz Mohyi, Branch Manager,

Angel Broking Ltd., Lucknow, for his invaluable time and advice given to
me from his busy schedule in completion of this project successfully.

He not only told me about various policies of Angel Broking

Ltd. but of others also, he helped me to get to the market so that I may
easily collect data and helped me peep into the working style of Angel’s
employees.

Besides each and every member of the team, were very supportive and
kind to me during the whole training period.

I am also highly thankful to my industry guides Mr. Himanshu

Singh, Equity Advisor, Angel Broking Ltd and Mr. Ali Asad, Sales, Angel
Broking Ltd for their efforts in guiding me as and when I required their
guidance.

In the end, I am thankful to my parents; friends & teachers who directly

or indirectly helped me while preparing the report.

Executive Summary
The activities of large, internationally active financial institutions have grown
increasingly complex and diverse in recent years. This increasing complexity has necessarily
been accompanied by a process of innovation in how these institutions measure and monitor

6| Page
their exposure to different kinds of risk. One set of risk management techniques that has
attracted a great deal of attention over the past several years, both among practitioners and
regulators, is "stress testing", which can be loosely defined as the examination of the
potential effects on a firm’s financial condition of a set of specified changes in risk factors,
corresponding to exceptional but plausible events.

This report represents the findings of a Working Group on Macro Stress Testing
established by the Committee on the Global Financial System. The group was asked to
investigate the current use of stress testing at large financial institutions, in line with the
Committee’s overall mandate to improve central banks’ understanding of institutional
developments relevant to global financial stability. The term "macro" in the group’s name
indicates another element of the group’s mandate, namely to explore the possibility that
aggregating financial firms’ stress test results might produce information that is of use to
central banks, other financial regulators, and private-sector practitioners.

Members of the group interviewed risk managers at more than twenty large,
internationally active financial institutions, both in their home countries and as a group at a
meeting hosted by the Banque de France. From these interviews, the group gained a
substantial base of knowledge on the current "state of the art" in the design and
implementation of risk management and on the role of stress testing in risk management
decisions at the corporate level.

Drawing on this knowledge, the group then considered some of the issues relating to
the aggregation of the results of risk management conducted at different financial firms. The
group concluded that, under ideal circumstances, aggregate stress tests could potentially
provide useful information in a number of areas. Aggregate risk management might be used
by financial firms to help make ex ante assessments of market liquidity risk under stress
when evaluating the riskiness of a trading strategy. Central banks and financial regulators
might use them to more effectively monitor broad patterns of risk-taking and risk-
intermediation in financial markets. However, the group also noted that it is as yet unclear
whether such ideal circumstances prevail. In particular, it is unclear whether an appropriate
reporting population can be assembled, whether the stress tests currently conducted by
financial firms are compatible with one another, and whether the information obtained would
justify the reporting burden.

7| Page
 This report represents practices application of risk management techniques in the
portfolio section. Risk management can be integrate by fundamental and technical method
which are used for calculation of annul return and E.P.S for the portfolio .

8| Page
 INDEX

Particular Page

Student certificate 2

Certificate of faculty Guide 3

Declaration 4

Acknowledgement 6

Executive summary 7

Chapter 1 10

THEORETICAL PRESENTATION OF THE TOPIC

Chapter 2 42

ORGANIZATIONAL PROFILE OF THE COMPANY

Chapter3 60

PRESENTATION OF DATA AND ANALYSIS

Chapter4 62

FINDINGS, CONCLUSIONS AND SUGGESTIONS

Conclusion 93

Bibliography 94

9| Page
 CHAPTER I

10 | P a g e
 RISK MANAGEMENT IN PORTFOLIO
SELECTION

Objective
WHY DO I INTEND TO TAKE UP THIS STUDY ?

1. Analyse risk factors affecting different portfolios,

2.Analyse the different portfolio preference of various income

groups,

3.Select best suited portfolio for different risk appetite clients,

4.Minimize risk exposure to the present portfolio,

5.Minimize losses at the time of extreme shock,

11 | P a g e
 INTRODUCTION
Over the past fifteen years, several investors have suffered huge losses
due to extreme events.

Barings Bank failed in 1995, Long Term Capital Management collapsed

In 1998, and Enron went bankrupt in 2001. Furthermore, the terrorist attacks in
the U.S. (2001), Spain (2004), and the U.K. (2005) and the most recent
American economy collapse causing slow down (2008-09) have tremendously
affected Indian financial markets.

Extreme market moves and distress condition throughout the world have
occurred since the beginning of organized market even so, 1998 was
distinguished by the number of spectacular market stresses. Many market
participants should have learned powerful lessons. But 1998 and in 2008 and
shows that many of us are still ill prepared.

Extreme incidences that makes the world economies to slow down also
effect the india stock

Market causing the fall in index from 20 to 60 percent some of the

extreme events that affect the Indian stock market.

12 | P a g e
 Moments of crisis often present unusual but fleeting
opportunities to profit from strategic repositioning.
The following is a comprehensive list of actions that should be considered:

• Buy protection or insurance for risks that can be immunized.

• Restructure business, client, or product mix.

• Price differently to include previously unidentified risk.

• Get out of the position, market, or business.

• Don’t change the business but systematically monitor and manage the business
through more stress

Testing, and develop contingency plans for the shocks.

• Evaluate the returns over the life cycle of the business for the total economics.

• Beware of the industry herd mentality and the resulting concentration of risks.

• Be careful of the .greater fool. Assumption.

• Prepare for liquidity and funding issues that naturally occur in stressful market
environments by increasing

Credit/counterparty lines/ limits and funding sources, and managing liability structure for
adequate short-, medium-, and long-term funding in a crisis.

In general, a capital charge is not a useful tool for dealing with the results of stress tests. One
or more of the above solutions should provide the protection more effectively.

Taken together, the above seeks to first ensure that the firm can survive the stress
events (which include the impact on capital adequacy, reported earnings, firm liquidity,
credit ratings, and customer and investor confidence). In addition, the actions aim to preserve
enough resilience in distressed market conditions and to enable the firm to take the offensive
and move quickly, because moments of crisis often present unusual but fleeting opportunities
to profit from strategic repositioning.

13 | P a g e
Risk Management

Since the occurrence of these incidents, the importance of risk management has been
extensively recognized by banks and securities firms when deciding the amount of risk they
are willing to take.

Moreover, bank regulators now put an emphasis on risk management practices in

attempting to reduce the fragility of financial and banking system.

Setting up of risk management cell is been practiced by various banks, brokerage

houses and other financial firms. Basic objective of this department was to eliminate risk
exposure to the firm and the client’s portfolio as much as possible.

In volatile financial markets, both market participants and market regulators need
models for measuring, managing and containing risks. Market participants need risk
management models to manage the risks involved in their open positions. Market regulators
on the other hand must ensure the financial integrity of the stock exchanges and the clearing
houses by appropriate margining and risk containment systems.

The successful use of risk management models is critically dependent upon estimates
of thevolatility of underlying prices. The principal difficulty is that the volatility is not
constant overtime - if it were, it could be estimated with very high accuracy by using a
sufficiently long sample of data. Thus models of time varying volatility become very
important. Practitioners and econometricians have developed a variety of different models for
this purpose. Whatever intuitive or theoretical merits any such model may have, the ultimate

14 | P a g e
test of its usability is how well it holds up against actual data. Empirical tests of risk
management models in the Indian stock market are therefore of great importance in the
context of the likely introduction of index futures trading in India.

There are several risk management models available, but the

most popular in them are :-
Value-at-Risk,

Stress Testing,

15 | P a g e
Value-at-Risk,
In financial risk management, Value at Risk (VaR) is a widely used measure of
the risk of loss on a specific portfolio of financial assets. For a given portfolio,
probability and time horizon, VaR is defined as a threshold value such that the probability
that the mark-to-market loss on the portfolio over the given time horizon exceeds this value
(assuming normal markets and no trading in the portfolio) is the given probability level.

For example, if a portfolio of stocks has a one-day 5% VaR of $1 million, there is a

5% probability that the portfolio will fall in value by more than $1 million over a one day
period, assuming markets are normal and there is no trading. Informally, a loss of $1 million
or more on this portfolio is expected on 1 day in 20. A loss which exceeds the VaR threshold
is termed a “VaR break.”

VaR has five main uses in finance: risk management, risk measurement,
financial control, financial reporting and computing regulatory capital. VaR is sometimes
used in non-financial applications as well.

Varieties of VaR

The definition of VaR is no constructive, it specifies a property VaR must have, but
not how to compute VaR. Moreover, there is wide scope for interpretation in the
definition. This has led to two broad types of VaR, one used primarily in risk
management and the other primarily for risk measurement. The distinction is not sharp,
however, and hybrid versions are typically used in financial control, financial reporting and
computing regulatory capital.

To a risk manager, VaR is a system, not a number. The system is run periodically
(usually daily) and the published number is compared to the computed price movement in
opening positions over the time horizon. There is never any subsequent adjustment to the
published VaR, and there is no distinction between VaR breaks caused by input errors
(including Information breakdowns, fraud and rogue trading), computation errors (including
failure to produce a VaR on time) and market movements.

A frequentist claim is made, that the long-term frequency of VaR breaks will equal
the specified probability, within the limits of sampling error, and that the VaR breaks will

16 | P a g e
be independent in time and independent of the level of VaR. This claim is validated by
a back test, a comparison of published VaRs to actual price movements. In this interpretation,
many different systems could produce VaRs with equally good back tests, but wide
disagreements on daily VaR values.

For risk measurement a number is needed, not a system. A Bayesian probability claim
is made, that given the information and beliefs at the time, the subjective probability of a
VaR break was the specified level. VaR is adjusted after the fact to correct errors in inputs
and computation, but not to incorporate information unavailable at the time of
computation. In this context, “backtest” has a different meaning. Rather than comparing
published VaRs to actual market movements over the period of time the system has been in
operation, VaR is retroactively computed on scrubbed data over as long a period as data are
available and deemed relevant. The same position data and pricing models are used for
computing the VaR as determining the price movements.

Although some of the sources listed here treat only one kind of VaR as legitimate,
most of the recent ones seem to agree that risk management VaR is superior for making
short-term and tactical decisions today, while risk measurement VaR should be used for
understanding the past, and making medium term and strategic decisions for the future.
When VaR is used forfinancial control or financial reporting it should incorporate elements
of both. For example, if a trading desk is held to a VaR limit, that is both a risk-management
rule for deciding what risks to allow today, and an input into the risk measurement
computation of the desk’s risk-adjusted return at the end of the reporting period.

Risk measure and Risk metric

The term “VaR” is used both for a risk measure and a risk metric. This sometimes
leads to confusion. Sources earlier than 1995 usually emphasize the risk measure, later
sources are more likely to emphasize the metric.

