A study on security analysis

A Study on Security
Analysis and Portfolio
Management
Prepared By
Himanshu Sharma
Ph 8130458545
E-mail Himanshus98@gmail.com

TABLE OF CONTENTS
1. Declaration
2. Acknowledgement
3. Certificate
4. Preface
5. Objectives of Study
6. Limitations of Study
7. Research Methodology
8. Chapter 1.
Introduction
1.1. History of Stock Exchanges
1.2. Profile of National Stock Exchange
1.3. Profile of Bombay Stock Exchange
9. Chapter 2.
Security Analysis
2.1. Fundamental Analysis
2.2. Technical Analysis
2.3. Random Walk Theory
10. Chapter 3.
Portfolio Management
3.1. Risk
3.2. Return
3.2.1. Return on Portfolio
3.3. Portfolio Construction
11. Chapter 4.
Literature Review of Portfolio Management
4.1. Modern Portfolio Approach (Markowitz Theory)
4.2. Capital Market Theory
4.3. Portfolio Analysis
12. Chapter 5
Company Profile (Aditya Birla Money Ltd.)
5.1. Management
5.2. Board of Directors
5.3. Industry Profile
13. Chapter 6
Practical Study of Some Selected Scrips
6.1. Interpretation (Findings)
14. Chapter 7.
7.1. Conclusion
7.2. Suggestion
7.3. Questionnaire
7.4. Bibliography

PREFACE
Portfolio management can be defined and used in many ways, because the basic meaning of
the word is “combination of the various things keeping intact”. So, I considered and
evaluated this from the perspective of the investment part in the securities segment.
From the investor point of view this portfolio followed by him is very important since
through this way one can manage the risk of investing in securities and thereby managing to
get good returns from the investment in diversified securities instead of putting all the
money into one basket. Now a day’s investors are very cautious in choosing the right
portfolio of securities to avoid the risks from the market forces and economic forces. So, this
topic is chosen because in portfolio management one must follow certain steps in choosing
the right portfolio in order to get good and effective returns by managing all the risks.
This topic covers how a particular portfolio has to be chosen concerning all the securities
individual return and there by arriving at the overall portfolio return. This also covers the
various techniques of evaluation of the portfolio with respect to all the uncertainties and
gives an edge to select the right one. The purpose of choosing this topic is to know how the
portfolio management has to be done in arriving at the effective one and at the same time
make aware the investor to choose the securities which they want to put in their portfolio.
This also gives an edge in arriving at the right portfolio in consideration to different
securities rather than one single security. The project is undertaken for the study of my
subject thoroughly while understanding the different case studies for the better
understanding of the investor and myself.

OBJECTIVES OF THE STUDY
 To make an in detailed study on the overall concepts of the portfolio management.
 To study and understand Security Analysis Concepts.
 To find out the various factors that an investor should take into consideration to
make proper investment decisions.
 To do an in-depth analysis of the risk and return characteristics of stocks related to
different industries and different companies.
 To help the investors to decide the effective portfolio of securities.
 To select an optimum portfolio of securities.
LIMITATIONS OF THE STUDY
 The data collected is basically confined to secondary sources, with very little amount
of primary data associated with the project.
 There is a constraint with regard to 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.

RESEARCH METHODOLOGY
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.

Chapter 1
INTRODUCTION
History of Stock Exchanges
The only stock exchanges operating in the 19th century were those of Bombay set up in
1875 and Ahmedabad set up in 1894. These were Efficient Market Hypothesis organized as
voluntary non-profit-making association of brokers to regulate and protect their interests.
Before the control on securities trading became a central subject under the constitution in
1950, it was a state subject and the Bombay Securities Contracts (Control) Act of 1925 used
to regulate trading in securities. Under this Act, The Bombay Stock Exchange was recognized
in 1927 and Ahmedabad in 1937.
During the war boom, several stock exchanges were organized even in Bombay, Ahmedabad
and other centers, but they were not recognized. Soon after it became a central subject,
central legislation was proposed, and a committee headed by A.D.Gorwala went into the bill
for securities regulation. Based on the committee's recommendations and public discussion,
the Securities Contracts (Regulation) Act became law in 1956.
Definition of Stock Exchange:
"Stock exchange means a body of individuals whether incorporated or not, constituted for
the purpose of assisting, regulating or controlling the business of buying, selling or dealing in
securities."
It is an association of member brokers for the purpose of self-regulation and protecting the
interests of its members.
It can operate only, if it is recognized by the Government under the Securities Contracts
(Regulation) Act, 1956. The recognition is granted under section 3 of the Act by the central
government, Ministry of Finance.

Nature & Functions of Stock Exchange
There is an extraordinary amount of ignorance and of prejudice born out of ignorance with
regard to nature and functions of Stock Exchange. As economic development proceeds, the
scope for acquisition and ownership of capital by private individuals also grow. Along with it,
the opportunity for Stock Exchange to render the service of stimulating private savings and
challenging such savings into productive investment exists on a vastly great scale. These are
services, which the Stock Exchange alone can render efficiently.
The Stock Exchanges in India have an important role to play in the building of a real
shareholders democracy. To protect the interest of the investing public, the authorities of
the Stock Exchanges have been increasingly subjecting not only its members to a high
degree of discipline, but also those who use its facilities-Joint Stock Companies and other
bodies in whose stocks and shares it deals.
The activities of the Stock Exchange are governed by a recognized code of conduct apart
from statutory regulations. Investors both actual and potential are provided, through the
daily Stock Exchange quotations. The job of the Stock Exchange and its members is to satisfy
the need of market for investments to bring the buyers and sellers of investments together,
and to make the 'Exchange' of Stock between them as simple and fair as possible.
Need for a Stock Exchange
As the business and industry expanded and economy became more complex in nature, a
need for permanent finance arose. Entrepreneurs require money for long term needs,
whereas investors demand liquidity. The solution to this problem gave way for the origin of
'stock exchange', which is a ready market for investment and liquidity.
As per the Securities Contract Act, 1956, "Stock Exchange" means a body of individuals
whether incorporated or not constituted for the purpose of regulating or controlling the
business of buying, selling or dealing in securities".

By-Laws
Besides the above act, the securities contracts (regulation) rules were also made in 1957 to
regulate certain matters of trading on the stock exchanges. There are also by-laws of
exchanges, which are concerned with the following subjects.
Opening / closing of the stock exchanges, timing of trading, regulation of blank transfers,
regulation of badla or carryover business, control of the settlement and other activities of
the stock exchange, fixation of margins, fixation of market prices or making up prices,
regulation of taravani business (jobbing), etc., regulation of brokers trading, Brokerage
charges, trading rules on the exchange, arbitration and settlement of disputes, Settlement
and clearing of the trading etc.
Regulation of Stock Exchanges:
The Securities Contracts (Regulation) act is the basis for operations of the stock exchanges in
India. No exchange can operate legally without the government permission or recognition.
Stock exchanges are given monopoly in certain areas under section 19 of the above Act to
ensure that the control and regulation are facilitated. Recognition can be granted to a stock
exchange provided certain conditions are satisfied and the necessary information is supplied
to the government. Recognitions can also be withdrawn, if necessary. Where there are no
stock exchanges, the government can license some of the brokers to perform the functions
of a stock exchange in its absence.
Securities Contracts (Regulation) Act, 1956:
SC(R)A aims at preventing undesirable transactions in securities by regulating the business
of dealing therein by providing for certain other matters connected therewith. This is the
principal Act, which governs the trading of securities in India.

The term "securities" has been defined in the SC(R)A. As per Section 2(h), the 'Securities'
include:
1. Shares, scripts, stocks, bonds, debentures, debenture stock or other marketable
securities of a like nature in or of any incorporated company or other body corporate
2. Derivative
3. Units or any other instrument issued by any collective investment scheme to the
investors in such schemes.
4. Government securities
5. Such other instruments as may be declared by the Central Government to be
securities.
6. Rights or interests in securities.
Securities and Exchange Board of India (SEBI)
Securities and Exchange Board of India (SEBI) setup as an autonomous regulatory authority
by the Government of India in 1988 "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". It is empowered by two acts namely the SEBI
Act, 1992 and the Securities Contract (Regulation) Act, 1956 to perform the function of
protecting investor's rights and regulating the capital markets.
The Ministry of Finance of the Government of India has overall administrative control over
its functions. On 30th January 1992, it was given a statutory status through an ordinance,
which later on was replaced by Act of Parliament known as Securities and Exchange Board
of India Act, 1992. The Securities and Exchange Board of India was established as an interim
administrative body on 12 April 1988 by the Government of India.
SEBI is considered as watchdog of the securities market.
Securities and Exchange Board of India (SEBI) regulatory reach has been extended to more
areas and there is a considerable change in the capital market. SEBI's annual report for
1997-98 has stated that throughout its six-year existence as a statutory body, it has sought

to balance the twin objectives of investor protection and market development. It has
formulated new rules and crafted regulations to foster development. Monitoring. and
surveillance was put in place in the Stock Exchanges in 1996-97 and strengthened in 1997-
98.
Reasons for the Establishment of SEBI:
During 1980s, there was tremendous growth in the capital market due to increasing
participation of public. This led to many malpractices like Rigging of prices, unofficial
premium on new issues, violation of rules and regulations of stock exchanges and listing
requirements, delay in delivery of shares etc. by the brokers, merchant bankers, companies,
investment consultants and others involved in the securities market.
This resulted in many investor grievances. Because of lack of proper penal provision and
legislation, the government and the stock exchanges were not able to redress these
grievances of the investors. This (necessitated a need for a separate regulatory body, and
hence Securities and Exchange Board of India was established.
Purpose and Role of SEBI:
The main objective is to create such an environment which facilitates efficient mobilization
and allocation of resources through the securities market. This environment consists of rules
and regulations, policy framework, practices and infrastructures to meet the needs of three
groups which mainly constitute the market i.e. issuers of securities (companies), the
investors and the market intermediaries.
(i) To the Issuers:
SEBI aims to provide a market place to the issuers where they can confidently look forward
to raising the required amount of funds in an easy and efficient manner.
(ii) To the Investors:
SEBI aims to protect the right and interest of the investors by providing adequate, accurate
and authentic information on a regular basis.

