Portfolio

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INTRODUCTION TO PORTFOLIO MANAGEMENT

PORTFOLIO

A Portfolio is a collection of investments. As it is not desirable for any

investor to invest all of his funds in one individual security / asset, it is essential that

every security / asset should be viewed in a portfolio context. An investor, while

constructing his portfolio, is faced with the problem of choosing a few from amongst

a large number of securities. His attempt would be to select the most desirable

securities and to allocate his available funds over these securities in the most rational

way. His choice would depend upon the risk-return characteristics of a portfolio differ

from those of the individual securities combined into it. The essence of optimal

portfolio lies in diversification.

DIVERSIFICATION

“NEVER PUT ALL YOUR EGGS IN ONE BASKET’’ is what is

meant by diversification. Instead of investing all funds is one asset, the funds be

invested in a group of assets. An investors starts with investing in one security. His

risk of investment is equal to the risk of the security. As he adds more securities to his

portfolio, his exposure to a particular source of risk becomes smaller. Risk reduction

through diversification can be explained in terms of the insurance principle.

NARASARAOPETA ENGINEERING COLLEGE Page 1

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NEED FOR THE STUDY

Portfolio management is a process encompassing many activities of

investment in assets and securities. It is a dynamic and flexible concept and involves

regular and systematic analysis judgment and action.

It helps to investor in adjusting their returns in tune with the market conditions.

It helps in optimizing the returns with lower risks.

It helps in the allocation of surplus funds.

The study helps to the unknown investors with the expertise of professionals in

investment and portfolio management.

The project study helps to guide & the investor to select the portfolios which

provide current income and constant income.


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OBJECTIVES OF THE STUDY

The objectives of the study have the following aspects.

To analyze the returns and risks of the selected securities.

To analyze the correlation between the securities.

To determine the weights of the portfolio.

To find out the optimal portfolio, which gives optimal return at a

minimize risk to the investor.

To study the effectiveness of portfolio management service.

To help the investors to choose wisely between alternative investments.


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SCOPE OF THE PRESENT STUDY

1. To study about the stock market as the best way of knowing about portfolio

management.

2. To study the importance of portfolio management.

3. The scope of the study is limited to the Indian context only.

4. This study covers the Markowitz model.

DATA SOURCES


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There are two types of data sources.

Primary Data.

Secondary Data.

Primary data is the data which is collected first time by

Our own by using observation, personal interview

and questionnaire.

Secondary data is the data which is taken from the

already existing source like books, magazines and news

papers. In the present study, the secondary data

is collected from the following sources.

News papers.

Journals & Magazines.

Websites.

DATA ANALYSIS

In the present study, I am going to analyze the data by using various

statistical tools like standard deviation, correlation coefficient, covariance, and by

using graphs and charts.

DATA COLLECTION METHODS

The methodology adopted for the study is observation method. It is used

to understand the procedures & evaluation of the investor’s performance as well as the

impact of the brokers of the stock exchange in the selection and performance of

portfolio.


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LIMITATIONS OF THE STUDY

1. The period of the study is limited.

2. The source of data is based on only Books, Magazines etc.,

3. Limited number of members is available to give the absolute information.

4. I collected the information related to movement of scripts which are related to

limited period of time i.e. 1 Aug 2011 to 31 Aug 2011.

FINANCIAL MARKETS


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In economics, a financial market is a mechanism that allows people to

easily buy and sell (trade) financial securities (such as stocks and bonds),

commodities (such as precious metals or agricultural goods), and other fungible items

of value at low transaction costs and at prices that reflect the efficient-market

hypothesis.

Financial markets have evolved significantly over several hundred years

and are undergoing constant innovation to improve liquidity. Both general markets

(where many commodities are traded) and specialized markets (where only one

commodity is traded) exist. Markets work by placing many interested buyers and

sellers in one "place", thus making it easier for them to find each other. An economy

which relies primarily on interactions between buyers and sellers to allocate resources

is known as a market economy in contrast either to a command economy or to a non-

market economy such as a gift economy.

In finance, financial markets facilitate –

The raising of capital (in the capital markets);

The transfer of risk (in the derivatives markets);

International trade (in the currency markets)

and are used to match those who want capital to those who have it.

Typically a borrower issues a receipt to the lender promising to pay back the

capital. These receipts are securities which may be freely bought or sold.

In return for lending money to the borrower, the lender will expect some

compensation in the form of interest or dividends.

DEFINITION


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In economics, typically, the term market means the aggregate of possible

buyers and sellers of a thing and the transactions between them.

The term "market" is sometimes used for what are more strictly exchanges,

organizations that facilitate the trade in financial securities, e.g., a stock exchange or

commodity exchange. This may be a physical location (like the NYSE) or an

electronic system (like NASDAQ). Much trading of stocks takes place on an

exchange; still, corporate actions (merger, spinoff) are outside an exchange, while any

two companies or people, for whatever reason, may agree to sell stock from the one to

the other without using an exchange.

Trading of currencies and bonds is largely on a bilateral basis, although

some bonds trade on a stock exchange, and people are building electronic systems for

these as well, similar to stock exchanges. Financial markets can be domestic or they

can be international.

TYPES OF FINANCIAL MARKETS

The financial markets can be divided into different subtypes:

Capital markets which consist of:

Stock markets, which provide financing through the issuance of

Shares or common stock, and enable the subsequent trading

thereof.

Bond markets, which provide financing through the issuance of

bonds, and enable the subsequent trading thereof.

Commodity markets, which facilitate the trading of commodities.

Money markets, which provide short term debt financing and

Investment.


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Derivatives markets, which provide instruments for the

Management of financial risk.

Futures markets, which provide standardized forward contracts for

trading products at some future date; see also forward market.

Insurance markets, which facilitate the redistribution of various

risks.

Foreign exchange markets, which facilitate the trading of foreign

exchange.

The capital markets consist of primary markets and secondary markets. Newly formed

(issued) securities are bought or sold in primary markets. Secondary markets allow

investors to sell securities that they hold or buy existing securities.

RAISING CAPITAL

Without financial markets, borrowers would have difficulty finding lenders

themselves. Intermediaries such as banks help in this process. Banks take deposits

from those who have money to save. They can then lend money from this pool of

deposited money to those who seek to borrow. Banks popularly lend money in the

form of loans and mortgages.

More complex transactions than a simple bank deposit require markets where

lenders and their agents can meet borrowers and their agents, and where existing

borrowing or lending commitments can be sold on to other parties. A good example

of a financial market is a stock exchange.


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CAPITAL MARKETS

The capital market is the market for securities, where companies and

governments can raise long term funds. It is a market in which money is lent for

periods longer than a year. The capital market includes the stock market and the bond

market. Financial regulators, such as the U.S. Securities and Exchange Commission,

oversee the capital markets in their designated countries to ensure that investors are

protected against fraud.

The capital markets consist of the primary market and the secondary

market. The primary market is where new stock and bonds issues are sold

(underwriting) to investors. The secondary markets are where existing securities are

sold and bought from one investor or speculator to another, usually on an exchange

(e.g. - New York Stock Exchange).

NEW ISSUE MARKET (OR) PRIMARY MARKET:-

Stocks available for the first time are offered through new issue market. The

issue may be a new co., are an existing co.,

In the new issue market the issue is to be considered as a manufactured. The

issuing house investment bankers and brokers act has the channel of distribution, for

the new issues they take the responsibilities of selling of stocks to the public.

The main objects of new issue markets are:-

To promote a new company.

To expand an existing company.

Diversification of the production.

To make the regular working capital requirements.

To capitalize the reserves.

The main service functions of primary market are origination, underwriting, and

distribution.


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Origination:

It deals with the origin of the new issue. The proposal is analysed in term of the

nature of the security and the size of the new issue and timing of the issue and

rotation method of the issue.

Under writing:

It contacts makes the share predictable and removes the element of uncertainty

in the subscription.

Distribution:

It refers to the sell of securities to the investors, this is carried out with the

help of the lead managers and the brokers to the issue.

Structure of the Market:

There are various sub-markets in the capital markets in India. The structure has

undergone vast changes in recent years. New instruments and new institutions

have emerged on the scene.

The sub markets are as follows:

1. Market for corporate securities for new issues and old securities.

2. Market for government securities.

3. Market for debt instruments debentures and Private sector

bonds, Public sector bonds, Public financial institutions.

4. Mutual fund schemes and UTI schemes, etc.


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SECONDARY MARKET

The securities are traded in the secondary market, which is commonly

known as the stock market (or) stock exchange. In the secondary market the investors

can be sell and buy the securities .The stock market deals with the equity shares and

debt instruments like bonds & debentures and also traded in the stock market. The

health of economy is reflected by the growth of the stock market.

STOCK MARKET STRUCTURE

Regular Stock Exchanges (21)

For big companies with paid up capital above Rs. 5 crores trading ring

and physical operations includes principal exchanges like Mumbai,

Delhi, etc. and regional exchanges like Hyderabad, Cochin etc.

Over the counter Exchange of India (1)

Computerized trading for smaller Companies with paid up capital of Rs.

30 lakhs to Rs. 25 crores. No trading ring started operations in Oct. 92.

National Stock Exchange (1)

Recognized in April 93 and started operations later, only in govt. securities

and money market instruments. Equity trading started in Nov. 1994

computerized trading. The National Stock Exchange (NSE) was set up in

June 1994. It has shown impressive performance since its inception. In

January 1997, there were 541 companies listed on NSE, and about 600

other securities wee permitted for trading. The trading volume has been

higher than BSE since November 1995. The total turnover in 1996 was Rs.

216483 crores. The market capitalization in January 1997 was Rs.4.2

billion.


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A company can be listed on NSE on the condition that it should have

a minimum paid up capital of Rs. 10 crore and a market capitalization of

Rs. 25 crores and it should have a track record of profitability atleast for

three years.

The trading system in NSE is computerized. By the end of 1996, NSE

has put in place 1102 VSATs (very small aperture terminals). They cover

66 cities (49 without any stock exchanges).

