portfolio mngt newww

7/31/2019 Portfolio Mngt Newww

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INTRODUCTION

PORTFOLIO MANAGEMENT

Administration of a pool of investments vehicles, selected on the basis of clearly

articulated investment objectives (such as asset protection, capital enhancement, income),

by an advisor or broker on behalf of a client.

A Portfolio is a collection of assets. The assets may be physical or financial like

shares, Bonds, Debentures, Preference Shares etc. The individual investor or a fund

manager would not like to put all his money in the shares of one company that would

amount to great risk. He would therefore; follow the age old maxim one should not all the

eggs into one basket. By doing so, he can achieve objective 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.

Portfolio management is a decision-support system that is designed with a view to

meet the multi-faced needs of investors.

Determining the mix of assets to hold in a portfolio is referred to as portfoliomanagement. A fundamental aspect of portfolio management is choosing assets which are

consistent with the portfolio holder's investment objectives and risk tolerance. The ultimate

goal of portfolio management is to achieve the optimum return for a given level of risk.

Investors must balance risk and performance in making portfolio management decisions.

Portfolio management strategies may be either active or passive. An investor who prefers

passive portfolio management will likely choose to invest in low cost index funds with the

goal of mirroring the market's performance. An investor who prefers active portfolio

management will choose managed funds which have the potential to outperform the

market. Investors are generally charged higher initial fees and annual management fees for

active portfolio management.


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NEED FOR THE STUDY :

1) To evaluate every transaction.` Whenever a security is brought or sold, we can attempt

to assets whether the decision was correct and profitable.

2) To evaluate the performance of a specific security in the portfolio to determine whether

it has been worthwhile to include it in our portfolio.

3) To evaluate the performance of portfolio as a whole during the period without

examining the performance of individual securities within the portfolio.

OBJECTIVES OF THE STUDY:

To study the investment pattern and its related risks & returns.

To find out optimal portfolio, which give optimal return at the minimize risk to the

investor.

To see whether the portfolio risk is less than individual risk on whose basis the

portfolios are constituted.

To see whether the selected portfolios is yielding a satisfactory and constant return

to the investor.

To understand, analyze and select the best portfolio.


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SCOPE OF STUDY:

This study covers the Markowitz model. The study covers the calculations 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 include the

calculation of individual standard deviation of securities and ends at the calculation of

weights of individual securities involved in the portfolio. These percentage help in

allocating the funds available for investment based on risky portfolios.

In the present study cover through examination of procedures of decision

making portfolio management environment, selection of securities Weights of differentsecurities and Earning of Portfolio NIACL.

RESEARCH METHODOLOGY

The data collection methods include both the primary and secondary collection

methods.

PRIMARY COLLECTION METHODS:

This method includes the data collection from the personal discussion with the

authorized clerks and members of the exchange

SECONDARY COLLECTION METHODS:

The secondary collection of methods includes the lectures of the superintend of the

department of market operations and so on.., also the data collected from the news,

magazines of the ISE and different books issues of the study.


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LIMITATIONS OF THE STUDY

1. Constructions of portfolio is two companies based on Markowitz model

2. Very few and randomly selected scripts / companies are analyzed from BKF

listings.

3. Data collection was strictly confined to secondary source. No primary data is

associated with the project.

4. Detailed study of the topic was not possible due to limited size of the project.

5. There was a constraint with regard to time allocation for the research study i.e. for a

period of two months.


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INDUSTRY PROFILE

The Bombay Stock Exchange (BSE) is a stock exchange located on Dalal Street,

Mumbai and is the oldest stock exchange in Asia. The equity market capitalization of the

companies listed on the BSE was US$1.63 trillion as of December 2010, making it the 4th

largest stock exchange in Asia and the 8th largest in the world. The BSE has the largest

number of listed companies in the world. It has also been cited as one of the world's best

performing stock market.

As of December 2010, there are over 5,034 listed Indian companies and over 7700

scrips on the stock exchange, the Bombay Stock Exchange has a significant tradingvolume. The BSE SENSEX , also called the "BSE 30", is a widely used market index in

India and Asia. Though many other exchanges exist, BSE and the National Stock Exchange

of India account for the majority of the equity trading in India.


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History:

The Phiroze Jeejeebhoy Towers house the Bombay Stock Exchange since 1980.

The Bombay Stock Exchange is the oldest exchange in Asia. It traces its history to

the 1850s, when 4 Gujarati and 1 Parsi stockbroker would gather under banyan trees in

front of Mumbai's Town Hall. The location of these meetings changed many times, as the

number of brokers constantly increased. The group eventually moved to Dalal Street in

1874 and in 1875 became an official organization known as 'The Native Share & Stock

Brokers Association'. In 1956, the BSE became the first stock exchange to be recognized

by the Indian Government under the Securities Contracts Regulation Act. The Bombay

Stock Exchange developed the BSE Sensex in 1986, giving the BSE a means to measure

overall performance of the exchange. In 2000 the BSE used this index to open its

derivatives market, trading Sensex futures contracts. The development of Sensex options

along with equity derivatives followed in 2001 and 2002, expanding the BSE's trading

platform. Historically an open outcry floor trading exchange, the Bombay Stock Exchange

switched to an electronic trading system in 1995. It took the exchange only fifty days to

make this transition. This automated, screen-based trading platform called BSE On-linetrading (BOLT) currently has a capacity of 8 million orders per day. The BSE has also

introduced the world's first centralized exchange-based internet trading system,

BSEWEBx.co.in to enable investors anywhere in the world to trade on the BSE platform.

