CHAPTER 1

1. INTRODUCTION

The art of selecting the right investment policy for the individuals in terms of
minimum risk and maximum return is called as portfolio management.A portfolio refers
to a collection of investment tools such as stock, shares mutual funds, bonds, cash and so
on depending on the investor’s income, budget and convenient time frame.

Portfolio management is the art and science of making decisions about investment
mix and policy, matching investments to objectives, asset allocation for individuals and
institutions, and balancing risk against performance.

Portfolio management is all about strengths, weaknesses, opportunities and threats

in the choice of debt vs, equity, domestic vs. international, growth vs. safety, and many
other tradeoffs encountered in the attempt to maximize return at a given appetite for risk.

Holding a portfolio is a part of an investment and risk-limiting strategy called

diversification. By owning several assets, certain types of risk (specific risk) can be
reduced. The assets in the portfolio could include stocks, bonds, options, warrants, gold,
estate, futures, production facilities, or any other item that is expected to retain its value.

In a layman’s language, the art of managing an individual’s investment is called as

portfolio management. Portfolio management refers to managing money of an individual
under the expert guidance of portfolio managers. Portfolio is a combination of securities
such as bonds, stocks and instruments. All the above securities comprise my portfolio.

DEFINITION OF PORTFOLIO MANAGEMENT

As per definition of SEBI Portfolio means “a collection of securities owned by an

investor”.It represents the total holdings of securities belonging to any person". It
comprises of different types of assets and securities.In finance, a portfolio is an
appropriate mix or collection of investments held by an institution or an individual.

1
 1.1 INDUSTRY PROFILE

In the previous chapter, brief introduction to the problem, scope and significance
of the problem and research methodology adopted was detailed.In this chapter the stock
market industry profile is described under following headings. Stock Market, Stock
Exchange, History of Indian Stock Market and Major Stock Exchangesin India.

STOCK MARKET
Capital market is the financial market for equity instruments and debt instruments
with a maturity greater than one year. The Capital market includes both primary market and
secondary markets. The primary market is the market that deals with new securities, i.e., the
securities that are offered to the investing public for the first time. So, it is a market for new
issues. Because of that, it is also called the new issues market.The secondary market is the
market in which existing securities are traded. This market is also known as stock market.

HISTORY OF STOCK MARKET

In 12th century France the courtiers de change was concerned with managing and
regulating the debts of agricultural communities on behalf of the banks. Because these men
also traded with debts, they could be called the first broker.In the middle of the 13th century,
Venetian bankers began to trade in government securities. Bankers in Pisa, Verona, Genoa
and Florence also began trading in government.

Securities during the 14th century. Italian companies were also the first to issue
shares. Companies in England and the Low Countries followed in the 16th century.The
Dutch East India Company (founded in 1602) was the first joint-stock company to get a fixed
capital stock and thus, continuous trade in company stock occurred on the Amsterdam
Exchange. Soon thereafter, a lively trade in various derivatives, among which options and
repos, emerged on the Amsterdam market. Dutch traders also pioneered short selling.

There are now stock markets in virtually every developed and most developing
economies, with the world's largest markets being in the United States, United Kingdom,
Japan, India, Pakistan, China, Canada, Germany, France, South Korea and the Netherlands.
STOCK EXCHANGE

2
 A stock exchange is a place which aggregates buyers and sellers. In the stock
exchanges buying and selling of long term securities such as stocks and bonds takes place.
Exchanges may also cover other types of security such as derivatives, commodities and
currencies, etc.

FUNCTION AND THE PURPOSE OF STOCK MARKET

The purpose of a stock exchange is to facilitate the exchange of securities between

buyers and sellers, thus providing a marketplace (virtual or real). The exchanges provide
real-time trading information on the listed securities, facilitating price discovery.
The stock market is one of the most important ways for companies to raise money.
This allows businesses to be publicly traded, and raise additional financial capital for
expansion by selling shares of ownership of the company in a public market. Company may
want to get their stock listed on a stock exchange for liquidity of shares and increase
shareholder value. The liquidity that an exchange affords the investors enable their holders to
quickly and easily sell securities, this is an attractive feature of investing in stocks, compared
to other less liquid investments such as property and other immoveable assets.
Exchanges also act as the clearinghouse for each transaction, meaning that they
collect and deliver the shares, and guarantee payment to the seller of a security. This
eliminates the risk to an individual buyer or seller that the counterparty could default on the
transaction.

PHYSICAL AND ELECTRONIC EXCHANGES

Some exchanges are physical locations where transactions are carried out on a trading
floor, by a method known as open outcry. An example of such an exchange is the New York
Stock Exchange. The other type of stock exchange is a virtual kind, composed of a network
of computers where trades are made electronically by traders. An example of such an
exchange is the National Stock Exchange of India (NSE).

The National Stock Exchange of India (NSE) is a virtual listed exchange, where all of
the trading is done over a computer network. The buyers and sellers are electronically
matched. One or more market makers will always provide a bid and ask price at which they
will always purchase or sell 'their' stock. People trading in big exchanges get greater number

3
 of potential counterparties (buyers for a seller, sellers for a buyer), and probably the best
price.

SIZE OF THE MARKET

At the close of 2014, the size of the world stock market (total market capitalization)
was about US$55 trillion. By country, the largest market was the United States (about 34%),
followed by Japan (about 6%) and the United Kingdom (about 6%).

The table below represents the list of largest stock exchanges around the world. New
York stock exchange (NYSE) is the biggest stock exchange in the world in terms of market
capitalization. Bombay Stock Exchange (BSE) holds the 10th place and National Stock
Exchange of India (NSE) holds 11th place.

PORTFOLIO MANAGEMENT IN INDIA

In India portfolio management is still in its infancy. Barring a few Indian banks, and
foreign banks and UTI, no other agency had professional portfolio management until 1987.
After the setting up of public sector mutual funds, since 1987, professional portfolio
management, backed by competent research staff became the order of the day. After th
success of mutual funds in portfolio management, several brokers and investment
consultants, some of whom are also professionally qualified have become portfolio
managers. They have managed the funds of clients on both discretionary and Non-
discretionary basis.

TABLE 1.1.1: RANKING OF STOCK EXCHANGES

BASED ON MARKET CAPITALIZATION

4
 Market Cap

Rank Stock Exchange

(in US$ trillion)

1 NYSE 19.2
2 NASDAQ 6.84
3 Tokyo Stock Exchange 4.43
4 Euronext 3.37
5 Hong Kong Stock Exchange 3.26
6 Shanghai Stock Exchange 2.96
7 TMX, Canada 2.14
8 Shenzhen Stock Exchange 1.95
9 National Stock Exchange India 1.55
10 BSE India 1.58

STOCK MARKET INDEX

The movements of the prices in a market or section of a market are captured in price
indices called stock market indices, of which there are many, e.g., the S&P, BSE SENSEX,
CNX NIFTY indices. Such indices are usually market capitalization weighted, with the
weights reflecting the contribution of the stock to the index. The constituents of the index are
reviewed frequently to include/exclude stocks to reflect the changing business environment.

THE BOMBAY STOCK EXCHANGE

The Bombay Stock Exchange is the oldest exchange in Asia. It traces its history
to 1855, when four Gujarati and one Paris stockbroker would gather under banyan trees
in front of Mumbai's Town Hall. The location of these meetings changed many times as
the number of brokers constantly increased. The group eventually moved to Dall Street in
1874and in 1875 became an official organization known as "The Native Share & Stock
Brokers Association". Figure below shows Bombay Stock Exchange.

HISTORY OF INDIAN STOCK MARKET

5
 The Indian stock market has a history of about 299 years old. It was in early 18th
Century, the main institution that is dealing in the trading of shares and stocks is the East
India Company. Later by around 1830′s the main dealing in the shares and stocks (mainly in
bank and cotton) was initiated in Bombay.

It was in year 1875 that the first stock exchange was formulated in the name of―The
Native Share and Stock Brokers Association‖ which is presently known as the Bombay stock
exchange there after it was in year 1908, that the stock exchange in Calcutta was formulated
known as‖ The Calcutta Stock Exchange Association‖. The formation of the Madras Stock
exchange took place in 1920 which was started with around 100 brokers who are trading in
the madras Stock exchange. It was in 1934 when the Lahore Stock exchange was established.
The Uttar Pradesh stock exchange and the Nagpur stock Exchange were established in year
1940. In year 1944, the Hyderabad stock exchange was established. It was in year 1947 that
the Delhi Stock and Share Broker Association Limited‖ and ―The Delhi stocks and Shares
Exchange Limited‖ was established in Delhi.

There was shutdown of various stock exchanges in India due to the depression that
took place after Independence. It was under the Securities Contracts (Regulations) Act, 1956
that various stock exchanges have got a recognition as a recognized stock exchange such as
Bombay, Delhi, Hyderabad, Indore etc. there are several other stock exchanges that were
established post-independence.

MAJOR STOCK EXCHANGES IN INDIA

The Major stock exchanges in India such as Bombay Stock Exchange (BSE), Calcutta
Stock Exchange, National Stock Exchange, Interconnected Stock Exchange (ISE), OTCEI,
Cochin Stock Exchange Ltd. is detailed below.

1.1.2 BOMBAY STOCK EXCHANGE

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 On 31 August 1957, the BSE became the first stock exchange to be recognized by the
Indian Government under the Securities Contracts Regulation Act. In 1980, the exchange
moved to the Fort area. In 1986, it developed the BSE SENSEX index, giving the BSE a
means to measure overall performance of the exchange. In 2000, the BSE used this index to
open its derivatives market, trading SENSEX futures contracts.

Historically an open outcry floor trading exchange, the Bombay Stock Exchange
switched to an electronic trading system in 1995. This automated, screen based trading
platform called BSE On-line trading (BOLT) had a capacity of 8 million orders per day. The
BSE has also introduced a centralized exchange-based internet trading system,
bsewebex.co.in to enable investors anywhere in the world to trade on the BSE platform.At
present BSE has 5696 listed companies with a market capitalization of Rs.1,03,15,342 crores.
It has 2,81,37,285 number of registered investors.
CALCUTTA STOCK EXCHANGE

7
 Calcutta Stock Exchange is located at the Lyons Range, Kolkata is the oldest stock
exchange in South Asia. It was incorporated in 1908 and was the second largest stock market
in India.

In 1830, the bourse activities in Kolkata used to conduct under a neem tree. In 1908,
the stock exchange was incorporated and consisted of 150 members. The present building at
the Lyons Range was constructed in 1928. The Calcutta Stock Exchange Ltd was granted
permanent recognition by the Government of India with effect from April 14, 1980 under the
relevant provisions of the Securities Contracts (Regulation) Act, 1956. The Calcutta Stock
Exchange followed the familiar outcry system for stock trading up until 1997, when it was
replaced by an electronic trading system known as C-STAR (CSE Screen Based Trading And
Reporting).