BOMBAY STOCK EXCHANGE

The Stock Exchange, Mumbai, popularly known as "BSE" was established in

1875 as "The Native Share and Stock Brokers Association". It is the oldest one in

Asia, even older than the Tokyo Stock Exchange, which was established in 1878. It is

a voluntary non-profit making Association of Persons (AOP) and is currently engaged

in the process of converting itself into demutualised and corporate entity. It has

evolved over the years into its present status as the premier Stock Exchange in the

country. It is the first Stock Exchange in the Country to have obtained permanent

recognition in 1956 from the Govt. of India under the Securities Contracts

(Regulation)

Act,1956.

The Exchange, while providing an efficient and transparent market for trading

in securities, debt and derivatives upholds the interests of the investors and ensures

redressal of their grievances whether against the companies or its own member-

brokers. It also strives to educate and enlighten the investors by conducting investor

education programmes and making available to them necessary informative inputs.


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A Governing Board having 20 directors is the apex body, which decides the

policies and regulates the affairs of the Exchange. The Governing Board consists of 9

elected directors, who are from the broking community (one third of them retire ever

year by rotation), three SEBI nominees, six public representatives and an Executive

Director & Chief Executive Officer and a Chief Operating Officer.

The Executive Director as the Chief Executive Officer is responsible for the day-

to-day administration of the Exchange and the Chief Operating Officer and other

Heads of Departments assist him.

The Exchange has inserted new Rule No.126 A in its Rules, Bye-laws &

Regulations pertaining to constitution of the Executive Committee of the Exchange.

Accordingly, an Executive Committee, consisting of three elected directors, three

SEBI nominees or public representatives, Executive Director & CEO and Chief

Operating Officer has been constituted. The Committee considers judicial & quasi

matters in which the Governing Board has powers as an Appellate Authority, matters

regarding annulment of transactions, admission, continuance and suspension of

member-brokers, declaration of a member-broker as defaulter, norms, procedures and

other matters relating to arbitration, fees, deposits, margins and other monies payable

by the member-brokers to the Exchange, etc.

Turnover on the Exchange

The average daily turnover of the Exchange during the financial year

2000-2001 (April-March), was Rs.3984.19 crores and the average

number of daily trades was 5.69 lakhs.

The average daily turnover of the Exchange in the subsequent two

Financial years, i.e., 2001-02 & 2002-03, has declined considerably

to Rs. 1248.15 crores and Rs. 1251.29 crores respectively.


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The average number of daily trades recorded during 2001-02 and 2002-03

numbered 5.17 lakhs and 5.63 lakhs respectively.

The average daily turnover and average number of daily trades during the quarter

April-June 2003 were Rs. 1101.05 crores and 5.70 lakhs respectively.

The ban on all deferral products like Borrowing & Lending of Securities Scheme

(BLESS) and Automated Lending & Borrowing Mechanism (ALBM) in the Indian

capital markets by SEBI w.e.f. July 2, 2001, abolition of account period settlements,

introduction of Compulsory Rolling Settlements in all scrips traded on the Exchanges

w.e.f. December 31, 2001, etc. have adversely impacted the liquidity in the market

and consequently there is a considerable decline in the average daily turnover at the

Exchange as reflected in above statistics.

CAPITAL MARKET INSTRUMENTS

There are a number of capital market instruments used for market trade,

including stocks, bonds, debentures, T-bills, foreign exchange, fixed deposits, and

others. These are used by the investors to make a profit out of their respective

markets.

All of these are called capital market instruments because these are

responsible for generating funds for companies, corporations, and sometimes national

governments.

This market is also known as securities market because long term funds

are raised through trade on debt and equity securities.


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These activities may be conducted by both companies and governments.

This market is divided into primary capital market and secondary capital market. The

primary market is designed for the new issues and the secondary market is meant for

the trade of existing issues.

Stocks and bonds are the two basic capital market instruments used in both

the primary and secondary markets. There are three different markets in which stocks

are used as the capital market instrument: the physical, virtual, and auction markets

MONEY MARKETS

The Concise Oxford Dictionary defines money as “a current medium of

exchange”. This definition, if rather sparse, does detail the essential nature of money:

it is a recognized form of exchange for goods and services. It can take many forms:

anything which is accepted by the seller, because it has a recognized value which can

be used to purchase further goods and services, will suffice as money. The purpose of

money is to fulfill the following. It must be accepted as a unit of account and a means

of exchange or payment, be durable, scarce, easily dividable, and stable in value.

Money that is on account of the Central Bank is the Real Money. All other

forms for e.g. the account balances with Commercial Banks, even cash (check out the

note by the RBI governor on Indian currency note), are promises to pay money, but

not real money. Like individuals, Banks and large institutions also transact amongst

each other, lending and borrowing huge amounts of money. In these transactions cash

is not involved, real money kept in accounts with the Central Bank will be transacted.

Consider this example. IDBI Bank needs to pay SBI Rs.10 Crores balancing

figure at the end of the day. This transaction happens by requesting RBI to increase

the account balance of SBI by 10 Crores and corresponding decrease in the account

balance of IDBI. Now with this the balances or total money with IDBI reduces. But it

might be requiring that money for transactions with its other customers. This means a


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party (IDBI), which wants to borrow money now. There might be another institution

that might be having surplus money that it does not require in the near future, say

ICICI Bank having surplus money for15 days (the same duration that IDBI wants it

for). So we have ICICI loaning IDBI Rs.10 Crores for 15 days at an agreed rate. This

was a MONEY MARKET transaction.

More specifically, Money Market provides short-term finance (for a period

less than 1 year.) The parties involved in Money Markets are Central Bank,

Commercial Banks, FIs, Mutual Funds and Primary Dealers. (The extension of

Money Market is Capital Market where finance is transacted for a period longer

than 1 year, in form of both Debt & Equity)

Money Markets exist because of the fundamental need of Working Capital

Management where balance between Liquidity and Profitability is paramount. The

market provides a conduit for Cash surplus and deficient organizations to transact and

reach an equilibrium regarding the cost of funds (interest rates.)

The borrowing and lending in money markets is high volume, low risk and

short-term. Because it is short-term, transaction costs are high relative to the interest

that can be earned. And because transaction costs are high relative to the interest that

can be earned, transactions in the money market tend to be for very large amounts.

Short-term is generally understood as ‘less than one year’, although, in fact, most

money market activity is concentrated in terms to maturity between overnight and

one-week.

MONEY MARKET INSTRUMENTS

Money market borrowing and lending utilizes a variety of different

instruments. These include

deposits and loans

repurchase agreements

and number of securitised debt instruments:


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Treasury bills

bankers’ acceptances

commercial paper, and

Certificates of deposit.

Borrowers in money markets are all high quality names and so the

securities issued and traded have low risk, low yield, high liquidity characteristics

which are attractive to risk average lenders.

In terms of risk Profiles: Treasury Bills, Banker’s Acceptances, CD and

CPs range from the lowest to highest risk in that order, being governed by the credit

worthiness of party backing it. Consequently, the returns are in inverse order for these

instruments.

Regular issues of Treasury bills backed by central government have the lowest

default risk, creating the deepest market segment of homogeneous, highly liquid paper

- with consequently the lowest yield. This is because governments’ are generally

assumed to have a very low default risk.

Bankers' Acceptances are also very safe investments as they carry the obligation to

honor payment by both a corporate and a bank, and in addition, because they usually

represent a business transaction with specific underlying goods.

Certificates of Deposit, honoured by a single bank, generally trade a few basis points

higher, but this can only be a generalisation as the market segment is itself tiered; the

range of names issuing resulting in different credit and liquidity premiums.

The Commercial Paper segment presents the greatest degree of tiering. Prime grade

CP generally trades a few basis points over CDs, but again, some corporates are

perceived as being more creditworthy than some banks. Medium grade CP offers the

highest yields to attract investors.


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REPO

A repurchase (repo) agreement can be seen as a short term swap between cash and

securities. Repurchase agreements, or repos, are specialised but important aspects of

many markets, especially those for government securities. In essence, if a security

holder wants to maintain his or her long-term position but needs cash for a short

period, he or she can enter into a repo contract whereby the securities are sold

together with a binding agreement to repurchase them at a future date, usually fairly

near-term. The effect is to provide the security holder with a short-term loan based on

the collateral of the government securities he or she owns. In major markets with repo

systems,

it is a cheap, simple and effective way to raise short-term funds.

For banks and large corporates, liquidity management is about getting a fine

return on cash, which they may need at short notice. They do this by borrowing and

lending between each other - using either money market securities or deposits and

loans - in what is called the interbank market.

Can individual investors invest in Money markets?

One of the main differences between the money market and the stock

market is that most money market securities trade in very high denominations and so

individual investors have limited access to them. The easiest way for individual

investors to gain access to the money market is with a money market mutual fund, or

sometimes a money market bank account. These accounts and funds pool together the

assets of thousands of investors and buy the money market securities on their behalf.

Although, some money market instruments like treasury bills may be purchased

directly or through other large financial institutions with direct access to these

markets.


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SEBI

(SECURITIES EXCHANGE BOARD OF INDIA

ESTABLISHMENT OF SEBI

The Securities and Exchange Board of India was established on April 12, 1992 in

accordance with the provisions of the Securities and Exchange Board of India Act,

1992.

PREAMBLE

The Preamble of the Securities and Exchange Board of India describes the basic

functions of the Securities and Exchange Board of India as

“…..to protect the interests of investors in securities and to promote the

development of, and to regulate the securities market and for matters connected

therewith or incidental thereto”

FUNCTIONS AND RESPONSIBILITIES

SEBI has to be responsive to the needs of three groups, which constitute the

market

The issuers of securities

The investors

The market intermediaries.

SEBI has three functions rolled into one body quasi-legislative, quasi-judicial

and quasi-executive. It drafts regulations in its legislative capacity, it conducts

investigation and enforcement action in its executive function and it passes rulings


http://www.sebi.gov.in/acts/act15ac.html

SECURITIES

EXCHANGE OF

BOARD IINDIA

IIIIindiaINDIA

REGISTRAROFCOMPANIES

COMPANY LAW BOARD

STOCK EXCHANGE

MINISTRY OF FINANCE

RESERVE BANK OF

INDIA

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and orders in its judicial capacity. Though this makes it very powerful, there is an

appeals process to create accountability. There is a Securities Appellate Tribunal

which is a three member tribunal and is presently headed by a former Chief Justice of

a High court - Mr. Justice NK Sodhi. A second appeal lies directly to the Supreme

Court.

