Summer Internship Project Report
“A STUDY ON PORTFOLIO MANAGEMENT”
SHAREKHAN LIMITED, KOCHI
Submitted in partial fulfilment of the degree of BBA + GDBA
Programme of Amity University (U.P)
Submitted to: Submitted by:
Ms. Vidya Subramanian Mr. Akash Jeevan
Faculty guide A31106413023
BBA + GDBA class of 2015
Amity Global Business School, Kochi
BBA + GDBA Batch 2013-2016
Title of Project Report:
‘A Study on Portfolio Management’
(a)That the work presented for assessment in this Summer Internship Report is my own,
that it has not previously been presented for another assessment and that my debts (for
words, data, arguments and ideas) have been appropriately acknowledged
(b)That the work conforms to the guidelines for presentation and style set out in the
Date: Mr. Akash Jeevan
BBA + GDBA class of 2015
CERTIFICATE FROM FACULTY GUIDE
I Ms. Vidya Subramanian hereby certify that Mr. Akash Jeevan student of Bachelor
of Business Administration and Graduate Diploma in Business Administration at Amity
Global Business School, Kochi, of Amity University Uttar Pradesh has completed the
Project Report on ― ‘A Study on Portfolio Management.’
Ms. Vidya Subramanian
Faculty in charge
An undertaking of work life - this is never an outcome of a single person; rather it bears
the imprints of a number of people who directly or indirectly helped me in completing
the present study. I would be failing in my duties if I don't say a word of thanks to all
those who made my training period educative and pleasurable one. I am thankful to
SHAREKHAN LIMITED, KOCHI for giving me an opportunity to do summer training
in the company.
First of all, I am extremely grateful to Mr. Ajith P Rao (Regional Manager, Kochi) for
his guidance, encouragement and tutelage during the course of the internship despite his
extremely busy schedule. My very special thanks to him for giving me the opportunity to
do this project and for his support throughout as a mentor.
I must also thank my faculty guide Ms. Vidya Subramanian (Faculty, Amity Global
Business School) for her continuous support, mellow criticism and able directional
guidance during the project.
I sincerely thank Ms. Anu Antony (Visiting Faculty, Amity Global Business School) for
helping me to choose a relevant project topic for my internship and her valuable
suggestions and recommendations in my study.
I would also like to thank all the respondents for giving their precious time and relevant
information and experience, I required, without which the Project would have been
Finally I would like to thank all lecturers, friends, co-intern guys and my family for their
kind support and to all who have directly or indirectly helped me in preparing this project
report. And at last I am thankful to all divine light and my parents, who kept my
motivation and zest for knowledge always high through the tides of time.
Investing in equities requires time, knowledge and constant monitoring of the market. For
those who need an expert to help to manage their investments, portfolio management
service (PMS) comes as an answer. The business of portfolio management has never been
an easy one. Juggling the limited choices at hand with the twin requirements of adequate
safety and sizeable returns is a task fraught with complexities. Given the unpredictable
nature of the market it requires solid experience and strong research to make the right
decision. In the end it boils down to make the right move in the right direction at the right
time. That’s where the expert comes in.
The term portfolio management in common practice refers to selection of securities and
their continuous shifting in a way that the holder gets maximum returns at minimum
possible risk. Portfolio management services are merchant banking activities recognized
by SEBI and these activities can be rendered by SEBI authorized portfolio managers or
discretionary portfolio managers. A portfolio manager by the virtue of his knowledge,
background and experience helps his clients to make investment in profitable avenues. A
portfolio manager has to comply with the provisions of the SEBI (portfolio managers)
rules and regulations, 1993. This project also includes the different services rendered by
the portfolio manager. It includes the functions to be performed by the portfolio manager.
What is the difference between the value of time and money? In other words, learn to
separate time from money.
When it comes to the importance of time, how many of us believe that time is money. We
all know that the work done by us is calculated by units of time. Have you ever considered
the difference between an employee who is working on an hourly rate and the other who
is working on salary basis? The only difference between them is of the unit of time. No
matter whether you get your pay by the hour, bi-weekly, or annually; one thing common
in all is that the amount is paid to you according to amount of time you spent on working.
In other words, time is precious and holds much more importance than money. That is
the reason the time is considered as an important factor in wealth creation. The project
also shows the factors that one considers for making an investment decision and briefs
about the information related to asset allocation.
TABLE OF CONTENTS
Chapter 1: Introduction to company…………………………………………………1
1.1: Introduction to Investment……………………………………………....11
1.1.1: Investment Avenues…………………………………………12
1.1.2: Investment Alternatives…………………………………...…14
1.2: Portfolio Management…………………………………………………...17
1.2.1: Phases of Portfolio Management…………………………….19
1.2.2: Models for Portfolio Management………………………..…20
1.2.3: Portfolio Management Strategy……………………………...27
1.2.4: Objectives of Portfolio Management……………………...…32
1.2.5: Functions of Portfolio Management………………….………33
1.2.6: Steps in Portfolio Management……………………………...34
1.2.7: Types of Portfolio Management……………………………..35
1.3: Portfolio Manager…………………………………………………….….39
1.3.1: Qualities of Portfolio Manager……………………………....39
1.3.2: Code of Conduct- Portfolio Managers………………………40
1.3.3: Factors Affecting the Investor……………………………….41
1.4: SEBI rules & regulations for portfolio managers…………………………43
1.4.1: Rules for portfolio managers…………………………………43
1.4.2: Regulations for portfolio managers……………………..……44
1.4.3: SEBI guidelines for advertisement by portfolio managers...…46
Chapter 2: Literature Review…………………………………………………...........48
Chapter 3: Research Methodology…………………………………………………...50
Chapter 4: Analysis and Interpretations……………………………………………..52
Chapter 5: Findings and conclusion……………………….…………………………81
LIST OF TABLES
1.2: Types of Risk…………………………………………………………………...….19
4.1: Return, R (Avg) Calculation of NSE CNX Nifty…………………………..……….52
4.2: Risk, S.D Calculation of NSE CNX Nifty………………………………………….53
4.3: Return, R (Avg) Calculation of HDFC Bank Limited………………………….....54
4.4: Risk, S.D Calculation of HDFC Bank Limited……………..………………………55
4.5: Return, R (Avg) Calculation of Lupin Limited………………………….………….56
4.6: Risk, S.D Calculation of Lupin Limited……………………………………………57
4.7: Return, R (Avg) Calculation of HUL…………………………………………….…58
4.8: Risk, S.D Calculation of HUL……………………………………...………………59
4.9: Return, R (Avg) Calculation of TCS……………………………….………………60
4.10: Risk, S.D Calculation of TCS……………………………………………….…….61
4.11: Return, R (Avg) Calculation of Tata Motors…………………..………………….62
4.12: Risk, S.D Calculation of Tata Motors……………………………………..………63
4.13: Beta of Stock……………………………………………………...………………64
4.14 Return, Risk, & Beta of individual stock for FY15 (MoM)…………...………….65
4.15: Correlation & Covariance of Portfolios……………………………………….....66
4.16: Return and Risk of Portfolio 1……………………………………...…………….67
4.17: Return and Risk of Portfolio 2………………………...………………………….68
4.18: Return and Risk of Portfolio 3…………………………...……………………….68
4.19: Return and Risk of Portfolio 4……………………………………...…………….69
4.20: Return and Risk of Portfolio 5……………………………...…………………….69
4.21: Return and Risk of Portfolio 6…………………………...……………………….70
4.22: Return and Risk of Portfolio 7……………………………………………...…….70
4.23: Return and Risk of Portfolio 8…………………………...……………………….71
4.24: Return and Risk of Portfolio 9…………………………………...……………….71
4.25: Return and Risk of Portfolio 10……………………………….………………….72
4.26: Beta of Portfolios ………………………………...………………………………73
4.27: Return, Risk, & Beta of Portfolios……………………………………………….74
4.28: Sharpe's Index - Sharpe's Performance Index……………………………………75
4.29: Treynor's Index - Treynor's Reward-to-Variability Measure………………….....77
4.30: Jenson's Index - Reward to risk ratio………………….………………………….79
Annexure Table 1: The Top Portfolio Managing Companies of the World………..……84
LIST OF GRAPHS
4.1: Return, Risk & Beta of Individual Stocks FY15 (MoM)………………….………65
4.2: Return, Risk & Beta of Portfolios FY15 (MoM)………………………………….74
4.3: Portfolio Ranks based on Sharpe’s Index……………………………………….....76
4.4: Portfolio Rank based on Treynor’s Index……………………………………...….78
4.5: Return & Expected Return (ERP) of Portfolios…………………………………....80
LIST OF FIGURES
1.1: Corporate Structure SSKI…………………………………………………..……….3
1.2: Security Market Line (SML)………………………………………………………24
1.3: Steps in Portfolio Management……………………………………………………34
1.4: Normal Curve Distribution of Investor’s Risk……………………………….……..34
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Sharekhan is one of the leading retail broking House of SSKI Group which was running
successfully since 1922 in the country. It is the retail broking arm of the Mumbai-based
SSKI Group, which has over eight decades of experience in the stock broking business.
Sharekhan offers its customers a wide range of equity related services including trade
execution on BSE, NSE, Derivatives, depository services, online trading, investment
advisory, Mutual Fund Advisory etc.