NATIONAL STOCK EXCHANGE OF INDIA (NSE)

The National Stock Exchange of India Limited (NSE) is the leading stock exchange
of India, located in Mumbai. NSE was the first exchange in the country to provide a modern,
fully automated screen-based electronic trading system which offered easy trading facility to
the investors spread across the length and breadth of the country.

NSE was set up by a group of leading Indian financial institutions at the behest of the
government of India to bring transparency to the Indian capital market. Based on the
recommendations laid out by the government committee, NSE has been established with a
diversified shareholding comprising domestic and global investors. The key domestic
investors include Life Insurance Corporation of India, State Bank of India, IFCI Limited
IDFC Limited and Stock Holding Corporation of India Limited. And the key global investors
are Gail FDI Limited, GS Strategic Investments Limited, SAIF II SE.Investments Mauritius
Limited, Aranda Investments (Mauritius) Pte. Limited and PI Opportunities Fund.

The exchange was incorporated in 1992 as a company and was recognized as a stock
exchange in 1993 under the Securities Contracts (Regulation) Act, 1956. NSE commenced
operations in the Wholesale Debt Market (WDM) segment in June 1994. The capital market
(equities) segment of the NSE commenced operations in November 1994, while operations in
the derivatives segment commenced in June 2000. The photo of National Stock Exchange is
given below.

1.1.3 NATIONAL STOCK EXCHANGE

8
 NSE has a market capitalization of more than US$1.65 trillion, making it the world ‘s
12th-largest stock exchange as of 23 January 2017, NSE's flagship index, the CNX Nifty, the
50-stock index is used extensively by investors in India and around the world as a barometer
of the Indian capital markets.

The National Stock Exchange of India Limited (NSE) commenced trading in

derivatives with the launch of index futures on 12 June 2000. The futures and options
segment of NSE has made a global mark. In the Futures and Options segment, trading in
CNX Nifty.

Index, CNX IT index, Bank Nifty Index, Nifty Midcap 50 index and single stock
futures are available. Trading in Mini Nifty Futures & Options and Long Term Options on
CNX Nifty are also available. The average daily turnover in the F&O Segment of the
Exchange during the financial year April 2015 to March 2016 stood at Rs 1,52,236 Crores.

9
 NSE ‘s trading systems, is a state of-the-art application. It has an up-time record of
99.99% and processes more than 450 million messages every day with sub millisecond
response time. Today NSE can handle 1, 60,000 orders/messages per second, with infinite
ability to scale up at short notice, NSE have continuously worked towards ensuring that the
settlement cycle comes down. Settlements have always been handled smoothly. The
settlement cycle has been reduced from T+5 to T+2/T+1.

COCHIN STOCK EXCHANGE LTD

COCHIN STOCK EXCHANGE LTD. is situated in Cochin in Kerala State,

established in the year 1978. The exchange had a humble beginning with just 5 companies
listed in 1978 -79, and had only 14 members. Today the Exchange has more than 508
members and 240 listed companies. In 1980 the Exchange computerized its offices. In order
to keep pace with the changing scenario in the capital market, CSE took various steps
including trading in dematerialized shares. CSE introduced the facility for computerized
trading - "Cochin Online Trading (COLT)" on March 17, 1997.

To face this challenge CSE promoted a 100% subsidiary called the "Cochin Stock
Brokers Ltd. (CSBL)" and started trading in the National Stock Exchange (NSE) and
Bombay Stock Exchange (BSE). CSBL is the first subsidiary of a stock exchange to get
membership in both NSE&BSE. CSBL also became a depository participant in the Central
Depository Services Ltd. The CSE has been playing a vital role in the economic development
of Kerala. A photo of Cochin Stock Exchange is given below.

10
1.1.4 COCHIN STOCK EXCHANGE

The Cochin Stock Exchange is directly under the control and supervision of
Securities & Exchange Board of India (the SEBI), and is today a demutualized entity in
accordance with the Cochin Stock Exchange (Demutualization) Scheme, 2005 approved and
notified by SEBI on 29th of August 2005. Demutualization essentially means de-linking and
separation of ownership and trading rights and restructuring the Board in accordance with the
provisions of the scheme.

The policy decisions of the CSE are taken by the Board of Directors. The Board is
constituted with 12 members of whom less than one-fourth are elected from amongst the
trading member of CSE, another one fourth are Public Interest Directors selected by SEBI
from the panel submitted by the Exchange and the remaining are Shareholder Directors. The
Board appoints the Executive Director who functions as an ex-officio member of the Board
and takes charge of the administration of the Exchange.

11
1.2 COMPANY PROFILE
In the previous chapter the history of world stock market, function and purpose of
stock market, important stock exchanges in the world, and physical and electronic trading
systems were detailed. Finally, the history of Indian stock exchanges and important stock
exchanges in India was detailed.

In this chapter, the company profile is discussed under following headings. Overview
of the Company, Mission of the Company, Values of the Company. Strengths of the
Company, Board of Directors of the Company, Awards and Recognitions Won ANGEL
BROKING. This chapter ends with a conclusion section in which a summary of this chapter
is given.

OVERVIEW OF THE COMPANY

ANGEL BROKING LTD is a well-diversified financial services firm offering a range

of financial products and services such as retail wealth management (including securities and
commodities broking), portfolio management services, institutional broking, venture capital
management and investment banking services. As a leading Indian domestic brokerage
house, M/s. ANGEL BROKING.

LTD have a diversified client base that includes retail customers (including high net
worth individuals), mutual funds, foreign institutional investors, financial institutions and
corporate clients. ANGEL BROKING LTD is headquartered in Mumbai and as of December
31, 2017, had a network spread across 363 cities and towns comprising 1,160 Business
Locations operated by the company and Business Associates.

Angel Broking is the holding company and provides financing for our retail broking
customers. ANGEL BROKING operates through the following four subsidiaries:

 ANGEL BROKING LTD.

 Angel Broking Commodities Brokers Private Limited.
 Angel Broking Venture Capital Advisors Private Limited.
 Angel Broking Investment Advisors Private Limited.
12
 Since inception, the business has primarily focused on retail wealth management and
institutional broking. In 2006, company diversified into investment banking and venture
capital management.

The principal business activities of the M/s. ANGEL BROKING are:

 Retail wealth management.

 Institutional broking.
 Investment banking.
 Venture capital management and advisory.

MISSION OF THE COMPANY

The mission of M/s. ANGEL BROKING is to be a well-respected and preferred

global financial services organization enabling wealth creation for all customers.

VALUES OF THE COMPANY

Key corporate values of the M/s. ANGEL BROKING are:

 Integrity.
 Teamwork.
 Meritocracy.
 Passion and attitude.
 Excellence in execution.

STRENGTHS OF THE COMPANY

The company achieved a prominent place in the Indian financial services company
due to following strengths.

13
STRONG RESEARCH AND SALES TEAMS

ANGEL BROKING believes that understanding of equity as an asset class and

business fundamentals drives the quality of their research and differentiates them from
competitors. Their research teams are focused on cash equities, equity derivatives and
commodities. As at December 31, 2016, M/s. ANGEL BROKING had 28 equity research
analysts covering 208 companies in 25 sectors and 5 analysts covering 18 commodities. M/s.
ANGEL BROKING have 1,964 employees, including 739 on a contract basis.

WIDE RANGE OF FINANCIAL PRODUTS AND SERVICES

The following products and services are offered by the company;

 Equity Broking.
 PMS (Portfolio Management Service).
 Investment.
 Banking.
 PE (Private Equity).
 Investments.
 MF (Mutual Funds).
 Investments.
 Commodity.
 Broking.

ANGEL BROKING offer a portfolio of products to satisfy the diverse investment and
strategic requirements of retail, institutional and corporate clients. M/s. ANGEL BROKING
believes that wide range of products and services enables to build stronger relationships with,
and increase business volumes from, their clients. In addition, their diverse portfolio reduces
dependence on any product, service or customer and allows exploiting synergies across their
businesses.

14
BOARD OF DIRECTORS OF THE COMPANY
The list of Board of Directors is given below.

TABLE 1.2.1: BOARD OF DIRECTORS

CMD & CEO Angel Broking

Joint Managing Director Raamdeo Agrawal

Navin Agarwal,
Balkumar Agarwal

Directors
Vivek Parapet,
Praveen Tirupati

Additional Independent Director Sharda Agarwal

AWARDS AND RECOGNITIONS WON BY M/S. ANGEL BROKING

M/s. Angel Broking Securities won the Best Performing Equity Broker.

M/s. Angel Broking Securities was declared "Best Equity Broker" at

Bloomberg UTV Financial Leadership Awards in April 2014.

M/s. Angel Broking Securities was awarded with Best Performing National
Financial Advisor Equity Broker Award in 2014, second time in succession.

M/s. Angel Broking Securities received Best Equity Broking House Award by
BSE IPF-D&B Equity Broking Awards 2013.

CNBC TV18 awarded M/s. Angel Broking the Best Performing Equity Broker
Award in 2012 at CNBC TV18 Financial Advisor Awards 2012.

Best Capital Markets & Related NBFC Award for FY11 by CNBC TV18
India Best Banks & Financial Institutions Awards 2013.

15
 CHAPTER 2

REVIEW OF LITERATURE

In the previous chapter, the brief overview of the company, its vision, mission,
values and strengths were detailed. The details of Director Board and awards and
recognitions received by the company were also detailed.

INVESTMENT ALTERNATIVES

An investor has wide range of investment avenues such as:

NON – MARKETABLE FINANCIAL ASSETS

A good portion of financial assets is represented by non – marketable

Financial Assets. They can be classified into various categories such as:

 Bank deposits.

 Post office deposits.

 Company deposits and.

 Provident fund deposits.

EQUITY SHARES

Equity shares represent ownership capital. An equity shareholder has an

ownership stake in the company i.e. he / she has a residual interest in income and
wealth. Equity shares are classified into broad categories by stock market analysts
such as:

16
  Blue chip Shares.
 Growth Shares.
 Income Shares.
 Cyclical Shares.
 Speculative shares.

BONDS

Bonds or Debentures represent long-term debt instruments. The issuer of a

bond promises to pay a stipulated stream of cash flow. Bonds may be classified
into the following categories such as:

 Government Securities.
 Savings Bonds.
 Government Agency Securities.
 PSU Bonds.
 Debentures of Private Sector Companies.
 Preference Shares.

MONEY MARKET INSTRUMENTS

Debt Instruments which have a maturity of less than one year at the time
of issue are called money market instruments. The important money market
instruments are:

 Treasury bills.
 Commercial paper and.
 Certificate of deposit.
17
MUTUAL FUND SCHEMES

Instead of directly buying equity shares and / or fixed income instruments

we can participate in various schemes of mutual funds which, in turn, invest in
equity shares and fixed income securities. There are three broad types of mutual
fund schemes such as:

 Equity Schemes.
 Debt Schemes.
 Balanced Schemes.