(iii) To the Intermediaries:
In order to enable the intermediaries to provide better service to the investors and the
issuers, SEBI provides a competitive, professionalised and expanding market to them having
adequate and efficient infrastructure.
Objectives of SEBI:
Following are the main objectives of SEBI:
1. Protection:
To guide, educate, and to protect the rights and interests of the investors.
2. Competitive and Professional:
To make the intermediaries like merchant bankers, brokers etc. competitive and
professional by regulating their activities and developing a code of conduct.
3. Prevention of Malpractices:
To prevent trading malpractices.
4. Balancing:
To establish a balance between statutory regulation and self-regulation by the securities
industry.
5. Orderly Functioning:
To promote orderly functioning of stock exchange and securities industry by regulating
them.
Salient Features of SEBI
 The SEBI shall be a body corporate by the name having perpetual succession and a
common seal with power to acquire, hold and dispose of property, both movable
and immovable, and to contract, and shall, by the said name, sue or by sued.

 The Head Office of the Board shall be at Bombay. The Board may establish offices at
other places in India. In Bombay, the Board is situated at Mittal Court, B- Wing, 224,
Nariman Point, Bombay-400 021.
 The chairman and the Members of the Board are appointed by the Central
Government.
 The general superintendence, direction and management of the affairs of the Board
are in a Board of Members, which may exercise all powers and do all acts and things
which may be exercised or done by that Board.
 The Government can prescribe terms of office and other conditions of service of the
Chairman and Members of the Board. The members can be removed under section 6
of the SEBI Act under specified circumstances.
 It is primary duty of the Board to protect the interest of the investor in securities and
to promote the development of and to regulate the securities market by such
measures, as it thinks fit.
Functions of SEBI
The functions of SEBI can be divided into three parts viz:
1. Regulatory Functions:
Regulatory functions of SEBI are as follows:
A. Registration of Brokers and Agents:
It registers brokers, sub-brokers, transfer agents, merchant banks etc.
B. Notifications of Rules and Regulations:
It notifies rules and regulations for the smooth functioning of all intermediaries in
the securities’ market.
C. Levying of Fees:
It levies fees, penalties and other charges for contravening its directions and orders.
D. Regulator of Investment Schemes:
It registers and regulates collective investment schemes and mutual funds.

E. Prohibits Unfair Trade Practices:
SEBI prohibits fraudulent and unfair trade practices.
F. Inspection and Enquiries:
It undertakes inspection and conducts enquiries & audit of stock exchange
G. Performing and Exercising Powers:
It performs & exercises such powers under Securities Contracts (Regulation) Act
1956, as have been delegated to it by the Government of India.
2. Development Functions:
Development functions of SEBI are as under:
A. Training to intermediaries:
It promotes training of intermediaries of the securities.
B. Promotion of fair trade:
It promotes fair trade practices by making underwriting optional.
C. Research:
It publishes information useful to all market participants for conducting research.
3. Protective Functions:
Protective Functions of SEBI are as under:
A. Prevents Insider Trading:
It does so by prohibiting insiders such as directors, promoters etc. to make profit
through trading of securities using confidential price sensitive information.
B. Prohibits Fraudulent and Unfair Trade Practices:
It prohibits fraudulent and unfair trade practices in the security market, such as price
rigging and sale or purchase of securities through misleading statements.
C. Promotes Fair Practices:

It promotes fair practices and code of conduct in the securities market e.g. it looks
after the interests of the debenture holders in terms of any mid-term revision of
interest rates etc.
D. Educates Investors:
It educates the investors through campaigns.

Profile of National Stock Exchange(NSE)
National Stock Exchange (NSE)
The NSE was incorporated in November 1992 with an equity capital of Rs.25crs. The
International Securities Consultancy (ISC) of Hong Kong helped in setting up NSE. ISC
prepared the detailed business plans and installation of hardware and software systems.
The promotions for NSE were Financial Institutions, Insurances Companies, Banks and SEBI
Capital Market Ltd., Infrastructure Leasing and Financial Services Ltd. and Stock Holding
Corporation Ltd.
It has been set up to strengthen the move towards professionalization of the capital market
as well as provide nationwide securities trading facilities to investors.
NSE is not an exchange in the traditional sense where brokers own and manage the
exchange. A two-tier administrative setup involving a company board and a governing board
of the exchange is envisaged.
NSE is a national market for shares of Public Sector Units Bonds, Debentures and
Government securities, since infrastructure and trading facilities are provided.
NSE-NIFTY:
The NSE on April 22, 1996 launched a new equity Index. The NSE-50. The new Index which
replaces the existing NSE-100 Index is expected to serve as an appropriate Index for the new
segment of futures and options.
"Nifty" means National Index for Fifty Stocks.
The NSE-50 comprises 50 companies that represent 20 broad Industry groups with an
aggregate market capitalization of around Rs.1,70,000 crs. All companies included in the

Index have a market capitalization in excess of Rs.500 crs each and should have traded for
85% of trading days at an impact cost of less than 1.5%.
The base period for the index is the close of prices on Nov3, 1995 which makes one year of
completion of operation of NSE's capital market segment. The base value of the Index has
been set at 1000.
NSE-MIDCAP Index:
The NSE midcap Index or the Junior Nifty comprises 50 stocks that represents 21 board
Industry groups and will provide proper representation of the midcap segment of the Indian
capital Market. All stocks in the Index should have market capitalization of greater than
Rs.200 crs and should have traded 85% of the trading days at an impact cost of less 2.5%.
The base period for the index is Nov 4, 1996 which signifies two years for completion of
operations of the capital market segment of the operation. The base value of the Index has
been set at 1000.
Average daily turnover of the present scenario 2,58,212 (Lacs) and number of average daily
trades 2,160 (Lacs).
At present, there are 23 stock exchanges recognized under the Securities Contract
(Regulation) Act, 1956. They are:

Stock Exchanges in India
S. No. NAME OF THE STOCK EXCHANGE YEAR
1 Bombay Stock Exchange 1875
2 Hyderabad Stock Exchange 1943
3 Ahmedabad Share and Stock Brokers Association 1957
4 Calcutta Stock Exchange Association Limited 1957
5 Delhi Stock Exchange Association Limited. 1957
6 Madras Stock Exchange Association Limited. 1957
7 Indoor Stock Brokers Association. 1958
8 Bangalore Stock Exchange. 1963
9 Cochin Stock Exchange. 1978
10 Pune Stock Exchange Limited. 1982
11 U.P Stock Exchange Association Limited. 1982
12 Ludhiana Stock Exchange Association Limited. 1983
13 Jaipur Stock Exchange Limited. 1984
14 Guwahati Stock Exchange Limited. 1984
15 Mangalore Stock Exchange Limited 1985
16 Maghad Stock Exchange Limited, Patna 1986
17 Bhubaneshwar Stock Exchange Association Limited 1989
18 Over the Stock Exchange Limited. 1989
19 Vadodara Stock Exchange Limited. 1991
20 Coimbatore Stock Exchange Limited. 1991
21 Meerut Stock Exchange Limited. 1991
22 National Stock Exchange Limited 1992
23 Integrated Stock Exchange. 1999
On July 9, 2007 SEBI has withdrawn its approval from Saurashtra Stock Exchange, Rajkot due
to its passive working. Hence the number of approved stock exchanges have come down to
23.

Profile of Bombay Stock Exchange(BSE)
Bombay Stock Exchange(BSE)
This Stock Exchange, Mumbai, popularly known as "BOMBAY STOCK EXCHANGE (BSE)" was
established in 1875 as ''The Native Share and Stock Brokers Association", as a voluntary non-
profit making association. It has evolved over the years into its present status as the
premiere Stock Exchange in the country. It may be noted that the Stock Exchange is the
oldest one in Asia, even older than the Tokyo Stock Exchange, which was founded in 1878.
The exchange, while providing an efficient and transparent market for trading in securities,
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 making available necessary informative inputs and conducting investor
education programmes.
A governing board comprising of 9 elected directors, 2 SEBI nominees, 7 public
representatives and an executive director is the apex body, which decides the policies and
regulates the affairs of the exchange.
The Executive director as the chief executive officer is responsible for the day to day
administration of the exchange.
BSE Indices:
In order to enable the market participants, analysts etc., to track the various ups and downs
in the Indian stock market, the Exchange introduced in 1986 an equity stock index called
BSE-SENSEX that subsequently became the barometer of the moments of the share prices in
the Indian stock market. It is a "Market capitalization-weighted" index of 30 component
stocks representing a sample of large, well established and leading companies. The base
year of SENSEX is 1978-79. The SENSEX is widely reported in both domestic and
international markets through print as well as electronic media.

