INTRODUCTION

INVESTMENT:
The term investment is a word of many meanings. The investment refers to
net additions to the capital stock of the community. Investment decision is a part of
our economic life. Everybody takes such decisions in different context and at
different times. The investor deploys money in specific investment channels with the
objective of better returns. The investor has various alternative investment avenues.
Savings are invested in assets depending on their risky. An intelligent investor with
skills of management can reduce the risk and maximie returns.
CONCEPT OF SECURITY ANALYSIS!
Security analysis refers to the analysis of trading securities. It analyses the
share price returns and the risk involved in the investment. Every investment
involves the risk and the expected return is related to risk. The security analysis will
help in understanding the behavior of security prices" market and decision making
for investment. If the analysis includes scrip the analysis of a market with various
securities it is known as macro picture of the behavior of the market. The entire
process of estimating return and risk of a security is known as security analysis.
This traditional investment analysis when applied to securities emphasies the
projection of prices ad dividends are known as security analysis. It involves the
potential price of a share and future dividend stream is forecast" and then discounted
back to the present value. Such value is called as #$intrinsic value$$. Then the
intrinsic value is compared with the securities market price" if the current market
price is lower than the intrinsic value" then purchase is recommended. %urther" the
&
security analysis is built around the idea that investors are concerned with two
principal properties inherent in securities" the return that can be expected from
holding a security" and risk that is achieved will be less than the return that was
expected.
'enerally" the investors are interested primarily in selling a security for more than
they pay for it. The investor hopes to achieve a higher reward than simply placing
the money in a saving account. An investor who seeks reward that exceeds those
available on savings account forces the real risk. There is no return without risk. The
process of estimating return and risk for individual securities is known as security
analysis. Security analysis is the essence of valuation of financial instruments. The
value of financial asset depends upon their return and risk. The universal fact is that
everyone must recognie the risk component in risk situation
OBJECTIVES OF SECURITY ANALYSIS:
The following are the objectives of security analysis!
&. To estimate the risk and return related to a particular security.
(. To find out the intrinsic value of the security with a view to make a buy)sell
decision
*. To identify the under valued securities to buy or over value securities to sell.
+. To analye the stock market trends to understand the stock market pattern
and behavior.
,. To forecast the future earning and dividends along with the price of the
securities.
-. To find out the key determinants of the intrinsic value.
.. To analyse and point out the position of economy industry and the company
with a view to select the possible company for investment.
(
APPROACHES TO SECURITY ANALYSIS:
The security analysis aimed at identifying under securities to buy and over
valued securities to sell. It involves the entire process of estimating return and risk
for an individual security.
It is deeply rooted in fundamental concepts to measure the risk and return of
security. It emphasies on the return and risk estimates rather than mere price and
dividend estimates. /owever" the return and risk estimates are dependent on share
prices and accompanying dividend stream.
Any forecast of security must necessarily consider the prospects of the economy.
The economic sets greatly influence the prospects of certain industries as well as the
psychological aspect of investing public.
The approaches for security analysis are broadly grouped into the following
categories.
&0 %undamental analysis
(0 Technical analysis
*0 Efficient market hypothesis.
1) FUNDAMENTAL ANALYSIS !
The first major analysis of securities analysis is the fundamental analysis. A
%undamental analysis is a time honored value based approach depending. 1pon a
careful assessment of the fundamental of an economy" industry and the company.
The fundamental analysis studies the general economic situation makes an
evaluation of an industry and finally does an in2depth analysis of both financial and
the non financials of the company of choice. The fundamental analysis is aimed at
*
analying the various fundamentals or basic factors that effect the risk return of the
securities. The fundamental analysis involves the analysis of the following!
A0 T/E E34546I3 A5A78SIS
90 T/E I5:1ST;8 A5A78SIS
30 T/E 346<A58 A5A78SIS
A) THE ECONOMIC ANALYSIS:
In the economic analysis the investor has to analyse the economic factor to
forecast of the economy in order to identify the growth of the economy and its trend.
%urther based on the economic analysis the investor will identify the industry groups
which are promising in the coming years in order to choose the best company in
such industry group. The economic analysis provides the investor to develop a sound
economic understand and be able to interpret the impact of important economic
indicators on the markets.
B) INDUSTRY ANALYSIS!
The object of the industry analysis is to assess the prospects of various
industrial groupings. The industry analysis helps to identify the industries with a
potential for future growth and to select companies from such industry to invest in
its securities. The industry analysis involves industry life cycle analysis" investment
implication" structure and characteristics of an industry.
C) THE COMPANY ANALYSIS:
3ompany analysis is the last leg in the economy" industry and company analysis
se=uence. The company analysis is a study of variable that influence the future of a
firm both =ualitatively and =uantitatively. The purpose of company analysis is to
know the intrinsic value of a share of a company.

+
2) THE TECHNICAL ANALYSIS:
As an approach to investment analysis" technical analysis is radically
different from fundamental analysis. The technical analysis is fre=uently used as a
supplement to fundamental analysis is" concerned with a critical study of the daily or
weekly price volume data of index comprising several shares. The technical analysis
analyses the buying and selling pressure" which govern the price trend. It helps the
investors to buy cheap and sell high" regardless of the type of company the investor
choose. The technical analysis complies a study of the market itself and not of the
various external factors which effect the market. According to technical analyst" all
relevant factors get gets reflected in the volume of the stock exchange transaction
and the level of the share prices
3) EFFICIENT MARKET HYPOTHSIS:
The efficient market hypothesis is also called as >;A5:46 ?A7@
T/E4;8A. It is the extension of fundamental and technical analysis to e=uity
investment decisions. Efficient market theory says that no investors can out perform
the market for the simple reason that there are numerous knowledgeable analysts
and investors who would not allow the market price to deviate from the intrinsic
value due to their active buying and selling. Therefore the current market price
incorporates all fundamental information. According to >?I77IA6 S/A;<EA A
perfectly efficient market is one in which every security price e=ualies market
value at all times. E1'E5 %A6A expressed that >An efficient capital market is a
market that is efficient in processing in information. The prices of securities
observed at any time are based on >correct evaluationA of all information available
at that time. In an efficient market" prices fully reflect all available information.
The efficient market theory has the following three forms of efficiency!
,
&. ?eak form of efficiency!
(. <rices reflect in all information found in the record of past prices and
volumes.
*. Semi2strong2 form of efficiency!
+. <rices reflect not only all information found in the records of past and
volumes but also other publicity available information.
,. Strong form of efficiency!
-. <rices reflect all available information" public as well as private.
CONCEPT OF PORTFOLIO MANAGEMENT:
<ortfolio is the collection of financial or real assets such as e=uity
shares" debentures" bonds" treasury" bills and property etc. in a more general sense
the term portfolio may be used synonymous with the expression >collection of
assetsA which can even include physical assets Bgold" silver" real estate" etc0.
<ortfolio means a collection of combination of financial assets Bsecurities0 such as
shares" debentures" government securities. <ortfolios are a combination of assets.
<ortfolio will consist of collection of securities. ?hat is to be borne in mind is that"
in portfolio context" assets are held for investment purposes and not for consumption
purposes. These holding are the result of individual preferences and decisions of the
holders regarding risk and return an a host of other considerations.
<ortfolio is the investment of funds in different securities in which the total
risk of the portfolio is minimied while expecting maximum return from it. <ortfolio
management takes the ingredients of risk and returns for individual securities and
considers the mixing of these securities. The portfolio management in total includes
the planning" super vision" forming rationalism and conservatism involved in the
collection of securities to meet investor$s objectives. In entails choosing the one best
-
portfolio to suit the risk2return preferences of the investors. It also encompasses the
evaluation and revising the portfolio in view of changing risk" return and investors
risk preferences
STATEMENT OF THE PROBLEM

