portfolio management services by sharekhan
TRANSCRIPT
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UNIVERSITY OF MUMBAI
PROJECT REPORT ON
POTFOLIO MANAGEMENT SERVICES
IN PARTIAL FULLFILMENT FOR BACHELORS OF
FINANCIAL MARKETS (SEMESTER V)
2011-12
PROJECT GUIDE
PROF. JENNIE.PRAJITH
SUBMITTED BY: KANNAN.PRAKASH
Roll No:
3039
MAHATAMA EDUCATION SOCIETYS
PILLAIS COLLEGE OF ARTS, COMMERCE &SCIENCENEW PANVEL
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MAHATAMA EDUCATION SOCIETYS
PILLAIS COLLEGE OF ARTS, COMMERCE, SCIENCE
NEW PANVEL
CERTIFICATE
To whomsoever it may concern
This is to certify that the work entered in this journal is the work of
KANNAN PRAKASH T.Y.F.M , have successfully completed a project
report on the PORTFOLIO MANAGEMENT SERVICES topic terms of
the year 2011-12 in the college as laid down by the college authority
_____________
(Professor/Guide) (BFMCo- ordinator)
Prof. Jennie prajith Prof. Jennie prajith
Date: __________ _______________
(External Examiner)
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DECLARATION
I, KANNAN PRAKASH studentofT.Y.F/M, MAHATAMA
EDUCATION SOCIETYS PILLAIS COLLEGE OF ARTS,
COMMERCE &SCIENCE, hereby declare that I have completed theproject report on PORTFOLIO MANAGEMENT SERVICES in the
academic year2011-12. The information submitted by me is true & original
to the best of my knowledge
Signature
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ACKNOWLEDGEMENT
I would like to thank my college that is Pillais College of Arts, Commerce and
Science, New Panvel where I have gained plenty of knowledge which helped me in
turning this project a success.
Apart from my efforts, the success of any project depends largely on the
encouragement and guidelines of many others. I take this opportunity to express my
gratitude to the people who have been instrumental in the successful completion of this
project.
I would especially thank my ProfessorProf. Jennie. Prajith and the T.Y.B.Com
F/M CoordinatorProf. Jennie Prajith for giving her valuable guidance in the design and
the changes that were required to be made for the proper implementation of the project.
Without those efforts this project would not have been successful.
I would also extend my thanks to our Vice Principal Mr. A.N.Kutty for his
support and facilities provided to me for the same.
Lastly, I would like to thank all those who directly and indirectly helped me in
completion of this project.
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Sr no Content
PAGE
NO
EXECUTIVE SUMMARY 6
1 INTRODUCTION1.1 Introduction 7-8
1.2 Objectives of the project 9
1.3 Research methodology 10
2 PROFILE
2.1 Company profile 11-12
2.2 Work structure of share khan 13
2.3 Product and Services offered by share khan 142.4 Reason to choose share khan limited 15-17
2.5 Share khan portfolio management services 18-23
3 CONCEPTUAL FRAMEWORK
3.1 Introduction to stock exchange 24-30
3.2 Portfolio management services 31
3.3 Need of portfolio management services 32-34
3.4 Portfolio Construction 35-42
3.5 Risk and Risk Aversion 43-46
3.6 Risk versus Return 47-53
3.7 Portfolio Diversification 54-59
3.8 Techniques of Portfolio management service 60-63
3.9 Types of portfolios 64-66
4 DATA ANALYSIS 67-82
5 INTERPRETATION OF THE DATA 83-84
6 CONCLUSION 85
7 SUGGESTION AND RECOMMENDATION 86
APPENDICES 87-88
BIBLIOGRAPHY 89
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EXECUTIVE SUMMARY
Investing is both Arts and Science. Every Individual has their own specific financial
need and expectation based on their risk taking capabilities, whereas some needs and
expectation are universal. Therefore, we find that the scenario of the Stock Market is
changing day by day hours by hours and minute by minute.
In order to keep the Investor safe from market fluctuation and make them profitable,
Portfolio Management Services (PMS) is fast gaining Investment Option for the High
Networth Individual (HNI).
In order to identify the effectiveness of Sharekhan PMS services this Research is
carried throughout specified area. At the time of investing money everyone look for the
Risk factor involve in the Investment option. The Report is prepared on the basis of
Research work done through the different Research Mythology the data is collected from
both the source Primary sources which consist of Questionnaire and secondary data is
collected from different sources such as Company website, Magazine and other sources.
As the PMS services ofSharekhan Limited have the best result in its field .It has
given 43.50% return in Trailing stops, 94.30%return in Nifty and 38.10% in Beta
Portfolio which is the result when the Market was not doing well from last one year.
In this project I have shown the details of financial planning as well as wealth
management so as to understand about the customers needs and wants with respect to
market and how a clients portfolio can be designed and what factors a portfolio manager
must consider for designing a portfolio. This project includes primary and secondary
data.
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INTRODUCTION
The field of investment traditionally divided into security analysis and portfolio
management. The heart of security analysis is valuation of financial assets. Value in turn
is the function of risk and return. These two concepts are in the study of investment
.Investment can be defined the commitment of funds to one or more assets that will be
held over for some future time period.
In today fast growing world many opportunities are available, so in order to move
with changes and grab the best opportunities in the field of investments a professional
fund manager is necessary.
Therefore, in the present scenario the Portfolio Management Services (PMS) is fast
gaining importance as an investment alternative for the High Networth Investors.
Portfolio Management Services (PMS) is an investment portfolio in stocks, fixed
income, debt, cash, structured products and other individual securities, managed by a
professional money manager that can potentially be tailored to meet specific investment
objectives.
When you invest in PMS, you own individual securities unlike a mutual fund
investor, who owns units of the entire fund. You have the freedom and flexibility to tailor
your portfolio to address personal preferences and financial goals. Although portfolio
managers may oversee hundreds of portfolio, your account may be unique.
Investment Management Solution in PMS can be provided in the following ways:
i. Discretionaryii. Non Discretionary
iii. AdvisoryDiscretionary: Under these services, the choice as well as the timings of the investment
decisions rest solely with the Portfolio Manager.
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Non Discretionary: Under these services, the portfolio manager only suggests the
investment ideas. The choice as well as the timings of the investment decisions rest solely
with the Investor.
However the execution of trade is done by the portfolio manager.
Advisory: Under these services, the portfolio manager only suggests the investment
ideas.
The choice as well as the execution of the investment decisions rest solely with the
Investor.
Rule 2, clause (d) of the SEBI (portfolio managers) Rules, 1993 defines the term
Portfolio as total holding of securities belonging to any person.