The VaR risk measure defines risk as mark-to-market loss on a fixed portfolio over a
fixed time horizon, assuming normal markets. There are many alternative risk measures in
finance. Instead of mark-to-market, which uses market prices to define loss, loss is often
defined as change in fundamental value. For example, if an institution holds a loan that

17 | P a g e
declines in market price because interest rates go up, but has no change in cash flows or
credit quality, some systems do not recognize a loss. Or we could try to incorporate
the economic cost of things not measured in daily financial statements, such as loss of market
confidence or employee morale, impairment of brand names or lawsuits.

Rather than assuming a fixed portfolio over a fixed time horizon, some risk measures
incorporate the effect of expected trading (such as a stop loss order) and consider the
expected holding period of positions. Finally, some risk measures adjust for the possible
effects of abnormal markets, rather than excluding them from the computation.

The VaR risk metric summarizes the distribution of possible losses by a quantile, a
point with a specified probability of greater losses. Common alternative metrics are standard
deviation, mean absolute deviation, expected shortfall and downside risk.

VaR risk management

Supporters of VaR-based risk management claim the first and possibly greatest
benefit of VaR is the improvement in systems and modeling it forces on an institution. In
1997, Philippe Jorion wrote:

The greatest benefit of VAR lies in the imposition of a structured methodology for
critically thinking about risk. Institutions that go through the process of computing their VAR
are forced to confront their exposure to financial risks and to set up a proper risk
management function. Thus the process of getting to VAR may be as important as the
number itself.

Publishing a daily number, on-time and with specified statistical properties holds
every part of a trading organization to a high objective standard. Robust backup systems and
default assumptions must be implemented. Positions that are reported, modeled or priced
incorrectly stand out, as do data feeds that are inaccurate or late and systems that are too-
frequently down. Anything that affects profit and loss that is left out of other reports will
show up either in inflated VaR or excessive VaR breaks. “A risk-taking institution that does
not compute VaR might escape disaster, but an institution that cannot compute VaR will
not.”

18 | P a g e
 The second claimed benefit of VaR is that it separates risk into two regimes. Inside
the VaR limit, conventional statistical methods are reliable. Relatively short-term and
specific data can be used for analysis. Probability estimates are meaningful, because there are
enough data to test them. In a sense, there is no true risk because you have a sum of
many independent observations with a left bound on the outcome. A casino doesn't worry
about whether red or black will come up on the next roulette spin. Risk managers encourage
productive risk-taking in this regime, because there is little true cost. People tend to worry
too much about these risks, because they happen frequently, and not enough about what
might happen on the worst days.

Outside the VaR limit, all bets are off. Risk should be analyzed with stress
testing based on long-term and broad market data.[14] Probability statements are no longer
meaningful. Knowing the distribution of losses beyond the VaR point is both impossible and
useless. The risk manager should concentrate instead on making sure good plans are in place
to limit the loss if possible, and to survive the loss if not.

One specific system uses three regimes.

1. Out to three times VaR are normal occurrences. You expect periodic VaR
breaks. The loss distribution typically has fat tails, and you might get more than one
break in a short period of time. Moreover, markets may be abnormal and trading may
exacerbate losses, and you may take losses not measured in daily marks such as
lawsuits, loss of employee morale and market confidence and impairment of brand
names. So an institution that can't deal with three times VaR losses as routine events
probably won't survive long enough to put a VaR system in place.

2. Three to ten times VaR is the range for stress testing. Institutions should be
confident they have examined all the foreseeable events that will cause losses in this
range, and are prepared to survive them. These events are too rare to estimate
probabilities reliably, so risk/return calculations are useless.

3. Foreseeable events should not cause losses beyond ten times VaR. If they do
they should be hedged or insured, or the business plan should be changed to avoid
them, or VaR should be increased. It's hard to run a business if foreseeable losses are
orders of magnitude larger than very large everyday losses. It's hard to plan for these
events, because they are out of scale with daily experience. Of course there will be
unforeseeable losses more than ten times VaR, but it's pointless to anticipate them,

19 | P a g e
 you can't know much about them and it results in needless worrying. Better to hope
that the discipline of preparing for all foreseeable three-to-ten times VaR losses will
improve chances for surviving the unforeseen and larger losses that inevitably occur.

"A risk manager has two jobs: make people take more risk the 99% of the time it is safe to do
so, and survive the other 1% of the time. VaR is the border."

VaR risk measurement

The VaR risk measure is a popular way to aggregate risk across an institution.
Individual business units have risk measures such as duration for a fixed
income portfolio or beta for anequity business. These cannot be combined in a meaningful
way.It is also difficult to aggregate results available at different times, such as positions
marked in different time zones, or a high frequency trading desk with a business holding
relatively illiquid positions. But since every business contributes to profit and loss in
an additive fashion, and many financial businesses mark-to-market daily, it is natural to
define firm-wide risk using the distribution of possible losses at a fixed point in the future.

In risk measurement, VaR is usually reported alongside other risk metrics such
as standard deviation, expected shortfall and “greeks” (partial derivatives of portfolio value
with respect to market factors). VaR is a distribution-free metric, that is it does not depend on
assumptions about the probability distribution of future gains and losses. The probability
level is chosen deep enough in the left tail of the loss distribution to be relevant for risk
decisions, but not so deep as to be difficult to estimate with accuracy.

Risk measurement VaR is sometimes called parametric VaR. This usage can be
confusing, however, because it can be estimated either parametrically (for
examples, variance-covarianceVaR or delta-gamma VaR) or nonparametrically (for
examples, historical simulation VaR or resampled VaR). The inverse usage makes more
logical sense, because risk management VaR is fundamentally nonparametric, but it is
seldom referred to as nonparametric VaR.

VaR has been controversial since it moved from trading desks into the public eye in
1994. A famous 1997 debate between Nassim Taleb and Philippe Jorion set out some of the
major points of contention. Taleb claimed VaR:[20]

20 | P a g e
 1. Ignored 2,500 years of experience in favor of untested models built by non-
traders

2. Was charlatanism because it claimed to estimate the risks of rare events,

which is impossible

3. Gave false confidence

4. Would be exploited by traders

More recently David Einhorn and Aaron Brown debated VaR in Global Association of
Risk Professionals Review[12] [21] Einhorn compared VaR to “an airbag that works all the time,
except when you have a car accident.” He further charged that VaR:

1. Led to excessive risk-taking and leverage at financial institutions

2. Focused on the manageable risks near the center of the distribution and
ignored the tails

3. Created an incentive to take “excessive but remote risks”

4. Was “potentially catastrophic when its use creates a false sense of security
among senior executives and watchdogs.”

New York Times reporter Joe Nocera wrote an extensive piece Risk Mismanagement on
January 4, 2009 discussing the role VaR played in the Financial crisis of 2007-2008. After
interviewing risk managers (including several of the ones cited above) the article suggests
that VaR was very useful to risk experts, but nevertheless exacerbated the crisis by giving
false security to bank executives and regulators. A powerful tool for professional risk
managers, VaR is portrayed as both easy to misunderstand, and dangerous when
misunderstood.

A common complaint among academics is that VaR is not subadditive. That means the
VaR of a combined portfolio can be larger than the sum of the VaRs of its components. To a
practicing risk manager this makes sense. For example, the average bank branch in the
United States is robbed about once every ten years. A single-branch bank has about 0.004%
chance of being robbed on a specific day, so the risk of robbery would not figure into one-
day 1% VaR. It would not even be within an order of magnitude of that, so it is in the range
where the institution should not worry about it, it should insure against it and take advice
from insurers on precautions. The whole point of insurance is to aggregate risks that are

21 | P a g e
beyond individual VaR limits, and bring them into a large enough portfolio to get statistical
predictability. It does not pay for a one-branch bank to have a security expert on staff.

As institutions get more branches, the risk of a robbery on a specific day rises to within
an order of magnitude of VaR. At that point it makes sense for the institution to run internal
stress tests and analyze the risk itself. It will spend less on insurance and more on in-house
expertise. For a very large banking institution, robberies are a routine daily occurrence.
Losses are part of the daily VaR calculation, and tracked statistically rather than case-by-
case. A sizable in-house security department is in charge of prevention and control, the
general risk manager just tracks the loss like any other cost of doing business.

As portfolios or institutions get larger, specific risks change from low-probability/low-

predictability/high-impact to statistically predictable losses of low individual impact. That
means they move from the range of far outside VaR, to be insured, to near outside VaR, to be
analyzed case-by-case, to inside VaR, to be treated statistically.

Even VaR supporters generally agree there are common abuses of VaR.

1. Referring to VaR as a "worst-case" or "maximum tolerable" loss. In fact, you

expect two or three losses per year that exceed one-day 1% VaR.

2. Making VaR control or VaR reduction the central concern of risk

management. It is far more important to worry about what happens when losses
exceed VaR.

3. Assuming plausible losses will be less than some multiple, often three, of
VaR. The entire point of VaR is that losses can be extremely large, and sometimes
impossible to define, once you get beyond the VaR point. To a risk manager, VaR is
the level of losses at which you stop trying to guess what will happen next, and start
preparing for anything.

4. Reporting a VaR that has not passed a backtest. Regardless of how VaR is
computed, it should have produced the correct number of breaks (within sampling
error) in the past. A common specific violation of this is to report a VaR based on the
unverified assumption that everything follows a multivariate normal distribution

22 | P a g e
Risk management in Indian capital market

• Categorisation of stocks for imposition of margins

Stock are classifed into three categories on the basis of their liquidity and impact cost.

• The Stocks which have traded at least 80% of the days for the previous six months
shall constitute the Group I and Group II.

• Out of the scrips identified above, the scrips having mean impact cost of less than or
equal to 1% are categorized under Group I and the scrips where the impact cost is
more than 1, are categorized under Group II.

• The remaining stocks are classified into Group III.

• The impact cost is calculated on the 15th of each month on a rolling basis considering
the order book snapshots of the previous six months. On the basis of the impact cost
so calculated, the scrips move from one group to another group from the 1st of the
next month.

• For securities that have been listed for less than six months, the trading frequency and
the impact cost are computed using the entire trading history of the security.

Categorisation of newly listed securities

For the first month and till the time of monthly review a newly listed security is
categorised in that Group where the market capitalization of the newly listed security exceeds
or equals the market capitalization of 80% of the securities in that particular group.
Subsequently, after one month, whenever the next monthly review is carried out, the actual
trading frequency and impact cost of the security is computed, to determine the liquidity
categorization of the security.

In case any corporate action results in a change in ISIN, then the securities bearing
the new ISIN are treated as newly listed security for group categorization.

23 | P a g e
24 | P a g e
 Margins
Daily margins payable by members consists of the following:

1. Value at Risk Margin

2. Extreme Loss Margin

3. Mark to Market Margin

Daily margin, comprising of the sum of VaR margin, Extreme Loss Margin and mark to
market margin is payable.

Value at Risk Margin

All securities are classified into three groups for the purpose of VaR margin

• For the securities listed in Group I, scrip wise daily volatility calculated using the
exponentially weighted moving average methodology is applied to daily returns. The
scrip wise daily VaR is 3.5 times the volatility so calculated subject to a minimum of
7.5%.

