Reformers Business School Indore

A Project Report On

Portfo lio Management

Submitted to
Prof. Sakheel Khan

Submitted by
Deepak houbey

A K!O"#$D%$&$!'

Reformers Business School Indore

The present project report is submitted to REFORMERS BUSINESS SCHOOL, IN ORE under BH!R!TI "I #!$EETH UNI"ERSIT#, $UNE, %S E& 'or p(rti() 'u)'i))ment o' M(sters e*ree in Business !dministr(tion %MB!&+ ,e bein* the student o' REFORMERS BUSINESS SCHOOL con-e. our sincere th(n/s to e(n Mr+ M(nmeet !ror( 'or pro-idin* ()) the '(ci)ities 'or m(/in* our project success'u)+ ,e t(/e ( deep p)e(sure in th(n/in* $ro'+ Sh(/hee) 0h(n 'or ()) the mo-e (nd educ(tion() support, 1hich he *(-e throu*hout the .e(r+ ,e (re h(-in* deep sense o' *uid(nce o' our '(cu)ties 'or pro-idin* us the *uid(nce 'or this project 1or/, emb(r/ed upon p)(nned (nd e2ecuted his sincere su**estion *re(t). in brin*in* out this 1or/ (s its present sh(pe+

NEED FOR SELECTING THE PROJECT

To *et the o-er()) /no1)ed*e o' securities (nd in-estment+

Reformers Business School Indore

To /no1 ho1 the in-estment m(de in di''erent securities minimizes the risk (nd maximizes the returns. To *et the /no1)ed*e o' di''erent '(ctors th(t (''ects the in-estment decision o' in-estors+ To /no1 ho1 di''erent comp(nies (re m(n(*in* their port'o)io i+e+ 1hen (nd in 1hich sectors the. (re in-estin*+ To /no1 1h(t is the need o' (ppointin* ( $ort'o)io M(n(*er (nd ho1 does he meets the needs o' the -(rious in-estors+ To *et the /no1)ed*e (bout the ro)e %p)(.ed& (nd 'unctions o' port'o)io m(n(*er+ To *et the /no1)ed*e o' in-estment decision (nd (sset ())oc(tion+

Reformers Business School Indore

INDEX
SRNO. TOPICS PAGE NO
%# & %# ) +#', */#**

.
'.

PORTFOLIO !"N"GE!ENT # INTROD$CTION T(PES OF PORTFOLIO !"N"GE!ENT PORTFOLIO !"N"GE!ENT PROCESS RIS- . RET$RN "N"L(SIS PORTFOLIO THEORIES PERSONS IN1OL1ED IN PORTFOLIO !"N"GE!ENT CONCL$SION 2I2LOGR"PH(

*. &. %. 0.

*&#&

&'#&%

&0#&) &+

Reformers Business School Indore

CH"PTER3
PORTFOLIO !"N"GE!ENT INTROD$CTION
Stoc/ e2ch(n*e oper(tions (re pecu)i(r in n(ture (nd most o' the In-estors 'ee) insecure in m(n(*in* their in-estment on the stoc/ m(r/et bec(use it is di''icu)t 'or (n indi-idu() to identi'. comp(nies 1hich h(-e *ro1th prospects 'or in-estment+ Further due to -o)(ti)e n(ture o' the m(r/ets, it re3uires const(nt reshu'')in* o' port'o)ios to c(pit()i4e on the *ro1th opportunities+ E-en ('ter identi'.in* the *ro1th oriented comp(nies (nd their securities, the tr(din* pr(ctices (re ()so comp)ic(ted, m(/in* it ( di''icu)t t(s/ 'or in-estors to tr(de in ()) the e2ch(n*e (nd 'o))o1 up on post tr(din* 'orm()ities+

In-estors choose to ho)d *roups o' securities r(ther th(n sin*)e securit. th(t o''er the *re(ter e2pected returns+ The. be)ie-e th(t ( combin(tion o' securities he)d to*ether 1i)) *i-e ( bene'ici() resu)t i' the. (re *rouped in ( m(nner to secure hi*her return ('ter t(/in* into consider(tion the ris/ e)ement+ Th(t is 1h. pro'ession() in-estment (d-ice throu*h port'o)io m(n(*ement ser-ice c(n he)p the in-estors to m(/e (n inte))i*ent (nd in'ormed choice bet1een ()tern(ti-e in-estments opportunities 1ithout the 1orr. o' post tr(din* h(ss)es+

