Portfolio Risk and Return - Selected Firms-Kotak Securities Limited

A
PROJECT REPORT
On
PORTFOLIO RISK AND RETURN – SELECTED FIRMS
With reference to
KOTAK SECURITIES LIMITED

By
MOHD HUSSAIN
H.T.NO:1422-11-672-160
Project Submitted in partial fulfillment for the Award of the Degree of
MASTER OF BUSINESS ADMINISTRATION
UNDER THE ESTEEMED GUIDANCE OF Mrs. P.V. NAGAMANI

CSI INSTITUTE OF PG STUDIES
(Affiliated to Osmania University, Approved by A.I.C.T.E)
EAST MARREDPALLY,SECUNDERABAD.
2011 - 2013
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CERTIFICATE
We hereby declare that this Project titled “ PORTFOLIO RISK AND
RETURN – SELECTED FIRMS ” submitted Partial fulfillment for the
award of MASTER OF BUSINESS ADMINISTRATION was carried
out by MOHD HUSSAIN under our guidance. This has not been submitted to
any other University or Institution for the award of any degree /
Diploma/Certificate.
.
Principal
DATE :
PLACE :
2
DECLARATION
I hereby declare that this Project Report titled PORTFOLIO RISK
AND RETURN – SELECTED FIRMS submitted by me to the Department
of Business Management, O.U., Hyderabad, is a bonafide work undertaken by me
and it is not submitted to any other University or Institution for the award of any
degree diploma / certificate or published any time before.
Name and Address of the Student Signature of the Student
DATE :
PLACE :
3
ACKNOWLEDGEMENT
 It is my privilege to thank all those who have contributed with their valuable suggestions
towards the completion of the project.
 I express my gratitude to our director Dr. Mrs. PREETHI CHRYSOTITE for his
consistent support for his encouragement.
 My deepest thanks to head of the department ( business management ) and Asst.

Professor Mrs. P. SUHASINI for extending her support.
 I would like to express my sincere thanks to my internal guide Mrs. P.V. NAGAMANI
( faculty guide ) for their immense support during my project report.
 I would like to thanks all the faculty member who have been a strong source of
inspiration throughout the project directly or indirectly.
 I am even very much thankful to project guide Mr. RAJESH ANAND and manager of
KOTAK SECURITIES Limited for allowing me to carry out my project work and
providing me whatever information are required in the organization.
4
TABLE OF CONTENTS
CONTENTS PAGE NUMBERS
List of Tables
List of Figures
CHAPTER – 1 7 TO 17
1.1 INTRODUCTION
1.2 OBJECTIVES OF THE STUDY
1.3 NEEDS AND SCOPE OF THE STUDY
1.4 RESEARCH METHODOLOGY
1.5 LIMITATION OF THE STUDY
2.1 REVIEW OF LITERATURE
2.2 ABOUT THE PORTFOLIO RISK & RETURN
3.1 INDUSTRY PROFILE
3.2 COMPANY PROFILE
5
4.1 DATA ANALYSIS
4.2 INTERPRETATION
5.1 FINDINGS
5.2 SUGGESSTIONS
5.3 BIBILOGRAPHY
6
CHAPTER – 1
7
1.1 INTRODUCTION
The financial market is the driver of the economic growth and development of any
country. A sound financial market can take the country to the apex. Financial resources were by
allocating the resources through one of the ways such as portfolios, which are combinations of
various securities. Portfolio analysis includes analyzing the range of possible portfolios that can
be constituted from a given set of securities.
A combination of securities with different risk- return characteristics will constitute the
portfolio of the investor. A portfolio is a combination of various assets and/or instruments of
investments. The portfolio is also built up out of the wealth or income of the investor over a
period of time with a view to suit his risk and return preferences to that of the portfolio that he
holds. The portfolio analysis is an analysis of the risk-return characteristics of individual
securities in the portfolio and changes that may take place in combination with other securities
due to interactions among themselves and impact of each one of them on others.
As individuals are becoming more and more responsible for ensuring their own financial
future, portfolio or fund management has taken on an increasingly important role in banks ranges
of offerings to their clients. In addition, as interest rates have come down and the stock market
has gone up and come down again, clients have a choice of leaving their saving in deposit
accounts, or putting those savings in unit trusts or investment portfolios which invest in equities
and/or bonds. Investing in unit trusts or mutual funds is one way for individuals and corporations
alike to potentially enhance the returns on their savings.
A portfolio is a collection of investments held by an institution or a private individual. In
8
building up an investment portfolio a financial institution will typically conduct its own
investment analysis, whilst a private individual may make use of the services of a financial
advisor or a financial institution which offers portfolio management services. Holding a portfolio
is part of an investment and risk-limiting strategy called diversification. By owning several
assets, certain types of risk (in particular specific risk) can be reduced. The assets in the portfolio
could include stocks, bonds, options, warrants, gold certificates, real estate, futures contracts,
production facilities, or any other item that is expected to retain its value.
Portfolio management involves deciding what assets to include in the portfolio, given the
goals of the portfolio owner and changing economic conditions. Selection involves deciding
what assets to purchase, how many to purchase, when to purchase them, and what assets to
divest. These decisions always involve some sort of performance measurement, most typically
expected return on the portfolio, and the risk associated with this return (i.e. the standard
deviation of the return). Typically the expected returns from portfolios, comprised of different
asset bundles are compared.
The unique goals and circumstances of the investor must also be considered. Some investors
are more risk averse than others. Mutual funds have developed particular techniques to optimize
their portfolio holdings.
Combination of individual assets or securities is a portfolio. Portfolio includes investment in

different types of marketable securities or investment papers like shares, debentures stock and
bonds etc., from different companies or institution held by individuals firms or corporate units
and portfolio management refers to managing securities. Portfolio management is a complex
process and has the following seven broad phases.
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1. Specification of investment objectives and constraints.
2. Choice of asset mix.
3. Formulation of portfolio strategy.
4. Selection of securities.
5. Portfolio execution.
6. Portfolio rebalancing.
7. Portfolio performance.
Portfolio Diversification:
An important way to reduce the risk of investing is to diversify your investments.

Diversification is aim to “not putting all your eggs in one basket”. For example, if your portfolio
only consisted of stocks of technology companies. It would likely face a substantial loss in value
if a major event adversely affected the technology industry.
There are different ways to diversify a portfolio whose holding are concentrated in one
industry. You might invest in the stocks of companies belonging to other industry groups. You
might allocate to different categories of stocks, such as growth, value, or income stocks. You
might include bonds and cash investments in your asset allocation decisions. Potential bond
categories include government, agency municipal and corporate bonds. You might also diversity
by investing in foreign stocks and bonds.
Diversification requires you to invest the securities whose investment returns do not
move together. In other words, their investment returns have a low correlation. The correlation
coefficient is used to measure the degree that returns of two securities are related. For example,
two stocks whose returns move in lockstep have a coefficient of +1.0. Two stocks whose returns
move in exactly the opposite direction have a correlation of -1.0. To effectively diversity, you
should aim to find investments that have a low or negative correlation.
As you increase the number of securities in your portfolio, you reach a point where
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you’ve likely diversified as much as reasonably possible. Financial planners vary in their views
on how many securities you need to have a fully diversified portfolio. Some say it is 10 to 20
securities. Others say it is closer to 30 securities. Mutual funds offer diversification at a lower
cost. You can buy no-load mutual funds from an online broker. Often, you can buy shares fund
directly from the mutual fund, avoiding a commission altogether.
Asset Allocation:
Asset allocation is the process of spreading your investment across the three major asset
classes of stocks, bonds and cash.
Asset allocation is a very important part of your investment decision-making.

Professional financial planner frequently point out that asset allocation decisions are responsible
for must of your investment return.
Asset allocation begins with setting up an initial allocation. First, you should determine
your investment profile. Specially, this requires you to assess you investment horizon, risk
tolerance, and financial goals:
Investment horizon, Also called time horizon your investment horizon is the number of
years you to save for a financial goal. Since you’re likely to have more than goal, this means you
will have more than one investment horizon. For example, saving for your give-year-daughter’s
college has an investment horizon of 12 years. Saving for your retirement in 30 years has an
investment horizon of 30 years. When you retire, you will want to have saved a lump sum that is
large enough to generate earnings every year until you die risk tolerance.
Your risk tolerance is a measure of your willingness to accept a higher degree of risk in
exchange for the chance to earn a higher rate or return. This is called the risk-return trade-off.
Some of us, naturally, are conservative investor, while other are aggressive investors.
As a general rule, the younger your are, the higher your risk tolerance and the more
11
aggressive you can be. As a result, you can afford to allocate a higher percentage of your
investment to securities with more risk. These include aggressive growth stocks and the mutual
funds that investion them.
A more aggressive allocation is variable because you have more time to recover form a
poor year of investment returns.
Financial goal, younger and aggressive investor’s allocation, as a general rule, younger
and aggressive investors allocate 70% to 100% of their portfolios to stocks, with the remainder in
bonds and cash. Conservative investors allocate 40% to 60% in bonds, and the remainder in cash.
Moderate investors allocate somewhere between the allocation of aggressive and