The BSE is currently housed in Phiroze Jeejeebhoy Towers at Dalal Street, Fort area.
http://en.wikipedia.org/wiki/File:India_economy.jpghttp://en.wikipedia.org/wiki/File:India_economy.jpg


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BSE indices:

Bombay Stock Exchange:

The launch of SENSEX in 1986 was later followed up in January 1989 by

introduction of BSE National Index. It comprised 100 stocks listed at five major stock

exchanges in India - Mumbai, Calcutta, Delhi, Ahmadabad and Madras. The BSE National

Index was renamed BSE-100 Index from October 14, 1996 and since then, it is being

calculated taking into consideration only the prices of stocks listed at BSE. BSE launched

the dollar-linked version of BSE-100 index on May 22, 2006. BSE launched two new index

series on 27 May 1994: The 'BSE-200' and the 'DOLLEX-200'. BSE-500 Index and 5

sectoral indices were launched in 1999. In 2001, BSE launched BSE-PSU Index,

DOLLEX-30 and the country's first free-float based index - the BSE Index. Over the years,

BSE shifted all its indices to the free-float methodology (except BSE-PSU index). BSE

disseminates information on the Price-Earnings Ratio, the Price to Book Value Ratio and

the Dividend Yield Percentage on day-to-day basis of all its major indices. The values of

all BSE indices are updated on real time basis during market hours and displayed through

the BOLT system, BSE website and news wire agencies. All BSE Indices are reviewed

periodically by the BSE Index Committee. This Committee which comprises eminent

independent finance professionals frames the broad policy guidelines for the development


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and maintenance of all BSE indices. The BSE Index Cell carries out the day-to-day

maintenance of all indices and conducts research on development of new indices.

National Stock Exchange (NSE):

India. It is the 9th largest stock exchange in the world by market capitalization and

largest in India by daily turnover and number of trades, for both equities and derivative

trading. NSE has a market capitalization of around US$1.59 trillion and over 1,552 listings

as of December 2010. Though a number of other exchanges exist, NSE and the Bombay

Stock Exchange are the two most significant stock exchanges in India and between them

are responsible for the vast majority of share transactions. The NSE's key index is the S&P

CNX Nifty, known as the NSE NIFTY (National Stock Exchange Fifty), an index of fifty

major stocks weighted by market capitalization.

NSE is mutually-owned by a set of leading financial institutions, banks, insurance

companies and other financial intermediaries in India but its ownership and management

operate as separate entities. There are at least 2 foreign investors NYSE Euro next and

Goldman Sachs who have taken a stake in the NSE. As of 2006, the NSE VSAT terminals,

2799 in total, cover more than 1500 cities across India. NSE is the third largest Stock

Exchange in the world in terms of the number of trades in equities. It is the second fastest

growing stock exchange in the world with a recorded growth of 16.6%.


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Origins:

The National Stock Exchange of India was promoted by leading financial

institutions at the behest of the Government of India, and was incorporated in November

1992 as a tax-paying company. In April 1993, it was recognized as a stock exchange under

the Securities Contracts (Regulation) Act, 1956. NSE commenced operations in the

Wholesale Debt Market (WDM) segment in June 1994. The Capital market (Equities)

segment of the NSE commenced operations in November 1994, while operations in the

Derivatives segment commenced in June 2000.

Innovations:

. NSE has remained in the forefront of modernization of India's capital and financial

markets, and its pioneering efforts include:

Being the first national, anonymous, electronic limit order book (LOB) exchange to

trade securities in India. Since the success of the NSE, existent market and new

market structures have followed the "NSE" model.

Setting up the first clearing corporation "National Securities Clearing Corporation

Ltd." in India. NSCCL was a landmark in providing innovation on all spot equity

market (and later, derivatives market) trades in India.

Co-promoting and setting up of National Securities Depository Limited, first

depository in India

Setting up of S&P CNX Nifty.

NSE pioneered commencement of Internet Trading in February 2000, which led to

the wide popularization of the NSE in the broker community.


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Being the first exchange that, in 1996, proposed exchange traded derivatives,

particularly on an equity index, in India. After four years of policy and regulatory

debate and formulation, the NSE was permitted to start trading equity derivatives

Being the first and the only exchange to trade GOLD ETFs (exchange traded funds)

in India.

Markets:

Currently, NSE has the following major segments of the capital market:

Equity Futures and Options

Retail Debt Market

Wholesale Debt Market

Currency futures

Mutual funds

Stocks Lending & Borrowing

August 2008 Currency derivatives were introduced in India with the launch of

Currency Futures in USD INR by NSE. Currently it has also launched currency futures in

EURO, POUND & YEN. Interest Rate Futures was introduced for the first time in India by

NSE on 31 August 2009, exactly after one year of the launch of Currency Futures.

NSE became the first stock exchange to get approval for Interest rate futures as

recommended by SEBI-RBI committee, on 31 August 2009, a futures contract based on

7% 10 Year GOI bond (NOTIONAL) was launched with quarterly maturities.