The firm’s online trading and investment site - www.sharekhan.com - was launched on
Feb 8, 2000. The site gives access to superior content and transaction facility to retail
customers across the country. Known for its jargon-free, investor friendly language and
high quality research, the site has a registered base of over two lakh customers. The
number of trading members currently stands More than 8 Lacs. While online trading
currently accounts for just over 8 per cent of the daily trading in stocks in India, Sharekhan
alone accounts for 32 per cent of the volumes traded online.
The content-rich and research oriented portal has stood out among its contemporaries
because of its steadfast dedication to offering customers best-of-breed technology and
superior market information. The objective has been to let customers make informed
decisions and to simplify the process of investing in stocks.
On April 17, 2002 Sharekhan launched Speed Trade, a net-based executable application
that emulates the broker terminals along with host of other information relevant to the
Day Traders. This was for the first time that a net-based trading station of this caliber was
offered to the traders. In the last six months Speed Trade has become a de facto standard
for the Day Trading community over the net.
On October 01, 2007 Sharekhan again launched his another integrated Software based
product Trade Tiger, a net-based executable application that emulates the broker
terminals along with host of other information relevant to the Day Traders. It has another
quality which differs it from other that it has the combined terminal for equity and
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Share khan’s ground network includes over 1005 centers in 410 cities in India, of which
210 are fully-owned branches. Sharekhan has always believed in investing in technology
to build its business. The company has used some of the best-known names in the IT
industry, like Sun Microsystems, Oracle, Microsoft, Cambridge Technologies, Nexgenix,
Vignette, Verisign Financial Technologies India Ltd, Spider Software Pvt. Ltd. to build
its trading engine and content. Previously the Morakiya family holds a majority stake in
the company but now a world famous brand CITI GROUP has taken a majority stake in
the company. HSBC, Intel & Carlyle are the other investors.
With a legacy of more than 80 years in the stock markets, the SSKI group ventured into
institutional broking and corporate finance 18 years ago. Presently SSKI is one of the
leading players in institutional broking and corporate finance activities. SSKI holds a
sizeable portion of the market in each of these segments. SSKI’s institutional broking arm
accounts for 7% of the market for Foreign Institutional portfolio investment and 5% of
all Domestic Institutional portfolio investment in the country. It has 60 institutional
clients spread over India, Far East, UK and US. Foreign Institutional Investors generate
about 65% of the organization’s revenue, with a daily turnover of over US$ 4 million.
The Corporate Finance section has a list of very prestigious clients and has many ‘firsts’
to its credit, in terms of the size of deal, sector tapped etc. The group has placed over US$
1 billion in private equity deals. Some of the clients include BPL Cellular Holding,
Gujarat Pipavav, Essar, Hutchison, Planetasia, and Shopper’s Stop.
1. Brokering business.
2. White feathering house production.
To be the best retail broking brand in the retail business of the stock market.
To educate and empower the individual investor to make better investment decisions
through quality advices and superior services.
Share khan is the retail broking arm of SSKI, an organization with more than eight
decade of trust and credibility in the stock market.
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Amongst pioneers of investment research in the Indian market.
In 1984 venture into institutional broking and the corporate finance.
Leading domestic player in the Indian institutional business.
Over US$5 billion of private equity deal.
SSKI group companies
SSKI investor services ltd (Sharekhan)
S.S. Kantilal Isharlal securities
SSKI corporate finance.
SSKI - Corporate Structure
Figure 1.1: Corporate Structure SSKI
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Sharekhan retail broking
Among the top three (3) branded retail services providers (Rs 856 crs average
NO. 2 player in online business
Large network of branded broking outlets in the country servicing around
5, 45, 000 Clients
Board of Directors
Tarun P. Shah Mr. Jaideep Arora Shankar Vailaya
Free Depository A/c
Secure Order by Voice Tool Dial-n-Trade.
Automated Portfolio to keep track of the value of your actual purchases.
24x7 Voice Tool access to your trading account.
Personalized Price and Account Alerts delivered instantly to your Cell Phone &
Special Personal Inbox for order and trade confirmations.
On-line Customer Service via Web Chat.
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Instant Cash Tranferation.
Multiple Bank Option.
Enjoy Automated Portfolio.
Buy or sell even single share.
Branch - Head Office
A-206, Phoenix House, 2nd Floor, Senapati Bapat Marg, Lower Parel, Mumbai- 400 013.
Telephone No: 67482000 Email: email@example.com
Key officials Designation
1. Mr. Shripal Morakhia Chairman
2. Mr. Tarun Shah CEO
3. Mr. Kaliyan Raman Online Sales Head
4. Mr. Jason Pandey and Mr. Pradeep DP Head
5. Mr. Hemendra Aggarwal Cluster Head
6. Mr Amit pal Singh and Mr. Maneet Rastogi Regional Sales Manager
Products of Sharekhan
This account allows the client to trade through the website www.sharekhan.com and is
suitable for the retail investor who is risk-averse and hence prefers to invest in stocks or
who do not trade too frequently.
It allows investor to buy and sell stocks online along with the following features like
multiple watch lists, Integrated Banking, De-mat and Digital contracts, Real-time
portfolio tracking with price alerts and Instant money transfer.
Online trading account for investing in Equity and Derivatives via
Live Terminal and Single terminal for NSE Cash, NSE F&O, BSE & Mutual
Funds (online and offline).
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Integration of On-line trading, Saving Bank and De-mat Accounts.
Instant cash transfer facility against purchase & sale of shares.
Competative transaction charges.
Instant order and trade confirmation by E-mail.
Streaming Quotes (Cash & Derivatives).
Personlized market watch.
Single screen interface for Cash and derivatives and more.
Provision to enter price trigger and view the same online in market watch.
TRADE TIGER is an internet-based software application which is the combination of
EQUITY & COMMODITIES, that enables you to buy and sell share and well as
commodities item instantly. It is ideal for every client of SHAREKHAN LTD.
Integration of EQUITY & COMMODITIES MARKET.
Instant order Execution and Confirmation.
Single screen trading terminal for NSE Cash, NSE F&O & BSE & Commodities.
Real-time streaming quotes, tic-by-tic charts.
Market summary (Cost traded scrip, highest value etc.)
Hot keys similar to broker’s terminal.
Alerts and reminders.
Back-up facility to place trades on Direct Phone lines.
Live market debts.
Along with enabling access for your trade online, the CLASSIC and TRADE TIGER
ACCOUNT also gives you our Dial-n-trade services. With this service, all you have to
do is dial our dedicated phone lines which are 1800-22-7500, 3970-7500.
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Portfolio Management Services
Sharekhan is also having Portfolio Management Services for Exclusive clients.
1. Proprime - Research & Fundamental Analysis
Ideal for investors looking at steady and superior returns with low to medium risk
appetite. This portfolio consists of a blend of quality blue-chip and growth stocks
ensuring a balanced portfolio with relatively medium risk profile. The portfolio
will mostly have large capitalization stocks based on sectors & themes that have
medium to long term growth potential.
2. Protech - Technical Analysis
Protech uses the knowledge of technical analysis and the power of derivatives
market to identify trading opportunities in the market. The Protech lines of
products are designed around various risk/reward/ volatility profiles for different
kinds of investment needs.
Thrifty Nifty: Nifty futures are bought and sold on the basis of an
automated trading system that generates calls to go long/short. The
exposure never exceeds value of portfolio i.e. there is no leveraging; but
being short in nifty allows you to earn even in falling markets and there
by generates linear
Beta Portfolio: Positional trading opportunities are identified in the
futures segment based on technical analysis. Inflection points in the
momentum cycles are identified to go long/short on stock/index futures
with 1-2 month time horizon. The idea is to generate the best possible
returns in the medium term irrespective of the direction of the market
without really leveraging beyond the portfolio value. Risk protection is
done based on stop losses on daily closing prices.
Star Nifty: Trailing Stops Momentum trading techniques are used to spot
short term momentum of 5-10 days in stocks and stocks/index futures.
Trailing stop loss method of risk management or profit protection is used
to lower the portfolio volatility and maximize returns. Trading
opportunities are explored both on the long and the short side as the market
demands to get the best of both upwards & downward trends.
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3. Proarbitrage: Exploit Price Analysis
Online IPO's and mutual funds advisory is available.
Process of Account Opening
Lead Management System (LMS) / References
Telephone and Personal Visit
Agree Disagree (Close)
Filling the Form
Submission the Form
Login of the Form
Sending the Account Opening Kit to the Customer for Trading
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Pre-paid or AMC a/c: -
Advance Amount which will be fully adjsted against your brokerage you paid in
Following Schemes Are Available: - Brokerage will be chagred -
1) 750/- Scheme:- 0.05 / 0.50 %
2) 1000/- Scheme 0.045 / 0.45 %
3) 2,000/- Scheme: - 0.035 / 0.40 %
4) 6,000/- Scheme: - 0.025 / 0.25 %
5) 18,000/- Scheme: - 0.020 / 0.20 %
6) 30,000/- Scheme: - 0.015 / 0.18 %
7) 60,000/- Scheme: - 0.010 / 0.15 %
8) 1,00,000/- Scheme: - 0.0075 / 0.10 %
Minimum Margin of Rs. 25000/- is required for Account Opening
Annual Maintenance Charges will NIL for 1
year and Rs. 375/- from 2
Exposure: 4 times (on margin money)
Exposure: 10 times (on max trading)
Online IPO's and mutual funds advisory is available.