Reformers Business School Indore

!E"NING OF PORTFOLIO !"N"GE!ENT

$ort'o)io m(n(*ement in common p(r)(nce re'ers to the se)ection o' securities (nd their continuous shi'tin* in the port'o)io to optimi4e returns to suit the objecti-es o' (n in-estor+ This ho1e-er re3uires 'in(nci() e2pertise in se)ectin* the ri*ht mi2 o' securities in ch(n*in* m(r/et conditions to *et the best out o' the stoc/ m(r/et+ In Indi(, (s 1e)) (s in ( number o' 1estern countries, port'o)io m(n(*ement ser-ice h(s (ssumed the ro)e o' ( speci()i4ed ser-ice no1 ( d(.s (nd ( number o' pro'ession() merch(nt b(n/ers compete (**ressi-e). to pro-ide the best to hi*h net 1orth c)ients, 1ho h(-e )itt)e time to m(n(*e their in-estments+ The ide( is c(tchin* on 1ith the boom in the c(pit() m(r/et (nd (n incre(sin* number o' peop)e (re inc)ined to m(/e pro'its out o' their h(rd5e(rned s(-in*s+ $ort'o)io m(n(*ement ser-ice is one o' the merch(nt b(n/in* (cti-ities reco*ni4ed b. Securities (nd E2ch(n*e Bo(rd o' Indi( %SEBI&+ The ser-ice c(n be rendered either b. merch(nt b(n/ers or port'o)io m(n(*ers or discretion(r. port'o)io m(n(*er (s de'ine in c)(use %e& (nd %'& o' Ru)e 6 o' Securities (nd E2ch(n*e Bo(rd o' Indi(%$ort'o)io M(n(*ers&Ru)es, 7889 (nd their 'unctionin* (re *uided b. the SEBI+ !ccordin* to the de'initions (s cont(ined in the (bo-e c)(uses, ( port'o)io m(n(*er me(ns (n. person 1ho is pursu(nt to contr(ct or (rr(n*ement 1ith ( c)ient, (d-ises or directs or undert(/es on beh()' o' the c)ient %1hether (s ( discretion(r. port'o)io m(n(*er or other1ise& the m(n(*ement or (dministr(tion o' ( port'o)io o' securities or the 'unds o' the c)ient, (s the c(se m(. be+ ! merch(nt b(n/er (ctin* (s ( $ort'o)io M(n(*er sh()) ()so be bound b. the ru)es (nd re*u)(tions (s (pp)ic(b)e to the port'o)io m(n(*er+ Re()i4in* the import(nce o' port'o)io m(n(*ement ser-ices, the SEBI h(s )(id do1n cert(in *uide)ines 'or the proper (nd pro'ession() conduct o' port'o)io m(n(*ement ser-ices+ !s per *uide)ines on). reco*ni4ed merch(nt b(n/ers re*istered 1ith SEBI (re (uthori4ed to o''er these ser-ices+ $ort'o)io m(n(*ement or in-estment he)ps in-estors in e''ecti-e (nd e''icient m(n(*ement o' their in-estment to (chie-e this *o()+ The r(pid *ro1th o' c(pit() m(r/ets in Indi( h(s opened up ne1 in-estment (-enues 'or in-estors+

Reformers Business School Indore

The stoc/ m(r/ets h(-e become (ttr(cti-e in-estment options 'or the common m(n+ But the need is to be (b)e to e''ecti-e). (nd e''icient). m(n(*e in-estments in order to /eep m(2imum returns 1ith minimum ris/+ Hence this is the stud. on :PORTFOLIO !"N"GE!ENT ; IN1EST!ENT DECISION< so (s to e2(mine the ro)e, process (nd merits o' e''ecti-e in-estment m(n(*ement (nd decision+

DEFINITIONS OF PORTFOLIO
4 In5est6r7s86r9s.:6m
! :6;;e:ti6n o' in5estments %())& o1ned b. the s(me in9i5i9ua; or 6r<anizati6n+ These in-estments o'ten inc)ude st6:ks, 1hich (re in-estments in indi-idu() =usinesses= =6n9s, 1hich (re in-estments in 9e=t th(t (re desi*ned to earn interest= (nd mutua; >un9s, 1hich (re essenti()). ?66;s o' m6ne@ 'rom m(n. in5est6rs th(t (re in-ested b. ?r6>essi6na;s or (ccordin* to in9i:es.

'4 Finan:ia; Di:ti6nar@ an9 8iki"nsAers.:6m

! co))ection o' -(rious comp(n. sh(res, 'i2ed interest securities or mone.5m(r/et instruments+ $eop)e m(. t()/ *r(nd). o' >runnin* ( port'o)io> 1hen the. o1n ( coup)e o' sh(res but the ch(r(cteristic o' ( serious in-estment port'o)io is di-ersit.+ It shou)d sho1 ( spre(d o' in-estments to minimi4e ris/ 5 bro/ers (nd in-estment (d-isers 1(rn (*(inst >puttin* ()) .our e**s in one b(s/et>+

*4 (6urDi:ti6nar@.:6m
(& !)) the securities he)d 'or in-estment (s b. (n indi-idu(), b(n/, in-estment comp(n., etc+ b& ! )ist o' such securities+

Reformers Business School Indore

DEFINITIONS OF PORTFOLIO !"N"GE!ENT

4 In5est6r7sA6r9s.:6m
The process o' m(n(*in* the (ssets o' ( mutu() 'und, inc)udin* choosin* (nd monitorin* (ppropri(te in-estments (nd ())oc(tin* 'unds (ccordin*).+

'4 In5est6r G;6ssar@

eterminin* the mi2 o' (ssets to ho)d in ( port'o)io is re'erred to (s port'o)io m(n(*ement+ ! 'und(ment() (spect o' port'o)io m(n(*ement is choosin* (ssets 1hich (re consistent 1ith the port'o)io ho)der>s in-estment objecti-es (nd ris/ to)er(nce+ The u)tim(te *o() o' port'o)io m(n(*ement is to (chie-e the optimum return 'or ( *i-en )e-e) o' ris/+ In-estors must b()(nce ris/ (nd per'orm(nce in m(/in* port'o)io m(n(*ement decisions+ $ort'o)io m(n(*ement str(te*ies m(. be either (cti-e or p(ssi-e+ !n in-estor 1ho pre'ers p(ssi-e port'o)io m(n(*ement 1i)) )i/e). choose to in-est in )o1 cost inde2 'unds 1ith the *o() o' mirrorin* the m(r/et>s per'orm(nce+ !n in-estor 1ho pre'ers (cti-e port'o)io m(n(*ement 1i)) choose m(n(*ed 'unds 1hich h(-e the potenti() to outper'orm the m(r/et+ In-estors (re *ener()). ch(r*ed hi*her initi() 'ees (nd (nnu() m(n(*ement 'ees 'or (cti-e port'o)io m(n(*ement+

*4 Finan:ia; Di:ti6nar@
M(n(*in* ( )(r*e sin*)e port'o)io or bein* emp)o.ed b. its o1ner to do so+ $ort'o)io m(n(*ers h(-e the /no1)ed*e (nd s/i)) 1hich encour(*e peop)e to put their in-estment decisions in the h(nds o' ( pro'ession() %'or ( 'ee&+

Reformers Business School Indore

DEFINITION OF DISCRETION"R( PORTFOLIO !"N"GE!ENT

2usinessDi:ti6nar@.:6m
In-estment (ccount (rr(n*ement in 1hich (n in5estment mana<er m(/es the bu.5se)) decisions 1ithout re'errin* to the (ccount o1ner %c)ient& 'or e-er. tr(ns(ction+ The m(n(*er, ho1e-er, must oper(te 1ithin the (*reed upon )imits to (chie-e the c)ient>s st(ted in-estment objecti-es+