SENSEX is calculated using a market capitalization weighted method. As per this
methodology, the level of the index reflects the total market value of all 30 component
stocks from different industries related to particular base period. The total market value of a
company is determined by multiplying the price of its stock by the number of shares
outstanding. Statisticians call an index of a set of combined variables (such as price and
number of shares) a composite Index. An Indexed number is used to represent the results of
this calculation in order to make the value easier to work with and track over a time. It is
much easier to graph a chart based on Indexed values than one based on actual values
world over majority of the well-known Indices are constructed using "Market capitalization
weighted method".
In practice, the daily calculation of SENSEX is done by dividing the aggregate market value of
the 30 companies in the Index by a number called the Index Divisor. The Divisor is the only
link to the original base period value of the SENSEX.
The Divisor keeps the Index comparable over a period of time and it is the reference point
for the entire Index maintenance adjustments. SENSEX is widely used to describe the mood
in the Indian Stock markets. Base year average is changed as per the formula:
Base year average is changed as per the formula
New base year average = old base year average *(new market value/old market value)

Chapter 2
SECURITY ANALYSIS
Definition:
For making proper investment involving both risk and return, the investor has to make study
of the alternative avenues of the investment-their risk and return characteristics and make a
proper projection or expectation of the risk and return of the alternative investments under
consideration. He has to tune the expectations to this preference of the risk and return for
making a proper investment choice. The process of analyzing the individual securities and
the market as a whole and estimating the risk and return expected from each of the
investments with a view to identify undervalues securities for buying and overvalues
securities for selling is both an art and a science that is what called security analysis.
Security:
The security has inclusive of shares, scripts, bonds, debenture stock or any other marketable
securities of like nature in or of any debentures of a company or body corporate, the
government and semi government body etc.
In the strict sense of the word, a security is an instrument of promissory note or a method of
borrowing or lending or a source of contributing to the funds need by a corporate body or
non-corporate body, private security for example is also a security as it is a promissory note
of an individual or firm and gives rise to claim on money. But such private securities of
private companies or promissory notes of individuals, partnership or firm to the intent that
their marketability is poor or nil, are not part of the capital market and do not constitute
part of the security analysis.

Analysis of securities:
Security analysis in both traditional sense and modern sense involves the projection of
future dividend or ensuring flows, forecast of the share price in the future and estimating
the intrinsic value of a security based on the forecast of earnings or dividend.
Security analysis in traditional sense is essentially on analysis of the fundamental value of
shares and its forecast for the future through the calculation of its intrinsic worth of share.
Modern security analysis relies on the fundamental analysis of the security, leading to its
intrinsic worth and also rise-return analysis depending on the variability of the returns,
covariance, safety of funds and the projection of the future returns.
If the security analysis based on fundamental factors of the company, then the forecast of
the share price has to take into account inevitably the trends and the scenario in the
economy, in the industry to which the company belongs and finally the strengths and
weaknesses of the company itself. Its management, promoters backward, financial results,
projection of expansion, term planning etc.
Approaches to Security Analysis:
 Fundamental Analysis
 Technical Analysis
 Efficient Market Hypothesis

FUNDAMENTAL ANALYSIS
It's a logical and systematic approach to estimating the future dividends & share price as
these two constitutes the return from investing in shares. According to this approach, the
share price of a company is determined by the fundamental factors affecting the Economy/
Industry/ Company such as Earnings Per Share, DIP ratio, Competition, Market Share,
Quality of Management etc. it calculates the true worth of the share based on its present
and future earning capacity and compares it with the current market price to identify the
mis-priced securities.
Fundamental analysis involves a three-step examination, which calls for:
1. Understanding of the macro-economic environment and developments.
2. Analyzing the prospects of the 9ndustry to which the firm belongs
3. Assessing the projected performance of the company.
Macro-Economic Analysis:
The macro-economy is the overall economic environment in which all firms operate. The key
variables commonly used to describe the state of the macro-economy are:
Growth Rate of Gross Domestic Product (GDP)
The Gross Domestic Product is measure of the total production of final goods and services in
the economy during a specified period usually a year. The growth rate 0 GDP is the most
important indicator of the performance of the economy. The higher the growth rate of GDP,
other things being equal, the more favorable it is for the stock market.
Industrial Growth Rate:
The stock market analysts focus more on the industrial sector. They look at the overall
industrial growth rate as well as the growth rates of different industries.

The higher the growth rate of the industrial sector, other things being equal, the more
favorable it is for the stock market.
Agriculture and Monsoons:
Agriculture accounts for about a quarter of the Indian economy and has important linkages,
direct and indirect, with industry. Hence, the increase or decrease of agricultural production
has a significant bearing on industrial production and corporate performance.
A spell of good monsoons imparts dynamism to the industrial sector and buoyancy to the
stock market. Likewise, a streak of bad monsoons casts its shadow over the industrial sector
and the stock market.
Savings and Investments:
The demand for corporate securities has an important bearing on stock price movements.
So, investment analysts should know what is the level of investment in the economy and
what proportion of that investment is directed toward the capital market. The analysts
should also know what the savings are and how the same are allocated over various
instruments like equities, bonds, bank deposits, small savings schemes, and bullion. Other
things being equal, the higher the level of savings and investments and the greater the
allocation of the same over equities, the more favorable it is for the stock market.
Government Budget and Deficit
Government plays an important role in most economies. The excess of government
expenditures over governmental revenues represents the deficit. While there are several
measures for deficit, the most popular measure is the fiscal deficit.
The fiscal deficit has to be financed with government borrowings, which is done in three
ways.
1. The government can borrow from the reserve bank of India.

2. The government can resort to borrowing in domestic capital market.
3. The government may borrow from abroad.
Investment analysts examine the government budget to assess how it is likely to impact on
the stock market.
Price Level and Inflation
The price level measures the degree to which the nominal rate of growth in GDP is
attributable to the factor of inflation. The effect of inflation on the corporate sector tends to
be uneven. While certain industries may benefit, others tend to suffer. Industries that enjoy
a strong market for their products and which do not come under the purview of price
control may benefit. On the other hand, industries that have a weak market and which
come under the purview of price control tend to lose. Overall, it appears that a mild level of
inflation is good for the stock market.
Interest Rate
Interest rates vary with maturity, default risk, inflation rate, produc6ivity of capital, special
features, and so on. A rise in interest rates depresses corporate profitability and also leads
to an increase in the discount rate applied by equity investors, both of which have an
adverse impact on stock prices. On the other hand, a fall in interest rates improves
corporate profitability and also leads to a decline in the discount rate applied by equity
investors, both of which have a favorable impact on stock prices.
Balance of Payments, Forex Reserves, and Exchange Rates:
The balance of payments deficit depletes the forex reserves of the country and has an
adverse impact on the exchange rate; on the other hand, a balance of payments surplus
augments the forex reserves of the country and has a favorable impact on the exchange
rate.

Infrastructural Facilities and Arrangements:
Infrastructural facilities and arrangements significantly influence industrial performance.
More specifically, the following are important:
 Adequate and regular supply of electric power at a reasonable tariff.
 A well-developed transportation and communication system (railway transportation,
road network, inland waterways, port facilities, air links, and telecommunications
system).
 An assured supply of basic industrial raw materials like steel, coal, petroleum
products, and cement.
 Responsive financial support for fixed assets and working capital.
Sentiments:
The sentiments of consumers and businessmen can have an important bearing on economic
performance. Higher consumer confidence leads to higher expenditure on big-ticket items.
Higher business confidence gets translated into greater business investment that has a
stimulating effect on the economy. Thus, sentiments influence consumption and investment
decisions and have a bearing on the aggregate demand for goods and services.

TECHNICAL ANALYSIS
Technical analysis involves a study of market-generated data like prices and volumes to
determine the future direction of price movement. Technical analysis analyses internal
market data with the help of charts and graphs. Subscribing to the 'castles in the air'
approach, they view the investment game as an exercise in anticipating the behavior of
market participants. They look at charts to understand what the market participants have
been doing and believe that this provides a basis for predicting future behavior.
Definition:
" The technical approach to investing is essentially a reflection of the idea that prices move
in trends which are determined by the changing attitudes of investors toward a variety of
economic, monetary, political and psychological forces. The art of technical analysis- for it is
an art - is to identify trend changes at an early stage and to maintain an investment posture
until the weight of the evidence indicates that the trend has been reversed."
-Martin J. Pring
Charting techniques in technical analysis:
Technical analysis uses a variety of charting techniques. The most popular ones are:
 The Dow theory,
 Bar and line charts,
 The point and figure chart,
 The moving averages line and
 The relative strength lines.
The Dow theory

" The market is always considered as having three movements, all going at the same time.
The first is the narrow movement from day to day. The second is the short swing, running
from two weeks to a month or more; the third is the main movement, covering at least four
years in its duration."
- Charles H.DOW
The Dow Theory refers to three movements as:
(a) Daily fluctuations that are random day-to-day wiggles;
(b) Secondary movements or corrections that may last for a few weeks to some
months;
(c) Primary trends representing bull and bear phases of the market.
Bar and line charts
The bar chart is one of the simplest and commonly used tools of technical analysis, depicts
the daily price range along with the closing price. It also shows the daily volume of
transactions. A line chart shows the line connecting successive closing prices.
Point and figure chart:
On a point and figure chart only, significant price changes are recorded. It eliminates the
time scale and small changes and condenses the recording of price changes.
Moving average analysis:
A moving average is calculated by taking into account the most recent 'n' observations. To
identify trends technical analysis use moving averages analysis.
Relative strength analysis:

The relative strength analysis is based on the assumption that the prices of some securities
rise rapidly during the bull phase but fall slowly during the bear phase in relation to the
market as a whole. Technical analysts measure relative strength in different ways. a simple
approach calculates rates of return and classifies securities that have superior historical
returns as having relative strength. More commonly, technical analysts look at certain ratios
to judge whether a security or, for that matter, an industry has relative strength.
Technical Indicators:
In addition to charts, which form the mainstay of technical analysis, technicians also use
certain indicators to gauge the overall market situation. They are:
 Breadth indicators
 Market sentiment indicators
Breadth Indicators:
1. The Advance-Decline line:
The advance decline line is also referred as the breadth of the market. Its measurement
involves two steps:
a. Calculate the number of net advances/ declines on a daily basis.
b. Obtain the breadth of the market by cumulating daily net advances/ declines.
2. New Highs and Lows:
A supplementary measure to accompany breadth of the market is the high-low differential
or index. The theory is that an expanding number of stocks attaining new highs and a
dwindling number of new lows will generally accompany a raising market. The reverse holds
true for a declining market.
Market Sentiment Indicators:
1. Short-Interest Ratio:

The short interest in a security is simply the number of shares that have been sold short but
yet bought back.
The short interest ratio is defined as follows:
volumetradingdailyAveragge
shortsoldsharesofnumberTotal
ratiointerestShort 
2. PUT /CALL Ratio:
Another indicator monitored by contrary technical analysis is the put / call ratio. Speculators
buy calls when they are bullish and buy puts when they are bearish. Since speculators are
often wrong, some technical analysts consider the put / call ratio as a useful indicator. The
put / call ratio is defined as:
purchasedcallsofNumber
purchasedputsofNumbers
ratioCallPut / 
3. Mutual-Fund Liquidity:
If mutual fund liquidity is low, it means that mutual funds are bullish. So, constrains argue
that the market is at, or near, a peak and hence is likely to decline. Thus, low mutual fund
liquidity is considered as a bearish indicator.
Conversely when the mutual fund liquidity is high, it means that mutual funds are bearish.
So, constrains believe that the market is at, or near, a bottom and hence is poised to rise.
Thus, high mutual fund liquidity is considered as a bullish indication.