As a matter of fact, portfolio is combination of assets the outcomes of which cannot
be defined with certainty new assets could be physical assets, real estates, land, building,
gold etc. or financial assets like stocks, equity, debenture, deposits etc.
Portfolio management refers to managing efficiently the investment in the securities
held by professional for others.
Merchant banker and the portfolio management with a view to ensure maximum
return by such investment with minimum risk of loss of return on the money invested in
securities held by them for their clients. The aim Portfolio management is to achieve the
maximum return from a portfolio, which has been delegated to be managed by manger or
financial institution.
There are lots of organization in the market on the lookout for the people like you
who need their portfolios managed for them .They have trained and skilled talent willwork on your money to make it do more for you.
Therefore, if any investors still insist on managing their own portfolio, then ensure
you build discipline into their investment. Work out their strategy and stand by it.
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1.1 Objectives of the Study
To know the concept of Portfolio Management Services. To know about the awareness in public towards stock brokers and share market. To study about the competitive position of Sharekhan Ltd in Competitive Market. To study about the effectiveness & efficiency of Sharekhan Ltd in relation to its
competitors
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1.2 Research Methodology
Primary data:
Primary data is a term for data collected on source which has not been subjected to
processing or any other manipulation, it is known as raw data. In this project primary data have
collected by survey method which questionnaire. Through survey method we can analyze
peoples opinion, suggestions & preferences.
Secondary data:
Secondary data is the data collected by someone other than the user. Secondary data includes
newspapers, books, etc. There are various sources by which we can collect secondary data.Secondary data includes information in detail. Along with it includes many features, functions,
concept & other relative information. In this project secondary data have collected by books,
websites & newspaper.
Research methodology
Primary data Secondary data
Surveys Books
Value guide by Sharekhan
Websites
www. wikicfo.com
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CH-2 PROFILE
2.1 COMPANY PROFILE
Sharekhan is one of the leading retail brokerage of Citi Venture which is running
successfully since 1922 in the country. Earlier it was the retail broking arm of the
Mumbai-based SSKI Group, which has over eight decades of experience in the stock
broking business. Share khan offers its customers a wide range of equity related services
including trade execution on BSE, NSE, Derivatives, depository services, online trading,
investment advice etc.
Earlier 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. 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. SSKIs 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 organizations revenue, with a daily
turnover of over US$ 2 million. 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
Mission of the Sharekhan is
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To educate and empower the individual investor to make better investment
decisions through
QUALITY ADVICE INNOVATIVE PRODUCTS and SUPERIOR SERVICE.
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2.2 WORK STRUCUTRE OF SHAREKHAN
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. The Citi Venture holds a majority stake in the company. HSBC, Intel
& Carlyle are the other investors.
On April 17, 2002 Sharekhan launched Speed Trade and Trade Tiger, are net-basedexecutable 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 SpeedTrade
has become a de facto standard for the Day Trading community over the net. Sharekhans
ground network includes over 700+ Shareshops in 130+ cities in India.
The firms online trading and investment site www.sharekhan.com - was launched on
Feb 8, 2000. The site gives access to superior content and transaction facility to retail
customers across the country. Known for its jargon-free, investor friendly language and
high quality research, the site has a registered base of over 3 Lacs customers. The number
of trading members currently stands at over 7 Lacs. While online trading currently
accounts for just over 5 per cent of the daily trading in stocks in India, Sharekhan alone
accounts for 27 per cent of the volumes traded online.
The Corporate Finance section has a list of very prestigious clients and has manyfirsts to its credit, in terms of the size of deal, sector tapped etc. The group has placed
over US$ 5 billion in private equity deals. Some of the clients include BPL Cellular
Holding, Gujarat Pipavav, Essar, Hutchison, Planetasia, and Shoppers Stop. Finally,
Sharekhan shifted hands and Citi venture get holds on it.
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2.3 PRODUCT AND SERVICES OFFERD BY SHAREKHAN
1- Equity Trading Platform (Online/Offline).
2- Commodities Trading Platform (Online/Offline).
3- Portfolio Management Service.
4- Mutual Fund Advisory and Distribution.
5- Insurance Distribution.
6-Forex
6. Forex.
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2.4 REASON TO CHOOSE SAHREKHAN LIMITED
ExperienceSSKI has more than eight decades of trust and credibility in the Indian stock market.
In the Asia Money broker's poll held recently, SSKI won the 'India's best broking house
for 2004' award. Ever since it launched Sharekhan as its retail broking division in
February 2000, it has been providing institutional-level research and broking services to
individual investors.
TechnologyWith their online trading account one can buy and sell shares in an instant from any
PC with an internet connection. Customers get access to the powerful online trading tools
that will help them to take complete control over their investment in shares.
Accessibility
Sharekhan provides ADVICE, EDUCATION, TOOLS AND EXECUTION services
for investors. These services are accessible through many centers across the country
(Over 650 locations in 150 cities), over the Internet (through the website
www.sharekhan.com) as well as over the Voice Tool.
Knowledge
In a business where the right information at the right time can translate into direct
profits, investors get access to a wide range of information on the content-rich portal,.
Investors will also get a useful set of knowledge-based tools that will empower them to
take informed decisions.
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Convenience
One can call Sharekhans Dial-N-Trade number to get investment advice and execute
his/her transactions. They have a dedicated call-center to provide this service via a Toll
Free Number 1800 22-7500 & 39707500 from anywhere in India.
Customer Service
Its customer service team assist their customer for any help that they need relating to
transactions, billing, demat and other queries. Their customer service can be contacted
via a toll-free number, email or live chat on www.sharekhan.com.
Investment AdviceSharekhan has dedicated research teams of more than 30people for fundamental and
technical research. Their analysts constantly track the pulse of the market andprovide
timely investment advice to customer in the form of daily research emails, online chat,
printed reports etc.
Benefits
Free Depository A/c
Instant Cash Transfer Multiple Bank Option. 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 Mobile Phone
& E-mail address.
Live Chat facility with Relationship Manager on Yahoo Messenger Special Personal Inbox for order and trade confirmations. On-line Customer Service via Web Chat. Enjoy Automated Portfolio. Buy or sell even single share Anytime Ordering.
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Share khan offers the following products:-
CLASSIC ACCOUNT
This is a User Friendly Product which allows the client to trade through website
www.sharekhan.com and is suitable for the retail investors who is risk-averse and hence
prefers to invest in stocks or who does not trade too frequently.