DEFINITIONS OF PROJECT PORTFOLIO !"N"GE!ENT

4 Internet.:6m . 8e=6?e9ia
$$M, short 'or ?r6Be:t ?6rt>6;i6 mana<ement, re'ers to ( so't1(re p(c/(*e th(t en(b)es corpor(te (nd business users to or*(ni4e ( series o' projects into ( sin*)e port'o)io th(t 1i)) pro-ide reports b(sed on the -(rious project objecti-es, costs, resources, ris/s (nd other pertinent (ssoci(tions+ $roject port'o)io m(n(*ement so't1(re ())o1s the user, usu()). m(n(*ement or e2ecuti-es 1ithin the comp(n., to re-ie1 the port'o)io 1hich 1i)) (ssist in m(/in* /e. 'in(nci() (nd business decisions 'or the projects+
)0

2it?i?e.:6m
$roject port'o)io m(n(*ement or*(ni4es ( series o' projects into ( sin*)e port'o)io

consistin* o' reports th(t c(pture project objecti-es, costs, time)ines, (ccomp)ishments, resources, ris/s (nd other critic() '(ctors+ E2ecuti-es c(n then re*u)(r). re-ie1 entire port'o)ios, spre(d resources (ppropri(te). (nd (djust projects to produce the hi*hest dep(rtment() returns+ !)so c())ed (s Enter?rise Pr6Be:t mana<ement an9 PP!

Reformers Business School Indore

!E"NING OF PORTFOLIO !"N"GERS

$ort'o)io m(n(*er me(ns (n. person 1ho enters into ( contr(ct or (rr(n*ement 1ith ( c)ient+ $ursu(nt to such (rr(n*ement he (d-ises the c)ient or undert(/es on beh()' o' such c)ient m(n(*ement or (dministr(tion o' port'o)io o' securities or in-ests or m(n(*es the c)ient?s 'unds+ ! discretion(r. port'o)io m(n(*er me(ns ( port'o)io m(n(*er 1ho e2ercises or m(. under ( contr(ct re)(tin* to port'o)io m(n(*ement, e2ercise (n. de*ree o' discretion in respect o' the in-estment or m(n(*ement o' port'o)io o' the port'o)io securities or the 'unds o' the c)ient, (s the c(se m(. be+ He sh()) independent). or indi-idu()). m(n(*e the 'unds o' e(ch c)ient in (ccord(nce 1ith the needs o' the c)ient in ( m(nner 1hich does not resemb)e the mutu() 'und+ ! non discretion(r. port'o)io m(n(*er sh()) m(n(*e the 'unds in (ccord(nce 1ith the directions o' the c)ient+ ! port'o)io m(n(*er b. -irtue o' his /no1)ed*e, b(c/*round (nd e2perience is e2pected to stud. the -(rious (-enues (-(i)(b)e 'or pro'it(b)e in-estment (nd (d-ise his c)ient to en(b)e the )(tter to m(2imi4e the return on his in-estment (nd (t the s(me time s('e*u(rd the 'unds in-ested+

(2

Reformers Business School Indore

SCOPE OF PORTFOLIO !"N"GE!ENT3

$ort'o)io m(n(*ement is (n (rt o' puttin* mone. in '(ir). s('e, 3uite pro'it(b)e (nd re(son(b). in )i3uid 'orm+ !n in-estor?s (ttempt to 'ind the best combin(tion o' ris/ (nd return is the 'irst (nd usu()). the 'oremost *o()+ In choosin* (mon* di''erent in-estment opportunities the 'o))o1in* (spects ris/ m(n(*ement shou)d be considered@ a4 The se)ection o' ( )e-e) or ris/ (nd return th(t re')ects the in-estor?s to)er(nce 'or ris/ (nd desire 'or return, i+e+ person() pre'erences+ =4 The m(n(*ement o' in-estment ()tern(ti-es to e2p(nd the set o' opportunities (-(i)(b)e (t the in-estors (ccept(b)e ris/ )e-e)+ The -er. ris/5(-erse in-estor mi*ht choose to in-est in mutu() 'unds+ The more ris/5to)er(nt in-estor mi*ht choose sh(res, i' the. o''er hi*her returns+ $ort'o)io m(n(*ement in Indi( is sti)) in its in'(nc.+ !n in-estor h(s to choose ( port'o)io (ccordin* to his pre'erences+ The 'irst pre'erence norm()). *oes to the necessities (nd com'orts )i/e purch(sin* ( house or domestic (pp)i(nces+ His second pre'erence *oes to some contr(ctu() ob)i*(tions such (s )i'e insur(nce or pro-ident 'unds+ The third pre'erence *oes to m(/e ( pro-ision 'or s(-in*s re3uired 'or m(/in* d(. to d(. p(.ments+ The ne2t pre'erence *oes to short term in-estments such (s UTI units (nd post o''ice deposits 1hich pro-ide e(s. )i3uidit.+ The )(st choice *oes to in-estment in comp(n. sh(res (nd debentures+ There (re number o' choices (nd decisions to be t(/en on the b(sis o' the (ttributes o' ris/, return (nd t(2 bene'its 'rom these sh(res (nd debentures+ The 'in() decision is t(/en on the b(sis o' ()tern(ti-es, (ttributes (nd in-estor pre'erences+ For most in-estors it is not possib)e to choose bet1een m(n(*in* one?s o1n port'o)io+ The. c(n hire ( pro'ession() m(n(*er to do it+ The pro'ession() m(n(*ers pro-ide ( -(riet. o' ser-ices inc)udin* di-ersi'ic(tion, (cti-e port'o)io m(n(*ement, )i3uid securities (nd per'orm(nce o' duties (ssoci(ted 1ith /eepin* tr(c/ o' in-estor?s mone.+