LIFE INSURANCE POLICIES

Life Insurance may also be viewed as an investment. Insurance premiums

represent the sacrifice and the assured sum, the benefit. The important types of
insurance policies are:

 Endowment assurance policy.

 Money back policy.
 Whole life policy.
 Team assurance policy.

REAL ESTATE
For the bulk of the investors the most important asset in their portfolio is a
residential house. In addition to a residential house, the more affluent investors
are likely to be interested in the following types of real estate:

 Agricultural Land.
 Semi – Urban Land.

18
  Commercial Property.
 A resort home.
 A second house.

PRECIOUS OBJECTS

Precious objects are items that are generally small but highly valuable in
monetary terms. The most important precious objects are:

 Gold and Silver.

 Precious Stones.
 Art Object.

FINANCIAL DERIVATIVES

A financial derivative is an instrument whose value is derived from the

value of an underlying asset. The most important financial derivatives from the
point of view of investors are:

 Options.
 Futures.

19
2.1 MEANING OF THE PORTFOLIO MANAGEMENT

The art of the selecting right investment policy for the individuals in terms of
minimum risk and maximum return is called as portfolio management.A portfolio refers to a
collection of investment tools such as stock, shares mutual funds, bonds, cash and so on
depending on the investor’s income, budget and convenient time frame.

Portfolio management is the art and science of making decisions about investment
mix and policy, matching investments to objectives, asset allocation for individuals and
institutions, and balancing risk against performance. In a layman’s language, the art of
managing an individual’s investment is called as portfolio management.

Portfolio management refers to managing money of an individual under the expert

guidance of portfolio managers.Portfolio is a combination of securities such as bonds, stocks
and other instruments. All the above securities comprise my portfolio.

Portfolio management refers to the professional management of securities and other

assets. Also, referred to as “asset management” wealth management. Portfolio management
services account is an investment portfolio in stocks, debt and fixed income products
managed by a professional money manager, that can potentially be tailored to meet specific
investment objectives.

20
2.2 NEED AND IMPORTANCE OF THE PORTFOLIO MANAGEMENT
Portfolio management presents the best investment plan to the individuals as per their

income, budget, age and ability to undertake risks.

 Portfolio management minimizes the risks involved it investing and

increases the chance of making of making profits.

 Portfolio management enables the portfolio managers to provide customized

investment solutions to clients as per their needs and requirements.

 Portfolio management presents that best investment plan to the individuals

as per their income, budget, age and ability to undertake risks.

 Understands client’s needs.

 Skilled and knowledgeable person.

 Understands client’s needs.

 Diversify risk and return.

 Skilled and knowledgeable persons.

 To achieve balance.

 To achieve focus.

 To provide better objectivity to project selection.

 To maintain the competitive position of the business to increase sales and

market share.

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2.3 METHODS OF THE PORTFOLIO MANAGEMENT
Group of securities is called as portfolio management.

SECURITIES

The following are the securities given below namely,

Currency

Shares Commodity

SECURITIES

Bonds Realestate

Debentures

 Each security having same type of risk.

 Don’t invest all money in single security.

 Each security having individual risk.

 “Don’t put all eggs in one basket.”

 Portfolio is combination of different types of securities such as shares, binds,

money market instrument.

 It deals with analysis of individual are securities as well as theory and

practical of optimum combination of different securities in portfolio
management.

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2.4 OTHERS

PORTFOLIO CONSTRUCTION

Portfolio is a combination of securities such as stocks bonds and money market

instruments. Diversification of investments over different assets helps to reduce risk without
sacrificing return. When determining a proper asset allocation one aims at maximizing the
expected return and minimizing the risk. The process of blending together the broad asset
classes to obtain optimum return with minimum risk is called portfolio construction.

APPROACHES TO PORTFOLIO CONSTRUCTION

There are two approaches to portfolio construction of the portfolio of securities viz,

 
Traditional approach.

 Modern approach.

In traditional approach, investor ‘s needs in terms of income and capital appreciation

are evaluated and appropriate securities are selected to meet the needs of the investor. The
common practice in the traditional approach is to evaluate the entire financial plan of the
individual.



In modern approach, portfolios are constructed to maximize the expected return for a
given level of risk. It views the portfolio construction in terms of the expected return and the
risk associated with obtaining the expected return.

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TRADITIONAL APPROACH OF PROTFOLIO CONSTRUCTION

The construction of portfolio by traditional method is carried out in 5 steps.

The five steps are

 Security analysis.

 Portfolio analysis.

 Portfolio selection.

 Portfolio revision.

 Portfolio evaluation.

These steps are detailed below under separate headings.

SECURITY ANALYSIS

Security analysis is the initial step of portfolio management. Security analysis is a

method which helps to calculate the value of various assets. There are two alternate
approaches to security analysis namely fundamental analysis and technical analysis.

FUNDAMENTAL ANALYSIS

The fundamental analysis tries to appraise intrinsic value of shares through economic,
industry and company analyses. If the price of share is lower than the intrinsic value, an
investor buys it. If he finds the price of the share higher than the intrinsic value, the investor
sells the share and makes profit.

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STEPS IN FUNDAMENTAL ANALYSIS

Economic Analysis

Industry Analysis

Company Analysis

ECONOMIC ANALYSIS

Economic Analysis is a systematic approach in which economists and other

professionals will estimate the economic environment and its strengths and weaknesses. The
level of economic activity has an impact on investment in many ways. When the level of
economic activity is low, the stock prices are low, and when the level of economic activity is
high, stock prices are high reflecting the prosperous outlook for sales and profits of the firm.

The commonly analyzed macroeconomic factors are as follows;

 Gross domestic product (GDP).

 Savings and investment.

 Inflation.

 Interest rates.

 Budget.

 Tax structure.

 Balance of payment.

25
  Monsoon and agriculture.

 Infrastructure facilities.

 Demographic factors.

 Economic forecasts.

 Economic indicators.

INDUSTRY ANALYSIS

An industry is a group of firms that have similar technological structure of production

and produce similar products. An industry analysis consists of three major elements: the
underlying forces at work in the industry; the overall attractiveness of the industry; and the
critical factors that determine a company's success within the industry.

The first step in performing an industry analysis is to assess the impact of Porter's five
forces. "The collective strength of these forces determines the ultimate profit potential in the
industry, where profit potential is measured in terms of long term return on invested capital,"
Porter stated. "The goal of competitive strategy for a business unit in an industry is to find a
position in the industry where the company can best defend itself against these competitive
forces or can influence them in its favor."

26
COMPANY ANALYSIS

Company analysis is a process carried out by investors to evaluate securities,

collecting data related to the company’s profile, products and services as well as profitability.
A company analysis considers the goods and services proffered by the company. If the
company is involved in manufacturing activities, the analysis studies the products produced
by the company and analyzes the demand and quality of these products. If it is a service
business, the investor studies the services put forward.

In the company analysis, the investor analyses information related to the company
and evaluates the present and future values of the stock. The present and future values are
affected by several factors and they are given below.

 The competitive edge of the company could be measured with the

company’s market share, growth and stability of sales.

 The financial statement reveals information about the financial state of the

company. Fund flow and cash flow statement is used to analyze the financial

health of the company.

 The ratio analysis helps the investor to study the individualparameters like

profitability, liquidity, leverage, and the value of stock.

27
 CHAPTER 3

RESEARCH AND METHODOLOY AND OBJECTIVES

3.1 NEEDS OF THE PORTFOLIO MANAGEMENT

The Portfolio Management deals with the process of selection securities from the
number of opportunities available with different expected returns and carrying different
levels of risk and the selection of securities is made with a view to provide the investors the
maximum yield for a given level of risk or ensure minimum risk for a level of return.

Portfolio Management is a process encompassing many activities of investment in

assets and securities. It is a dynamics and flexible concept and involves regular and
systematic analysis, judgment and actions. The objectives of this service are to help the
unknown investors with the expertise of professionals in investment Portfolio
Management. It involves construction of a portfolio based upon the investor’s objectives,
constrains, preferences for risk and return and liability. The portfolio is reviewed and
adjusted from time to time with the market conditions. The evaluation of portfolio is to be
done in terms of targets set for risk and return. The changes in portfolio are to be effected
to meet the changing conditions.

Portfolio Construction refers to the allocation of surplus funds in hand among a

variety of financial assets open for investment. Portfolio theory concerns itself with the
principles governing such allocation. The modern view of investment is oriented towards
the assembly of proper combinations held together will give beneficial result if they are
grouped in a manner to secure higher return after taking into consideration the risk
element.

The modern theory is the view that by diversification, risk can be reduced. The
investor can make diversification either by having many shares of companies in different
regions, in different industries or those producing different types of product lines.
Modern theory believes in the perspectives of combination of securities under constraints
of risk and return.

28
3.2 OBJECTIVES OF THE PORTFOLIO MANAGEMENT

 To construct an optimal portfolio using Shape ‘s optimization model and find

out risk and return of optimal portfolio.

 To perform the risk, return analysis of the CNX NIFTY Index shares.

 Construct two random portfolios. One with same rate of return as optimal

portfolio and another with same risk as optimal portfolio.

 To evaluate the performance of these three portfolios using Sharpe ‘s ratio,

Trainor’s. Ratio and Jensen Measure.

 The basic objective of Portfolio Management is to maximize yield and

minimize risk. The other ancillary objectives are as per needs of investors,

namely:

 Regular income or stable return.

 Appreciation of capital.

 Marketability and liquidity.

 Safety of investment.

 Minimizing of tax liability.

 Stability of income.

 Capital growth.

 Liquidity.

29
3.3 SCOPE AND SIGNIFICANCE OF THE PORTFOLIO
MANAGEMENT
The effectiveness of a portfolio is decided the collection of assets under portfolio and
their proportions. There for an investor who want to invest his own shall be thorough with
the methods of security analysis, portfolio analysis, portfolio selection, portfolio evaluation
and revision.

Since this study attempts to touch almost all the points required to reach optimal
portfolio it has very significance for an investor.

30
3.4 METHODOLOGY OF THE PORTFOLIO MANAGEMENT

PRIMARY DATA

 Primary data collected from newspapers & magazines.

 Data collected from brokers.

 Data obtained from company journals.

SECONDARY DATA

 Data collected from various books and sites.

 Data collected from internet.

3.5 LIMITATIONS OF THE PORTFOLIO MANAGEMENT

Duration of the study is limited hence extensive and deep study such as fundamental
analysis and technical analysis could not be possible.

The beta value changes from time to time. It may not reflect the future volatility of
returns. Hence the portfolio needs to be revised periodically.

An optimized portfolio cannot reduce systematic risk affecting the entire market.
Hence, the return from the portfolio varies with the general trend in the markets.

31
  The data collected is basically confined to secondary sources, with very
little amount of primary data associated with the project.

 There is a constraint regarding time allocated for the research study.

 The availability of information in the form of annual reports & price

fluctuations of the companies is a big constraint to the study.

 The data collected for a period of one year i.e., from October 2007 to

September 2007.