It is a service activity which is associated with providing =uantitative
information primarily financial in nature and that which may needed for making
economic decisions regarding reasoned choice among different alternative course of
action. %inancial management is a process of identifying management" accumulation
analysis" preparation" interpretation and communication of financial information to
plan evaluate and control. %inancial management is that specialied function of
general management which is related to the procurement of finance and its effective
utiliation for the achievement of the common goal of the organiation.
Security Analysis refers to the analysis of trading securities. It analysis the
share price returns and the risk involved in the statement. The security analysis
aimed at identifying under valued securities to buy and over valued securities to sell.
?ith the reasonable review of the literature a thorough work in studying
the effective functioning of the Security analysis and <ortfolio management in
/yderabad Stock Exchange" is felt a necessary in the explained circumstances" it is
chosen for the studying in /yderabad Stock Exchange" /yderabad.
.
NEED FOR THE STUDY :
The investor today is looking at investing in securities" which would
give him better returns that an ordinary savings bank account or fixed deposits
though at a certain amount of risk. Every person saves money by post poning
consumption because future is uncertain. So" they have to search out for efficient
opportunities. :ue to fast changing development in economic and industries
scenario improving the performance of the organiation is essential. As a result
undertaking an academic study on Security Analysis and <ortfolio 6anagement will
be a welcome step. This study will be defiantly help full to the investor in achieving
higher returns with minimum risk.
OBJECTIVES:
&0 To study the investment pattern and it$s related risks and returns.
(0 To find out the intrinsic value of security with a view to make a buy) sell
decision.
*0 To understand" analye and select the best <ortfolio.
HYPOTHESIS:
1) Security Analysis and <ortfolio 6anagement is the best approach for
investment.
2) Effective Security Analysis and <ortfolio 6anagement contribute to increase
the returns of the portfolio.
SCOPE:
Even though there are number of techni=ues for <ortfolio analysis"
6arkowit 6odel has been choosing for the analysis. The scope of study has
been restricted to common investor of /yderabad Stock Exchange. SE9I role
C
and guidelines has been covered in this study" at large Indian stock market
tendencies also has been considered in the study.
METHODOLOGY
In attempting to pursue this research study topic =ualitative as well as
=uantitative approaches are undertaken.
Sources of Information:-
9oth primary and secondary data were gathered and utilied for the study of
Security Analysis and <ortfolio 6anagement.
The statements cover the aspects of Security Analysis and <ortfolio
6anagement and associated issues. <ersonal interviews are taken with respondents
to strengthen the information.
:ata collection tools, to obtain the data for the purpose of present study the
following tools usedD
a0 The data has been collected from /SE staff" the project guide and stock
brokers.
b0 The data has been collected through journals" news papers and internet.
:ata is analyed using basic parametric techni=ues such as percentages and averages
etc" where ever they are re=uired.
LIMITATIONS OF THE STUDY:
&0 7imited access to company$s financial information.
(0 :etailed study of the topic was not possible due to limited sie of the project.
E
REVIEW OF LITERATURE
The securities available to an investor for investment are numerous and of
various types. The shares of over .FFF companies are listed in the stock exchanges
of the country. Traditionally" the securities were classified into ownership securities
such as e=uity shares and preference shares and creditorship security such as
debentures and 9onbs.;ecently a number of new securities with innovative features
are being issued by companies to raise funds for their projects.
Securities analysis is the initial phase of the portfolio management process.
This step consists of examining the risk2return characteristics of individual
securities. A basic strategy in securities investment is to buy under priced securities
and sell over priced securities.
There are two alternative approaches to security analysis" namely"
fundamental analysis and technical analysis. They are based on different premises
and follow different techni=ues fundamental analysis" the order of the two
approaches" concentrates on the fundamental factors affecting the company such as
the E<S of the company the dividend pay2out ratio" the competition faced by the
company" the market share" =uality of management"etc
According to this approach" the share price of a company is determined by
these fundamental factors. The fundamental analyst works out the true worth or
intrinsic value of a security based on its fundamentals! if the current market price is
higher than the intrinsic value" the share is set to be over priced and vice versa.
%undamental analysis helps to identify fundamentally strong companies
whose share are worthy to be included in the investor$s portfolio.
&F
The alternative approach to security analysis is Technical analysis. The
technical analyst believes that share price movements are systematic and exhibit
certain consistent patterns. /e there fore studies past movements in the prices of
shares to identify trends and patterns. /e then tries to predict the future piece
movements. Technical analysis is an approach which concentrates on price
movements and ignores the fundamentals of the shares.
A more recent approach to security analysis is the efficient market hypothesis
according to the school of thoughtD the financial market is efficient in pricing
securities. The efficient market hypothesis holds the market prices instantaneously
and fully reflect all relevant available information. It means that the market prices of
securities will always e=ual its intrinsic value.
Efficient market hypothesis is a direct repudiation of both fundamental
analysis and technical analysis. An investor cannot consistently earn abnormal
returns by undertaking fundamental analysis or technical analysis. According to
efficient market hypothesis it is possible for an investor to earn normal returns by
normally choosing securities of a given risk level.
In literature Beinhocker say that evaluation provide a powerful and effective
recipe for salving problems and creating strategies in an predictable environment.
%itness landscapes demonstrates how evolutionary search creates robustness and
adaptability through constant experimentation" parallel search " and mix of adaptive
walks and long jumps .by creating and cultivating evolving portfolios of strategies"
managers can make it more likely that there company will stay out of the strategy
wilderness and enjoy the high fitness peaks.
In view of Korczak adopts a different approach in the portfolio optimiation
problem. /e identified problems trading rules in stock market using genetic
&&
algorithms. Technical analysis assumes that future trends can be identified as a more
or less complicated function of past prices. 1sing a trade rule is a practical way of
identifying trends" which" in terms generate buying" and selling signals. on the basis
of past prices" each rule generates a signal! to sell" to hold" or to buy. To ensure
simplicity in the computing these decision.
In literature of Vieire, he is present a method for finding the optimal portfolio using
genetic algorithm matching the parameters defined by the analyst and the desired
beta of the portfolio. The analysis done by using functions that provides the most
important information on the financial health of a company. In this work" the
parameter used for the analysis is the following indices! current ration" =uick ratio
and market value) patrimony value. 9inary codification is used to represent the
portfolio. The representation not only includes the share held in the portfolio" but
also it is proportion. The implementation was run for more than +FFF generations
and the fitness the value reached very close to the maximum.
In view of M.Sitaram Venugopal, S.Subramanian and U.S.Rao the dynamic
portfolio consisting of both debt and e=uity that has been selected for each month for
out performed the Sensex throughout the testing period. In addition" it also
dynamically switches from debt to e=uity during bull phase and vice versa in bear
phase automatically. thus the model is able to identify the portfolio of e=uity and
debt securities mix dynamically without human intervention and obtain consistently
good results in both phases. It could used by investors2both individual and
institutional for decision making.
&(
PROFILE OF HYDERABAD STOCK ECHANGE
ORIGIN
;apid growth in industries in the erstwhile /yderabad State saw efforts at
starting the Stock Exchange. In 5ovember" &E+& some leading bankers and brokers
formed the share and stock 9rokers Association. In &E+(" 6r. 'ulab 6ohammed"
the %inance 6inister formed a 3ommittee for the purpose of constituting ;ules and
;egulations of the Stock Exchange. Sri <urushothamdas Thakurdas" <resident and
%ounder 6ember of the /yderabad Stock Exchange performed the opening
ceremony of the Exchange on &+.&&.&E+* under /yderabad 3ompanies Act" 6r.
@amal 8ar Gung 9ahadur was the first <resident of the Exchange. The /SE started
functioning under /yderabad Securities 3ontract Act of 5o. (& of &*,( under
/.E./. 5iam$s 'overnment as a 3ompany 7imited by guarantee. It was the -
th
Stock Exchange recognied under Securities 3ontract Act" after the <remier Stock
Exchanges" Ahmedabad" 9ombay" 3alcutta" 6adras and 9angalore stock Exchange.
All deliveries were completed every 6onday or the next working day. The
Securities 3ontracts B;egulation0 Act" &E,- was enacted by the <arliament" passed
into 7aw and the rules were also framed in &E,.. The Act and the ;ules were
brought into force from (F
th
%ebruary &E,. by the 'overnment of India. The /SE
was first recognised by the 'overnment of India on (E
th
September &E,C as
Securities ;egulation Act was made applicable to twin cities of /yderabad and
Secunderabad from that date. In view of substantial growth in trading activities" and
for the yeoman services rendered by the Exchange" the Exchange was bestowed with
permanent recognition with effect from (E
th
September &EC*. The Exchange has a
&*
significant share in achievements of erstwhile State of Andhra <radesh to its present
state in the matter of Industrial development
OBJECTIVES
The Exchange was established on &C
th
4ctober" &E+* with the main objective
to create " protect and develop a healthy 3apital 6arket in the State of Andhra
<radesh to effectively serve the <ublic and Investor$s interests. The property" capital
and income of the Exchange" as per the 6emorandum and Articles of Association of
the Exchange" shall have to be applied solely towards the promotion of the objects
of the Exchange. Even in case of dissolution" the surplus funds shall have to be
devoted to any activity having the same objects" as Exchange or be distributed in
3harity" as may be determined by the Exchange or the /igh 3ourt of judicature.
Thus" in short" it is a 3haritable Institution. The /yderabad Stock Exchange 7imited