((

Reformers Business School Indore

NEED FOR PORTFOLIO !"N"GE!ENT3

$ort'o)io m(n(*ement is ( process encomp(ssin* m(n. (cti-ities o' in-estment in (ssets (nd securities+ It is ( d.n(mic (nd ')e2ib)e concept (nd in-o)-es re*u)(r (nd s.stem(tic (n().sis, jud*ment (nd (ction+ The objecti-e o' this ser-ice is to he)p the un/no1n (nd in-estors 1ith the e2pertise o' pro'ession()s in in-estment port'o)io m(n(*ement+ It in-o)-es construction o' ( port'o)io b(sed upon the in-estor?s objecti-es, constr(ints, pre'erences 'or ris/ (nd returns (nd t(2 )i(bi)it.+ The port'o)io is re-ie1ed (nd (djusted 'rom time to time in tune 1ith the m(r/et conditions+ The e-()u(tion o' port'o)io is to be done in terms o' t(r*ets set 'or ris/ (nd returns+ The ch(n*es in the port'o)io (re to be e''ected to meet the ch(n*in* condition+ $ort'o)io construction re'ers to the ())oc(tion o' surp)us 'unds in h(nd (mon* ( -(riet. o' 'in(nci() (ssets open 'or in-estment+ $ort'o)io theor. concerns itse)' 1ith the princip)es *o-ernin* such ())oc(tion+ The modern -ie1 o' in-estment is oriented more *o to1(rds the (ssemb). o' proper combin(tion o' indi-idu() securities to 'orm in-estment port'o)io+ ! combin(tion o' securities he)d to*ether 1i)) *i-e ( bene'ici() resu)t i' the. *rouped in ( m(nner to secure hi*her returns ('ter t(/in* into consider(tion the ris/ e)ements+ The modern theor. is the -ie1 th(t b. di-ersi'ic(tion ris/ c(n be reduced+ i-ersi'ic(tion c(n be m(de b. the in-estor either b. h(-in* ( )(r*e number o' sh(res o' comp(nies in di''erent re*ions, in di''erent industries or those producin* di''erent t.pes o' product )ines+ Modern theor. be)ie-es in the perspecti-e o' combin(tion o' securities under constr(ints o' ris/ (nd returns+

()

Reformers Business School Indore

O2JECTI1ES OF PORTFOLIO !"N"GE!ENT3

The maB6r 6=Be:ti5es 6> ?6rt>6;i6 mana<ement are summarize9 as =e;6A3#

4 Se:urit@CSa>et@ 6> Prini:?a;3 Securit. not on). in-o)-es /eepin* the princip() sum int(ct but ()so /eepin* int(ct its purch(sin* po1er int(ct+

'4 Sta=i;it@ 6> In:6me3 So (s to '(ci)it(te p)(nnin* more (ccur(te). (nd s.stem(tic()). the rein-estment consumption o' income.

*4 Ca?ita; Gr6Ath3 This c(n be (tt(ined b. rein-estin* in *ro1th securities or throu*h purch(se o' *ro1th securities+

&4 !arketa=i;it@3 i+e+ is the c(se 1ith 1hich ( securit. c(n be bou*ht or so)d+ This is essenti() 'or pro-idin* ')e2ibi)it. to in-estment port'o)io+

%4 LiDui9it@ i.e Nearness T6 !6ne@3 It is desir(b)e to in-estor so (s to t(/e (d-(nt(*e o' (ttr(cti-e opportunities upcomin* in the m(r/et.

04 Di5ersi>i:ati6n3 The b(sic objecti-e o' bui)din* ( port'o)io is to reduce ris/ o' )oss o' c(pit() (nd A or income b. in-estin* in -(rious t.pes o' securities (nd o-er ( 1ide r(n*e o' industries+

)4 Fa56ra=;e Tax Status3 The e''ecti-e .ie)d (n in-estor *ets 'orm his in-estment depends on t(2 to 1hich it is subject+ B. minimi4in* the t(2 burden, .ie)d c(n be e''ecti-e). impro-ed+

(*

Reformers Business School Indore

2"SIC PRINCIPLES OF PORTFOLIO !"N"GE!ENT3

There (re t1o b(sic princip)es 'or e''ecti-e port'o)io m(n(*ement 1hich (re *i-en be)o1@5
I. E>>e:ti5e in5estment ?;annin< >6r the in5estment in se:urities =@ :6nsi9erin< the

>6;;6Ain< >a:t6rs#

a) Fisc(),

'in(nci() (nd

(nd

monet(r.

po)icies

o'

the

Bo-t+ its

o'

Indi( on

(nd

the

Reser-e B(n/ o' Indi(+

b) Industri()

economic

en-ironment

(nd

imp(ct

industr.+

$rospect in terms o' prospecti-e techno)o*ic() ch(n*es, competition in the m(r/et, c(p(cit. uti)i4(tion 1ith industr. (nd dem(nd prospects etc+

II. C6nstant Re5ieA 6> In5estment3 It re3uires to re-ie1 the in-estment in securities (nd to

continue the se))in* (nd purch(sin* o' in-estment in more pro'it(b)e m(nner+ For this purpose the. h(-e to c(rr. the 'o))o1in* (n().sis@

a) To (ssess the 3u()it. o' the m(n(*ement o' the comp(nies in 1hich in-estment h(s been

m(de or proposed to be m(de+

b) To (ssess the 'in(nci() (nd trend (n().sis o' comp(nies B()(nce Sheet (nd $ro'it (nd Loss

!ccounts to identi'. the optimum c(pit() structure (nd better per'orm(nce 'or the purpose o' 1ithho)din* the in-estment 'rom poor comp(nies+

c) To (n().4e the securit. m(r/et (nd its trend in continuous b(sis to (rri-e (t ( conc)usion

(s to 1hether the securities ()re(d. in possession shou)d be disin-ested (nd ne1 securities be purch(sed+ I' so the timin* 'or in-estment or dis5in-estment is ()so re-e()ed+

