A Study On Diversification Applications in Portfolio Management. By PRIYANKA.A.M IV Semester MBA 14MB1026 Guide Bharath.K.A Project Report submitted to the University of Mysore in partial fulfillment of the requirements of IV Semester MBA degree examinations- 2016 Ramaiah Institute of Management Studies #15, New BEL Road, MSRIT Post, M S Ramaiah Nagar Bangalore – 560054 i
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A Study On Diversification Applications in Portfolio Management.
By
PRIYANKA.A.M
IV Semester MBA
14MB1026
Guide
Bharath.K.A
Project Report submitted to the University of Mysore in partial fulfillment of the
requirements of IV Semester MBA degree examinations- 2016
Ramaiah Institute of Management Studies
#15, New BEL Road, MSRIT Post, M S Ramaiah Nagar
Bangalore – 560054
i
Ramaiah Institute of Management Studies
Bangalore - 560054
CERTIFICATE
This is to certify that the Project Report titled “A study on Diversification
Applications In Portfolio Management.” submitted to the University of Mysore,
in partial fulfillment of IV Semester MBA Degree Examination- 2016, by
PRIYANKA.A.M bearing Registration No. 14MB1026 has worked under my
supervision and guidance. I certify that no part of this Project Report has been
submitted earlier to any Department/ University for the award of any Degree/
Diploma to the best of my Knowledge.
Place: Bangalore Guide’s Signature
Date: Name: Bharath..K.A
Designation: Professor
ii
DECLARATION
I, PRIYANKA.A.M hereby declare that this Project Report titled “A study on
Diversification Applications In Portfolio Management” submitted in partial
fulfillment of the requirement for IV SEMESTER MBA degree Examination to
the University of Mysore, through Ramaiah Institute of Management Studies,
Bangalore- 54 is a record of my original work done by me and has not been
submitted previously for the award of any degree/ diploma to any other university.
Place: Bangalore Candidate’s Signature
Date: Reg. No. 14MB1026
iii
ACKNOWLEDGEMENTS
A work like this needs support and encouragement from different sections of
various industrialists. This project researcher has taken the help of many
personalities like Professors of Business Management and Business Leaders. Many
of them are either working in industries as officers or working as managers and
some of them are really business entrepreneurs who have got vast knowledge in
many areas.
At the very outset this project researcher expresses thanks to the reputed University
of Mysore for giving me an opportunity to pursue my MBA Degree and allowed
me to submit this work for the award of MBA degree.
Researcher also expresses thanks to Dr. M. R. Pattabhiram, the Honorable
Director of Ramaiah Institute of Management Studies for encouraging me to do this
work.
I also wish to express my sincere thanks to my guide Bharath.K.A for encouraging
me to do this by his valuable knowledge and experience in this field.
I also wish to record my sincere thanks to the Hon. Dean Dr. Y Rajaram for the
encouragement in writing this report.
I owe irredeemable debt to my Parents. Further, I wish to record my thanks to Mr.
Vedamurthy, Librarian, Ramaiah Institute of Management studies, Bangalore for
his patience and timely help
Date: Signature of the Candidate
iv
CONTENTS
Particulars Page No.
Inner Title page…………………………………………………………………….i
Certificate from Guide…………………………………………….……………….ii
Declaration…………………………………………………….…………………..iii
Acknowledgements………………………………………………………………..iv
Contents……………………………………………………………………..…..…v
List of Tables……………………………………………………………………... vii
List of Charts………………………………………………………………………vii
Chapter1
1.1 Introduction………….……….…………………………….……………….…01
1.2 Hypothesis………………………..……………………………………………06
1.3 Review of Literature…………………………..………………….…...............07
Chapter 2
2.1 Introduction to Methodology and Data Collection..……………….…….........13
A literature review is a text written by someone to consider the critical
points of current knowledge including substantive findings, as well as
theoretical and methodological contributions to a particular topic. Literature
reviews are secondary sources, and as such, do not report any new or
original experimental work. Also, a literature review can be interpreted as a
review of an abstract accomplishment.