SEBI has enjoyed success as a regulator by pushing systemic reforms

aggressively and successively (e.g. the quick movement towards making the markets

electronic and paperless rolling settlement on T+2 basis). SEBI has been active in

setting up the regulations as required under law

ORGANISATION STRUCTURE

Chandrasekhar Bhaskar Bhave is the sixth chairman of the Securities Market

Regulator. Prior to taking charge as Chairman SEBI, he had been the chairman

of NSDL (National Securities Depository Limited) ushering in paperless

securities. Prior to his stint at NSDL, he had served SEBI as a Senior Executive

Director. He is a former Indian Administrative Service officer of the 1975 batch.


http://en.wikipedia.org/wiki/Indian_Administrative_Service

http://en.wikipedia.org/wiki/National_Securities_Depository_Limited

http://en.wikipedia.org/wiki/Chandrasekhar_Bhaskar_Bhave

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COMPANY PRAOFILE

Bajaj Allianz Life Insurance is a union between AAllianz AG, one of the

largest Insurance Company and Bajaj Finserv. (Recently demerged from Bajaj Auto.)

Allianz AG is a leading insurance conglomerate globally and one of the largest asset

managers in the world, managing assets worth over a Trillion (Over INR. 55, 00,000

Crores). ALLIANZ AG has over 115 years of financial experience and is present in

over 70 countries around the world.

At Bajaj Allianz Life Insurance, customer delight is our guiding principle. Our

business philosophy is to ensure excellent insurance and investment solutions by

offering customized products, supported by the best technology. It started in 2001.

Bajaj Finserv, the financial services arm of the Bajaj Group, posted a net profit

of Rs 42 crore for the quarter ended June 30, 2011. It had posted a loss of Rs 36 crore

in the corresponding period last year.

The group’s life insurance arm, Bajaj Allianz Life Insurance Company, was the

biggest contributor to the firm’s income. Bajaj Allianz has posted a profit of Rs 68

crore in the June quarter. In the year-ago quarter, it had posted a loss of Rs 3

crore.Gross written premium for the quarter rose 40 per cent to Rs 2,001 crore as

against Rs 1,847 crore in the corresponding period last year. Renewal premium, too,

increased to Rs 1,423 crore as against Rs 1,018 crore in the quarter ended June 30,

2010. However, new business premium fell 42.28 per cent to Rs 577 crore.


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2.1 ALLIANZ GROUP:

Allianz Group is one of the world's leading insurers and financial services

providers. Founded in 1890 in Berlin, Allianz is now present in over 70 countries with

almost 174,000 employees. At the top of the international group is the holding

company, Allianz AG, with its head office in Munich. Allianz Group provides its

more than 60 million customers worldwide with a comprehensive range of services in

the areas of

Property and Casualty Insurance,

Life and Health Insurance,

Asset Management and Banking.

Allianz Ag- A Global Financial Powerhouse

Worldwide 2nd by Gross Written Premiums - Rs.4, 46,654 crore.

2.3 VISION OF THE COMPANY:

To be the first choice insurer for customers.

To be the preferred employer for staff in Insurance industry.

To be the number one insurer for creating shareholder value

To aspire to be a world class organization.

2.4 MISSION OF THE COMPANY:


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As a responsible, customer focused market leader, BAJAJ ALLIANZ is

determined to understand the insurance needs of the consumers and translate it into

affordable products that deliver value for money.

2.5 HISTORY OF THE COMPANY:

Bajaj Allianz Life Insurance Co. Ltd. is a joint venture between two leading

conglomerates- Allianz AG, one of the world's largest insurance companies, and Bajaj

Auto, one of the biggest 2 and 3 wheeler manufacturers in the world. Characterized by

global presence with a local focus and driven by customer orientation to establish

high earnings potential and financial strength, Bajaj Allianz Life Insurance Co. Ltd.

was incorporated on 12th March 2001.

The company received the Insurance Regulatory and Development Authority

(IRDA) certificate of Registration (R3) No 116 on 3rd August 2001 to conduct Life

Insurance business in India. Bajaj Auto Ltd, the flagship company of the Rs. 8000

crore Bajaj group is the largest manufacturer of two-wheelers and three-wheelers in

India and one of the largest in the world. A household name in India, Bajaj Auto has a

strong brand image & brand loyalty synonymous with quality & customer focus. With

over 15,000 employees, the company is a Rs. 4000 crore auto giant, is the largest 2/3-

wheeler manufacturer in India and the 4th largest in the world. AAA rated by Crisil,

Bajaj Auto has been in operation for over 55 years. It has joined hands with Allianz to

provide the Indian consumers with a distinct option in terms of life insurance

products.


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DETAILS OF THE COMPANY:

Mr. KAMESH GOYAL

Managing Director and CEO

BOARD OF DIRECTORS:

Mr. Rahul Bajaj (Chairman)

Dr. Werner Zedelius

Mr. Sanjay Asher

Mr. Niraj Bajaj

Mr. Sanjiv Bajaj

Mr. Heinz Dollberg

Mr. Ranjit Gupta

Mr. S. H. Khan

Mr. Suraj Mehta

Mr. Dietmar Raich

Mr. Manu Tandon

Mr. Kamesh Goyal (Alternate Director to Dr. Werner Zedelius)


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MAJOR COMPETITORS:


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http://www.google.co.in/imgres?imgurl=http://images03.olx.in/ui/2/56/25/35815125_1.jpg&imgrefurl=http://kolkata.olx.in/business-associates-wanted-for-tata-aig-life-insurance-co-iid-35815125&usg=__NUrdfWVu49ODIrXZ6fUW9p7nJxE=&h=268&w=600&sz=13&hl=en&start=2&zoom=1&tbnid=n-MuD5QNm5e_dM:&tbnh=60&tbnw=135&ei=QjX8T53LIIftrAfNh6i-Bg&prev=/search?q=tata+ing+insurance+logo&um=1&hl=en&biw=1366&bih=673&tbm=isch&um=1&itbs=1

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SAFE GUARD FOR POLICY HOLDERS MONEY

Important Sections

1. Section 27 of Insurance Act

Investment of Assets 65% Government Securities & 35% Specified Stocks

2. Section 27C of Insurance Act

Prohibition for Investment of Funds outside INDIA No Insurer shall directly or indirectly

invest outside INDIA

“THE FUNDS OF THE POLICY HOLDER”


“Prohibition of Loans”

“No Insurer shall grant loans or temporary advances either on hypothecation of property or

on personal security or otherwise, except loans on life policies issued by him within the

surrender value, to any

Director,

Manager,

Managing Agent,

Actuary, etc”.


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4. Section 31B of Insurance Act

“Power to restrict payment of excessive remuneration”

“Remuneration by way of Salary or Commission cannot be disproportionate

according to normal standards prevailing in the insurance industry”.

5. Section 40B of Insurance Act

“Limitation of Expenses of Management in Life Insurance Business”

“No Insurer shall, in respect of life insurance business transacted by him in India, spend as

expenses of management in any calendar year an amount in excess of the prescribed limits”.

6. Section 52H of Insurance Act

“Power of Central Government to acquire undertaking of Insurers in certain cases”.

“In the interest of the Policy Holders or Share Holders of such Insurer, it is necessary to

acquire the undertaking of such Insurer the Central Government may, by notified order,

Acquire the undertaking of such Insurer”.


“Voluntary winding up” “Not withstanding anything contained in the Indian Companies Act,

1913 (7 of 1913), an Insurance Company shall not be wound up voluntarily except for the

purpose of affecting an amalgamation or a reconstruction of the company”.

Recently (11-6-07) Bajaj Allianz has launched a medical policy is known as “Care First”.


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About the Bajaj Allianz Care First Plan

Bajaj Allianz Care First is a unique hospitalization-cum-insurance plan that take care of

policy holders hospitalization bills and also provide crucial financial to dependents in case of

policy holders unfortunate death. Unlike ordinary annual Mediclaim policies this is a 3 year

risk cover plan that allows policy holders to renew the policy after every 3 years and keeps

covered till the age of 65 years. The premium rate is level and guaranteed for the length of

the each policy term of 3 years.

How does the plan work?

The policy covers hospitalization expenses ranging from Rs. 1lac to Rs. 7 lacks. This means

policy holder opt for a sum assured of Rs. 5 lacks them policy holder up to Rs. 5 lacks every

year to meet the policy holder hospitalization expenses.

Key Benefits

Hospitalization Cover

Day Care Treatment

Pre-Hospitalization and Post- Hospitalization Cover

Cash Less Service Facility

Death Benefit

Tax Benefit


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Hospitalization Cover

Following expenses incurred during hospitalization for continuous period of 24 hours for

inpatient treatment would be covered under this policy.

1. Room rent and Boarding expenses.

2. Nursing expenses

3. Doctor’s fees

4. Operation theatre charges

5. Cost of Anesthesia, Medicines and Drugs, Artificial Limb, an Pacemaker.

Day Care Treatment

If policy holder require to undergo treatment for the illnesses like Eye surgery, Cataract,

Lithotripsy, Cardiac Catheterization etc.. wherein policy holder don’t need to be hospitalized

for at least 24 continuous hours, it will be considered as proper hospitalization and the

medical expense would be reimbursed.

Pre-Hospitalization and Post-Hospitalization Cover

This plan covers the expenses associated with pre-hospitalization treatment, for a period of

15 days prior to the hospitalization and post-hospitalization expenses for a period of 30 days

after the discharge from the hospital


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THEORETICAL FRAMEWORK

PORTFOLIO MANAGEMENT:

Specification and qualification of investor objectives, constraints, and preferences in

the form of an investment policy statement.

Determination and qualification of capital market expectations for the economy,

market sectors, industries and individual securities.

Allocation of assets and determination of appropriate portfolio strategies for each

asset class and selection of individual securities.

Performance measurement and evaluation to ensure attainment of investor objectives.

Monitoring portfolio factors and responding to changes in investor objectives,

constrains and / or capital market expectations.

Rebalancing the portfolio when necessary by repeating the asset allocation, portfolio

strategy and security selection.