is now on its stride of completing its -,
th
year in the history of 3apital #6arkets$
serving the cause of saving and investments. The Exchange has made its beginning
in &E+* and today occupies a prominent place among the ;egional Stock Exchanges
in India. The /yderabad Stock Exchange has been promoting the mobiliation of
funds into the Industrial sector for development of industrialiation in the State of
Andhra <radesh
GROWTH
The /yderabad Stock Exchange 7td." established in &E+* as a 5on2profit
making organiation" catering to the needs of investing population started its
operations in a small way in a rented building in @oti area. It had shifted into
Aiyangar <laa" 9ank Street in &EC.. In September &ECE" the then Hice2<resident of
&+
India" /on$ble :r. Shankar :ayal Sharma had inaugurated the own building of the
Stock exchange at /imayathnagar" /yderabad. 7ater in order to bring all the trading
members under one roof" the exchange ac=uired still a larger premises situated -2*2
-,+)A D Somajiguda" /yderabad 2 C(" with a six storied building and a constructed
area of about +"C-"C+( sft Bincluding cellar of .F"C,. sft0. 3onsiderably" there has
been a tremendous perceptible growth which could be observed from the statistics.
The number of members of the Exchange was ,, in &E+*" &&. in &EE* and increased
to *FF with C-E listed companies having paid up capital of ;s.&E&(C.E, crores as
on *&)F*)(FFF. The business turnover has also substantially increased to ;s. &(*-.,&
crores in &EEE2(FFF. The Exchange has got a very smooth settlement system
GOVERNING BOARD
At present" the 'overning 9oard consists of the following!
MEMBERS OF THE ECHANGE
S!" PANDURANGAREDDY K
*2+2-*(
5A;A8A5A'1:A
/8:E;A9A: ,FFF(E
</45E ! (.,-F-*,
S!" HARI KISHAN ATTAL
%7AT 54 *F(" /.54. &2&2.,F)9)(I*
S1;8A I6<E;IA7
'A5:/I5A'A;
&,
/8:E;A9A: ,FF *CF
</.54 ! (*+*.,&&)(.-*EF.,)(.-*-,-C
SEBI NOMINEE DIRECTORS
S!"# HENRY RICHARD 22 ;egistrar of 3ompanies J'ovt. of
India.K
4)4 ;E'IST;A; 4% 346<A5IES
S17TA5 9ALA;" @4TI" /8: 2 &E,
</! (.(F&---)(.(FEECC
PUBLIC NOMINEE DIRECTORS
D!# N#R# S"$%&'%() *C+%"!(%,, HSE0 22 %ormar39:T 3hairman
<74T &&*" /.54 &F*C" ;4A: 54.&F
G197EE /I77S" /8: 2 F**
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J-&."/0 V# B+%&1%!% R%2 22 ;etd. Gudge /igh 3ourt
/.54. &.2&(.)&+," EAST @A78A5<1;I
1<<A7" /8: 2 *E.
</! (.(F&---)(.(FEECC
S!" P# M-!%3"(2+%, R%2 22 6ogiliI3o.23hartered Accountants
<74T 54. -*(" ;4A: 54. *,
G197EE /I77S" /8: 2 **.
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D! B# B!%+(%"%+ 22 '.6. G5I:9
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GAI<;A@AS/ 5A'A;" 8E77A;E::8'1:A
/8: 2 F.*. </45E ! (*FFF(-C
EECUTIVE DIRECTOR
COMPUTERI4ATION
The Stock Exchange business operations are e=uipped with modern
communication systems. 4nline computeriation for simultaneously carrying out the
trading transactions" monitoring functions have been introduced at this Exchange
since &ECC and the Settlement and :elivery System has become simple and easy to
the Exchange members.
The /SE 4n2line Securities Trading System was built around the most sophisticated
state of the art computers" communication systems" and the proven HE3T4;
Software from 363 and was one of the most powerful S9T Systems in the country"
operating in a ?A5 environment" connected through E.- @9<S ( wire 7eased 7ines
from the offices of the members to the office of the Stock Exchange at Somajiguda"
where the 3entral System 3/A77E5'E27 :ES@ SI:E SE;HE; made of Silicon
'raphicsBS'I 6odel 5o. :2E,-F(2S(0 was located and connected all the members
who were provided with 346<AM :ES@<;4 (FFF):ES@T4< ,&(F 3omputers
connected through 64T4;47A *(-, v. *+ 6A5A'EA97E STA5: A745E
64:E6S B(C.C kbps0 for carrying out business from computer terminals located in
the offices of the members.
&.
The /4ST System enabled the Exchange to expand its operations later to other
prime trading centers outside the twin cities of /yderabad and Secunderabad.
CLEARING HOUSE
The Exchange set-up a Clearing House to collect the Securities from all the Members
and distribute to each member, all the securities due in respect of every settlement. The
hole of the operations of the Clearing House ere also computeri!ed. "t present through #$
all the settlement obligations are met.
INTER 5 CONNECTED MARKET SYSTEM *ICMS0
The /SE was the convener of a 3ommittee constituted by the %ederation of
Indian Stock Exchanges for implementing an Inter2connected 6arket
SystemBI36S0 in which the Screen 9ased Trading systems of various Stock
Exchanges was inter2connected to create a large 5ational 6arket. SE9I welcomed
the creation of I36S.
The /4ST provided the net2work for /SE to hook itself into the ISE. The
ISE provided the members of /SE and their investors" access to a large national
network of Stock Exchanges.
The Inter2connected Stock Exchange is a 5ational Exchange and all /SE
6embers could have trading terminals with access to the 5ational 6arket without
any fee" which was a boon to the 6embers of an Exchange)Exchanges to have the
trading rights on 5ational Exchange BISE0" without any fee or expenditure
ON-LINE SURVEILLANCE
&C
/SE pays special attention to 6arket Surveillance and monitoring exposures
of the members" particularly the mark to market losses. 9y taking prompt steps to
collect the margins for mark to market losses" the risk of default by members is
avoided. It is heartening that there have been no defaults by members in any
settlement since the introduction of Screen 9ased Trading
IMPROVEMENT IN THE VOLUMES
It is heartening that after implementing /4ST" /SENs daily turnover has
fairly stabilied at a level of ;s. (F.FF crores. this should enable in improving our
ranking among Indian Stock Exchanges for &+th position to -th position. ?e shall
continuously strive to improve upon this to ensure a premier position for our
Exchange and its members and to render excellent services to investors in this
region.
The number of transactions" turnovers of the Exchange" number of listd
companies and the paid up capital listed have grown up substainally as may be seen
from the following figures.
YEAR
NUMBER OF
TRANSACTIONS
TURNOVER
S
LISTED
COMPANIES
MARKET
CAPIT
&E
IN T+2-&%,6&
R&#IN C!2!0& R&#IN C!2!0&
&EE&2E( ,&,.E+E ,C..., (*- (.+F.,-
&EE(2E* +(&.EC, -.-.FF (.+ &F((C.+C
&EE*2E+ -F*.-*, EC+.+- *.( &*&,-.&,
&EE+2E, C-F.-+( &&-F.+C --C &C,CC..&
&EE,2E- .(F.,(& &&F..*F .(. (F&,E.*&
&EE-2E. (+F.-+ +.E.EC C,& ((F,F.-E
&EE.2EC +(..C* &C-F.C- C,( &C.F,.&F
&EEC2EE ,&*.&-C &(-E.EF C,- &C.,*.E*
&EEE2FF ,&*.++F &(*-.,& C-E &E&(C.E,
(FFF2F& +(..(F, E...C* E*+ &+.&..FC
(FF&2F( *+.*(- +&.(- . .
(FF(2F* +.(F* +.,C . .
(FF*2F+ (.(.. (..* C,- ((&(-.-,
(FF+2F, +.+F& &+.&* C(F &++,-.E,
(FF,2F- &*.(F* E...E .E( &(&(E.--
SETTLEMENT GUARANTEE FUND
/e Exchange has introduced Trade 'uarantee %und on (,)F&)(FFF. This will
insulate the trading member from the counter2party risks while trading with another
member. In other words" the trading member and his investors will be assured of the
timely completion of the pay2out of funds and securities notwithstanding the default"
if any" of any trading member of the Exchange. The shortfalls" if any" arising from
the the default of any member will be met out of the Trade 'uarantee %und. several
pay2ins worth of crores of rupees in all the settlements have been successfully
completed after the introduction of Trade 'uarantee %und "without utiliing any
amount from the Trade 'uarantee %und.The Trade 'uarantee %und will be a major
step in re2building this confidence of the members and the investors in /SE. /SENs
Trade 'uarantee %und has a corpus of ;s. (.FF crores initially which will later be
raised to ;s. ,.FF crores. At present ;s. *.(F 3rores is stood in the credit of S'%.The
(F
Trade 'uarantee %und had strict rules and regulations to be complied with by the
members to avail the guarantee facility. The /4ST system facilitated monitoring the
compliance of members in respect of such rules and regulations.
CURRENT DIVERSIFICATIONS
A) DEPOSITORY PARTICIPANT
The The Exchange has also become a :epository <articipant with 5ational
Securities :epository 7imited B5S:70 and 3entral :epository Services 7imited
B3:S70. 4ur own :< is fully operational and the execution time will come down
substantially. The depository functions are undertaken by the Exchange by opening
the accounts at /yderabad of investors" members of the Exchange and other
Exchanges. The trades of all the Exchanges having 4n2line trading which get into
5ational depository can also be settled at /yderabad by this exchange itself. In short
all the trades of all the investors and members of any Exchange at /yderabad in
dematerialised securities can be settled by the Exchange itself as a participant of
5S:7 and 3:S7. The exchange has about &,"FFF 9.4. accounts.
B) FLOATING OF A SUBSIDIARY COMPANY FOR THE MEMBERSHIP
OF MAJOR STOCK ECHANGES OF .+0 COUNTRY
The Exchange had floated a Subsidiary 3ompany in the name and style of 6)s /SE
Securities 7imited for obtaining the 6embership of 5SE and 9SE. The Subsidiary
had obtained membership of both 5SE and 9SE. About &&* Sub2brokers may
registered with /SES" of which about ., sub2brokers are active. Turnover details are
furnished here under.
(&
YEAR
NSE CASH
R&#I, L%1+&
NSE F7O
R&#IN L%1+&
BSE
CASH
R&#IN L%1+&
(FF&2F( **C(*-.C& 22 22
(FF(2F* +(-&+*.,F &--,..FC 22
(FF*2F+ -&.CFC.+- *&((F*.,- &.,,C.,E
(FF+2F, +C+&CE.&& *,+*.F..& *E,&E.E-
C) FACILITY TO TRADE AT NSE,DERIVATIVES TRADING, NET
TRADING ETC
The Exchange has incorporated a Subsidiary O/SE securities 7imited O with a paid
up capital of ;s. (.,F crores initially to take 5SE 6embership" so that the members
of the exchange will have access to the 5SENs Trading Screen as Sub2brokers"
:erivatives Trading and 5et Trading etc. The 6embers of this Exchange will also
have e=ual opportunity of participating in such trading like any other 5SE member
PORTFOLIO MANAGEMENT PROCESS
<ortfolio management is a complex activity which may be broken down into
following stepsD
1) S80/"9"/%."2, 29 ",$0&.(0,. 2:;0/."$0& %,6 /2,&.!%",.&<
The typical objectives sought by investors are current income"
capital appreciation" and safety of principal. The relative importance of these
((
objectives should be specified. %urther" the constraints arising from li=uidity" tome
horion" tax" and special circumstances must be identified.
2) /+2"/0 29 %&&0. ("=:
The most important decision in portfolio management is the
asset mix :ecision. Hery broadly" this is concerned with the proportions of #stocks$
Be=uity shares and units ) shares of e=uity )) oriented mutual funds0 and #bonds$
Bfixed income investment vechiles in general0 in the portfolio. The appropriate
#stock bond$ mix depends mainly on the risk tolerance and investment tolerance
horion of the investor.
3) F2!(-3%."2, 29 82!.923"2 &.!%.0>)!
4nce a certain asset mix is chosen" an appropriate portfolio
strategy has to be hammered out. Two broad choices are available! an active
portfolio strategy or a passive portfolio strategy. An active portfolio strategy strives
to earn superior risk2adjusted returns by resorting to market timing" or sector
rotation" or security selection" or some combination of these. A passive portfolio
strategy" on the other hand involves holding a broadly diversified portfolio and
maintaining a pre2determined level of risk exposure.
?) S030/."2, 29 &0/-!"."0&
'enerally" investors pursue an active stance with respect to