We are having tie-up with eleven banks for online fund transferring i.e. HDFC, ICICI,
IDBI, CITI, Union Bank of India, Oriental Bank of Commerce, INDUSIND, AXIS,
Centurian Bank of Punjab, Bank of India and Yes Bank.
Company Provide 4-6 E-mail to their customers per day.
Online Trade in Share
Sharekhan customers can online trade through their computers, through internet during
the market timings.
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Online Fund Transfer
We have tie up with Eleven Banks for online fund transferring i.e. HDFC, IDBI, CITI,
UBI, OBC, INDSLANDAND and UTI BANK, Yes bank, Bank of India for Online
Research based investment advice
Investment and trading services
Trading and seminars
Technology based investment tools
Integrated demat facility
Customer can trade in
SWOT Analysis of Sharekhan (My Observations)
1. Big client base
2. In-house research house
3. online as well as offline trading
4. Online IPO/ MF services
5. Share shops
7. User friendly tie ups with 10 banks
8. Excellent order execution speed and reliability
1. Lack of awareness among customer
2. Less focus on customer retention
3. Less Exposure
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2. Product modification
3. Improve Web based trading
4. Provide competitive brokerage
5. Concentrate on PMS
6. Focus on Institutional investors
7. Concentrate on HNI’s (high net worth investor)
1. Aggressive promotional strategies by close competitor like Religare, Angel Broking
and India bulls.
2. More and more players are venturing into this domain, which can further reduce the
earning of Share Khan.
3. Stock market is very volatile, risk involves is very high.
1.1 INTRODUCTION TO INVESTMENT
Investment may be defined as an activity that commits funds in any financial form in the
present with an expectation of receiving additional return in the future. The expectations
bring with it a probability that the quantum of return may vary from a minimum to a
maximum. This possibility of variation in the actual return is known as investment risk.
Thus every investment involves a return and risk.
Investment is an activity that is undertaken by those who have savings. Savings can be
defined as the excess of income over expenditure. An investor earns/expects to earn
additional monetary value from the mode of investment that could be in the form of
The three important characteristics of any financial asset are:
Return-the potential return possible from an asset.
Risk-the variability in returns of the asset form the chances of its value going
Liquidity-the ease with which an asset can be converted into cash.
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Investors tend to look at these three characteristics while deciding on their individual
preference pattern of investments. Each financial asset will have a certain level of each
of these characteristics.
1.1.1 Investment Avenues
There are a large number of investment avenues for savers in India. Some of them are
marketable and liquid, while others are non-marketable. Some of them are highly risky
while some others are almost risk less.
Investment avenues can be broadly categorized under the following heads:
Joint stock companies in the private sector issue corporate securities. These include equity
shares, preference shares, and debentures. Equity shares have variable dividend and hence
belong to the high risk-high return category; preference shares and debentures have fixed
returns with lower risk.
The classification of corporate securities that can be chosen as investment avenues can be
depicted as shown below:
By investing in shares, investors basically buy the ownership right to the company. When
the company makes profits, shareholders receive their share of the profits in the form of
dividends. In addition, when company performs well and the future expectation from the
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company is very high, the price of the company’s shares goes up in the market. This
allows shareholders to sell shares at a profit, leading to capital gains. Investors can invest
in shares either through primary market offerings or in the secondary market. The primary
market has shown abnormal returns to investors who subscribed for the public issue and
were allotted shares.
In a stock exchange a person who wishes to sell his security is called a seller, and a person
who is willing to buy the particular stock is called as the buyer. The rate of stock depends
on the simple law of demand and supply. If the demand of shares of company x is greater
than its supply then its price of its security increases.
In Online Exchange the trading is done on a computer network. The sellers and buyers
log on to the network and propose their bids. The system is designed in such ways that at
any given instance, the buyers/sellers are bidding at the best prices
An economist says when people earn a rupee; they do one of two things with it: they
either consume it or save it. A person consumes a rupee by spending it on something like
a car, clothing or food. People also consume some of their money involuntarily because
they must pay tax; a person saves a rupee by somehow putting it aside for consumption
at a later time.
A distinction can be made between saving and investing. Saving involves putting money
away with little, if any, risk saving rupee. Putting money in a bank certificate of deposit
or a passbook account is saving. A saver knows the future return, and the account is
probably insured by the Federal deposit Insurance Corporation (FDIC), a government
agency that protects depositors against bank failure. In the short-run, saving involves few
worries. Investing also involves putting money away, but in a risky endeavour. Buying
shares of stock in a NATIONAL STOCK EXCHANGE listed company is investing. If
an investor choose to let a broker hold the shares and just send an account statement each
month, his or her investment is protected against theft, loss, or brokerage firm failure by
the SECURITIES & EXCHANGE BOARD OF INDIA but not against a decline in value.
Depending on the particular stock purchased and other holdings, an investor may have
plenty to worry about. Both saving and investing amount to consumption shifting through
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time. By not spending a Rupee today, a person is able to spend more lately, assuming of
course, the person saved or invested wisely. Investing is risky but saving is not.
1.1.2 Investment Alternatives
Assets are things that people own. The two kinds of assets are financial assets and
real assets. The distinction between these terms is easiest to see from an
accounting viewpoint. A financial asset carries a corresponding liability
somewhere. If an investor buys shares of stock, they are an asset to the investor
but show up on the right side of the corporation’s balance sheet. A financial asset,
therefore, is on the left-hand side of the owner’s balance sheet and the right-hand
side of the issuer’s balance sheet. A real asset does not have a corresponding
liability associated with it, although one might be created to finance the real asset.
Financial assets have a corresponding liability but real assets do not.
A security is a legal document that shows an ownership interest. Securities have
historically been associated with financial assets such as stocks and bonds, but in
recent years have also been used with real assets. Securitization is the process of
converting an asset or collection of assets into a more marketable forum.
Security Groupings: Securities are placed in one of three categories: equity
securities, fixed income securities or derivative assets.
Equity Securities: The most important equity security is common stock.
Stock represents ownership interest in a corporation. Equity securities may
pay dividends from the company’s earnings, although the company has no
legal obligation to do so. Most companies do pay dividends, and most
companies try to increase these dividends on a regular basis.
Fixed Income Securities: A fixed income security usually provides a
known cash flow with no growth in the income stream. Bonds are the most
important fixed income securities. A bond is a legal obligation to repay a
loan’s principal and interest, but carries no obligation to pay more than
this. Interest is the cost of borrowing money. Although accountants
classify preferred stock as an equity security, the investment
characteristics of preferred stock are more like those of a fixed income
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security. Most preferred stocks pay a fixed annual dividend that does not
change overtime consequently. An investment manager will usually lump
preferred shares with bonds rather than with common stocks. Conversely,
a convertible bond is a debt security paying a fixed interest rate. It has the
added feature of being convertible into shares of common stocks by the
bond holders. If the terms of the conversion feature are not particularly
attractive at a given moment, the bonds behave like a bond and are
classified as fixed income securities. On the other hand, rising stock prices
make the bond act more like the underlying stock, in which case the bond
might be classified as an equity security. The point is that one cannot
generalize and group all stock issues as equity securities and all bonds as
fixed income securities. Their investment characteristics determine how
they are treated. For investment purposes, preferred stock is considered
a fixed income security.
Derivative Assets: Derivative assets have received a great deal of
attention in the 1990s. A derivative asset is probably impossible to define
universally. In general, the value of such an asset derives from the value
of some other asset or the relationship between several other assets. Future
and options contracts are the most familiar derivative assets. These
building blocks of risk management programs are used by all large
investment houses and commercial banks. The three broad categories of
securities are equities, fixed income securities, and derivative asset.
A good way to begin understanding what portfolio management is (and is
not) may be to define the term portfolio. In a business context, we can look
to the mutual fund industry to explain the term's origins.
Morgan Stanley's Dictionary of Financial Terms offers the following
It says if you own more than one security, you have an investment
portfolio. You build the portfolio by buying additional stocks, bonds,
mutual funds, or other investments. Your goal is to increase the portfolio's
value by selecting investments that you believe will go up in price.
According to modern portfolio theory, you can reduce your investment
risk by creating a diversified portfolio that includes enough different types,
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or classes, of securities so that at least some of them may produce strong
returns in any economic climate.
Note that this explanation contains a number of important ideas:
A portfolio contains many investment vehicles.
Owning a portfolio involves making choices -- that is, deciding what
additional stocks, bonds, or other financial instruments to buy; when to
buy; what and when to sell; and so forth. Making such decisions are a form
of management. The management of a portfolio is goal-driven. For an
investment portfolio, the specific goal is to increase the value.
Managing a portfolio involves inherent risks.
Over time, other industry sectors have adapted and applied these ideas to
other types of "investments," including the following:
Application portfolio management
This refers to the practice of managing an entire group or major subset of software
applications within a portfolio. Organizations regard these applications as
investments because they require development (or acquisition) costs and incur
continuing maintenance costs. Also, organizations must constantly make financial
decisions about new and existing software applications, including whether to
invest in modifying them, whether to buy additional applications, and when to
"sell" -- that is, retire – an obsolete software application.