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COMPANY PROFILE

Share khan, Indias leading stock broker is the retail arm of SSKI, an organization

with over eighty years of experience in the stock market with more than 290 share shop in

120 cities and big towns, and premier online trading destination www.sharekhan.com.

Share khan offers the trade execution facilities for cash as well derivatives, on BSE ANDNSE, depository services, commodities trading on the MCX (MULTI COMMODITY

EXCHANGE) and most important, investment advice tempered by eight years of broking

experience.


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Share khan provides the facility to trade in commodities through share khan

commodities Pvt. Ltd- a wholly owned subsidiary of its parent SSKI. Share khan is the

member of two major commodities exchange MCX AND NCDEX.

The main plus point of share khan is its research report. These research reports are

based on the fundamental and technical analysis, which is done in MUMBAI head office.

Share khan got the CNBC award for BEST RESEARCH TEAM in India for past 4 years.

Also share khan is the top stock broking companies in India. Other stock broking

companies dont have the strong research team to back-up their recommendations is about

80-90%.

SSKI (S.S.Kantilal Ishwarlal)

Apart from share khan, the SSKI group also comprises of institutional broking and

corporate finance, the institutional broking division caters to domestic and foreign

institutional investor, while the corporate finance division focuses on niche areas such as

infrastructure, telecom, and media. SSKI owns 5% in share khan and the balance

ownership is HSBC, first Caryl and Intel pacific. SSKI had been voted as the top domestic

brokerage house in the research category, twice by euro money and four times by Asia

money survey.

A Sharekhan outlet offers the following services:

1. Online BSE and NSE executions (through BOLT and NEAT terminals)

2. Free access to invest advice from share khans research team

3. Sharekhan value line (a fortnightly publication with reviews of

recommendation, stock to watch out for etc.


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4. Daily research report and market review (High Noon , Eagle Eye)

5. Pre market report

6. Daily trading calls based on technical analysis

7. Cool trading products (Daring Derivatives, Trading Ring and Market Strategy)

8. Personalized advice

9. Live market information

10. Depository service: Demit and Remit transactions.

11. Derivative trading (future and options)

12. Internet-based trading: Speed Trade, Speed Trade Plus

COMPETITORS

The main competitors are India bull, HDFC securities, and ICICI to some extent,

KOTAK securities. But still share khan has too many positive points against competitors to

convert them into share khan customer.

THE MAJOR COMPITITORS OF SHARE KHAN

1. KOTAKSTEET.COM

2. INDIAINFOLINE.COM

3. INDIABULLS.COM

4. ICICIDIRECT.COM


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5. HDFCSEC.COM

HDFC securities Ltd is promoted by the HDFC Bank, HDFC and Chase Capital

Partners and their association .Pioneers in setting up Dial-a-share service with the largest

team of Tele-brokers.

CUSTOMERS

The Share khan customers are all those people who are interested in online as well as

off-line trading. The customers whom I approached are the following:

1. Private employee

2. Government employee

3. Business people

4. Students

5. Faculties of various colleges

6.

BASIC SERVICES

(Brief description about DP service)

1. Account Maintenance

2. Demit /Remit

3. Trades

4. Pledges

5. Corporate benefits

Account opening:

Opening a DP account with share khan

1. You can open Depository participants (DP) accounts through share khan branches

or through share khan franchisee center.

2. There is no fee for opening DP accounts with share khan. How ever,

deposit(Refundable) will be levied towards service which can be adjusted towards

billing charges


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All investors have to submit their proof of identity and proof of address along with the

prescribed account opening form.

1. Proof of identity: Your signature and photograph must be authenticated by an

existing Demit account holder with the same DP or by bank manager. Alternatively,

you can submit a copy of passport, voters ID card, Driving license or PAN card

with photograph.

2. Proof of address: you can submit a copy of passport, voter ID card, Driving

License, PAN card with photograph, ration card, or bank passbook as a proof of

address. You must remember to take original documents to the DP for verification.

3. Passport-size photograph.

DEMATERIALIZATION:

Dematerialization is the process by which an investor can get physical certificates

converted into electronic balances maintained in its accounts.

FEATURES:

Holding is only those securities that are admitted for dematerialized by NSDL can

be dematerialized.

Structure of holding in the securities should match with the account structure if the

depositary account .If the share are in the name of X and Y it cannot be dematerialized into

the account of either X and Y alone. Further, if share are in the name of X first and Y

second and the account is in the name of Y first and X second, then these shares cannot be

dematerialized in this accounts. The dematerialized you can pledge your share and the

money can be utilized to finance your personal needs, or you can make further investment.

Only those holding that are registered in the name of the accountant holder can bedematerialized.

REMATERIALIZATION:


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Rematerialization is the process by which a client can get his electronic holding

convertible into physical certificates. The client has to submit the dematerialization request

to the DP with whom he has an account. The DP enters the request in its system which

blocks the clients holding to that extent automatically. The DP releases the request to

NSDL and sends the request from to the Issuer/R&T Agent. The Issuer/R&T agent then

prints the certificates, dispatching the same to the client and simultaneously electronically

confirms the acceptance of the request to NSDL. There after, the clients blocked balances

are debited.

FEATURES:

1. A client can rematerialized his dematerialized holding at any point of time.

2. The dematerialized process is completed within 30days.

3. The securities sent for dematerialized cannot be traded.

TRADES

When an investor sells in a market trade i.e., through a broker, the flow of securities

happen as follows.