security selection. %or stock selection" investors commonly go by fundamental
analysis and ) or technical analysis. The factors that are considered in selecting
bonds Bor fixed income instruments0 are yield to maturity" credit rating" term to
maturity" tax shelter" and li=uidity.
@) P2!.923"2 0=0/-."2,:
(*
This is the phase of portfolio management which is concerned with
implementing the portfolio plan by buying and) or selling specified securities in
given amounts. Though often glossed over in portfolio management discussions" this
is an important practices step that has a bearing on investment results.
A) P2!.923"2 !0$"&"2,:
The value of a portfolio as well as its composition the relative proportions of stock
and bond components may change as stocks and bonds fluctuate. 4f course the
fluctutations of stocks is often the dominant factor underlying this change. In
response to such changes" periodic rebalancing of the portfolio is re=uired. This
primarily involves a shift from stocks to bonds or vice versa. In addition" it may call
for sector rotation as well as security switches.
.0 P0!92!(%,/0 0$%3-%."2,:
The performance of a portfolio should be evaluated periodically. The key
dimensions of portfolio performance return are commensurate with its risk exposure.
Such a review may provide useful feedback to improve the =uality of the portfolio
management process on a continuing basis.
S2-!/0& 29 ",$0&.(0,. !"&1:
As an investor you are exposed to may variety of risks. Among these there are three
major ones! business risk" interest rate risk. ?hile a detailed discussion of these is
woven in the entire book" at this juncture a brief idea may be given.
&0 B-&",0&& !"&1:
As a holder of corporate securities Be=uity shares or debentures0" you are
exposed to the risk of poor business performance. This may be caused by a variety
(+
of factors like heightened competition" emergence of new technologies" development
of substitute products" shifts in consumer preferences. Inade=uate supply of essential
inputs" changes in government policies" and so on. 4ften" of course" the principal
factor may be inept and in component management. The poor business performance
definitely affects the interest of share holders" who have a residual claim on the
income and wealth of the firm. It can also affect the interest of debenture holders if
the ability of the firm to meet its interest and principal interest payment obligation is
impaired. In such a case" debenture holders face the prospect of default risk.
2) I,.0!0&. !%.0 !"&1:
The changes in interest have a bearing on the welfare of the investors. As the
interest rate goes up." the market price of existing fixed income securities falls" and
vice versa. This happens because the buyer of a fixed income security would not buy
it at its par value of share value if its fixed interest rate ids lower than the prevailing
rate interest rate on a similar security. %or example" a debenture that has a face value
of ;s &FFanda fixed rate of &(P will sell at discount if the interest rate moves up"
say" &(P to &+P. ?hile changes in interest rate will have a direct bearing on the
prices of fixed income securities" they affect e=uity prices too" albeit some what
indirectly. The changes in the relative yields of debentures and e=uity shares
influence e=uity prices.
3) M%!10. !"&1:
Even if the power of the corporate sector and the interest rate structure remain
more or less unchanged" prices of securities" e=uity shares in particular" tend to
fluctuates. ?hile there can be several reasons for fluctuation" the main cause appears
to be the changing psychology of the investors. There are periods when investors
become bullish and their investments horions lengthen. Investor optimism" which
(,
may border on euphoria" during such periods drives share prices to great heights.
The buoyancy created in the wake of this development is pervasive" affecting all
most ass the shares. 4n the others hand" when a wave of pessimism Bwhich often is
an exaggerated response to some unfavorable political or economic development0
sweeps the market" investors turn bearish and myopic prices of all most all e=uity
shares register as decline as fear and uncertainly pervade the market. The market
tends to move in cycles. As john says! >you need to get deeply in to your bones the
sense that any market" and certainly the stock market" moves in cycles" so that you
will infallibly wonderful bargains every few years" and have a chance to sell again at
ridiculously high prices a few years later.A
The cycles are caused by mass psychology. As john train explains!
>the ebb and flow of mass emotion =uite regular! panic is followed by relief" and
relief by optimismD then comes enthusiasm" then euphoria and rapture" then the
bubble bursts" and public feeling slides off again into concern" desperation "and
finally a new panic.A 4ne would expect large participation of institutions to dampen
the price fluctuations in the market. After all institutional investors have core
professional expertise to de fundamental analysis and greater financial resources to
act on fundamental analysis. /owever nothing of this kind has happened. 4n the
contrary" price fluctuation seen to have become wider after the arrival of the
institutional investors in larger numbers. ?hyQ <erhaps the institutions and their
analysis have not displayed more presence and rationality than the general investing
public and have succumbed in e=ual measure to the temptation to the speculation. As
john 6aynard @enyes has argued" factors that contribute to the volatility of the
market are not likely to diminish when expert professionals possessing best
judgement and knowledge compete in the market place. ?hyQ According to @enyes"
(-
even these people are concerned with speculation Bthe activity of forecasting the
psychology of the market0 and not the enterprise Bthe activity of forecasting the
prospective yield of assets over their whole life0.
PORTFOLIO THEORY THE BUSINESS OF DIVERSIFICATION:
Hery broadly speaking the investment process consists of two types. The first task is
security analysis which focuses on assessing the risk and risk returns characteristic
of the available investment vehicles. The second task is portfolio selection" which
involves portfolio selection" which involves choosing the best portfolio from the set
of feasible portfolios.
?e begin our discussion with the second task with the help of portfolio theory.
<ortfolio theory" originally proposed by #$/A;;8 6A;@4EITL$$ in the &E,Fs"
was the first formal attempt to =uantify the risk of aportfolio and develop a
methodology for determining the optimal portfolio. <rior to the development of
portfolio theory" investors dealt with the concepts of return and risk somewhat
loosely. Intuitively smart investors knew the benefit of diversification which is
reflected in the traditional adage! #$do not put all your eggs in one basket. #$/A;;8
6A;@4?IT8$$ was the first person to show =uantitively why and how
diversification reduces risk. In recongnition of his seminal contribution in the field
was awarded the 5obel prie in Economic in &EEF
PORTFOLIO RETURNS:
M0%&-!",> %/.-%3 82!.923"2 !0.-!,
The actual Bor realied0 return of a portfolio of assets over some specific time period
is calculated as follows!
;p R ?&;&S?(;(S.......?n ;n
?here ;p R rate on return on portfolio
(.
;i R rate on return of assest I BI R &"T.n0
?i R weight of assest i in the portfolio B I R&"T.n0
5 R number of assests in the portfolio
E=uation can be expressed succinctly as follows!
;p R U ?i ;i
E=uation B(0 says that return on a portfolio of assests is e=ual to the weighted
average of the returns on various assests on the portfolio.
%or example consider a portfolio consisting of five assests!
ASSET 6A;@ET HA71E ;ATE 4% ;ET1;5
& ;S +million &,P
( ;S -million &(P
* ;S Cmillion 2-P
+ ;S &Fmillion EP
, ;S &(million &FP
+Fmillion
The weight of various assets are!
?& R +)+F RF.&F " ?( R -)+F RF.&,"
?* R C)+F R F.(F "?+ R&F)+F RF.(, "and
?, R &()+F Ro.*F
The portfolio return is!
; R F.&F B &,P0 S F.&, B &(P0 SF.(F B2-P0 RF.(, BEP0 RF.*FB&FP0
; R ..*,P
THE EPECTED RETURN ON A PORTFOLIO OF RISKY ASSETS
(C
n
i R &
In portfolio analysis we often want to know the expected B or anticipated0 return
on a portfolio of risky assets. The expected return on portfolio is!
EB;p0 R ?&EB ;&0 S ?( E B;(0 S TTT.. S?nE B;n0
?here EB;p0 R Expected return on portfolio
?i R weigh of assest I in the portfolio BI R&"T.n0
EB;i0 R expected return on asset I B iR &"T.n0
PORTFOLIO RISK:
.
R"&1 29 % .'2 %&&0. 82!.923"2!
;ecall that the variance of an individual asset #s risk is defined as !
HarB ;i 0 R U J ;
is
V EB ;
i
0K
(
<
s
The variance of the return on a portfolio consisting of two assets is slightly more
difficult to calculate. It depends not only on the variance of the returns of the two
assests but also on the covariance of the returns of the two assests
HarB;p0 R w&
(
varB;&0 S w(
(
HarB;(0 S (?&?( 3ov B;&;(0
?here Har B;p0 R Hariance of the <ort polio return"
?&?( R ?eights of assets & I ( in the <ort polio"
varB;&0"HarB;(0 R Hariance of the returns on assets & and ("
3ov B;&" ;(0R 3ovariance of the returns on the assets & and ("
(E
S R &
n
In the words the above e=uation says that the variance of the return on a (2
asset portfolio is the sum of the weighted variances of the two assets plus the
weighted covariance between the two assets.
C2$%!"%,/0:
The covariance term in the above e=uation term reflects the degree to which
the returns of the two assets vary or change together. A positive covariance means
that the returns of the two assets move in the same direction where as a negative
covariance implies that the returns of the two assets move on the opposite direction.
The covariance between any two assets I and j is calculated as follows.
3ov B;
i
" ;
j
0 R <
&
J;
i&
V E B;
i
0K J; V EB;
j
0K
S <
(
J;
i(
V E B;
i
0K J; V EB;
j
0K
S TT.
S <
n
J;
in
V E B;
i
0K J; V EB;
j
0K.
?here <
&"
<
("
<
*"T
<
n
R <robabilities associated with states &"Tn"
;
i&"
;
i( T
;
in
R ;eturn on asset I in state &"Tn"
;
j&"
;
j( T
;
jn
R ;eturn on assets G in states &Tn
E B;
i
0" E B;
j
0 R Expected returns on assets I and G"
E=%(830: the returns on assets & and ( under the five possible states nature
are given below
State of 5ature <robability ;eturn on asset & ;eturn on assets (
& F.&F 2&F ,
( F.*F &, &(
*F
* F.*F &C &E
+ F.(F (( &,
, F.&F (. &(
The expected return on asset & is!
EB;&0 R F.&F B2&FP0 S F.*F B&CP0 S F.(F B((P0 S F.&FB (.P0 R &-P
The expected return on assets ( is!
EB;(0 R F.&F B&,P0 S F.*F B &(P0 S F.*F B&EP0 S F.(F B&,P0 S F.&F B&(P0 R &+P
The covariance between the returns on assets & and ( calculated below!
S.%.0 29
N%.-!0
P!2:%:"3".)
R0.-!, 2,
%&&0. 1
D0$"%."2, 29
.+0 !0.-!, 2,
%&&0. 1 9!2(
".& (0%,
R0.-!, 2,
%&&0. 2
D0$"%."2, 29
.+0 !0.-!, 2,
%&&0. 2 9!2(
".& (0%,
P!26-/. 29 .+0
60$"%."2,&
."(0&
8!2:%:"3".)
1 2 3 ? @ A *2)*?)*A)
&
(
*
+
,
F.&F
F.*F
F.*F
F.(F
F.&F
2&FP
&,P
&CP
((P
(.P
2(-P
2&P
(P
-P
&&P
,P
&(P
&EP
&,P
&(P
2EP
2(P
,P
&P
2(P
(*.+
F.-
*.F
&.(
2(.(
sumR(-.F
Thus the covariance between the returns on the two assets is (-.F
R03%."2, :0.'00, /2$%!"%,/0 %,6 /2!!03%."2,!
3ovariance correlation are conceptually analogous in the sense that both of them
reflect the degree of comovement between two variables. 6athematically " they are
related as follows!
3ov B;
i
" ;
j
0
*&
(Ri) (Rj)
?here corB;i" ;i0 Rcorrelation coefficient between the returns on assets I and j