RANDOM WALK THEORY
Fundamental analysis tries to evaluate the intrinsic value of the securities by studying the
various fundamental factors about Economy, Industry and company and based on this
information, it categories the securities as wither undervalued or overhauled. Technical
analysis believes that the past behavior of stock prices gives an indication of the future
behavior and that the stock price movement is quite orderly and random. But, a new theory
known as Random Walk Theory, asserts that share price movements represent random walk
rather than an orderly movement.
According to this theory, any change in the stock prices is the result of information about
certain changes in the economy, industry and company. Each price change is independent of
other price changes as each change is caused by a new piece of information. These changes
in stock's prices reveals the fact that all the information on changes in the economy,
industry and company performance is fully reflected in the stock prices i.e., the investors
will have full knowledge about the securities. Thus, the Random Walk Theory is based on
the hypothesis that the Stock Markets are efficient. Hence, later it is known as Efficient
Market Hypothesis.
Efficient Market Hypothesis
This theory presupposes that the stock Markets are so competitive and efficient in
processing all the available information about the securities that there is "immediate price
adjustment" to the changes in the economy, industry and company. The Efficient Market
Hypothesis model is actually concerned with the speed with which information is
incorporated into the security prices.
The Efficient Market Hypothesis has three Sub-hypotheses: -

a. Weakly Efficient: -
This form of Efficient Market Hypothesis states that the current prices already fully
reflect all the information contained in the past price movements and any new price
change is the result of a new piece of information and is not related! Independent of
historical data. This form is a direct repudiation of technical analysis.
b. Semi-Strongly Efficient: -
This form of Efficient Market Hypothesis states that the stock prices not only reflect
all historical information but also reflect all publicly available information about the
company as soon as it is received. So, it repudiates the fundamental analysis by
implying that there is no time gap for the fundamental analyst in which he can trade
for superior gains, as there is an immediate price adjustment.
c. Strongly Efficient: -
This form of Efficient Market Hypothesis states that the market -cannot be beaten by
using both publicly available information as well as private or insider information.
But, even though the Efficient Market Hypothesis repudiates both Fundamental and
Technical analysis, the market is efficient precisely because of the organized and
systematic efforts of thousands of analysts undertaking Fundamental and Technical
analysis. Thus, the paradox of Efficient Market Hypothesis is that both the analysis is
required to make the market efficient and thereby validate the hypothesis.

Chapter 3
PORTOFOLIO MANAGEMENT
Definition:
A portfolio is a collection of investments held by an institution or a private individual. In
building up an investment portfolio a financial institution will typically conduct its own
investment analysis, whilst a private individual may make use of the services of a financial
advisor or a financial institution which offers portfolio management services. Holding a
portfolio is part of an investment and risk-limiting strategy called diversification. By owning
several assets, certain types of risk (in particular specific risk) can be reduced. The assets in
the portfolio could include stocks, bonds, options, warrants, gold certificates, real estate,
futures contracts, production facilities, or any other item that is expected to retain its value.
Portfolio management involves deciding what assets to include in the portfolio, given the
goals of the portfolio owner and changing economic conditions. Selection involves deciding
what assets to purchase, how many to purchase, when to purchase them, and what assets
to divest. These decisions always involve some sort of performance measurement, most
typically expected return on the portfolio, and the risk associated with this return (i.e. the
standard deviation of the return). Typically, the expected returns from portfolios, comprised
of different asset bundles are compared.
The unique goals and circumstances of the investor must also be considered. Some
investors are more risk averse than others. Mutual funds have developed particular
techniques to optimize their portfolio holdings.

Thus, portfolio management is all about strengths, weaknesses, opportunities and threats in
the choice of debt vs. equity, domestic vs. international, growth vs. safety and numerous
other trade-offs encountered in the attempt to maximize return at a given appetite for risk.
Aspects of Portfolio Management:
Basically, portfolio management involves
 A proper investment decision making of what to buy & sell
 Proper money management in terms of investment in a basket of assets so as to
satisfy the asset preferences of investors.
 Reduce the risk and increase returns.
Objectives of Portfolio Management:
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.
Need for 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 affected 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 a large number of shares of companies in different
regions, in different industries or those producing different types of product lines. Modern
theory believes in the perspectives of combination of securities under constraints of risk and
return.
Elements:
Portfolio Management is an on-going process involving the following basic tasks.
 Identification of the investors objective constrains and preferences which help
formulated the invest policy.
 Strategies are to be developed and implemented in tune with invest policy
formulated. This will help the selection of asset classes and securities in each class
depending upon their risk-return attributes.

 Review and monitoring of the performance of the portfolio by continuous overview
of the market conditions, company’s performance and investor’s circumstances.
 Finally, the evaluation of portfolio for the results to compare with the targets and
needed adjustments have to be made in the portfolio to the emerging conditions
and to make up for any shortfalls in achievements (targets).
Schematic diagram of stages in portfolio management:

Process of portfolio management:
The Portfolio Program and Asset Management Program both follow a disciplined process to
establish and monitor an optimal investment mix. This six-stage process helps ensure that
the investments match investor’s unique needs, both now and in the future.
Specification and
quantification of
investor
objectives,
constraints, and
preferences
Portfolio policies
and strategies
Capital market
expectations
Relevant
economic, social,
political sector
and security
considerations
Monitoring investor
related input factors
Portfolio construction
and revision asset
allocation, portfolio
optimization, security
selection,
implementation and
execution
Monitoring
economic and
market input factors
Attainment of
investor
objectives
Performance
measurement

1. Identify Goals and Objectives:
When will you need the money from your investments? What are you saving your
money for? With the assistance of financial advisor, the Investment Profile Questionnaire
will guide through a series of questions to help identify the goals and objectives for the
investments.
2. Determine Optimal Investment Mix:
Once the Investment Profile Questionnaire is completed, investor’s optimal investment
mix or asset allocation will be determined. An asset allocation represents the mix of
investments (cash, fixed income and equities) that match individual risk and return
needs.
This step represents one of the most important decisions in your portfolio construction,
as asset allocation has been found to be the major determinant of long-term portfolio
performance.

3. Create a Customized Investment Policy Statement
When the optimal investment mix is determined, the next step is to formalize our
goals and objectives in order to utilize them as a benchmark to monitor progress and
future updates.
4. Select Investments
The customized portfolio is created using an allocation of select QFM Funds. Each
QFM Fund is designed to satisfy the requirements of a specific asset class and is
selected in the necessary proportion to match the optimal investment mix.
5. Monitor Progress
Building an optimal investment mix is only part of the process. It is equally important
to maintain the optimal mix when varying market conditions cause investment mix
to drift away from its target. To ensure that mix of asset classes stays in line with
investor’s unique needs, the portfolio will be monitored and rebalanced back to the
optimal investment mix.
6. Reassesses Needs and Goals
Just as markets shift, so do the goals and objectives of investors. With the flexibility
of the Portfolio Program and Asset Management Program, when the investor’s
needs or other life circumstances change, the portfolio has the flexibility to
accommodate such changes.