CRITERIA FOR PORTFOLIO DECISIONS:

In portfolio management emphasis is put on identifying the collective importance of

all investor’s holdings. The emphasis shifts from individual assets selection to a more

balanced emphasis on diversification and risk-return interrelationships of individual

assets within the portfolio. Individual securities are important only to the extent they

affect the aggregate portfolio. In short, all decisions should focus on the impact which

the decision will have on the aggregate portfolio of all the assets held.

Portfolio strategy should be molded to the unique needs and characteristics of the

portfolio‘s owner.

Diversification across securities will reduce a portfolio‘s risk. If the risk and return

are lower than the desired level, leverages (borrowing) can be used to achieve the

desired level.


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Larger portfolio returns come only with larger portfolio risk. The most important

decision to make is the amount of risk which is acceptable.

The risk associated with a security type depends on when the investment will be

liquidated. Risk is reduced by selecting securities with a payoff close to when the

portfolio is to be liquidated..

Provides user interfaces that allow for the extraction of data based on user

defined parameters.

Provides a comprehensive set of tools to perform portfolio and risk evaluation

against parameters set within the risk framework.

Provides a set of tools to optimise portfolio value and risk position by:

Considering various legs of different contracts to create an optimal trading

strategy.

The calculation of residual purchase requirements.

Performs analysis that provides the relevant information to create hedge and

trade plans.

Performs analysis on current and potential trades.

Evaluates the best mix of contracts on offer from counterparties to minimise

the overall purchase cost and maximize profits.

Creates and maintains trading and hedge strategies by:

Allocating trades to contracts and books.

Maintaining trades against contracts and books.

Reviewing trades against existing trading strategy.

Maintains an audit trail of decisions taken and query resolution.

Produces accurate and timely reports


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Portfolio Management

To sustain long-term growth, companies manage a number of products and

candidates at different stages of maturity. However, different product profiles and the

therapeutic areas they serve have disparate commercial opportunities.

Our portfolio prioritization, pipeline analysis, category franchise strategy, and

technology licensing assessments provide a systematic means of optimizing

development programs and product opportunities. We outline and quantify the areas

of greatest opportunity for your organization and recommend actionable strategies

that establish or expand your position in target markets.

Key portfolio management questions that we address:

Which technologies and product candidates have the greatest potential

commercial value?

How can we broaden and deepen our therapy penetration?

What actions can we take to maximize return on investment for individual

candidates and discoveries?

Which proprietary rights do we buy, co-market, license, or sell?

How do we balance short and long term product needs to maximize therapeutic

franchise value?

We detail the value of discoveries in clinical phases, candidates in the pipeline, and

products on the market. These individual and therapeutic category evaluations enable

executives to make strategic investment, licensing and prioritization decisions to

realize their portfolio's full potential.


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Portfolio Management

you can now receive the same portfolio management services as many

institutional investors-whether it is a separately managed account or a mutual fund

wrap portfolio.

Some benefits of managed portfolios include:

1. Providing access to top-tier investment management professionals

2. Tailored portfolios to meet specific investment needs

3. Ownership of individual securities

4. Ease of pre-designed mutual fund portfolios


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Every investor is unique, and investment advisory services provide you with

professional investment advice and a personalized investment strategy. Whether

you're seeking a tailored, professionally managed portfolio, or the convenience and

simplicity of a diversified mutual fund wrap program, your investment choice should

focus on meeting your financial goals. During this process, you should consider

current and future growth objectives, income needs, time horizon and risk tolerance.

These considerations form the blueprint for developing a portfolio management

strateg.

The process involves, but is not limited to, the following important stages.

Set investment objectives

Develop an asset allocation strategy

Evaluate/Select investment vehicle

Portfolio review -- Ongoing portfolio monitoring

Portfolio Management Maturity

Summarizes five levels of project portfolio management maturity .each level

represents the adoption of an increasingly comprehensive and effective subset of

related solutions discussed in the previous parts of this 6-part paper for addressing the

reasons that organizations choose the wrong projects. Understanding organizational

maturity with regard to project portfolio management is useful.

The fact that five maturity levels have been identified is not meant to suggest

that all organizations ought to strive for top-level performance. Each organization

needs to determine what level of performance is reasonable at the current time based

on business needs, resources available for engineering change, and organizational


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ability to accept change. Experience shows that achieving high levels of performance

typically takes several years. It is difficult to leap-frog several steps at once. Making

progress is what counts.

Five levels of project portfolio management.

The detailed definitions of the levels, provided below, are not precise. Real

organizations will tend to be more advanced with regard to some characteristics and

less advanced relative to others. For most organizations, though, it is easy to pick one

of the levels as characterizing the current maturity of project portfolio management

performance.


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Level 1: Foundation

Level 1 organizes work into discrete projects and tracks costs at the project level.

Project decisions are made project-by-project without adherence to formal

project selection criteria.

The portfolio concept may be recognized, but portfolio data are not centrally

managed and/or not regularly refreshed.

Roles and responsibilities have not been defined or are generic, and no value-

creation framework has been established.

Only rarely are business case analyses conducted for projects, and the quality is

often poor.

Project proposals reference business benefits generally, but estimates are

nearly always qualitative rather than quantitative.

There is little or no formal balancing between the supply and demand for

project resources, and there is little if any coordination of resources across

projects, which often results in resource conflicts.

Over-commitment of resources is common.

There may be a growing recognition that risks need to be managed, but there is

little real management of risk.

Level 1 organizations are not yet benefiting from project portfolio management,

but they are motivated to address the relevant problems and have the minimum

foundation in place to begin building project portfolio management capability. At this

level, organizations should focus on establishing consistent, repeatable processes for

project scheduling, resource assignment, time tracking, and general project oversight

and support.


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Level 2: Basics

Level 2 replaces project-by-project decision making with the goal of identifying the

best collection of projects to be conducted within the resources available. At a

minimum this requires aggregating project data into a central database, assigning

responsibilities for project portfolio management, and force-ranking projects.

Redundant projects are identified and eliminated or merged.

Business cases are conducted for larger projects, although quality may be

inconsistent.

Individual departments may be establishing structures to oversee and

coordinate their projects.

Planning is mostly activity scheduling with limited performance forecasting.

There are attempts to quantify some non-financial benefits, but estimates are

mostly "guestimates" generated without the aid of standard techniques.

Overlap and double counting of benefits between projects is common.

Ongoing projects are still rarely terminated based on poor performance.

The PPM tools being used may have good data display and management

capabilities.

Portfolio data has an established refresh cycle or is regularly accessed and

updated. Resource requirements at the portfolio level are recognized but not

systematically managed.

Knowledge sharing is local and ad hoc.

Risk analysis may be conducted early in projects but is not maintained as a

continual management processSchedule and cost overruns are still common,

and the risks of project failure remain large.


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Level 2 organizations are beginning to implement project portfolio management,

but most of the opportunity has not yet been realized. The focus should be on

formalizing the framework for evaluating and prioritizing projects and on

implementing tools and processes for supporting project budgeting, risk and issues

tracking, requirements tracking, and resource management.

Level 3: Value Management

Level 3, the most difficult step for most organizations, requires metrics, models, and

tools for quantifying the value to be derived from projects. Although project

interdependencies and portfolio risks may not be fully and rigorously addressed,

analysis allows projects to be ranked based on "bang-for-the-buck," often producing a

good approximation of the value-maximizing project portfolio.

The principles of portfolio management are widely understood and accepted.

The project portfolio has a well-defined perimeter, with clear demarcation and

understanding of what it contains and does not contain.

Portfolio management processes are centrally defined and well documented, as

are roles and responsibility for governance and delivery.

.

Plans are developed to a consistent standard and are outcome- or value-based.

Effective estimation techniques are being used within planning and a range of

project alternatives are routinely considered.

Data quality assurance processes are in place and independent reviews are

conducted.

There is a common, consistent practice for project approval and monitoring.

Project dependencies are identified, tracked, and managed.


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Decisions are made with the aid of a tool based on a defensible logic for

computing project value that generates the efficient frontier.

Portfolio data are kept up-to-date and audit trails are maintained.

Costs, expenditures and forecasts are monitored at the portfolio level in

accordance with established guidelines and procedures.

Interfaces with financial and other related functions within the organization

have been defined.

Level 3 organizations demonstrate a commitment to proactive, standardized

project and project portfolio management. They are achieving significant return from

their investment, although more value is available.

Level 4: Optimization

Level 4 is characterized by mature processes, superior analytics, and quantitatively

managed behavior.

Tools for optimizing the project portfolio correctly and fully account for

project risks and interdependencies.

The business processes of value creation have been modeled and measurement

data is collected to validate and refine the model.

The model is the basis for the logic for estimating project value, prioritizing

projects, making project funding and resource allocation decisions, and

optimizing the project portfolio.

The organization's tolerance for risk is known, and used to guide decisions that

determine the balance of risk and benefit across the portfolio.

There is clear accountability and ownership of risks.

External risks are monitored and evaluated as part of the investment

management process and common risks across the whole portfolio.


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There is likely to be an established training program to develop the skills and

knowledge of individuals so that they can more readily perform their

designated roles.

An extensive range of communications channels and techniques are used for

collaboration and stakeholder management.

High-level reports on key aspects of portfolio are regularly delivered to

executives and the information is used to inform strategic decision making.

There is trend reporting on progress, actual and projected cost, value, and level

of risk.

Level 4 organizations are using quantitative analysis and measurements to obtain

efficient predictable and controllable project and project portfolio management. They

are obtaining the bulk of the value available from practicing project portfolio

management.

Level 5: Core Competency

Level 5 occurs when the organization has made project portfolio management a

core competency, uses best-practice analytic tools, and has put processes in place for

continuous learning and improvement.

Portfolio management processes are proven and project decisions, including

project funding levels and timing, are routinely made based the value

maximization value.

Processes are continually refined to take into account increasing knowledge,

changing business needs, and external factors.

High levels of competence are embedded in all portfolio management roles,

and portfolio management skills are seen as important for career advancement.


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Portfolio gate reviews are used to proactively assess and manage portfolio

value and risk.

Portfolio management informs future capacity demands, capability

requirements are recognized, and resource levels are strategically managed.

Information is highly valued, and the organization's ability to mitigate external

risks and grasp opportunities is enhanced by identifying innovative ways to

acquire and better share knowledge.