(+

Reformers Business School Indore

CHAPTER 2
T(PES OF PORTFOLIO !"N"GE!ENT
There are 5ari6us t@?es 6> ?6rt>6;i6 mana<ement3 In5estment !ana<ement

It P6rt>6;i6 !ana<ement

Pr6Be:t P6rt>6;i6 !ana<ement

. IN1ES!ENT !"N"GE!ENT3
In5estment mana<ement is the pro'ession() m(n(*ement o' -(rious securities %sh(res, bonds etc+& (nd (ssets %e+*+, re() est(te&, to meet speci'ied in-estment *o()s 'or the bene'it o' the in-estors+ In-estors m(. be institutions %insur(nce comp(nies, pension 'unds, corpor(tions etc+& or pri-(te in-estors %both direct). -i( in-estment contr(cts (nd more common). -i( co))ecti-e in-estment schemes e+*+ mutu() 'unds or E2ch(n*e Tr(ded Funds&+ The term asset mana<ement is o'ten used to re'er to the in-estment m(n(*ement o' co))ecti-e in-estments,%not necess(ri).& 1hi)st the more *eneric >un9 mana<ement m(. re'er to ()) 'orms o' institution() in-estment (s 1e)) (s in-estment m(n(*ement 'or pri-(te in-estors+ In-estment m(n(*ers 1ho speci()i4e in advisory or discretionary m(n(*ement on beh()' o' %norm()). 1e()th.& pri-(te in-estors m(. o'ten re'er to their ser-ices (s Aea;th mana<ement or ?6rt>6;i6 mana<ement o'ten 1ithin the conte2t o' so5c())ed Cpri-(te b(n/in*C+
(,

Reformers Business School Indore

Fun9 mana<er %or in5estment a95iser in the U+S+& re'ers to both ( 'irm th(t pro-ides in-estment m(n(*ement ser-ices (nd (n indi-idu() 1ho directs 'und m(n(*ement decisions+

(-

Reformers Business School Indore

'. IT PORTFOLIO !"N"GE!ENT3

IT ?6rt>6;i6 mana<ement is the (pp)ic(tion o' s.stem(tic m(n(*ement to )(r*e c)(sses o' items m(n(*ed b. enterprise In'orm(tion Techno)o*. %IT& c(p(bi)ities+ E2(mp)es o' IT port'o)ios 1ou)d be p)(nned initi(ti-es, projects, (nd on*oin* IT ser-ices %such (s (pp)ic(tion support&+ The promise o' IT port'o)io m(n(*ement is the 3u(nti'ic(tion o' pre-ious). m.sterious IT e''orts, en(b)in* me(surement (nd objecti-e e-()u(tion o' in-estment scen(rios+

The concept is (n()o*ous to 'in(nci() port'o)io m(n(*ement, but there (re si*ni'ic(nt di''erences+ IT in-estments (re not )i3uid, )i/e stoc/s (nd bonds %()thou*h in-estment port'o)ios m(. ()so inc)ude i))i3uid (ssets&, (nd (re me(sured usin* both 'in(nci() (nd non5'in(nci() .(rdstic/s %'or e2(mp)e, ( b()(nced scorec(rd (ppro(ch&= ( pure). 'in(nci() -ie1 is not su''icient+ !t its most m(ture, IT $ort'o)io m(n(*ement is (ccomp)ished throu*h the cre(tion o' t1o port'o)ios@ Ei4 "??;i:ati6n P6rt>6;i6 # M(n(*ement o' this port'o)io 'ocuses on comp(rin* spendin* on est(b)ished s.stems b(sed upon their re)(ti-e -()ue to the or*(ni4(tion+ The comp(rison c(n be b(sed upon the )e-e) o' contribution in terms o' IT in-estment?s pro'it(bi)it.+ !ddition())., this comp(rison c(n ()so be b(sed upon the non5t(n*ib)e '(ctors such (s or*(ni4(tions? )e-e) o' e2perience 1ith ( cert(in techno)o*., users? '(mi)i(rit. 1ith the
(.

Reformers Business School Indore

(pp)ic(tions (nd in'r(structure, (nd e2tern() 'orces such (s emer*ence o' ne1 techno)o*ies (nd obso)esce o' o)d ones+

Eii4 Pr6Be:t P6rt>6;i6 # This t.pe o' port'o)io m(n(*ement speci()). (ddress the issues 1ith spendin* on the de-e)opment o' inno-(ti-e c(p(bi)ities in terms o' potenti() ROI (nd reducin* in-estment o-er)(ps in situ(tions 1here reor*(ni4(tion or (c3uisition occurs+ The m(n(*ement issues 1ith the second t.pe o' port'o)io m(n(*ement c(n be jud*ed in terms o' d(t( c)e(n)iness, m(inten(nce s(-in*s, suit(bi)it. o' resu)tin* so)ution (nd the re)(ti-e -()ue o' ne1 in-estments to rep)(ce these projects+

*. PROJECT PORTFOLIO !"N"GE!ENT3

$roject port'o)io m(n(*ement or*(ni4es ( series o' projects into ( sin*)e port'o)io consistin* o' reports th(t c(pture project objecti-es, costs, time)ines, (ccomp)ishments, resources, ris/s (nd other critic() '(ctors+ E2ecuti-es c(n then re*u)(r). re-ie1 entire port'o)ios, spre(d resources (ppropri(te). (nd (djust projects to produce the hi*hest dep(rtment() returns+ $roject m(n(*ement is the discip)ine o' p)(nnin*, or*(ni4in* (nd m(n(*in* resources to brin* (bout the success'u) comp)etion o' speci'ic project *o()s (nd objecti-es+ ! project is ( 'inite ende(-or %h(-in* speci'ic st(rt (nd comp)etion d(tes& undert(/en to cre(te ( uni3ue product or ser-ice 1hich brin*s (bout bene'ici() ch(n*e or (dded -()ue+ This 'inite ch(r(cteristic o' projects st(nds in contr(st to processes, or oper(tions, 1hich (re perm(nent or semi5perm(nent 'unction() 1or/ to repetiti-e). produce the s(me product or ser-ice+ In pr(ctice, the m(n(*ement o' these t1o s.stems is o'ten 'ound to be 3uite di''erent, (nd (s such re3uires the de-e)opment o' distinct technic() s/i))s (nd the (doption o' sep(r(te m(n(*ement+