RISK
Risk refers to the probability that the return and therefore the value of an asset or security
may have alternative outcomes. Risk is the uncertainty (today) surrounding the eventual
outcome of an event which will occur in the future. Risk is uncertainty of the income/capital
appreciation or loss of both. All investments are risky. The higher the risk taken, the higher
is the return. But proper management of risk involves the right choice of investments whose
risks are compensation.
Types of Risk:
1. Systematic risk:
The systematic risk affects the entire market often we read in the newspaper that
the stock market is in the bear hug or in the bull grip. This indicates that the entire
market is moving in a particular direction either downward or upward. The economic
conditions, political situations and the sociological changes affect the security
market. The recession in the economy affects the profit prospects of the industry
and the stock market. The systematic risk is further divided into three types they are
as follows:
A. Market risk:
Jack Clark Francis has defined market risk as that portion of total variability of
return caused by the alternative forces of bull and bear markets. The forces that
affect the stock market are tangible and intangible events are real events such as
earthquake, war, and political uncertainty ad fall in the value of currency.
B. Interest rate risk:
Interest rate risk is the variation in the single period rates of return caused by the
fluctuations in the market interest rate. Most commonly interest rate risk affects
the price of bonds, debentures and stocks. The fluctuations on the interest rates

are caused by the changes in the government policy and the changes that occur
in the interest rate of the treasury bills and government bonds.
C. Purchasing power risk:
Variations in the returns are caused also by the loss of purchasing power of
currency. Inflation is a reason behind the loss of purchasing power. The level of
inflation proceeds faster than the increase in capital value. Purchasing power risk
is the probable loss in the purchasing power of the returns to be received.
2. Unsystematic risk:
As already mentioned, unsystematic risk is unique and peculiar to a firm or an
industry. Unsystematic risk stem from managerial inefficiency, ethnological change
in the production process, availability of raw material, changes in the consumer
preference, and labor problems. The nature and the 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.
A. Business risk:
Business risk is that position 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 the growth and stability of the earnings. The
variation in the expected operating income indicates the business risk. Business
risk can be divided into:
 External business risk
 Internal business risk
I) Internal business Risk: This risk is associated with the optional
efficiency of the firm. The following are the few:
 Fluctuations in the sales
 Research and development
 Personal development
 Fixed cost

 Single product
ii) External risk: This risk is the result of the operating conditions
imposed on the firm by circumstances beyond its control. The external
environment in which it operated exerts some pressure on the firm.
 Social and regularity factors
 Political risk
 Business cycle
B. Financial risk:
This risk relates to the method of financing, adopted by the company, high
leverage lending to larger debt servicing problems or short-term liquidity
problems due to bad debts, delayed receivables and fall in current assets or rise
in current liabilities. These problems could no doubt be solved, but they may lead
to fluctuations in the earnings, profits and dividends to shareholders. Sometimes,
if the company runs into losses or reduced profits, these may lead to fall in
returns to investors or negative returns. Proper financial planning and other
financial adjustments can be used to correct this risk and as such it is
controllable.
C. Credit or default risk:
The borrower or issuer of securities may become insolvent or may default, or
delay the payments due, such as interest installments or principle repayments.
The borrower’s credit rating might have fallen suddenly and he became default
prone and in its extreme from it may lead to insolvency or bankruptcies. In such
cases, the investor may get no return or negative returns. An investment in a
healthy company’s share might turn out to be a waste paper, if within a short
span, by the deliberate mistakes of management or acts of God, the company
became sick and its share price tumbled below its face price.

RETURN
Return-yield or return differs from the nature of instruments, maturity period and the
creditor or debtor nature of the instrument and a host of other factors. The most important
factor influencing return is risk return is measured by taking the price income plus the price
change.
Portfolio Risk:
Risk on portfolio is different from the risk on individual securities. This risk is reflected by in
the variability of the returns from zero to infinity. The expected return depends on
probability of the returns and their weighted contribution to the risk of the portfolio.
RETURN ON PORTFOLIO
Each security in a portfolio contributes returns in the proportion of its investment in
security. Thus, the portfolio of expected returns, from each of the securities with weights
representing the proportionate share of security in the total investments.
Risk-Return Relationship:
The risk/return relationship is a fundamental concept in not only financial analysis, but in
every aspect of life. If decisions are to lead to benefit maximization, it is necessary that
individuals/institutions consider the combined influence on expected (future) return or
benefit as well as on risk/cost. The requirement that expected return/benefit be
commensurate with risk/cost is known as the "risk/return trade-off" in finance. All
investments have some risks. An investment in shares of companies has its own risks or
uncertainty. These risks arise out of variability of returns or yields and uncertainty of

appreciation or depreciation of share prices, loss of liquidity etc. and the overtime can be
represented by the variance of the returns. Normally, higher the risk that the investors take,
the higher is the return.
GRAPHICAL REPRESENTATION OF RISK AND RETURN ANALYSIS
PORTFLIO CONSTRUCTION
Portfolio is combination of securities such as stocks, bonds and money market instruments.
The process of blending together the broad assets classes so as to obtain optimum return
with minimum risk is called portfolio construction.
Minimization of risks:
The company specific risks (unsystematic risks) can be reduced by diversifying into a few
companies belonging to various industry groups, asset group or different types of

instruments like equity shares, bonds, debentures etc. thus, asset classes are bank deposits,
company deposits, gold, silver, land, real estate, equity shares etc. industry group like tea,
sugar paper, cement, steel, electricity etc. Each of them has different risk – return
characteristics and investments are to be made, based on individual’s risk preference. The
second category of risk (systematic risk) is managed by the use of beta of different company
shares.
Approaches in portfolio construction
Commonly there are two approaches in the construction of the portfolio of securities
viz.,
 Traditional approach
 Markowitz efficient frontier approach.
In the traditional approach, investors need in terms of income and capital appreciation are
evaluated and then appropriate securities are selected to, meet the needs of investors. The
common practice in the traditional approach is to evaluate the entire financial plan of the
individuals. In the modern approach, portfolios are constructed to maximize the expected
return for a given level of risk. It views portfolio construction in terms of the expected
return and the risk associated with obtaining the expected return.
Efficient portfolio:
To construct an efficient portfolio, we have to conceptualize various combinations of
investments in a basket and designate them as portfolio one to ‘N’. Then the expected
returns from these portfolios are to be worked out and then portfolios are to be estimated
by measuring the standard deviation of different portfolio returns. To reduce the risk,
investors have to diversify into a number of securities whose risk – return profiles vary.
A single asset or a portfolio of assets is considered to be “efficient” if no other asset offers
higher expected return with the same risk or lower risk with the same expected return. A

portfolio is said to be efficient when it is expected to yield the highest returns for the level
of risk accepted or, alternatively, the smallest portfolio risk or a specified level of expected
return.
Main features of efficient set of portfolios:
 The investor determines a set of efficient portfolios from a universe of ‘n’ securities and
an efficient set of portfolios is the subset of ‘n’ security universe.
 The investor selects the particular efficient that provides him with most suitable
combination of risk and return.

Chapter 4
Literature Review of Portfolio Management
Portfolio theory was introduced by Harry Markowitz (1952) with his paper on “portfolio
selection”. Before this work, investors focused on assessing the risks and benefits of
individual securities. Investment analysis identified securities that offered the most
promising opportunities for gain with the least amount of risk and then constructed a
portfolio from these securities. This approach resulted in a set of securities that involved, for
example, the pharmaceutical industry or the automotive industry.
Markowitz instead suggested that investors focus on selecting portfolios based on their
overall risk- reward characteristics, rather than only compiling portfolios from securities that
had attractive risk-reward characteristics. Markowitz noted that if single period returns for
various securities were treated as random variables they could be assigned expected values,
standard deviations and correlations. This led to the ability to calculate the expected return
and volatility of any portfolio constructed with these securities.
He connected linear programming and investments, noting that the desired output is a
higher return, while the cost to be minimized is the volatility of the return. To construct this
model, the expected return of each potential component of the portfolio was required,
along with determination of the expected volatility of each component’s return, and the
expected correlation of each component with every other component. To
Determine these returns; Markowitz suggested the use of the observed values for the past
period.
Markowitz’s model identified the various components that will yield the best trade-offs
between return and volatility for the portfolio. certain portfolios would optimally balance

risk and reward, which Markowitz called an “efficient frontier” of portfolios. The investor
than should select a portfolio that lies on the “efficient frontier”, as each portfolio would
offer the maximum possible expected return for a given level of risk. This model laid the
foundation for the development of the portfolio theory, although Markowitz acknowledged
that anticipating the future could be as much an art as of science.
Tobin (1958) expanded on Markowitz work and added a risk-free asset to the analysis in
order to leverage or de-leverage, as appropriate portfolios on the “efficient frontier” leading
to the super-efficient portfolio and capital market line. With leverage, portfolios on the
capital market line could outperform portfolios on the efficient frontier. Sharpe (1964) then
prepared a capital asset pricing model that noted that all the investors should hold the
market portfolio, whether leveraged or de- leveraged, with positions on the risk-free assets.
However even earlier Bernoulli (1738), in an article about the St. Petersburg paradox, stated
that risk averse investors should diversify. Bernoulli explained that goods that are exposed
to some small danger should be divided into several portions rather than grouping them all
together as a single unit. Markowitz (1999) later noted that the Bernoulli’s work was
superseded by that of William Shakespeare in the merchant of Venice, Act 1, scene no1, in
which Antonio said:
“ ………. I thank my fortune for it
My ventures are not in one bottom trusted
Nor to one place; nor is my whole estate
Upon the fortune of this present year……”
Markowitz at this time pointed though that while diversification would reduce risk, it still
could not eliminate risk. He stated that an investor should maximize the expected portfolio
return, while minimizing expected variance return. One stock might provide long-term
growth while another might generate short term dividends. Some stocks should be part of
the portfolio in order to insulate it from wide market fluctuations.

Markowitz’s approach is known common among institutional portfolio managers to
structure their portfolios and measure their performance and is used to manage the
portfolios of ordinary investors. Its extension has led to increasingly refined theories of the
effects of risks on valuation. The mathematics of portfolio theory are used extensively in
financial risk management as financial portfolio managers concentrate their efforts on
achieving the most optimal trade-offs between risk and return, taking into account the
different levels of risk tolerance of different investors. The portfolio model therefore strives
to obtain the maximum return with minimum risk.
Portfolio managers thus estimate expected returns, standard deviations and correlations.
The mean is the expected returns of each potential project and the variance or the standard
deviation measures the risk associated with the portfolio.
In 1990, Markowitz along with Merton miller, William Sharpe shared a noble prize for their
work on a theory of portfolio selection. Portfolio theory provides a context to help
understand the interactions of systematic risk and reward. It has helped the Sharpe how
institutional portfolios are managed and fostered the use of passive investment
management techniques.