Product portfolio management
Businesses group major products that they develop and sell into (logical)
portfolios, organized by major line-of-business or business segment. Such
portfolios require ongoing management decisions about what new products to
develop (to diversify investments and investment risk) and what existing products
to transform or retire (i.e., spin off or divest). Project or initiative portfolio
management, an initiative, in the simplest sense, is a body of work with:
A specific (and limited) collection of needed results or work products.
A group of people who are responsible for executing the initiative and use
resources, such as funding.
A defined beginning and end.
Managers can group a number of initiatives into a portfolio that supports a
business segment, product, or product line. These efforts are goal-driven; that is,
they support major goals and/or components of the enterprise's business strategy.
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Managers must continually choose among competing initiatives (i.e., manage the
organization's investments), selecting those that best support and enable diverse
business goals (i.e., they diversify investment risk). They must also manage their
investments by providing continuing oversight and decision-making about which
initiatives to undertake, which to continue, and which to reject or discontinue.
1.2 PORTFOLIO MANAGEMENT
What is portfolio management?
Portfolio is a collection of asset.
The asset may be physical or financial like Shares Bonds, Debentures, and
Preference Shares etc.
The individual investor or a fund manager would not like to put all his money in
the shares of one company, for that would amount to great risk.
Main objective is to maximize portfolio return and at the same time minimizing
the portfolio risk by diversification.
Portfolio management is the management of various financial assets, which
comprise the portfolio.
According to Securities and Exchange Board of India (Portfolio manager) Rules,
1993; ―portfolio‖ means the total holding of securities belonging to any person.
Designing portfolios to suit investor requirement often involves making several
projections regarding the future, based on the current information.
When the actual situation is at variance from the projections portfolio composition
needs to be changed.
One of the key inputs in portfolio building is the risk bearing ability of the
Portfolio management can be having institutional, for example, Unit Trust,
Mutual Funds, Pension Provident and Insurance Funds, Investment Companies
and non-Investment Companies.
Institutional e.g. individual, Hindu undivided families, Noninvestment
The large institutional investors avail services of professionals.
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A professional, who manages other people’s or institution’s investment portfolio
with the object of profitability, growth and risk minimization, is known as a
The portfolio manager performs the job of security analyst.
In case of medium and large sized organization, job function of portfolio manager
and security analyst are separate.
Portfolios are built to suit the return expectations and the risk appetite of the
Portfolio analysis considers the determination of future risk and return in holding
various blends of individual securities.
Portfolio expected return is a weighted average of the expected return of
individual securities but portfolio variance, in short contrast, can be something
less than a weighted average of security variances.
As a result an investor can sometimes reduce portfolio risk by adding security
with greater individual risk than any other security in the portfolio. This is because
risk depends greatly on the co-variance among return of individual securities.
Since portfolios expected return is a weighted average of the expected return of
its securities, the contribution of each security to the portfolio’s expected returns
depends on its expected returns and its proportionate share of the initial portfolio’s
Risk is a concept that denotes a potential negative impact to an asset or some characteristic
of value that may arise from some present process or future event. In everyday usage, risk
is often used synonymously with the probability of a known loss. Risk is uncertainty of
the income / capital appreciation or loss of the both. The total risk of an individual security
comprises two components, the market related risk called systematic risk also known as
undiversifiable risk and the unique risk of that particular security called unsystematic risk
or diversifiable risk.
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Types of risk
Table 1.2: Types of Risk
Systematic risk (market) Unsystematic risk (company risk)
Interest rate risk Labour troubles
Market risk Liquidity problems
Inflation risk Raw materials risks
Demand Financial risks
Government policy Management problems
1.2.1 Phases of Portfolio Management
Five phases can be identified in this process:
1. Security analysis
2. Portfolio analysis
3. Portfolio selection
4. Portfolio revision
5. Portfolio evaluation
An examination and evaluation of the various factors affecting the value of a security.
Security Analysis stands for the proposition that a well-disciplined investor can determine
a rough value for a company from all of its financial statements, make purchases when
the market inevitably under-prices some of them, earn a satisfactory return, and never be
in real danger of permanent loss.
Analysis 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.
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The proper goal of portfolio construction is to generate a portfolio that provides the
highest returns at a given level of risk. A portfolio having this characteristic is known as
an efficient portfolio. The inputs from portfolio analysis can be used to identify the set of
efficient portfolios. From this set of efficient portfolios, the optimal portfolio has to be
selected for investment. Harry Markowitz portfolio theory provides both the conceptual
framework and analytical tools for determining the optimal portfolio in a disciplined and
Having constructed the optimal portfolio, the investor has to constantly monitor the
portfolio to ensure that it continues to be optimal. Portfolio revision is as important as
portfolio analysis and selection.
It is the process, which is concerned with assessing the performance of the portfolio over
a selected period of time in terms of returns and risk. This involves quantitative
measurement of actual return realized and the risk born by the portfolio over the period
of investment. It provides a feedback mechanism for improving the entire portfolio
1.2.2 Models for Portfolio Management
Some of the financial models used in the process of Valuation, stock selection, and
management of portfolios include:
Maximizing return, given an acceptable level of risk.
Modern portfolio theory—a model proposed by Harry Markowitz among others.
The single-index model of portfolio variance.
Capital asset pricing model.
Arbitrage pricing theory.
The Jensen Index.
The Treynor Index.
The Sharpe Diagonal (or Index) model.
Value at risk model
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Markowitz: Portfolio Selection Model
The basic portfolio model, developed by Harry Markowitz, derived the expected rate of
return for a portfolio of assets and an expected risk measure. Markowitz showed that the
variance of the rate of return was meaning full measure of risk under a reasonable set of
assumptions and derives the formulas for computing the variance of the portfolio. This
portfolio variance formulation indicated the importance of diversification for reducing
risk, and showed how to properly diversify.
Parameters of Markowitz: The Mean Variance Criterion
Based on his research, for building up the efficient set of portfolio, as laid down by
Markowitz, we need to look into these important parameters.
i. Expected return
ii. Variability of returns as measured by standard deviation from the mean.
iii. Covariance or variance of one asset return to other asset returns.
Assumptions of Markowitz Model
Investors consider each investment alternative as being represented by a
probability distribution of expected returns over some holding period.
Investors maximize one period expected utility and possess utility curves that
demonstrate diminishing marginal utility of wealth.
Individuals estimate risk on the basis of the variability of expected returns.
Investors base decisions solely on expected return and risk; i.e., their utility curves
are a function of expected return and variance (or standard deviation) of returns
For a given risk level, investors prefer higher returns to lower returns. Similarly,
for a given level of expected return, investors prefer less risk to more risk.
Expected risk calculation:
Portfolio risk = SQRT [(Wx^2*Sdx^2) + (Wy^2*Sdy^2) +
Wx, Wy = proportion of total portfolio invested in security x & y respectively
Sdx, sdy = standard deviation of stock x & stock y respectively
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rxy = correlation coefficient of x & y
Expected Return Of A Portfolio Calculation:
Portfolio return = [(Wx*rx) + (Wy*ry)]
Wx = proportion of total portfolio invested in security x
Wy = proportion of total portfolio invested in security y
rx = expected return to security x
ry = expected return to security y
Formulas Used In Markowitz Model
Vi is the initial investment value and
Vf is the final investment value
This return has the following characteristics:
ROIArith = + 1.00 = + 100% when the final value is twice the initial value
ROIArith > 0 when the investment is profitable
ROIArith < 0 when the investment is at a loss
ROIArith = − 1.00 = − 100% when investment can no longer be recovered
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σ = Square root ((mean return -expected return) ^2/N)
COV (X, Y) =1/N [(RX-RX) (RY-RY)
The Beta coefficient, in terms of finance and investing, is a measure of a stock (or
portfolio)’s volatility in relation to the rest of the market. Beta is calculated for individual
companies using regression analysis.
The beta coefficient is a key parameter in the capital asset pricing model (CAPM). It
measures the part of the asset's statistical variance that cannot be mitigated by the
diversification provided by the portfolio of many risky assets, because it is correlated with
the return of the other assets that are in the portfolio.
For example, if every stock in the New York Stock Exchange was uncorrelated with every
other stock, then every stock would have a Beta of zero, and it would be possible to create
a portfolio that was nearly risk free, simply by diversifying it sufficiently so that the
variations in the individual stocks' prices averaged out. In reality, investments tend to be
correlated, more so within an industry, or when considering a single asset class (such as
equities). This correlated risk, measured by Beta, is what actually creates almost all of the
risk in a diversified portfolio. The formula for the Beta of an asset within a portfolio is
ra measures the rate of return of the asset,
rp measures the rate of return of the portfolio of which the asset is a part
And Cov (ra, rp) is the covariance between the rates of return.
In the CAPM formulation, the portfolio is the market portfolio that contains all risky
assets, and so the rp terms in the formula are replaced by rm, the rate of return of the
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The beta movement should be distinguished from the actual returns of the stocks. For
example, a sector may be performing well and may have good prospects, but the fact that
its movement does not correlate well with the broader market index may decrease its beta.
Beta is a measure of risk and not to be confused with the attractiveness of the investment.
The Security Market Line (SML)
The Security Market Line (SML) is the graphical representation of the Capital Asset
Pricing Model. It displays the expected rate of return for an overall market as a function
of systematic (non-diversifiable) risk (beta).