Features Online trading account for investing in Equity andDerivatives Live Terminal and Single terminal for NSE Cash, NSE F&O & BSE. Integration of On-line trading, Saving Bank and Demat Account. Instant cash transfer facility against purchase & sale of shares. Competitive transaction charges. Instant order and trade confirmation by E-mail.
Streaming Quotes (Cash & Derivatives). Personalized market watch. Single screen interface for Cash and derivatives and more. Provision to enter price trigger and view the same online in market watch.
SPEEDTRADE
SPEEDTRADE is an internet-based software application that enables you to buy and
sell in an instant. It is ideal for active traders and jobbers who transact frequently during
days session to capitalize on intra-day price movement.
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2.5 Sharekhan Portfolio Management Services
Pro Prime
Product Approach
Investment will be keeping in mind 3 investment tenets.
1. Consistent, steady and sustainable returns.2. Margin of Safety3. Low Volatility
PRO PRIMEPRO
ARBITRAGE
PRO TECH
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Product offering
Pro Prime is the ideal for investors looking at steady and superior with low and
medium risk appetite.
The portfolio consists of a blend of quality blue chip and growth stocks ensuring a
balanced portfolio with relatively medium risk profile.
The portfolio constitutes of relatively large capitalization stocks, based on sector and
themes which have medium to long term growth potential.
Product Characteristics
Bottom up stock selection In depth ,independent fundamental research High quality companies with relatively large capitalization Disciplined valuation approach applying multiple valuation measure. Medium to long term vision, resulting in low portfolio turnover.How to invest?
Minimum Investment : 10 Lacs Lock in : 6 months Reporting: Access to website showing clients holding .Monthly
reporting of portfolio holding /transaction.
Charges: 2.5% pa AMC (Annual Maintenances Charges) fees chargedevery quarter ,0.5% brokerage ,20% profit sharing after 15% hurdle is
crossed chargeable at the end of fiscal year.
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Pro Arbitrage
Product Approach
An opportunity lies in basis which is the difference between cash and future.
Whenever basis is high we buy the stocks and sell the future to lock in difference .The
difference is bound to be zero at expiry.
Product Offered
Cash future arbitrage:
The product intends to spot low risk opportunities which will yield more than thenormal low risk product .Whenever such opportunity is spotted stocks will be bought and
to lock in the basis, future will be sold .This position will be liquated in the expiry or
before that if the basis vanishes early .Similarly the scheme will move on from
opportunity to opportunity.
Product Characteristics
Low Risk: This is relatively low risk product which can be compared with liquidfunds issued by mutual funds.
High return: Compared with other low risk products, this products offers an
indicative post tax return of 8 to 10% plus.
Product Details
Minimum Investment:Rs.1 Crore Lock in :6 months Reporting: Fortnightly for portfolio Net worth, Monthly reporting pf
portfolio Holding /transaction.
Charges: 0.035% brokerage for future ,0.07% for delivery
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Pro Tech
Protech using the knowledge of technique analysis and the power of depravities
markets to identify trading opportunities in the market .The protech line of the product is
designed around various risk /reward /volatility profiles for the different kind of
investment needs.
Product Approach
Better performance is possible from superior market timing and from picking stocks
before inflation points in their trading cycles .Linear return are possible from having
hedged/ sell market positions in downtrends .Absolute return are targeted by focusing on
finding trading opportunities & not out performance of an index.
Product offered
1.
Nifty Thirty:
Nifty futures will be bought and sold on the basis of an automated trading
system generated calls to go long/short. The exposure will never exceed the value
of portfolio i.e. no leveraging; but allows us to be short /hedged in Nifty in falling
market therefore allowing the client to earn irrespective of the market direction.
2. Beta Portfolio :Positional trading opportunities are identified in the future segment based on
technical analysis .Inflection points in the momentum cycles are identified to go
long /short on stock/index futures with 1-2 months time horizon .The idea is to
generate the best possible return 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.
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3. Star Nifty:Swing trading technique and Dow theory is used to identify short term
reversal levels for Nifty futures and ride with trend both on the long and short side
.This return can be earned in bull and bear market .Stop and reverse means to
reverse ones position from long to short or vice a versa at the reversal levels
simultaneously .The exposure never exceeds value of portfolio i.e. there is no
leveraging.
4.
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 return .Trading opportunities are exposed both on the long side and the
short side as the market demands to get the best of both upward and downward
trends.
Product Characteristics
Using swing based index trading systems stop and reverse .trend following andmomentum trading technique.
Nifty based products for low impact cost and low product volatility Both long and short strategies to earn returns even in falling market. Trading in future market to allow for active risk protection using trailing stop
losses
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CHAP-3 CONCEPTUAL FRAMEWORK
3.1 INTRODUCTION TO STOCK EXCHANGE
The emergence of stock market can be traced back to 1830. In Bombay, business
passed in the shares of banks like the commercial bank, the chartered mercantile bank,
the chartered bank, the oriental bank and the old bank of Bombay and shares of cotton
presses. In Calcutta, Englishman reported the quotations of 4%, 5%, and 6% loans of East
India Company as well as the shares of the bank of Bengal in 1836. This list was a further
broadened in 1839 when the Calcutta newspaper printed the quotations of banks like
union bank and Agra bank. It also quoted the prices of business ventures like the Bengal
bonded warehouse, the Docking Company and the storm tug company.
Between 1840 and 1850, only half a dozen brokers existed for the limited business.
But during the share mania of 1860-65, the number of brokers increased considerably. By
1860, the number of brokers was about 60 and during the exciting period of the American
Civil war, their number increased to about 200 to 250. The end of American Civil war
brought disillusionment and many
Failures and the brokers decreased in number and prosperity. It was in those
troublesome times between 1868 and 1875 that brokers organized an informal association
and finally as recited in the Indenture constituting the Articles of Association of the
Exchange.
On or about 9th day of July,1875, a few native brokers doing brokerage business in
shares and stocks resolved upon forming in Bombay an association for protecting the
character, status and interest of native share and stock brokers and providing a hall or
building for the use of the Members of such association.
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As a meeting held in the broker Hall on the 5th day of February, 1887, it was
resolved to execute a formal deal of association and to constitute the first managing
committee and to appoint the first trustees. Accordingly, the Articles of Association ofthe Exchange and the Stock
Exchange was formally established in Bombay on 3rd day of December, 1887. The
Association is now known as The Stock Exchange.
The entrance fee for new member was Re.1 and there were 318 members on the list,
when the exchange was constituted. The numbers of members increased to 333 in 1896,
362 in 1916and 478 in 1920 and the entrance fee was raised to Rs.5 in 1877, Rs.1000 in
1896, Rs.2500 in 1916 and Rs. 48,000 in 1920. At present there are 23recognized stock
exchanges with about 6000 stock brokers. Organization structure of stock exchange
varies.