Benefits management processes are embedded across the organization, with

benefits realization explicitly aligned with the value measurement framework.

The portfolio is actively managed to ensure the long term sustainability of the

enterprise.

The relationship between the portfolio and strategic planning is understood and

managed.

Resource allocations to and from projects are intimately aligned so as the

maximize value creation.

Level 5 organizations are obtaining maximum possible value from project

portfolio management. By fully institutionalizing project portfolio management into

their culture they free people to become more creative and innovative in achieving

business success.

Building Project Portfolio Management Maturity

Experience shows that building project portfolio management maturity takes time. As

suggested by, significant short-term performance gains can be achieved, but making

step changes requires understanding current weaknesses and the commitment of effort

and resources.


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Step changes can be made, but achieving high levels of maturity typically takes years

QUALITIES OF PORTFOLIO MANAGER:

1. SOUND GENERAL KNOWLEDGE: Portfolio management is an exciting and

challenging job. He has to work in an extremely uncertain and confliction

environment. In the stock market every new piece of information affects the value of

the securities of different industries in a different way. He must be able to judge and

predict the effects of the information he gets. He must have sharp memory, alertness,

fast intuition and self-confidence to arrive at quick decisions.

2. ANALYTICAL ABILITY: He must have his own theory to arrive at the instrinsic

value of the security. An analysis of the security‘s values, company, etc. is s

continuous job of the portfolio manager. A good analyst makes a good financial

consultant. The analyst can know the strengths, weaknesses, opportunities of the

economy, industry and the company.

3. MARKETING SKILLS: He must be good salesman. He has to convince the clients

about the particular security. He has to compete with the stock brokers in the stock

market. In this context, the marketing skills help him a lot.


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4. EXPERIENCE: In the cyclical behavior of the stock market history is often

repeated, therefore the experience of the different phases helps to make rational

decisions. The experience of the different types of securities, clients, market trends,

etc., makes a perfect professional manager.

PORTFOLIO BUILDING:

Portfolio decisions for an individual investor are influenced by a wide variety

of factors. Individuals differ greatly in their circumstances and therefore, a financial

programme well suited to one individual may be inappropriate for another. Ideally, an

individual‘s portfolio should be tailor-made to fit one‘s individual needs.

Investor‘s Characteristics:

An analysis of an individual‘s investment situation requires a study of personal

characteristics such as age, health conditions, personal habits, family responsibilities,

business or professional situation, and tax status, all of which affect the investor‘s

willingness to assume risk.

Stage in the Life Cycle:

One of the most important factors affecting the individual‘s investment

objective is his stage in the life cycle. A young person may put greater emphasis on

growth and lesser emphasis on liquidity. He can afford to wait for realization of

capital gains as his time horizon is large.

Family responsibilities:

The investor‘s marital status and his responsibilities towards other members of the

family can have a large impact on his investment needs and goals.


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Investor‘s experience:

The success of portfolio depends upon the investor‘s knowledge and

experience in financial matters. If an investor has an aptitude for financial affairs, he

may wish to be more aggressive in his investments.

Attitude towards Risk:

A person‘s psychological make-up and financial position dictate his ability to

assume the risk. Different kinds of securities have different kinds of risks. The higher

the risk, the greater the opportunity for higher gain or loss.

Liquidity Needs:

Liquidity needs vary considerably among individual investors. Investors with

regular income from other sources may not worry much about instantaneous liquidity,

but individuals who depend heavily upon investment for meeting their general or

specific needs, must plan portfolio to match their liquidity needs. Liquidity can be

obtained in two ways:

1. By allocating an appropriate percentage of the portfolio to bank deposits, and

2. By requiring that bonds and equities purchased be highly marketable.

Tax consirerations:

Since different individuals, depending upon their incomes, are subjected to

different marginal rates of taxes, tax considerations become most important factor in

individual‘s portfolio strategy. There are differing tax treatments for investment in

various kinds of assets.

Time Horizon:


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In investment planning, time horizon becomes an important consideration. It is

highly variable from individual to individual. Individuals in their young age have long

time horizon for planning, they can smooth out and absorb the ups and downs of risky

combination. Individuals who are old have smaller time horizon, they generally tend

to avoid volatile portfolios.

Individual‘s Financial Objectives:

In the initial stages, the primary objective of an individual could be to accumulate

wealth via regular monthly savings and have an investment programmed to achieve

long term capital gains.

Safety of Principal:

The protection of the rupee value of the investment is of prime importance to most

investors. The original investment can be recovered only if the security can be readily

sold in the market without much loss of value.

Assurance of Income:

`Different investors have different current income needs. If an individual is

dependent of its investment income for current consumption then income received

now in the form of dividend and interest payments become primary objective.

Investment Risk:

All investment decisions revolve around the trade-off between risk and return.

All rational investors want a substantial return from their investment. An ability to

understand, measure and properly manage investment risk is fundamental to any

intelligent investor or a speculator. Frequently, the risk associated with security

investment is ignored and only the rewards are emphasized. An investor who does not

fully appreciate the risks in security investments will find it difficult to obtain

continuing positive results.


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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.

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.

TYPES OF RISKS:


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Risk consists of two components. They are

1. Systematic Risk

2. 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.

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.


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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

Labor 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

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


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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.

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.

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


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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.

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)


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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.

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


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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.

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. 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%

if -0.5 in risk free asset and 1.5 in risky asset, the return is



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= (12.5 x -0.5) + 20 (1.5)

= -6.25+ 30

= 23.75%

DATA ANALYSIS AND INTERPRETATION

CONSTRUCTION OF THE STUDY

The purpose of the study is to find out at what percentage of investment

should be invested between two companies on the basis of risk and return of each


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security in comparison. These percentages help in allocating the funds available for

investment in risky portfolios.

IMPLEMENTATION OF STUDY

For implementing the study, FOUR securities or stocks constituting the

Sensex Market are selected of one month closing share movement prices data from

Google finance dated from July-2010 to June-2011. Those are

1) ICICI 2) ITC

3) BHEL 4) BHARATI TELEVENTURES

In order to know the risk & return of the stock or security, we use the different

formulae which are given below.

COVARIANCE

The way the security return returns vary with each other and affect the

overall risk of the portfolio. If the rates of the returns of two securities move together,

they interactive risk or covariance is positive. Inverse movements in returns result in

negative covariance. If the rates of returns are independent, covariance is zero. The

covariance between two securities of the X and Y may be calculated as under:

FORMULA

CO-VARIANCE (COV AB) =

1n∑t=1

n

( RA−RA )( RB−RB )

Where


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( RA−RA )( RB−RB ) = combined deviations of A& B

n = number of sample observations.

CORRELATION

Correlation coefficient is an pure measure of co movements between security

returns. It varies from -1 to +1. If it is -1, it refers to perfect negative correlation and if

it is +1, it refers to perfect positive correlation between the returns the securities.

Correlation Coefficient (rAB) = COV AB

(SD of A ) ( SD of B )

Standard Deviation = √variance

Variance =

1n∑t=1

n

( R−R )2

Where

(S.D of A) (S.D of B) = Combined standard deviations of A & B

COVAB = Covariance between A & B

PORTFOLIO WEIGHTS

It shows the proportion the investments, how much to invest to get maximum return

to investor. The formula for calculation of portfolio

weights is:


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Xa = σb

2−rab σb σa

σa2+σ b

2−2 ρab σb σa

Xb = 1-Xa

RISK

The risk of a portfolio, as measured by the standard deviation, is not simply the

weighted average of the standard deviation of individual securities in the portfolio.

The calculation of the standard deviation of a portfolio is little more difficult than

calculation of expected return of a portfolio. In order to find out the risk of the

portfolio, the riskiness of each security vis-à-vis the overall portfolio is to be

considered. What is required is the incorporation of how the of a security move with

the returns of other securities in the portfolio. An investigation into the inter-

relationship among the securities returns be made in order to

Calculate portfolio risk, and

Reduce the portfolio risk to be minimum level.

σ P=√( Xa )2( σa )

2+( Xb )2 (σb )

2+2( Xa )( X b )( ρab)( σa )(σ b )σ P = Portfolio risk

xa = Proportion of Investment in security 1

a = Standard deviation of security 1

xb = Proportion of investment in security 2


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b = Standard deviation of security 2

rab = correlation coefficient between security 1 and 2

RETURN

The expected return of a portfolio is simply the weighted average of the

returns of individual securities that are comprised in the portfolio. The weights are the

fraction of the total funds invested in a particular security. The expected return of the

portfolio may be stated as

RP=∑

t=a

n

Xa Ra

RP = Return on the portfolio

X a = Proportion of the total portfolio invested in security 1

Ra = Expected return of security

TABLE: 4.1

ICICI


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DATE SHARE PRICE 29-07-11 1,038.30

01-08-11 1,040.00

02-08-11 1,025.00

03-08-11 1,006.50

04-08-11 991.00

05-08-11 975.00

08-08-11 954.15

09-08-11 938.00

10-08-11 964.60

11-08-11 942.00

12-08-11 938.70

16-08-11 940.00

17-08-11 912.50

18-08-11 863.15

19-08-11 838.00

22-08-11 852.80

23-08-11 851.00

24-08-11 833.90

25-08-11 836.55

26-08-11 819.20

29-08-11 860.25

31-08-11 875.50

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CHART: 4.1 ICICI

SHARE PRICE

0.00

200.00

400.00

600.00

800.00

1,000.00

1,200.00

29

-07-

11

02

-08-

11

04

-08-

11

08

-08-

11

10

-08-

11

12

-08-

11

17

-08-

11

19

-08-

11

23

-08-

11

25

-08-

11

29

-08-

11

SHARE PRICE

INTERPRETATION:

In the above shows that fluctuations of the ICICI.

TABLE: 4.2


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ITC

DATE SHARE PRICE

29-07-11 208.30

01-08-11 208.90

02-08-11 204.70

03-08-11 206.55

04-08-11 200.00

05-08-11 196.50

08-08-11 194.95

09-08-11 199.70

10-08-11 197.40

11-08-11 198.35

12-08-11 198.30

16-08-11 200.00

17-08-11 204.10

18-08-11 203.35

19-08-11 198.85

22-08-11 202.45

23-08-11 202.65

24-08-11 201.90

25-08-11 202.35

26-08-11 196.85

29-08-11 201.95

31-08-11 200.00


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CHART: 4.2 ITC

SHARE PRICE

185

190

195

200

205

210

29

-07-

11

02

-08-

11

04

-08-

11

08

-08-

11

10

-08-

11

12

-08-

11

17

-08-

11

19

-08-

11

23

-08-

11

25

-08-

11

29

-08-

11

SHARE PRICE

INTERPRETATION:

In the above shows that fluctuations of the ITC.