Modern Portfolio Approach
MARKOWITZ MODEL
Harry M. Markowitz is credited with introducing new concept of risk measurement and their
application to the selection of portfolios. He started with the idea of risk aversion of
investors and their desire to maximize expected return with the least risk.
Markowitz used mathematical programming and statistical analysis in order to arrange for
the optimum allocation of assets within portfolio. To reach this objective, Markowitz
generated portfolios within a reward-risk context. In other words, he considered the
variance in the expected returns from investments and their relationship to each other in
constructing portfolios. In essence, Markowitz's model is a theoretical framework for the
analysis of risk return choices. Decisions are based on the concept of efficient portfolios.
A portfolio is efficient when it is expected to yield the highest return for the level of risk
accepted or, alternatively, the smallest portfolio risk or a specified level of expected return.
To build an efficient portfolio an expected return level is chosen, and assets are substituted
until the portfolio combination with the smallest variance at the return level is found. As
this process is repeated for other expected returns, set of efficient portfolios is generated.
Assumptions
The Markowitz model is based on several assumptions regarding investor behavior:

i) Investors consider each investment alternative as being represented by a
probability distribution of expected returns over some holding period.
ii) Investors maximize one period-expected utility and possess utility curve,
which demonstrates diminishing marginal utility of wealth.
iii) Individuals estimate risk on the basis of the variability of expected returns.
iv) Investors base decisions solely on expected return and variance (or standard
deviation) of returns only.
v) For a given risk level, investors prefer high returns to lower returns. Similarly,
for a given level of expected return, investor prefer less risk to more risk.
Under these assumptions, a single asset or portfolio of assets is considered to be "efficient"
if no other asset or portfolio of assets offers higher expected return with the same (or
lower) risk or lower risk with the same (or higher) expected return.
Markowitz Diversification
Markowitz postulated that diversification should not only aim at reducing the risk of a
security by reducing its variability or standard deviation but by reducing the covariance or
interactive risk of two or more securities in a portfolio.
As by combination of different securities, it is theoretically possible to have a range of risk
varying from zero to infinity. Markowitz theory of portfolio diversification attached
importance to standard deviation to reduce it to zero, if possible.
Efficient frontier:
As for Markowitz model minimum variance portfolio is used for determination of proportion
of investment in first security and second security. It means a portfolio consists of two
securities only. When different portfolios and their expected return and standard deviation
risk rates are given for determination of best portfolio, efficient frontier is used.

Efficient frontier is graphical representation on the base of the optimum point this is to
identify the portfolio which may give better returns at low risk. At that point the investor
can choose portfolio. On the basis of these holding period of portfolio can be determined.
On “X” axis risk rate of portfolio (s.d of p), and on “y” axis return on portfolios are to be
shown. Calculate return on portfolio and standard deviation of portfolio for various
combinations of weights of two securities. Various returns are shown in the graphical and
identify the optimum point.
Calculation of expected rate of return (ERR):
 Calculate the proportion of each security’s proportion in the total investment.
 It gives the weight for each component of securities.
 Multiply the funds invested in each component with the weights.
 It gives the initial wealth or initial market values.
Equation: Rp = w1R1+w2R2+w3R3+ …………. +wnRn
Where Rp = Expected return on portfolio
w1, w2, w3, w4… = proportional weight invested
R1, R2, R3, R4… = expected returns on securities
The rate of return on portfolio is always weighted average of the securities in the portfolio.
Estimation of Portfolio Risk:
A useful measure of risk should take into account both the probability of various possible
bad outcomes and their associated magnitudes. Instead of measuring the probability of a
number of different possible outcomes and ideal measure of risk would estimate the extent
to which the actual outcome is likely to diverge from the expected outcome.
Two measures are used for this purpose:
 Average absolute deviation
 Standard deviation

In order to estimate the total risk of a portfolio of assets, several estimations are needed:
a. The predicted return on the portfolio is simply a weighted average of the predicted
returns on the securities, using the proportionate values as weights.
b. The risk of the portfolio depends not only on the risk of its securities considered in
isolation, but also on the extent to which they are affected similarly by underlying events
c. The deviation of each securities return from its expected value is determined and the
product of the two obtained.
d. The variance in a weighted average of such products, using the probabilities of the events
as weight.
Effect of combining two securities:
It is believed that spreading the portfolio in two securities is less risky than concentrating in
only one security. If two stocks, which have negative correlation, were chosen on a portfolio
risk could be completely reduced due to the gain in the whole offset the loss on the other.
The effect of two securities, one more risky and other less risky, on one another can also be
studied. Markowitz theory is also applicable in the case of multiple securities.
Corner portfolios:
A number of portfolios on the efficient frontier are corner portfolios, it may be either new
security or security or securities dropped from previous efficient portfolios. By swapping
one security with other the portfolio expected return could be increased with no change in
its risk.
Dominance principle:
It has been developed to understand risk return trade off conceptually. It states that
efficient frontier always assumes that investors prefer return and dislike risk.

Criticism of Markowitz Theory:
The Markowitz model is confronted with several criticisms on both theoretical and practical
point of view.
 Very tedious I and in variably required a computer to effect numerous calculations.
 Another criticism related to this theory is rational investor can avert risk.
 Most of the works stimulated by Markowitz uses short term volatility to determine
whether the expected rate of return from a security should be assigned high or a low
expected variance, but if an investor has limited liquidity constraints, and is truly a
long-term holder, and then price volatility per share does not really pose a risk.
Rather in this case, the question concern is one ultimate price realization and not
interim volatility.
 Another apparent hindrance is that practicing investment managers found it difficult
to understand the conceptual mathematics
 Involved in calculating the various measure of risk and return. There was a general
criticism that an academic approach to portfolio management is essentially unsound.
 Security analysts are not comfortable in calculating covariance among securities
while assessing the possible ranges of error in their expectations.
Capital Market Theory
The CAPM was developed in mid-1960, the model has generally been attributed to William
Sharpe, but John Linter and Jan Mossin made similar independent derivations.
Consequently, the model is often referred to as Sharpe-Linter-Mossin (SLM) Capital Asset
Pricing Model. The CAPM explains the relationship that should exist between securities
expected returns and their risks in terms of the means and standard deviations about
security returns. Because of this focus on the mean and standard deviation the CAPM is a
direct extension of the portfolio models developed by Markowitz and Sharpe.

Capital Market Theory is an extension of the portfolio theory of Markowitz. This is an
economic model describes how securities are priced in the market place. The portfolio
theory explains how rational investors should build efficient portfolio based on their risk
return preferences. Capital Asset Pricing Model (CAPM) incorporates a relationship,
explaining how assets should be priced in the capital market.
Assumptions of Capital Market Theory
The CAPM rests on eight assumptions. The first 5 assumptions are those that underlie the
efficient market hypothesis and thus underlie both modern portfolio theory (MPT) and the
CAPM. The last 3 assumptions are necessary to create the CAPM from MPT. The eight
assumptions are the following:
1) The Investor's objective is to maximize the utility of terminal wealth.
2) Investors make choices on the basis of risk and return.
3) Investors have homogeneous expectations of risk and return.
4) Investors have identical time horizon.
5) Information is freely and simultaneously available to investors.
6) There is a risk-free asset, and investors can borrow and lend unlimited amounts at
the
risk-free rate.
7) There are no taxes, transaction costs, restrictions on short rates or other market
imperfections.
8) Total asset quantity is fixed, and all assets are marketable and divisible.

PORTFOLIO ANALYSIS
A Portfolio is a group of securities held together as investment. Investors invest their funds
in a portfolio of securities rather than in a single security because they are risk averse. By
constructing a portfolio, investors attempt to spread risk by not putting all their eggs into
one basket. Portfolio phase of portfolio management consists of identifying the range of
possible portfolios that can be constituted from a given set of securities and calculating their
return and risk for further analysis.
Individual securities in a portfolio are associated with certain amount of Risk & Returns.
Once a set of securities, that are to be invested in, are identified based on Risk-Return
characteristics, portfolio analysis is to be done as next step as the Risk & Return of the
portfolio is not a simple aggregation of Risk & Returns of individual securities but, somewhat
less or more than that. Portfolio analysis considers the determination of future Risk &
Return in holding various blends of individual securities so that right combinations giving
higher returns at lower risk, called Efficient Portfolios, can be identified so as to select an
optimum one out of these efficient portfolios can be selected in the next step.
Expected Return of a Portfolio:

It is the weighted average of the expected returns of the individual securities held in the
portfolio. These weights are the proportions of total investable funds in each security.
ii
n
1I
RxRp 

RP = Expected return of portfolio
N = No. of Securities in Portfolio
X I = Proportion of Investment in Security i.
Ri = Expected Return on security i
Risk Measurement
The statistical tool often used to measure and used as a proxy for risk is the standard
deviation.
N
1i
2
E(r))-(rip


2
N
2
E(r))-ri(p)(ceVarian 
)(VarianceHere 2

P = is the probability of security
N = Number of securities in portfolio
ri = Expected return on security i
Portfolio Selection
Portfolio analysis provides the input for the next phase in portfolio management, which is
portfolio selection. The proper goal of portfolio construction is to get high returns at a given
level of risk. The inputs from portfolio analysis can be used to identify the set of efficient
portfolios. From this set of portfolios, the optimal portfolio has to be selected for
investment.