• For the securities listed in Group II, the VaR margin is higher of scrip VaR (3.5
sigma) or three times the index VaR, and it is scaled up by root 3.

• For the securities listed in Group III the VaR margin is equal to five times the index
VaR and scaled up by root 3.

The index VaR, for the purpose, is the higher of the daily Index VaR based on S&P CNX
NIFTY or BSE SENSEX, subject to a minimum of 5%.

NSCCL may stipulate security specific margins from time to time.

The VaR margin rate computed as mentioned above is charged on the net outstanding
position (buy value-sell value) of the respective clients on the respective securities across all
open settlements. There is no netting off of positions across different settlements. The net
position at a client level for a member is arrived at and thereafter, it is grossed across all the
clients including proprietary position to arrive at the gross open position.

For example, in case of a member, if client A has a buy position of 1000 in a security and
client B has a sell position of 1000 in the same security, the net position of the member in the
security is taken as 2000. The buy position of client A and sell position of client B in the

25 | P a g e
same security is not netted. It is summed up to arrive at the member’s open position for the
purpose of margin calculation.

The VaR margin is collected on an upfront basis by adjusting against the total liquid
assets of the member at the time of trade.

The VaR margin so collected is released on completion of pay-in of the settlement.

Extreme Loss Margin

The Extreme Loss Margin for any security is higher of:

1. 5%, or

2. 1.5 times the standard deviation of daily logarithmic returns of the security price in
the last six months. This computation is done at the end of each month by taking the
price data on a rolling basis for the past six months and the resulting value is
applicable for the next month.

The Extreme Loss Margin is collected/ adjusted against the total liquid assets of the member
on a real time basis.

The Extreme Loss Margin is collected on the gross open position of the member. The
gross open position for this purpose means the gross of all net positions across all the clients
of a member including its proprietary position.

There is no netting off of positions across different settlements. The Extreme Loss
Margin collected is released on completion of pay-in of the settlement.

Mark-to-Market Margin

Mark to market loss is calculated by marking each transaction in security to the

closing price of the security at the end of trading. In case the security has not been traded on
a particular day, the latest available closing price at NSE is considered as the closing price. In
case the net outstanding position in any security is nil, the difference between the buy and
sell values shall be is considered as notional loss for the purpose of calculating the mark to
market margin payable.

26 | P a g e
The mark to market margin (MTM) is collected from the member before the start of the
trading of the next day.

The MTM margin is collected/adjusted from/against the cash/cash equivalent

component of the liquid net worth deposited with the Exchange.

The MTM margin is collected on the gross open position of the member. The gross
open position for this purpose means the gross of all net positions across all the clients of a
member including its proprietary position. For this purpose, the position of a client is netted
across its various securities and the positions of all the clients of a member are grossed.
There is no netting off of the positions and setoff against MTM profits across two
rolling settlements i.e. T day and T+1 day. However, for computation of MTM profits/losses
for the day, netting or setoff against MTM profits is permitted.

Trade for Trade segment –Surveillance segment

In case of securities in Trade for Trade –Surveillance segment (TFT-S segment) the
upfront margin rates (VaR Margin + Extreme Loss Margin) applicable is 100 % and each
trade is marked to market based on the closing price of that security.

The details of all margins VAR, extreme loss margin and mark to market as at end of
each day are downloaded to members in their respective Extranet directory.

Margins collection from Client

Members should have a prudent system of risk management to protect themselves
from client default. Margins are likely to be an important element of such a system. The same
should be well documented and be made accessible to the clients and the Stock Exchanges.
However, the quantum of these margins and the form and mode of collection are left to the
discretion of the members.

27 | P a g e
 Margin Shortfall

In case of any shortfall in margin:

• The members shall not be permitted to trade with immediate effect.

• There is a penalty for margin violation

Penalty applicable for margin violation is levied on a monthly basis based on slabs as
mentioned below:

Instances of
Penalty to be levied
Disablement

1st instance 0.07% per day

2nd to 5th instance

0.07% per day +Rs.5000/- per instance from 2nd to 5th instance
of disablement

6th to 10th instance 0.07% per day+ Rs. 20000 ( for 2nd to 5th instance) +Rs.10000/- per
of disablement instance from 6th to 10th instance

0.07% per day +Rs. 70,000/- (for 2nd to 10th instance) +Rs.10000/- per
11th instance
instance from 11th instance onwards. Additionally, the member will be
onwards
referred to the Disciplinary Action Committee for suitable action

Instances as mentioned above shall refer to all disablements during market hours in a
calendar month. The penal charge of 0.07% per day shall is applicable on all disablements
due to margin violation anytime during the day.

28 | P a g e
 Liquid assets

Embers are required to provide liquid assets which adequately cover various margins
and Security Deposit requirements. A member may deposit liquid assets in the form of cash,
bank guarantees, fixed deposit receipts, approved securities and any other form of collateral
as may be prescribed from time to time. The total liquid assets comprise of the cash
component and the non cash component wherein the cash component shall be at least 50% of
liquid assets.

1. Cash Component:

a. Cash

b. Bank fixed deposits (FDRs) issued by approved banks and deposited withapproved
custodians or NSCCL.

c. Bank Guarantees (BGs) in favour of NSCCL from approved banks in the specified
format.

d. Units of money market mutual fund and Gilt funds where applicable haircut is 10%.

2. Non Cash Component:

a. Liquid (Group I) Equity Shares in demat form, as specified by NSCCL from time to
time deposited with approved custodians.

b. Mutual fund units other than those listed under cash component decided by NSCCL
from time to time deposited with approved custodians.

Margins for institutional deals

Nstitutional businesses i.e., transactions done by all institutional investors

are margined from T+1 day subsequent to confirmation of the transactions by the
custodians. For this purpose, institutional investors include

• Foreign Institutional Investors registered with SEBI. (FII)

• Mutual Funds registered with SEBI. (MF)

29 | P a g e
 • Public Financial Institutions as defined under Section 4A of the Companies Act,
1956. (DFI)

• Banks, i.e., a banking company as defined under Section 5(1)(c) of the Banking
Regulations Act, 1949. (BNK)

• Insurance companies registered with IRDA. (INS)

Pension Funds registered with PFRDA (PNF)

Levy of margins:

• Institutional transactions are identified by the use of the participant code at the time of
order entry.

• In respect of institutional transactions confirmed by the custodians the margins are

levied on the custodians.

• In respect of institutional transactions rejected/not accepted by the custodians the

margins are levied on the members who have executed the transactions.

• The margins are computed and levied at a client (Custodial Participant code) level in
respect of institutional transactions and collected from the custodians/members.

Retail Professional Clearing Member:

In case of transactions which are to be settled by Retail Professional Clearing

Members (PCM), all the trades with PCM code are included in the trading member’s
positions till the same are confirmed by the PCM. Margins are collected from respective
trading members until confirmation of trades by PCM.

On confirmation of trades by PCM, such trades are reduced from the positions of
trading member and included in the positions of PCM. The PCMs are then liable to pay
margins on the same.

• Exemption upon early pay-in of securities

In cases where early pay-in of securities is made prior to the securities pay-in, such
positions for which early pay-in (EPI) of securities is made are exempt from margins.
Members are required to provide client level early pay-in file in a specified format. The EPI
of securities is allocated to clients having net deliverable position, on a random basis unless

30 | P a g e
specific client details are provided by the member/ custodian. However, member/ custodian
shall ensure to pass on appropriate early pay-in benefit of margin to the relevant clients.
Additionally, member/custodian can specify the clients to whom the early pay-in may be
allocated.

Exemption upon early pay-in of funds

In cases where early pay-in of funds is made prior to the funds pay-in, such positions
for which early pay-in (EPI) of funds is made are exempt from margins based on the client
details provided by the member/ custodian in the specified format . Early pay-in of funds
specified by the member/custodians for a specific client and for a settlement is allocated
against the securities in the descending order of the net buy value of outstanding position of
the client.

Cross Margin

Salient features of the cross margining available are as under:

1. Cross margining benefit is available across Cash and Derivatives segment

2. Cross margining benefit is available to all categories of market participants

3. For client/entities clearing through same clearing member in Cash and Derivatives
segments, the clearing member is required to intimate client details through a file
upload through Collateral Interface for Members (CIM) to avail the benefit of Cross
margining

4. For client/entities clearing through different clearing member in Cash and Derivatives
segments they are required to enter into necessary agreements for availing cross
margining benefit.

5. For the client/entities who wish to avail cross margining benefit in respect of
positions in Index Futures and Constituent Stock Futures only, the entity’s clearing
member in the Derivatives segment has to provide the details of the clients and not
the copies of the agreements. The details to be provided by the clearing members in
this regard are stipulated in the Format

1. Positions eligible for cross-margin benefit

31 | P a g e
 2. Entities/clients eligible for cross margining

3. Facility of maintaining two client accounts

4. Computation of cross margining benefit

5. Provisions in respect of default

6. Additional Reports for Cross Margin

1. Positions eligible for cross-margin benefit:

Cross margining is available across Cash and F&O segment and to all categories of market
participants. The positions of clients in both the Cash and F&O segments to the extent they
offset each other are being considered for the purpose of cross margining as per the following
priority

a. Index futures and constituent stock futures in F&O segment

b. Index futures and constituent stock positions in Cash segment

c. Stock futures in F&O segment and stock positions in Cash segment

i. In order to extend the cross margin benefit as per (a) and (b) above, the basket
of constituent stock futures/ stock positions should be a complete replica of
the index futures. NSCCL specifies the number of units of the constituent
stocks/ stock futures required in the basket to be considered as a complete
replica of the index on the website of the exchange
(www.nseindia.com/NSCCL/Notification) from time to time.

ii. The number of units are changed only in case of change in share capital of the
constituent stock due to corporate action or issue of additional share capital or
change in the constituents of the index.

iii. The positions in F&O segment for the stock futures and index futures should
be in the same expiry month to be eligible for cross margining benefit.

iv. The position in a security is considered only once for providing cross
margining benefit. E.g. Positions in Stock Futures of security ‘A’ used to set-
off against index futures positions will not be considered again if there is an
off-setting positions in the security ‘A’ in Cash segment.

v. Positions in option contracts are not considered for cross margining benefit.

32 | P a g e
2. Entities/clients eligible for cross margining

The clearing member has to inform NSCCL the details of client to whom cross
margining benefit is to be provided. The cross margining benefit is available only if clearing
members provide the details of clients in such manner and within such time as specified by
NSCCL from time to time.

1. Client/entity settling through same clearing member in both Cash

and F&O segment

i. The clearing member has to ensure that the code allotted (code used while
executing client trade) to client/entity in both Cash and F&O segment is same

ii. The clearing member must inform the details of clients to whom cross
margining benefit is to be provided through a file upload facility provided in
Collateral Interface for Members (CIM).