3ov B;i";j0 R covariance between the returns on assets I and j
W B;i0" W B;j0 R standard deviation of the returns
Thus the correlation coefficient can vary between 2&.F and S&.&F. A value of 2&.F
mean perfect negative correlation or perfect comovement in the opposite directionD a
value of F means no correlations of comovement whatsoeverD a value of 2&.F means
perfect correlation or perfect comovement in the same direction. The exhibit
portrays graphically various types of correlation relationships.
*(
**
*+
*,
5otice that in the table there are n variance terms Bthe diagonal terms0 and nBn2&0
covariance terms Bthe non2diagonal terms0. If n is just two" there are two variance
terms. /owever " as n increases" the number of covariance terms is much larger than
the number of variance terms. %or example" when n is &F" there are &F Bthat is
n0variance terms. /ence the variance of a well2diversified portfolio is largely
determined by the covariance terms. If covariance terms are likely to be negative" it
may be possible to grid of risk almost wholly by restoring to diversification.
1nfortunately" securities prices tend to move together. This means that most
covariance terms are positive. /ence" irrespective of how widely diversified a
portfolio is" its risk does not fall below a certain level.
D2(",%,/0 29 /2$%!"%,/0:
As the number of securities included in a portfolio increases" the important of risk of
each individual security decreases where as the significance of the covariance
relation ship increases" to understand this" let us look at the e=uation for the variance
of the portfolio return!
HarB;p0 R U ?i
(
varB;i0 SU U ?i ?j covB;i;j0
BiXj0
If a valve diversification strategy is followed w R &)n under such a strategy
HarB;p0 R &)n U &)n varB;i0 SU U &)n
(
covB;i ;j0
*-
i R &
n
i R &
n
j R &
n
i R &
n n n
i R & j R &
The range variation term and the average covariance term may be expressed as
follows!
Har R &)n U varB;i0
3ov R &)nBn2&0 U U 3ov B;i" ;j0
/ence
Har B;0 R &)n Har S n2&)n cov
As n increases" the first term tends to become ero and the second term looms large.
<ut differently" the importance of the variance term diminishes where as the
importance of the covariance term increases.
O8."(%3 82!.923"2:
9efore we discuss the procedure prescribed by 6arkowi for selecting the optimal
portfolio" let us review the key assumptions made by markowit about asset
selection behaviour.
Investors decisions are based on only two parameters" vi . the expected
return and variance.
Investors are risk averse. This means that investors when investors are faced
with two investments with the same expected return but with different risks"
they will prefer the one with the lower risk.
Investors seek to achieve the higest expected return at a given level of risk.
*.
i R &
n
i R & j R &
n n
Investors have identical expectations about expected return" variances" and
covariances for all risky assets.
Investors have a common one2period investment horion.
The procedure developed by markowit for choosing the optimal portfolio of
risky assets consists of three steps!
1) delineate the set of efficient portfolio.
2) specify the risk V return indifference curves.
3) choose the optimal portfolio.
E99"/"0,. 82!.923"2&:
Suppose an investor is evaluating two stocks A and 9 for investment stock A has an
expected return of &, percent and a standard deviation of &F percent.
Stock 9 has an expected return of (F percent and a standard of (, percent. The
coefficient of correlation in the returns of A and 9 is F.+
/e can combine stocks A and 9 in a portfolio in a number of ways by simply
changing the proportions of his funds allocates to them. Some of the options
available to him are shown below.
<ort polio
<roportion ofA
?
A
<roportion of
9?
9
Expectedreturn
EB;
p
0 P
Standard:eviation
W
p B
& &.FF F.FF &, &F
( F.., F.(, &-.(, &&.(,
* F.,F F.,F &..,F &,.(&
+ F.(, F.., &C.., &E.CC
, F.FF &.FF (F.FF (,.FF
The five options described above are plotted graphically as shown. If just two stocks
offer the investor with so many options" imagine the range of possibilities open to
*C
him when he invests in a number of different securities. Exhibits shows the
innumerable portfolio options available to the investor. The collection of all possible
portfolio options represented by the broken V egg shaped region is referred to as the
feasible region.
Expected ;eturns" EB;p0
;isk" Wp
(FP
&,P
&FP
F,P
(FP
&,P
&FP
*E
The investor need not" however feel unduly overwhelmed by the belwildering range
of possibilities shown in the exhibit because what really matters to him is the north
west of the feasible range defined by the thick darkline. ;eferred to as the efficient
frontier" this boundary contains all the efficient portfolio options available to him.
It may be useful to clarify here what exactly a portfolio is. A portfolio is efficient if
Band only if0 there is no alternative with
+F
i. the same EB;p0 and a lower W p " or
ii. the same W p and a higher EB;p0" or
iii. a higher EB;p0 and a lower W p.
Thus in exhibit while all the available portfolio are contained in the region
A%Y654" only the portfolio which lie along the boundary A%Y are efficient. A%Y
represents the efficient frontier. All the other portfolios are inefficient. A portfolio
like is inefficient because portfolio like 9 and :" among others" dominate it. The
efficient frontier is the same for all the investors because portfolio theory is based on
the assumption that investors have homogenous expectations
?e have merely defined what is meant by set of efficient portfolios. /ow can
this actually obtained from the innumerable from the innumerable portfolio
possibilities that lie before the investors Q the set of efficient portfolios may be
determined with the help of graphical analysis" or calculus analysis" or =uadratics
programming analysis" the major advantage of graphical analysis is that it is easier
to grasp. Its advantage is hat it cannot handle
<ortfolios containing more than three securities. 6athematical analysis can grapple
with the n2 dimensional space. /owever" the calculus method is not capable of
handling constraints in the form of ine=ualities Muadratic programming analysis is
the most versatile of all the three approaches. It can handle any number of securities
and cope with ine=ualities as well. %or all practical" the =uadratic programming
approach is the most useful approach.
Expected
;eturn" EB;p0
+&
RISK RETURN INDIFFERENCE CURVES!
4nce the efficient frontier is delineated" the next =uestion is! ?hat is the optimal
portfolio for the investorQ To determine the optimal portfolio on the efficient
portfolio on the efficient frontier" the investor$s risk returns trade off must be known.
Exhibit represents the to illustrative indifference curves which reflect risk and return
tradeoff functions note that all points lying on an indifference curve provide the
same level of satisfaction. The indifference curves Ip and I= represents the risk
return tradeoffs of two hypothetical investors" < and M both < and M like most
investors are risk averse. They want higher returns to bear more risk. M is how ever
more risk averse than < M wants a higher expected return for bearing a given amount
of risk as compared to <. In general" the steeper the slope of the indifference curve
the greater the degree of risk aversion.
+(
Expected
returns
Each person has a map of indifference curves. Exhibit shows the indifference
map for < .in this figure" four risk2return indifference curves" Ip&"Ip("Ip and Ip+ are
shown. All the points lying on a given indifference curve offer the same level of
satisfaction. %or example" points A and 9" which lie on the indifference curve Ip&
offer the same level of satisfactionD likewise" points ; and S" which lie on the
indifference curve Ip( represents a higher level of satisfaction as compared to the
indifference curve Ip&"the indifference curve Ip* represents a higher level of
satisfaction when compared to the indifference curve Ip+ and so on.
O8."(%3 82!.923"2!
'iven the efficient frontier and the risk2return indifference curves" the optimal
portfolio is found at the point of tangency between the efficient frontier and a utility
indifference curve. In exhibit two investors < and M" confronted the same efficient
frontier" but having having different utility indifferences curves BIp&"Ip("and Ip* for
< and I=&"I=(" and I=* for M 0are shown to achieve their highest utility indifference
curves B Ip&"Ip(" and Ip* for < and I=&"I=(" and I=* for M 0 are shown to achieve
their highest utility at points <Z and MZ respectively.
Expected return
+*
O8."(%3 82!.923"2 '".+ 30,6",> %,6 :2!!2'",>:
7et us introduce yet another opportunity. Suppose that the investor can also
lend and borrow money at a risk free rate of ; percent as shown in the exhibit. If he
lends a portion of his funds at ;f and invests the balance in S BS is the point of the
efficient frontier of risky portfolios where the straight line emanating from ; is
tangential to the efficient frontier of risky portfolios0" he can obtain any combination
of risk and return along the line that connects ;f and S further" if he borrows some
more money and invests it along with his own funds" he can reach a point '" beyond
S" as shown in the exhibit. Thus" with the opportunity of lending and borrowing" the
efficient frontier changes. It is no longer A%Y. ;ather" it becomes ;f S' because
++
;fS' which is superior to the point on A'Y[ %or example" compared to 3 on A%Y"
: on ;fS' offers a higher expected return for the same standard deviation" likewise"
compared to 8 on A%Y" L on ;fS' offers the same expected return with a lower
standard deviation! and so on.
Since ;fS' dominates A%Y" every investor would do well to choose some
combination of ; and S a conservative investor may choose a point like u" where as
an aggressive investor may choose a point like H. /owever" note that both investors
choose some combination of ;f and S. ?hile the
3onservative investor weighs ; more in his portfolio" the aggressive investor weighs
S more in his portfolio Bin fact" in his portfolio" the weight assigned to ;f is negative
and that assigned to S is more than &0.
+,
Thus" the task of portfolio selection can be separated in to two steps!
a0 identification of" the optimal portfolio of risky securities.
b0 3hoice of combination of ; and S depending one$s risk attitude. This is the
import of the celebrated separation theorem" first enunciated by Games Tobin" a
5obel laureate in Economics.
P2!.923"2 (%,%>0(0,. 9!%(0 '2!1
S030/."2, 29 %&&0. ("=:
In your scheme of investments" you should accord top priority to a residential cover.
In addition" you must maintain a comfortable li=uid balance in a convenient form to
+-
meet expected and unexpected expenses in the short run. 4nce these are ade=uately
provided for" your asset mix decision in concerned mainly with financial assets
which may be divided into broad categories" via stocks and bonds. #stocks$ include
e=uity shares Bwhich in turn may be classified into income shares" growth shares"
blue chip shares" cyclical shares" speculative shares" and so on0 and units ) shares of
e=uity2oriented schemes of mutual funds Blike 6aster shares"9irla advantage" and so
on0.
#9onds$" defined very broadly" consist of non convertible2debentures of
private companies" public sector bonds" gilt2edged securities" ;9I relief bonds" units
) shares of debt2oriented schemes" deposits in the national savings shame" and so on.