(/

Reformers Business School Indore

CHAPTER: 3
PORTFOLIO !"N"GE!ENT PROCESS3
(A) THERE

"RE THREE !"JOR "CTI1ITIES IN1OL1ED IN "N PORTFOLIO !"N"GE!ENT 8HICH "RE "S

EFFICIENT FOLLO8S3#

a) Identi'ic(tion o' (ssets or securities, ())oc(tion o' in-estment (nd ()so identi'.in* the

c)(sses o' (ssets 'or the purpose o' in-estment+

b) The. h(-e to decide the m(jor 1ei*hts, proportion o' di''erent (ssets in the port'o)io b.

t(/in* in to consider(tion the re)(ted ris/ '(ctors+

c) Fin()). the. se)ect the securit. 1ithin the (sset c)(sses (s identi'.+

The (bo-e (cti-ities (re directed to (chie-e the so)e purpose o' m(2imi4in* return (nd minimi4in* ris/ on in-estment+ It is 1e)) /no1n '(ct th(t port'o)io m(n(*er b()(nces the ris/ (nd return in ( port'o)io in-estment+ ,ith hi*her ris/ hi*her return m(. be e2pected (nd -ice -ers(+

E24
'(ctors@5

IN1EST!ENT DECISION3

Bi-en ( cert(in sum o' 'unds, the in-estment decisions b(sic()). depend upon the 'o))o1in*

I. O=Be:ti5es 6> In5estment P6rt>6;i63 This is ( cruci() point 1hich ( Fin(nce M(n(*er must

(1

Reformers Business School Indore

consider+ There c(n be m(n. objecti-es o' m(/in* (n in-estment+ The m(n(*er o' ( pro-ident 'und port'o)io h(s to )oo/ 'or securit. (nd m(. be s(tis'ied 1ith none too hi*h ( return, 1here (s (n (**ressi-e in-estment comp(n. be 1i))in* to t(/e hi*h ris/ in order to h(-e hi*h c(pit() (ppreci(tion+

Ho1 the objecti-es c(n (''ect in in-estment decision c(n be seen 'rom the '(ct th(t the Unit Trust o' Indi( h(s t1o m(jor schemes @ Its :c(pit() units< (re me(nt 'or those 1ho 1ish to h(-e ( *ood c(pit() (ppreci(tion (nd ( moder(te return, 1here (s the ordin(r. unit (re me(nt to pro-ide ( ste(d. return on).+ The in-estment m(n(*er under both the scheme 1i)) in-est the mone. o' the Trust in di''erent /inds o' sh(res (nd securities+ So it is ob-ious th(t the objecti-es must be c)e(r). de'ined be'ore (n in-estment decision is t(/en+
II. Se;e:ti6n 6> In5estment3 H(-in* de'ined the objecti-es o' the in-estment, the ne2t

decision is to decide the /ind o' in-estment to be se)ected+ The decision 1h(t to bu. h(s to be seen in the conte2t o' the 'o))o1in*@5

a) There is ( 1ide -(riet. o' in-estments (-(i)(b)e in m(r/et i+e+ E3uit. sh(res, pre'erence

sh(re, debentures, con-ertib)e bond, Bo-t+ securities (nd bond, c(pit() units etc+ Out o' these 1h(t t.pes o' securities to be purch(sed+

b) ,h(t shou)d be the proportion o' in-estment in 'i2ed interest di-idend securities (nd

-(ri(b)e di-idend be(rin* securitiesD The 'i2ed one ensures ( de'inite return (nd thus ( )o1er ris/ but the return is usu()). not (s hi*her (s th(t 'rom the -(ri(b)e di-idend be(rin* sh(res+

c) I' the in-estment is decided in sh(res or debentures, then the industries sho1in* (

potenti() in *ro1th shou)d be t(/en in 'irst )ine+ Industr.51ise5(n().sis is import(nt since -(rious industries (re not (t the s(me )e-e) 'rom the in-estment point o' -ie1+ It is import(nt to reco*ni4e th(t (t ( p(rticu)(r point o' time, ( p(rticu)(r industr. m(. h(-e (
)2

Reformers Business School Indore

better *ro1th potenti() th(n other industries+ For e2(mp)e, there 1(s ( time 1hen jute industr. 1(s in *re(t '(-our bec(use o' its *ro1th potenti() (nd hi*h pro'it(bi)it., the industr. is no )on*er (t this point o' time (s ( *ro1th oriented industr.+
d) Once industries 1ith hi*h *ro1th potenti() h(-e been identi'ied, the ne2t step is to se)ect

the p(rticu)(r comp(nies, in 1hose sh(res or securities in-estments (re to be m(de+

)(

Reformers Business School Indore F$ND"!ENT"L "N"L(SIS3

E"4 F$ND"!ENT"L "N"L(SIS OF GRO8TH ORIENTED CO!P"NIES3 One o' the 'irst decisions th(t (n in-estment m(n(*er '(ces is to identi'. the industries 1hich h(-e ( hi*h *ro1th potenti()+ T1o (ppro(ches (re su**ested in this re*(rd+ The. (re@
a) Statisti:a; "na;@sis 6> Past Per>6rman:e3