2. Client/entity settling through different clearing member in Cash and F&O

segment

i. In case a client settles in the Cash segment through a trading member /

custodian and clears and settles through a different clearing member in F&O
segment, then they are required to enter into necessary agreements.

ii. In case where the client/entity settles through Custodian in Cash segment, then
the client/entity, custodian and the clearing member in F&O segment are
required to enter into a tri-partite agreement as per the format

iii. In case where the client/entity clears and settles through a member in Cash
segment, and a different clearing member in F&O segment, then the member
in Cash segment and the clearing member in F&O segment have to enter into
an agreement as per the format. Further, the client/entity must enter into an
agreement with the member as per the format.

iv. The clearing member in the F&O segment must intimate to NSCCL the details
of the client/entity in F&O segment along-with letter from trading
member/custodian giving details of client/entity in Cash segment who wish to
avail cross margining benefit.

33 | P a g e
3. Facility of maintaining two client accounts

As specified by SEBI, a client may maintain two accounts with their respective members to
avail cross margin benefit only. The two accounts namely arbitrage account and a non-
arbitrage account may be used for converting partially replicated portfolio into a fully
replicated portfolio by taking opposite positions in two accounts. However, for the purpose
of compliance and reporting requirements, the positions across both accounts shall be taken
together and client shall continue to have unique client code.

4. Computation of cross margining benefit

i. The computation of cross margining benefit is done at client level on an online real
time basis and provided to the trading member / clearing member / custodian, as the
case may be, who, in turn, shall pass on the benefit to the respective client.

ii. For institutional investors the positions in Cash segment are considered only after
confirmation by the custodian on T+1 basis and on confirmation by the clearing
member in F&O segment.

iii. The positions in the Cash and F&O segment are considered for cross margining only
till time the margins are levied on such positions.

iv. While reckoning the offsetting positions in the Cash segment, positions in respect of
which margin benefit has been given on account of early pay-in of securities or funds
are not considered.

v. The positions which are eligible for offset, are subject to spread margins. The spread
margins are 25% of the applicable upfront margins on the offsetting positions or such
other amount as specified by NSCCL from time to time.

vi. The difference in the margins on the total portfolio and on the portfolio excluding off-
setting positions considered for cross margining, less the spread margins is considered
as cross margining benefit. Example

5. Provisions in respect of default

In the event of default by a trading member / clearing member / custodian, as the case
may be, whose clients have availed cross margining benefit, NSCCL may:

i. Hold the positions in the cross margin account till expiry in its own name.

34 | P a g e
 ii. Liquidate the positions / collateral in either segment and use the proceeds to meet the
default obligation in the other segment.

iii. In addition to the foregoing provisions, take such other risk containment measures or
disciplinary action as it may deem fit and appropriate in this regard.

35 | P a g e
 Stress testing in risk management

Stress testing defines a scenario and uses a specific algorithm to determine the expected
impact on a portfolio's return should such a scenario occur. There are three types of
scenarios:

 Extreme event: hypothesize the portfolio's return given the recurrence of a historical
event. Current positions and risk exposures are combined with the historical factor returns.

 Risk factor shock: shock any factor in the chosen risk model by a user-specified
amount. The factor exposures remain unchanged, while the covariance matrix is used to
adjust the factor returns based on their correlation with the shocked factor.

 External factor shock: instead of a risk factor, shock any index, macro-economic
series (e.g., oil prices), or custom series (e.g., exchange rates). Using regression analysis, new
factor returns are estimated as a result of the shock.

In an exponentially weighted stress test, historical periods more like the defined
scenario receive a more significant weighting in the predicted outcome. The defined decay
rate lets the tester manipulate the relative importance of the most similar periods. In the
standard stress test, each period is equally weighted.

Instead of doing financial projection on a "best estimate" basis, a company may do stress
testing where they look at how robust a financial instrument is in certain crashes, a form
ofscenario analysis. They may test the instrument under, for example, the following stresses:

 What happens if the market crashes by more than x% this year?

 What happens if interest rates go up by at least y%?

 What if half the instruments in the portfolio terminate their contacts in the fifth year?

 What happens if oil prices rise by 200%?

This type of analysis has become increasingly widespread, and has been taken up by
various governmental bodies (such as the FSA in the UK) as a regulatory requirement on
certain financial institutions to ensure adequate capital allocation levels to cover potential
losses incurred during extreme, but plausible, events. This emphasis on adequate, risk
adjusted determination of capital has been further enhanced by modifications to banking
regulations such as Basel II. Stress testing models typically allow not only the testing of
individual stressors, but also combinations of different events. There is also usually the

36 | P a g e
ability to test the current exposure to a known historical scenario (such as the Russian debt
default in 1998 or 9/11 attacks) to ensure the liquidity of the institution.

Stress testing reveals how well a portfolio is positioned in the event forecasts prove true.
Stress testing also lends insight into a portfolio's vulnerabilities. Though extreme events are
never certain, studying their performance implications strengthens understanding.

Stress Testing Approaches

The following comprise a fairly comprehensive set of approaches for stress testing:

Historical event analysis.

What happens if the severe market event happens again? For example,

what is the impact on your portfolio if the Reliance industries drops 23% as it did on
October 19, 1987?

Scenario analysis based on historical events.

Develop scenarios based on historical events but update them for current conditions.

Institution-specific scenario analysis.

Identify scenarios based on the institution.s portfolio, businesses,and structural risks. This
seeks to identify the vulnerabilities and the worst-case loss events specific to the firm.

Extreme standard deviation scenarios.

Identify extreme moves and construct the scenarios in which such losses can occur. For
example, what can cause a 5-, 6-, 7-, 8-, 9-, 10-standard-deviation loss event?

Extreme incremental market moves and tail risk.

This approach does not identify the scenarios but just quantifies a set of progressively severe
market moves and the resultant loss. For example,

what is the potential loss if all equity markets markets gap by plus and minus 5%, 10%,
15%, 20%,etc.?

Quantitative evaluation of distributions of tail events and extreme value theory.

Based on observed historical market events, quantify the impact of a series of tail
events to evaluate the severity of the worst case losses. This approach also evaluates the

37 | P a g e
distribution of tail events to determine if there are any patterns that should be used for
scenario analysis.

Specific Stress Tests by Category

Stress tests can be categorized by the types of assumptions they challenge, the
types of things that can go wrong, the nature of the surprises or market moves,model
parameters, product complexity, credit, sea changes.

38 | P a g e
 PORTFOLIO SELECTION
THE PROCESS OF SELECTING a portfolio may be divided into two stages.

The first stage starts with observation and experience and ends with beliefs about the
future performances of available securities.

Thesecond stage starts with the relevant beliefs about future performances and ends
with the choice of portfolio.

This report is concerned with the second stage. We first consider the rule that the
investor does (or should) maximize discounted expected, or anticipated, returns. This rule is
rejected both as a hypothesis to explain, and as a maximum to guide investment behavior.
We next consider the rule that the investor does (or should) consider expected return a
desirable thing and variance of returnan undesirable thing. This rule has many sound points,
both as amaxim for, and hypothesis about, investment behavior. We illustrate relations
between beliefs and choice of portfolio according to the "expected returns-variance of
returns" rule.One type of rule concerning choice of portfolio is that the investor does (or
should) maximize the discounted (or capitalized) value of future returns.

. Since the future is not known with certainty, it must be "expected" or "anticipatded7'
returns which we discount. Variations of this type of rule can be suggested. Following Hicks,
we could let "anticipated" returns include an allowance for risk.

We could let the rate at which we capitalize the returns from particular securities vary
with risk.

The hypothesis (or maxim) that the investor does (or should)maximize discounted
return must be rejected. If we ignore market imperfections the foregoing rule never implies
that there is a diversified portfolio which is preferable to all non-diversified portfolios.
Diversification is both observed and sensible; a rule of behavior which doesnot imply the
superiority of diversification must be rejected both as a maxim.There is a rule which implies
both that the investor should diversify and that he should maximize expected return. The rule
states that the investor does (or should) diversify his funds among all those securities which
give maximum expected return. The law of large numbers will insure that the actual yield of
the portfolio will be almost the same as the expected yield.5 This rule is a special case of the
expected returnsvariance of returns rule (to be presented below). It assumes that there is a
portfolio which gives both maximum expected return and minimum variance, and it
39 | P a g e
commends this portfolio to the investor.This presumption, that the law of large numbers
applies to a portfolio of securities, cannot be accepted. The returns from securities are too
intercorrelated. Diversification cannot eliminate all variance.

The portfolio with maximum expected return is not necessarily the one with
minimum variance. There is a rate at which the investor can gain expected return by taking
on variance, or reduce variance by giving

Up expected return.We saw that the expected returns or anticipated returns rule is
inadequate. Let us now consider the expected returns-variance of returns (E-V) rule. It will
be necessary to first present a few elementary concepts and results . We will then show some
implications of the E-V rule. After this we will discuss its plausibility.In our presentation we
try to avoid complicated mathematical statements and proofs. As a consequence a price is
paid in terms of rigor and generality. The chief limitations from this source are (1) we do not
derive our results analytically for the n-security case; instead, we present them geometrically
for the 3 and 4 security cases;

(2) we assume static probability beliefs. In a general presentation we must recognize that
the probability distribution of yields of the various securities is a function of time.
The writer intends to present, in the future, the general,mathematical treatment which
removes these limitations.The concepts "yield" and "risk" appear frequently in
financialwritings. Usually if the term "yield" were replaced by "expected yield" or
"expected return," and "risk" by "variance of return," little change of apparent
meaning would result.

40 | P a g e
 Integrating Risk Management with Portfolio selection
Practical implementation of risk management at the selecting or creating the portfolio
can be a great tool which can insure the better performance of portfolio even in the
extremely volatile stock market . Risk management cannot protect you from losses in
extreme shock but it can minimize the risk and surprises . Risk measures such as VAR
provide useful base-case information. Risk capital serves as a last line of defense. Stress
testing, together with daily management dialogue and decision making, provides proactive
and dynamic management of risk. No risk management can prevent losses but the best can
minimize surprises. Stress testing is a powerful means of anticipating, understanding, and
preparing for shocks and the resulting potential losses.

Modern portfolio theory aims to allocate assets by maximizing the expected risk
premium per unit of risk. In a mean –variance frame work risk is defined in term of the
possible variation of expected portfolio return. The focus on standard deviation as the
appropriate measure for risk implies that the investor weigh the probability of negative return
equally against positive return. However it is a stylized fact that the distribution of many
financial return series are non-normal Furthermore there is ample evidence that agents often
treat losses and gains asymmetrically. There is a wealth of experimental evidence for loss
aversion. The choice therefore of mean variance efficient portfolios is likely to give rise to an
inefficient strategy for optimizing expected returns for financial assets whilst minimizing
risk. It would therefore be more desirable to focus on a measure for risk that is able to
incorporate any non-normality in the return distributions of financial assets. Indeed risk
measures such as semi-variance were originally constructed in order to measure the negative
tail of the distribution separately.