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TABLE: 4.3

BHEL

DATE SHARE PRICE

29-07-11 1,838.35

01-08-11 1,824.95

02-08-11 1,814.45

03-08-11 1,811.05

04-08-11 1,788.05

05-08-11 1,716.00

08-08-11 1,711.85

09-08-11 1,731.50

10-08-11 1,780.65

11-08-11 1,762.05

12-08-11 1,727.90

16-08-11 1,767.70

17-08-11 1,777.50

18-08-11 1,764.95

19-08-11 1,683.25

22-08-11 1,716.00

23-08-11 1,761.50

24-08-11 1,751.05

25-08-11 1,751.60

26-08-11 1,736.50

29-08-11 1,767.85

31-08-11 1,767.70


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CHART: 4.3 BHEL

SHARE PRICE

1,600.00

1,650.00

1,700.00

1,750.00

1,800.00

1,850.00

29

-07-

11

02

-08-

11

04

-08-

11

08

-08-

11

10

-08-

11

12

-08-

11

17

-08-

11

19

-08-

11

23

-08-

11

25

-08-

11

29

-08-

11

SHARE PRICE

INTERPRETION;

In the above shows that fluctuations of the BHEL.


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TABLE: 4.4

BHARATI TELEVENTURES

DATE SHARE PRICE

29-07-11 437.00

01-08-11 440.25

02-08-11 432.05

03-08-11 426.75

04-08-11 423.40

05-08-11 415.15

08-08-11 408.60

09-08-11 407.10

10-08-11 406.95

11-08-11 397.10

12-08-11 389.30

16-08-11 396.05

17-08-11 396.75

18-08-11 391.75

19-08-11 383.50

22-08-11 393.75

23-08-11 401.60

24-08-11 397.10

25-08-11 401.80

26-08-11 398.75

29-08-11 404.85

31-08-11 404.20


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CHART: 4.4

BHARATI TELEVENTURE

SHARE PRICE

350360370380390400410420430440450

29

-07-

11

02

-08-

11

04

-08-

11

08

-08-

11

10

-08-

11

12

-08-

11

17

-08-

11

19

-08-

11

23

-08-

11

25

-08-

11

29

-08-

11

SHARE PRICE

INTERPRETION;

In the above shows that fluctuations of the BHARATI TELEVENTURE.

CALCULATION OF MEAN AND STANDARDDEVIATION


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TABLE: 4.5 ICICI

DATE Share price RETURN MEAN DEV SQ DEV

R R−

R−R−

( R−R−

)2

29-07-11 1,038.30

01-08-11 1,040.00 0.16 -0.5538 0.71 0.50

02-08-11 1,025.00 -1.46 -0.5538 -0.91 0.83

03-08-11 1,006.50 -1.84 -0.5538 -1.29 1.66

04-08-11 991.00 -1.56 -0.5538 -1.01 1.02

05-08-11 975.00 -1.64 -0.5538 -1.09 1.19

08-08-11 954.15 -2.19 -0.5538 -1.64 2.69

09-08-11 938.00 -1.72 -0.5538 -1.17 1.97

10-08-11 964.60 2.76 -0.5538 3.31 10.96

11-08-11 942.00 -2.40 -0.5538 -1.85 3.42

12-08-11 938.70 -0.35 -0.5538 0.20 0.04

16-08-11 940.00 0.14 -0.5538 0.69 0.48

17-08-11 912.50 -3.01 -0.5538 -2.46 6.05

18-08-11 863.15 -5.72 -0.5538 -5.17 26.73

19-08-11 838.00 3.00 -0.5538 3.55 12.60

22-08-11 852.80 1.74 -0.5538 2.29 5.24

23-08-11 851.00 -0.21 -0.5538 0.34 0.12

24-08-11 833.90 -2.05 -0.5538 -1.50 2.22

25-08-11 836.55 0.32 -0.5538 0.87 0.76

26-08-11 819.20 -2.11 -0.5538 -1.56 2.43

29-08-11 860.25 4.77 -0.5538 5.32 28.30

31-08-11 875.50 1.74 -0.5538 2.29 5.24

TOTAL -11.63 113.85


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Mean= ∑ R

n = -11.63/21 = -0.5538

Variance =

1n ∑

t=1

n

(R−R)2

=1/22(113.85)= 5.42

Standard Deviation = √variance = √5.18=2.27

TABLE: 4. 6 ITC


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R R

−R−R

−( R−R

−)2

29-07-11 208.30

01-08-11 208.90 0.29 -.2138 0.50 0.25

02-08-11 204.70 -2.65 -.2138 -2.35 5.52

03-08-11 206.55 0.90 -.2138 1.11 1.23

04-08-11 200.00 -3.27 -.2138 -3.06 9.36

05-08-11 196.50 -1.78 -.2138 -1.57 2.46

08-08-11 194.95 -1.03 -.2138 -0.82 0.67

09-08-11 199.70 2.38 -.2138 2.59 6.71

10-08-11 197.40 -1.17 -.2138 -0.96 0.92

11-08-11 198.35 0.48 -.2138 0.69 0.48

12-08-11 198.30 -0.02 -.2138 0.19 0.03

16-08-11 200.00 0.85 -.2138 1.06 1.12

17-08-11 204.10 2.00 -.2138 2.21 4.88

18-08-11 203.35 -0.37 -.2138 -0.16 0.02

19-08-11 198.85 -2.27 -.2138 -2.06 4.24

22-08-11 202.45 1.78 -.2138 2.00 4.00

23-08-11 202.65 0.10 -.2138 0.31 0.09

24-08-11 201.90 -0.37 -.2138 -0.16 0.02

25-08-11 202.35 0.22 -.2138 0.43 0.18

26-08-11 196.85 -2.80 -.2138 -2.59 6.71

29-08-11 201.95 2.53 -.2138 2.74 7.51

31-08-11 200.00 -0.97 -.2138 -0.76 0.58

TOTAL -4.49 56.98


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Mean = ∑ R

n = -4.49/21 = -0.2138

Variance =

1n

∑t=1

n

(R−R)2

=1/21(56.98)= 2.71

Standard Deviation = √variance = √2.71 =1.67


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TABLE: 4.7 BHEL


R R

−R−R

−( R−R

−)2

29-07-11 1,838.35

01-08-11 1,824.95 -0.73 -0.2023 -0.53 0.28

02-08-11 1,814.45 -0.58 -0.2023 -0.38 0.14

03-08-11 1,811.05 -0.18 -0.2023 0.02 0.00

04-08-11 1,788.05 -1.28 -0.2023 -1.08 1.66

05-08-11 1,716.00 -4.20 -0.2023 -4.00 16

08-08-11 1,711.85 -0.24 -0.2023 -0.04 0.00

09-08-11 1,731.50 -1.14 -0.2023 1.34 1.80

10-08-11 1,780.65 2.70 -0.2023 3.29 10.82

11-08-11 1,762.05 -1.05 -0.2023 -0.85 0.72

12-08-11 1,727.90 -1.98 -0.2023 -1.78 3.17

16-08-11 1,767.70 2.30 -0.2023 2.50 6.25

17-08-11 1,777.50 0.55 -0.2023 0.75 0.56

18-08-11 1,764.95 -0.71 -0.2023 -0.51 0.26

19-08-11 1,683.25 -4.86 -0.2023 -4.65 21.62

22-08-11 1,716.00 1.91 -0.2023 2.11 4.45

23-08-11 1,761.50 2.58 -0.2023 2.78 7.73

24-08-11 1,751.05 -0.60 -0.2023 -0.40 0.16

25-08-11 1,751.60 0.03 -0.2023 0.23 0.05

26-08-11 1,736.50 -0.87 -0.2023 -0.67 0.45

29-08-11 1,767.85 1.77 -0.2023 1.97 3.88

31-08-11 1,767.70 -0.01 -0.2023 0.21 0.04

TOTAL -4.25 80.04


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Mean= ∑ R

n = -4.25/21 = -0.2023

Variance =

1n

∑t=1

n

(R−R)2

=1/21(80.04) =3.81

Standard Deviation = √variance = √3.81= 1.95


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TABLE: 4.8 BHARATI TELEVENTURES


R R

−R−R

−( R−R

−)2

29-07-11 437.0

01-08-11 440.25 0.74 -0.3814 1.12 1.25

02-08-11 432.05 -1.90 -0.3814 -1.52 2.31

03-08-11 426.75 -1.24 -0.3814 -0.86 0.74

04-08-11 423.40 -0.79 -0.3814 -0.40 0.16

05-08-11 415.15 -1.98 -0.3814 -1.59 2.53

08-08-11 408.60 -1.60 -0.3814 -1.22 1.49

09-08-11 407.10 -0.37 -0.3814 0.01 0.00

10-08-11 406.95 -0.04 -0.3814 0.34 0.12

11-08-11 397.10 -2.48 -0.3814 -2.19 4.80

12-08-11 389.30 -2.00 -0.3814 -1.62 2.62

16-08-11 396.05 1.70 -0.3814 2.08 4.33

17-08-11 396.75 0.18 -0.3814 0.56 0.31

18-08-11 391.75 -1.27 -0.3814 -0.89 0.79

19-08-11 383.50 -2.15 -0.3814 -1.77 3.13

22-08-11 393.75 2.00 -0.3814 2.98 8.88

23-08-11 401.60 1.96 -0.3814 2.34 5.48

24-08-11 397.10 -1.13 -0.3814 -0.75 0.56

25-08-11 401.80 1.17 -0.3814 1.55 2.40

26-08-11 398.75 -0.76 -0.3814 -0.38 0.14

29-08-11 404.85 1.51 -0.3814 1.89 3.57

31-08-11 404.20 0.16 -0.3814 0.22 0.04

TOTAL -8.01 45.65


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Mean= ∑ R

n = -8.01/22 = -0.3814

Variance =

1n ∑

t=1

n

(R−R)2

=1/21(45.65) = 2.17

Standard Deviation = √variance = √2.17 = 1.47

TABLE: 4.9

CALCULATED AVERAGES AND STANDARD DEVIATIONS

NAME OF THE

SCRIPTS

MEAN VARIANCE STANDARD

DEVIATION

ICICI -0.5538 5.42 2.31

ITC -0.2138 2.71 1.67

BHEL -0.2023 3.81 1.95

BHARATI

TELEVENTURES

-0.3814 2.17 1.47


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CHART: 4.5

TOTAL MEAN

ICICIITC

BHELBHARATHI

-1

0

1

2

3

4

5

6

MEAN

VARIANCE

SD.DEVIATION

MEANVARIANCESD.DEVIATION

INTERPRETION;

In the above diagram shows the all four scripts means, variance, standard

deviations, all scripts means are negative due to down trend to Indian economy.