conservative, to make an initial allocation, you need to build a portfolio of individual securities,
mutual funds, or both. In general, mutual funds provide more diversification benefit for the buck.
How you choose to precisely allocate among the major asset classes depends, in part, on
other factors. For example, if example, if interest rates are expected to rise, you might allocate a
greater percentage to money market mutual funds, CDs, or other bank deposits. If rates are
headed lower, you may choose to allocate more to stocks or bonds.
Financial planners suggest that you rebalance, or reallocate, your portfolio from time to
time. They differ in their views on how often you should reallocate. It may be once a year or it
may be every three to six months. At a minimum, reallocation lets you up date any changes in
your investment profile, or to take advantage of a change in interest rates. Rebalancing often
involves nothing more than a “fine-tuning” of your current allocations. For example, a
conservative investor may decide to shift 5% of her portfolio form stocks to cash to take
advantage of higher rates that money market funds may be offering.
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SPECIFIC INVESTMENT OBJECTIVE AND CONSTRAINS
The first step in the portfolio management process is to specify the one’s investment objectives
and constraints.
The commonly stated investment goals are:-
INCOME - To provide a steady income through the regular interest or divided payment.
GROWTH -To increase the value of the principal amount through capital appreciation.
STABILITY – Since income and growth represent two ways by which return is generated and
investment objectives may be expressed in terms of return and risk. An investor will be
interested in higher return and lower level risk. However the risk and return go hand to hand, so
an investor has to bear a higher level of risk in order to earn a higher return.
CONSTRAINTS –
An investor should bear in mind the constraints arising our of the following factor.
-Liquidity
-Taxes
-Time horizon
-Unique preferences and circumstances
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1.2 OBJECTIVES OF THE STUDY:
 To construct three portfolios of public sector units, public limited companies and foreign
collaboration and fine their ex-post returns and risk for the period of three year.
 To make a comparative study of the risk-adjusted measure of portfolio performance using

the shapre’s and Treynor’s performance indeed under total risk and market risk and
market risk situations, by taking ex-post returns for a period of three years.
 To see whether the portfolio risk is less than individual risk on whose basis the portfolios
are constituted
 To study the investment pattern and its related risks & returns.
 To find out optimal portfolio, which gave optimal return at a minimize risk to the investor.
 To understand portfolio selection process.
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1.3 NEED AND SCOPES OF THE STUDY:
 Portfolio management presents the best investment plan to the individuals as per their
income, budget, age and ability to undertake risks.
 Portfolio management minimizes the risks involved in investing and also increases the
chance of making profits.
Portfolio managers understand the client’s financial needs and suggest the best and unique
investment policy for them with minimum risks involved.
Portfolio management enables the portfolio managers to provide customized investment

solutions to clients as per their needs and requirements.
Portfolio management is a continuous process. It is a dynamic activity. The following are

the basic operations of a portfolio management.
a) Monitoring the performance of portfolio by incorporating the latest market conditions.

b) Identification of the investor’s objective, constraints and preferences.
c) Making an evaluation of portfolio income (comparison with targets and achievement).
d) Making revision in the portfolio.
e) Implementation of the strategies in tune with investment objectives.
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1.4 METHODOLOGY OF THE STUDY:
Using a model consisting of two modules has carried out the work. The first module
involves the section of portfolio and the second module involved evaluation of portfolio’s
performance.
MODULE-1
Securities selection and portfolio construction has been made by taking scripts Public
Sector Units, public limited companies and foreign collaboration units. Equal weigtage has been
given to industries like shipping, oil&gas and power growth oriented industries like
pharmaceuticals, banking and FMCG and technology oriented industries like software and
telecommunications.
MODULE – 2
Portfolio performance was evaluated by ranking holding period’s returns under total risk
and market risk situation (measured by standard deviation and Beta coefficient) for the period of
three years.
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1.5 LIMITATIONS OF THE STUDY:
The work has been carried out under the following limitations:
 The all portfolio consist of riskly assets there no risk-free assets.
 Riskly assets consist of equity shares and where as risk-free assets consists of
investments in the saving bank account, deposits, treasury bills, bonds etc.
 The holding period for risky assets was for I yr i.e. shares were assumed to be purchased
at the first day and sold at the second consecutive day and average return for I yr is
considered.
 An equal no of shares i.e. I (one) share of each script is assumed to be purchased form the
secondary market.
 Return on the saving bank account is considered as benchmark rate of return.
 All the portfolio has been held constant for the whole period of the three years.
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CHAPTER – 2
18
2.1 REVIEW OF LITERATURE
DEFINITIONS :
The art and science of making decisions about investment mix and policy, matching investments
to objectives, asset allocation for individuals and institutions, and balancing risk against performance.
Portfolio management is all about strengths, weaknesses, opportunities and threats in the choice of debt
vs. equity, domestic vs. international, growth vs. safety, and many other tradeoffs encountered in the
attempt to maximize return at a given appetite for risk.
http://www.investopedia.com
A portfolio is a collection of investments held by an institution or a private individual. In
building up an investment portfolio a financial institution will typically conduct its own
investment analysis, whilst a private individual may make use of the services of a financial
advisor or a financial institution which offers portfolio management services. Holding a portfolio
is part of an investment and risk-limiting strategy called diversification. By owning several
assets, certain types of risk (in particular specific risk) can be reduced. The assets in the portfolio
could include stocks, bonds, options, warrants, gold certificates, real estate, futures contracts,
production facilities, or any other item that is expected to retain its value.
E. GORDEN
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Portfolio management involves deciding what assets to include in the portfolio, given the
goals of the portfolio owner and changing economic conditions. Selection involves deciding
what assets to purchase, how many to purchase, when to purchase them, and what assets to
divest. These decisions always involve some sort of performance measurement, most typically
expected return on the portfolio, and the risk associated with this return (i.e. the standard
deviation of the return). Typically the expected returns from portfolios, comprised of different
asset bundles are compared.
The unique goals and circumstances of the investor must also be considered. Some investors are
more risk averse than others. Mutual funds have developed particular techniques to optimize
their portfolio holdings.
S. KEVIN
PORTFOLIO ANALYSIS:
Various groups of securities when held together behave in a different manner and give interest
payments and dividends also, which are different to the analysis of individual securities. A combination
of securities held together will give a beneficial result if they are grouped in a manner to secure higher
return after taking into consideration the risk element.
There are two approaches in construction of the portfolio of securities. They are
 Traditional approach
 Modern approach
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TRADITIONAL APPROACH:
Traditional approach was based on the fact that risk could be measured on each individual
security through the process of finding out the standard deviation and that security should be chosen
where the deviation was the lowest. Traditional approach believes that the market is inefficient and the
fundamental analyst can take advantage of the situation. Traditional approach is a comprehensive
financial plan for the individual. It takes into account the individual need such as housing, life insurance
and pension plans. Traditional approach basically deals with two major decisions. They are
a) Determining the objectives of the portfolio
b) Selection of securities to be included in the portfolio
MODERN APPROACH:
Modern approach theory was brought out by Markowitz and Sharpe. It is the combination of
securities to get the most efficient portfolio. Combination of securities can be made in many ways.
Markowitz developed the theory of diversification through scientific reasoning and method. Modern
portfolio theory believes in the maximization of return through a combination of securities. The modern
approach discusses the relationship between different securities and then draws inter-relationships of
risks between them. Markowitz gives more attention to the process of selecting the portfolio. It does not
deal with the individual needs.
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MARKOWITZ MODEL:
Markowitz model is a theoretical framework for analysis of risk and return and their
relationships. He used statistical analysis for the measurement of risk and mathematical programming
for selection of assets in a portfolio in an efficient manner. Markowitz apporach determines for the
investor the efficient set of portfolio through three important variables i.e.
 Return
 Standard deviation
 Co-efficient of correlation
Markowitz model is also called as an “Full Covariance Model“. Through this model the investor
can find out the efficient set of portfolio by finding out the trade off between risk and return, between
the limits of zero and infinity. According to this theory, the effects of one security purchase over the
effects of the other security purchase are taken into consideration and then the results are evaluated.
Most people agree that holding two stocks is less risky than holding one stock. For example, holding
stocks from textile, banking and electronic companies is better than investing all the money on the
textile company‘s stock.
Markowitz had given up the single stock portfolio and introduced diversification. The single
stock portfolio would be preferable if the investor is perfectly certain that his expectation of highest
return would turn out to be real. In the world of uncertainty, most of the risk adverse investors would
like to join Markowitz rather than keeping a single stock, because diversification reduces the risk.
ASSUMPTIONS:
 All investors would like to earn the maximum rate of return that they can achieve from their
investments.
 All investors have the same expected single period investment horizon.
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 All investors before making any investments have a common goal. This is the avoidance of risk
because Investors are risk-averse.
 Investors base their investment decisions on the expected return and standard deviation of returns
from a possible investment.
 Perfect markets are assumed (e.g. no taxes and no transition costs)
 The investor assumes that greater or larger the return that he achieves on his investments, the
higher the risk factor surrounds him. On the contrary when risks are low the return can also be
expected to be low.
 The investor can reduce his risk if he adds investments to his portfolio.
 An investor should be able to get higher return for each level of risk “by determining the
efficient set of securities“.
 An individual seller or buyer cannot affect the price of a stock. This assumption is the basic
assumption of the perfectly competitive market.
 Investors make their decisions only on the basis of the expected returns, standard deviation and
covariance’s of all pairs of securities.
 Investors are assumed to have homogenous expectations during the decision-making period
 The investor can lend or borrow any amount of funds at the risk less rate of interest. The risk
less rate of interest is the rate of interest offered for the treasury bills or Government securities.
 Investors are risk-averse, so when given a choice between two otherwise identical portfolios,
they will choose the one with the lower standard deviation.
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 Individual assets are infinitely divisible, meaning that an investor can buy a fraction of a share if
he or she so desires.
 There is a risk free rate at which an investor may either lend (i.e. invest) money or borrow
money.
 There is no transaction cost i.e. no cost involved in buying and selling of stocks.
 There is no personal income tax. Hence, the investor is indifferent to the form of return either
capital gain or dividend.
THE EFFECT OF COMBINING TWO SECURITIES:
It is believed that holding two securities is less risky than by having only one investment in a
person‘s portfolio. When two stocks are taken on a portfolio and if they have negative correlation then
risk can be completely reduced because the gain on one can offset the loss on the other. This can be
shown with the help of following example:
INTER- ACTIVE RISK THROUGH COVARIANCE:
Covariance of the securities will help in finding out the inter-active risk. When the covariance
will be positive then the rates of return of securities move together either upwards or downwards.
Alternatively it can also be said that the inter-active risk is positive. Secondly, covariance will be zero
on two investments if the rates of return are independent.
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Holding two securities may reduce the portfolio risk too. The portfolio risk can be calculated
with the help of the following formula:
CAPITAL ASSET PRICING MODEL (CAPM):
Markowitz, William Sharpe, John Lintner and Jan Mossin provided the basic structure of Capital
Asset Pricing Model. It is a model of linear general equilibrium return. In the CAPM theory, the
required rate return of an asset is having a linear relationship with asset‘s beta value i.e. un-diversifiable
or systematic risk (i.e. market related risk) because non market risk can be eliminated by diversification
and systematic risk measured by beta. Therefore, the relationship between an assets return and its
systematic risk can be expressed by the CAPM, which is also called the Security Market Line.
R = Rf Xf+ Rm(1- Xf)