This statement of the trade happens on the investor giving his DP an instruction to

debit his account and credit the broker account for the quantity of shares and the broker is

turn giving his DP the instruction of delivering the share to the clearing corporation. Thus,

on the respective DPs executive the instruction the transfer of securities takes place.

Incase of market purchase, the securities come into the broker account from the

clearing corporation on payout, then the broker provides instructions to his DP to transfer


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stocks into the investor account. If the investor has not availed of automatic credit facility,

the he should provide a receipt instruction to his DP.

Incase of an off-market trade, securities move from the seller to the buyer on the

execution of respective instruction by the respective DPs.

Thus the flow of securities essentially depends upon the parties to the trade

providing the relevant instructions to the respective DPs at the appropriate time.

PLEDGE

Pledge enables you to obtain loans against you dematerialized shares. So you get

liquidity without having to sell your shares.

You can pledge your share and the money can be utilized to finance your personal needs,

or you can further investment.

CHARGES:

SERVICE SSKI CHARGES REMARKS

ACCOUNT OPENNING NILL

ACCOUNT CLOSING RS.100/-

DEMATERIALIZED RS.3/- PER CERTIFICATE OR RS.15/-PER REQUEST WHICH EVER ISHIGHER

INCLUDINGCOURIERCHARGES,

REMATERIALIZED RS.25/- PER CERTIFICATE OR 0.12%OF THE VALUE OF THE SECURITIESREQUESTED FOR REMATERALIZED,WHICH EVER IS HIGHER


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SETTLEMENT FEES-(BUY)

0.02% OR RS15/- PER TRANSACTIONWHICH EVER IS HIGHER

ONMARKETVALUE

SETTLEMENT FEES-(SALE)

0.04% OR RS.15/- PER TRANSACTIONWHICH EVER IS HIGHER

ON MARKETVALUE

CUSTODY FEE NIL

OFF MARKET-(BUY-INTER DP)-FROM OTHERDP

NIL

OFF MARKET (BUY-INTRA DP )-FROM

OTHER DP

0.02% OR RS15/- PER TRANSACTIONWHICH EVER IS HIGHER

ON MARKETVALUE

OFF MARKET (SALE) 0.04% OR RS.15/- PER TRANSACTIONWHICH EVER IS HIGHER

ON MATKETVALUE

ACCOUNTMAINTANANCE FEE

RS.75/- PER QUARTER

PLEDGE CREATION 0.02% OR RS.15/- PER TRANSACTIONWHICH EVER IS HIGHER

ON MARKETVALUE

PLEDGE CLOSURE 0.02% OR RS.15/- PER TRANSACTIONWHICH EVER IS HIGHER

ON MARKETVALUE

PLEDGE INVOCATION 0.03% OR RS.15/- PER TRANSACTIONWHICH EVER IS HIGHER

ON MARKETVALUE

LEND UP TP 3 MONTHS 0.04% AND ABOVR 3 MONTHS 0.06%

ON MARKETVALUE

FREEZ/ DE-FREEZINGOF ACCOUNT

RS.25/- PER REQUEST

DEPOSIT RS.500/- UPFRONT

NOTE:-


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1.Fee schedule based on existing NSDL charges; if NSDL revises its charges, SSKI

will reserve the right for changing its service charges.

2.Value of transaction/holding will be in accordance with NSDL formulae.

3.Any service not quoted above will be charged separately.

Transaction statement: - free of cost once every fortnight subject to a transaction having

taken place or once a quarter. Every extra statement shall be charged at RS.10/- if the

number of pages exceeds 10, then every additional page will be charged at the rate of

Rs.3/- per page

What are the benefits of depository system?

The benefits of participation in depository are

Immediate transfer of securities.

No stamp duty on transfer of securities.

Elimination of risk associated with physical certificates such as dad delivery,

fake securities, etc.,

Nomination facility.

Change in address recorded with DP gets registered with all companies in

which investor holds securities electronically eliminating the need to

correspond with each of them separately

Transmission of securities is done by DP eliminating correspondence with

companies.

Convenient method of consolidation of folios/accounts.

Holding investment in equity and debt instrument in a single account.


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REVIEW OF LITERATURE:

Portfolio Management

Portfolio management is all about strengths, weaknesses, opportunity, threats in the

choice of debt vs. equity, domestic vs. international vs. growth vs. safety, and numerous

other trades-offs encountered in the attempt to maximize return at a given appetite for risk.

A portfolio is a collection of securities. Since it is rarely desirable to invest the

entire funds of an individual or an institution in a single security, it is essential that every

security be view in portfolio context. Thus, it seems logical that the expected return on a

portfolio should depend on the expected return of each of the security contained in the

portfolio.


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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 a security variance. As a result, an investor can

sometimes reduce portfolio risk by adding security will greater individual risk than any

other security in the portfolio. This is because risk depends greatly on the covariance

among returns of individual securities. Portfolios, which are combination of securities may

or may not take only aggregate characteristics of their individual parts

IMPORTANCE OF PORTFOLIO MANAGEMENT

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.

Growth in the number and size of ingestible funds a large part of house hold

savings is being directed towards financial assets.

Increased market volatility risk and return parameters of financial assets are

continuously changing because of frequent changes in governments industrial and

fiscal policies, uncertainty and instability.

Greater of computer for processing mass of data.