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TABLE: 4.10

CORRELATION BETWEEN ICICI AND ITC

DATE ICICI ITC COMBINED DEV 01-08-11 0.71 0.50 0.35

02-08-11 -0.91 -2.35 2.14

03-08-11 -1.29 1.11 -1.43

04-08-11 -1.01 -3.06 3.09

05-08-11 -1.09 -1.57 1.71

08-08-11 -1.64 -0.82 1.34

09-08-11 -1.17 2.59 -3.03

10-08-11 3.31 -0.96 -3.18

11-08-11 -1.85 0.69 -1.28

12-08-11 0.20 0.19 0.03

16-08-11 0.69 1.06 0.73

17-08-11 -2.46 2.21 -5.44

18-08-11 -5.17 -0.16 0.83

19-08-11 3.55 -2.06 -7.31

22-08-11 2.29 2.00 4.58

23-08-11 0.34 0.31 0.10

24-08-11 -1.50 -0.16 0.24

25-08-11 0.87 0.43 0.37

26-08-11 -1.56 -2.59 4.04

29-08-11 5.32 2.74 14.58

31-08-11 2.29 -0.76 -1.74

TOTAL 10.72


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CO-VARIANCE (COV AB) = 1n

∑t=1

n

(RA−RA ) ( RB−RB )

CO-VARIANCE (COV AB) = 1/21(10.72) =0.51



=0.51/ (2.31*1.67) = 0.13

CALCULATION OF PORTFOLIO WEIGHTS

Wa =

Where,

=2.31 = 1.67 rab = 0.13

(1.67)2-(0.13)(1.67)(2.31)

= ----------------------------------------------------

(2.31)2+ (1.67)2-2(0.13)(1.67)(2.31)

2.79 - 0.50

= --------------------------

5.34+2.79-1.00

2.29

= --------------= 0.28

8.13

Wb = 1 - Wa

=1 –O.28


MBA PROGRAMME

= 0.72

CALCULATION OF RISK

p = a2*Wa2 + b2*Wb2 + 2rab*a*b*WA*Wb

Where

a =2.31; b =1.67; Wa=0.28; Wb =0.72; rab =0.13;

= (2.31)2*(0.28)2+(1.67)2(0.72)2+2(0.13)( 2.31)(1.67)(0.28)(0.72)

= (5.34)(0.08)+((2.79)(0.52)+0.26(3.86)(0.18)

= 0.43+1.45+0.18

= 2.06

= 1.43

CALCULATION OF RETURN

PR= (Xa*Wa) + (Xb*Wb)

Where, Xa = -0.5538, Xb =-0.2138, Wa = 0.28, Wb = 0.72

= (-0.5538)( 0.28)+( -0.2138)( 0.72)

= -0.15+-0.15

= -0.30.

TABLE : 4.11


MBA PROGRAMME

CORRELATION BETWEEN ITC & BHEL

DATE ITC BHEL COMBINED DEV 01-08-11 0.50 -0.53 -0.26

02-08-11 -2.35 -0.38 0.89

03-08-11 1.11 0.02 0.02

04-08-11 -3.06 -1.08 3.30

05-08-11 -1.57 -4.00 6.28

08-08-11 -0.82 -0.04 0.03

09-08-11 2.59 1.34 3.47

10-08-11 -0.96 3.29 -3.16

11-08-11 0.69 -0.85 -0.59

12-08-11 0.19 -1.78 -0.34

16-08-11 1.06 2.50 2.65

17-08-11 2.21 0.75 1.66

18-08-11 -0.16 -0.51 0.08

19-08-11 -2.06 -4.65 9.58

22-08-11 2.00 2.11 4.22

23-08-11 0.31 2.78 0.86

24-08-11 -0.16 -0.40 0.06

25-08-11 0.43 0.23 0.10

26-08-11 -2.59 -0.67 1.73

29-08-11 2.74 1.97 5.40

31-08-11 -0.76 0.21 0.16

TOTAL 44.84


∑t=1

n



MBA PROGRAMME




=2.13/ (1.67*1.95) = 0.65


Wa =

Where,

=1.67 = 1.95 rab

= 0.65

(1.95)2-(0.65)(1.95)(1.67)

= ----------------------------------------------------

(1.67)2+ (1.95)2-2(0.65)(1.95)(1.67)

3.80-2.12

= --------------------------

2.79+3.80-2.76

1.68

= --------------= 0.44

3.83


MBA PROGRAMME

Wb = 1 - Wa

=1 –O.44

= 0.56

CALCULATION OF RISK


Where

a =1.67; b =1.95; Wa=0.44; Wb =0.56; rab =0.65;

= (1.67)2(0.44)2+(1.95)2(0.56)2+2(0.65)(1.67)(1.95)(0.44)(0.56)

= (2.79)(0.88)+(3.80)(0.31)+1.3(2.12)(0.25)

= 2.45+1.18+1.3(0.53)

= 4.32

= 2.08


Where, Xa = -0.2138, Xb =-0.2023, Wa = 0.44, Wb = 0.56

= (-0.2138)(0.44)+( -0.2023)(0.56)

= -0.09+-0.11

= -0.2.

CORRELATION BETWEEN BHEL & BHARATI TELEVENTURES

TABLE :4.12


MBA PROGRAMME

DATE BHELBHARATI TELEVENTURES COMBINED DEV

01-08-11 -0.53 1.12 -0.59

02-08-11 -0.38 -1.52 0.58

03-08-11 0.02 -0.86 -0.02

04-08-11 -1.08 -0.40 0.43

05-08-11 -4.00 -1.59 -6.36

08-08-11 -0.04 -1.22 0.05

09-08-11 1.34 0.01 0.01

10-08-11 3.29 0.34 1.12

11-08-11 -0.85 -2.19 1.79

12-08-11 -1.78 -1.62 -2.88

16-08-11 2.50 2.08 5.20

17-08-11 0.75 0.56 0.42

18-08-11 -0.51 -0.89 0.45

19-08-11 -4.65 -1.77 8.23

22-08-11 2.11 2.98 6.29

23-08-11 2.78 2.34 6.50

24-08-11 -0.40 -0.75 0.30

25-08-11 0.23 1.55 0.36

26-08-11 -0.67 -0.38 0.25

29-08-11 1.97 1.89 3.72

31-08-11 0.21 0.22 0.05

TOTAL 25.90


∑t=1

n



MBA PROGRAMME




=1.21/ (1.95*1.47) = 0.44


Wa =

Where,

=1.95 = 1.47 rab

= 0.44

(1.47)2-(0.44)(1.47)(1.95)

= ----------------------------------------------------

(1.95)2+ (1.47)2-2(0.44)(1.47)(1.95)

2.16-1.27

= --------------------------

5.90-2.52

0.89

= -------------- = 0.26

3.44


MBA PROGRAMME

Wb = 1 - Wa

= 1 –O.26

= 0.74

CALCULATION OF RISK


Where

a =1.95; b =1.47; Wa=0.26; Wb =0.74; rab =0.74;

= (1.95)2(0.26)2+(1.47)2(0.74)2+2(0.74)(1.95)(1.47)(0.26)(0.74)

= (3.80)(0.07)+(2.16)(0.55)+0.88(2.87)(0.19)

= 0.27+1.19+0.47

= 1.93

= 1.39


Where, Xa = -0.2023, Xb =--0.3814, Wa = 0.26, Wb = 0.74

= (-0.2023)(0.26)+( --0.3814)(0.74)

= -0.05+-0.28

= -0.33.

CORRELATION BETWEEN ICICI & BHEL


MBA PROGRAMME

TABLE :4.13

DATE ICICI BHEL COMBINED DEV 01-08-11 0.71 -0.53 -0.38

02-08-11 -0.91 -0.38 0.35

03-08-11 -1.29 0.02 -0.02

04-08-11 -1.01 -1.08 1.09

05-08-11 -1.09 -4.00 4.36

08-08-11 -1.64 -0.04 0.06

09-08-11 -1.17 1.34 -1.57

10-08-11 3.31 3.29 10.89

11-08-11 -1.85 -0.85 1.57

12-08-11 0.20 -1.78 0.36

16-08-11 0.69 2.50 1.72

17-08-11 -2.46 0.75 -1.46

18-08-11 -5.17 -0.51 -2.64

19-08-11 3.55 -4.65 -16.19

22-08-11 2.29 2.11 4.83

23-08-11 0.34 2.78 0.94

24-08-11 -1.50 -0.40 0.60

25-08-11 0.87 0.23 0.20

26-08-11 -1.56 -0.67 1.04

29-08-11 5.32 1.97 10.48

31-08-11 2.29 0.21 0.48

TOTAL 21.61


∑t=1

n



MBA PROGRAMME




=1.03/ (2.31*1.95) = 0.23


Wa =

Where,

=2.31 = 1.95 rab

= 0.23

(1.95)2-(0.23)(1.95)(2.31)

= ----------------------------------------------------

(2.31)2+ (1.95)2-2(0.23)(1.95)(2.31)

3.80-1.03

= --------------------------

9.14-2.07

2.77

= -------------- = 0.39

7.07


MBA PROGRAMME

Wb = 1 - Wa

= 1 –O.39

= 0.61

CALCULATION OF RISK


Where

a =2.31; b =1.95; Wa=0.39; Wb =0.61; rab =0.23;

Xa=-11.63; Xb=-4.25

= (2.31)2(0.39)2+(1.95)2(0.69)2+2(0.23)(2.31)(1.95)(0.39)(0.61)

= (5.34)(0.15)+(3.80)(0.37)+0.46(4.50)(0.24)

= 0.80+1.41+0.50

= 2.71

= 1.65


Where, Xa = -0.5538, Xb =-0.2023, Wa = 0.39, Wb = 0.61

= (-0.5538)(0.39)+(- 0.2023)(0.61)

= -0.21+-0.12

= -0.33.