The basic characteristics of this investment are that they earn a fixed or near2fixed
return. Should the long2term stock2bond mix be ,F!,F or .,!(, or any otherQ
;eferred to as the strategic2asset mix decision Bpolicy asset maxi decision0" this is by
far the most important decision to be made by the investor. Empirical studies have
shown that nearly EFpercent of the variance of the portfolio return is explained by its
asset mix. <ut differently" only &F percent of the variance of the portfolio return is
explained by the other elements like$ sector rotation$ and$ security selection. 'iven
the significance of the asset2mix decision" you should hammer it out carefully.
C2,$0,."2,%3 '"&62( 2, %&&0. ("=:
The conventional wisdom on asset mix is embodies in two
propositions!
4ther things being e=ual" an investor with greater tolerance for risk should tilt the
portfolio in favors of stocksD where as an investor with lesser tolerance for frisk
should tilt the portfolio in favour of bonds. This is because in general" stocks are
riskier than bonds and hence raen higher returns than bonds. GA6ES /.74;E
+.
summed up the long view well when he stated!$ the most enduring relation in all
finance perhaps is the relation ship between returns on e=uities or stocks and returns
on bonds.$ a similar observation can be made when we look at the returns on stocks
and bonds in India for the last two decades.
4ther things being e=ual" an investor with a long investment horion should tilt his
portfolio in favor of stocks where as investor with a shorter investor horion tilts his
portfolio in favour of bonds. This is because while the expected return from stocks is
not sensitive to the length of the investment period" the risk from stocks diminishes
as the investment period over the period &E,F2&ECF in the 1.S capital market. 4ne
can reasonably expect a similar pattern in other capital markets as well. ?hy does
the risk of stocks diminish as the investment period lengthensQ As the investment
period lengthens" the average yearly return over the period is subject to lesser
volatility because low returns in some years may be
4ffset by high returns in other years and vice versa. <ut differently there is benefit
of #time diversification$. As period" they invest through many periods. /ence they
are more comfortable investing in riskly assets over long run that over the short run.$
The implication of the above proposition are captures in exhibit which shoes how
the appropriate percentage allocate to the stock component of the portfolio is
influenced by the two basic factors" vi risk tolerance and investment horion. To
obtain the corresponding percentage allocation for the bond component of the
portfolio" simply subtract the number given in the exhibit from &FF.you will find this
matrix" helpful in resolving in your asset2mix decision.Bof course" before using this
matrix" you should define your risk tolerance ) short time horion may be raised to
&F percent or so. In a similar manner" the &FF percent" given for the cell high risk
tolerance ) long time horion the benefit of diversification across stocks and bonds.
+C
A88!28!"%.0 80!/0,.%>0 %332/%."2, ", .+0 &.2/1 /2(82,0,. 29 .+0 82!.923"2
Time horion ;isk Tolerance
7ow moderate /igh
short F (, ,F
6edium (, ,F .,
7ong ,F ., &FF
%or the sake of simplicity" we assumed there is a single investment horion. In
reality" an investor may have multiple investment horions corresponding to varied
needs. %or example" the investment horions corresponding to various goals sought
by an investor may be as follows!
I,$0&.(0,. >2%3 ",$0&.(0,. +2!"C2,
9uying a car two years
3onstructing a house ten years
Achieving financial independence twenty years
Establishing a charitable institution thirty years
4bviously" the appropriate asset mix corresponding to these investment goals would
be different.
F2!(-3%."2, 29 82!.923"2 &.!%.0>):
After you have chosen a certain asset mix" you have to formulate the
appropriate portfolio strategy. Two broad choices are available in this respect" an
active portfolio strategy or a passive portfolio strategy.
A/."$0 82!.923"2 &.!%.0>)
+E
An active portfolio strategy is followed by most investment professional and
aggressive investors who strive to earn superior returns" after adjustment for risk.
The four principal vectors of an active strategy" as shown in the exhibit are!
6arket timing
Sector rotation
Security selection
1se a specialied concept
V0/.2!& 29 %/."$0 82!.923"2 (%,%>0(0,.
/ighly active highly passive
6arket timing TTTTTTTTTTTTTTTT..
Sector rotation TTTTTTTTTTTTTTTT..
Security selection TTTTTTTTTTTTTTTT
1se a specialied concept TTTTTTTTTTTTTTTT..
M%!10. ."(",>:
This involves departing from the normal or strategy or long run asset mix to
reflect one$s assessment of the prospects of various assets in the near future.
Suppose your investible resources for financial assets are &FF and your normal or
strategic stock bond mix is ,F!,F. in the short hand and intermediate run however
you may be inclined to deviate from your long2term asset mix. If you expect stocks
to out perform bonds" on a risk2adjusted basis " in the near future" you may perhaps
set up the stock component of of your portfolio to say -F or .F percent. Such an
action" of course" would raise the beta of your portfolio. 4n the other hand" if you
expect bonds to out2perform stocks" on a risk adjusted basis" in the near future" you
,F
may set up the bond component of your portfolio to -F percent or .F percent. This
will naturally lower the beta of your portfolio.
6arketing timing is based on an explicit or implicit of general market
movements. The advocate of market timing employs a variety of tools like business
cycle analysis" moving average analysis" advance2decline analysis" and econometric
models. The forecast of the general market movement derived with the help of one
or more of these tools is tempered by the subjective judgment of the investors.
4ften" of course" the investor may go largely by his market sense.
Anyone who reviews the fluctuation in the market may be tempered to play
the play of marketing timing. 8et very few seem to succeed in this game. A careful
study on market timing argues that a investment manager must forecast the market
correctly ., percent of the time to break2even" after taking into account the cost of
errors and the cost of transactions. As %IS/E; 97A3@ said! $the market does just
as well" on average" when the investor is out of the market as it does when he is in.
so he loses money" relative to a simple buy2and2hold strategy" by being out of the
market part of the time$. Echoing a similar view G4/5 94'7E" chairman of the
vanguard group of investment companies said! # in *F years in this business" I do not
know any one who has done it successfully and consistently" nor any body who
knows any body who has done it successfully and consistently. Indeed" my
impression is that trying to do market timing is likely to be counter productive. >
G4/5 6A85A;: @E85ES rendered a similar verdict decades ago!$ we have not
proved able to take much advantage of a general systematic out of and into ordinary
shares as a whole at different phases of the trade cycle. As a result of these
experiences I am clear that the idea of whole sale shifts is for various reasons
impracticable and indeed undesirable.
,&
S0/.2! !2.%."2,:
The concept of sector rotation can be applied to stocks as well as bonds. It is"
however" used more commonly with respect to the stock component of the portfolio
where it essentially involves shifting the weightings for various industrial sector
based on their assessed outlook. %or example" if you believe that cement and
pharmaceutical sector would do well compared to other sector in the forthcoming
period Bone year" two years" or whatever"0 you may overweight these sectors" relative
to their position in the market portfolio.
?ith respect to binds" sector rotation implies a shift in the composition of the bond
portfolio in terms of =uality Bas reflected in credit rating 0" coupon rate" term to
maturity" and so on. %or example. If you anticipate a rise in interest rates you may
shift from long2term bonds to medium2term or even short2term bonds. ;emember
that a long2term is sensitive to interest rate variation compared to short2term bond.
S0/-!".) &030/."2,:
<erhaps the most commonly used vector by those who follow an active
portfolio strategy" security selection involves a search for under2priced securities. If
you resort to active stock selection" you amyl employ fundamental and or technical
analysis to identify stocks which seem to promise superior returns and concentrate
the stock component of your portfolio on them. <ut differently" in your portfolio
such will be over weighted relative to their position to their market portfolio. 7ike2
wise" stocks which are perceived to be unattractive will be underweighted relative to
position in their market portfolio. As far bonds are concerned" security selection
calls for choosing bonds which offer the highest yield to maturity at a given level of
risk.
,(
U&0 29 % &80/"%3"C06 ",$0&.(0,. /2,/08.:
A fourth possible approach to achieve superior returns is to employ a
specialied concept or philosophy" particularly with respect to investment in stocks.
As 3/A;7ES :.E77IS put it" a possible way to enhance returnsA is to develop
profound and valid insight into the forces that drive a particular centre of the market
or a particular group accompanies or industries and systematically exploit that
investment insight or concept.A
Some of the concepts that have been exploited successfully by investment
practitioners are
1# G!2'.+ &.2/1&:
2# N0>30/.06 2! D2-. 29 9%$2-!E &.2/1&:
3# A&&0.-!"6>0 &.2/1&:
?# T0/+,232>) &.2/1&:
@# C)/3"/%3 &.2/1&:
The advantage of cultivating a specialied investment concept or philosophy is that
it will help you to!
A0 %ocus your efforts on a certain kind of investment that reflect your abilities
and talents"
90 Avoid the distraction of pursuing other alternatives" and
30 6aster an approach or style though sustain practice and continual self2
criti=ue. As against these merits" the great disadvantage of focusing exclusively on a
specialied concept or philosophy is that it may become obsolete. The changes in
market place may cast a shadow over the validity of the basic premise underlying
,*
the investment philosophy. 'ive your profound condition and long2term
commitment to your specialied investment concept or philosophy" you may not
detect the need for change till it becomes rather late.
P%&&"$0 &.!%.0>):
The active strategy is based on the premise that the capital market is characteried
by inefficiencies which can be exploited by resorting to market timing or sector
rotation or security selection or use of a specialied concept or some combination of
these vectors. The passive strategy" on the other hand" rests on the tenant that he
capital market is fairly efficient with respect to the available information. /ence"
the search for superior returns through an active strategy is considered futile.
4perationally" how is the passive strategy implementedQ 9asically" it involves
adhering to the following two guide lines!
&. 3reate a well2diversified portfolio at a pre2determined level of risk.
(. /old the portfolio relatively unchanged over time" unless it becomes in
ade=uately
*. :iversified or inconsistent with the investor$s risk2return preferences.