 In this study the statistical tools used are risk, return, average, variance,

correlation.

 No career path ops career suicide.

 PMO “just does a few reports.”

 No direct line to Board or Strategy.

 Not sustained.

CHAPTER 4

ANALYSIS AND INTERPRETATIONS

4.1 INTRODUCTION
In the previous chapter the traditional approaches and modern approaches to portfolio
management is described. The portfolio construction by traditional method is detailed. Tools
of fundamental analysis and Technical analysis are described. The steps in portfolio
construction using Sharpe ‘s single index model, the formula used for portfolio evaluation,

32
 risk and return calculations are detailed. Finally, an abstract of formulae used for this study is
given.

The data for study, mainly stock prices for the last five years were collected from the
Angel Broking Securities, Manjra. The analysis done using those data and its interpretations
are discussed under following headings. CNX Nifty Index Shares, Analysis of Securities,
Analysis of Risk of Securities, Construction of Optimal Portfolio Using Sharpe ‘s Single
Index model, Measuring Return and Risk of Optimal Portfolio, Construction of Portfolio #2
with Same Return as Optimal Portfolio, Construction of Portfolio # 3 with Same Risk as
Optimal Portfolio. The three portfolios are evaluated in the section called portfolio evaluation
using three ratios viz, Sharpe ‘s index, Trainor’s ratio and Jensen Measure. Asummary of this
chapter is provided in the conclusion section.

4.2 CNX NIFTY INDEX SHARES

The CNX NIFTY 50 Index comprises of 50 companies from various sectors, which
ranks high in market capitalization. The weight of stocks in the index is determined by the
market capitalization of free floating shares of the respective companies.

CNX Nifty index is used as a barometer of Indian stock market and economy. The list
of 50 shares which constitutes the index is shown the table 4.2 given in the next page.

33
 TABLE 4.2: LIST OF CNX NIFTY 50 SHARES

SL No Security SL No Security
1 ACC 26 Infosys
2 Ambuja Cements 27 ITC
3 Asian Paints 28 Jindal Steel& Power (JSP)
4 Axis Bank 29 Kotak Bank
5 Bajaj Auto 30 L&T
6 Bharti Airtel 31 Lupin
Mahindra &Mahindra
7 BHEL 32
(M&M)
8 BoB 33 Maruti Suzuki
9 BPCL 34 NMDC
10 Cairn Energy 35 NTPC
11 Cipla 36 ONGC
12 Coal India 37 Power Grid
13 DLF 38 PNB
Dr. Reddy's Laboratories
14 39 Reliance Industries
(DRL)
15 GAIL 40 SBI
16 Grasim 41 Sesa Sterlite
17 HCL Tech 42 Sun pharma
18 HDFC 43 Tata Motors
19 HDFC Bank 44 Tata Power
20 Hero Motor Corporation 45 Tata Steel
21 Hindalco 46 TCS
Hindustan Unilever Ltd.
22 47 Tech Mahindra
(HUL)
ICICI Bank
23 48 Ultratech Cements
24 IDFC 49 Wipro
25 IndusInd bank 50 Zee Entertainment.

34
4.3 ANALYSIS OF SECURITES

Here all the 50 CNX NIFTY index stocks are used for study. Security analysis
involves calculation of average return, variance, alpha and beta of the securities. These
values form the basic secondary data for the formation of optimal portfolio.

Security analysis on all the CNX Nifty shares were conducted and average return,
variance, alpha and beta of the security of the shares were calculated using Microsoft Excel

Return = (Today ‘s price- Last year ‘s price) *100

Last year ‘s price

Average return of security Ri ‘= Σ Ri/n

Average return of the market Rm = Σ Rm/n

Variance of security σi2 = Σ (Ri-Ri ‘)2/(n-1)

Variance of market σm2 =Σ (Rm-Rm ‘)2/(n-1)

Covariance of Security & Market COV R, M = Σ(Ri-Ri ‘) *(Rm-Rm ‘)/ (n-1)

Beta of security β = COV R, M / σm2

Alpha of security α = Ri ‘- β Rm ‘

A Microsoft Excel work sheet was prepared with above formulae and calculations
were done using computers. A sample calculation of Ambuja Cements is shown in the
Chapter Appendix – A The table below shows the return, alpha, beta variance of CNX Nifty
shares summary of calculation of all shares.

35
 TABLE 4.3: SUMMARY TABLE SHOWING RISK AND RETURN OF CNX NIFTY
SHARES

Return Alpha Beta Variance Return Alpha Beta Variance

Name of Security Ri%) α β σi2(%)2 Name of Security Ri(%) α β σi2(%)2
ACC 11.29 17.04 -0.56 186.92 ITC 24.69 32.71 -0.79 409.81
Ambuja Cements 17.82 10.79 0.21 211.34 Jindal Steel 24.44 -19.75 -0.45 346.71
Asian Paints 42.05 39.90 1.65 3723.36 Kotak Bank 15.35 -0.96 1.59 748.70
Axis Bank 27.00 0.81 0.55 1342.00 L&T 13.06 -4.81 1.744 552.70
Bajaj Auto 14.65 18.47 -0.37 230.48 Lupin 41.66 27.7 1.36 458.18
Airtel 7.68 -3.60 1.10 331.74 M&M 27.95 45.39 -1.70 774.93
BHEL -7.99 -26.53 1.80 331.74 Maruti 25.77 4.63 2.06 1060.17
BoB 22.83 10.60 0.66 1175.07 NMDC 19.78 20.88 -0.107 849.63
BPCL 31.74 13.60 1.07 779.79 NTPC 10.39 10.10 0.03 148.28
Cairn -3.59 4.06 -0.74 245.22 ONGC 8.42 4.76 0.35 193.62
Cipla 17.33 -0.33 1.72 935.17 Power Grid 9.59 1.39 0.799 368.82
Coal India 9.64 -0.24 0.965 329.21 PNB 11.52 2.29 0.90 675.25
DLF -10.99 -16.14 0.502 715.38 Reliance -1.23 -8.86 0.745 262.39
Dr. Reddy's 23.24 14.76 0.82 202.80 SBI 24.48 6.54 1.75 500.94
Gail 1.05 -9.91 1.06 292.50 Sesa Sterlite -24.44 -19.75 -0.457 346.71
Grasim 6.11 -1.13 0.706 253.11 Sun Pharma 39.38 33.79 0.645 219.51
HCL Tech 41.93 28.98 1.26 1297.79 Tata Motors 18.41 17.72 0.07 335.99
HDFC 21.65 8.86 1.24 358.71 Tata Power -5.22 -7.43 0.215 65.75
HDFC Bank 22.89 18.77 0.402 151.07 Tata Steel -5.92 -10.71 0.466 726.16
Hero Motor 9.52 14.56 -0.49 547.74 TCS 29.92 27.36 0.249 673.14
Hindalco -1.667 -15.35 1.33 1707.17 Tech Mahindra 35.29 18.80 1.60 1762.50
HUL 32.17 32.06 0.011 130.87
ICICI Bank 24.24 4.83 1.89 666.45 Ultratech Cements 24.32 23.71 0.06 179.75
IDFC 5.19 -13.69 1.84 1126.94 Wipro 10.59 2.59 0.78 681.72
IndusInd bank 40.77 27.37 1.30 701.68 Zee Ent. 22.03 9.15 1.25 1519.34
Infosys 15.35 -9.66 1.59 748.70 CNX NIFTY 10.2746 0 1 149.25

36
INFERENCES

 Variance (3723.36 %2) and Tata Power has lowest variance (65.75%2).

The return of CNX Nifty index was 10.2476 % for the period and market risk was 149.25 % 2. Form
the above table 4.3, following inferences are made.


 Asian Paints has highest return (42.05 %) and Sesa Sterlite has lowest

return(-24.44 %).

 Mahindra & Mahindra has highest Alpha (45.39) and BHEL has lowest

Alpha (-26.53).

 Maruti Suzuki has highest Beta (2.06) and Mahindra and Mahindra has

lowest Beta (-1.70).

 Asian Paints has highest.

37
4.4 RISK ANALYSIS OF SECURITIES

The total risk of securities is divided in to two; the systematic risk which cannot be
diversified and unsystematic or security specific risk which can be reduced by
diversification. Systematic and unsystematic risks are measured by using Sharpe ‘s index
model.

4.4.1 SYSTEMATIC RISK OF SECURITIES

The systematic risk indicates non-diversifiable part of the risk of a security. It is

calculated using the following formulae.

Systematic risk = βi2 σm2

Where σm2 = Variance of Market

Market is represented by CNX NIFTY, from table No. 4.2= 149.25 %2.

The calculations are performed using Microsoft excel software. The result of

calculation of systematic risk of securities is given in the table below.

38
 TABLE 4.4.1 SYSTEMATIC RISK OF CNX NIFTY
SHARES

Systematic Systematic Risk

Security βi σm2 Risk Security βi σm2 (βi2 σm2)
(βi2 σm2)
ACC -0.56 149.25 46.80 Infosys 1.59 149.25 377.32
Ambuja Cements 0.21 149.25 6.58 ITC -0.79 149.25 93.15
Asian Paints 1.65 149.25 406.33 JSP -0.45 149.25 30.22
Axis Bank 0.55 149.25 45.15 Kotak Bank 1.59 149.25 377.32
Bajaj Auto -0.37 149.25 20.77 L&T 1.74 149.25 453.95
Bharti Airtel 1.10 149.25 180.59 Lupin 1.36 149.25 276.05
BHEL 1.80 149.25 483.57 M&M -1.70 149.25 431.33
BoB 0.66 149.25 65.01 Maruti 2.06 149.25 633.36
BPCL 1.07 149.25 170.88 NMDC -0.11 149.25 1.71
Cairn Energy -0.75 149.25 83.28 NTPC 0.03 149.25 0.13
Cipla 1.72 149.25 441.54 ONGC 0.35 149.25 18.28
Coal India 0.97 149.25 139.92 Power Grid 0.80 149.25 95.28
DLF 0.50 149.25 37.61 PNB 0.90 149.25 120.89
Dr. Reddy's 0.82 149.25 100.36 Reliance 0.75 149.25 82.84
Gail 1.06 149.25 167.70 SBI 1.75 149.25 457.08
Grasim 0.71 149.25 74.39 Sesa Sterlite -0.46 149.25 31.17
HCL Tech 1.26 149.25 236.95 Sun Pharma 0.65 149.25 62.09
HDFC 1.24 149.25 229.49 Tata Motors 0.07 149.25 0.73
HDFC Bank 0.40 149.25 24.28 Tata Power 0.22 149.25 6.90
Hero Mot -0.49 149.25 35.83 Tata Steel 0.47 149.25 32.41
Hindalco 1.33 149.25 264.01 TCS 0.25 149.25 9.25
HUL 0.01 149.25 0.02 Tech Mahindra 1.60 149.25 382.08
ICICI Bank 1.89 149.25 533.14 Ultra tech 0.06 149.25 0.54
IDFC 1.84 149.25 505.30 Wipro 0.78 149.25 90.80
IndusInd bank 1.30 149.25 252.23 Zee Ent. 1.25 149.25 233.20

39
INFERENCE

 From the above table 4.4.1, it is inferred that Hindustan Unilever has

minimum systematic risk (0.02 %2) and Axis bank has highest systematic risk

(975.06 %2).