14 stock exchanges are organized as public limited companies, 6 as companies
limited by guarantee and 3 are non-profit voluntary organization. Of the total of 23, only
9 stock exchanges have been permanent recognition. Others have to seek recognition on
annual basis.These exchange do not work of its own, rather, these are run by some persons and
with the help of some persons and institution. All these are down as functionaries on
stock exchange. These are:
i. Stockbrokersii. Sub-broker
iii.
Market makersiv. Portfolio consultants etc.
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1. Stockbrokers:
Stock brokers are the members of stock exchanges. These are the
persons who buy, sell or deal in securities. A certificate of registration from SEBI is
mandatory to act as a broker. SEBI can impose certain conditions while granting thecertificate of registrations. It is obligatory for the person to abide by the rules, regulations
and the buy-law. Stock brokers are commission broker, floor broker, arbitrageur etc.
Detail of Registered Brokers
Total no. of registered brokers as
on 31.03.09
Total no. of sub-broker as on
31.03.09
9000 24,000
2. Sub-broker:
A sub-broker acts as agent of stock broker. He is not a member of a
stock exchange. He assists the investors in buying, selling or dealing in securities through
stockbroker. The broker and sub-broker should enter into an agreement in whichobligations of both should be
specified. Sub-broker must be registered SEBI for a dealing in securities. For getting
registered with SEBI, he must fulfill certain rules and regulation.
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3. Market Makers:
Market maker is a designated specialist in the specified
securities. They make both bid and offer at the same time. A market maker has to abide
by bye-laws, rules regulations of the concerned stock exchange. He is exempt from themargin requirements. As per the listing requirements, a company where the paid-up
capital is Rs. 3 Crore but not more than Rs. 5 core and having a commercial operation for
less than 2 years should appoint a market maker at the time of issue of securities.
4. Portfolio Consultants:
A combination of securities such as stocks, bonds andmoney market instruments is collectively called as portfolio. Whereas the portfolio
consultants are the persons, firms or companies who advise, direct or undertake the
management oradministration of securities or funds on behalf of theirclients.
Traditionally stock trading is done through stock brokers, personally or through
telephones.
As number of people trading in stock market increase enormously in last few years,
some issues like location constrains, busy phone lines, miss communication etc start
growing in stock broker offices. Information technology (Stock Market Software) helps
stock brokers in solving these problems with Online Stock Trading.
Online Stock Market Trading is an internet based stock trading facility. Investor can
trade shares through a website without any manual intervention from Stock Broker.
There are two different type of trading environments available for online equitytrading.
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1.Installable software based Stock Trading Terminals
This trading environment requires software to be installed on investors computer.
This software is provided by the stock broker. This software requires high speed internet
connection. These kind of trading terminals are used by high volume intraday equitytraders.
2.Web (Internet) based trading application
This kind of trading environment doesn't require any additional software installation.
They are like other internet websites which investor can access from around the world
through normal internet connection.
Stock exchanges are like market places, where stockbrokers buy and sell securities for
individuals or institutions. As per the SCRA (Securities Contracts Regulation Act) 1956,
the definition of securities includes shares, bonds, stocks, debentures, government
securities, derivatives of securities, units of collective investment scheme (CIS) etc. The
securities market has two interdependent segments: the primary and secondary market.
The primary market is the channel for creation of new securities issued by public
limited companies or by government agencies. New securities issued in the primary
market are traded in the secondary market.
The secondary market operates through the over-the-counter (OTC) market and the
exchange trade market.
Advantages of Stocks Trading1. Better returns
Actively trading stocks can produce better overall returns than simply buying and
holding.
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2. Huge Choice
There are thousands of stocks listed on markets around the world. There is always a
stock whose price is moving - its just a matter of finding them.
3. FamiliarityThe most traded stocks are in the largest companies that most of us have heard of and
understand - Microsoft, IBM, and Cisco etc
Disadvantages of Stocks Trading
1. LeverageWith a margined account the maximum amount of leverage available for stock
trading is usually 4:1. Meaning a $25,000 could trade up to $100,000 of stock. This is
pretty low compared to Forex trading or futures trading.
2. Pattern Day Trader Rules
It requires at least $25,000 to be held in a trading account if the trader completes
more than 4 trades in a 5 day period. No such rule applies to Forex trading or futures
trading.
3. Uptick Rule on Short Selling
A trader must wait until a stock price ticks up before they can short sell it. Again
there are no such rules in Forex trading or futures trading where going short are as easy
as going long.
4. Need to Borrow Stock to Short
Stocks are physical commodities and if a trader wishes to go short then the broker
must have arrangements in place to borrow that stock from a shareholder until the trader
closes their position. This limits the opportunities available for short selling. Contrast this
to futures trading where selling is as easy as buying.
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5. Costs
Although online trading costs for stock trading are low they still add considerably to
the costs of day trading. Online futures trading are about 1/4 of the cost for the equivalent
value. In the UK 0.5% stamp duty is also levied on all share purchases making tradingvirtually impossible, hence the popularity of spread betting.
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3.2 PORTFOLIO MANGEMNT SERVICES (PMS)
Portfolio (finance) means a collection of investments held by an institution or a
private individual. Holding a portfolio is often part of an investment and risk-limiting
strategy called diversification. By owning several assets, certain types of risk (in
particular specific risk) can be reduced. There are also portfolios which are aimed at
taking high risks these are called concentrated portfolios.
Investment management is the professional management of various securities (shares,
bonds etc) and other assets (e.g. real estate), to meet specified investment goals for the
benefit of the investors. Investors may be institutions (insurance companies, pension
funds, corporations etc.) or private investors (both directly via investment contracts and
more commonly via collective investment schemes e.g. mutual funds).
The term asset management is often used to refer to the investment management of
collective investments, whilst the more generic fund management may refer to all forms
of institutional investment as well as investment management for private investors.
Investment managers who specialize in advisory or discretionary management on behalf
of (normally wealthy) private investors may often refer to their services as wealthmanagement or portfolio management often within the context of so-called "private
banking".
The provision of 'investment management services' includes elements of financial
analysis, asset selection, stock selection, plan implementation and ongoing monitoring of
investments. Outside of the financial industry, the term "investment management" is
often applied to investments other than financial instruments. Investments are often
meant to include projects, brands, patents and many things other than stocks and bonds.
Even in this case, the term implies that rigorous financial and economic analysis methods
are used.