S030/."2, 29 &0/-!"."0&:
Selection of bonds Bfixed income avenues0
8ou should carefully evaluate the following factors in selecting fixed income
avenues
&. yield to maturity!
(. the yield to maturity for a fixed income avenue reoresents the rate of retun
earned by the investor if he invests in the fixed income avenue and holds it
till its maturity.
*. risk of default!
,+
+. to asses the risk of default on a bond" you may look at the credit rating of the
band. If no credit ratin is available" examine relevant financial ratios Blike
debt2to2e=uity ratio" times interest earned ratio" and earning power0 of the
firm and asses the general prospects of the industry to which the firm
belongs.
a. in yester years" several fixed income avenues offered tax shieldD now
very few do so.
b. 7i=uidity!
If the fixed income avenue can be converted wholly or substantially into cash at a
fairly short notice" it possesses li=uidity of a high order.
S030/."2, 29 &.2/1& *0F-".) &+%!0&)
Three broad approaches are employed for the selection of e=uity shares!
technical analysis looks at price behavior and volume data to determine whether the
share will move up or down or remain trend less. %undamental analysis focuses on
fundamental factors like the earnings level the growth prospects" and risk exposure
to establish the intrinsic value and the prevailing market price. The random selection
approach is based on the premise that the market is efficient and securities are
properly priced.
P2!.923"2 0=0/-."2,:
9y the time the portfolio management is reached " several keys issues have
been sorted out. Investment objectives and constraints have been specified" asset
mix has been chosen" portfolio strategy has been developed" and specific securities
to be included in the portfolio have been identified. The next step is to implement
the portfolio plan by buying and or selling specified securities in given amounts. this
is the phase of portfolio execution which is often glossed over in the portfolio
,,
management literature. /owever it is an important practical step that has an
significant bearing on investment results. %urther" it is neither simple nor costless as
is sometimes naively felt. %or effectively handling the portfolio execution phase" you
should understand what the trading game is like" what is the nature of key players
Btransactors0 in this game" who are the likely winners and the losers in the game" and
what guidelines should be borne in mind while trading.
T!%6",> >%(0:
Security transactions tend to differ from normal business transactions in two
fundamental ways!
&0 a business man entering in to a transaction does so with a reasonable
understanding of the motives of the party on the other side of the transaction. %or
example" when you are buying a piece of machinery" you are well aware of the
motives of the seller. In constrast" in a typical securities transaction" the motive " and
even the identity" of the other party is not known.
(0 ?hile both parties generally gain from a business transaction" a security
transaction tends to be a ero sum game. A security offers the same future cash flow
stream to the buyer as well as the seller. So" apart from considerations of taxes and
differential risk2bearing abilities" the value of security is the same to the buyer as
well as the seller. /ence constructive motives which guide business transaction are
not present in most security transactions. This means that if a security transaction
benefits a party it hurts the other.
<ut differently" if one wins the other loses.
M2."$0& 92! .!%60:
?hy do people tradeQ 4ne motivation is cognitive. <eople trade because they think
they have superior information or better methods for analying information.
,-
/owever" most traders tend to confuse noise or randomness for information. As
6EI;STAT645 says!
#$ traders are patterns in stock prices that are random" and they relay on intuitive
judgement even when systematic analysis would have demonstrated that their
judgement in incorrect$$.
Another motivation is emotional. Trading ca be a source of pride. As
6EI;STAT6A5 saysD #$ specifically people trade because trading brings with it the
joy of pride. ?hen someone decides to buy a stock he assumes responsibility for the
decision. A stock that goes up brings not only profits" but also pride.$$ 4f course" if
the trading decision turns out to be wrong it can inflict losses and cause
embarrassment.
K0) 83%)0!&:
Securities market appears to be thronged by four types of players or transactions!
value2based transactors" information2based transactors" li=uidity based transactors"
and pseudo2information based transactors. 'enerally" the dealer or the market maker
intermediates between these transactors.
V%3-0 :%&06 .!%,&%/.2!&:
A value based transactor BH9T" here after0 carrier out extensive analysis of publicly
available information to establish values. /e trades when the difference between the
value assessed by him and the prevailing market prices so warrants. Typically" he
places limit orders to buy and sell with a spread that is large enough to provide a
cushion against errors of judgement and informational lacunae. %or example" a H9T
who establishes an intrinsic value of ;S ,F for some e=uity share may place an
order to buy if the net price is ;S +F or less. H9T s generally serve as the anchor for
,.
the trading system and establish the framework for the operations for the dealers.
H9T s typically don$t place much important on time.
I,92!(%."2, :%&06 .!%,&%/.2!&:
An information based transactor B I9T here after0 transacts on the basis of
information which is not in public domain and" therefore" not reflected in security
prices. Since he expects this information to have a significant impact on prices" he is
keen to transact soon. To him" time is a great value. ?hile the H9T is concerned
about how much the market will move towards the justified price. Bthe price
established in him based on fundamental analysis 0" the I9T is bothered about how
soon the market price will move up or down in response to new information. The
I9T generally employs #incremental$ fundamental analysis Bas he is concered about
price movements in response to new information0. In addition" he uses technical
analysis because timing is crucial to his operations. 1nlike the H9T" he rarely tries
to establish the absolute value of a security. Instead" he tries to assess the likely
impact of marginal fundamental and technical developments.
L"F-"6".) :%&06 .!%,&%.2!&:
A H9T" like an I9T" trades to reap investment advantage. A li=uidity based
transactor Blbt" hereafter0 however" trades primarily due to li=uidity considerations.
/e trades to deploy surplus funds or to obtain funds or to rebalances the portfolio.
/is trades are not based on a detailed valuation exercise B as is the case of H9T0 or
access to some information that is not already reflected in market price B as is the
case of an I9T0 . /ence he may be regarded as an information less trader who is
driven mainly by li=uidity considerations.
P&0-62-",92!(%."2, B%&06 .!%,&%/.2!&:
,C
A pseudo2information based transactor I<I9T" hereafter0 believes that he
possesses information that can be a source of gain" even though yhat information is
already captured or impounded in the price of the security. 4r" he exaggerates the
value of new information that he may come across and forms unrealistic
expectations. Essentially" the <I9T" like the 79T" is an information less trader. 8et"
he mistakenly believes that the possesses information which will generate
investment advantage to him.
D0%30!&:
A dealer intermediates between buyers and sellers gager to transact. The
dealer is ready to buy or sell with a spread which is failly small for an certain
security may be CF2C(. this means that the dealer is willing to buy at CF and sell at
C(. the dealer$s =uotations may move swiftly in response to changes in demand and
supply forces in the market. Typically the dealer$s bid2ask price band lies well with
in the bid2ask price band set by the H9T. This means that the bid price of the dealer
is higher than the bid price of the H9T and the ask price of the dealer is lower than
the ask price of H9T. The dealer$s function is such that he is not re=uired totake a
view on whether a security is worth buying or worth selling.he simply plays the role
of the intermediary and he does not plan to hold the position he ac=uires in
accommodating a transaction. /ence the dealer is a remarkably innocuous person.
7urking behind the dealer" of the cource
" is the transistor$s real trading adversary" whose identify and motive are often
unknown.
Exhibit summaries the trading trading motivations" time horions" and time
T!%,&%/.2! M2."$%."2, T"(0 +2!"C2, T"(0 $& 8!"/0
8!090!0,/0
H9T :iscrepancy between ?eeks to months <rice
,E
value and price
I9T
79T
5ew information
release or absorb cash
/ours to days Time
<I9T Apparently new
information
/ours to days Time
:ealer Accommodation 6utes to hours indifferent
S-((%!) 29 .!%6",> M2."$%."2,&, T"(0 +2!"C2,&, %,6 T"(0 $& 8!"/0 8!090!0,/0&
W+2 '",&, '+2 32&0&
?ho wins and who loses in the trading game which is essentially a ero sum game.
It appear that the I9T$S odds of winning are the highest" assuming that his
information is substantiated by the market he is followed by the H9T" 79T" and
<I9T in the that order.
<ut differently" the" the above =uestion may be answered as follows!
The I9T seems to have a distinct edge over others.
The H9T tends to lose against the I9T but gains against the 79T and <I9T.
The 79T may have some advantage over the <I9T.
S/!"8.& W+"/+ I H%$0 S030/.06
S#L#N#O SECTOR COMPANY
& E5E;'8 ;E7IA53E
( 4I7 I5:IA5 4I7 34;<
* </A;6A 3I<7A
+ STEE7 GI5:A7 STEE7
CALUCALTION OF STANDARD DEVIATION OF CIPLA
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T4TA7 -C**..,FF (,(,.-F*.
Average B;0 R -C**..,FF)(* R(E..&&E-
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Standard :eviation R Hariance
Standard :eviation R &&+.CFF(
Standard :eviation R &F..&+,
-&
CALUCALTION OF STANDARD DEVIATION OF IOC
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T4TA7 &F(+E.-,FF *E,C.F(C*
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CALUCALTION OF STANDARD DEVIATION OF RELIANCE
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CALUCALTION OF STANDARD DEVIATION OF JINDAL STEEL
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-)&*)(FF- EFF.FFFF CEC.F+*, &.E,-, *.C(.E
-)&+)(FF- CC-.,,FF CEC.F+*, 2&&.+E*, &*(.&FF,
-)&,)(FF- CEE.*FFF CEC.F+*, &.(,-, &.,.CC
-)&-)(FF- C.E.,,FF CEC.F+*, 2&C.+E*, *+(.FFE,
-)&.)(FF- CC-.FFFF CEC.F+*, 2&(.F+*, &+,.F+,E
-)&E)(FF- CE,.*FFF CEC.F+*, 2(..+*, ..,(-.
-)(F)(FF- CE..C,FF CEC.F+*, 2F.&E*, F.F*.+
-)(&)(FF- E&+.FFFF CEC.F+*, 2&,.E,-, (,+.-FEE
-)(()(FF- E(F.*FFF CEC.F+*, ((.(,-, +E,.*,&C
-)(*)(FF- E((.+FFF CEC.F+*, (+..F-, ,E*.(*E&+
-)(+)(FF- E((..,FF CEC.F+*, (+.*,-, -&F.+&&&
-)(-)(FF- CE..C,FF CEC.F+*, 2F.&E*, F.F*.+
-)(.)(FF- CCC.-FFF CEC.F+*, 2E.++*, CE.&.E.
Average B;0 R &*-,&.,,)(* R ,E*.,+,-
Hariane R &)(*2&B++&*E.-E,.0
Hariance R (FF-.*+EC
Standard :eviation R Hariance
Standard :eviation R (FF-.*+EC
Standard :eciation R ++..E((
-+
-)(C)(FF- C*F.FFFF CEC.F+*, 2-C.F+*, +-(-.E&.E
T4TA7 (F-,+.EFFF .+-C.F(EC
Average B;0 R (F-,+.EFFF)(* RCEC.F+*,
Hariane R &)(*2&B.+-C.F(EC0
Hariance R**E.+,,E
Standard :eviation R Hariance
Standard :eviation R **E.+,,E
Standard :eviation R &C.+(+*
CALUCLATED AVERAGE AND STANDARD DEVIATION
;eliance ,E*.,+,- ++..E((