Rp = Portfolio return
Xf =The proportion of funds invested in risk free assets
1- Xf = The proportion of funds invested in risky assets
Rf = Risk free rate of return
Rm = Return on risky assets
Formula can be used to calculate the expected returns for different situations, like mixing risk
less assets with risky assets, investing only in the risky asset and mixing the borrowing with risky assets.
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THE CONCEPT:
According to CAPM, all investors hold only the market portfolio and risk less securities. The
market portfolio is a portfolio comprised of all stocks in the market. Each asset is held in proportion to
its market value to the total value of all risky assets.
For example, if wipro Industry share represents 15% of all risky assets, then the market portfolio
of the individual investor contains 15% of wipro Industry shares. At this stage, the investor has the
ability to borrow or lend any amount of money at the risk less rate of interest.
E.g.: assume that borrowing and lending rate to be 12.5% and the return from the risky assets to
be 20%. There is a trade off between the expected return and risk. If an investor invests in risk free
assets and risky assets, his risk may be less than what he invests in the risky asset alone. But if he
borrows to invest in risky assets, his risk would increase more than he invests his own money in the
risky assets. When he borrows to invest, we call it financial leverage. If he invests 50% in risk free
assets and 50% in risky assets, his expected return of the portfolio would be
Rp= Rf Xf+ Rm(1- Xf)

= (12.5 x 0.5) + 20 (1-0.5)
= 6.25 + 10
= 16.25%
if there is a zero investment in risk free asset and 100% in risky asset, the return is
= 0 + 20%
= 20%
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if -0.5 in risk free asset and 1.5 in risky asset, the return is

= (12.5 x -0.5) + 20 (1.5)
= -6.25+ 30
= 23.75%
EVALUATION OF PORTFOLIO:
Portfolio manager evaluates his portfolio performance and identifies the sources of strengths and
weakness. The evaluation of the portfolio provides a feed back about the performance to evolve better
management strategy. Even though evaluation of portfolio performance is considered to be the last stage
of investment process, it is a continuous process. There are number of situations in which an evaluation
becomes necessary and important.
i. Self Valuation: An individual may want to evaluate how well he has done. This is a part of
the process of refining his skills and improving his performance over a period of time.
ii. Evaluation of Managers: A mutual fund or similar organization might want to evaluate its
managers. A mutual fund may have several managers each running a separate fund or sub-fund.
It is often necessary to compare the performance of these managers.
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iii. Evaluation of Mutual Funds: An investor may want to evaluate the various mutual funds
operating in the country to decide which, if any, of these should be chosen for investment. A
similar need arises in the case of individuals or organizations who engage external agencies for
portfolio advisory services.
iv. Evaluation of Groups: have different skills or access to different information. Academics or
researchers may want to evaluate the performance of a whole group of investors and compare it
with another group of investors who use different techniques or who
NEED FOR EVALUATION OF PORTFOLIO:
 We can try to evaluate every transaction. Whenever a security is brought or sold, we can attempt
to assess whether the decision was correct and profitable.
 We can try to evaluate the performance of a specific security in the portfolio to determine
whether it has been worthwhile to include it in our portfolio.
 We can try to evaluate the performance of portfolio as a whole during the period without
examining the performance of individual securities within the portfolio.
NEED & IMPORTANCE:
Portfolio management has emerged as a separate academic discipline in India. Portfolio theory
that deals with the rational investment decision-making process has now become an integral part of
financial literature.
28
Investing in securities such as shares, debentures & bonds is profitable well as exciting. It is
indeed rewarding but involves a great deal of risk & need artistic skill. Investing in financial securities
is now considered to be one of the most risky avenues of investment. It is rare to find investors
investing their entire savings in a single security. Instead, they tend to invest in a group of securities.
Such group of securities is called as PORTFOLIO. Creation of portfolio helps to reduce risk without
sacrificing returns. Portfolio management deals with the analysis of individual securities as well as with
the theory & practice of optimally combining securities into portfolios.
The modern theory is of the view that by diversification, risk can be reduced. The investor can
make diversification either by having a large number of shares of companies in different regions, in
different industries or those producing different types of product lines. Modern theory believes in the
perspective of combinations of securities under constraints of risk and return.
PORTFOLIO REVISION:
The portfolio which is once selected has to be continuously reviewed over a period of time and
then revised depending on the objectives of the investor. The care taken in construction of portfolio
should be extended to the review and revision of the portfolio. Fluctuations that occur in the equity
prices cause substantial gain or loss to the investors.
The investor should have competence and skill in the revision of the portfolio. The portfolio
management process needs frequent changes in the composition of stocks and bonds. In securities, the
type of securities to be held should be revised according to the portfolio policy.
An investor purchases stock according to his objectives and return risk framework. The prices of
stock that he purchases fluctuate, each stock having its own cycle of fluctuations. These price
fluctuations may be related to economic activity in a country or due to other changed circumstances in
the market.
29
If an investor is able to forecast these changes by developing a framework for the future through
careful analysis of the behavior and movement of stock prices is in a position to make higher profit than
if he was to simply buy securities and hold them through the process of diversification. Mechanical
methods are adopted to earn better profit through proper timing. The investor uses formula plans to help
him in making decisions for the future by exploiting the fluctuations in prices.
FORMULA PLANS:
The formula plans provide the basic rules and regulations for the purchase and sale of securities.
The amount to be spent on the different types of securities is fixed. The amount may be fixed either in
constant or variable ratio. This depends on the investor‘s attitude towards risk and return. The
commonly used formula plans are
i. Average Rupee Plan

ii. Constant Rupee Plan
iii. Constant Ratio Plan
iv. Variable Ratio Plan
ADVANTAGES:
 Basic rules and regulations for the purchase and sale of securities are provided.
 The rules and regulations are rigid and help to overcome human emotion.
 The investor can earn higher profits by adopting the plans.
 A course of action is formulated according to the investor‘s objectives
 It controls the buying and selling of securities by the investor.
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DISADVANTAGES:
 The formula plan does not help the selection of the security. The selection of the security has to
be done either on the basis of the fundamental or technical analysis.
 It is strict and not flexible with the inherent problem of adjustment.
 The formula plans should be applied for long periods, otherwise the transaction cost may be
high.
 Even if the investor adopts the formula plan, he needs forecasting. Market forecasting helps him
to identify the best stocks.
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2.2 ABOUT THE PORTFOLIO RISK & RETURN
INTRODUCTION:
The financial market is the driver of the economic growth and development of any
country. A sound financial market can take the country to the apex. Financial resources were by
allocating the resources through one of the ways such as portfolios, which are combinations of
various securities. Portfolio analysis includes analyzing the range of possible portfolios that can
be constituted from a given set of securities.
A combination of securities with different risk- return characteristics will constitute the
portfolio of the investor. A portfolio is a combination of various assets and/or instruments of
investments. The portfolio is also built up out of the wealth or income of the investor over a
period of time with a view to suit his risk and return preferences to that of the portfolio that he
holds. The portfolio analysis is an analysis of the risk-return characteristics of individual
securities in the portfolio and changes that may take place in combination with other securities
due to interactions among themselves and impact of each one of them on others.
As individuals are becoming more and more responsible for ensuring their own financial
future, portfolio or fund management has taken on an increasingly important role in banks ranges
of offerings to their clients. In addition, as interest rates have come down and the stock market
has gone up and come down again, clients have a choice of leaving their saving in deposit
accounts, or putting those savings in unit trusts or investment portfolios which invest in equities
32
and/or bonds. Investing in unit trusts or mutual funds is one way for individuals and corporations
alike to potentially enhance the returns on their savings.
Thus, portfolio management is all about strengths, weaknesses, opportunities and threats in
the choice of debt vs. equity, domestic vs. international, growth vs. safety and numerous
other trade-offs encountered in the attempt to maximize return at a given appetite for risk.
Aspects of Portfolio Management:
Basically portfolio management involves
 A proper investment decision making of what to buy & sell
 Proper money management in terms of investment in a basket of assets so as to
satisfy the asset preferences of investors.
 Reduce the risk and increase returns.
RISK AND EXPECTED RETURN:
There is a positive relationship between the amount of risk and the amount of expected return
i.e., the greater the risk, the larger the expected return and larger the chances of substantial loss. One of
the most difficult problems for an investor is to estimate the highest level of risk he is able to assume.
33
 Risk is measured along the horizontal axis and increases from the left to right.
 Expected rate of return is measured on the vertical axis and rises from bottom to top.
 The line from 0 to R (f) is called the rate of return or risk less investments commonly associated
with the yield on government securities.
 The diagonal line form R (f) to E(r) illustrates the concept of expected rate of return increasing
as level of risk increases.
34
TYPES OF RISKS:
Risk consists of two components. They are