 It means Hindustan Unilever is less affected by ups and downs in market and
Axis Bank share price is highly influenced by volatility in the market.

40
4.4.2 UNSYSTEMATICRISK OF THE SECURITIES

Unsystematic risk refers to that portion of risk which is caused due to factors unique
or related to a firm or industry.

The total Risk of the security is the sum of systematic risk and non-systematic risk,
the unsystematic risk is fond out by deducting systematic risk from total risk. i.e.

Unsystematic risk = Variance of security- Systematic risk

The unsystematic risk is calculated using the formula,

Unsystematic risk = σi2- βi2 σm2.

Where

σi2 = Variance of security

βi = Beta of Security

σm2 = The variance of market index

Market is represented by CNX NIFTY INDEX

From Summary table 4.4.2, σm2= 149.25(%2)

The table 4.4.2 given in the next page shows the calculation of unsystematic risk of
securities.

41
 TABLE 4.4.2: UNSYSTEMATIC RISK OF CNX NIFTY SHARES

Security σi 2 βi Unsystematic Security σi 2 βi Unsystematic

Risk Risk
σei2=σi2-(βi2 σm2) σei2=σi2-(βi2 σm2)
ACC 186.92 -0.56 140.11 Infosys 748.7 1.59 371.38
Ambuja Cements 211.34 0.21 204.76 ITC 409.81 -0.79 316.66
Asian Paints 3723.36 1.65 3317.03 Jindal 346.71 -0.45 316.49
Axis Bank 1342 0.55 1296.85 Kotak Bank 748.7 1.59 371.38
Bajaj Auto 230.48 -0.37 209.72 L&T 552.7 1.74 98.75
Bharti Airtel 331.74 1.10 151.15 Lupin 458.18 1.36 182.13
BHEL 331.74 1.80 -151.83 M&M 774.93 -1.70 343.60
BoB 1175.07 0.66 1110.06 Maruti Suzuki 1060.17 2.06 426.81
BPCL 779.79 1.07 608.91 NMDC 849.63 -0.11 847.92
Cairn Energy 245.22 -0.75 161.94 NTPC 148.28 0.03 148.15
Cipla 935.17 1.72 493.63 ONGC 193.62 0.35 175.34
Coal India 329.21 0.97 189.30 Power Grid 368.82 0.80 273.54
DLF 715.38 0.50 677.77 PNB 675.25 0.90 554.36
Dr. Reddy's 202.80 0.82 102.44 Reliance Ind. 262.39 0.75 179.55
Gail 292.50 1.06 124.80 SBI 500.94 1.75 43.86
Grasim 253.11 0.71 178.72 Sesa Sterlite 346.71 -0.46 315.54
HCL Tech 1297.79 1.26 1060.84 Sun Pharma 219.51 0.65 157.42
HDFC 358.71 1.24 129.22 Tata Motors 335.99 0.07 335.26
HDFC Bank 151.07 0.40 126.79 Tata Power 65.75 0.22 58.85
Hero Mot 547.74 -0.49 511.91 Tata Steel 726.16 0.47 693.75
Hindalco 1707.17 1.33 1443.16 TCS 673.14 0.25 663.89
HUL 130.87 0.01 130.85 Tech Mahindra 1762.5 1.60 1380.42
ICICI Bank 666.45 1.89 133.31 Ultratech Cements 179.75 0.06 179.21
IDFC 1126.94 1.84 621.64 Wipro 681.72 0.78 590.92
IndusInd bank 701.68 1.30 449.45 Zee Entertainment 1519.34 1.25 1286.14

42
INFERENCE

 From the table 4.4.2, it is inferred that the Asian Paints has highest

unsystematic risk (3317.02 %2) and Dr. Reddy ‘s lab has lowest unsystematic

risk (100.77 %2).

4.4.3 TOTAL RISK OF SECURITIES

 Total risk of a security is the sum of systematic and unsystematic risks.

 Total Risk = Systematic Risk + Unsystematic Risk.

The table 4.4.3 given in the next page shows the total risk of securities.

43
 TABLE 4.4.3: TOTAL RISK OF CNX NIFTY SHARES

Systematic Unsystematic Total Systematic Unsystematic Total

Security Security
Risk Risk Risk Risk Risk Risk
ACC 46.80 140.11 186.92 Infosys 377.32 371.38 748.70
Ambuja Cements 6.58 204.76 211.34 ITC 93.15 316.66 409.81
Asian Paints 406.33 3317.03 3723.36 JSP 30.22 316.49 346.71
Axis Bank 45.15 1296.85 1342.00 Kotak Bank 377.32 371.38 748.70
Bajaj Auto 20.77 209.72 230.48 L&T 453.95 98.75 552.70
Bharti Airtel 180.59 151.15 331.74 Lupin 276.05 182.13 458.18
BHEL 483.57 -151.83 331.74 M&M 431.33 343.60 774.93
BoB 65.01 1110.06 1175.07 Maruti 633.36 426.81 1060.17
BPCL 170.88 608.91 779.79 NMDC 1.71 847.92 849.63
Cairn Energy 83.28 161.94 245.22 NTPC 0.13 148.15 148.28
Cipla 441.54 493.63 935.17 ONGC 18.28 175.34 193.62
Coal India 139.92 189.30 329.21 Power Grid 95.28 273.54 368.82
DLF 37.61 677.77 715.38 PNB 120.89 554.36 675.25
Dr. Reddy's 100.36 102.44 202.80 Reliance 82.84 179.55 262.39
Gail 167.70 124.80 292.50 SBI 457.08 43.86 500.94
Grasim 74.39 178.72 253.11 Sesa Sterlite 31.17 315.54 346.71
HCL Tech 236.95 1060.84 1297.79 Sun Pharma 62.09 157.42 219.51
HDFC 229.49 129.22 358.71 Tata Motors 0.73 335.26 335.99
HDFC Bank 24.28 126.79 151.07 Tata Power 6.90 58.85 65.75
Hero Motor 35.83 511.91 547.74 Tata Steel 32.41 693.75 726.16
Hindalco 264.01 1443.16 1707.17 TCS 9.25 663.89 673.14
HUL 0.02 130.85 130.87 Tech Mahindra 382.08 1380.42 1762.50
ICICI Bank 533.14 133.31 666.45 Ultra tech 0.54 179.21 179.75
IDFC 505.30 621.64 1126.94 Wipro 90.80 590.92 681.72
IndusInd bank 252.23 449.45 701.68 Zee Entertainment 233.20 1286.14 1519.34

44
INFERENCE

 From the above table 4.4.3, it is inferred that, the Asian Paints has highest
total risk (3723.36 %2) and Hindustan Uniliver Ltd (130.88 %2) has lowest
total risk.

4.5 CONSTRUCTION OF OPTIMAL PORTFOLIO USING

SHARPE’S OPTIMIZATION MODEL.

The construction of optimal portfolio using Sharpe ‘s single index model involves
following steps.

 Ranking of the securities based on excess return over risk i.e. (Ri -Rf)/ β ratio.

 Calculation of Cut-off point.

 Selection of securities based on the cut-off point.

 Calculation of Weight of each security in the portfolio.

45
4.5.1 RANKING OF SECURITIES

The CNX NIFTY securities are ranked based on (Ri -Rf)/ β ratio.

Where;

Ri= Return of the security

Rf= the risk-free rate.

The latest MIBOR (Mumbai Inter Bank Offer Rate) is taken as risk free rate R f. The

present rate is 7.21 %. Hence, 7.21% is taken as risk free rate for calculation.

The table 4.5.1 given in the next page shows the rank of securities based on (Ri -Rf)/ β
ratio.

46
 TABLE 4.5.1: RANKING OF CNX NIFTY SHARES

Security Ri Rf β (Ri -Rf)/ β Rank Security Ri Rf β (Ri -Rf)/ β Rank

ACC 11.29 7.21 -0.56 -7.29 41 Infosys 15.35 7.21 1.59 5.12 28
Ambuja
17.82 7.21 0.21 50.52 7 ITC 24.69 7.21 -0.79 -22.13 45
Cements
Jindal Steel&
Asian Paints 42.05 7.21 1.65 21.16 16 24.44 7.21 -0.45 -38.29 48
Power
Axis Bank 27.00 7.21 0.55 35.98 10 Kotak Bank 15.35 7.21 1.59 5.12 29
Bajaj Auto 14.65 7.21 -0.37 -19.94 44 L&T 13.06 7.21 1.74 3.35 32
Bharti Airtel 7.68 7.21 1.10 0.42 34 Lupin 41.66 7.21 1.36 25.33 13
BHEL -7.99 7.21 1.80 -8.44 40 M&M 27.95 7.21 -1.70 -12.20 43
BoB 22.83 7.21 0.66 23.67 14 Maruti 25.77 7.21 2.06 9.01 24
BPCL 31.74 7.21 1.07 22.93 15 NMDC 19.78 7.21 -0.11 -117.48 50
Cairn -3.59 7.21 -0.75 14.46 19 NTPC 10.39 7.21 0.03 106.00 4
Cipla 17.33 7.21 1.72 5.88 26 ONGC 8.42 7.21 0.35 3.46 25
Coal India 9.64 7.21 0.97 2.52 33 Power Grid 9.59 7.21 0.80 2.98 31
DLF -10.99 7.21 0.50 -36.26 47 PNB 11.52 7.21 0.90 4.79 27
Dr. Reddy's 23.24 7.21 0.82 19.55 17 Reliance -1.23 7.21 0.75 -11.32 42
GAIL 1.05 7.21 1.06 -5.81 38 SBI 24.48 7.21 1.75 9.87 22
Grasim 6.11 7.21 0.71 -1.56 35 Sesa Sterlite -24.44 7.21 -0.46 69.26 6
HCL Tech 41.93 7.21 1.26 27.56 11 Sun Pharma 39.38 7.21 0.65 49.88 8
HDFC 21.65 7.21 1.24 11.65 21 Tata Motors 18.41 7.21 0.07 160.00 3
HDFC Bank 22.89 7.21 0.40 39.01 9 Tata Power -5.22 7.21 0.22 -57.82 49
Hero Motor
9.52 7.21 -0.49 -4.71 39 Tata Steel -5.92 7.21 0.47 -28.18 46
Corp
Hindalco -1.667 7.21 1.33 -6.67 37 TCS 29.92 7.21 0.25 91.20 5
Tech
HUL 32.17 7.21 0.01 2269.09 1 35.29 7.21 1.60 17.55 18
Mahindra
ICICI Bank 24.24 7.21 1.89 9.01 23 Ultratech 24.32 7.21 0.06 285.17 2
IDFC 5.19 7.21 1.84 -1.10 36 Wipro 10.59 7.21 0.78 4.33 30
IndusInd
40.77 7.21 1.30 25.82 12 Zee Ent. 22.03 7.21 1.25 11.86 20
Bank

47
4.5.2 CALCULATION OF CUT OFF POINT

The securities are rearranged based on the rank of (Ri -Rf)/ β ratio.