Typically mainstream finance rests on the assumption of normality, so that a move

away from the assumption of normally distributed returns is not particularly favored; one
drawback often stated is the loss in the possibility of moving between discrete and
continuous time frameworks. However it is precisely this simplifying approach, whereby any
deviations from the square root of time rule are ignored, which needs to be incorporated into
current finance theory. The ability to focus on additional moments in the return distribution
enables additional risk factors to be included into the optimal portfolio selection

41 | P a g e
 CHAPTER II

42 | P a g e
 COMPANY PROFILE
Angel Broking ltd. is one of India's leading financial institutions, offering
complete financial solutions that encompass every sphere of life. From stock
broking, to mutual funds, to life insurance, to investment, the group caters to the
financial needs of individuals and corporate.

Angel group is leading Retail Broking service provider in the country.

The group has emerged as one of the top 3 retail stock broking house offering a
gamut of retail centric services like Research, investment Advisory ,wealth
Management Services ,E-broking & Commodities to the individual investor.

Angel has a wide and efficient network of 21 regional hubs,150 branches

and 2200+ business associates in 115 cities all over the country services more
than 1.9 lac individual investors. The group is promoted by Mr. Dinesh
thakar, who started these enterprises as a sub broker in 1987.

Angel Broking's tryst with excellence in customer relations began in

1987. Today, Angel has emerged as one of the most respected Stock-Broking
and Wealth Management Companies in India. With its unique retail-focused
stock trading business model, Angel is committed to providing ‘Real Value for
Money’ to all itsclients.

The Angel Group is a member of the Bombay Stock Exchange (BSE),

National Stock Exchange (NSE) and the two leading Commodity Exchanges in
the country: NCDEX & MCX. Angel is also registered as a Depository
Participant with CDSL.

43 | P a g e
 Research Strength at Angel

Angel Broking is one of the leading retail brokerage houses with a

professional and qualified research team. We deploy state of the art research
metrics and international news services like Bloomberg/ Reuters etc. to remain
in touch with global / domestic developments.

Angel’s research has a proven track record of over 5 years. Emphasis on

providing best investment value for money to the retail client is the core
philosophy at angel .angel principally focuses on the individual investor
community and has an investment / advisory desk to give first hand information
/ guidance to them. Angel’s research and advisory team comprises of 80+
professionals working continuously to discover potential multi- bagger stocks
for you.

Angel broking Research center the special research cell where some of
India’s finest financial analyst bring you intensive research reports on how the
stock market is faring. When is the right time to invest, when to execute your
order and more. Depending on what kink of investor you are, we bring you
fundamental or basis research and technical research. As an investor with angel
broking ltd., you get access to these research reports exclusively. You get
access to the following reports.

Intraday Calls

These calls are provided according to changing market situations. Be it

news, momentum or technical perspectives be updated with what are experts
advise you to do during the market hours.

44 | P a g e
Daily Technical view

A technical view summarizing the previous day movement and what is

expected to happen on the current day. This report will also provide you with
technical calls for trading along with various supports and resistances of chosen
stocks.

Sectorial Reports

Deciding which sector to invest in, our super sector report can guide you.
Know details including the effect of government policies and regulations and
estimates about how the sector is expected to behave.

M connect

At last but not the least you can get these expert tips and
recommendations as SMS on to your mobile phone.

45 | P a g e
 Angel broking limited

The journey so far (milestones)

February, 2008 Crossed the 400,000 mark in unique trading accounts

November, 2007 Received "Major Volume Driver" award for FY07

March, 2007 Crossed the 200,000 mark in unique trading accounts

December, 2006 Crossed the 2,500 mark in terms of business associates.

October, 2006 Received "Major Volume Driver" award for FY06

September, 2006 Commenced Mutual Fund and IPO distribution business

July, 2006 Formally launched the PMS function

March, 2006 Crossed the 100,000 mark in unique trading accounts

October, 2005 Received the prestigious "Major Volume Driver" award for FY05

September, 2004 Launch of Online Trading Platform

46 | P a g e
 Services of Angel Broking Ltd.

47 | P a g e
48 | P a g e
 Competitors

49 | P a g e
KARVY

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

among the top five in the country in all its business segments, services over 16
million individual investors in various capacities, and provides investor services
to over 300 corporate, comprising the who is who of Corporate India. KARVY
covers the entire spectrum of financial services such as Stock broking,
Depository Participants, Distribution of financial products - mutual funds,
bonds, fixed deposit, equities, Insurance Broking, Commodities Broking,
Personal Finance Advisory Services, Merchant Banking & Corporate Finance,
placement of equity, IPOs, among others. Karvy has a professional management
team and ranks among the best in technology, operations and research of
various industrial segments.

The birth of Karvy was on a modest scale in 1981. It began with the
vision and enterprise of a small group of practicing Chartered Accountants who
founded the flagship company …Karvy Consultants Limited. We started with
consulting and financial accounting automation, and carved inroads into the
field of registry and share accounting by 1985. Since then, we have utilized our
experience and superlative expertise to go from strength to strength…to better
our services, to provide new ones, to innovate, diversify and in the process,
evolved Karvy as one of India’s premier integrated financial service enterprise.

50 | P a g e
ICICI direct .com

ICICI Bank Demat Services boasts of an ever-growing customer base of

over 11.5 lacs account holders. In our continuous endeavor to offer best of the
class services to our customers we offer the following features:

E-Instructions: You can transfer securities 24 hours a day, 7 days a week

through Internet & Interactive Voice Response (IVR) at a lower cost. Now with
"Speak to transfer", you can also transfer or pledge instructions through our
customer care officer.

Consolidation Demat Account: Dematerialise your physical shares in

various holding patterns and consolidate all such scattered holdings into your
primary demat account at reduced cost.

Digitally Signed Statement: Receive your account statement and bill by

email.

Corporate Benefit Tracking: Track your dividend, interest, bonus through

your account statement.

Mobile Request: Access your demat account by sending SMS to enquire

about Holdings, Transactions, Bill & ISIN details.

Mobile Alerts: Receive SMS alerts for all debits/credits as well as for any
request which cannot be processed.

51 | P a g e
INDIA INFOLINE
The India Infoline Group comprises the holding company, India Infoline
Ltd, which has 4 wholly-owned subsidiaries engaged in distinct yet
complementary businesses which together offer a whole bouquet of products
and services to make your money grow. As on date, the Group employs 4000
plus employees, in over 60 locations, across India. The corporate structure has
evolved to comply with oddities of the regulatory framework but still
beautifully help attain synergy and allow flexibility to adapt to dynamics of
different businesses.

The parent company, India Infoline Ltd owns and manages the web
properties www.indiainfoline.com and www.5paisa.com. It also undertakes
research, customized and off-the-shelf. Launched on 11 May 1999,
www.indiainfoline.com is India’s leading and most comprehensive business
and financial information website. The site provides quality information and
analysis - earlier restricted to a few people - to the common man, absolutely
free! The site has met with an overwhelming response and has been reviewed as
the most comprehensive financial content website in India by BBC World -
Money Watch, Business World, Business Line and others. The company also
won the Golden Mouse Award in India Internet World 2000 for the "Best
Finance" site. In May 2001, our website was included in the Top 200 Best of
the Web list by Forbes Global under the Asia Investing category. We were the
only website from India to be featured in any category. Since then it has been
nominated twice to this list. In its last review, Forbes editors have said,
"www.indiainfoline.com is a must read for the investors in South Asia..."

52 | P a g e
Sharekhan
Sharekhan is a India’s leading stock broker of the retail arm SSKI (Sri
Shantilal Kantiwal,Ishwarlal Pvt. Ltd.), an organization with over eighty years
of experience in the stock market, With more than 240 share shops in 110 cities,
and India’s premier online trading destination. Sharekhan’s customer enjoy
multi channel access to the stock market, and it offers you trade execution
facilities for each as well as derivatives, on the BSE and the NSE, depository
services, commodities trading on the MCX and NCDEX and most importantly,
It bring investment advice tempered by eighty years of broking experience.

53 | P a g e
Indiabulls
Indiabulls Financial Services Ltd is listed on the National Stock Exchange,

Bombay Stock Exchange, Luxembourg Stock Exchange and London Stock

Exchange. The market capitalization of Indiabulls is around USD 800 million, and
the consolidated net worth of the company is around USD 500 million. Indiabulls
and its group companies have attracted USD 300 million of equity capital in
Foreign Direct Investment (FDI) since March 2000. Some of the large
shareholders of Indiabulls are the largest financial institutions of the world such
as Fidelity Funds, Capital International, Goldman Sachs, Merrill Lynch, Lloyd
George and Farallon Capital.

54 | P a g e
 PRODUCT BOUQUET
Angel Oyster

Bottom up concentrated portfolio with emphasis on Value Investing.

Objective:

• To generate wealth on long term basis rather than outperform by taking higher risk.

• Earlier identification of stock to ride through the entire investment cycle

• Stock picking is based on hidden values and not the market capitalization.

Investment Strategy:

• A blend of Value and growth stocks; high weightage is towards value stock.

• Ensuring a balanced portfolio with a relatively medium risk profile.

Investor Profile:

• The scheme would be suited for investors with medium to high risk appetite having long

term perspective

Fees and Charges

2% Asset Management Charges

0.50% brokerage on transactions

55 | P a g e
Angel Blue-chip

Bottom up concentrated portfolio with Emphasis on GARP (Growth at Reasonable

Price).

Objective:

• The scheme will seek to achieve returns through broad based participation in equity

markets by creating a diversified equity portfolio of medium to large capitalized

companies

• Out-performance to sensex will be the prime motive

Investment Strategy:

• Major proportion of large and medium capitalized stocks

• Medium capitalized stocks not to exceed 25%

• Sectoral exposure not to exceed 25%

Investor Profile:

• The scheme would be suited for investors with medium to low risk appetite, having long

term perspective

Fees and Charges

• 2% Asset Management Fees • 0.50% Brokerage on transactions

56 | P a g e
Angel Equity Derivatives Fund

Bottom up concentrated portfolio with Equities and Derivatives and Emphasis on

Hedging using volatility in the Markets.

Objective:

• The scheme will seek to achieve returns through deployment into Equity assets and partially
hedging the portfolio using options and futures. The objective is to generate moderate returns
by creating margin of safety.

• Also the funds lying idle would be deployed in arbitrage between cash and future and /or
place in low maturity debt funds and low risk F&O Strategies.

Investment Strategy:

• Investments would be in fundamentally strong Large cap and Mid Cap companies having
high liquidity in Options.

• Partial hedging of open positions would be done by writing options

Investor Profile:

• The scheme would be suited for investors with low to medium risk appetite, having long
term perspective.

• Suitable for HNI’s and Corporates who want to park money for consistent Return from the
market even if market remained flat.

Fees and Charges

• 1% Asset Management Charges

• 0.10% on Delivery and Rs.50 flat on options, 0.03% on futures

57 | P a g e
Angel Growth

Bottom up concentrated portfolio with emphasis on growth Investment.

Objective:

• To generate capital appreciation in the medium to long term

• Investments in equities and equity related instruments comprising of predominantly Mid –

Cap and Small – Cap.

Investment Strategy:

• Creating a Diversified portfolio with the aim to earn return through broad based
participation in equity markets.

• Portfolio strives to insulate an investor from cyclical themes by investing in sector offering

secular growth outlook.