Most often associated with academic- oriented literature, such as a thesis or
peer- reviewed article, a literature review usually precedes a research proposal
and results section. Its main goals are to situate the current study within the
body of literature and to provide context for the particular reader. Literature
reviews are a staple for research in nearly every academic field.
A systematic review is a literature review focused on a research question,
trying to identify, appraise, select and synthesize all high quality research
evidence relevant to that question. A meta-analysis is typically a systematic
review using statistical methods to effectively combine the data used on all
selected studies to produce a more reliable result
Article Review
Portfolio Management by Albert Mentink(2010) examines whether the optimal
bond portfolio are really an improvement by analyzing the characteristics of the
individual bonds in the optimal portfolio. Moreover, the composition of such an
optimal portfolio is very sensitive to small changes in the mean forward price of its
main constituents.
As a risk measure we use the conditional value at risk, which at a given percentile
equals the expected value of the losses that exceed the value at risk also provides
7
information about the losses larger than the value at risk. Furthermore, the
conditional value at risk can be optimized using linear programming.
Rakesh Kumar and Raj s Dhankar(2010) advocates the relationship between risk
and return and also examines the possibility of diversification effect on portfolio
risk, which is the composite of market and non-market risk. The study based on
daily, weekly, 36 and monthly adjusted opening and closing prices of BSE 100
composite portfolios for the period of June2005 through May 2010.
The findings suggest that the relationship between portfolio return and risk is very
weak, based on daily return. However, Portfolio risk and return exhibit a high
degree of positive relationship when monthly return is used. Portfolio non-market
risk shows a declining tendency with diversification.
Mark Grinblatt and Sheridan Titman (2011) include the problem of identifying
proper benchmark portfolio the possibility of overestimating risk because of
markettiming ability, and the failure of informed investors to earn positive risk-
adjusted returns because of increasing risk aversion. The article argues that these
need not be serious problem for getting perfect portfolio and its performance
evaluation.
Prof. Y. Rama Krishna(2013) This article includes HPR, Daily and annualized
Returns, Unsystematic Risk and correlation among the stocks belongs to similar
industry type of S&P CNX 500 was considered as market index. This study
consider 244 days of trading of 31 December 2011to 31st December 2012.
8
Returns are calculated using the continuous compounding method and Correlation
analysis used for the movement of stock market. A positive correlation was found
among the stock and market index.
S.M.Tariq Zafar, D.S.Chaubey, and Shruti Nagar (2013) Every investor has
different thinking to invest in stock which may give them maximum return with
lesser or no risk. So, they want a portfolio which provides maximum return. The
main objective of this paper is to analyze the relationship between risks, return, and
diversification effect on portfolio risk with composite of market and non-market
risk.
For the purpose 25 stock of S&P nifty have been analyzed on the basis of portfolio
beta and portfolio return. The first part of paper gives an insight about the portfolio,
risk return and diversification and its various aspects while the second part consists
of data and their analysis.
Denis Chaves, Jason Hsu, Feifei Li, and Omid Shakernia Heuristic (2013)
undertake most of the strategies use for a portfolio. It finds that the traditional
portfolio construction does not consistently outperformed model pension fund
portfolio anchored 60/40 equity/bond portfolio structure. Although risk parity
performs on par with equal weighting, it does provide better diversification and
then we allocate asset. Thus, to execute risk parity successfully, the careful
selection of asset classes is critical, which, for the time being, remains an art rather
than a formulaic exercise based on theory.
Richard Grinold (2014) provides a general framework for the description of
various aspects of a portfolio using a set of factors. The work is cousin to the well-
worn topic of performance analysis and attribution, and in that sense, is fairly
9
represented as being old wine in new bottles—the scope is much more general,
however. Grinold first provides a theoretical structure with a model that describes
various aspects of a portfolio as either the allocation of a portfolio‘s variance or as
the covariance of two portfolios.
