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A Study On Portfolio Management


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It is project report on portfolio management, done at Sharekhan Limited, Kochi.

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A Study On Portfolio Management

  1. 1. Summer Internship Project Report On “A STUDY ON PORTFOLIO MANAGEMENT” At 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
  2. 2. DECLARATION Title of Project Report: ‘A Study on Portfolio Management’ I declare (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 relevant documentation. Date: Mr. Akash Jeevan A31106413023 BBA + GDBA class of 2015
  3. 3. 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 AGBS, Kochi
  5. 5. ACKNOWLEDGEMENT 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 incomplete. 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.
  6. 6. ABSTRACT 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.
  7. 7. 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 References……………………………………………………………………………...83 Annexure……………………………………………………………………………....84
  8. 8. 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
  9. 9. 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
  10. 10. 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
  11. 11. 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
  13. 13. 1 | P a g e Sharekhan Limited Introduction 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 - - 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 commodities both.
  14. 14. 2 | P a g e 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. Sharekhan Business 1. Brokering business. 2. White feathering house production. Vision To be the best retail broking brand in the retail business of the stock market. Mission 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.
  15. 15. 3 | P a g e  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
  16. 16. 4 | P a g e Sharekhan profile Sharekhan retail broking  Among the top three (3) branded retail services providers (Rs 856 crs average daily volume.  NO. 2 player in online business  Large network of branded broking outlets in the country servicing around 5, 45, 000 Clients Management Team Board of Directors Tarun P. Shah Mr. Jaideep Arora Shankar Vailaya Benefits  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 & E-mail address.  Special Personal Inbox for order and trade confirmations.  On-line Customer Service via Web Chat.  Anytime Ordering.  NSDL Account
  17. 17. 5 | P a g e  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: 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 Classic Account This account allows the client to trade through the website 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. Features  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).
  18. 18. 6 | P a g e  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 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. Features  Integration of EQUITY & COMMODITIES MARKET.  Instant order Execution and Confirmation.  Single screen trading terminal for NSE Cash, NSE F&O & BSE & Commodities.  Technical Studies.  Multiple Charting.  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. Dial-n-trade 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.
  19. 19. 7 | P a g e 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.
  20. 20. 8 | P a g e 3. Proarbitrage: Exploit Price Analysis Online IPO's and mutual funds advisory is available. Process of Account Opening Lead Management System (LMS) / References Contact Telephone and Personal Visit Appointment Demonstration Agree Disagree (Close) Documentation Filling the Form Submission the Form Login of the Form Sending the Account Opening Kit to the Customer for Trading
  21. 21. 9 | P a g e Charge Structure Pre-paid or AMC a/c: -  Advance Amount which will be fully adjsted against your brokerage you paid in One year. 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 st year and Rs. 375/- from 2 nd year.  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.
  22. 22. 10 | P a g e 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 Money Transfer.  Research based investment advice  Investment and trading services  Trading and seminars  Technology based investment tools  Integrated demat facility  Customer can trade in 1. Equities 2. Derivatives 3. Commodities SWOT Analysis of Sharekhan (My Observations) Strengths 1. Big client base 2. In-house research house 3. online as well as offline trading 4. Online IPO/ MF services 5. Share shops 6. Transparent 7. User friendly tie ups with 10 banks 8. Excellent order execution speed and reliability Weakness 1. Lack of awareness among customer 2. Less focus on customer retention 3. Less Exposure
  23. 23. 11 | P a g e Opportunities 1. Diversification 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) Threats 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 financial assets. 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 down/up.  Liquidity-the ease with which an asset can be converted into cash.
  24. 24. 12 | P a g e 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:  Corporate securities  Equity shares.  Preference shares.  Debentures/Bonds.  Derivatives.  Others Corporate Securities 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:  Equity Shares  Preference shares  Bonds  Warrants  Derivative Equity Shares 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
  25. 25. 13 | P a g e 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. Stock Exchange 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
  26. 26. 14 | P a g e 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: 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.  Securities: 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
  27. 27. 15 | P a g e 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 explanation: 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,
  28. 28. 16 | P a g e 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.
  29. 29. 17 | P a g e 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 investor.  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 Company’s etc.  The large institutional investors avail services of professionals.
  30. 30. 18 | P a g e  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 portfolio manager.  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 investor.  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 market value. Risk 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.
  31. 31. 19 | P a g e 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 International factors 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 Security analysis 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. Portfolio analysis 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.
  32. 32. 20 | P a g e Portfolio selection 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 objective way. Portfolio revision 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. Portfolio evaluation 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 management process. 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
  33. 33. 21 | P a g e 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 only.  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) + (2*Wx*Wy)*(rxy*Sdx^2*Sdy^2)] Where, Wx, Wy = proportion of total portfolio invested in security x & y respectively Sdx, sdy = standard deviation of stock x & stock y respectively