Professionalization of the field and increasing use of analytical methods (e.g.

quantitative techniques) in the investment decision making


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Larger direct and indirect costs of errors shortfalls in meeting portfolio objectives

increased competition and greater security by investors.

PORTFOLIO MANAGER:

Portfolio manager means any person who pursuant to a contract or arrangement

with a client, advice or direct or undertakes on behalf of the client (whether as a

discretionary portfolio manager or otherwise) the management or administration of

securities are the funds of the client.

1. Discretionary Portfolio Manager:

A discretionary portfolio manager meansa portfolio manager who exercises or may,

under a contract relating to portfolio management, exercises any degree of discretion in

respect of the investments or management of the portfolio of securities or the funds of

the clients, as the case may be. He shall individually and independently manage the

funds of each client in accordance with the needs of the client in a manner which does

not resemble a mutual fund.

2. Non-Discretionary Portfolio Manager:A Non-Discretionary Portfolio Manager shall manage the funds of each client in

accordance with the directions of the client.

A portfolio manager, by the virtue of his knowledge, background and

experience is expected to study the various avenues available for profitable investment

and advise his client to enable the latter to maximize the return on his investment and at

the same time safeguard the funds invested.

FUNCTIONS OF PORTFOLIO MANGERS:

They study economic environment affecting the capital market and clients

investment.


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They study securities market and evaluate price trend of shares and securities in

which investment is to be made.

They maintain complete and updated financial performance data of Blue-Chip and

other companies.

They keep a track on latest policies and guidelines of Government of India, RBI

and Stock Exchanges.

They study problems of industry affecting securities market and the attitude of

investors.

They study the financial behaviour of development financial institutions and other

players in the capital market to find out sentiments in the capital market.

They counsel the prospective investors on share market and suggest investments in

certain assured securities.

They carry out investments in securities or sale or purchase of securities on behalf of

the clients to attain maximum return at lesser risk.

ADVANTAGES

In the portfolio we can find many advantages which can make us to run our

business in most efficient manner. Of these some of them are described below:

1. Maximize the expected rate of return subject to the risk exposure being held within a

certain limit. (The risk tolerance level)

2. Minimize the risk exposure, without sacrificing a certain rate of return. (The target

rate of return)

3. To increase the value of the principal amount through capital appreciation.

4. To protect the principal amount invested from the risk of loss.

5. To provide a steady stream of income through regular interest/dividend payments.

When we are purchasing any security or bond of the company, they give higher return

rather than banks or financial institutions. When any person invests his money in any bank

they give low return.


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For example: - S.B.I provides 9% return on investment, rather than companys securities

provide higher return on investment

PORTFOLIO ANALYSISVarious groups of securities when held together behave in a different manner and give

interest payments and dividends also, which are different to the analysis of individual

securities. A combination of securities held together will give a beneficial result if they are

grouped in a manner to secure higher return after taking into consideration the risk element.

There are two approaches in construction of the portfolio of securities. They are

Traditional approach

Modern approach

TRADITIONAL APPROACH:

Traditional approach was based on the fact risk could be measured on each

individual security through the process of finding out the standard deviation and the

security should be chosen where the deviation was the lowest. Traditional approach

believes that the market is inefficient and the fundamental analyst can take advantage of the

situation. Traditional approach is a comprehensive financial plan for the individual. It takes

in to account the individual need such as housing, life insurance and pension plans.

Traditional approach basically deals with two major decisions. They are

a) Determining the objectives of the portfolio


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b) Selecting of securities to be include in the portfolio.

MODERN APPORACH:

Modern approach theory was brought out by Markowitz and sharp. It is combination

of securities to get the most efficient portfolio. Combination of securities can be made in

many ways. Markowitz developed the theory of diversification through scientific reasoning

and method. Modern portfolio theory believes in the maximization of return through a

combination of securities. The modern selecting the portfolio. It does not deal with the

individual needs.

MARKOWITZ MODEL:

Markowitz model is a theoretical framework for analysis of risk and return and

their relationship. He used statistical analysis for the measurement of risk and mathematical

programming for selection of assets in a portfolio in an efficient manner. Markowitz

approach determines for the investor the efficient set of portfolio through three important

variables i.e.

Return

Standard deviation

Co-efficient of correlation

Markowitz model is also called as an Full Covariance Model Through this model

the investor can find out the trade off between risk and return, between the limits of zero

and infinity. According to this theory, the effects of one security purchase over the security


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purchase are taken into consideration and then the results are evaluated. Most people agree

that holding two stocks is less risky than holding one stock. For example, holding stocks

from textile, banking and electronic companies is better than investing all the money on the

textile companies stock.

Markowitz had given up the single portfolio and introduced diversification. The

single stock portfolio would be preferable if the investor is perfectly certain that his

expectation of higher return would turn out to real. In the world of uncertainty, most of risk

adverse investors would like to join Markowitz rather than keeping a single stock, because

diversification reduces the risk.

ASSUMPTIONS:

1. Investors behave rationally.

2. All investors have the same expected single period investment horizon.

3. All investors before making any investment have a common goal.

4. Investors know all the information about the market situation.

5. Investor free access to fair and correct information on the return and risk.

6. Investors are risk averse and choose higher return to lower level of risk.

7. The investor can reduce his risk if he adds investment to his portfolio.

8. The markets are efficient and they absorb information to his portfolio.

9. Investors make their decision only on the basis of the expected returns, standard

deviation and covariance of all pairs of securities.