Here researcher takes a portfolio-centric approach and explains all of the results in
terms of the risk and correlation of portfolios. The expanded framework and
portfolio focus opens up a wide range of problems that can be studied with the
same framework. The researcher uses examples to illustrate what the methodology
can accomplish and as a guide to sense when we are asking too much from the
model.
Ashish Garg and Ajay Chauhan (2014) points out the impact of the developed
world market on the Indian industrial portfolios‘ return by taking returns of Dow
Jones index and Morgan Stanly Composite Index (MSCI) as representatives of the
developed world markets‘ returns, and returns of various sectoral indices,
constructed by BSE, as representatives of the Indian industrial portfolios‘ return.
For the purpose, a set of parametrical and econometric tests are employed on daily
data, from January 2009 to December 2013.
The findings show that auto, metal, banking, healthcare, technology and real estate
are the most affected sectors by the US market and developed world markets. The
study also reveals that the Indian markets also influence the developed world
markets.
Lourence Wormald and Elmarie vander merwe (2014) deals with the
relationship between conventional shrinkage approaches to the construction of the
covariance matrix for portfolio optimization. Here, we use Quadratic constraints on
each part of the total risk (variance) measure, such as the systematic or specific risk
10
associated with risk factor. For examine the practical value of this approach, using a
well documented set of alphas, we set out the result of 13-year simulation exercise
over the Russell 3000 Growth U.S. equity universe.
The results shows the effect of constraints on decline on covariance matrix related
with span part of alpha will result in different portfolio allocations.
Edward Qian (2012) argues analytical results regarding portfolio rebalancing and
the associated diversification returns for different kinds of portfolios. He analyzes
diversification returns of risk parity portfolios. His numerical examples show that
diversification return is, in general, positive for leveraged risk parity portfolios
when leverage ratio is not too high, in addition, he shows that low correlations
between different assets are crucial in achieving positive diversification return and
reducing portfolio turnover for risk parity portfolios.
Dhanraj Sharma (2013) reviewed the samples consists 10 growth oriented-open
ended-equity mutual fund schemes from 5 public and 2 private mutual fund
companies. Results are tested through risk-return analysis, Co-efficient of variation,
Treynor‘s ratio, Sharp‘s ratio, Jensen‘s measure, Fama‘s measure and regression
analysis. The data used is monthly closing for the study period of April 2007 to
march 2012.
The risk return analysis revealed that out of 10 schemes 3 have underperformed the
market, 7 are found to have lower total risk than the market and all the schemes
have given returns higher than risk free rates. The regression analysis suggests that
benchmark market return index has statistically significant impact on mutual fund
return at 5% level of significance.
11
Kumar Gaurav and Pitabas Mohanty (2013) had studied Traditional portfolio
theory assumes that when the returns are not jointly normally distributed then the
meanvariance efficient portfolio does not maximize the utility of the investor. In
addition to mean-variance, the investors also need to consider skewness, the third
moment of return distributions. Using nine years‘ monthly returns data for the
NSE‘s CNX nifty stocks, we attempt to create portfolios which maximize returns,
minimize variance and maximize skewness at the same time. Results show
substantial improvement in portfolio performance when we consider skewness in
addition to mean and variance.
12
CHAPTER- 2
RESEARCH METHODOLOGY
AND
DATA COLLECTION
2. 1 Introduction to methodology and data collection.
This chapter describes the methods the researcher used to obtain the information
and how it was presented. The content in this covers the research design, sampling
design, sample size, sampling procedure, data collection and analysis, data
presentations and the limitations of the study.
2.2 SAMPLING TECHNIQUE:
Random Sampling
In this technique, each member of the population has an equal chance of being
selected as subject. The entire process of sampling is done in a single step with each
subject selected independently of the other members of the population.
An unbiased random selection and a representative sample is important in drawing
conclusions from the results of a study. Remember that one of the goals of research
is to be able to make conclusions pertaining to the population from the results
obtained from a sample. Due to the representativeness of a sample obtained by
simple random sampling, it is reasonable to make generalizations from the results
of the sample back to the population.
a. Sample A sample is a part of a target population, which is carefully selected to represent the
population.
b. Sample unit: Retail investors in the capital market.
c. Sample size: Total sample size is 50.