CORRELATION BETWEEN ICICI &BHARATI TELEVENTURES


MBA PROGRAMME

TABLE :4.14

DATE ICICI BHARATI TELEVENTURES COMBINED DEV

01-08-11 0.71 1.12 0.80

02-08-11 -0.91 -1.52 1.42

03-08-11 -1.29 -0.86 1.11

04-08-11 -1.01 -0.40 0.40

05-08-11 -1.09 -1.59 1.73

08-08-11 -1.64 -1.22 2.00

09-08-11 -1.17 0.01 0.01

10-08-11 3.31 0.34 1.06

11-08-11 -1.85 -2.19 3.88

12-08-11 0.20 -1.62 -0.32

16-08-11 0.69 2.08 1.43

17-08-11 -2.46 0.56 -1.38

18-08-11 -5.17 -0.89 4.60

19-08-11 3.55 -1.77 -6.28

22-08-11 2.29 2.98 6.82

23-08-11 0.34 2.34 0.79

24-08-11 -1.50 -0.75 1.11

25-08-11 0.87 1.55 1.35

26-08-11 -1.56 -0.38 0.59

29-08-11 5.32 1.89 10.05

31-08-11 2.29 0.22 0.50

TOTAL 29.71


∑t=1

n



MBA PROGRAMME




=1.41/ (2.31*1.47) = 0.41


Wa =

Where,

=2.31 = 1.47 rab

= 0.41

(1.47)2-(0.41)(1.47)(2.31)

= ----------------------------------------------------

(2.31)2+ (1.47)2-2(0.41)(1.47)(2.31)

2.16 – 1.39

= --------------------------

7.5 – 2.78

0.77

= -------------- =0.16

4.72


MBA PROGRAMME

Wb = 1 - Wa

= 1 –(0.16)

= 0.84

CALCULATION OF RISK


Where

a =2.31; b =1.47; Wa= 0.16; Wb =0.84; rab =0.41;

= (2.31)2(0.16)2+(1.47)2(0.86)2+2(0.41)(2.31)(1.47)(0.16)(0.84)

= (5.34)(0.03)+(2.16)(0.69)+0.82(3.39)(0.13)

= 0.16+1.49+0.36

= 2.01

= 1.42


Where, Xa = -0.5538, Xb =-0.3814, Wa = 0.16., Wb = 0.86

= (-0.5538)(0.16)+(- 0.3814)(0.84)

= -0.09+-0.32

= -0.41.


MBA PROGRAMME

CORRELATION BETWEEN ITC&BHARATI TELEVENTURES

TABLE :4.15

DATE ITC BHARATI TELEVENTURES COMBINED DEV

01-08-11 0.50 1.12 0.56

02-08-11 -2.35 -1.52 3.67

03-08-11 1.11 -0.86 -0.95

04-08-11 -3.06 -0.40 1.22

05-08-11 -1.57 -1.59 2.50

08-08-11 -0.82 -1.22 1.00

09-08-11 2.59 0.01 0.02

10-08-11 -0.96 0.34 -0.31

11-08-11 0.69 -2.19 -1.50

12-08-11 0.19 -1.62 -0.31

16-08-11 1.06 2.08 2.26

17-08-11 2.21 0.56 1.23

18-08-11 -0.16 -0.89 0.14

19-08-11 -2.06 -1.77 3.65

22-08-11 2.00 2.98 5.96

23-08-11 0.31 2.34 0.72

24-08-11 -0.16 -0.75 0.12

25-08-11 0.43 1.55 0.67

26-08-11 -2.59 -0.38 0.98

29-08-11 2.74 1.89 5.18

31-08-11 -0.76 0.22 -0.17

TOTAL 26.64


MBA PROGRAMME


∑t=1

n





=1.47/ (1.67*1.47) = 0.52


Wa =

Where,

=1.67 = 1.47 rab

= 0.52

(1.47)2-(0.52)(1.47)(1.67)

= ----------------------------------------------------

(1.67)2+ (1.47)2-2(0.52)(1.47)(1.67)

2.16 – 1.27

= --------------------------

4.95 – 2.55

0.89

= -------------- =0.37


MBA PROGRAMME

2.4

Wb = 1 - Wa

= 1 –(0.37)

= 0.63

CALCULATION OF RISK


Where

a =1.67; b =1.47; Wa= 0.37; Wb =0.67; rab =0.52;

= (1.67)2(0.37)2+(1.47)2(0.63)2+2(0.52)(1.67)(1.47)(0.23)(0.67)

= (2.79)(0.14)+(2.16)(0.40)+1.04(2.45)(0.23)

= 0.39+0.86+0.58

= 1.83

= 1.35


Where, Xa = -0.2138, Xb =-0.3814, Wa = 0.37., Wb = 0.63

= (-0.2138)(0.37)+(- 0.3814)(0.63)

= -0.08+-0.24


MBA PROGRAMME

= -0.32.

RISK, RETURN WITH DIFFERENT COMBINATIONS

TABLE:4.16

PORTFOLIO RISK RETURNS

ICICI & ITC 1.43 -0.30

ITC & BHEL 2.08 -0.20

BHEL & BHARATI TELEVENTURES

1.39 -0.33

ICICI & BHEL 1.65 -0.33

ICICI & BHARATI TELEVENTURES

1.42 -0.41

ITC&BHARATI TELEVENTURES

1.35 -0.32


MBA PROGRAMME

CHART: 4.6

RISK AND RETURN

ICICI &

ITC

ITC

&

BHEL

BHEL &

BHARATI

TELEV

ENTU

RES

ICICI &

BHEL

ICICI &

BHARATI

TELEV

ENTU

RES

ITC&BHARATI

TELEV

ENTU

RES

-1

-0.5

0

0.5

1

1.5

2

2.5

RISK&RETURN

RISKRETURNS


MBA PROGRAMME

FINDINGS

1. It was found that from the study, all the selected four scripts mean’s are

negative. This was due to drown trend in the economy.

2. Among the four selected scripts BHEL has high mean, ICICI has low mean.

3. It was found that BHARATHI TELEVENTURE has low risk value and ICICI

has high risk value.

4. Their was calculated six correlation’s between the two scripts. Their was found

all correlation’s are positive. Their was highest positive correlation between

ITC&BHEL. Their was lowest positive correlation between ICICI&ITC.

5. In the present study six portfolio’s were constructed all the six portfolio’s

mean’s are negative. Portfolio which has the lowest negative mean is good

portfolio. The portfolio consists of ITC&BHEL scripts was good portfolio.

6. From the six portfolio’s it was found that the portfolio of

ITC&BHARATHITELEVENTURE has the lowest risk.

7. According to Markowitz portfolio theory, portfolio consists of

ITC&BHARATHITELEVENTURE was the optimal portfolio, which has low

portfolio risk, it is also called minimum variance portfolio.


MBA PROGRAMME

SUGGESTIONS

1. Choosing the scripts is important.

2. Correlation is an important element while constructing the portfolio.

3. If the correlation high, we can’t reduces the risk level for getting optimum

return level.

4. Before going to portfolio construction one should check the constraint i.e. the

correlation coefficient is less than the one or not, if it is les then one ,the

combination of those two securities provides a lesser Standard Deviation of

return than when either of the security is taken alone.

5. Investor should go for effective investment rather than random investment by

using portfolio weight formula to gain maximum return among these

combinations.

6. It is suggested that the diversification should neither be to large or to low. It

should be an adequate diversification according to the size of the portfolio.

7. It is suggested to the investor that he should keep in his mind that the market

psychology may be affected by tangible events or fictions.

8. It is suggested that the investor should go for an appropriate diversification

towards reducing the risk.. Diversification of investments helps to spread risk

in many securities.

9. Return is based on the scripts average return and its weights. So select the

scripts which will give higher average return with lower risk level among

different scripts.

10. The risk level is one of important factor in determination of portfolio. The risk

affected by co-variance, standard deviation, correlation of two securities.

11. Choosing the securities, which are having negative correlation or lower

correlation, will give maximum return with the optimal risk level.


MBA PROGRAMME

12. It is suggested to the investor that before going to investment, he should

conduct the fundamental analysis i.e. economic analysis, industry and company

analysis.

13. It is suggested that a portfolio should be constructed to meet the investor’s

goals and objectives. The objective of every investor is to select portfolio that

gives optimal return with low risk.

14. The following are the qualities for successful investing.

Contrary thinking

Patience

Composure

Flexibility

Openness


MBA PROGRAMME

CONCLUSION

The objective of constructing a portfolio and revising it periodically is to earn

maximum returns with minimum risk. Portfolio evaluation is the process which is

concerned with assessing the performance of the portfolio over a selected period of

time in terms of return and risk. This involves quantitative measurement of actual

return realized and the risk borne by the portfolio over the period of investment.

These have to be compared with objective norms to assess the relative performance of

the portfolio. Alternative measures of performance evaluation have been developed

for use by investors and portfolio managers.

The portfolio management process is an ongoing process. It starts with

security analysis, proceeds to portfolio construction, and continues with portfolio

revision and evaluation. The evaluation provides the necessary feed back for

designing a better portfolio next time. Superior performance is achieved through

continual refinement of portfolio management skills.


MBA PROGRAMME

BIBLIOGRAPHY

AUTHOR BOOK PUBLISHER YEAR

S.Kevin

Security analysis

and portfolio

management

PHI Learning PVT L.T.D 2006

V.K.Bhalla Investment

Management

S.CHAND&COMPANY

LIMITED

2010

Punithavathy

Pandian

Security analysis

and portfolio

management

VIKAS PUBLISHING

HOUSE LIMITED

2011

Prasanna Chandra Investment

Management

Mc.Graw-Hill professional

series

2003

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