10. The investor can lend or borrow any amount of funds at the risk less rate of

interest. The risk less rate of interest is the rate of interest offered for the treasure

bills or Government securities.

FUNCTIONS OF PORTFOLIO MANAGEMENT:

To frame the investment strategy and select an investment mix to achieve the

desired investment objectives.

To provide a balanced portfolio which not only can hedge against the inflation but

ca so optimize returns with the associated degree of risk.


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To make timely buying and selling of securities

To maximize the after-tax return by investing in various tax saving investment instruments,

EVALUATION OF PORTFOLIO:

Portfolio manager evaluates his portfolio and identifies the sources of strengths and

weakness. The evaluation of the portfolio provides a feed back about the performance to

evolve better management strategy. Even though evaluation of portfolio performance is

considered to be the lat stage of investment process. There are number of situations in

which an evaluation becomes necessary and important.

I. Self valuation: An individual done. This is a part of the process of refining his

skills and improving his performance over a period of time.

II. Evaluation of manager: A mutual fund or similar organization might want to

evaluate its managers. A mutual fund may have several managers each running

a separate fund or sub-fund. It is often necessary to compare the performance of

these managers.

PROCESS OF TYPICAL PORTFOLIO MANAGEMENT

The process of portfolio management is a complex activity. It is divided into seven

broad phases.

1. Specification of investment, objective and constraints

2. Asset mix

3. Formation of portfolio strategy

4. Selection of securities

5. Portfolio execution

6. Portfolio revision

7. Performance evaluation

1. SPECIFICATION OF INVESTMENT, OBJECTIVE AND CONSTRAINTS


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The first step in the portfolio management is to be specifying the investment policies

which summarize the objective, constraints and preference of the investor.

The objectives of investor policy may be expressed as follows

Return requirement

Risk tolerance

Constraints and preferences

Liquidity

Investment

Horizon

Taxes

Regulation

Unique circumstance

2. SELECTION OF ASSET MIX

Based on your objective and constraints you have to specify your asset allocation.

That is you have to decide how much of your portfolio has to be invested in each of the

following asset categories.

Cash

Bonds

Stocks

Real estates

Precious metals

3. FORMATION OF PORTFOLIO STRATEGY

After you have chosen a certain asset mix you have to formulate an appropriate

portfolio strategy.

Two broad choices are available in this respect

An active portfolio strategy


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Passive portfolio strategy

An active portfolio strategy

An active portfolio strategy is followed by most investment professionals and

aggressive investors who strive to earn superior return after adjustment for risk.

The four principle factors of an active strategy

1) Market timing

2) Sector rotation

3) Security selection

4) Use of a specified concept

The active strategy is based on the promise that the capital market is characterized

by inefficiency which can be exploited by resorting to market timing or sector or security

selection or use of a specialized concept or some combination of these sectors.

Passive strategy

The passive strategy rests on the tenant that the capital market is fairly efficient

with respect to the available information. It involves the following two guidelines:

a) Create a well diversified portfolio at a predetermined level of risk.

b) Hold the portfolio relatively unchanged overtimes, unless it becomes inadequate

diversified or inconsistency with the investors risk return preference.

4. SELECTION OF SECURITIES

While selecting bonds we have to carefully evaluate the following factors

YTM risk of default

Tax shield

Liquidity

Three broad approaches are employed for the selection of equity shares.


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Technical analysis

Fundamental analysis

Random selection

5. PORTFOLIO EXECUTION

The next step is to implement the buying and selling of specified securities in

given amount. It is an important practical step that has a significant bearing an investment

results.

6. PORTFOLIO REVISION

Irrespective of how well you have constructed a portfolio, it soon tends to become

inefficient and hence needs to be monitored and revised periodically.

As Robert D. A molt says portfolios do not manage them nor can they.

Whether the age unaltered with each passing day, portfolio that we carefully created

yesterday becomes very less than optimal today.

Portfolio rebalancing

Portfolio upgrading

7. PORTFOLIO PERFORMANCE EVALUATION

Rate of return

Risk

Variability

Beta

TYPES OF PORTFOLIO MANAGEMNT

1. DISCREATIONARY PORTFOLIO MANAGEMENT SERVICE (DPMS)

In this type of services, the client parts with his money in favor of the

manager, who is return, handles all the paper work, makes all the decisions and

gives a good return on the investment and charges fees. In the Discretionary

Portfolio Management Service, to maximize the yield, almost all portfolio


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managers parks the funds in the money market securities such as overnight market,

18 days treasury bills and 90 days treasury bills. Normally, the return of such

investment varies from 14 to 18 percent, depending on the call money rates

prevailing at the time of investment.

2. NON-DISCREATIONARY PORTFOLIO MANAGEMNT

SERVICE (NDPMS)

The manager functions as a counselor, but the investor if free to accept or

reject the managers advice. The paper work is also undertaken by manager for a

service charge. The manager concentrates on stock market instruments with

portfolio tailor-made to the risk taking ability of the investor.

CRITERIA FOR PORTFOLIO DECISION

1. Portfolio management emphasis is put on identifying the collective importance of

all investors holding. The emphasis shifts from individual assets selection to a

more balanced emphasis on diversification and risk-return interrelationship of

individual assets within the portfolio. Individual securities are important only to the

extent they affect the aggregate portfolio. In short, all decisions should focus on the

impact which decision will have effect on the aggregate portfolio of all assets held.