14
2.3 DATA COLLECTION SOURCES:
Primary data: The data directly collected by the researcher, with respect to the problem under
study, is known as primary data. Primary data is also the first- hand data collected
by the researcher for the immediate purpose of the study.
Standard questionnaire will be needed to collect responses from borrower.
Secondary data: Secondary data are statistics that already exist. They have been gathered not for
immediate use. This may be described as “those data that have been compiled by
some agency other than the user”.
E.g. Information collected from internet, journal, magazine text book, on-line
published article etc.
Data collection Instruments:
Questionnaire:
Questionnaires had both open and close-ended questions which required specific
answers. The respondents selected the correct options, ticked and wrote the correct
answers where appropriate, for those who could read and write. For those who were
unable to read and write, interviews were conducted using the questionnaires.
The study is restricted to the city
of Bangalore.
15
2.4 SCOPE OF THE STUDY:
2.5 Statement of Problem.
“DIVERSIFICATION APPLICATIONS IN PORTFOLIO MANAGEMENT”.
Significance of the problem
Analysis of risk and return has always been factors that aid investing decisions. The study on the topic “DIVERSIFICATION APPLICATIONS IN PORTFOLIO MANAGEMENT” will analyze how the investment decisions will be made and what are the factors an investor considers to make investment decision, and how to apply the concept of diversification in portfolio management in order to minimize the risk factor.
2.6 Objectives of the study .
To understand the investors risk and return perception. To understand the application of diversification to minimize risk. To validate that risk is the safety of principle is prime factors of investment.
2.7 Research Method
Descriptive research Descriptive research is used to describe characteristics of a population or
phenomenon being studied. It does not answer questions about how/when/why the
characteristics occurred. Rather it addresses the "what" question. The characteristics
used to describe the situation or population are usually some kind of categorical
scheme also known as descriptive categories. For example, the periodic table
categorizes the elements. Scientists use knowledge about the nature of electrons,
protons and neutrons to devise this categorical scheme. We now take for granted
the periodic table, yet it took descriptive research to devise it. Descriptive research
generally precedes explanatory research. For example, over time the periodic
16
table’s description of the elements allowed scientists to explain chemical reaction
and make sound prediction when elements were combined.
Hence, research cannot describe what caused a situation. Thus, descriptive research
cannot be used to as the basis of a causal relationship, where one variable affects
another. In other words, descriptive research can be said to have a low requirement
for internal validity.
The description is used for frequencies, averages and other statistical calculations.
Often the best approach, prior to writing descriptive research, is to conduct a survey
investigation. Qualitative research often has the aim of description and researchers
may follow-up with examinations of why the observations exist and what the
implications of the findings are.
2.8 Sampling Method:
Convenience Sampling:Convenience Sampling is a type of non-probability sampling that involves
the sample being drawn from that part of the population that is close to hand. That
is, a sample population selected because it is readily available and convenient,
as researchers are drawing on relationships or networks to which they have easy
access. The researcher using such a sample cannot scientifically make
generalizations about the total population from this sample because it would not be
representative enough. For example, if the interviewer was to conduct such a survey
at a shopping centre early in the morning on a given day, the people that he/she
could interview would be limited to those given there at that given time, which
would not represent the views of other members of society in such an area, if the
survey was to be conducted at different times of day and several times per
week. Convenience sampling is need to collect primary information.
17
Definition and meanings of the terms used in the title.
DEFINITION of 'Diversification'
A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.
Diversification strives to smooth out unsystematic risk events in a portfolio so that the positive performance of some investments will neutralize the negative performance of others. Therefore, the benefits of diversification will hold only if the securities in the portfolio are not perfectly correlated.
DEFINITION of 'Portfolio Management'
Portfolio management is 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.
2.10 LIMITATIONS:The limitations of this study can be explained as under:
Time is a major constraint.
The whole research study is done only in Bangalore.
Portfolio management is a huge topic to work on.
Sample unit is only 50 investors.
The information is given may not be accurate.