1. Un-systematic Risk
1. Systematic Risk:
Systematic risk is caused by factors external to the particular company and uncontrollable by the
company. The systematic risk affects the market as a whole. Factors affect the systematic risk are
 economic conditions
 political conditions
 sociological changes
The systematic risk is unavoidable. Systematic risk is further sub-divided into three types. They are
a) Market Risk
b) Interest Rate Risk
c) Purchasing Power Risk
a). Market Risk
One would notice that when the stock market surges up, most stocks post higher price. On the
other hand, when the market falls sharply, most common stocks will drop. It is not uncommon to find
stock prices falling from time to time while a company‘s earnings are rising and vice-versa. The price of
stock may fluctuate widely within a short time even though earnings remain unchanged or relatively
stable.
35
b). Interest Rate Risk:
Interest rate risk is the risk of loss of principal brought about the changes in the interest rate paid
on new securities currently being issued.
c). Purchasing Power Risk:
The typical investor seeks an investment which will give him current income and / or capital
appreciation in addition to his original investment.
2. Un-systematic Risk:
Un-systematic risk is unique and peculiar to a firm or an industry. The nature and mode of raising
finance and paying back the loans, involve the risk element. Financial leverage of the companies that is
debt-equity portion of the companies differs from each other. All these factors affect the un-systematic
risk and contribute a portion in the total variability of the return.
 Managerial inefficiently
 Technological change in the production process
 Availability of raw materials
 Changes in the consumer preference
 Labour problems
The nature and magnitude of the above mentioned factors differ from industry to industry and
company to company. They have to be analyzed separately for each industry and firm. Un-systematic
risk can be broadly classified into:
a) Business Risk
b) Financial Risk
36
a. Business Risk:
Business risk is that portion of the unsystematic risk caused by the operating environment of the
business. Business risk arises from the inability of a firm to maintain its competitive edge and growth or
stability of the earnings. The volatility in stock prices due to factors intrinsic to the company itself is
known as Business risk. Business risk is concerned with the difference between revenue and earnings
before interest and tax. Business risk can be divided into.
i). Internal Business Risk
Internal business risk is associated with the operational efficiency of the firm. The operational
efficiency differs from company to company. The efficiency of operation is reflected on the company‘s
achievement of its pre-set goals and the fulfillment of the promises to its investors.
ii).External Business Risk
External business risk is the result of operating conditions imposed on the firm by circumstances
beyond its control. The external environments in which it operates exert some pressure on the firm. The
external factors are social and regulatory factors, monetary and fiscal policies of the government,
business cycle and the general economic environment within which a firm or an industry operates.
b. Financial Risk:
It refers to the variability of the income to the equity capital due to the debt capital. Financial
risk in a company is associated with the capital structure of the company. Capital structure of the
company consists of equity funds and borrowed funds.
37
CHAPTER – 3
38
3.1 HISTORY OF STOCK
EXCHANGES IN INDIA
39
HISTORY OF STOCK EXCHANGES IN INDIA
The origin of the Stock Exchanges in India can be traced back to the later half of 19th
century. After the American Civil War (1860-61) due to the share mania of the public, the number
of brokers dealing in shares increased. The brokers organized an informal association in Mumbai
named “The Native Stock and Share Brokers Association in 1875”.later evolved as Bombay stock
exchange .
Increased activity in trade and commerce during the First World War and Second World
War resulted in an increase in the stock trading. The Growth of Stock Exchanges suffered a set
after the end of World War. World wide depression affected them most of the Stock Exchanges in
the early stages had a speculative nature of working without technical strength. After
independence, government took keen interest to regulate the speculative nature of stock exchange
working. In that direction, securities and Contract Regulation Act 1956 was passed, this gave
powers to Central Government to regulate the stock exchanges. Further to develop secondary
markets in the country, stock exchanges established at Mumbai, Chennai, Delhi, Hyderabad,
Ahmedabad and Indore. The Bangalore Stock Exchange was recognized in 1963. At present there
are 23 Stock Exchanges.
Till recent past, floor trading took place in all Stock Exchanges. In the floor trading system,
the trade take place through open outcry system during the official trading hours. Trading posts are
assigned for different securities where by and sell activities of securities took place. This system
needs a face – to – face contact among the traders and restricts the trading volume. The speed of
the new information reflected on the prices was rather than the investors.
The Setting up of NSE and OTCEI (Over the counter exchange of India with the screen
based trading facility resulted in more and more Sock exchanges turning towards the computer
based trading. BSE introduced the screen based trading system in 1995, which known as BOLT
(Bombay on – line Trading. System.
40
Madras Stock Exchange introduced Automated Network Trading System (MANTRA) on
October 7, 1996 Apart from Bombay Stock Exchanges have introduced screen based trading.
FUNCTIONS OF STOCK EXCHANGE
Maintain Active Trading: Shares are traded on the stock exchanges, enabling the investors to
buy and sell securities. The prices may vary from transaction to transaction. A continuous trading
increases the liquidity or marketability of the shares traded on the stock exchanges.
Fixation of Prices: Price is determined by the transactions that flow from investors demand and the
supplier’s preferences. Usually the traded prices are made known to the public. This helps the
investors to make the better decision.
Ensures safe and fair dealings: The rules, regulations and bylaws of the Stock Exchanges
provide a measure of safety to the investors. Transactions are conducted under competitive conditions
enabling the investors to get a fair deal.
Aids in financing the Industry: A continuous market for shares provides a favorable climate for
raising capital. The negotiability and transferability of the securities, investors are willing to subscribe
to the initial public offering (IPO). This stimulates the capital formation.
Dissemination of Information: Stock Exchanges provide information through their various

publications. They publish the share prices traded on their basis along with the volume traded.
Directory of Corporate Information is useful for the investor’s assessment regarding the corporate.
Handouts, handbooks and pamphlets provide information regarding the functioning of the Stock
Exchanges.
41
Performance Inducer: The prices of stocks reflect the performance of the traded companies.
This makes the corporate more concerned with its public image and tries to maintain good
performance.
Self-regulating organization: The Stock Exchanges monitor the integrity of the members,
brokers, listed companies and clients. Continuous internal audit safeguards the investors against unfair
trade practices. It settles the disputes between member brokers, investors and brokers.
REGULATORY FRAME WORK
This Securities Contract Regulation Act, 1956 and Securities and Exchange board of India (SEB1)
Act, 1992, provides a comprehensive legal framework. A 3-tier regulatory structure comprising the
ministry of finance, SEB1 and the Governing Boards of the Stock Exchanges regulates the functioning
of Stock Exchanges.
Ministry of finance: The Stock Exchange division of the Ministry of Finance has powers related
to the application of the provision of the SCR Act and licensing of dealers in the other area. According
to SEBI Act, The Ministry of Finance has the appellate and the supervisory power over the SEBI. It
has powered to grant recognition to the Stock Exchange and regulation of their operations. Ministry of
Finance has the power to approve the appointments of executives chiefs and the nominations of the
public representatives in the government Boards of the Stock Exchanges. It has the responsibility of
preventing undesirable speculation.
42
The Securities and Exchange Board of India
The Securities and Exchange Board of India even though established in the year 1988.
Received statutory powers only on 30th January 1992. Under the SEBI Act, a wide variety of powers
are vested in the hands of SEBI. SEBI has the powers to regulate the business of Stock Exchanges,
other security and mutual funds. Registration and regulation of market intermediaries are also carried
out by SEBI. It has responsibility to prohibit the fraudulent unfair trade practices and insider dealings.
Takeovers are also monitored by the SEBI has the multi pronged duty to promote the healthy growth of
the capital market and protect the investors.
The Governing Board of stock exchanges:
The Governing Board of the Stock Exchange consists of elected members of directors,
government nominees and public representatives. Rules, by laws and regulations of the Stock
Exchange substantial powers to the executive director for maintaining efficient and smooth day-to day
functioning of Stock Exchange. The Governing Board has the responsibility to maintain and orderly
and well-regulated market.
The Governing body of the Stock Exchange consists of 13 members of which
A. Six members of the Stock Exchange are elected by the members of the Stock Exchange.
B. Central Government nominates not more than three members.
C. The board nominates three public representatives.
D. SEBI nominates persona not exceeding three and
One third of the elected members retire at annual general meeting (AGM). The retired
member can offer himself for election if he is not elected for two consecutive years. If a member serves
in the governing body for two years consecutively, he should refrain offering himself for another two
years.
43
The members of the governing body elect the president and vice-president. It needs to
approval from the Central Government or the Board. The office tenure for the president and vice-
president is on year. They can offer themselves for re-election, if they have not held for two
consecutive years. In that case they can offer themselves for re-election after a gap of one-year period
NATIONAL STOCK EXCHANGE
The National Stock Exchange (NSE) of India became operational in the capital market
segment on third November 1994 in Mumbai. The genesis of the NSE lies in the recommendations of
the pherwani committee (1991). Apart from the NSE. It had recommended for the establishment of
National Stock market System also. The committee pointed out some major defects in the Indian stock
market. The defects specified are.
1. Lack of liquidity in most of the markets in terms of depth and breadth.