! st(tistic() (n().sis o' the immedi(te p(st per'orm(nce o' the sh(re price indices o' -(rious industries (nd ch(n*es there in re)(ted to the *ener() price inde2 o' sh(res o' ()) industries shou)d be m(de+ The Reser-e B(n/ o' Indi( inde2 numbers o' securit. prices pub)ished e-er. month in its bu))etin m(. be t(/en to represent the beh(-iour o' sh(re prices o' -(rious industries in the )(st 'e1 .e(rs+ The re)(ted ch(n*es in the price inde2 o' e(ch industr. (s comp(red 1ith the ch(n*es in the (-er(*e price inde2 o' the sh(res o' ()) industries 1ou)d sho1 those industries 1hich (re h(-in* ( hi*her *ro1th potenti() in the p(st 'e1 .e(rs+ It m(. be noted th(t (n Industr. m(. not be rem(inin* ( *ro1th Industr. 'or ()) the time+ So he sh()) no1 h(-e to m(/e (n (ssessment o' the -(rious Industries /eepin* in -ie1 the present potenti()it. ()so to 'in()i4e the )ist o' Industries in 1hich he 1i)) tr. to spre(d his in-estment+
b) "ssessin< the Intrinsi: 1a;ue 6> an In9ustr@CC6m?an@3

!'ter (n in-estment m(n(*er h(s identi'ied st(tistic()). the industries in the sh(re o' 1hich the in-estors sho1 interest, he 1ou)d (ssess the -(rious '(ctors 1hich in')uence the -()ue o' ( p(rticu)(r sh(re+ These '(ctors *ener()). re)(te to the stren*ths (nd 1e(/nesses o' the comp(n. under consider(tion, Ch(r(cteristics o' the industr. 1ithin 1hich the comp(n. '(i)s (nd the n(tion() (nd intern(tion() economic scene+ It is the job o' the in-estment m(n(*er to e2(mine (nd 1ei*h the -(rious '(ctors (nd jud*e the 3u()it. o' the sh(re or the securit. under consider(tion+ This (ppro(ch is /no1n (s the intrinsic -()ue (ppro(ch+ The m(jor objecti-e o' the (n().sis is to determine the re)(ti-e 3u()it. (nd the 3u(ntit. o' the securit. (nd to decide 1hether or not is securit. is *ood (t current m(r/ets prices+ In this, both 3u()it(ti-e (nd 3u(ntit(ti-e '(ctors (re to be considered+
))

Reformers Business School Indore E24 IND$STR( "N"L(SIS

First o' ()), (n (ssessment 1i)) h(-e to be m(de re*(rdin* ()) the conditions (nd '(ctors re)(tin* to dem(nd o' the p(rticu)(r product, cost structure o' the industr. (nd other economic (nd Bo-ernment constr(ints on the s(me+ !s 1e h(-e discussed e(r)ier, (n (ppr(is() o' the p(rticu)(r industr.?s prospect is essenti() (nd the b(sic pro'it(bi)it. o' (n. comp(n. is dependent upon the economic prospect o' the industr. to 1hich it be)on*s+ The 'o))o1in* '(ctors m(. p(rticu)(r). be /ept in mind 1hi)e (ssessin* to '(ctors re)(tin* to (n industr.+

(i) Deman9 an9 Su??;@ Pattern >6r the In9ustries Pr69u:ts an9 Its Gr6Ath P6tentia;3

The m(in import(nt (spect is to see the )i/e). dem(nd o' the products o' the industr. (nd the *(p bet1een dem(nd (nd supp).+ This 1ou)d re')ect the 'uture *ro1th prospects o' the industr.+ In order to /no1 the 'uture -o)ume (nd the -()ue o' the output in the ne2t ten .e(rs or so, the in-estment m(n(*er 1i)) h(-e to re). on the -(rious dem(nd 'orec(sts m(de b. -(rious (*encies )i/e the p)(nnin* commission, Ch(mbers o' Commerce (nd institutions )i/e NC!ER, etc+ The m(n(*ement e2pert identi'ies 'i-es st(*es in the )i'e o' (n industr.+ These (re :Introduction, de-e)opment, r(pid *ro1th, m(turit. (nd dec)ine<+ I' (n industr. h(s ()re(d. re(ched the m(turit. or dec)ine st(*e, its 'uture dem(nd potenti() is not )i/e). to be hi*h+

)*

Reformers Business School Indore

(ii) Pr6>ita=i;it@3 It is ( -it() consider(tion 'or the in-estors (s pro'it is the me(sure o'

per'orm(nce (nd ( source o' e(rnin* 'or him+ So the cost structure o' the industr. (s re)(ted to its s()e price is (n import(nt consider(tion+ In Indi( there (re m(n. industries 1hich h(-e ( *ro1th potenti() on (ccount o' *ood dem(nd position+ The other point to be considered is the r(tio (n().sis, especi()). return on in-estment, *ross pro'it (nd net pro'it r(tio o' the e2istin* comp(nies in the industr.+ This 1ou)d *i-e him (n ide( (bout the pro'it(bi)it. o' the industr. (s ( 1ho)e+
(iii) Parti:u;ar Chara:teristi:s 6> the In9ustr@3 E(ch industr. h(s its o1n ch(r(cteristics,

1hich must be studied in depth in order to underst(nd their imp(ct on the 1or/in* o' the industr.+ Bec(use the industr. h(-in* ( '(st ch(n*in* techno)o*. become obso)ete (t ( '(ster r(te+ Simi)(r)., m(n. industries (re ch(r(cteri4ed b. hi*h r(te o' pro'its (nd )osses in ()tern(te .e(rs+ Such ')uctu(tions in e(rnin*s must be c(re'u)). e2(mined+

(iv) La=6ur !ana<ement Re;ati6ns in the In9ustr@3 The st(te o' )(bour5m(n(*ement

re)(tionship in the p(rticu)(r industr. ()so h(s ( *re(t de() o' in')uence on the 'uture pro'it(bi)it. o' the industr.+ The in-estment m(n(*er shou)d, there'ore, see 1hether the industr. under (n().sis h(s been m(int(inin* ( cordi() re)(tionship bet1een )(bour (nd m(n(*ement+ Once the industr.?s ch(r(cteristics h(-e been (n().4ed (nd cert(in industries 1ith *ro1th potenti() identi'ied, the ne2t st(*e 1ou)d be to undert(/e (nd (n().4e ()) the '(ctors 1hich sho1 the desir(bi)it. o' -(rious comp(nies 1ithin (n industr. *roup 'rom in-estment point o' -ie1+