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3.3 Need of portfolio management services
As in the current scenario the effectiveness of PMS is required. As the PMS gives
investors periodically review their asset allocation across different assets as the portfoliocan get skewed over a period of time. This can be largely due to appreciation /
depreciation in the value of the investments.
As the financial goals are diverse, the investment choices also need to be different to
meet those needs. No single investment is likely to meet all the needs, so one should keep
some money in bank deposits and / liquid funds to meet any urgent need for cash and
keep the balance in other investment products/ schemes that would maximize the return
and minimize the risk. Investment allocation can also change depending on ones risk-
return profile.
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Objective of PMS
There are the following objective which is full filled by Portfolio Management
Services.
1. Safety Of Fund: -The investment should be preserved, not be lost, and should remain in the
returnable position in cash or kind.
2. Marketability: -The investment made in securities should be marketable that means, the
securities must be listed and tradedin stock exchange so as to avoid difficulty intheir encashment.
3. Liquidity: -The portfolio must consist of such securities, which could be en-cashed
without any difficulty or involvement of time to meet urgent need for funds.
Marketability ensuresliquidity to the portfolio.
4. Reasonable return: -The investment should earn a reasonable return toupkeep the declining value
of money and be compatible with opportunity cost of the money in terms of
current income in theform of interest or dividend.
5. Appreciation in Capital: -
The money invested in portfolio should grow andresult into capital gains.
6. Tax planning: -
Efficient portfolio management is concerned with composite tax planning
covering income tax, capital gain tax,wealth tax and gift tax.
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7. Minimize risk: -
Risk avoidance and minimization of risk are important objective of portfolio
management. Portfoliomanagers achieve these objectives by effective investment
planning and periodical review of market, situation and economic environmentaffecting the financial market.
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3.4 PORTFOLIO CONSTRUCTION
The Portfolio Construction of Rational investors wish to maximize the returns on
their funds for a given level of risk. All investments possess varying degrees of risk.Returns come in the form of income, such as interest or dividends, or through growth in
capital values (i.e. capital gains).
The portfolio construction process can be broadly characterized as comprising the
following steps:
1. Setting objectives.
The first step in building a portfolio is to determine the main objectives of the fund
given the constraints (i.e. tax and liquidity requirements) that may apply. Each investor
has different objectives, time horizons and attitude towards risk. Pension funds have
long-term obligations and, as a result, invest for the long term. Their objective may be to
maximize total returns in excess of the inflation rate. A charity might wish to generate the
highest level of income whilst maintaining the value of its capital received from bequests.
An individual may have certain liabilities and wish to match them at a future date.
Assessing a clients risk tolerance can be difficult. The concepts of efficient portfolios
and diversification must also be considered when setting up the investment objectives.
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2. Defining Policy.
Once the objectives have been set, a suitable investment policy must be established.
The standard procedure is for the money manager to ask clients to select their preferred
mix of assets, for example equities and bonds, to provide an idea of the normal mix
desired. Clients are then asked to specify limits or maximum and minimum amounts they
will allow to be invested in the different assets available. The main asset classes are cash,
equities, gilts/bonds and other debt instruments, derivatives, property and overseas assets.
Alternative investments, such as private equity, are also growing in popularity, and will
be discussed in a later chapter. Attaining the optimal asset mix over time is one of the key
factors of successful investing.
3. Applying portfolio strategy.
At either end of the portfolio management spectrum of strategies are active and
passive strategies. An active strategy involves predicting trends and changingexpectations about the likely future performance of the various asset classes and actively
dealing in and out of investments to seek a better performance. For example, if the
manager expects interest rates to rise, bond prices are likely to fall and so bonds should
be sold, unless this expectation is already
factored into bond prices. At this stage, the active fund manager should also determine
the style of the portfolio. For example, will the fund invest primarily in companies with
large market capitalizations, in shares of companies expected to generate high growth
rates, or in companies whose valuations are low? A passive strategy usually involves
buying securities to match a preselected market index. Alternatively, a portfolio can be
set up to match the investors choice of tailor-made index. Passive strategies rely on
diversification to reduce risk. Outperformance versus the chosen index is not expected.
This strategy requires minimum input from the portfolio manager. In practice, many
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active funds are managed somewhere between the active and passive extremes, the core
holdings of the fund being passively managed and the balance being actively managed.
4. Asset selections.
Once the strategy is decided, the fund manager must select individual assets in which
to invest. Usually a systematic procedure known as an investment process is established,
which sets guidelines or criteria for asset selection. Active strategies require that the fund
managers apply analytical skills and judgment for asset selection in order to identify
undervalued assets and to try to generate superior performance.
5. Performance assessments.
In order to assess the success of the fund manager, the performance of the fund is
periodically measured against a pre-agreed benchmark perhaps a suitable stock
exchange index or against a group of similar portfolios (peer group comparison). The
portfolio construction process is continuously iterative, reflecting changes internally and
externally. For example, expected movements in exchange rates may make overseas
investment more attractive, leading to changes in asset allocation. Or, if many large-scaleinvestors simultaneously decide to switch from passive to more active strategies, pressure
will be put on the fund managers to offer more active funds. Poor performance of a fund
may lead to modifications in individual asset holdings or, as an extreme measure; the
manager of the fund may be changed altogether.
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Steps to Stock Selection Process
\
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Types of assets
The structure of a portfolio will depend ultimately on the investors objectives and on
the asset selection decision reached. The portfolio structure takes into account a range of
factors, including the investors time horizon, attitude to risk, liquidity requirements, tax
position and availability of investments. The main asset classes are cash, bonds and other
fixed income securities, equities, derivatives, property and overseas assets.
Cash and cash instruments
Cash can be invested over any desired period, to generate interest income, in a range of
highly liquid or easily redeemable instruments, from simple bank deposits, negotiable
certificates of deposits, commercial paper (short term corporate debt) and Treasury bills
(short term government debt) to money market funds, which actively manage cash
resources across a range of domestic and foreign markets. Cash is normally held over the
short term pending use elsewhere (perhaps for paying claims by a non-life insurance
company or for paying pensions), but may be held over the longer term as well. Returnson cash are driven by the general demand for funds in an economy, interest rates, and the
expected rate of inflation. A portfolio will normally maintain at least a small proportion
of its funds in cash in order to take advantage of buying opportunities.