Then the he cut of rate is calculated using the formulae.

Where

σm2 = Market variance

Ri - Rf = Market risk premium

σei2 = Unsystematic risk of the security

The calculation of cut-off point is shown in the table 4.5.2 given in the next page.

From the table, it seen that the cut- off point Ci shows a character of increasing
gradually and after reaching a peak value it i starts decreasing gradually. This point is highest
cut off rate and it will be denoted as C*.

The cut-off point determines which securities are to be included in the portfolio. The
Securities with (Ri-Rf)/ β values up to cut off point C* (25.1394) are included in the
portfolio. Securities with (Ri-Rf)/ β values beyond cut off point are excluded from the
portfolio.

48
 TABLE 4.5.2: CALCULATION OF OPTIMAL PORTFOLIO

SECURITY β σei 2 (Ri -Rf)/ βC* Zi ΣZi Weight

Xi=Zi/ ΣZi

HUL 0.01 130.85 2378.18 25.1394 0.0022 0.1684 0.013

Ultratech
Cements 0.06 179.21 305.17 25.1394 0.0056 0.1684 0.033
Tata Motors 0.07 335.26 177.14 0.0022 0.1684 0.013
NTPC 0.03 148.15 146.00 25.1394 0.0007 0.1684 0.004
TCS 0.25 663.89 96.02 25.1394 0.0066 0.1684 0.039
Sesa Sterlite 0.46 315.54 66.63 25.1394 0.0275 0.1684 0.163
Ambuja Cements 0.21 204.76 56.24 25.1394 0.0067 0.1684 0.040
Sun Pharma 0.65 157.42 51.74 25.1394 0.0703 0.1684 0.417
HDFC Bank 0.40 126.79 41.99 25.1394 0.0215 0.1684 0.128
Axis Bank 0.55 1296.9 38.16 25.1394 0.0030 0.1684 0.018
HCL Tech 1.26 1060.8 28.51 25.1394 0.0050 0.1684 0.030
IndusInd bank 1.30 449.45 26.74 25.1394 0.0060 0.1684 0.036
Lupin 1.36 182.13 26.21 25.1394 0.0109 0.1684 0.065
BoB 0.66 1110.1 25.48 25.1394 0.0001 0.1684 0.001
Total Σ Zi= 0.1684
Σ Wi= 1.00

INFERENCE

The Sun pharma has highest weight in the portfolio (41.7 %) and Bank of Baroda has
lowest weight in the optimal portfolio (0.1%).

49
4.6 MEASURING RETURN AND RISK OF OPTIMAL PORTFOLIO
The return and risk of optimal portfolio is required for evaluation of portfolio with
other portfolios.

4.6.1 CALCULATION OF PORTFOLIO ALPHA IN OPTIMAL

PORTFOLIO
The portfolio alpha is the weighted average of the specific returns (alpha) of the
individual securities. The Portfolio alpha is calculated using the equation

Portfolio Alpha (αp) = Σwi αi,

i=1
Where Wi= weight of security, αi = Alpha of security

TABLE 4.6.1: CALCULATION OF ALPHA OF OPTIMAL PORTFOLIO

Alpha * Weight
Security Alpha (αi) Weight (wi)
(wi* αi)
Ambuja Cements 39.90 0.040 1.5960
Axis Bank 0.81 0.018 0.0146
BoB 10.60 0.001 0.0106
HCL Tech 28.98 0.030 0.8694
HDFC Bank 18.77 0.128 2.4026
Hindustan Uniliver 32.06 0.013 0.4168
IndusInd bank 27.37 0.036 0.9853
Lupin 27.70 0.065 1.8005
NTPC 10.10 0.004 0.0404
Sesa Sterlite -19.75 0.163 -3.2193
Sun Pharma 33.79 0.417 14.0904
Tata Motors 17.72 0.013 0.2304
TCS 27.36 0.039 1.0670
Ultratech Cements 23.71 0.033 0.7824
Total 21.0872

INFERENCE

From the above table 4.6.1, it is inferred that the alpha (excess return over the market)

of optimal portfolio is 21.09%.

50
4.6.2 CALCULATION OF PORTFOLIO BETA IN OPTIMAL
PORTFOLIO
The portfolio beta is the weightedaverage of the beta coefficient of the individual

securities. The portfolio beta is calculated using the equation’s

Portfolio Beta (βp) =Σ wi βi

i=1

Where

wi = Proportion of investment in security i.

βi = beta of individual securities.

The table below shows the calculation of beta of optimal portfolio.

51
 TABLE 4.6.2: CALCULATION OF BETA OF OPTIMAL PORTFOLIO

Beta Weight Beta * Weight

Security
(βi) (wi) (wi βi)
Ambuja Cements 0.21 0.040 0.00840
Axis Bank 0.55 0.018 0.00990
BoB 0.66 0.001 0.00066
HCL Tech 1.26 0.030 0.03780
HDFC Bank 0.40 0.128 0.05120
Hindustan 0.00013
Uniliver 0.01 0.013
IndusInd bank 1.30 0.036 0.04680
Lupin 1.36 0.065 0.08840
NTPC 0.03 0.004 0.00012
Sesa Sterlite -0.46 0.163 -0.07500
Sun Pharma 0.65 0.417 0.27105
Tata Motors 0.07 0.013 0.00091
TCS 0.25 0.039 0.00975
Ultratech Cements 0.06 0.033 0.00198
0.45212
Total

INFERENCE

From the above table 4.6.2 it is inferred that beta of the portfolio is 0.4512, i.e. for 1%
variation in value of market index, the risk in portfolio will be only 0.45 %.

52
4.6.3 CALCULATION OF RETRN OF THE OPTIMULPORTFOLIO

The expected return of a portfolio is calculated using the formulae.

Rp= αp + βp*Rm

Where,

αp = Portfolio alpha

βp = Portfolio beta

Rm = Market Return

The table below shows the calculation of return of optimal portfolio.

TABLE 4.6.3: CALCULATION OF RETURN OF OPTIMAL PORTFOLIO

Portfolio Portfolio Portfolio Market Portfolio Return

Alpha Beta Return Rp= αp + βp*Rm
(αp) (βp) (Rm)
(%)

OPTIMAL
21.09 0.45 10.25 25.72
PORTFOLIO

INFERENCE
From the above table 4.6.3 it is inferred that, the average return of the optimal
portfolio for the five years from 2012-2017 is 25.72 %.

53
4.6.4 CALCULATION OF RESIDUAL VARIANCE (UNSYSTEMATIC
RISK) IN OPTIMUL PORTFOLIO

Unsystematic risk or Residual variance of a portfolio is given by the equation.

Unsystematic risk = Σwi2σei2

i=1

Where

wi =Weight of Security in portfolio

σei2 = Residual variance of individual securities.

The table given below shows the calculation of unsystematic risk of optimal portfolio.

54
 TABLE 4.6.4: CALCULATION OF UNSYSTEMATIC RISK OF OPTIMAL PORTFOLIO

Residual wi2* σei2

Weight 2
Security Variance
(%2)
wi
(wi)
2
(σei )
Ambuja Cements 204.76 0.040 0.001600 0.3276
Axis Bank 1296.90 0.018 0.000324 0.4202
BoB 1110.10 0.001 0.000001 0.0011
HCL Tech 1060.80 0.030 0.000900 0.9547
HDFC Bank 126.79 0.128 0.016384 2.0773
Hindustan Uniliver 130.85 0.013 0.000169 0.0221
IndusInd bank 449.45 0.036 0.001296 0.5825
Lupin 182.13 0.065 0.004225 0.7695
NTPC 148.15 0.004 0.000016 0.0024
Sesa Sterlite 315.54 0.163 0.026569 8.3836
Sun Pharma 157.42 0.417 0.173889 27.3736
Tata Motors 335.26 0.013 0.000169 0.0567
TCS 663.89 0.039 0.001521 1.0098
Ultratech Cements 179.21 0.033 0.001089 0.1952
Total 42.1762

INFERENCE

From the above table 4.6.4, it is inferred that the residual variance of the optimal

portfolio is 42.176 %2.

55
4.6.5 CALCULATION OF SYSTEMATIC OF OPTIMUL
PORTFOILIO

Systematic risk of a portfolio is calculated using the equation given below.

Systematic risk of Portfolio = βp2 σm2

Where,

Βp= Beta of Portfolio.

σm 2 = Variance of market index.

The table below shows the calculation of systematic risk of optimal portfolio.

TABLE 4.6.5: CALCULATION OF SYSTEMATIC RISK OF

OPTIMAL PORTFOLIO

Systematic Risk
Portfolio βp βp 2 σm2 2 2
βp σm (% )
OPTIMAL PORTFOLIO 0.4521 0.2044 149.26 30.51

INFERENCE

From the above table 4.6.5 it is inferred that the systematic risk of optimal portfolio is
30.51%2.

56
4.6.6 CALCULATION OF TOTAL RISK OF PORTFOLIO

The total risk of a portfolio is sum of systematic risk and unsystematic risk of a
portfolio.
This may be expressed as:
n
σp2 = βp2 σm2 +Σ wi2 σei2
i=1

Where,

σp2 = Total risk

βp2 σm2 = Systematic risk

∑ wi2 σei2 = Unsystematic risk i = 1

The table below shows the calculation of total risk of optimal portfolio.

TABLE 4.6.6: CALCULATION OF TOTAL RISK OF OPTIMAL PORTFOLIO

Unsystematic Systematic Total Risk

Portfolio
Risk Risk (%2)

OPTIMAL PORTFOLIO 42.18 30.51 72.69

INFERENCE

From the above table 4.6.6 it is inferred that the total risk of optimal portfolio is 72.69
%2.

57
4.7 CONSTRUCTION OF PORTFOLIO #2. (A PORTFOLIO WITH
SAME RETURN AS OPTIMAL PORTFOLIO)

A portfolio is constructed selecting 14 securities is selected in random from

remaining NIFTY 50 shares. Their weight is selected in such a way that portfolio return is
same as that of optimal portfolio (25.72%). Microsoft excel solver was used to find out the
weight of securities.
The table below represents the securities selected and their proportion (weight) in the
portfolio#2.
TABLE 4.7: PORTFOLIO #2

SL No. Security Weight (Wi)

1 Asian Paints 0.04

2 Bajaj Auto 0.03
3 BHEL 0.03
4 Cairn Energy 0.01
5 Coal India 0.01
6 Dr. Reddy's Lab 0.25
7 Grasim 0.03
8 Hero motor corp. 0.02
9 ICICI Bank 0.04
10 Jindal Steel & Power 0.01
11 Maruti Suzuki 0.02
12 SBI 0.02
13 Tech Mahindra 0.38
14 Zee Entertainment 0.11
Total 1.00

INFERENCE
From the above table 4.7, it is inferred that the Tech Mahindra has highest weight
(0.38) and Jindal Steel, Coal India, and Cairn Energy have lowest weight of 0.01 each.