2. Portfolio strategy should be molded to the unique needs and characteristics of the

portfolios owner.

3. Diversification across securities will reduce a portfolios risk. Is the risk and return

are lower than the desired level; leverages (borrowing) can be used to achieve thedesired level.

4. Large portfolio returns come only with larger portfolio risk. The most important

decision to make is the amount of risk which is acceptable.


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5. The risk associated with a security type depends on when the investment will be

liquidated; risk is reduced by selecting securities with payoff close to when the

portfolio is to be liquated.

6. Completion for abnormal return is extensive, so one has to be careful in evaluating

the risk and return from securities. Imbalance do not last long and one has to act

fast to profit exceptional opportunities.

RISK AND EXPECTED RETURN

There is a positive relationship between the amount of risk and the amount of

expected return i.e., the greater the risk, the larger the expected return and larger the

chances of substantial loss. One of the most difficult problems for an investor is to estimate

the highest level of risk he is able to assume.

THE EFFECTS OF COMBINING TWO SECURITIES

It is believed that holding two securities is less risky than by having only one

investment in a persons portfolio. When two stocks are taken on a portfolio and if they

have negative correlation then risk can be completely reduced because the gain on one can

offset the loss on the other.

INTER-ACTIVE RISK THROUGH COVARIANCECovariance of the securities will help in finding out the inter-active risk. When the

covariance will be positive then the rate of return of securities move together either

upwards or downwards. Alternatively it can also say that the inter-active risk is positive.

Secondly, covariance will be zero on two investments if the rates of return are independent.


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Holding two securities may reduce the portfolio risk too. The portfolio risk can be

calculated with the help of the following formula:

PORTFOLIO AGE RELATIONSHIP

Your age will help you to determine what a good mix /portfolio is

AGE PORTFOLIO

Below 30

80% in stocks or mutual funds

10% in cash10% in fixed income

30 t0 40

70% in stocks or mutual funds10% in cash20% in fixed income

40 to 50


50 to 60

50% in stocks or mutual funds

10% in cash40% in fixed income

Above 60



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It is important to always have some equities in your portfolio (or equity funds) no

matter what your age. If inflation roars back, this will be the portion of your investments

that protects you from the damage, not your fixed income.

Also, the fixed income of your portfolio should be diversified. If you buy bonds and

debentures directly or if you invest in FDs, then make sure you have at least five different

maturities to spread out the interest rate risk.

CALCULATION OF YEARLY RETURN OF INDIVIDUAL COMPANIES:

1. AVERAGE RETURN OF BANK OF BARODA:

YEAR OPENINGPRICE (PO)

CLOSINGPRICE (PI)

PI-PO [PI-PO/PO]*100

2007

374.85 584.7

209.85 55.982

2008

586.25 890.4

304.15 51.88

2009

889 1232.4

343.4 38.627

2010

1235 448.35

-786.65 -63.696

2011

455 875.70

420.7 92.461

TOTAL RETURNS 175.254

ReturnsAverage Return =

No. of Years


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.

= 175.254/5

= 35.05

2. AVERAGE RETURN OF INFOSYS

YEAR

OPENING

PRICE

(PO)

CLOSING

PRICE

(PI)

PI-PO[PI-PO/PO]*100

2007 2099 2996.75897.75 42.77

2008 3000 2240.5-759.5 -25.317

2009 2242 1768.4-473.6 -21.124

2010 1758 1117.85-640.15 -36.414

2011 1125 26061481 131.644




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.

No. of Years

= 133.807/5

= 26.76

3. AVERAGE RETURN OF RELIANCE

YEAR

OPENING

PRICE (PO)

CLOSING

PRICE (PI)PO-PI [PI-

PO/PO]*100

2007 520.05 889.65

369.6 71.07

2008 893.45 1270.35

376.9 42.184

2009 1252.55 2881.05

1628.5 130.014

2010 2950 1230

-1720 -58.305

2011 1240.05 1089.40

150.65 -12.149



No. of Years

= 172.814/5

= 34.56


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4. AVERAGE RETURN OF HCL

YEAROPENING

PRICE

CLOSING

PRICE

PO-PI [PI-PO/PO]*100

2007 753 463.45-289.55 -38.453

2008 464 604.55140.55 30.29

2009 607.9 525.6 -82.3 -13.5

2010 522 233.55-288.45 -55.25

2011 236 679.40443.4 187.88



No. of Years

= 110.92/5

= 22.1


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2) CALCULATION OF STANDARDARD DEVIATION

1. BANK OF BARODA:

Year Return (R)Average

Return (R )(R - R ) (R - R )

2

2007

55.98235.05 20.932 438.148

2008

51.8835.05 16.83 283.248

2009

38.627 .35.05 3.577 12.794

2010

-63.69635.05 98.746 9750.772

2011

92.46135.05 57.411 3296.022

13780.984

= 13780.984/5

= 2756.1968


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.

Standard Deviation = Variance

= 2756.1968

= 52.50

2. INFOSYS:


Return (R )(R - R ) (R - R )

2

200742.77 26.76 16.01 256.320

2008-25.317 26.76 52.077 2712.013

2009-21.124 26.76 47.886 2292.973

2010-36.414 26.76 63.174 3990.954

2011

131.644 26.76 104.884 11000.653

20252.913

= 20252.913/5

= 4050.5826



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.