Bonds
Bonds are debt instruments on which the issuer (the borrower) agrees to make interest
payments at periodic intervals over the life of the bond this can be for two to thirty
years or, sometimes, in perpetuity. Interest payments can be fixed or variable, the latter
being linked to prevailing levels of interest rates. Bond markets are international and have
grown rapidly over recent years. The bond markets are highly liquid, with many issuers
of similar standing, including governments (sovereigns) and state-guaranteed
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organizations. Corporate bonds are bonds that are issued by companies. To assist
investors and to help in the efficient pricing of bond issues, many bond issues are given
ratings by specialist agencies such as Standard & Poors and Moodys. The highest
investment grade is AAA, going all the way down to D, which is graded as in default.Depending on expected movements in future interest rates, the capital values of bonds
fluctuate daily, providing investors with the potential for capital gains or losses. Future
interest rates are driven by the likely demand/ supply of money in an economy, future
inflation rates, political events and interest rates elsewhere in world markets. Investors
with short-term horizons and liquidity requirements may choose to invest in bonds
because of their relatively higher return than cash and their prospects for possible capital
appreciation. Long-term investors, such as pension funds, may acquire bonds for the
higher income and may hold them until redemption for perhaps seven or fifteen years.
Because of the greater risk, long bonds (over ten years to maturity) tend to be more
volatile in price than medium- and short-term bonds, and have a higher yield.
Equities
Equity consists of shares in a company representing the capital originally provided by
shareholders. An ordinary shareholder owns a proportional share of the company and an
ordinary share carries the residual risk and rewards after all liabilities and costs have been
paid. Ordinary shares carry the right to receive income in the form of dividends (once
declared out of distributable profits) and any residual claim on the companys assets once
its liabilities have been paid in full. Preference shares are another type of share capital.
They differ from ordinary shares in that the dividend on a preference share is usually
fixed at some amount and does not change. Also, preference shares usually do not carry
voting rights and, in the event of firm failure, preference shareholders are paid beforeordinary shareholders. Returns from investing in equities are generated in the form of
dividend income and capital gain arising from the ultimate sale of the shares. The level of
dividends may vary from year to year, reflecting the changing profitability of a company.
Similarly, the market price of a share will change from day to day to reflect all relevant
available information. Although not guaranteed, equity prices generally rise over time,
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reflecting general economic growth, and have been found over the long term to generate
growing levels of income in excess of the rate of inflation. Granted, there may be periods
of time, even years, when equity prices trend downwards usually during recessionary
times. The overall long-term prospect, however, for capital appreciation makes equitiesan attractive investment proposition for major institutional investors.
Derivatives
Derivative instruments are financial assets that are derived from existing primary
assets as opposed to being issued by a company or government entity. The two most
popular derivatives are futures and options. The extent to which a fund may incorporate
derivatives products in the fund will be specified in the fund rules and, depending on the
type of fund established for the client and depending on the client, may not be allowable
at all.
A futures contract is an agreement in the form of a standardized contract between
two counterparties to exchange an asset at a fixed price and date in the future. The
underlying asset of the futures contract can be a commodity or a financial security. Each
contract specifies the type and amount of the asset to be exchanged, and where it is to be
delivered (usually one of a few approved locations for that particular asset). Futures
contracts can be set up for the delivery of cocoa, steel, oil or coffee. Likewise, financial
futures contracts can specify the delivery of foreign currency or a range of government
bonds. The buyer of a futures contract takes a long position, and will make a profit if
the value of the contract rises after the purchase. The seller of the futures contract takes a
short position and will, in turn, make a profit if the price of the futures contract falls.
When the futures contract expires, the seller of the contract is required to deliver theunderlying asset to the buyer of the contract. Regarding financial futures contracts,
however, in the vast majority of cases no physical delivery of the underlying asset takes
place as many contracts are cash settled or closed out with the offsetting position before
the expiry date.
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An option contract is an agreement that gives the owner the right, but not
obligation, to buy or sell (depending on the type of option) a certain asset for a specified
period of time. A call option gives the holder the right to buy the asset. A put option givesthe holder the right to sell the asset. European options can be exercised only on the
options expiry date. US options can be exercised at any time before the contracts
maturity date. Option contracts on stocks or stock indices are particularly popular.
Buying an option involves paying a premium; selling an option involves receiving the
premium. Options have the potential for large gains or losses, and are considered to be
high-risk instruments. Sometimes, however, option contracts are used to reduce risk. For
example, fund managers can use a call option to reduce risk when they own an asset.
Only very specific funds are allowed to hold options.
Property
Property investment can be made either directly by buying properties, or indirectly by
buying shares in listed property companies. Only major institutional investors with long-
term time horizons and no liquidity pressures tend to make direct property investments.
These institutions purchase freehold and leasehold properties as part of a property
portfolio held for the long term, perhaps twenty or more years. Property sectors of
interest would include prime, quality, well-located commercial office and shop
properties, modern industrial warehouses and estates, hotels, farmland and woodland.
Returns are generated from annual rents and any capital gains on realization. These
investments are often highly illiquid.
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3.5 Risk and Risk Aversion
Portfolio theory also assumes that investors are basically risk averse, meaning that,
given a choice between two assets with equal rates of return they will select the asset with
lower level of risk.
For example, they purchased various type of insurance including life insurance,
Health insurance and car insurance. The Combination of risk preference and risk aversion
can be explained by an attitude toward risk that depends on the amount of money
involved.
A discussion of portfolio or fund management must include some thought given to
the concept of risk. Any portfolio that is being developed will have certain risk
constraints specified in the fund rules, very often to cater to a particular segment of
investor who possesses a particular level of risk appetite. It is, therefore, important to
spend some time discussing the basic theories of quantifying the level of risk in an
investment, and to attempt to explain the way in which market values of investments are
determined
Definition of Risk
Although there is a difference in the specific definitionsof risk and uncertainty, for our
purpose and in most financialliterature the two terms are used interchangeably. In fact,
oneway to define risk is the uncertainty of future outcomes. Analternative definition
might be the probability of an adverse outcome.
Composite risks involve the different risk as explained below:-
(1). Interest rate risk: -
It occurs due to variability cause in return by changes in level of interest rate. In long
runs all interest rate move up or downwards. These changes affect the value of security.
RBI, in India, is the monitoring authority which effectalises the change in interest rate.
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in depression brings downfall in the prizes of all types of securities. Flexible income
securities are nearly affected than fix rate securities during depression due to decline n
the market prize.
(4) Financial risk:
Financial risk emanates from the changes in the capital structure of the company. It is
also known as leveraged risk and expressed in term of debt equity ratio. Excess of debts
against equity in the capital structure indicates the company to be highly geared or highly
levered. Although leveraged companys earnings per share (EPS) are more but
dependence on borrowing exposes it to the risk of winding up. For, its inability to thehonor its commitments towards the creditors are most important.