2. Lack of ability to develop markets for debt.
3. Lack of infrastructure facilities and outdated trading system.
4. Lack of transparency in the operations that affect investors’ confidence.
5. Outdated settlement system that are inadequate to cater to the growing volume, leading to
delays.
6. Lack of single market due to the inability of various stock exchanges to function cohesively
with legal structure and regulatory framework.
These factors led to the establishment of the NSE.
The main objectives of NSE are as follows

1). To establish a nation wide trading facility for equities, debt and hybrid instruments
2). To ensure equal access investors all over the country through appropriate
communication network.
3). To provide a fair, efficient and transparent securities market to investors using an
electronic communication network.
4). To enable shorter settlement cycle and book entry settlement system.
44
5). To meet current international standards of securities market.
Promoters of NSE: IDBI, ICICI, IFCI, LIC, GIC, SBI, Bank of Baroda. Canara Bank,
Corporation Bank, Indian Bank, Oriental Bank of Commerce. Union Bank of India, Punjab
National Bank, Infrastructure Leasing and Financial Services, Stock Holding Corporation of India
and SBE capital market are the promoters of NSE.
MEMBERSHIP:
Membership is based on factors such as capital adequacy, corporate structure, track record,
education, experience etc. Admission is a two-stage process with applicants requiring going
through a written examination followed by an interview. A committee consisting of experienced
people from the industry to assess the applicant’s capability to operate as an exchange member,
interviews candidates. The exchange admits members separately to Wholesale Debt Market
(WDM) segment and the capital market segment. Only corporate members are admitted on the debt
market segment whereas individuals and firms are also eligible on the capital market segment.
Eligibility criteria for trading membership on the segment of WDM are as follows.
1). The persons eligible to become trading members are bodies corporate, companies
institutions including subsidiaries of banks engaged in financial services and such other persons or
entities as may be permitted form time to time by RBI/SEBI.
2).The whole-time directors should possess at least two years experience in any activity
related to banking or financial services or treasury.
3).The applicant must possess a minimum net worth of Rs.2 crores.
4).The applicant must be engaged solely ion the business of securities and must not be
engaged in any fund-based activities.
45
The eligibility criteria for the capital market segment are;
1). Individuals, registered firms, bodies corporate, companies and such other persons may be
permitted under SCRA, 1957.
2). The applicant must be engaged in the business of securities and must not be engaged in any
fund-based activities.
3). The minimum net worth requirements prescribed are as follows;
a). Individual and registered firms – Rs.100 Lacs.
b).Corporate bodies – Rs. 100 Lacs.
4). The minimum prescribed qualification of graduation and two years experience of handling
securities as broker, sub-broker, authorized assistant, etc must be fulfilled by
a) Minimum two directors in case the applicant is a corporate
b). Minimum two partners in case of partnership firms and
c). The individual in case of individual or sole proprietary concerns.
The two experienced director in a corporate applicant or trading member should hold minimum of
5% of the capital of the company.
46
3.2 COMPANY PROFILE
47
COMPANY PROFILE
The Kotak Mahindra Group was born in 1985 as Kotak Capital Management
Finance Limited. Uday Kotak, Sidney A.A.Pinto and Kotak & Company promoted
this company. Industrialists Harish Mahindra and Anand Mahindra took a stake in
1986, and that’s when the company changes its name to Kotak Mahindra Finance
Limited.
Since then it’s been a steady and confident journey to growth and success.
1986: -Kotak Mahindra Finance Limited starts the activity of Bill Discounting.
1987: -Kotak Mahindra Finance Limited enters the lease and hire purchase market.
1990: -The Auto Finance Division is started.
1991: -The Investment Banking Division is started.
1992: -Enters the Funds Syndication sector.
1995: -Brokerage and Distribution Businesses incorporated in to a separate
company - Kotak Securities Investment Banking Division incorporated into a
separate company – Kotak Mahindra Capital Company.
1996: -The Auto Finance Business is hired off into a separate company – Kotak
48
Securities investment Banking Division Incorporated into a separate company -
Kotak Mahindra Capital Company.
1998: -Enters the Mutual Fund Marker with the launch of Kotak Mahindra asset
Management Company.
2000: -Kotak Mahindra tie up with old Mutual PIC for the life insurance business.
Kotak Securities launches its on-line broking site ( www.kotak securities.com
2001: -Matrix sold to Friday Corporation launches insurance Services
2005: - Kotak Mahindra Finance Limited converts to a Commercial Bank – The
first Indian Company to do so.
2007: -Launches India growth fund, a private equity fund.
2010: -Kotak group realigns Joint Ventures in ford credit; Buys Kotak Mahindra
prime and sells ford credit Kotak Mahindra Launches a Real-estate Fund.
49
Group Management: -
Mr.Uday Kotak –
Executive Vice Chairman & Managing Director.
Mr.Sivaji Dam
Mr.C.Jayaram
Mr.Dipak Gupta.
50
Kotak Mahindra Group
Kotak Mahindra is one of India’s leading financial institutions offering complete
financial solutions that encompass every sphere of life. From commercial banking, to stock
broking, to mutual funds, to life insurance to investment banking, the group caters to the
financial needs of individuals and corporates.
The group has a net worth of around Rs.2000 crore and the AUM across the group is
around 120 billion and employs over 6000 employees in its various businesses. With a presence
in 216 cities in India and offices in New York, London, Dubai and Mauritius, it services a
customer base of over 10.00,000.
The group specializes in offering top class financial services catering to every segment of
the industry. The various group companies include.
 Kotak Mahindra Capital Limited
 Kotak Mahindra Securities Limited
 Kotak Mahindra Inc
 Kotak Mahindra (International) Limited
 Global Investments Opportunities Fund Limited
 Kotak Mahindra(UK) Limited Kotak Securities Limited
 Kotak Mahindra Old Mutual Life Insurance Company Limited
 Kotak Mahindra Asset Management Company Limited
 Kotak Mahindra Trustee Company Limited
 Kotak Mahindra Investments Limited
 Kotak Forex Brokerage Limited
51
 Kotak Mahindra Private-Equity Trustee Limited
Group Structure
Kotak Mahindra
Bank
Kotak Kotak Kotak Kotak Kotak Kotak

Mahindra Mahindra Mahindra Mahindra
Securities Mahindra Asset
Capital Investments Trust
Company Prime Management
Company
Company
Kotak Mahindra Securities Kotak Mahindra (UK)
Kotak Mahindra
( International)
Global Investment
Opportunities Fund
Kotak Mahindra Inc.
* 40% through Kotak Mahindra Investments Limited and 1% through Kotak Mahindra
Asset Management.
52
# 25% in KMCC is held through KS and 25% in KS is held through KMCC
Kotak Securities Limited.
Kotak Securities Ltd. Is India’s leading stock broking house with a marker share of
around 8% Kotak Securities Ltd. Has been the largest in IPO distribution.
The accolades that Kotak Securities has been graced with include :
 Prime Ranking Award (2003-04) Largest Distributor of IPO’s
 Finance Asia Award (2004) – India’s best Equity House.
 Finance Asia Award (2005) – Best Broker in India.
 Euromoney Award (2005) – Best Equities House in Inida
The company has a full-fledged research division involved in Macro Economic studies
Sectoral research and Company specific Equity Research combined with a strong and well
networked sales force which helps deliver current and up to date market information and news.
Kotak Securities Ltd is also a depository participant with National Securities Depository Limited
(NSDL) and Central Depository services Limited (CSDL), Providing dual benefit services
wherein in investors can use the brokerage services of the company for executing the
transactions and the depository services for settling them.
Kotak Securities has 122 branches servicing more than 1,70,000 customer and a coverage
53
of 187 cities, kotaksecurities.com, the online division of Kotak Securities Limited offers internet
Broking services and also online IPO and Mutual Fund Investments.
Kotak Securities Limited Manages assets over 2500 crores of Assets under Management
(AUM). The Portfoilo Management Services provide top class service, catering to the high end
of the market. Portfolio Management from Kotak Securities comes as an answer to those who
would like to grow exponentially on the crest of the stock market, with the backing of an expert.
At Kotak securities.com, acknowledge and accept that the personal details that you inpart to us,
is to be kept in strict confidentiality and to use the information only in the manner which would
be beneficial to our customers. We consider our relationship with you as invaluable and strive to
respect and safeguard your right to privacy.
We shall protect the personal details received from you with the same degree of care, but
no less than a reasonable degree of care, to prevent the unauthorized use, dissemination, or
publication of these information as we protect our own confidential information of a like nature.
We shall use the personal information to improve our service to you and to keep you updated
about our new product or information that may be of interest to you. The information collected
from you would be used in the right spirit and context in which it is intended to be used. Your
information would be used by us to process your trading request and to carry out the settlements
of your obligations.
We would ensure that we collect personal information only to the extent it is necessary to
administer out services in the best possible manner and what is required under the various
regulations of India Laws.
54
PRODUCT PROFILE
SERVICES:
 E-transact
 My Networth
 Grievance handling
 Call & Trade
 Consolidation
55
 Financial planning
CHAPTER – 4
56
4.1 DATA ANALYSIS
57
PORTFOLIOS
PORTFOLIOS I
NSE CODE
BANK OF INDA BANKINDIA
BHEL HEL
HLL HINDLEVER
M&M M&M
SCI SCI
MAHINDRA SATYAM MAHINDRA SATYAM
VSNL VSNL
GLAXO GLAXO
IBP IBP
SAIL SAIL
58
PORTFOLIO II
NSE CODE
UTI BANK UTIBANK
TATA POWER TATAPOWER
ITC ITC
ESCORTS ESCORTS
VARUNSHIPING VARUNSHIP
WIPRO WIPRO
BHRATI BHRATI
DRREDDYS DRREDDY
IPCL IPCL
TISCL TISCO
59
PORTFOLIO III
NSE CODE
ING VYSYA VYSYA BANK
ABB ABB
CADILA CADILA
MICO BOSH MICO
GESHIPPING GESHIP
HUGHES SOFTWARE HUGHESSOFT
TATA TELECOM TATA TELECOM
NICOLAS PHARMA NICOLASPIR
ONGC ONGC
ESSAR STEEL ESSARGUJ
60
HOLDING PERIODS RETURNS:
All the investment is made at a certain period of time. Holding period returns enables an
investor to know his returns during that period of time. It can be computed by using the formula:-
Holding period returns (HPR) =