= 20252.913

= 142.312

3. RELIANCE:


Return (R )(R - R ) (R - R )

2

200771.07 34.56 36.51 1332.980

200842.184 34.56 7.624 58.125

2009130.014 34.56 95.456 9111.657

2010

.-58.305 34.56 -92.865 8623.908

2011-12.149 34.56 -46.709 2181.730

21308.4

= 21308.4/5

= 4261.68



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.

= 4261.68

= 65.281

4. HCL:


Return (R )(R - R ) (R - R )

2

2007

-38.453 22.1 60.553 3666.665

200830.29 22.1 8.19 67.076

2009-13.5 22.1 -35.638 1270.067

2010-55.25 22.1 77.359 5984.414

2011187.88 22.1 165.781 27483.339

38471.531

= 38471.531/5

= 7694.306



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.

= 7694.306

= 87.717

.

TABLE 4.6

CALCULATION OF COVARIANCE & CORRELATION OF DIFFERENT

PORTFOLIOS

1. BOB (RA) AND INFOSYS (RB)

Year (RA - RA ) (RB-RB ) (RA - RA )(RB-RB )

200720.93 24.46 511.94

2008 16.83 -43.62 -734.12

20093.57 -39.43 -140.76

2010-98.74 -54.72 5403.05

201157.41 113.33 6506.27

11546.38


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Covariance of BOB & Infosys = (RA - RA )(RB- RB )/N

= 11546.38/5

= 2309.27

Correlation Coefficient = COV ab/b

a = 52.50

b = 142.312

= 2309.27/52.50*142.312

= 2309.27/7471.38

= 0.30

Covariance Correlation coefficient

2309.27 0.30


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TABLE 4.7

2. RELIANCE INDUSTIRES Ltd (RA). & HCL (RB)

YEAR (RA - RA ) (RB-RB ) (RA - RA )(RB-RB )

200736.51 -60.64 -2213.96

20087.62 8.1 61.72

2009 95.44 -35.69 -3406.25

2010-92.86 -77.44 7191.07

2011-46.7 165.69 -7737.72


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-6105.14

Covariance of Reliance & HCL = (RA - RA )(RB-RB )/N

= -6105.14/5

= -1221.02


a = 65.281

b = 87.717

= -1221.02/65.281*87.717

= -1221.02/5726.253477

= -0.21


-1221.02 -0.21


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TABLE 4.8

3. BOB (RA) & RELIANCE INDUSTIRES Ltd. (RB)


200720.93 36.51 764.15

200816.83 7.62 128.24

20093.57 95.44 340.72

2010

-98.74 -92.86 9168.99

201157.41 -46.7 -2681.04

7721.06


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Covariance of BOB & Reliance = (RA - RA )(RB-RB )/N

= 7721.06/5

= 1544.21


a = 52.50

b = 65.281

= 1544.21/52.50*65.281

= 1544.21/3427.2525

= 0.45


1544.21 0.45


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TABLE 4.9

4. BOB (RA) & HCL (RB)


200720.93 -60.64 -1269.19

200816.83 8.1 136.32

20093.57 -35.69 -127.41

2010-98.74 -77.44 7646.42

201157.41 165.69 9512.26

15898.4


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Covariance of BOB & HCL = (RA - RA )(RB-RB )/N

= 15898.4/5

= 3179.68


a = 52.50

b = 87.717

= 3179.68/52.50*87.717= 3179.68/4605.1425

= 0.69


3179.68 0.69


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TABLE 4.10

5. INFOSYS (RA) AND RELIANCE (RB)


200724.46 36.51 893.03

2008-43.62 7.62 -332.38

2009-39.43 95.44 -3763.19

2010-54.72 -92.86 5081.29

2011113.33 -46.7 -5292.51

-3413.76

Covariance of Infosys & Reliance = (RA - RA )(RB-RB )/N

= -3413.76/5


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.

= - 682.75


a = 142.312b = 65.281

= -682.75/142.312*65.281

= -682.75/9290.269672= -0.073


-682.75 -0.073


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TABLE - 4.11

6. INFOSYS (RA) AND HCL (RB)


200724.46 -60.64 -1483.25

2008-43.62 8.1 -353.32

2009-39.43 -35.69 1407.25

2010-54.72 -77.44 4237.51

2011113.33 165.69 18777.64

22585.83

Covariance of Infosys & HCL = (RA - RA )(RB-RB )/N

= 22585.83/5


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.

= 4517.16


a = 142.312

b = 87.717

= 4517.16/142.312*87.717

= 4517.16/12483.181704

= 0.36

TABLE - 4.12


4517.16 0.36


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.

REPORT OF YEARLY COVARIANCE AND CORRELATION OF BOB, INFOSYS,

RELIANCE AND HCL COMPANIES

Companies Covariance Correlation

BOBa and INFOSYSb 2309.27 0.30

BOBa and RELIANCEb 1544.21 0.45

BOBa and HCLb 3179.68 0.69

INFOSYSa andRELIANCEb -682.75 -0.073

INFOSYSa and HCLb 4517.16 0.36

RELIANCEa and HCLb -1221.02 -0.21

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