Here it is imperative to express the relationship between risk and return, which is
depicted graphically below
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Maximize returns, minimize risks
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3.6 RISK VERSUS RETURN
Risk versus return is the reason why investors invest in portfolios. The ideal goal in
portfolio management is to create an optimal portfolio derived from the best riskreturn
opportunities available given a particular set of risk constraints. To be able to make
decisions, it must be possible to quantify the degree of risk in a particular opportunity.
The most common method is to use the standard deviation of the expected returns. This
method measures spreads, and it is the possible returns of these spreads that provide the
measure of risk. The presence of risk means that more than one outcome is possible. An
investment is expected to produce different returns depending on the set of circumstances
that prevail.
For example, given the following for Investment A:
Circumstance Return(x) Probability(p)
I 10% 0.2
II 12% 0.3III 15% 0.4
IV 19% 0.1
It is possible to calculate:
1. The expected (or average) returnMean (average) = x = expected value (EV) = px
Circumstan
ce
Return(x) Probability(p) px
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If the above exercise were to be performed using another investment that offered the
same expected return, but a different standard deviation, then the following result might
occur:
If the above exercise were to be performed using another investment that offered the
same expected return, but a different standard deviation, then the following result might
occur:
Plan Expected Return Risk(standard
deviation)
Investment A 9% 2.5%
Investment B 9% 4.0%
Since both investments have the same expected return, the best selection of
investment would be Investment A, which provides the lower risk. Similarly, if there are
two investments presenting the same risk, but one has a higher return than the other, that
investment would be chosen over the investment with the lower return for the same risk.
In the real world, there are all types of investors. Some investors are completely risk
averse and others are willing to take some risk, but expect a higher return for that risk.
Different investors will also have different tolerances or threshold levels for riskreturn
trade-offs i.e. for a given level of risk, one investor may demand a higher rate of return
than another investor.
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INDIFFERNCE CURVE
Suppose the following situation exists
Plan Expected Return Risk(Standard
Deviation)
Investment A 10% 5%
Investment B 20% 10%
The question to ask here is, does the extra 10% return compensate for the extra risk?
There is no right answer, as the decision would depend on the particular investorsattitude to risk. A particular investors indifference curve can be ascertained by plotting
what rate of return the investor would require for each level of risk to be indifferent
amongst all of the investments.
For example, there may be an investor who can obtain a return of 50% with zero risk and
a return of 55 %with a risk or standard deviation of 5% who will be indifferent between
the two investments. If further investments were considered, each with a higher degree ofrisk, the investor would require still higher returns to make all of the investments equally
attractive. The investor being discussed could present the following as the indifference
curve shown in Figure.
Indifference Curve
Expected Return Risk
50% 0%
55% 5%
70% 10%
100% 15%
120% 18%
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230% 25%
Risk
Indifference curve
It could be the case that this investor would have different indifference curves given a
different starting level of return for zero risk. The exercise would need to be repeated for
various levels of riskreturn starting points. An entire set of indifference curves could be
constructed that would portray a particular investors attitude towards risk
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Indifference Curve
Utility scores
At this stage the concept of utility scores can be introduced. These can be seen as a
way of ranking competing portfolios based on the expected return and risk of those
portfolios. Thus if a fund manager had to determine which investment a particular
investor would prefer, i.e. Investment A equaling a return of 10% for a risk of 5% or
Investment B equaling a return of 20% for a risk of 10%, the manager would create
indifference curves for that particular investor and look at the utility scores. Higher utility
scores are assigned to portfolios or investments with more attractive riskreturn profiles.
Although several scoring systems are legitimate, one function that is commonlyemployed assigns a portfolio or investment with expected return or value EV and
variance of returns 2the following utility value:
U = EV .005A2 where:
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U = utility value
A = an index of the investors aversion, (the factor of .005 is a scaling convention that
allows expression of the expected return and standard deviation in the equation as apercentage rather than a decimal).
Utility is enhanced by high expected returns and diminished by high risk. Investors
choosing amongst competing investment portfolios will select the one providing the
highest utility value. Thus, in the example above, the investor will select the investment
(portfolio) with the higher utility value of 18.
Expected
Return(EV)
Standard deviation() Utility=EV-.005A2
10% 5% 10 .005 4 25 = 9.5
20% 10% 20 .005 4 100 = 18
(Assume A= 4 in this case)
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3.7 Portfolio Diversification
There are several different factors that cause risk or lead to variability inreturns on an
individual investment. Factors that may influence risk in any given investment vehicle
include uncertainty of income, interest rates,inflation, exchange rates, tax rates, the state
of the economy, default risk and liquidity risk (the risk of not being able to sell on the
investment). Inaddition, an investor will assess the risk of a given investment (portfolio)
within the context of other types of investments that may already be owned,i.e. stakes in
pension funds, life insurance policies with savings components, and property.
One way to control portfolio risk is via diversification, whereby investments are
made in a wide variety of assets so that the exposure to the risk of anyparticular security
is limited. This concept is based on the old adage do notput all your eggs in one basket.
If an investor owns shares in only onecompany, that investment will fluctuate depending
on the factors influencing that company. If that company goes bankrupt, the investor
might lose 100 per cent of the investment. If, however, the investor owns shares in
several companies in different sectors, then the likelihood of allof those companies going
bankrupt simultaneously is greatly diminished. Thus, diversification reduces risk.
Although bankruptcy risk has beenconsidered here, the same principle applies to other
forms of risk
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RISK RETURN MATRIX
Covariance and Correlation
The goal is to hold a group of investments or securities within a portfolio potentially
to reduce the risk level suffered without reducing the level of return. To measure the
success of a potentially diversified portfolio, covarianceand correlationare considered.
Covariance measures to what degree the returns of two risky assets move in tandem. A
positive covariance means that the returns of the two assets move together, whilst a
negative covariance means that they move in inverse directions.
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Covariance
COV(x, y) = p(x-x) (y-y) for two investments x and y, where p is the
probability.
Covariance is an absolute measure, and covariances cannot be compared with one
another. To obtain a relative measure, the formula for correlation coefficient [r] is used.
Correlation coefficient
r = COVxy
xy
To illustrate the above, here is the example:
Circumstance Probability x-x y-y
p(x-x) (y-y)
I 0.2 +1.0 -3.5 -0.7
II 0.3 0 -1.5 0
III 0.4 +1.5 +1.5 0.9
IV 0.1 -4 +5.5 -2.2
COVxy =-2.0
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For data regarding (y y), see earlier example. Assume that a similar exercise has
been run for data regarding (x x). Assume the variance or 2 of x=2.45, and the
variance or2 of y = 7.06. Thus, the correlation coefficient would be
r= -2.0 = -0.481
2.45 *7.056
If, the same example is run again, but using a different set of numbers for y, a
different correlation coefficient might result of say, 0.988. It can be concluded that a
large negative correlation confirms the strong tendency of the two investments to move
inversely.