Today’s closing price – Yesterday’s closing price
Yesterday’s closing price
Holding period returns are used for comparative criterion. Holding period returns can be
compared for making an assessment of relative returns.
61
MODULE I
HOLDING PERIOD
RETURNS
62
Portfolio I for 2009-10
Name of the Face Dividen Dividen Market %Return %Return Total

script value d d price on on return
declare amount when dividend security
d purchase
d
BANK OF INDIA 10 0 0 10.5 0 -17.42 -17.42
BHEL 10 40 4 128.7 3.11 40.62 43.729
HLL 1 300 3 222.2 1.35 5.84 7.1901
M&M 10 0 0 119.2 0.00 8.11 8.11
SCI 10 0 0 30.0 0.00 98.11 98.11
MAHINDRA 2 0 0 243.7 0.00 41.24 41.24

SATYAM
VSNL 10 0 0 286.2 0.00 -20.27 -20.27
GLAXO 10 0 7 417.8 1.68 -3.18 -1.504
IBP 10 100 10 294.3 3.40 119.95 123.35
SAIL 10 0 0 5.7 0.00 -3.98 -3.98
Return 27.855
63
Name of the Face Dividend Dividend Market %Return %Return Total

script value declared amount price when on on security return
purchased dividend
BANK OF INDIA 10 30 3 26.5 11.32 89.32 100.6
BHEL 10 40 4 180.8 2.21 24.99 27.2
HLL 1 300 3 227.25 1.32 -39.47 -38.14
M&M 10 55 5.5 112.8 4.88 -6.52 -1.644
SCI 10 0 0 72.55 6.00 -20.9 -20.9
MAHINDRA 2 110 2.2 257 0.86 -28.55 -27.69

SATYAM
VSNL 10 85 8.5 188.5 4.51 -88.61 -84.1
GLAXO 10 70 7 34.7 2.04 -6.5 -4.457
IBP 10 140 14 891.35 1.57 -13.95 -12.38
SAIL 10 0 0 5.65 0.00 71.74 71.74
Return 1.026
64

purchased dividend
BANK OF INDIA 10 10 1 39.35 2.541 49.06 51.601
BHEL 10 30 3 223.65 1.341 107.1 108.44
HLL 1 300 3 149.15 2.011 8.43 10.441
M&M 10 90 9 99.1 9.082 164.23 173.31
SCI 10 0 0 51.25 0.000 109.51 109.51
MAHINDRA 2 140 2.8 173.65 1.612 67.29 68.902

SATYAM
VSNL 10 45 45.5 74.3 6.057 59.51 65.567
GLAXO 10 100 10 294.7 3.393 77.02 80.413
IBP 10 0 0 199.8 0.000 123.8 123.8
SAIL 10 0 0 9.05 0.000 153.06 153.0
Return 94.505
65
PORTFOLIO II FOR 2009-10

purchased dividend
UTIBANK 10 0 0 23.7 0.000 63.82 63.82
TATAPOWER 10 0 0 103.1 0.000 18.92 18.92
ITC 10 0 0 625 0.000 -10.19 -10.19
ESORTS 10 10 1 77.1 1.297 -10.17 -8.873
VARUNSHIPING 10 0 0 11.55 0.000 6.63 6.63
WIPRO 2 50 1 1268.45 0.079 58.71 58.789
BHARTI 10 0 0 44.35 0.000 -13.12 -13.12
DRREDDY 5 0 0 914.95 0.000 22.24 22.24
IPCI 10 0 0 54.15 0.000 52.26 52.26
TISCO 10 0 0 115.75 0.000 -7.8 -7.8
Return 18.268
66

purchased dividend
UTIBANK 10 22 2.2 40.7 5.40541 2.23 7.6354
TATAPOWER 10 65 6.5 114.05 5.69925 2.27 7.9693
ITC 10 0 0 706.3 0 -8.61 -8.61
ESORTS 10 10 1 61.15 1.63532 -48.74 -47.105
VARUNSHIPING 10 0 0 11.7 0 -21.4 -21.4
WIPRO 2 50 1 1690 0.05917 -22.58 -22.521
BHARTI 10 20 2 38.9 5.14139 -23.04 -17.899
DRREDDY 5 100 5 1096.1 0.45616 -13.5 -13.044
IPCI 10 22.5 2.25 87.5 2.57143 8.47 11.041
TISCO 10 80 8 97.85 8.17578 35.9 44.076
Return -5.9856
67

purchased dividend
UTIBANK 10 25 2.5 39.9 6.26566 150.6 156.83
TATAPOWER 10 70 7 114.1 6.13497 128.11 134.24
ITC 10 200 20 625.9 3.1954 54.68 57.875
ESORTS 10 0 0 35.25 0 76.54 76.54
VARUNSHIPING 10 6 0.6 9.2 6.52174 105.49 112.01
WIPRO 2 200 4 1231.2 0.32489 21.35 21.675
BHARTI 10 60 6 29.1 20.6186 183.36 203.98
DRREDDY 5 100 5 914.95 0.54648 14.92 15.466
IPCI 10 25 2.5 83.85 2.98151 89.2 92.182
TISCO 10 100 10 135.1 7.40192 112.82 120.22
Return 99.102
68
PORT6FOLIO III FOR 2009-10

purchased dividend
ING VYSA 10 35 3.5 112.2 3.11943 89.95 93.069
ABB 10 0 0 238.9 0 16.72 16.72
CADILA 5 0 0 124 0 11.282 11.28
MICOBOSH 100 0 0 2709 0 -4.06 -4.06
GESHIPPING 10 0 0 25.3 0 22.45 22.45
HUGHES 5 40 2 593.25 0.33713 -40.45 -40.113
TATATELECOM 10 0 0 56.4 0 139.1 139.1
NICOLAS 10 0 0 295.75 0 -0.047 -0.047

PHARMA
ONGC 10 140 14 125.65 11.1421 87.97 99.112
ESSAR STEEL 10 0 0 125.65 0 87.97 87.97
Return 42.548
69
PORTFOLIO III FOR 2010-11

purchased dividend
ING VYSA 10 40 3.5 247.25 1.41557 4.77 6.1856
ABB 10 60 6 263.9 2.27359 12.77 15.044
CADILA 5 70 3.5 129.55 2.70166 -3.31 -0.6083
MICOBOSH 100 40 40 2387.35 1.6755 47.45 49.125
GESHIPPING 10 40 4 30.75 13.008 25.99 38.998
HUGHES 5 40 2 277.7 0.7202 -28.22 -27.5
TATATELECOM 10 25 2.5 171.9 1.45433 47.45 48.904
NICOLAS 10 105 10.5 271.05 3.87382 -24.88 -21.006

PHARMA
ONGC 10 130 13 329.6 3.94417 13.43 17.374
ESSAR STEEL 10 0 0 329.6 0 13.43 13.43
Return 13.995
70
PORTFOLIO III FOR 2011-12

purchased dividend
ING VYSA 10 40 3.5 247.25 1.41557 76.28 77.696
ABB 10 60 6 263.9 2.27359 106.67 108.94
CADILA 5 70 3.5 129.55 2.70166 144.09 146.04
MICOBOSH 100 40 40 2387.35 1.6755 138.36 140.04
GESHIPPING 10 40 4 30.75 13.0081 135.6 148.61
HUGHES 5 40 2 277.7 0.7202 117.65 118.37
TATATELECOM 10 25 2.5 171.9 1.45433 96.37 97.824
NICOLAS 10 105 10.5 271.05 3.87382 -24.88 -21.006

PHARMA
ONGC 10 130 13 329.6 3.94417 95.26 99.204
ESSAR STEEL 10 0 0 329.6 0 95.26 95.26
Return 101.1727
71
EX-POST PORTFOLIO RETURNS
YEAR PORTFOLIO PORTFOLIO PORTFOLIO