Portfolio Revision
Having constructed the optimal portfolio, the investor has to constantly monitor the
portfolio to ensure that it continues to be optimal. As the economy and financial markets
are dynamic, the changes take place almost daily. The investor now has to revise his
portfolio. The revision leads to purchase of new securities and sale of some of the existing
securities from the portfolio.
Need for revision:
 Availability of additional funds for investment
 Availability of new investment avenues
 Change in the risk tolerance
 Change in the time horizon
 Change in the investment goals
 Change in the liquidity needs
 Change in the taxes
Portfolio Evaluation
Portfolio managers and investors who manage their own portfolios continuously monitor
and review the performance of the portfolio. The evaluation of each portfolio, followed by
revision and reconstruction are all steps in the portfolio management.
The ability to diversify with a view to reduce and even eliminate all unsystematic risk and
expertise in managing the systematic risk related to the market by use of appropriate risk
measures, namely, betas. Selection of proper securities is thus the first requirement.
Methods of evaluation:
 Sharpe index model: It depends on total risk rate of the portfolio. Return of the
security compare with risk free rate of return, the excess return of security is treated
as premium or reward to the investor. The risk of the premium is calculated by
comparing portfolio risk rate. While calculating return on security any one of the

previous methods is used. If there is no premium Sharpe index shows negative value
(-). In such a case portfolio is not treated as efficient portfolio.
Sharpe’s ratio (Sp) = rp – rf / σp
Where,
Sp = Sharpe Index Performance Model
Rp = Return of Portfolio
rf = Risk Free Rate of Return
σp = Portfolio Standard Deviation
This method is also called “reward to variability” method. When more than one portfolio is
evaluated highest index is treated as first rank. That portfolio can be treated as better
portfolio compared to other portfolios. Ranks are prepared on the basis of descending
order.
 Treynor’s index model: It is another method to measure the portfolio performance.
Where systematic risk rate is used to compare the unsystematic risk rate. Systematic
risk rate is measured by beta. It is also called “reward to systematic risk “.
Treynor’s ratio (Tp) = rp – rf / σp
Where,
Tp = Treynor’s Portfolio Performance Model
Rf = Risk Free Rate of Return
Σp = Portfolio Standard Deviation.
If the beta portfolio is not given market beta is considered for calculation of the
performance index. Highest value of the index portfolio is accepted.
 Jansen’s index model: It is different method compared to the previous methods. It
depends on return of security which is calculated by using CAPM. The actual security
returns are less than the expected return of CAPM the difference is treated as
negative (-) then the portfolio is treated as inefficient portfolio.
Jp = rp-[rf+ σp (rm-rf)]
Where,
Jp = Jansen’s Index Performance Model

Rf = Risk free rate of return
σp = portfolio standard deviation
rm = Return on market
This method is also called “reward to variability “method. When more than one portfolio is
evaluated highest index is treated as better portfolio compared to other portfolios. Ranks
are prepared on the basis of descending order.
Chapter 5
Company Profile
ADITYA BIRLA MONEY LIMITED (ABML)
Aditya Birla Money Limited (“ABML”) is a listed company. Its shares are listed on the BSE
and NSE since 2008. ABML is currently engaged in the business of securities broking and is
registered as a stock broker with SEBI. It is a member of BSE and NSE and offers equity and
derivatives trading through NSE and BSE. It holds license from SEBI and offers portfolio
management services. ABML is also registered as a depository participant with National
Securities Depository Limited (“NSDL”) and the Central Depository Services (India) Limited
(“CDSL”). It also holds SEBI license as a research analyst, an Investment Adviser and ARN
code issued by AMFI. ABML also offers commodity broking through its wholly owned
subsidiary Aditya Birla Commodities Broking Limited which is a member of MCX and NCDEX.
As of quarter ended September 30th, 2017, ABML reported revenues from operations of
over Rs 361 Million. It offers a wide range of solutions including broking, portfolio
management services, depository and e-insurance repository solutions and distribution of
other financial products. It has a combined pan India distribution network of over 40
branches, spread across Andhra Pradesh, Chandigarh, Rajasthan, Chhattisgarh, Madhya
Pradesh, UP, West Bengal, Punjab, Maharashtra, Kerala, Karnataka, Delhi, Gujarat and Tamil
Nadu and 737 franchisee offices. It also has a robust online and offline model with a strong
technological backbone to support a large registered customer base of over 300,000

customers.
Aditya Birla Capital Limited (ABCL), the holding company, is a Universal Financial Solutions
Provider and one of the largest financial services players in India. It is committed to serving
the end-to-end financial needs of its retail and corporate customers under a unified brand
— Aditya Birla Capital. Delivering a wide range of money solutions for protecting, investing
and financing, Aditya Birla Capital serves millions of customers across the country.
Apart from broking, ABCL has a significant presence across several business sectors
including NBFC, asset management, life insurance, health insurance, housing finance,
private equity, general insurance broking, wealth management, online personal finance
management and pension fund management.
Aditya Birla Capital, through its subsidiaries and joint ventures, manages aggregate assets
worth Rs. 2,813 billion and has a lending book of Rs. 447 billion as of September 30th, 2017.
Company Core Purpose:
To be a well-respected and preferred global financial services organization enabling wealth
creation for all our customers.
Values:
Integrity: A company honoring commitment with highest ethical and business practices.
Team Work: Attaining goals collectively and collaboratively.
Meritocracy: Performance gets differentiated, recognized and rewarded in an apolitical
environment.

Passion & Attitude: High energy and self-motivated with a “Do It” attitude and
entrepreneurial spirit.
Excellence in Execution: Time bound results within the framework of the company’s value
system.
Management
1. Tushar Shah:
CEO, Infrastructure & Structured Finance, (Aditya Birla
Finance Ltd.)
Director (Aditya Birla Money Ltd.)
Director (Aditya Birla ARC Ltd.)
Tushar Shah is the CEO for the Infrastructure Finance
business of ABFL since November 2011. The Infrastructure
Finance business encompasses Project-linked lending,
lending to large corporates, Debt Capital Markets, Debt Syndication and setting up
an Infrastructure PE Fund. As a Director in Aditya Birla Money Limited, he mentors
the Equity and Debt Stock Broking business. He is also a director in Aditya Birla ARC
Limited, which will house the Asset Reconstruction business. Prior to ABFL, Tushar
Shah was the Chief Operating Officer of IL&FS Financial Services Limited. His
responsibilities there included Asset and Structured Finance, DCM business and
managing the Structured Mezzanine Credit Facility. He was with the IL&FS group for
16 years and has worked in the areas of Capital Markets, Investment Banking and
Corporate Banking. Prior to IL&FS Financial Services Limited, Tushar Shah was a

partner in a chartered accountancy firm M/s Shah & Co and used to look after audit
and taxation. He is Chartered Accountant and holds an LLB degree.
2. Saurabh Shukla
Business Head - Broking & Distribution
Saurabh Shukla is the Business Head. He has 21 years of
experience in broking & distribution business and has
built & managed large brokerage & distribution house. In
his previous assignment as Chief Executive Officer (CEO)
with Destimoney Securities Private Ltd., he was
instrumental in turning around the company as one of the
fastest growing brokerages, wealth management & distribution organization in a
short timeframe. He has also in his past experience, been the Director on the Board
and Group COO with Bonanza, one of India's largest brokerage & distribution house.
Saurabh is steering Aditya Birla Money’s, broking & distribution business with
specific focus on Equity, Commodity, Currency, Margin financing, other Capital
market-led investments and lending products. His key responsibilities include
establishing multi-channel distribution platform for all segments of investors, with
best in class services for customers. Saurabh is a commerce graduate and has
attended management program at School of Management at IIT, Bombay.
3. Pradeep Sharma
Chief Financial Officer
Pradeep Sharma is the Chief Finance Officer of Aditya Birla
Money Ltd.(ABM), effective from August 2016 & before
that he was CFO for Aditya Birla Money Mart Ltd. from April

2015-July 2016. Pradeep has a post qualification rich work experience of more than
21 years in several corporate and line roles in large organizations out of which for
the last 19 years he has been playing pivotal role in various capacities at Aditya Birla
Group companies. Prior to joining ABM, he was working with Corporate Finance
Division of Ultratech cement since May 2010 and held the position of a Sr. Vice
President & Head- Corporate Taxation. At Aditya Birla Group, he started his career in
May 1996 from Birla White Cement Division of Ultratech Cement and worked
successfully in various positions in Finance and Commercial function. He was Head of
Finance and Commercial Function from July 2004, where he provided strategic
leadership on financial and commercial areas with a clear focus on enhancing
stakeholder value. He is a Fellow member of the Institute of Chartered Accountants
of India and the Institute of Company Secretaries of India.
4. Vivek Mahajan
Head- Fundamental Research
With over 2 decades of rich experience, Vivek is heading the
research bureau of Aditya Birla Money. He is responsible for
generating research ideas for our wealth and institutional
clients. His job involves monitoring investment scenario
(domestic and international) with specific focus on companies,
sectors and market related issues and use inputs and insights to help shape
investment strategy. Prior to joining Aditya Birla Money, Vivek had successful stints
at companies like HSBC InvesDirect Securities, HDFC Securities and IIT Investrust Ltd.
5. Hemant Thukral
Head- Derivatives
Mr. Hemant Thukral, in his role as head of Derivatives desk is
responsible for the overall delivery of Derivatives Desk,

including introducing newer derivatives product themes, developing derivatives
strategies, identifying market trends and oversees training & guidance on derivatives
to the dealers & sales teams, our franchisees & channel partners. Hemant has a rich
experience of over 12 years in the financial services industry. Prior to taking up this
assignment, he was associated with SBI Capital Securities Pvt. Ltd as VP – Derivative
Research. He has also worked with organisation like Asian Markets Securities P Ltd,
Anand Rathi Securities Pvt. Ltd, Way 2 Wealth Securities & PNR Securities Ltd. He has
completed his PGDBM in Marketing from IILM, New Delhi.
BOARD OF DIRECTORS

INDUSTRY PROFILE
HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY:
The mutual fund industry in India started in 1963 with the formation of Unit Trust of India,
at the initiative of the Government of India and The Reserve Bank. The history of mutual
funds in India can be broadly divided into four distinct phases
First Phase – 1964-87
Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by
the Reserve Bank of India and functioned under the Regulatory and administrative control
of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial
Development Bank of India (IDBI) took over the regulatory and administrative control in
place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988
UTI had Rs.6,700 crores of assets under management.
Second Phase – 1987-1993 (Entry of Public Sector Funds)
1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks
and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India
(GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed
by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank
Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC
established its mutual fund in June 1989 while GIC had set up its mutual fund in December
1990.
At the end of 1993, the mutual fund industry had assets under management of Rs.47,004
crores.