The x-axis represents the risk (beta), and the y-axis represents the expected return.
The market risk premium is determined from the slope of the SML.
The securities market line can be regarded as representing a single-factor model of the
asset price, where Beta is exposure to changes in value of the Market. The equation of the
SML is thus:
Figure 1.2: Security Market Line (SML)
Implications for Investors from the Measurement of Portfolio Risk
If the investor conservative and interested in low variability of portfolio returns from the
expected return (actual realizable return not from expected), he should:
Invest his funds in securities with low standard deviations, and
Ensure that the securities chosen for his portfolio have relatively low coefficients of
correlation with one another.
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Theoretically, if it is possible, he should include some securities with negative
coefficients of correlation with other securities in the portfolio.
Sharpe Single Index Model:
The single-index model (SIM) is a simple asset pricing model commonly used in the
finance industry to measure risk and return of a stock. Mathematically the SIM is
rit is return to stock i in period t
rf is the risk free rate (i.e. the interest rate on treasury bills)
rmt is the return to the market portfolio in period t
αi is the stock's alpha, or abnormal return
βi is the stocks's beta, or responsiveness to the market return
Note that rit − rf is called the excess return on the stock, rmt − rf the excess return on the
εit is the residual (random) return, which is assumed normally distributed with mean zero
and standard deviation σi
These equations show that the stock return is influenced by the market (beta), has a firm
specific expected value (alpha) and firm-specific unexpected component (residual). Each
stock's performance is in relation to the performance of a market index (such as the All
Ordinaries). Security analysts often use the SIM for such functions as computing stock
betas, evaluating stock selection skills, and conducting event studies.
Assumptions of the single-index model
To simplify analysis, the single-index model assumes that there is only 1 macroeconomic
factor that causes the systematic risk affecting all stock returns and this factor can be
represented by the rate of return on a market index, such as the
S&P 500. According to this model, the return of any stock can be decomposed into the
expected excess return of the individual stock due to firm-specific factors, commonly
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denoted by its alpha coefficient (α), the return due to macroeconomic events that affect
the market, and the unexpected microeconomic events that affect only the firm.
The term βi(rm − rf) represents the movement of the market modified by the stock's beta,
while ei represents the unsystematic risk of the security due to firm-specific factors.
Macroeconomic events, such as changes in interest rates or the cost of labour, causes the
systematic risk that affects the returns of all stocks, and the firm-specific events are the
unexpected microeconomic events that affect the returns of specific firms, such as the
death of key people or the lowering of the firm's credit rating, that would affect the firm,
but would have a negligible effect on the economy. In a portfolio, the unsystematic risk
due to firm-specific factors can be reduced to zero by diversification.
The index model is based on the following:
Most stocks have a positive covariance because they all respond similarly to
However, some firms are more sensitive to these factors than others, and this firm-
specific variance is typically denoted by its beta (β), which measures its variance
compared to the market for one or more economic factors.
Covariances among securities result from differing responses to macroeconomic
factors. Hence, the covariance of each stock can be found by multiplying their
betas and the market variance:
Cov (Ri, Rk) = βiβkσ2. This last equation greatly reduces the computations
required to determine covariance because otherwise the covariance of the
securities within a portfolio must be calculated using historical returns, and the
covariance of each possible pair of securities in the portfolio must be calculated
independently. With this equation, only the betas of the individual securities and
the market variance need to be estimated to calculate covariance. Hence, the index
model greatly reduces the number of calculations that would otherwise have to be
made to model a large portfolio of thousands of securities.
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1.2.3 Portfolio Management Strategy
There are mainly two types of portfolio strategies available, these are
1. Active Portfolio Strategy
2. Passive Portfolio Strategy
Active Portfolio Strategy
In an active portfolio strategy, a manager uses financial and economic indicators along
with various other tools to forecast the market and achieve higher gains than a buy-and-
hold (passive) portfolio. Although not always the case, some active portfolio strategies
will include passive techniques such as dollar cost averaging.
Active management (also called active investing) refers to a portfolio management
strategy where the manager makes specific investments with the goal of outperforming
an investment benchmark index. Investors or mutual funds that do not aspire to create a
return in excess of a benchmark index will often invest in an index fund that replicates as
closely as possible the investment weighting and returns of that index; this is called
passive management. Active management is the opposite of passive management,
because in passive management the manager does not seek to outperform the benchmark
index and reinvesting dividends.
Ideally, the active manager exploits market inefficiencies by purchasing securities (stocks
etc.) that are undervalued or by short selling securities that are overvalued. Either of these
methods may be used alone or in combination. Depending on the goals of the specific
investment portfolio, hedge fund or mutual fund, active management may also serve to
create less volatility (or risk) than the benchmark index. The reduction of risk may be
instead of, or in addition to, the goal of creating an investment return greater than the
benchmark. Active portfolio managers may use a variety of factors and strategies to
construct their portfolio(s). These include quantitative measures such as price/earnings
ratio P/E ratios and PEG ratios, sector investments that attempt to anticipate long-term
macroeconomic trends (such as a focus on energy or housing stocks), and purchasing
stocks of companies that are temporarily out-of-favour or selling at a discount to their
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intrinsic value. Some actively managed funds also pursue strategies such as merger
arbitrage, short positions, option writing, and asset allocation.
The effectiveness of an actively-managed investment portfolio obviously depends on the
skill of the manager and research staff. In reality, the majority of actively managed
collective investment schemes rarely outperform their index counterparts over an
extended period of time, assuming that they are benchmarked correctly. For example, the
Standard & Poor's Index Versus Active (SPIVA) quarterly scorecards demonstrate that
only a minority of actively managed mutual funds have gains better than the Standard &
Poor's (S&P) index benchmark. As the time period for comparison increases, the
percentage of actively-managed funds whose gains exceed the S&P benchmark declines
further. Due to mutual fund fees and/or expenses, it is possible that an active or passively
managed mutual fund could underperform compared to the benchmark index, even
though the securities that comprise the mutual fund are outperforming the benchmark.
However, since many investors are not satisfied with a benchmark return a demand for
actively-managed continues to exist. In addition, many investors find active management
an attractive investment strategy when investing in market segments that are less likely
to be profitable when considered as whole. These kinds of sectors might include a sector
such as small cap stocks.
Advantages of active management
The primary attraction of active management is that it allows selection of a variety of
investments instead of investing in the market as a whole. Investors may have a variety
of motivations for following such a strategy: They may be skeptical of the efficient-
market hypothesis, or believe that some market segments are less efficient in creating
profits than others. They may want to manage volatility by investing in less-risky, high-
quality companies rather than in the market as a whole, even at the cost of slightly lower
returns. Conversely, some investors may want to take on additional risk in exchange for
the opportunity of obtaining higher-than-market returns. Investments that are not highly
correlated to the market are useful as a portfolio diversifier and may reduce overall
portfolio volatility. Some investors may wish to follow a strategy that avoids or
underweights certain industries compared to the market as a whole, and may find an
actively-managed fund more in line with their particular investment goals. (For instance,
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an employee of a high-technology growth company who receives company stock or stock
options as a benefit might prefer not to have additional funds invested in the same
Several of the actively-managed mutual funds with strong long-term records invest in
value stocks. Passively-managed funds that track broad market indices such as the S&P
500 have money invested in all the securities in that index i.e. both growth and value
The use of managed funds in certain emerging markets has been recommended by Burton
Malkiel, a proponent of the efficient market theory who normally considers index funds
to be superior to active management in developed markets.
Disadvantages of active management
The most obvious disadvantage of active management is that the fund manager may make
bad investment choices or follow an unsound theory in managing the portfolio. The fees
associated with active management are also higher than those associated with passive
management, even if frequent trading is not present. Those who are considering investing
in an actively-managed mutual fund should evaluate the fund's prospectus carefully. Data
from recent decades demonstrates that the majority of actively-managed large and mid-
cap stock funds in United States fail to outperform their passive stock index counterparts.
Active fund management strategies that involve frequent trading generate higher
transaction costs which diminish the fund's return. In addition, the short-term capital gains
resulting from frequent trades often have an unfavourable income tax impact when such
funds are held in a taxable account.
When the asset base of an actively-managed fund becomes too large, it begins to take on
index-like characteristics because it must invest in an increasingly diverse set of
investments instead of those limited to the fund manager's best ideas. Many mutual fund
companies close their funds before they reach this point, but there is potential for a
conflict of interest between mutual fund management and shareholders because closing
the fund will result in a loss of income (management fees) for the mutual fund company.
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Passive Portfolio Strategy
A strategy that involves minimal expectational input, and instead relies on diversification
to match the performance of some market index. A passive strategy assumes that the
marketplace will reflect all available information in the price paid for securities, and
therefore, does not attempt to find mispriced securities.
The Portfolio Manager
This is a new role for organizations that embrace a portfolio management approach.
A portfolio manager is responsible for continuing oversight of the contents within a
portfolio. If you have several portfolios within your portfolio structure, then you will
likely need a portfolio manager for each one. The exact range of responsibilities (and
authority) will vary from one organization to another, but the basics are as follows:
One portfolio manager oversees one portfolio.
The portfolio manager provides day-to-day oversight.
The portfolio manager periodically reviews the performance of, and conformance
to expectations for, initiatives within the portfolio.