Indian 4il ++,.-*.+ &*.+&(-

3ipla (E..&&E- &F..&+,

Gindal Steel CEC.F+*, &C.+(+*
CORRELATION BETWEEN CIPLA 7 RELIANCE
STANDARD DEVIATION
COMPANY NAME PERCENTAGE
;E7IA53E (EP
I5:IA5 4I7 EP
3I<7A .P
GI5:A7 STEE7 &(P
-,

DEVIATION OF CIPLA
DEVIATION
RELIANCE COMBINED DEVIATION
:ATE ;A2;A ;92;9 B;A2;A0B;92;90
-)&)(FF- 2+.E&E- &F.,C+C 2,(.F.(E
-)()(FF- 2..C&E- F..C+C 2-.&*-C
-)*)(FF- 2-.*-E- 2F.&&,( F..**C
-),)(FF- 2..-&E- 2*..&,( (C.*FC*
-)-)(FF- 2..(-E- F..*+C 2,.*+&.
-).)(FF- 2..*&E- *.&C+C 2(*.*&&,
-)C)(FF- 2&..&E- &F.C*+C 2&C.-*&,
-)E)(FF- 2*.,&E- &C.-*+C 2-,.,C.F
-)&F)(FF- 2,.--E- -..*+C 2*C.&C*-
-)&*)(FF- 2..F&E- &&.+*+C 2CF.(-..
-)&+)(FF- 2-..&E- &*.,*+C 2EF.E+C+
-)&,)(FF- 2C.E&E- &&.,*+C 2&F(.CC,C
-)&-)(FF- 2&&.&-E- &F.&*+C 2&&*.(F&.
-)&.)(FF- 2&(.&-E- ,.&C+C 2-*.FE-E
-)&E)(FF- 2&(.*-E- *.+*+C 2+(.+C.&
-)(F)(FF- ...*F+ 2(.C&,( 2(&..-(-
-)(&)(FF- &,.**F+ 2&-.F&,( 2(+,.,,&E
-)(()(FF- &*.,CF+ 2&E.F&,( 2(,C.(*+F
-)(*)(FF- &..&CF+ 2(F.+&,( 2*,F..+&*
-)(+)(FF- &*.,CF+ 2*.E-,( 2,*.C+E
-)(-)(FF- &*..CF+ 2(&.-&,( 2(C+.FC,.
-)(.)(FF- &(.CCF+ 2&..+-,( 2((+.E,CC
-)(C)(FF- &-.,*F+ 2&.-&,( 2(-.-EEE

T4TA7 2(&*C.EE*.
342Hariance B34HA90R&)(* B2(&*C.EE*.0
2E(.EEE.
34HA9
3orrelation 3oefficient
B<A90R
BStd.A0 BStd.90
2EE.EEE.
2F..*+E
B&F..&+,0B&&.C&0
--
CALUCLATED CORRELATION CO-EFFICIENT AND PORTFOLIO
RISK BETWEEN TWO COMPANIES
346<A58 5A6E 3orrelation coefficient ;isk BP0 <ortfolio

3I<7A I ;E7IA53E 2F.-++( &,.C&CE

;E7IA53E I I5:IA5 4I7 2F.E*+* -.--FF
-.
PORTFOLIO RISK

P G
H
Y
&
(

&
(
S
Y
(
(

(
(
S (BY
&
0 BY
(
0 B
&(
0
&

(
?here Y
&
R <roportion of Investment in Security (.
Y
(
R <roportion of Investment in Security &.

&
R Standard :eviation of Security &.

(
R Standard :eviation of Security (.
Y
&(
R 3orrelation 3o2Efficient between Security & and (.

p
R <ortfolio ;isk.
1# CIPLA 7 RELIANCE
Y
&
R F.C*
&
R &&.C&
Y
&(
R 2F.-++(
Y
(
R F.&.
(
R ++..E((

P
R

H
Y
&
(

&
(
S
Y
(
(

(
(
S (BY
&
0 BY
(
0 B
&(
0
&

(
-C

BF.C*0
(
B&&.C&0
(
S BF.&.0
(
B++..E((0
(
S(BF.C*0BF.&.0
B2F.-++(0B&&.C&0B++..E((0
F.-CCE ] &*E.+.-& S F.F(CE ] (FF-.*+&( S E-.&-.E
E-.FC,& S &,+.&,&- &,.C&CE
PORTFOLIO RISK

P G
H
Y
&
(

&
(
S
Y
(
(

(
(
S (BY
&
0 BY
(
0 B
&(
0
&

(
?here Y
&
R <roportion of Investment in Security (.
Y
(
R <roportion of Investment in Security &.

&
R Standard :eviation of Security &.

(
R Standard :eviation of Security (.
Y
&(
R 3orrelation 3o2Efficient between Security & and (.
-E

p
R <ortfolio ;isk.
2# RELIANCE 7 IOC
Y
&
R F.-C
&
R &*.+&(-
Y
&(
R 2F.E*+*
Y
(
R

F.*(
(
R ++..E((

P
R

H
Y
&
(

&
(
S
Y
(
(

(
(
S (BY
&
0 BY
(
0 B
&(
0
&

BF.-C0
(
B&*.+&(-0
(
S BF.*(0
(
B++..E((0
(
S(BF.-C0BF.*(0
B2F.E*+*0 B&*.+&(-0B++..E((0
C*.&C+. S (F,.++E* V (++.(C&,
-.--
.F
PORTFOLIO WEIGHTS
CIPLA 7 RELIANC
FORMULA:

(
b
V <
ab

a

b
% G

(
a
S
(
b
2(<
ab

a

b
: G 1 5 %
% G CIPLA
: G RELIANCE

% G 11#I1

: G ??#JK22
P
%: G -L#A??22
*??#JK22)
2
5 *-L#A??2) *11#I1) *??#JK22)
% G

*11#I1)
2
M *??#JK22)
2
5 2*-L#A??2) *11#I1 ) *??#JK22)
2LLA#3?12 M 3?L#JJK1
G
13K#?JA1 M 2LLA#3?11 M AI1#
23?J#12L3
G
2I2J#3J@?
.&
G L#I3
: G 1 5 %
: G 1 5 L#I3 G L#1J
RELIANCE 7 IOC
FORMULA:

(
b
V <
ab

a

b
% G

(
a
S
(
b
2(<
ab

a

b
: G 1 5 %
% G IOC
: G RELIANCE

% G 13#?12A

: G ??#JK22
P
%: G -L#K3?3
*??#JK22)
2
5 *-L#K3?3) *13#?12A) *??#JK22)
% G

*13#?12A)
2
M *??#JK22)
2
5 2*-L#K3?3) *13#?12A ) *??#JK22)

2LLA#3?12 M @A1#3LIA
.(
G
1JK#IKJI M 2?JK#2A3K M 1122#A1J2

2@AJ#A?KI
G
3JI1#JJI2
G L#AI
: G 1 5 %
: G 1 5 L#AI G L#32
.*
CONCLUSIONS FOR TWO ASSETS PORTFOLIOES
1# CIPLA 7 RELIANCE
In this combination" as per calculations and study 3I<7A bears a proportion of
F.C* and where as ;E7IA53E bears a proportion of F.&." which is less
compared 3I<7Aproportion" the deviation of two companies are &&.C&FF for
3I<7A and ++..E(( for ;E7IA53E
/ere risk of 3I<7A is lesser than the ;E7IA53E i.e.
&&.C&FF^++..E((. So investors can invest their money or fund in 3I<7A" which
has less standard deviation means less risk.
?here as" the portfolio risk of two companies are reduced to &,.C&CE.
2# RELIANCE 7 INDIAN OIL
As per this combination portfolio weights are F.-C and F.*( for Indian 4il and
;eliance respectively and standard deviation of Indian 4il is &*.+&(- which is less
compare to the standard deviation of ;eliance i.e. ++..E((" which means less risk
involved in Indian 4il compare to ;eliance. So" to any investor wants to invest his
money or fund in this portfolio" it is suggested that he can invest some portion of
fund in Indian 4il and rest of part in ;eliance.
The portfolio risk of the companies ;eliance and Indian 4il -.--FF" which is
less than the individual companies risk
.+
BIBLIOGRAPHY
V A avadhani" Security Analysis and <ortfolio 6anagement" /imalaya publishing
house"<p &2&C"
Ibid. +*-2+,F.
Donald !i"her and Ronald # #ardan" Security Analysis and <ortfolio 6anagement"
-
th
edition" <earson education" <p (2,.
Ibid. (C,.
S.Kevin" <ortfolio 6anagement" <rentic" hall India pvt ltd.(FF*" <p &2&C.
$ra"anna %handra" Investment Analysis <ortfolio 6anagement" Tata 6c 'raw2hill
<ublishing 3ompany ltd" <p (&C2((F.
V k Bhalla" Investment management" &F
th
edition" S chand and company 7td" <p
.F&2.&F.
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