• Allocation of sectors and stocks may be dynamically structured in tune with changes in
broader market conditions.

Investor Profile:

• The scheme would be suited for investors with moderate risk appetite.

• Recommended investment horizon is 15 to 18 months.

Fees and Charges:

• 2% Asset Management Charges

• 0.5% brokerage on transactions

58 | P a g e
 THE PMS TEAM

• ANGEL OYSTER

Chief Investment Officer Mr. Rajen Shah

• ANGEL BLUE-CHIP

Fund Manager Mr. Phani Sekhar

• ANGEL GROWTH

Fund Manager Mr. Phani Sekhar

• ANGEL Equity Derivative

Fund Manager Mr. Siddarth Bhamre

59 | P a g e
 CHAPTER III

60 | P a g e
 Secondary Data Collection

For preparation of this dissertation report I have only counted on

secondary data available to me from various web sites, newspaper, article

,journal, reports, and past record.

A part from this I have also spoken to the top official of the angel broking

to gather some internal information regarding the risk management but

unfortunately they not able to disclose all those fact which are highly classified

for the company purpose

61 | P a g e
 CHAPTER IV

62 | P a g e
 EXAMPLES OF EXTREME

63 | P a g e
1987 Stock market crash:

One day moves. Dow Jones Industrial Average (DJIA) fell 23% to 1738.74, and the S
&P500 Index fell 20% to 224.84 on October 19, 1987. Contagion effects included the Nikkei
index.s 15% drop, the FTSE 100 Index.s 12% drop, and the Hang Seng Index closing for
four days and falling 33%

on October 26 .

1990 Nikkei crash, high yield tumbles.

Nikkei fell 48% to a low of 20,221.86 over the year, and the one-week historical
volatility exceeded 120% in September/October 1990. The Japan Real Estate Index tumbled
56%. In addition, the Salomon Brothers High Yield composite fell 13% to 158.75 in October.
Drexel Burnham Lambert collapsed.

64 | P a g e
1992 European currency crisis.

The European Rate Mechanism, a prescribed set of ranges that the 12-member
European community currencies can trade between,broke down. When the monetary system
started to crumble, institutions rushed to protect their investments by selling the weaker
currencies and buying the German mark. The UK raised rates to 12% to defend the currency
but eventually suspended its participation in the European monetary system and let the pound
fall. Italy devalued the lire by 7%, Spain devalued the paseta by 5%

1994 U.S. interest rates.

U.S. Federal Funds short-term target rate was raised six times from 3.0% on January
3, 1994, to 5.5% on December 30, 1994, an increase of 83%. Following, the 12-month
domestic funds rate increased 110% to 7.75% at year-end. The DJIA fell 10% to 3593.35 on
April 4, 1994. The Salomon Treasury Index fell 5% to 446.8 on June 30, 1994, and the
Salomon Corporate Bond index fell 6% to 489.8 on June 30, 1994.

65 | P a g e
1994 and 1995 Mexican peso crisisand Latin America crisis.

Mexican peso devalued 15% to 3.975 on December 20,Lieng-Seng Wee and Judy
Lee is a principal at Capital Market Risk 1994, and the one-week historical volatility
exceeded 150% in December. From September 1994 to March 1995, the Mexican Bolsa
Index dropped 49% to1447.52, the Brazilian Bovespa Stock Index dropped 61% to 2138.28,
and the Argentinian Merval Index dropped 58% to 262.11

66 | P a g e
1997 Asian crisis.

The Thai baht had a oneday fall of 16% on July 2, 1997. The crisis spread rapidly to
the other Asian currencies. The South Korean won dropped 41% between December 4,1997,
and December 23, 1997, and the Korea Composite Index dropped 50% to 350.68. The
Indonesian rupiah fell 71% between December 1, 1997, and January 26, 1998, and one-week
volatility exceeded 200%. The Jakarta Composite Index dropped 41 % to 339.53 from
September 10, 1997, to December 15,1997. The Malaysian ringgit fell 25% in December.The
Kuala Lumpur Composite Index dropped 45% to 477.57 from September 10, 1997, to
January 12, 1998

67 | P a g e
1998 Russian crisis.

The Russian ruble fell 41% from August 25, 1998, to August 27, 1998, with a one-
day fall of 29% on August 27, 1998, as Russia defaulted on its internal government debt.
Russia.s RTS stock index lost 86% for 1998. Also, Russian government bond yields
increased from 333% on August 26, 1998, to 578% on August 27, 1998 (24,290 bps).

1998 LTCM.

Long Term Capital was a major driver of the depressed equity markets in the third
quarter. The DJIA fell 12%, price volatilities exceeded 70% in August, credit spreads
increased substantially across the board.

1999 Brazil crisis.

Brazil devalued its currency by 8% on January 14, 1999, and the Bovespa stock
index fell 10% to a low of 5057.19 the same day. Price volatilities on the Brazilian real
exceeded 80% in January.

68 | P a g e
 LESSONS LEARNED
These crises show that it is hazardous to base one risk-management process on
normal or likely market moves. Effective risk management must minimize surprises and,
hence, must cover less likely but severe events, shocks, or surprises like the following:

Linkages abnormal correlations.

In distress conditions different markets can become linked quickly and normal
correlations cease to hold. Markets do not stay compartmentalized due to the speed of
information and investor-driven financial flows. Hence, correlation assumptions based on
history of normality break down, and correlations tend to swing to extremes , including +
100% or -100%

Speed of price shocks.

Markets gap or price moves become discontinuous as information spreads almost

instantaneously and market participants rush to act. Hedging assumptions break down and
orderly execution becomes difficult.

Concentration.

Under normal conditions, one can balance the hazards of concentration against the
competitive benefits of scale and market leadership that it allows. But market shocks can turn
a concentration into a near-fatal loss. Further, distress market conditions can create new,
surprising, and near-fatal concentrations through new and sudden linkages. Each market
crisis or major loss reveals surprising new sources of concentration.

Sudden decreases in liquidity.

All markets can experience dramatic drops in liquidity and, through new linkages,
multiple markets can become illiquid at the same time. Institutions have generally become
more vulnerable to liquidity shocks as growth in investor needs and higher margin products
are increasingly in newer, smaller markets and more complex and thinly traded products.

69 | P a g e
Credit / macroeconomic bets.

An increasing proportion of many portfolios is bets on creditworthiness, credit

spreads, or favorable macroeconomic conditions in a country or region. Hence, structural
changes or shocks in macroeconomic, sociopolitical factors leading to crises of confidence;
pressures on currency values, interest rates, or capital flows; and sudden worsening of
economic conditions in a country or region can cause spectacular losses.

Hedging techniques fail.

Severe market turbulence can create excessive costs if not outright difficulties in
hedging or rebalancing positions. Key assumptions built into pricing models cease to be

valid. Large unexpected losses occur.

70 | P a g e
 Market moves.
Stress testing for extreme market moves is common. We are all familiar with tests
like shocking equity prices by gaps of 10%,20%, 30%, and 40%. Other important tests, some
of which are not as common as should be, include the following:

Parallel shifts in the yield curve,

For example, the interest-rate-risk and portfolio impact of a 100-basis-point shift in

the yield curve. Identify the number and level of yield curve shifts to test for. These can be
designed to take into consideration the individual markets propensity for large movements by
evaluating the impact of a large standard deviation move in the market, such as .What the
impact of a 5, 6, or 7 + standard deviation move?.

Yield curve twists.

Identify the impact of changes in the shape of the yield curve. What happens when
the curve steepens, flattens, or inverts by 25, 50, or 100 basis points? How sensitive is your
portfolio to each of these scenarios and by how much?

Basis changes.

Understand and test for the relationships assumed in the risk exposures of your
portfolio .For example, are you betting that the relationship between two countries. rates or
their interest-rate differential holds, narrows, or widens?

Swap and other credit spreads.

Test for the impact of changing credit spreads on the portfolio. How hedged is the
portfolio? What are the implicit credit spread assumptions within each of your portfolios of
swaps, corporate bonds, high-yield securities, converts versus equities, and how would these
differ by market or country?

Price shifts.

Evaluate the impact of price shifts in equities, commodities, currencies, and other
asset classes such as real estate and their impact on the portfolio. For each asset or market,
select the size of the price shocks that are stressful enough but still possible based on
evidence of a similar event in order to make it meaningful.

71 | P a g e
Currency devaluations.

Estimate the impact to the portfolio of currency devaluations and the effect on related
markets and currencies.

Volatility changes and twists in the term structure of volatility.

What is the impact of changes in volatilities in the market and changes in the
volatility term structure on the options and other portfolios?

Liquidity.

Test what happens when market liquidity dries up so that you can no longer hedge
your portfolio. Likewise, test for instances where you have to liquidate your hedges if the
underlying transaction.s hedging is extinguished. Test for the impact of reducing large
positions at different levels of market liquidity and estimate how long it takes and the costs
of covering the position.

Credit tightening.

What is the impact to your portfolio of credit and counterparty lines tightening?
Estimate and anticipate alternative funding costs and sources in a difficult market
environment. How would this affect the economics of current business and the pricing and
competitiveness of future business?

Contagion.

Evaluate the portfolio impact of all positions and markets moving in the wrong
direction. What is the worst-case loss? Understand how markets are linked and size the
impact of a regional and worldwide effect on markets.

Speed and time period.

Estimate the speed and duration of the extreme market moves and how well the e
market moves and how well the portfolio can withstand it.

72 | P a g e
 Implementation of stress testing model in
portfolio selection
Whether it is deal valuation, credit estimates or VAR, models are used with
assumptions that are not routinely stress tested. It.s critical to understand the limitations of all
the modelsused and understand their sensitivity to inputs, calculations, and methodologies.

Modeling assumptions to be stress tested include the following:

Yield curve interpolation and creation.

The yield curve used for valuations across many instruments should be tested
rigorously. In addition, itis important to stress test more routinely for markets with less liquid
or fewer available instruments along the yield curvel

Pricing models.

What is the choice of pricing models used? For example, there are differences in
option-pricing models used even for instruments in deeply traded markets. In newly
developing markets the differences may be very significant as it is in the current state of
credit derivatives models used. Differences in pricing models used are also due to the
proprietary nature of the models as in the case of mortgage models. Further, are the same

models used in different parts of the organization to evaluate the same portfolio?

Models used for trading and hedging strategies.

Models used for trading and hedging strategies should be evaluated for critical
assumptions such as, .What is a typical market move? What correlation assumptions are
assumed in pricing different markets? How dependent is the portfolio’s value on these
models?

73 | P a g e
Risk and economic capital measures.

Identify the portion of the risk and capital measures that isdependent on assumptions
of volatilities and correlations.Assess the impact of differences in methods and calculations
used.

Volatilities.

Evaluate the historical volatilities used in the models. How close are these to the
implied volatilities? What is the impact on the portfolio valuations and risk measures if the
assumptions are 10%, 20%, 30% + off?

Correlations.