  34. 34. 22 | P a g e rxy = correlation coefficient of x & y Expected Return Of A Portfolio Calculation: Portfolio return = [(Wx*rx) + (Wy*ry)] Where, 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 Arithmetic return Where, 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
  35. 35. 23 | P a g e Standard Deviation σ = Square root ((mean return -expected return) ^2/N) Covariance COV (X, Y) =1/N [(RX-RX) (RY-RY) Beta (β): 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 Where 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 market.
  36. 36. 24 | P a g e 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.
  37. 37. 25 | P a g e 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 expressed as: Where: 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 market 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
  38. 38. 26 | P a g e 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 macroeconomic factors.  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.
  39. 39. 27 | P a g e 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. Concept 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
  40. 40. 28 | P a g e intrinsic value. Some actively managed funds also pursue strategies such as merger arbitrage, short positions, option writing, and asset allocation. Performance 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,
  41. 41. 29 | P a g e 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 industry.) 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 stocks. 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.
  42. 42. 30 | P a g e 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
  43. 43. 31 | P a g e 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. Governance 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 and decision-making.  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 initiatives.  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
  44. 44. 32 | P a g e 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 share. 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
  45. 45. 33 | P a g e portfolio should contain a planned proportion of high-grade and readily saleable investment. 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 instruments.
  46. 46. 34 | P a g e 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.
  47. 47. 35 | P a g e 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 funds.  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 returns. 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.
  48. 48. 36 | P a g e 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 work.  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.
  49. 49. 37 | P a g e 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 his business.  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 management activities.  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.
  50. 50. 38 | P a g e  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 as well.  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 badly.  Problem inherent in most schemes on offer will be misused of investor’s funds to some extent.  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 return.  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.
  51. 51. 39 | P a g e 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.  Analytical Ability  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 portfolio manager.  A good analyst makes a good financial consultant.  The analyst can know the strengths, weakness, opportunities of the economy, industry and the company.  Marketing skills  He must be good salesman.  He has to convince the clients about the particular security.  He has to compete with the Stock brokers in the stock market.  In this Marketing skills help him a lot.  Experience  In the cyclical behaviour of the stock market history is often repeated, therefore the experience of the different phases helps to make rational decisions.  The experience of different types of securities, clients, markets trends etc. makes a perfect professional manager.
  52. 52. 40 | P a g e 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 portfolio managers. 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 other clients. 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 corporate. 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
  53. 53. 41 | P a g e securities and subscription of/or rights in accordance with the client’s instruction. 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 decision. 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.
  54. 54. 42 | P a g e  Births, deaths, marriages, and divorces – all have their own impact on the investment horizon.  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 effect.  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 get reduced.  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 mode.  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.
  55. 55. 43 | P a g e  Others  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 investments. 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 may be.  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;
  56. 56. 44 | P a g e  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 received;  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.
  57. 57. 45 | P a g e 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 namely:  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 body corporate;  The applicant, fulfils the capital adequacy requirements specified in regulation 7  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 business management.
  58. 58. 46 | P a g e 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 electronic media.  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 future.  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.
  59. 59. 47 | P a g e  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, 1993  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
  61. 61. 48 | P a g e 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 Quarter 1999):59–78 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.
  62. 62. 49 | P a g e Lubos Pastor 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. Abstract: 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.
  64. 64. 50 | P a g e Aim 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. diversification. Objectives  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 Methodology  Research type: - Empirical  Type of sampling: - Convenient sampling  Sample size: - 5 companies from different sectors is selected from NSE CNX Nifty  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 Previous price c. Standard deviation
  65. 65. 51 | P a g e d. Variance 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.  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.
  67. 67. 52 | P a g e Return & Risk of Benchmark index: NSE CNX NIFTY Return, R (Avg) Calculation Table 4.1: Return, R (Avg) Calculation of NSE CNX Nifty FY 2014-15 P0 P1 Dividend R Apr-14 6721.05 6696.40 -0.37 May-14 6694.50 7229.95 8.00 Jun-14 7362.50 7611.35 3.38 Jul-14 7634.70 7721.30 1.13 Aug-14 7602.60 7954.35 4.63 Sep-14 8027.70 7964.80 -0.78 Oct-14 7945.55 8322.20 4.74 Nov-14 8324.15 8588.25 3.17 Dec-14 8555.90 8282.70 -3.19 Jan-15 8284.00 8808.90 6.34 Feb-15 8797.40 8901.85 1.19 Mar-15 8956.75 8491.00 -5.20 Total 23.03 Average Return, R 1.92 Return, R = Dividend + (P1 - P0)/P0*100 FY15 (MoM) Return for NSE CNX Nifty = 1.92%