I II III
2010 27.85 18.26 42.54
2011 1.02 -5.98 13.99
2012 94.5 99.1 101.17
Ri 41.1233333 37.12666667 52.567
72
MODULE – II
RISK ADJUSTED MEASUREMENT OF PORTFOLIO PERFORMANCE
SHARPE’S PERFORMANCE MEASURE
CALCULATIONS OF STANDARD DEVIATION
73
Risk
Risk in holding securities is generally associated with the possibility that realized return
will be less than returns were expected. The source of such disappointment is the failure of
dividends or the fail in security’s prices. Forces that contribute to variation in return, price or
dividend const6itures elements of risk. Some influences that are external to the firm, cannot be
controlled and affect large number of securities. Other influences are internal to the firm are
controllable to all large degree.
Systematic Risk
The systematic risk affects the entire market.Those forces that are uncontrollable external
and board in the effect are called sources of systematic risk. Economic, political and sociological
changes are sources of systematic risk.
Systematic risk further divided into
-Market Risk
-Interest
-Purchasing power Risk
Market Risk
J.C. Francis defined Market risk as that portion of total variability of returned caused by
the alternating farces of bull and bear market. When the security index moves upwards haltingly
for a significant period of time, it is known as bull market. In the bull market the indeed moves
form a low level to the peak. Bear market is just reverse to the bull market. During the bull and
74
bear market more than 80 percent of the securities prices rise or fall along with the stock market
indices.
Interest Rate Risk
The rise or fall in the interest rate affects the cost borrowing. When the call money
market rate changes. Interest rates not only affect the security traders but also corporate bodies
who carry their business on borrowed funds. The cost of borrowing would.
Increase and a heavy out flow of profit would take place in the form of interest to the
capital borrowed. This lead a reduction in earning per share and a consequent fall in the price of
share.
Purchasing power Risk
Variations in the returns are caused also by the loss of purchasing power of currency.
Inflation is the reason behind the loss of purchasing power the rise in price penalizes the returns
to the investors, and every potential rise in price a risk to the investor.
Unsystematic Risk
Unsystematic risk is the unique risk, which will be different to different firms.
Unsystematic risk stems form managerial inefficiency, technological change in production
process, availability of raw material mentioned factors differ form industry to industry, and
company to company. They have to be analyzed separately for each industry and firm.
Broadly Unsystematic risk can be classified into:
-Business risk
-Financial risk
75
Business Risk
It is the portion of the unsystematic risk caused by the operat6in environment of the
business.
Financial Risk
Financial risk in a company is associated with the capital structure the company. It refers
to the variability of the income to the equity capital to debt capital.
Measurement of Risk
The risk of a portfolio can be measured by using the following measure of risk.
Variability
Investment risk is associated with the variability of rates of return. The more variable is
the return, the more risky the investment. The total variance is the rate of return on a stock
around the expected average, which includes both systematic and unsystematic risk.
The total risk can be calculated by using the standard deviation. The standard deviation of
a set of numbers is the squares root of the square of deviation around the arithmetic average.
Ymbolically, the standard deviation can be expressed as-
ð = ∑ (rit-ri)
n-1
Where,
ri is the mean return of the portfolio and
76
rit is the return form the portfolio for a particular year
SHARPE’S PERFORMANCE INDEX:-
William Sharpe’s of portfolio performance is also known as reward to variability ratio (RVAR).
It is simply the ratio of reward, which defined as realized portfolio returns in excess of the risk
free rate, to the variability of return measured by the standard deviation relation to total risk
assumed by the investor.
The measure can be defined follows:-
RVAR = rp-rf
ð
Where,
rp= the average return for the portfolio (P) during it HPR
rf= risk free rate of return during JHPR
ð = the standard deviation of the portfolio (P) during HPR
77
CAPITAL MARKET LINE:
Capital market shows the conditions prevailing in the capital market in terms of expected
return and risk. It depicts the equilibrium condition that prevails in the market for efficient
portfolio’s consisting of the portfolio of risky asset or risk free asset or both. All combination of
risky and risk free portfolio are bounded by the capital market line, and all investors will end up
with portfolio somewhere on the capital market line. The capital market is usually derived under
the assumptions that there exists a risk a risk-less asset available for investment. It is further
assumed that6 investor can borrow or lend as much as desired at the risk free assets with a
portfolio or risky assets to obtain the desired risk return combination. Using the capital market
line can graphically represent Sharpe’s measure for portfolios. The vertical axis represents the
return on the portfolios and the the horizontal axis represents the standard deviation for returns.
The vertical intercept is rf. RVAR measures the slope of the line form rf to the portfolio being
evaluated. The steeper the line, the higher the slope (RVAR) and the better performance.
TREYNOR’S PERFORMANCE INDEXES:
The measure is also referred to as reward to volatility ratios (RVOL). Treynor sough to
relate return on a portfolio to its risk. He distinguished between total risk and systematic risk
assuming that6 the portfolio is well diversified. In measuring the portfolio performance Treynor
introduced the concept of characteristic line. The slope of the characteristics measures the
relative volatility of the portfolio’s returns. The slope of this line is the beta co-efficient which is
measure of the volatility (or responsiveness) of the portfolio’s returns in relation to those of the
market index. Treynors’s ratio is the realized portfolio’s return in excess of the risk-free to the
volatility of return as measured by the portfolio beta.
78
RVOT = rp-rf
Bp
= Average excess return of portfolio (P)
Systematic risk for portfolio
SECURITY MAEKET LINE:
The security market line indicates the risk-return trade-off for portfolio and individual
securities. Treynor extended his analysis to identify the component of risk that will be
compensated by the market. It is known as systematic risk and is commonly measured by the
beta. Beta is a measure of risk that applies to all assets and portfolio whether efficient or
inefficient. Security market line specifies the relationship between expected return and risk for
all assets and portfolios whether efficient or inefficient. The security market is obtained by
taking the risk (beta) on the horizontal axis and portfolio return on the vertical axis. The Security
market line can be graphically.
E (rm) SML
rf
Beta 1.00
79
Beta
Beta is a market risk measure employed primarily in the equity. It measures the systematic
risk of a single instrument or an entire portfolio. William Sharp (1964) used the notion in his
landmark paper introducing the capital asset pricing model (CAPM). The name “beta” was
applied later.
Beta describes the sensitivity of an instrument or portfolio to broad market

movements. The stock market (represented by an index such s the S&P 500 or 100) is assigned a
beta of 1.0. By comparison, a portfolio (or instrument) with a beta of 2.0 will tend to benefit or
suffer form broad market moves twice as much as the market overall.
The formula for beta is
∑XY-(∑XY) (∑Y)
N∑X-(∑X)
Where X is the market return

And Y is the security return
Both quantities are calculated using simple returns. Beta is generally estimated form
historical price time series. For example, 60 trading of simple returns might be used with sample
estimators for covariance and variance.
It is possible to construct negative beta portfolio beta portfolios. Approaches include.

Beta is sometimes used as a measure of a portfolio’s mark risk. This can be misleading because
beta does not capture specific risk. Because of specific risk. A portfolio can have a low beta, but
still be highly volatile. Ti price fluctuations would simply have a low correlation with those of
80
the overall market. It is said that a security or portfolio having higher beta will perform well
provided market has to go up i.e., market indeed.
Calculation of standard deviation of returns
PORTFOLIO I
Year Return Di=r-ri Di*Di S.D
2010 27.85 -13.273 176.18
2011 1.02 -40.103 1608.3 48.133
2012 94.5 53.377 2849.1
Ri= 41.123 4633.5
PORTFOLIO II
2010 18.26 -18.867 355.95
2011 -5.98 -43.973 1858.2 55.022
2012 99.1 3840.7
81
Ri= 37.127 6054.8
PORTFOLIO III

2010 45.54 -8.0267 64.427
2011 13.99 -39.577 1566.3 44.141
2012 101.17 47.603 2266.1
Ri= 53.567 3896.8
SHARPE PERFORMANCE MEASURE
Avg
portfolio Risk free Excess Standard Sharpe’s
Portfolios Return Rate return Deviation Ratio rp- Ranking
(;p) in % (n)% (rp-ri) rt\
I 41.128 5.25 35.878 48.13 0.745 2
II 37.128 5.25 31.878 55.02 0.579 3
82
III 52.57 5.25 47.32 44.14 1.072 1
TREYNOR’S PERFORMANCE MEASURE CALCULATION OF

BETA:
Beta for portfolio I
Year Avg Avg

Market X2 Stock XY
Return X Return Y
2009-10 5.683 32.296 27.855 158.3
2010-11 -8.827 77.916 1.025 -9.0477
2011-12 72.886 5890.8 123.38 7334.4
Beta =1.05261
83
Beta portfolio II
Year Avg Avg

Market X2 Stock XY
Return X Return Y
2009-10 5.683 32.296 18.267 103.81
2010-11 -8.827 77.916 -5.985 52.83
2011-12 76.03 5780.6 99.102 7534.7
72.886 5890.8 111.38 7691.4
Beta =1.210018
Beta for portfolio III
Year Avg Avg