What happens when correlations are different from history? Test for extreme moves
such as correlations going to 1. Test for all markets moving against the portfolio positions or
correlations moving opposite from history to the extremes at 1, 0, and - 1. Create scenarios
where markets are linked, such as equity moves affecting interest-rate moves, affecting
currency moves

74 | P a g e
 Product complexity.
As products become more complex, what drives their valuation becomes less
transparent. The risks are less obvious and difficult to visualize.These products typically have
multiple risk elements and linked parameters. For such products, stress testing is imperative
for understanding and quantifying the risks.

Derivatives.

All derivative portfolios should be stress tested along with the models used.
Derivatives models assume continuous markets and the ability to dynamically hedge the
portfolio. Often these assumptions are taken for granted, because this is usually the case in
the most liquid derivatives markets of USD or other major currencies. However, thereis a
crucial distinction between the conditions in major markets and conditions for derivatives in
the emerging markets.

Mortgages.

Complex proprietary pricing models have been developed to manage and assess the
risks of mortgages. However, the behavioral aspects of mortgages and the results on the cash
flow assumptions leave no choice but to do a battery of scenarios and stress testing of
underlying parameters.

Structured products with embedded multiple risks.

The more complex the instrument that embodies a structured view on the market and
risk types,the more difficult it is to simply view the drivers of the risks. It becomes crucial for
these products to have sensitivity analysis done for extreme levels of market moves.

Products that have a wide range in acceptable pricing models used.

The pertinent questions are: What is the range of acceptable prices and how wide isit?
What happens with hedging accuracy? How much of the portfolio do you feel comfortable to
be at risk to this modeling and product assumption?

75 | P a g e
Difficult-to-handle risks and asset types.

Private equity,venture capital, and real estate are examples of non-traditional asset
classes that have become larger pieces of portfolios. Products that have wide bid/ask spreads
also fall into this category. These assets require stress testing to properly measure and
manage.

Emerging markets and other difficult-to-handle markets

Emerging markets have a high propensity for discontinuous market moves as a result
of political and economic changes. They often also have short histories of relevant market
information that can be applied in the traditional risk measures such as VAR. As a result, it is
crucial to supplement the standard measures by asking .What can go wrong? What happens
in a default situation? How exposed is the portfolio to devaluations, currency controls,
liquidity crises, client concentrations, etc.?

Credit.

Much attention has been paid to the market-risk side of the equation, but for most
financial institutions, the credit-risk portfolio is still the larger portion by far of total risk
exposure. Further, a larger part of the traded portfolio is dependent on credit plays in the
form of taking basis risks on corporations, sovereign risks in non-G7 countries, and outright
credit positions through credit derivatives. Hence, it is crucial to stress test the various facets
of credit risk in an institution.

• Credit or name concentration. How much outstanding is there to a name or

counterparty? How much outstanding risk is there to each credit class,for example,
BBB credits? What are the effects on the portfolio of significant downgrades and the
rollover effects to like credits?

• Industry concentration. How much exposure is there to an industry, and what is the
impact if the industry sector is undergoing cyclical changes, economic downturn,
etc.?

Country or region concentrations. What is the country mix of the portfolio? How is it
exposed to regional concentrations? What is the likely impact of credit downgrades by
country and the rollover effects in the region? How linked are countries in that region?

76 | P a g e
 • Concentration across different client segments .Identify drivers of client financial
flows that are similar across otherwise different client segments. These are hidden
potential sources of concentration.

• Drivers of the ability and willingness to repay, particularly under crises. Evaluate
the impact of significant market crises and the effect it has on entire classes of
counterparties or credits. What are potential default rates? What is the range of
reasonable recoveries and in what time frame l

• Contingent credit exposures, particularly of derivatives. Design stress tests that

allow you to estimate the potential exposure of the portfolio to extreme market
moves. This is an area where market risk drives the size of the credit risk exposure
and linkages across risk types

• Sea changes. The year 1998 was also notable in the number of .firsts. or records in
the financial markets, for example:

 The lowest Japanese long-term interest rates in recorded history, 0.25%, which
makes borrowing money almost cost-free;

 The lowest U.S. mortgage rates since 1967;

 The largest drop in the Russell 2000 index of small cap stocks (31% from the
high);

 Record levels of trading losses across all financial institutions.

These market records should warn us of the need to watch for sea changes and to
anticipate the potential impaction the portfolios of these changes. Sea changes on the
horizon include the following:

The effects of the European monetary union on trading, on Europe as a common

market force, and on the potential winners and losers due to competition, consolidation, and
rationalization of resources and assets in the markets.

The millennium and the impact of Y2K, changes in the political arena the next century
will bring, and the changes in the nature of the financial services industry;

77 | P a g e
 The impact of countries. political and economic policies on the financial markets,
such as capital controls, and the speed with which everyone would need to manage across
boundaries that are quickly disappearing

MANY DO IT BUT FEW ARE SATISFIED

Although many firms have stress-testing programs, few are satisfied with their efforts
or the results. Our experience suggests that one or more of the following attributes of
effective stress testing are usually missing:

Must be stressful enough. Smaller moves are not relevant for stress testing and are
already taken care of in risk and capital measures. As long as the events are not impossible,
no matter how unlikely or draconian it may seem, it is important to include it. Also, it is
important to account for the speed and duration of the stress event.

Must identify key assumptions. It must answer .What key assumptions when changed
would substantially change my results and comfort level with the portfolio and risks?. Unless
explicitly examined, key assumptions tend to remain hidden.

Must make risks transparent. It must describe and measure the difficult-to-visualize,
nonlinear, asymmetric risks, such as options and prepayment risks.

Must not compartmentalize risks. It must identify linkages across risks and markets
and describe how these can change, for example, the impact of correlations on liquidity, the
impact of extreme correlations on prices. Stress tests must also take into account the ripple
effect across markets, industries, and institutions, for example, LTCM Must be updated
systematically. Stress tests must be refreshed and updated systematically to capture new
sources of surprises and current portfolio characteristics.

Must be aligned to the firm’s culture. To be effective, methods selected should take
into consideration the culture, management style, and processes of the firm. For example,
how quantitative or qualitative a stress testing program is will be driven primarily by the
firm’s style and comfort.

In addition to missing one or more of the above attributes, some firms are paralyzed
by the following concerns.

78 | P a g e
 If I apply a capital charge based on the results of stress tests, it’ll kill my business. If
I don’t what’s the point of stress testing?

How can I communicate the stress-testing program to senior management without

raising undue alarm?

Ultimately, what can I do with the results of stress testing? If the tests are extreme
enough,wouldn.t the results be too scary? If we ignore the results in order to continue to run
our businesses,why go through the exercise?

WHAT TO DO WITH THE RESULTS OF STRESS TESTING

In our experience, the following process works well Senior management must take the lead
in designing the stress-testing program and in asking the extreme and difficult questions.

Scan all markets and extraordinary risk events to learn the lessons from history.

Identify the key assumptions, common drivers, and other vulnerabilities affecting the
portfolio and earnings

Run stress tests and scenarios appropriate for the portfolio and risks.

Systematically refresh the battery of stress tests specific to the portfolio and repeat
periodically(some tests weekly, others monthly, others yearly.

79 | P a g e
 Implementation of value at risk model in portfolio selection

Portfolio selection under shortfall constraints

Portfolio selection under shortfall constraints has its origins in the work by Roy
(1952) on safety-first theory. Roy defined the shortfall constraint such that the probability of
the portfolio value falling below a specified disaster level is limited to a specified disaster
probability. We extend the literature on asset allocation subject to shortfall constraints.We
address the potential problem concerning the defnition of disaster levels and probabilities
through the use of VaR, and develop a market equilibrium model for portfolio selection,
which allows for alternative parametric distributions to be used. Banks and financial
institutions have adopted VaR as the measure for market risk,whereby VaRis defined as the
maximum expected loss on an investment over a specified horizon given some confidence
level.For example a 99% VaR for a 10-day holding period,implies that the maximum loss
incurred over the next 10 days should only exceed the VaR limit once in every 100 cases. It
therefore restricts the potential downside risk faced on investments in terms of nominal
losses. Introducing VaR as a shortfall constraint into the portfolio selection decision, so that
the portfolio manager or investor is highly concerned about the value of the portfolio falling
below the VaR constraint, is much more in sitting with individual perception to risk and more
in line with the constraints which management currently face.In the framework developed,
the measure for risk is defined in terms of the VaR over and above the risk free rate of return
on the initial wealth. The portfolio is then selected to maximise expected return subject to the
level of risk. The final choice of portfolio, including the borrowing and lending decision will
therefore meet the specified VaR limit. VaR is therefore used as an exante market risk
control measure, extending the richness of VaR as a risk management tool. Developing upon
the framework as laid out by Arzac and Bawa (1977), we provide a model in terms of
downside risk, so that the optimal portfolio is determined in terms of its VaR, and a
performance index, similar to the Sharpe ratio is developed. In this way, we are able to leave
the distributional assumptions about the structure of the tails of the distribution or any
skewness, to that most in accordance with the financial asset held. This has the advantage of

80 | P a g e
allowing for non-normal payos as with most derivative products: providing a general but
highly desirable model for optimal portfolio selection. We shall also see that under certain
distributional assumptions the model collapses to the CAPM,as developed by Sharpe (1964),
Lintner (1965)and Mossin (1966). Since the model is able to encompass much of modern
portfolio theory we are able to observe the eect on the portfolio decision induced by non-
normalities.

Portfolio selection model

In this section, we present a portfolio construction model subject to a VaR limit set by
the risk manager for a specified horizon. In other words, we derive an optimal portfolio such
that the maximum expected loss would not exceed the VaR for a chosen investment horizon
at a given confidence level.

Using VaR as the measure for risk in this framework is in accordance with the
banking regulations in practice and provides a clear interpretation of investors' behaviour of
minimising downside risk. The degree of risk aversion is set according to the VaR limit;
hence avoiding the limitations of expected utility theory as to the degree of risk aversion,
which an investor is thought to exhibit.

Optimal portfolio selection for US stocks and bonds

In order to determine the effect of deviations from normality, and the time horizon
chosen for the VaR level we have estimated the optimal portfolios for a US investor using
US Stocks and Bonds such that a VaR constraint over various time horizons is met. We use
data obtained from datastream for the S&P 500 composite return index for the US, the 10-
year datastream benchmark US government bond return index and the 3-month US Treasury
Bill rate for the risk-free rate. We employ daily data from these US indices from January
1990 until December 1998, providing us with 2364 observations. The average annual return
on the S&P 500 over the sample period was 16.81%, just over twice as high as the average
annual return on the 10-year Government Bond Index of 8.35%. The annual standard
deviation is also higher on the S&P 500 at 13.42% per annum, compared to the less volatile
nature of the Government Bonds with an annual standard deviation of only 6.31%. Looking
at the alternative frequencies in, we see that the monthly average return is naturally greater
than the daily return; however the standard deviation of the distribution is also greater, and is
even greater than the square root of time rule would suggest. This provides an indication of
autocorrelation. We also see that for all three data frequencies significant skewness and

81 | P a g e
kurtosisis prevalent

Portfolio selected with implementation of Risk management

Sample 1:

Name Percentage PE Ratio EPS Face Net profit Return

value margin(%) on
average
equity

Rural 11.75 12.08 14.81 10 24.31 16.02

Electrific

IVRCL Infra 9.28 20.02 16.93 2 5.58 13.13

& Pr

MphasiS Ltd. 11 34.03 12.66 10 18.16 22.62

Mundra Port 7.92 48.66 11.51 10 25.44 8.17

&
Specia

Shree 8 9.28 165.91 10 20.8 47.76

Cement

United 13 31.68 29.68 10 9.82 15.48

Spirits Ltd.