Perfect positive correlation (correlation coefficient = +1) occurs when the
returns from two securities move up and down together in proportion. If these securities
were combined in a portfolio, the offsetting effect would not occur.
Perfect negative correlation(correlation coefficient = 1) takes place when one
security moves up and the other one down in exact proportion. Combining these two
securities in a portfolio would increase the diversification effect.
Uncorrelated(correlation coefficient = 0) occurs when returns from two securities
move independently of each other that is, if one goes up, the other may go up or down
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or may not move at all. As a result, the combination of these two securities in a portfolio
may or may not create a diversification effect. However, it is still better to be in this
position than in a perfect positive correlation situation.
Unsystematic and systematic risk
As mentioned previously, diversification diminishes risk: the more shares or assets
held in a portfolio or in investments, the greater the risk reduction. However, it is
impossible to eliminate all risk completely even with extensive diversification. The risk
that remains is called market risk; the risk that is caused by general market influences.
This risk is also known as systematic risk or non-diversifiable risk. The risk that isassociated with a specific asset and that can be abolished with diversification is known as
unsystematic risk, unique risk or diversifiable risk.
Total risk = Systematic risk + Unsystematic risk
Systematicrisk= the potential variability in the returns offered by a security or asset
caused by general market factors, such as interest rate changes, inflation rate movements,
tax rates, state of the economy.
Unsystematic risk = the potential variability in the returns offered by a security or
asset caused by factors specific to that company, such as profitability margins, debt
levels, quality of management, susceptibility to demands of customers and suppliers.
As the number of assets in a portfolio increases, the total risk may decline as a result
of the decline in the unsystematic risk in that portfolio. The relationship amongst these
risks can be quantified as follows
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TR2 = SR2 + UR2 or 2i = s2 + u
2
Where:
= the investments total risk (standard deviation)
s =the investments systematic risk
u =the investments unsystematic risk.
The correlation coefficient between two investment opportunities can be
expressed as:
s = i CORim
Where,
s = the investment systematic risk
i = the investments total risk (systematic and unsystematic)
CORim = the correlation coefficient between the return of the investment andthose of the market.
If an investment were perfectly correlated to the market so that all its movements
could be fully explained by movements in market, then all of the risk would be
systematic & i = sIfan investment were not correlated at all to the market, then all of
its risk would be unsystematic
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3.8 TECHNIQUES OF PORTFOLIO MANAGEMENT
Various types of portfolio require different techniques to be adopted to achieve the
desired objectives. Some of the techniques followed in India by portfolio managers are
summarized below.
(1). Equity portfolio-
Equity portfolio is affected by internal and external factors:
(a) Internal factors
Pertain to the inner working of the particular company of which equity shares are
held. These factors generally include:
(1) Market value of shares
(2) Book value of shares
(3) Price earnings ratio (P/E ratio)
(4) Dividend payout ratio
(b) External factors
(1) Government policies
(2) Norms prescribed by institutions
(3) Business environment
(4) Trade cycles
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(2). Equity stock analysis
The basic objective behind the analysis is to determine the probable future value of
the shares of the concerned company. It is carried out primarily fewer than two ways. :
(a) Earnings per share
(b) Price earnings ratio
(A)Trend of earning: -
A higher price-earnings ratio discount expected profit growth. Conversely, adownward trend in earning results in a low price-earnings ratio to discount
anticipated decrease in profits, price and dividend. Rising EPS causes
appreciation in price of shares, which
benefits investors in lower tax brackets? Such investors have not pay tax or to give
lower rate tax on capital gains. Many institutional investor like stability and growth and support high EPS.
Growth of EPS is diluted when a company finances internally its expansionprogram and offers new stock.
EPS increase rapidly and result in higher P/E ratio when a company finances itsexpansion program from internal sources and borrowings without offering new
stock.
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(B) Quality of reported earning: -
Quality of reported earnings affects P/E ratio. The factors that affect the quality of
reported earnings are as under:
Depreciation allowances: -Larger (Non Cash) deduction for depreciation provides more funds to
company to finance profitable expansion schemes internally. This builds up
future earning power of company.
Research and development outlets: -There is higher P/E ratio for a company, which carries R&D programs. R&D
enhances profit earning strength of the company through increased future sales.
Inventory and other non-recurring type of profit: -Low cost inventory may be sold at higher price due to inflationary conditions
among profit but such profit may not always occur and hence low P/E ratio.
(C) Dividend policy: -
Dividend policy is significant in affecting P/E ratio. With higher dividend ratio, equity
price goes up and thus raises P/E ratio. Dividend rates are raised to push in share prices
up. Dividend cover is calculated to find out the time the dividend is protected, In terms of
earnings. It is calculated as under:
Dividend Cover = EPS / Dividend per Share
(D) Investors demand: -
Demand from institutional investors for equity also enhances the P/E ratio.
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(3) Quality of management: -
Investors decide about the ability and caliber of management and hold and dispose of
equity academy. P/E ratio is more where a company is managed by reputed entrepreneurs
with good past records of management performance.
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3.9 Types of Portfolios
The different types of Portfolio which is carried by any Fund Manager to maximize
profit and minimize losses are different as per their objectives .They are as follows.
Aggressive Portfolio:
Objective: Growth. This strategy might be appropriate for investors who
seek High growth and who can tolerate wide fluctuations in market values,
over the short term.
Growth Portfolio:
Objective: Growth. This strategy might be appropriate for investors who
have a preference for growth and who can withstand significant fluctuations
in market value.
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Balanced Portfolio:
Objective: Capital appreciation and income. This strategy might be
appropriate for investors who want the potential for capital appreciation and
some growth, and who can withstand moderate fluctuations in market values
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Conservative Portfolio:
Objective: Income and capital appreciation. This strategy may be
appropriate for investors who want to preserve their capital and minimize
fluctuations in market value.
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Chapter 4.Collection and interpretation of data.
This survey conducted by 40 selected respondents. Questions are regarding to the
portfolio management services by share khan.
1. Do you know about the Investment Option available?
COMMENT
As the above table shows the knowledge of Investor out of 100
respondent carried throughout the Hyderabad Area is only 85%. The
remaining 15% take his/her residential property as an investment According
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
YES
NO
YES, 85%
NO, 15%