58
4.7.1 CALCULATION OF ALPHA OF PORTFOLIO #2

The table below shows the calculation of alpha of portfolio#2.

TABLE 4.7.1: CALCULATION OF ALPHA OF PORTFOLIO #2

SL No. Security Weight (Wi) Alpha (αi) αi * wi (%)

1 Asian Paints 0.04 39.90 1.5960

2 Bajaj Auto 0.03 18.47 0.5541
3 BHEL 0.03 -26.53 -0.7959
4 Cairn Energy 0.01 4.06 0.0406
5 Coal India 0.01 -0.24 -0.0024
6 Dr. Reddy's Lab 0.25 14.76 3.6900
7 Grasim 0.03 -1.13 -0.0339
8 Hero motor corp. 0.02 14.56 0.2912
9 ICICI Bank 0.04 4.83 0.1932
Jindal Steel &
10 Power 0.01 -19.75 -0.1975
11 Maruti Suzuki 0.02 4.63 0.0926
12 SBI 0.02 6.54 0.1308
13 Tech Mahindra 0.38 18.80 7.1440
14 Zee Entertainment 0.11 9.15 1.0065
Total 1.00 13.7093

INFERENCE

From the above 4.7.1, table it is inferred that the alpha of portfolio#2 is 13.7093 %.

59
4.7.2 CALCULATION OF PORTFOLIO BETA OF PORTFOLIO #2

The table below shows the calculation of beta of portfolio#2.

TABLE 4.7.2: CALCULATION OF BETA OF PORTFOLIO #2

Sl No. Security Beta (βi) Weight (wi) βi * w i

1 Asian Paints 0.21 0.04 0.008

2 Bajaj Auto -0.373 0.03 -0.011
3 BHEL 1.8 0.03 0.054
4 Cairn Energy -0.747 0.01 -0.007
5 Coal India 0.965 0.01 0.010
6 Dr. Reddy's Lab 0.82 0.25 0.205
7 Grasim 0.706 0.03 0.021
8 Hero motor corp. -0.49 0.02 -0.010
9 ICICI Bank 1.89 0.04 0.076
10 Jindal Steel &Power 0.45 0.01 0.005
11 Maruti Suzuki Ltd 2.06 0.02 0.041
12 SBI 1.75 0.02 0.035
13 Tech Mahindra 1.6 0.38 0.608
14 Zee Entertainment 1.25 0.11 0.138
Total 1.00 1.172

INFERENCE

From the above 4.7.2 table, it is inferred that the beta of portfolio#2 is 1.172.

60
4.7.3 CALCULATIONOF RETURNOF THE PORTFOLIO #2

The table below shows the calculation of return of portfolio#2.

TABLE 4.7.3: CALCULATION OF RETURN OF PORTFOLIO #2

Portfolio Portfolio Market Portfolio Return

Portfolio Alpha Beta Return Rp= αp + βp*Rm

(αp) (βp) (Rm)

(%)

PORTFOLIO #2 13.7093 1.172 10.2476 25.72

INFERENCE

From the above table 4.7.3, it is inferred that the return of portfolio#2 is 25.72%.

61
4.7.4 CALCULATION OF UNSYSTEMATIC RISKIN PORTFOLIO #2

The table below shows the calculation of unsystematic risk of portfolio#2.

TABLE 4.7.4 CALCULATION OF UNSYSTEMATIC RISK OF PORTFOLIO #2

Residual
Weight 2 2 2
Security Variance wi wi * σei
2 (wi)
(σei )
Asian Paints 3317.03 0.04 0.0016 5.3072

Bajaj Auto 209.71 0.03 0.0009 0.1887

BHEL -151.83 0.03 0.0009 -0.1366

Cairn Energy 161.94 0.01 0.0001 0.0162

Coal India 189.29 0.01 0.0001 0.0189

Dr. Reddy's Lab 102.44 0.25 0.0625 6.4025

Grasim 178.72 0.03 0.0009 0.1608

Hero motor corp. 511.91 0.02 0.0004 0.2048

ICICI Bank 133.31 0.04 0.0016 0.2133

Jindal Steel &Power 316.49 0.01 0.0001 0.0316

Maruti Suzuki 426.81 0.02 0.0004 0.1707

SBI 43.86 0.02 0.0004 0.0175

Tech Mahindra 1380.42 0.38 0.1444 199.3326

Zee Entertainment 1286.14 0.11 0.0121 15.5623

Total 1.00 227.4907

INFERENCE

From the abovetable4.7.4, it is inferred that the unsystematic risk of portfolio#2 is 227.49%2

62
4.7.5 CALCULATION OF SYSTEMATICRISK IN PORTFOLIO #2

The table below shows the calculation of systematic risk of portfolio#2.

TABLE 4.7.5: CALCULATION OF SYSTEMATIC RISK OF PORTFOLIO #2

Systematic
Portfolio βp σm2 Risk
(βp2 σm2)

PORTFOLIO #2 1.172 149.25 205.01

INFERENCE

From the above table 4.7.5 it is inferred that the systematic risk of portfolio#2 is
205.01 %2.

4.7.6 CALCULATION OF TOTALRISK OF PORTFOLIO #2

The table below shows the calculation of total risk of portfolio#2.

TABLE 4.7.6: CALCULATION OF TOTAL RISK OF PORTFOLIO #2

Portfolio Unsystematic risk Systematic risk Total

Risk

PORTFOLIO #2 227.4907 205.01 432.50

INFERENCE
From the above table 4.7.6, it is inferred that the total risk of portfolio#2 is 432.50 %2.

63
4.8 CONSTRUCTION OF PORTFOLIO # 3. (A PORTFOLIO WITH
SAME RISK AS OPTIMAL PORTFOLIO)

A portfolio was constructed selecting 14 securities in random from remaining NIFTY

50 shares. Their weight is selected in such a way that portfolio risk is same as that of optimal
portfolio (72.69 %2). Microsoft Excel solver was used to find out the weight of securities in
the portfolio.

The table below shows securities selected and their proportion (weight) in the
portfolio #3.

TABLE 4.8: PORTFOLIO #3

Sl No. Security Weight (wi)

1 Barati Airtel 0.080
2 BPCL 0.030
3 Cipla 0.050
4 HDFC 0.100
5 Infosys 0.018
6 ITC 0.050
7 Kotak Bank 0.030
8 L&T 0.050
9 Mahindra Mahindra 0.147
10 NMDC 0.111
11 ONGC 0.264
12 PNB 0.020
13 Power Grid 0.010
14 Wipro 0.040
Total 1.00

INFERENCE
From the above table 4.8, it is inferred that the ONGC has highest weight (26.4 %)
and Power Grid has lowest weight (1%) in the portfolio#3.

64
4.8.1 CALCULATION OF BETA OF PORTFOLIO #3

The table below shows the calculation of beta of portfolio#3.

TABLE 4.8.1: CALCULATION OF BETA OF PORTFOLIO #3

SL No Security Weight (wi) Beta (βi) βi * w i

1 Airtel 0.080 1.10 0.09

2 BPCL 0.030 1.77 0.05
3 Cipla 0.050 1.72 0.09
4 HDFC 0.100 1.24 0.12
5 Infosys 0.018 1.59 0.03
6 ITC 0.050 -0.79 -0.04
7 Kotak Bank 0.030 1.59 0.05
8 L&T 0.050 1.74 0.09
9 Mahindra& Mahindra 0.147 -0.56 -0.08
10 NMDC 0.111 -0.11 -0.01
11 ONGC 0.264 0.35 0.09
12 PNB 0.020 0.90 0.02
13 Power Grid 0.010 0.80 0.01
14 Wipro 0.040 0.78 0.03
Total 1.00 0.53

INFERENCE
From the above table 4.8.1 it is inferred that the beta of portfolio#3 is 0.53.

65
4.8.2 CALCULATION OF UNSYSTEMATIC RISKIN PORTFOLIO #3

The table below shows the calculation of beta of portfolio#3.

TABLE 4.8.2: CALCULATION OF UNSYSTEMATIC RISK OF PORTFOLIO #3

Security Residual Variance (σei 2) Weight (wi) wi2* σei2

Airtel 151.15 0.080 0.97
BPCL 608.91 0.030 0.55
Cipla 493.63 0.050 1.23
HDFC 129.22 0.100 1.29
Infosys 371.38 0.018 0.12
ITC 316.66 0.050 0.79
Kotak Bank 748.70 0.030 0.67
L&T 98.75 0.050 0.25
M&M 46.80 0.147 1.01
NMDC 847.92 0.111 10.45
ONGC 175.34 0.264 12.22
PNB 554.36 0.020 0.22
Power Grid 273.54 0.010 0.03
Wipro 590.92 0.040 0.95
Total 1.00 30.74

INFERENCE
From the above table 4.8.2, it is inferred that the unsystematic risk of portfolio #3 is
30.74 %2.

66
4.8.3 CALCULATION OF SYSTEMATIC RISK IN PORTFOLIO #3

The table shown below calculates the systematic risk of portfolio #3.

TABLE 4.8.3: CALCULATION OF SYSTEMATIC RISK OF PORTFOLIO #3

Systematic Risk
Portfolio βp βp2 σm2
βp2 σm2

PORTFOLIO #3
(Portfolio with same risk 0.53 0.281 149.25 41.95
as optimal portfolio)

INFERENCE

From the above table 4.8.3 it is inferred that the systematic risk of portfolio #3 is

41.95 %2

67
4.8.4 CALCULATION OF TOTLA RISKOF PORTFOLIO #3

The table below shows the calculation of total risk of portfolio#3.

TABLE 4.8.4: CALCULATION OF TOTAL RISK OF PORTFOLIO #3

Portfolio Unsystematic Risk Systematic Risk Total

Risk
PORTFOLIO #3
(Portfolio with
30.74 41.95 72.69
same risk as
optimal portfolio)

INFERENCE

From the above table 4.8.4 it is inferred that the total risk of portfolio #3 is 72.69 %2.

68
4.8.5 CALCULATION OF ALPHAOF PORTFOLIO #3

The table below shows the calculation of alpha of portfolio#3.