Federal Bank 10 8.41 29.26 10 12.64 9.39

Power 9.87 13.14 17.16 10 23.95 11.6

Finance Co

UltraTech 12 10.28 78.48 10 15.06 27.13

Cement

Engineers 7.18 17.26 61.25 10 23.89 16.89

82 | P a g e
India

Expected retur : 40%

Minimum investment : >500000

Portfolio PE Ratio : 20.48

Portfolio earning per share: 43.76

Avgerage face value of portfolio: 9.2

Return average equity : 18.81

Risk management model : VAR

Risk Exposure : 30-80%

Category : High Risk High Return

Diversification : 7%

This portfolio is good for the income group between Rs 5-10 lac and willing to invest
on market value portfolio of greater than Rs10 lac. Risk appetite of the client is low.
liquidity in type of portfolio is high. Emphasis is given to financial institution , Computers -
Software, Cement - Major, Construction & Contracting - Civil. With the diversification
of approx 7% at the time of creating portfolio

83 | P a g e
Sample 2

Name Percentage PE EPS Face Net profit Return on

Ratio value margin(%) average
equity

Eicher Motors 12.06 24.75 14.34 10 5.42 8.1

Apollo Tyres 13.25 18.23 2.14 1 2.63 7.99

Indian Bank 12.9 4.97 28.98 10 16.25 22.03

LIC Housing Fi 11.47 9.41 62.59 10 18.37 23.79

Exide Inds. 11.25 22.97 3.55 1 7.55 23.35

Ashok Leyland 11.02 24.51 1.43 1 3.1 9.05

Ramkrishna
Forgings 8.41 29.15 2.96 10 6.22 15.38

Amara Raja
Batt. 4.22 12.32 9.42 2 5.98 19.84

IndiabullsFinSe
rvice 3.24 51.44 3.92 2 34.38 17.59

Escorts Ltd. 12.18 51.59 1.31 10 0.58 1.63

84 | P a g e
Expected return: 35%

Minimum Investment: >600000

Portfolio PE Ratio : 24.93

Portfolio earning per share: 13.0

Avgerage face value of portfolio : 5.7

Return average equity : 10.04

Risk management model : VAR

Risk Exposure : 40-80%

Category : High risk High Return

Diversification :7%

This portfolio is good for the income group between Rs 5-10 lac and willing to invest
on market value portfolio of lesser than Rs 25 lac. Risk appetite of the client is high. liquidity
in type of portfolio is low. Emphasis is given to Auto - LCVs/HCVs, Auto Ancl - Batteries,
Tyres & Tubes And Exploration, Finance - Banks - Public Secto. With the
diversification of approx 7%

85 | P a g e
Sample 3

Name Percentage PE EPS Face Net profit Return

Ratio value margin(%) on
average
equity

Indian Rly. Fin 6.72 879.22 830.31 1000 17.45 21.51

LIC Housing Fi 13.16 9.41 62.59 10 18.37 23.79

ICICI Bank 12.44 22.44 33.76 10 9.74 7.58

ONGC 8.86 14.62 75.4 10 25.93 23.87

Power Finance Co 9.59 13.14 17.16 10 23.95 11.6

SBI 7.58 11.7 143.67 10 12.03 15.74

Bank of Baroda 6.55 6.84 60.93 10 12.86 17.35

Rural Electrific 18.54 12.08 14.81 10 24.31 16.02

GlaxoSmithKlineConsu 7.35 23.57 44.78 10 11.56 24.75

Crompton Greaves 9.21 27.43 10.83 2 8.4 32.35

86 | P a g e
Expected return: 30%

Minimum investment: >500000

Portfolio PE Ratio : 102.04

Portfolio earning per share: 129.42

Avgerage face value of portfolio: 108.2

Return average equity : 19.45

Risk Management model : VAR

Risk Exposure : 40-60%

Category : Medium risk, Medium Return

Diversification : 10%

This portfolio is good for the income group between 10-25 lac and willing to invest
on market value portfolio of lesser than10-50 lac. Risk appetite of the client is low. liquidity
in type of portfolio is high. Emphasis is given to financial institute , Computers - Software,
Oil Drilling And Exploration, Telecommunications - Service. With the diversification of
approx 10%

87 | P a g e
Sample 4

Name Percentage PE Ratio EPS Face Net profit Return on

value margin(%) average
equity

Rallis India 15 12.07 60 10 8.32 25.51

Power 13.14 17.16 10 23.95 11.6

Finance Co 10.96

IDBI Bank 8.77 11.85 10 6.71 11.53

Ltd. 13.47

Trent Ltd. 10.62 36.25 13.7 10 4.68 4.15

Indian Rly. 879.22 830.31 1000 17.45 21.51

Fin 6.66

Infosys 19.61 101.73 5 27.54 32.67

Techno. 6.52

Reliance 19.68 97.07 10 14.47 24.66

Inds. 6.18

Nava 5.39 59.78 2 35.11 38.85

Bharat
Ventures 6.14

ITC Ltd. 11.64 27.81 8.65 1 21.18 23.85

L & T 12.81 25.14 59.44 2 8.54 22.81

Expected return: 24.92

Minimum investment: >400000

Portfolio PE Ratio : 104.708

88 | P a g e
Portfolio earning per share: 125.96

Avgerage face value of portfolio: 106

Return average equity: 21.71

Risk management model : VAR

Risk Exposure : 40-60%

Category : Medium risk, Medium Return

Diversification: 10%

This portfolio is good for the income group between 1-5 lac and willing to invest on
market value portfolio of lesser than25 lac. Risk appetite of the client is high. liquidity in
type of portfolio is low. Emphasis is given to Finance - Term Lending Institutions,
Chemicals, Computers - Software Telecommunications - Service, Finance - Banks - Public
Sector. With the diversification of approx 10%

Sample 5

Name Percentage PE Ratio EPS Face Net profit Return on

value margin(%) average

89 | P a g e
 equity

Indian Oil 20.87 24.74 10 2.78 16.99

Corp 13.18

SBI 11.23 11.7 143.67 10 12.03 15.74

National
Housing 9.3 9.41 62.59 10 18.37 23.79

IDBI Bank 8.77 11.85 10 6.71 11.53

Ltd. 12.56

Reliance 19.68 97.07 10 14.45 24.66

Inds. 9.8

HDFC 27.18 52.78 10 11.35 15.32

Bank 11.24

Neyveli 27.95 4.89 10 30.7 12.22

Lignite 9.56

ACC Ltd. 6.16 13.42 64.55 10 16.29 24.61

Axis Bank 18.56 50.57 10 13.31 17.77

Ltd. 7.42

HDFC 9.55 29.59 80.24 10 20.71 17.37

Expected return: 13%

Minimum investment: >100000

Portfolio PE Ratio : 17.52

Portfolio earning per share: 59.29

Average face value of portfolio; 10

Return average equity: 18

90 | P a g e
Risk management model : VAR

Risk Exposure : 20-40%

Category : low risk low return

Diversification : 7%

This portfolio is good for the income group between 1-5 lacs and willing to invest on
market value portfolio of lesser than 1 lacs. Risk appetite of the client is low. liquidity in type
of portfolio is high but comparatively return is quite low. Emphasis is given to financial
institute , Refineries, Power - Generation/Distribution, Cement – Major. Wih the
diversification of approx 7%

Sample 6

Name Percentage PE Ratio EPS Face Net profit Return on

value margin(%) average
equity

Reliance 12.03 19.68 97.07 10 14.45 24.66

91 | P a g e
Inds.

L & T 7.84 25.14 59.44 2 8.54 22.81

Infosys 19.61 101.73 5 27.52 32.67

Techno. 9.41

ICICI Bank 9.12 21.91 33.76 10 9.74 7.58

HDFC 9.75 29.59 80.24 10 20.71 17.37

HDFC 27.18 52.78 10 11.35 15.32

Bank 9.26

Bharti 20.76 20.4 5 23.99 30.94

Airtel 9.18

ITC Ltd. 23.12 27.81 8.65 1 21.18 23.85

SBI 5 11.7 143.67 10 12.03 15.74

ONGC 5.29 14.62 75.4 10 25.93 23.87

92 | P a g e
Expected return: 25%

Minimum investment: >2000000

Portfolio PE Ratio : 102.04

Portfolio earning per share: 129.42

Avgerage face value of portfolio: 108.2

Return average equity: 19.45

Risk management model : VAR

Risk Exposure : 5-30%

Category : Blue chip

Diversification : 16%

This portfolio is good for the income group between 10-25 lacs and willing to invest
on market value portfolio of lesser than10-50 lacs. Risk appetite of the client is low. liquidity
in type of portfolio is high. Emphasis is given to financial institute , Computers - Software,
Oil Drilling And Exploration, Telecommunications - Service. With the diversification of
approx 16%

93 | P a g e
 CONCLUSION

Focussing on downside risk as an alternative measure for risk in financial markets has
enabled us to develop a framework for portfolio selection that moves away from the standard
mean±variance approach. The measure for risk depends on a portfolio's potential loss
function, itself a function of portfolio VaR. Introducing VaR into the measure for risk has the
benefit of allowing the risk +return trade-o to be analysed for various associated confidence
levels.

Since the riskiness of an asset increases with the choice of the confidence level
associated with the downside risk measure, risk becomes a function of the individual's risk
aversion level. The portfolio selection problem is still to maximise expected return, however
whilst minimising the downside risk as captured by VaR. This allows us to develop a very
generalized framework for portfolio selection. Indeed the use of certain parametric
distributions such as the normal allows for a market equilibrium model to be derived, with
the assumption of normality enabling the model to collapse.

94 | P a g e
 BIBLIOGRAPHY
Following sources is been proved very helpful in preparation of this report

Website

www.angelbroking.com

www.in.ibtimes.com

www.rediff.com/money

www.thehindubusinessline.com

Journal

Investor’s journal of financial economic by ER Bawa

Journal of Portfolio Management by Bekaert, G., Erb, C., Harvey, C., Viskanta, T.,

Das, D., Uppal, R., 1999. The eect of systemic risk on international portfolio choice.
Workingp paper.

Journal of Banking & Finance 25 (2001)

Books

Financial market in india by rakesh shahni

Integrated risk management :techniques and strategies for managing corporate risk byNeil A
Doherty.

The financing of catastrophe risk by Kenneth Froot

95 | P a g e