The portfolio manager ensures that data is collected and analysed about each of
the initiatives in the portfolio.
The portfolio manager enables periodic decision making about the future direction
of individual initiatives.
Portfolio Reviews and Decision Making
As initiatives are executed, the organization should conduct periodic reviews of actual
(versus planned) performance and conformance to original expectations.
Typically, organization managers specify the frequency and contents for these periodic
reviews, and individual portfolio managers oversee their planning and execution. The
reviews should be multi-dimensional, including both tactical elements (e.g., adherence to
plan, budget, and resource allocation) and strategic elements (e.g., support for business
strategy goals and delivery of expected organizational benefits). A significant aspect of
oversight is setting multiple decision points for each initiative, so that managers can
periodically evaluate data and decide whether to continue the work. These
"continue/change/discontinue" decisions should be driven by an understanding
(developed via the periodic reviews) of a given initiative's continuing value, expected
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benefits, and strategic contribution, Making these decisions at multiple points in the
initiative's lifecycle helps to ensure that managers will continually examine and assess
changing internal and external circumstances, needs and performance.
Implementing portfolio management practices in an organization is a transformation
effort that typically involves developing new capabilities to address new work efforts,
defining (and filling) new roles to identify portfolios (collections of work to be done), and
delineating boundaries among work efforts and collections.
Implementing portfolio management also requires creating a structure to provide
planning, continuing direction, and oversight and control for all portfolios and the
initiatives they encompass. That is where the notion of governance comes into play. The
view of governance is:
An abstract, collective term that defines and contains a framework for organization,
exercise of control and oversight, and decision-making authority, and within which
actions and activities are legitimately and properly executed; together with the definition
of the functions, the roles, and the responsibilities of those who exercise this oversight
Portfolio management governance involves multiple dimensions, including:
Defining and maintaining an enterprise business strategy.
Defining and maintaining a portfolio structure containing all of the organization's
initiatives (programs, projects, etc.
Reviewing and approving business cases that propose the creation of new
Providing oversight, control, and decision-making for all ongoing initiatives.
Ownership of portfolios and their contents.
Each of these dimensions requires an owner -- either an individual or a collective -- to
develop and approve plans, continuously adjust direction, and exercise control through
periodic assessment and review of conformance to expectations.
A good governance structure decomposes both the types of work and the authority to plan
and oversee work. It defines individual and collective roles, and links them to an authority
scheme. Policies that are collectively developed and agreed upon provide a framework
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for the exercise of governance. The complexities of governance structures extend well
beyond the scope of this article. Many organizations turn to experts for help in this area
because it is so critical to the success of any business transformation effort that
encompasses portfolio management. For now, suffice it to say that it is worth investing
time and effort to create a sound and flexible governance structure before you attempt to
implement portfolio management practices.
Portfolio management essentials
Every practical discipline is based on a collection of fundamental concepts that people
have identified and proven (and sometimes refined or discarded) through continuous
application. These concepts are useful until they become obsolete, supplanted by newer
and more effective ideas.
For example, in Roman times, engineers discovered that if the upstream supports of a
bridge were shaped to offer little resistance to the current of a stream or river, they would
last longer. They applied this principle all across the Roman Empire. Then, in the middle
Ages, engineers discovered that such supports would last even longer if their downstream
side was also shaped to offer little resistance to the current. So that became the new
standard for bridge construction. Portfolio management, like bridge-building, is a
discipline, and a number of authors and practitioners have documented fundamental ideas
about its exercise.
1.2.4 Objectives of Portfolio Management
The basic objective of Portfolio Management is to maximize yield and minimize risk. The
other objectives are as follows:
a) Stability of Income: An investor considers stability of income from his
investment. He also considers the stability of purchasing power of income.
b) Capital Growth: Capital appreciation has become an important investment
principle. Investors seek growth stocks which provide a very large capital
appreciation by way of rights, bonus and appreciation in the market price of a
c) Liquidity: An investment is a liquid asset. It can be converted into cash with the
help of a stock exchange. Investment should be liquid as well as marketable. The
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portfolio should contain a planned proportion of high-grade and readily saleable
d) Safety: safety means protection for investment against loss under reasonably
variations. In order to provide safety, a careful review of economic and industry
trends is necessary. In other words, errors in portfolio are unavoidable and it
requires extensive diversification.
e) Tax Incentives: Investors try to minimize their tax liabilities from the
investments. The portfolio manager has to keep a list of such investment avenues
along with the return risk profile, tax implications, yields and other returns.
There are three goals of portfolio management
1. Maximize the value of the portfolio
2. Seek balance in the portfolio
3. Keep portfolio projects strategically aligned.
1.2.5 Functions of Portfolio Management
The basic purpose of portfolio management is to maximize yield and minimize risk. Every
investor is risk averse. In order to diversify the risk by investing into various securities
following functions are required to be performed.
The functions undertaken by the portfolio management are as follows:
1. To frame the investment strategy and select an investment mix to achieve the
desired investment objective;
2. To provide a balanced portfolio this not only can hedge against the inflation but
can also optimize returns with the associated degree of risk;
3. To make timely buying and selling of securities;
4. To maximize the after-tax return by investing in various taxes saving investment
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1.2.6 Steps in Portfolio Management
Figure 1.3: Steps in Portfolio Management
As guided by SEBI, the 6 steps for an ideal portfolio management should be
1. Establish the client's investment objectives.
2. Measure a client's attitude to risk by completion of a risk profile questionnaire.
Figure 1.4: Normal Curve Distribution of Investor’s Risk
3. Determine the asset class allocation appropriate to a client's risk grade profile.
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4. Undertake portfolio fund selection in association with a global asset management
company. This will provide:
Access to some of the world’s best managers, not just mass market retail
A process with the rigorous objectivity to change drifting managers.
A solution previously only available to large institutional investors.
Continual daily monitoring and replacement of managers - by a dedicated
global team of more than 100 analysts.
An investment process designed to manage risk and deliver consistent
5. Tax wrapper allocation (ISA's, Bonds, Units Trusts, OEICs) according to client's
tax position and investment requirements.
6. Ongoing Portfolio Management (on a quarterly, six monthly or annually basis)
to undertake regular fund performance reviews, reaffirm client investment
requirements, and implement any agreed fund switch recommendations. 24x7 on-
line access to the Portfolio Management Platform.
1.2.7 Types of Portfolio Management:
The two types of portfolio management services are available to the investors:
i. Discretionary portfolio management services.
ii. Nondiscretionary portfolio management services.
The Discretionary portfolio management services (DPMS)
In this type of services, the client parts with his money in favour of manager, who
in return, handles all the paper work, makes all the decisions and gives a good
return on the investment and for this he charges a certain fees.
In this discretionary PMS, to maximize the yield, almost all portfolio managers
parks the funds in the money market securities such as overnight market, 182 days
treasury bills and 90 days commercial bills.
Normally, return on such investment varies from 14 to 18 per cent, depending on
the call money rates prevailing at the time of investment.
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The Non-discretionary portfolio management services
The manager function as a counsellor, but the investor is free to accept or reject
the manager’s advice; the manager for a services charge also undertakes the paper
The manager concentrates on stock market instruments with a portfolio tailor
made to the risk taking ability of the investor.
Advantages of portfolio management
Individuals will benefits immensely by taking portfolio management services for the
following reason: -a) Whatever may be the status of the capital market; over the long
period capital markets have given an excellent return when compared to other forms of
investment. The return from bank deposits, units etc., is much less than from stock market.
b) The Indian stock markets are very complicated. Though there are thousands of
companies that are listed only a few hundred, which have the necessary liquidity. It is
impossible for any individual wishing to invest and sit down and analyses all these
intricacies of the market unless he does nothing else. c) Even if an investor is able to
visualize the market, it is difficult to investor to trade in all the major Exchanges of India,
look after his deliveries and payments. This is further complicated by the volatile nature
of our markets, which demands constant reshuffling of port.
Importance of portfolio management
In the past one-decade, significant changes have taken place in the investment
climate in India.
Portfolio management is becoming a rapidly growing area serving a broad array
of investors- both individual and institutional-with investment portfolios ranging
in asset size from thousands to cores of rupees.
It is becoming important because of:
Emergence of institutional investing on behalf of individuals. A number of
financial institutions, mutual funds, and other agencies are undertaking the task of
investing money of small investors, on their behalf.
a. Growth in the number and the size of invisible funds–a large part of
household savings is being directed towards financial assets.
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b. Increased market volatility- risk and return parameters of financial assets
are continuously changing because of frequent changes in governments
industrial and fiscal policies, economic uncertainty and instability.
c. Greater use of computers for processing mass of data.
d. Professionalization of the field and increase use of analytical methods (e.g.
quantitative techniques) in the investment decision-making, and
e. Larger direct and indirect costs of errors or shortfalls in meeting portfolio
objectives- increased competition and greater scrutiny by investors.
Portfolio management schemes (PMS) present scenario
The regulatory environment has totally changed now and with SEBI fixing strict
norms for companies launching PMS, only the serious players are going to enter
The PMS members today have full transparency: managers are required to
maintain individual accounts showing all dealings in a client’s portfolio.
They must also advise him on all transactions.
Secondly, all PMS Managers have to send their clients at least a quarterly report
giving the status of their portfolio and the transactions that have taken place.