TABLE 4.8.5: CALCULATION OF ALPHA OF PORTFOLIO #3

SL No. Security Alpha (αi) Weight (wi) αi * wi

1 Airtel -3.60 0.080 -0.29

2 BPCL 13.60 0.030 0.41
3 Cipla -0.33 0.050 -0.02
4 HDFC 8.86 0.100 0.89
5 Infosys -0.97 0.018 -0.02
6 ITC 32.71 0.050 1.64
7 Kotak Bank -0.96 0.030 -0.03
8 L&T -4.81 0.050 -0.24
9 M&M 4.80 0.147 0.71
10 NMDC 20.88 0.111 2.32
11 ONGC 4.76 0.264 1.26
12 PNB 2.29 0.020 0.05
13 Power Grid 1.39 0.010 0.01
14 Wipro 2.59 0.040 0.10
Total 1.00 6.78

INFERENCE
From the above table 4.8.5 it is inferred that the alpha of portfolio #3 is 6.78%

69
4.8.6 CALCULATION OF RETURN OF THE PORTFOLIO #3

The table below shows the calculation of return of portfolio#3.

TABLE 4.8.6: CALCULATION OF RETURN OF PORTFOLIO #3

Portfolio Portfolio Portfolio Market Portfolio Return

Alpha Beta Return Rp= αp + βp*Rm
(αp) (βp) (Rm)

PORTFOLIO #3 6.78 0.53 10.2476 12.21

INFERENCE

From the above table 4.8.6 it is inferred that the return of portfolio #3 is 12.21 %.

70
4.9 PORTFOLIO EVALUATION

For evaluating the performance, a portfolio, it is necessary to consider both risk and
return.

The following three evaluation methods are used.

 Sharpe ‘s Ratio

 Trainor ‘s Ratio

 Jensen Measure

71
4.9.1. PORTFOLIO EVALUATIONBY USING SHARPE’S INDEX

Sharpe ‘s ratio is the ratio of excess return to risk. The risk is taken as total risk of
portfolio indicated by standard deviation of portfolio.

Sharpe’s Ratio = (Rp-Rf)/ σp

The table below shows the calculation of Sharpe ‘s index.

TABLE 4.9.1: CALCULATION OF SHARPE’S INDEX OF PORTFOLIOS

Rp Rf σp (Rp-Rf)/
PORTFOLIO Rank
(%) (%) (%) σp

Optimal Portfolio 25.72 7.21 72.69 0.255 1

Portfolio#2
(Portfolio with same return as 25.72 7.21 432.50 0.043 3
optimal portfolio)

Portfolio #3
(Portfolio with same risk as 12.21 7.21 72.69 0.069 2
optimal portfolio)

INFERENCE

Sharpe ‘s ratio is highest for optimal portfolio indicating that the performance of
Sharpe ‘s optimal portfolio is superior to that of other portfolios.

72
4.9.2 PORTFOLIO EVALUATIONBY USING TREYNOR’S RATIO

Trainor ‘s ratio also indication of excess returns to risk. Here risk is defined as
systematic risk or market risk.

Treynor’s Ratio = (Rp-Rf)/ βp

Table below shows the calculation of Trainor ‘s ratio.

TABLE 4.9.2: CALCULATION OF TRAINOR’S RATIO OF PORTFOLIOS

Portfolio Rp Rf βp(%) (Rp-Rf)/ βp Rank

(%) (%)

OPTIMAL
25.72 7.21 0.452 40.95 1
PORTFOLIO

PORTFOLIO#2
(Portfolio with same return as 25.72 7.21 1.172 15.79 2
optimal portfolio)

PORTFOLIO #3
(Portfolio with same risk as 12.21 7.21 0.53 9.43 3
optimal portfolio)

INFERENCE

Trainor’s ratio is highest for Sharpe ‘s optimal portfolio indicating that the
performance of Sharpe ‘s optimal portfolio is superior to that of other portfolios.

73
4.9.3 PORTFOLIO EVALUATION BYUSING JENSEN MEASURE

Jensen Measure gives return earned by the portfolio above the expected return as
mandated by the Capital Asset Pricing Model (CAPM). A positive value indicates superior
performance of the portfolio.

Jensen’s Measure = Rp - E(Rp)

E(Rp) = Rf + βp (Rm - Rf)

Where

Rp = Portfolio average return

E(Rp) = Expected return of portfolio

Rm = Average market return

Rf = Risk free rate of return = (Latest MIBOR rate =7.21)

βp = Beta co-efficient of the portfolio.

The table below shows the calculation of expected return of portfolios.

TABLE 4.9.3: CALCULATION OF EXPECTED RETURN OF PORTFOLIOS

Portfolio Rf Βp Rm R m - Rf E(Rp)

Optimal Portfolio 7.21 0.452 10.2476 3.0376 8.58

Portfolio#2
(Portfolio with same
7.21 1.172 10.2476 3.0376 10.77
return as optimal
portfolio)
Portfolio #3
(Portfolio with same risk 7.21 0.53 10.2476 3.0376 8.82
as optimal portfolio)

INFERENCE

The table 4.9.3 aboveshows the calculation of Jensen Measure o re portfolios.

74
 TABLE 4.9.3: CALCULATION OF JENSON’S MEASURE OF
PORTFOLIOS

12

Portfolio Ri E(Rp) Rp - E(Rp) Rank

PORTFOLIO#1
25.72 8.58 17.14 1
Optimal Portfolio

PORTFOLIO#2
(Portfolio with same return 25.72 10.77 14.95 2
as optimal portfolio)

PORTFOLIO #3
(Portfolio with same risk as 12.21 8.82 3.39 3
optimal portfolio)

INFERENCE

Jensen Measure is highest for Sharpe ‘s optimal portfolio indicating that the
performance of Sharpe ‘s optimal portfolio is superior to that of other portfolios.

75
 CHAPTER 5

FINDINGS, SUGGESTIONS AND CONCLUSION

5.1 FINDINGS

The study titled ―A study on construction of optimal portfolio of CNX Nifty shares
using Sharpe ‘s portfolio single index model‖ has following findings.

RISK AND RETURN ANALYSIS

RISK

 Tech Mahindra has highest risk (1762.49).

 Hindustan Uniliver (130.88) has lowest risk.

RETURN

 Sesa Sterlite has lowest return (-24.44 %).

 Asian Paints has highest return (42.05 %).

ALPHA

 Mahindra & Mahindra has highest Alpha (45.39).

 BHEL has lowest Alpha (-26.53).

BETA

 Maruti Suzuki has highest Beta (2.06).

 Mahindra &Mahindra has lowest Beta (-1.70).

76
SYSTEMATIC & UNSYSTEMATIC RISK OF SECURITIES

SYSTEMATIC RISK

 Axis bank has highest systematic risk (975.06 %).

 Hindustan Unilever has minimum systematic risk (0.02 %).

UNSYSTEMATIC RISK

 Asian Paints has highest unsystematic risk (3317.02).

 Dr. Reddy ‘s Lab has lowest unsystematic risk (100.77).

77
PORTFOLIO CONSTRUCTION & OPTIMIZATION

An optimal portfolio and two other portfolios with different criteria were
constructed and their risk and return has been evaluated. The optimal portfolio had 14
shares with a cut of point of 25.1394. Two other Portfolios were constructed by using 14
nos. of randomly selected Nifty Shares each such a way that Portfoilo#2 has same return
as that of Optimal Portfolio (25.72 %) and Portfolio #3 had same risk as that of Optimal
Portfolio (72.69%).

RETURN & RISK

 Optimal portfolio has a return of 25.72 % and a risk of 72.69 %.

 Portfoilo#2 has same return of 25.72 % but its risk was very high
(432.50%).

 Portfolio #3 has a risk of 72.69% (same as optimal portfolio) but its

return is very low (12.21%).

PORTFOLIO EVALUATION

Three methods were employed for evaluation of portfolios, i.e., Sharpe ‘s Ratio,
Trainor ‘s ratio and Jensen Measure.

 Sharpe ‘s ratio indicated that optimal portfolio has highest rank (0.255).

 Treynor ‘s ratio indicated that the optimal portfolio is the best portfolio
(40.95%).

 Jenson ‘s measure indicated that optimal portfolio is the best portfolio

with maximum extra return (17.14%).

 All those evaluation methods proved that optimal portfolio is the best
portfolio.

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5.2 SUGGESTIONS

 Since the equity markets are highly volatile, the investors must strive to
maximize return with minimum risk.

 This study has revealed that the Sharpe ‘s single index model of portfolio
optimization is very simple and most effective tool for delivering highest
risk adjusted return. Hence, investors are advised to use this financial
model to improve the performance of their portfolio and achieve the
investment objective of maximizing return and minimizing risk.

 The study can be also extended to include a midcap and small cap stock
which offers higher return than large cap stocks.

 Statistical tools such as ‗t- test ‘can be used for proving the superiority of
optimal portfolio constructed using Sharpe ‘s single index model.

 The investors must strive to maximize return with minimum risk.

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5.3 CONCLUSION

Since there are thousands of companies listed in the stock market, the equity
selection and portfolio construction is a highly complex task. The study titled “Studyon
construction of optimal portfolio of CNX Nifty shares using Sharpe’s portfolio single
index model” was a successful attempt to simplify the task of equity selection, portfolio
construction and portfolio evaluation.

This study gives a practical knowledge of construction of portfolio by considering

risk and reward factors of security market. With the help of given project, I got an in
depth knowledge about the working of portfolio management. Also, I got an insight as too
how to invest in portfolio management. Which scheme provide better return as compared
to other and who are the portfolio management players in the Indian market.

I can be concluding from the project that future of portfolio management is bright
provided proper regulations prevail and investors needs are satisfied by providing variety
of scheme. The interest of investors is protected by SEBI. Portfolio management is
governed by SEBI act.

Due to the benefits, available to the individuals such as reduction in risk, expert
professional management, diversified portfolio, tax benefits etc. young generation (i.e.
age group bet 18-30) is willing to invest in different investment avenues through portfolio
manager or through mutual funds which are again managed by portfolio managers. On the
other hand, age group of 60 & above are least interested in making investment in different
avenues through portfolio.
.

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 BIBLIOGRAPHY

1. “Kothari C.R”,“Research Methodology, Methods and Techniques”, New Age International

Pvt.Ltd., New Delhi, 2004.

2. “Gupta K Shashi, Gupta Neeti”, “Financial Management”, Kalyani Publishers, Ludhiana, 2015.

3. “Dr. Prasanna Chandra”, “Investment Analysis and Portfolio Management”, Tata McGraw- Hill
Publishing Company Limited, 2004.

4. “Pandian Punithavathy, Meara E, Machiraju H.R”, “Investment Management”, Vikas Publishing

House PVT LTD, New Delhi, 2013.

5. “Kevin’s “,“Portfolio Management”,Prentice Hall of India Pvt. Ltd, New Delhi, 2003.

MAGAZINES, JOURNALS & NEWS PAPERS

1. Chauhan. A. Apurva, A study on usage of Sharpe’s single index model in Portfolio Construction,
Global Journal for Research Analysis, 2016

WEBSITES

1. http://www.nseindia.com

2. http://www.bse.com

3. http://www.investopedia.com

4. http:// www.cochinstockexchange.com

5. http://www.fidelity.com

6. http://www.finance.yahoo.com

7. http://www.angelbroking.com

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