Market X2 Stock XY
Return X Return Y
2009-10 5.683 32.296 42.548 241.8
2010-11 -8.827 77.916 13.99 -123.49
84
2011-12 76.03 5780.6 101.17 7692.1
72.886 5890.8 157.71 7810.4
Beta =0.965732
TREYNORS PERFOMANCE INDEDX
Portfolio
Portfolios Avg Risk free Beta Risk Tn Ranking
Return Rate (rf) Premimum Rp-rf
(rp) ß
I 41.128 5.25 1.052 35.878 34.1046 2
II 37.128 5.25 1.21 31.878 26.3455 3
III 52.57 5.25 0.965 47.32 49.0363 1
85
4.2 INTERPRETATION
86
HOLDING PERIOD RETURNS:
In THE YEAR 2010 NSE INDEX gained 5.58% returns during the same year portfolio I,
II and III has registered a growth of 27.85, 94.50 respectively. Return wise portfolio III emerges
as best portfolio subsequently PI and PII
During the year 2011 the NSE INDEX registered a negative growth rate of -8.82 during
the same year portfolio I II and III has registered return of 18.26, -5.98 and 99.10 respectively.
Return wise portfolio III performs well and portfolio I and II occupying subsequent position.
In the year 2012 he NSE INDEX shows a fabulous growth rate of 76.88 and portfolio I, II
and III performed by 42.54, 13.29 and 101.17 and portfolio III emerged as best portfolio
subsequently portfolio I and II
OVERALL PERFOMANCE:
C The overall performance of the market and the portfolios can be shown by taking the
arithmetic average of return. For the previously said of three years market has registered growth
rate of 24.58. Arithmetic of portfolio I II and III are 41.128, 37.12 and 52.57 respectively.
Portfolio III emerges as best performer.
87
SHARPE’S PERFORMANCE MEASURE:
Sharpe’s performance measure gives the appropriate return per unit of risk as measured
by standard deviation. The reward of variability ratios computed has shown the ex-post return of
per unit of risk for the three portfolio’s for the period of three years.
The rate of risk of portfolio II is high deviation by 55.02 by an average return of 37.12,
similarly the portfolio I has a deviation of 48.13 with a return or 41.128 and portfolio III with a
deviation of 44.14 with an average return of 55.57.
Using 5.25 as return on saving bank account as a proxy for the risk free rate and
substuting there value in Sharpe’s evaluation portfolio I gives a slope of 0.745, in portfolio I
gives a reward of 35.87(41.128-4.25) for bearing a risk of 48.13 making the sharpe’s ratio to
0.745. For every additional 1% risk and investor has as additional pf 0.745 returns for above
portfolio.
Portfolio II gives a return or 37.12 while the standard deviation was 55.02 using 5%
return on the saving account as proxy market shares ratios to 0.579. Therefore for every
additional 1% risk investor will earn an additional 0.579 of return. And portfolio II with a return
of 52.57 with an standard deviation making Sharpes ratios to 1.072 as additional return.
OVERALLPERFORMANCE:
88
Overall performances of the portfolios are 41.12, 37, 12 and 52.57 respectively. The risk free rate
was 5.25. Investing in three portfolios during the same period provide an risk premium of 35.87,
31.87, one 47.32 respectively. For every 1% of additional risk an investor will earn 0.745, 0.579
and 1.07 of return. Portfolio III outperformed by 1.072 compared with other two portfolios. The
investor will earn on return per unit of beta of 34.120, 26.34 and 49.036 by ranking the portfolio
shows that portfolio III performs well as compared with other two portfolios.
TREYNOR’S PERFORMANCE MEASURE:
Treynor’s performance measure gives appropriate return per unit or firsk as measured by
the beta coefficient.
Portfolio I,II and II provided a return of 41.12% 37.12% and 52.57% with 1.05% 1.21% and
0.965% as beta coefficient respectively. Treynor’s ratios for the three portfolios above the risk
free rate of 5.25% were 34.16%26.34%, 49.036% respectively. Investing in portfolio I II and III
provides risk premium of 35.87, 31.87 and47.32 for bearing a risk of beta of 1.052% 1.21% and
0.965% receptively. Thus an investor will earn a return per unit of beta of 34.16% 26.34% and
49.03% receptively. Portfolio III emerging as the best performer, portfolio I and II was
occupying the subsequent position.
89
CHAPTER – 5
90
5.1 FINDINGS
1. Among the three portfolios I II and III, portfolio III gives a highest return with a
proportionate risk ( ) of 44% with a return of 52.57%.
2. Portfolio III has outperformed in both Sharpe’s and Treynor’s measure.
3. It is advisable to invest in portfolio III i.e. foreign collaboration securities in long run and
portfolio II i.e. public limited companies in short run because the later is more correlated
with the market index.
4. Diversification of portfolios in various projects or securities may reduce high risk and it
provides the high wealth to the shareholders.
5. Beta is used to evaluate the risk proper measurement of beta may reduce the high risk and
it gives the high risk premium.
91
5.2 SUGGESTIONS:
 The closing prices of shares changes from time to time it may be higher or lower than
the purchased prices.
 It is not guarantee that companies should announce dividends. In some years they may
not announce t he dividends and in some others they may announce higher dividends.
 In the single period, the investor may or may not get his investment back. Investing in
single company may not return even his investment.
 Generally the risk of single company is higher than the risk of the portfolio. And risk of
any portfolio varies with different weitages and also varies with combination of
companies. Similarly returns of portfolios changes. If higher the return higher the risk it
involves. If lower the risk lower the returns.
 In evaluation of portfolios on expected risk and return, different measures give different
evaluation rankings. There is no single standard to measure.
 It depends on the investor objectives, character to select any measure to use.
92
BIBILOGRAPHY
93
Bibilography
 Prasanna Chandra (Security Analysis and Portfolio Management)
 Avadhani (Security Analysis and Portfolio Management)
 Francis and Taylor (Investment Management)
 Graham and Dodd Security Analysis, McGraw Hill
INTERNET SITES:
http://www.nseindia.com/corporates/new_corporates.htm
http://www.wikipedia.org/wiki/Portfolio_management/03210-67/en.
http://www.bseindia.com/investors/sebicircular.aspx?expandable=1
http://www.bseindia.com/markets/MutualFund/TurnOverHLMF.aspx?expandable=0
http://wiki.answers.com/Q/what_is_the_meaning_of_portfolio
http://www.investorwords.com/3741/portfolio.html
SEARCH ENGINES:
94
http://www.google.co.in/webhp?source=search_app
http://www.google.co.in
95

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PORTFOLIO RISK AND RETURN – SELECTED FIRMS

KOTAK SECURITIES LIMITED

Project Submitted in partial fulfillment for the Award of the Degree of

MASTER OF BUSINESS ADMINISTRATION

UNDER THE ESTEEMED GUIDANCE OF Mrs. P.V. NAGAMANI

We hereby declare that this Project titled “ PORTFOLIO RISK AND

RETURN – SELECTED FIRMS ” submitted Partial fulfillment for the

award of MASTER OF BUSINESS ADMINISTRATION was carried

any other University or Institution for the award of any degree /

I hereby declare that this Project Report titled PORTFOLIO RISK

AND RETURN – SELECTED FIRMS submitted by me to the Department

of Business Management, O.U., Hyderabad, is a bonafide work undertaken by me

degree diploma / certificate or published any time before.

Name and Address of the Student Signature of the Student

 My deepest thanks to head of the department ( business management ) and Asst.

CONTENTS PAGE NUMBERS

be constituted from a given set of securities.

portfolio of the investor. A portfolio is a combination of various assets and/or instruments of

holds. The portfolio analysis is an analysis of the risk-return characteristics of individual

alike to potentially enhance the returns on their savings.

A portfolio is a collection of investments held by an institution or a private individual. In

is part of an investment and risk-limiting strategy called diversification. By owning several

asset bundles are compared.

their portfolio holdings.

Combination of individual assets or securities is a portfolio. Portfolio includes investment in

An important way to reduce the risk of investing is to diversify your investments.

Asset allocation is a very important part of your investment decision-making.

Moderate investors allocate somewhere between the allocation of aggressive and

 To make a comparative study of the risk-adjusted measure of portfolio performance using

 To understand portfolio selection process.

Portfolio management enables the portfolio managers to provide customized investment

Portfolio management is a continuous process. It is a dynamic activity. The following are

a) Monitoring the performance of portfolio by incorporating the latest market conditions.

A portfolio is a collection of investments held by an institution or a private individual. In

is part of an investment and risk-limiting strategy called diversification. By owning several

asset bundles are compared.

their portfolio holdings.

a) Determining the objectives of the portfolio

b) Selection of securities to be included in the portfolio

 Perfect markets are assumed (e.g. no taxes and no transition costs)

THE EFFECT OF COMBINING TWO SECURITIES:

INTER- ACTIVE RISK THROUGH COVARIANCE:

CAPITAL ASSET PRICING MODEL (CAPM):

R = Rf Xf+ Rm(1- Xf)

Rp= Rf Xf+ Rm(1- Xf)

Rp= Rf Xf+ Rm(1- Xf)

NEED FOR EVALUATION OF PORTFOLIO:

NEED & IMPORTANCE:

i. Average Rupee Plan

be constituted from a given set of securities.

portfolio of the investor. A portfolio is a combination of various assets and/or instruments of

holds. The portfolio analysis is an analysis of the risk-return characteristics of individual

alike to potentially enhance the returns on their savings.

Aspects of Portfolio Management:

Basically portfolio management involves

 A proper investment decision making of what to buy & sell

 Proper money management in terms of investment in a basket of assets so as to

satisfy the asset preferences of investors.

 Reduce the risk and increase returns.

RISK AND EXPECTED RETURN:

Risk consists of two components. They are

b) Interest Rate Risk