Third Phase – 1993-2003 (Entry of Private Sector Funds)
With the entry of private sector funds in 1993, a new era started in the Indian mutual fund
industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year
in which the first Mutual Fund Regulations came into being, under which all mutual funds,
except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged
with Franklin Templeton) was the first private sector mutual fund registered in July 1993.
The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and
revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI
(Mutual Fund) Regulations 1996.
The number of mutual fund houses went on increasing, with many foreign mutual funds
setting up funds in India and also the industry has witnessed several mergers and
acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of
Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under
management was way ahead of other mutual funds.
Fourth Phase – since February 2003
In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated
into two separate entities. One is the Specified Undertaking of the Unit Trust of India with
assets under management of Rs.29,835 crores as at the end of January 2003, representing
broadly, the assets of US 64 scheme, assured return and certain other schemes. The
Specified Undertaking of Unit Trust of India, functioning under an administrator and under
the rules framed by Government of India and does not come under the purview of the
Mutual Fund Regulations.
The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered
with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the
erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under
management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual
Fund Regulations, and with recent mergers taking place among different private sector

funds, the mutual fund industry has entered its current phase of consolidation and growth.
As at the end of September 2004, there were 29 funds, which manage assets of Rs.153108
crores under 421 schemes. The graph indicates the growth of assets over the years.
GROWTH IN ASSETS UNDER MANAGEMENT
Erstwhile UTI was bifurcated
into UTI Mutual Fund and
the Specified Undertaking of
the Unit Trust of India
effective from February
2003. The Assets under
management of the
Specified Undertaking of the
Unit Trust of India has
therefore been excluded
from the total assets of the
industry as a whole from
February 2003 onwards.

Chapter 6
Practical Study of Some Selected Scrips
Calculation of Return and Risk:
N
R
(Ri)ERETURNEXPECTED i

PORTFOLIO - A PORTFOLIO – B
 BHEL  MAHINDRA SATYAM LIMITED
 RELIANCE ENERGY  WIPRO
 CROMPTION GREAVES  JINDAL STEEL & POWER LIMITED

Portfolio-A
Bharat Heavy Electronics Limited (BHEL)
DATE SHARE PRICE (X) (X-X') (X-X')2
14/3/2018 2,098 -62.00 3844.00
23/3/2018 2,099.45 -60.55 3666.30
09/4/2018 2,282 122.00 14884.00
17/4/2018 2,323.60 163.60 26764.96
25/4/2018 2,262.90 102.90 10588.41
02/5/2018 2,180.55 20.55 422.30
15/5/2018 2,085.10 -74.90 5610.01
24/5/2018 2,058.85 -101.15 10231.32
05/6/2018 2,092.05 -67.95 4617.20
16/6/2018 2,124.20 -35.80 1281.64
Expected Return = 21,607/10 = 2,160 = X’
(X-X') 2
= 81,910.15
Risk = 81,910.15 = 286.20

Reliance Energy
14/3/2018 1,510 -74.37 5530.90
23/3/2018 1,485.55 -98.62 9725.90
09/4/2018 1,568 -16.42 269.62
17/4/2018 1,600.70 16.53 273.24
25/4/2018 1,631.35 47.18 2225.95
02/5/2018 1,697.25 113.08 12787.09
15/5/2018 1,622.70 38.53 1484.56
24/5/2018 1,555.90 -28.27 799.19
05/6/2018 1,595.05 10.88 118.37
16/6/2018 1,575.65 -8.52 72.59
Expected Return = 15,842/10 = 1,584 = X’
(X-X') 2
= 33,287.42
Risk = 33,287.42 = 286.20

Crompton Greaves
14/3/2018 302 -8.92 79.66
23/3/2018 309.95 -0.97 0.95
09/4/2018 314 3.48 12.08
17/4/2018 326.10 15.18 230.28
25/4/2018 326.55 15.63 244.14
02/5/2018 311.80 0.88 0.77
15/5/2018 299.30 -11.62 135.14
24/5/2018 297.85 -13.07 170.96
05/6/2018 308.70 -2.22 4.95
16/6/2018 312.60 1.68 2.81
Expected Return = 3,109/10 = 310.9 = X’
(X-X') 2
= 881.72
Risk = 881.72 = 29.69

Portfolio – B
Mahindra Satyam Limited
14/3/2018 406 -29.56 873.50
23/3/2018 411.95 -23.61 557.20
09/4/2018 434 -1.41 1.97
17/4/2018 446.80 11.25 126.45
25/4/2018 437.10 1.55 2.39
02/5/2018 449.75 14.20 201.50
15/5/2018 450.30 14.75 217.42
24/5/2018 438.80 3.25 10.53
05/6/2018 458.20 22.65 512.80
16/6/2018 422.50 -13.06 170.43
(X-X') 2
= 2,674.18
Risk = 2674.18 = 51.71

Wipro
14/3/2018 417 -14.13 199.52
23/3/2018 419.70 -10.93 119.36
09/4/2018 435 4.02 16.20
17/4/2018 446.45 15.83 250.43
25/4/2018 439.90 9.27 86.03
02/5/2018 444.15 13.53 182.93
15/5/2018 439.55 8.93 79.66
24/5/2018 422.40 -8.23 67.65
05/6/2018 431.65 1.02 1.05
16/6/2018 411.30 -19.33 373.46
(X-X') 2
= 13, 76.27
Risk = 1376.27 = 37.09

Jindal Steel & Power Limited
14/3/2018 1,007 -73.86 5454.56
23/3/2018 1,014.40 -66.36 4402.99
09/4/2018 1,062 -19.21 368.83
17/4/2018 1,079.80 -0.96 0.91
25/4/2018 1,063.55 -17.21 296.01
02/5/2018 1,093.55 12.79 163.71
15/5/2018 1,117.00 36.24 1313.70
24/5/2018 1,115.45 34.69 1203.74
05/6/2018 1,142.60 61.84 3824.80
16/6/2018 1,112.75 31.99 1023.68
(X-X') 2
= 18,052.94
Risk = 18052.94 = 134.36

PORTFOLIO-A
The Risk and Return of each Company
In Portfolio A
SL. No COMPANY RETURN RISK
1 BHEL 2160 286.20
2 Reliance Energy 1584 286.20
3 Crompton Greaves 310.9 29.69
PORTFOLIO-B
The Risk and Return of each Company
In Portfolio B
SI. No COMPANY RETURN RISK
1 Mahindra Satyam Limited 435.6 51.71
2 Wipro 430.6 37.09
3 Jindal Steel & Power Limited 1080.8 134.36

INTERPERATION (Findings)
From the above figures, it is clear that in total there is a high return on portfolio A
companies when compared with portfolio B companies. But at the same time if we compare
the risk it is clear that risk is less for companies in portfolio B when compared with portfolio
A companies. As per the Markowitz an efficient portfolio is one with “Minimum risk,
maximum profit” therefore, it is advisable for an investor to work out his portfolio in such a
way where he can optimize his returns by evaluating and revising his portfolio on a
continuous basis.

Chapter – 7
Conclusions
Portfolio is collection of different securities and assets by which we can satisfy the basic
objective "Maximize yield minimize risk. Further' we have to remember some important
investing rules.
 Investing rules to be remembered.
 Don't speculate unless it's full-time job
 Beware of barbers, beauticians, waiters-of anyone -bringing gifts of inside
information or tips.
 Before buying a security, it’s better to find out everything one can about the
company, its management and competitors, its earnings and possibilities for growth.
 Don't try to buy at the bottom and sell at the top. This can't be done-except by liars.
 Learn how to take your losses and cleanly. Don't expect to be right all the time. If
you have made a mistake, cut your losses as quickly as possible
 Don't buy too many different securities. Better have only a few investments that can
be watched.
 Make a periodic reappraisal of all your investments to see whether changing
developments have altered prospects.
 Study your tax position to known when you sell to greatest advantages.
 Always keep a good part of your capital in a cash reserve. Never invest all your funds.
 Don't try to be jack-off-all-investments. Stick to field you known best.
 Purchasing stocks, you do not understand if you can't explain it to a ten-year-old,
just don't invest in it.
 Over diversifying: This is the most oversold, overused, logic-defying concept among
stockbrokers and registered investment advisors.

 Not recognizing difference between value and price: This goes along with the failure
to compute the intrinsic value of a stock, which are simply the discounted future
earnings of the business enterprise.
 Failure to understand Mr. Market: Just because the market has put a price on a
business does not mean it is worth it. Only an individual can determine the value of
an investment and then determine if the market price is rational.
 Failure to understand the impact of taxes: Also known as the sorrows of
compounding, just as compounding works to the investor's long-term advantage, the
burden of taxes because pf excessive trading works against building wealth
 Too much focus on the market whether or not an individual investment has merit
and value has nothing to do with that the overall market is doing.

SUGGESTIONS
 Select the investments on the basis of economic grounds.
 Buy stock with a disparity and discrepancy between the situation of the firm - and
the expectations and appraisal of the public.
 Buy stocks in companies with potential for surprises.
 Take advantage of volatility before reaching a new equilibrium.
 Listen to rumors and tips, check for yourself.
 Don’t put trust in only one investment. It is like “putting all the eggs in one basket “.
This will help lessen the risk in the long term.
 The investor must select the right advisory body which is has sound knowledge
about the product which they are offering.
 Professionalized advisory is the most important feature to the investors.
Professionalized research, analysis which will be helpful for reducing any kind of risk
to overcome.

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