The client-PMS manager contract is as per SEBI ground rules.
It has several checks to protect investor’s interest like laying the custodial
responsibility on the manager and preventing any alterations in the scheme
without the client’s consent.
Finally, managers have to send half-yearly reports to SEBI on their portfolio
Experienced handling of cash and money power apart, PMS also takes care of a
number of the headaches endemic with investing in the markets.
The biggest one is custodial services.
All PMS Managers act as custodians of shares and are responsible for the load of
paper work related to the share transfer, documentation work, postal work and
even ensuring that dividends are credited to clients account.
SEBI directives also put the onus on the PMS promoters to take follow-up action
in case shares are lost or damaged.
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Difficulties such as late transfer and postal theft are reduced in case of brokers,
because they not only have direct access to registrars but also have branch offices
to ensure quicker transfers.
While the actual PMS charges vary from a high of 7% of the amount invested to
a low of around 3.5%, follow-up services charges extra.
As in all schemes, there is a downside to putting cash into portfolio management
The most important is the fact that despite all the SEBI checks.
PMS Managers are not allowed to assured any fixed returns.
This really discharges the managers for any responsibility if the scheme does
Problem inherent in most schemes on offer will be misused of investor’s funds to
Funds collected from investors will aid the brokers concerned in their own games
in the market.
Prospects of portfolio management
At present, there are a very few agencies which render this type of services in an
organized and professional way.
However, their share in the total volume is very small.
There is no constraint on the demand for this type of financial service as every
entity would be saving and investing and interested in optimizing the rate of
The size of capital market is increasing.
There is an increase in the number of stock exchanges.
New instruments are being introduced in the capital market.
The equity cult is spreading in the interiors and rural areas.
The percentage of investment of the household savings is bound to go up.
It is conservatively estimated that during the eighth plan resources to the tune of
over Rs.50000crore will be mobilized through the stock market.
India today has 20 million investors, as compared to 2 million in 1980.
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1.3 PORTFOLIO MANAGER
Portfolio managers are well trained professional experts. They give proper advice to the
investors or invest in behalf of the investor to fulfil investor’s expectations.
1.3.1 Qualities of Portfolio Manager
Sound general knowledge
Portfolio management is an existing and challenging job.
He has to work in an extremely uncertain and conflicting environment.
In the stock market every new piece of information affects the value of the
securities of different industries in a different way.
He must be able to judge and predict the effects of the information he gets.
He must have sharp memory, alertness, fast intuition and self-confidence
to arrive at quick decisions.
He must have his own theory to arrive at the value of the security.
An analysis of the security’s values, company, etc. is continues job of the
A good analyst makes a good financial consultant.
The analyst can know the strengths, weakness, opportunities of the
economy, industry and the company.
He must be good salesman.
He has to convince the clients about the particular security.
He has to compete with the Stock brokers in the stock market.
In this Marketing skills help him a lot.
In the cyclical behaviour of the stock market history is often repeated,
therefore the experience of the different phases helps to make rational
The experience of different types of securities, clients, markets trends etc.
makes a perfect professional manager.
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1.3.2 Code of Conduct- Portfolio Managers
1. A portfolio manager shall, in the conduct of his business, observe high
standards of integrity and fairness in all his dealings with his clients and other
2. The money received by a portfolio manager from a client for an investment
purpose should be deployed by the portfolio manager as soon as possible for
that purpose and money due and payable to a client should be paid forthwith.
3. A portfolio manager shall render at all-time high standards of services
exercise due diligence, ensure proper care and exercise independent
professional judgment. The portfolio manager shall either avoid any conflict
of interest in his investment or disinvestments decision, or where any conflict
of interest arises; ensure fair treatment to all his customers. He shall disclose
to the clients, possible sources of conflict of duties and interest, while
providing unbiased services. A portfolio manager shall not place his interest
above those of his clients.
4. A portfolio manager shall not make any statement or become privy to any
act, practice or unfair competition, which is likely to be harmful to the
interests of other portfolio managers or it likely to place such other portfolio
managers in a disadvantageous position in relation to the portfolio manager
himself, while competing for or executing any assignment.
5. A portfolio manager shall not make any exaggerated statement, whether oral
or written, to the client either about the qualification or the capability to
render certain services or his achievements in regard to services rendered to
6. At the time of entering into a contract, the portfolio manager shall obtain in
writing from the client, his interest in various corporate bodies, which
enables him to obtain unpublished price-sensitive information of the body
7. A portfolio manager shall not disclose to any clients or press any confidential
information about his clients, which has come to his knowledge.
8. The portfolio manager shall where necessary and in the interest of the client
take adequate steps for registration of the transfer of the client’s securities
and for claiming and receiving dividend, interest payment and other rights
accruing to the client. He shall also take necessary action for conversion of
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securities and subscription of/or rights in accordance with the client’s
9. Portfolio manager shall ensure that the investors are provided with true and
adequate information without making any misguiding or exaggerated claims
and are made aware of attendant risks before they take any investment
10. He should render the best possible advice to the client having regard to the
client’s needs and the environment, and his own professional skills.
1.3.3 Factors Affecting the Investor
There may be many reasons why the portfolio of an investor may have to be changed.
The portfolio manager always remains alert and sensitive to the changes in the
requirements of the investor. The following are some factors affecting the investor, which
make it necessary to change the portfolio composition.
Change in Wealth
According to the utility theory, the risk taking ability of the investor
increases with increase in wealth.
It says that people can afford to take more risk as they grow rich and
benefit from its reward.
But, in practice, while they can afford, they may not be willing.
As people get rich, they become more concerned about losing the newly
got riches than getting richer.
So they may become conservative and vary risk- averse.
The fund manager should observe the changes in the attitude of the
investor towards risk and try to understand them in proper perspective.
If the investor turns to be conservative after making huge gains, the
portfolio manager should modify the portfolio accordingly.
Change in the Time Horizon
As time passes, some events take place that may have an impact on the
time horizon of the investor.
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Births, deaths, marriages, and divorces – all have their own impact on the
There are, of course, many other important events in the person’s life that
may force a change in the investment horizon.
The happening or the non-happening of the events will naturally have its
For example, a person may have planned for an early retirement,
considering his delicate health. But, after turning 55 years of age, if his
health improves, he may not take retirement.
Change in Liquidity Needs
Investors very often ask the portfolio manager to keep enough scope in the
portfolio to get some cash as and they want.
This forces portfolio manager to increase the weight of liquid investments
in the asset mix.
Due to this, the amounts available for investment in the fixed income or
growth securities that actually help in achieving the goal of the investor
That is, the money taken out today from the portfolio means that the
amount and the return that would have been earned on it are no longer
available for achievement of the investor’s goals.
Changes in Taxes
It is said that there are only two things certain in this world death and taxes.
The only uncertainties regarding them relate to the date, time, place and
Portfolio manager have to constantly look out for changes in the tax
structure and make suitable changes in the portfolio composition.
The rate of tax under long- term capital gains is usually lower than the rate
applicable for income. If there is a change in the minimum holding period
for long-term capital gains, it may lead to revision. The specifics of the
planning depend on the nature of the investments.
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There can be many of other reasons for which clients may ask for a change
in the asset mix in the portfolio.
For example, there may be change in the return available on the
investments that have to be compulsorily made with the government say,
in the form of provident fund.
This may call for a change in the return required from the other
1.4 SEBI rules & regulations for portfolio managers
1.4.1 Rules for portfolio managers
No person to act as portfolio manager without certificate
No person shall carry on any activity as a portfolio manager unless he
holds a certificate granted by the Board under this regulation.
Provided that such person, who was engaged as portfolio manager prior to
the coming into force of the Act, may continue to carry on activity as
portfolio manager, if he has made an application for such registration, till
the disposal of such application.
Provided further that nothing contained in this rule shall apply in case of
merchant banker holding a certificate granted by the board of India
Regulations, 1992 as category I or category II merchant banker, as the case
Provided also that a merchant banker acting as a portfolio manager under
the second provision to this rule shall also be bound by the rules and
regulations applicable to a portfolio manager.
Conditions for grant or renewal of certificate to portfolio manager
The board may grant or renew certificate to portfolio manager subject to the
following conditions namely:
The portfolio manager in case of any change in its status and constitution
shall obtain prior permission of the board to carry on its activities;
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He shall pay the amount of fees for registration or renewal, as the case
may be, in the manner provided in the regulations;
He shall make adequate steps for redressed of grievances of the clients
within one month of the date of receipt of the complaint and keep the board
informed about the number, nature and other particulars of the complaints
He shall abide by the rules and regulations made under the Act in respect
of the activities carried on by the portfolio manager.
Period of validity of the certificate
The certificate of registration on its renewal, as the case may be, shall be valid for
a period of here years from the date of its issue to the portfolio manager.
1.4.2 Regulations for portfolio managers
Registration of Portfolio Managers
1. Application for grant of certificate
An application by a portfolio manager for grant of a certificate shall be
made to the board on Form A.
Notwithstanding anything contained in sub regulation (1), any
application made by a portfolio manager prior to coming into force of
these regulations containing such particulars or as near thereto as
mentioned in form A shall be treated as an application made in
pursuance of sub-regulation and dealt with accordingly.