Some of the respondents did not answer they were Busy hence the right information
could not be obtained.
18
CHAPTER - 3
DATA ANALYSIS
3.1. MEANING OF DATA ANALYSIS:
Analysis of data is a process of inspecting, cleaning, transforming, and
modelling data with the goal of discovering useful information, suggesting
conclusions, and supporting decision making. Data analysis has multiple facets and
approaches, encompassing diverse techniques under a variety of names, in different
business, science, and social science domains.
INTERPRETATION
Interpretation is a process of relating various bits of information to existing
information. Interpretation attempts to answer well, what relation existing between
the findings to research objectives and hypothesis framed for the study in the
beginning..The responses obtained for different equations were analysed and
depicted in the following tables and charts.
PRIMARY DATA
SELECTION OF THE SAMPLE
To get the information about the study, a survey has been conducted considering
number of respondents. Respondents were selected by using random sampling
technique. Samples would be chosen as various possible investments or funds under
a portfolio. Data has been collected through questionnaire mainly considering
various age groups, their risk perception, risk appetite, safety of principal, liquidity
etc. Keeping this view in mind we followed a simple method of selecting
respondents – following the method of “Simple Random Sampling”. The
respondents were selected randomly. Due to the want of time and resources only 50
respondents were selected for the study.
34
How do you look into Indian economy?
TABLE 3.1:
Very
Good
10 20%
Good 37 74%
Bad 3 6%
Don’t
Know
0 0%
CHART 3.1:
ANALYSIS AND INTERPRETATION:
74% of the respondents have said Indian economy is good. This means that after
the economic meltdown the Indian economy has been fairing well.
35
20% of the respondents have said Indian economy is very good. This means they
feel that irrespective of the recession effects, the economy is doing good.
6% of the respondents feel Indian economy is bad. This means they still feel the
economy has to grow for better means.
Each and every respondent has a fair idea about Indian economy, therefore there
were no respondents as such who said that they don’t know about Indian economy.
Being an investor, you must be aware of all investment options available today?
TABLE 3.2:
Yes 32 64%
No 17 34%
Didn’
t Say
1 2%
36
CHART 3.2:
ANALYSIS AND INTERPRETATION
64% of the respondents are aware of all the investment options available. This
means they have been tracking the market conditions and have a fair idea of what
are the options available for investing wherein they can earn money.
34% of the respondents are not aware of the investment options available. This
means they are least bothered to know about the options available for investing and
rather try to play safe side by not taking too much of risk.
2% of the respondents didn’t say anything because they may not have any idea of
what are the investment avenues and may be they take help of third party for their
investments and remain ignorant.
37
If No, do you take help of an investment advisor?
TABLE3. 3:
CHART 3.3:
ANALYSIS AND INTERPRETATION
Out of total respondents, 34% (17) said they are not aware of all the investment
options available and out of this,
65% of 17 respondents take the help of investment advisor because they are not
38
aware of the present market conditions and its volatility and don’t want to take
unnecessary risk by investing into various portfolio without understanding its
consequences.
35% of 17 respondents don’t take help of investment advisor even if they are not
aware of the investment avenues. This shows the ignorance of the investors and
their lack of interest towards being educated regarding various investment options.
Is your investment objective for?
TABLE 3.4:
Retirement
Planning
14 28%
To meet
major
commitments
13 26%
Wealth
Creation
19 38%
Others 4 8%
39
CHART 3.4:
ANALYSIS AND INTERPRETATION
8% of the respondents have said their investment objective is for retirement
planning. This means they are investing in order to secure their future after their
retirement.
26% of the respondents have said their investment objective is to meet major
commitments. Here major commitments means higher education for their
dependents, marriage etc.
38% of the respondents have said their investment objective is for wealth creation.
This means majority of the investors invest to create wealth. Their motto is to
invest into various avenues and get maximum out of it.
8% of the respondents have said they have some other reasons for investment
instead of creating wealth, to meet major commitments and retirement planning.
40
Prioritize your investment criteria? (Rate between 1 and 4)