2. Application of confirm to the requirements
Subject to the provisions of sub-regulation (2) of regulation 3, any
application, which is not complete in all respects and does not confirm
to the instructions specified in the form, shall be rejected:
Provided that, before rejecting any such application, the applicant shall
be given an opportunity to remove within the time specified such
objections as may be indicated by the Board.
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3. Furnishing of further information, clarification and personal representation.
The Board may require the applicant to furnish further information or
clarification regarding matters relevant to his activity of a portfolio
manager for the purposes of disposal of the application.
The applicant or, its principal officer shall, if so required, appear before
the Board for personal representation.
4. Consideration of application
The Board shall take into account for considering the grant of certificate, all
matters which are relevant to the activities relating to portfolio manager and
in particular whether the applicant complies with the following requirements
The applicant has the necessary infrastructure like to adequate office
space, equipments and manpower to effectively discharge his activities;
The applicant has his employment minimum of two persons who have
the experience to conduct the business of portfolio manager;
A person, directly or indirectly connected with the applicant has not
been granted registration by the Board in case of the applicant being a
The applicant, fulfils the capital adequacy requirements specified in
The applicant, his partner, director or principal officer is not involved in
any litigation connected with the securities market and which has an
adverse bearing on the business of the applicant;
The applicant, his director, partner or principal officer has not at any
time been convinced for any offence involving moral turpitude or has
been found guilty of any economic offences;
The applicant has the professional qualification from an institution
recognized by the government in finance, law, and accountancy or
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1.4.3 SEBI guidelines for advertisement by portfolio managers
For the purpose of these guidelines, the expression‖ advertisement means notices,
brochures, pamphlets, circulars, show cards, catalogues, holdings, placards, posters,
insertions in newspapers, pictures, films, radio/television programs or through any
Code of advertisement
An advertisement shall be truthful, fair and clear and shall not contain any
statement, promise or forecast which is untrue or misleading.
An advertisement shall be considered to be misleading if it contains –
i. Statements made about the performance or activities of the
Portfolio Manager in the absence of necessary explanatory or
qualifying statements, which may give an exaggerated picture of
the performance or activities of the Portfolio Manager, than what
it really is.
ii. An inaccurate portrayal of the past performance or portrayal in a
manner which implies that past gains or income will be repeated in
The advertisement shall not be so designed in content and format or in
print as to be likely to be misunderstood, or likely to disguise the
significance of any statement. Advertisement shall not contain statements
which directly or by implication or by omission mislead the investor.
The publicity literature should contain only information, the details of
which are contained in the Portfolio Managers scheme particulars.
As the investors may not be sophisticated in legal or financial matters, care
should be taken that the advertisement is set forth in a clear, concise and
understandable manner. Extensive use of technical or legal terminology or
complex language and the inclusion of excessive details which may detract
the investors should be avoided.
The advertisement shall not contain information, the accuracy of which is
to any extent dependent on assumptions.
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If however, in any advertisement the Portfolio Manager indicates any
minimum rate of return or yield to the prospective investors, resources to
back such a guarantee shall also be indicated.
The advertisement shall not compare one Portfolio Manager with another,
implicitly or explicitly, unless the comparison is fair and all information
relevant to the comparison is included in the advertisement.
Observance of code of advertisement
Every Portfolio Manager shall strictly observe the Code of Advertisement
set out in paragraph in I given above. Any breach of the Code would be
construed as breach of Code of conduct set out in Schedule III to the
Securities and Exchange Board of India (Portfolio Managers) Regulations,
Authority for issue of guidelines
These guidelines have been issued in pursuance of sub-section (1) of
Section 11 of Securities and Exchange Board of India Act, 1992 by way
of measures for protection of the interests of investors in Securities and
for orderly development and growth of the securities market
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Jamadar Lal (1992) presents a profile of Indian investors and evaluates their investment
decisions. He made an effort to study their familiarity with, and comprehension of
financial information, and the extent to which this is put to use. The information that the
companies provide generally fails to meet the needs of a variety of individual investors
and there is a general impression that the company's Annual Report and other statements
are not well received by them.
Jack Clark Francis (1986) revealed the importance of the rate of return in investments
and reviewed the possibility of default and bankruptcy risk. He opined that in an uncertain
world, investors cannot predict exactly what rate of return an investment will yield.
However he suggested that the investors can formulate a probability distribution of the
possible rates of return.
New academic portfolio theory is an extension of traditional portfolio advice first posited
by Markowitz (Journal of Finance, 1952). The traditional advice suggests a “two-fund
theorem” that allocates between risk-free bonds and a broad-based passively managed
stock fund. The most efficient portfolios, those on the mean– variance frontier, can be
formed by combining those two asset classes. Tailoring portfolios by adding style-based
asset classes is inefficient because each of these classes lies on or inside the frontier.
Therefore, every investor needs to hold only the two basic asset classes, with risk aversion
determining the proportions.
John H. Cochrane
Economic Perspectives, Federal Reserve Bank of Chicago, vol. 23, no. 3 (Third
Investors today face numerous and often bewildering investment decisions. Investors
used to have fairly straightforward choices to make, selecting among managed mutual
funds, index funds, and expensive trading in a personal account. Today, a wide variety of
styles exist among funds, active managers offer customized and complex strategies, and
inexpensive online trading is widely available. The author reviews these issues and
addresses how they affect asset allocation decisions, particularly in multifactor models.
He also examines return predictability and describes how the stock market acts as a large
insurance market by facilitating the transfer of risk among investors.
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Journal of Finance, vol. 55, no. 1 (February 2000):179–223
The author develops a portfolio-selection method using a Bayesian framework that
incorporates a prior degree of belief in an asset-pricing model. In the empirical analysis,
the author evaluates sample evidence on home bias, value, and size effect from an asset
allocation perspective. The results provide a different perspective from that normally
found in the literature on the benefits of international diversification.
Gustavo Grullon and Roni Michaely
Journal of Finance, vol. 57, no. 4 (August 2002):1649–84
Cash dividends and stock repurchases are two major forms of payout to stockholders.
They influence stock prices and returns and thus decisions for investing and trading in
stocks. The authors analyze the behaviour of U.S. corporations that paid dividends and
repurchased shares in the 1972–2000 period. They address the relative merits of
dividends and repurchases from the corporation’s point of view, the substitutability
between the two forms of payout, and the differences in their tax treatment from the
investor’s perspective. Their findings are of interest to corporate financial officers,
equity analysts, and portfolio managers.
Osthoff, Peer C. and Kempf, Alexander. (2007) “The Effect of Socially Responsible
Investing on Portfolio Performance”. In European Financial Management, Vol. 13,
No. 5, pp. 908-922.
More and more investors apply socially responsible screens when building their stock
portfolios. This raises the question whether these investors can increase their performance
by incorporating such screens into their investment process. To answer this question we
implement a simple trading strategy based on socially responsible ratings from the KLD
Research & Analytics: Buy stocks with high socially responsible ratings and sell stocks
with low socially responsible ratings. We find that this strategy leads to high abnormal
returns of up to 8.7% per year. The maximum abnormal returns are reached when
investors employ the best-in-class screening approach, use a combination of several
socially responsible screens at the same time, and restrict themselves to stocks with
extreme socially responsible ratings. The abnormal returns remain significant even after
taking into account reasonable transaction costs.
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The main aim of this study is to understand the portfolio management. Also to understand
the effect while investing in single security and investing in more than one security i.e.
To calculate the return of various companies.
To calculate the risk of various companies.
To calculate the portfolio return & risk of different portfolios designed for the
combination of various companies.
To evaluate the performance of various portfolios.
To understand, analyze and select the best portfolio.
To understand the effect of diversification of investment.
Scope of the study
This study covers the Markowitz model. The study covers the calculation of correlations
between the different securities in order to find out at what percentage funds should be
invested among the companies in the portfolio. Also the study includes the calculation of
individual Standard Deviation of securities and ends at the calculation of weights of
individual securities involved in the portfolio. These percentages help in allocating the
funds available for investment based on risky portfolios.
Research type: - Empirical
Type of sampling: - Convenient sampling
Sample size: - 5 companies from different sectors is selected from NSE CNX
Sample universe: - Companies listed & trade in NSE
Data type: - Secondary data
Research tools used: -
a. Arithmetic average or mean
b. Return = Dividend + (Current price - Previous price) * 100
c. Standard deviation
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e. Correlation - Karl Pearson’s method
f. Sharpe’s Index
g. Treynor’s Index
h. Jenson’s Index
Data collection methods
The entire date were collected from the secondary source. Internet is main source of
secondary sources of date collection used. Magazines, Newspapers and Journals were
also used for collecting data
Analysis and Interpretations
The analysis and interpretation has been made with the help of graphs and percentage of
returns of securities. Microsoft Excel 2013 & IBM SPSS Statistics 20 is the software used
for this purpose.
Limitations of the study
The sample size is limited by 5 stocks from 5 different sectors.
Markowitz modern portfolio theory is used here to calculate return & risk of
Portfolio created for the study is of 2 securities/stock combination, for making
study easier and understandable. Portfolios with 2 or more number of stock can
give a wider image of portfolio management.
While constructing portfolios the stock are given equal weightage, return & risk
will change if weightage is different.
The data was collected from the time horizon of one financial year starting from
April 2014 to March 2015.
The data has been collected from secondary sources only, relevance of
information may not fully trustworthy.