)+

Reformers Business School Indore EC4 CO!P"N( "N"L(SIS3

To se)ect ( comp(n. 'or in-estment purpose ( number o' 3u()it(ti-e '(ctors h(-e to be seen+ Be'ore purch(sin* the sh(res o' the comp(n., re)e-(nt in'orm(tion must be co))ected (nd proper). (n().4ed+ "n i;;ustrati5e ;ist 6> >a:t6rs Ahi:h he;? the ana;@st in takin< the in5estment 9e:isi6n is <i5en =e;6A. Ho1e-er, it must be emph(si4ed th(t the p(st per'orm(nce (nd in'orm(tion is re)e-(nt on). to the e2tent it indic(tes the 'uture trends+ Hence, the in-estment m(n(*er h(s to -isu()i4e the per'orm(nce o' the comp(n. in 'uture b. (n().4in* its p(st per'orm(nce+

1) Size an9 Rankin<3 ! rou*h ide( re*(rdin* the si4e (nd r(n/in* o' the comp(n. 1ithin

the econom., in *ener(), (nd the industr., in p(rticu)(r, 1ou)d he)p the in-estment m(n(*er in (ssessin* the ris/ (ssoci(ted 1ith the comp(n.+ In this re*(rd the net c(pit() emp)o.ed, the net pro'its, the return on in-estment (nd the s()es -o)ume o' the comp(n. under consider(tion m(. be comp(red 1ith simi)(r d(t( o' other comp(n. in the s(me industr. *roup+ It m(. ()so be use'u) to (ssess the position o' the comp(n. in terms o' technic() /no1ho1, rese(rch (nd de-e)opment (cti-it. (nd price )e(dership+
2) Gr6Ath Re:6r93 The *ro1th in s()es, net income, net c(pit() emp)o.ed (nd e(rnin*s per

sh(re o' the comp(n. in the p(st 'e1 .e(rs must be e2(mined+ The 'o))o1in* three *ro1th indic(tors m(. be p(rticu)(r). )oo/ed in to %(& $rice e(rnin*s r(tio, %b& $ercent(*e *ro1th r(te o' e(rnin*s per (nnum (nd %c& $ercent(*e *ro1th r(te o' net b)oc/ o' the comp(n.+ The price e(rnin*s r(tio is (n import(nt indic(tor 'or the in-estment m(n(*er since it sho1s the number the times the e(rnin*s per sh(re (re co-ered b. the m(r/et price o' ( sh(re+ Theoretic())., this r(tio shou)d be s(me 'or t1o comp(nies 1ith simi)(r 'e(tures+ Ho1e-er, this is not so in pr(ctice due to m(n. '(ctors+ Hence, b. ( comp(rison o' this r(tio pert(inin* to di''erent comp(nies the in-estment m(n(*er c(n h(-e (n ide( (bout the im(*e o' the comp(n. (nd c(n determine 1hether the sh(re is under5priced or o-er5priced+ !n e-()u(tion o' 'uture *ro1th prospects o' the comp(n. shou)d be c(re'u)). m(de+ This re3uires the (n().sis o' the e2istin* c(p(cities (nd their uti)i4(tion, proposed e2p(nsion (nd di-ersi'ic(tion p)(ns (nd the n(ture o' the comp(n.?s techno)o*.+
),

Reformers Business School Indore

The e2istin* c(p(cit. uti)i4(tion )e-e)s c(n be /no1n 'rom the 3u(ntit(ti-e in'orm(tion *i-en in the pub)ished pro'it (nd )oss (ccounts o' the comp(n.+ The p)(ns o' the comp(n., in terms o' e2p(nsion or di-ersi'ic(tion, c(n be /no1n 'rom the directors reports the ch(irm(n?s st(tements (nd 'rom the 'uture c(pit() commitments (s sho1n b. 1(. o' notes in the b()(nce sheets+ The n(ture o' techno)o*. o' ( comp(n. shou)d be seen 1ith re'erence to techno)o*ic() de-e)opments in the concerned 'ie)ds, the possibi)it. o' its product bein* superseded o' the possibi)it. o' emer*ence o' more e''ecti-e method o' m(nu'(cturin*+ Bro1th is the sin*)e most import(nt '(ctor in comp(n. (n().sis 'or the purpose o' in-estment m(n(*ement+ ! comp(n. m(. h(-e ( *ood record o' pro'its (nd per'orm(nce in the p(st= but i' it does not h(-e *ro1th potenti(), its sh(res c(nnot be r(ted hi*h 'rom the in-estment point o' -ie1+

ED4

FIN"NCI"L "N"L(SIS3

!n (n().sis o' 'in(nci() 'or the p(st 'e1 .e(rs 1ou)d he)p the in-estment m(n(*er in underst(ndin* the 'in(nci() so)-enc. (nd )i3uidit., the e''icienc. 1ith 1hich the 'unds (re used, the pro'it(bi)it., the oper(tin* e''icienc. (nd oper(tin* )e-er(*es o' the comp(n.+ For this purpose cert(in 'und(ment() r(tios h(-e to be c()cu)(ted+ From the in-estment point o' -ie1, the most import(nt 'i*ures (re e(rnin*s per sh(re, price e(rnin*s r(tios, .ie)d, boo/ -()ue (nd the intrinsic -()ue o' the sh(re+ The 'i-e e)ements m(. be c()cu)(ted 'or the p(st ten .e(rs or so (nd comp(red 1ith simi)(r r(tios computed 'rom the 'in(nci() (ccounts o' other comp(nies in the industr. (nd 1ith the (-er(*e r(tios o' the industr. (s ( 1ho)e+ The .ie)d (nd the (sset b(c/in* o' ( sh(re (re import(nt consider(tions in ( decision re*(rdin* 1hether the p(rticu)(r m(r/et price o' the sh(re is proper or not+ "(rious other r(tios to me(sure pro'it(bi)it., oper(tin* e''icienc. (nd turno-er e''icienc. o' the comp(n. m(. ()so be c()cu)(ted+ The return on o1ner?s in-estment, c(pit() turno-er r(tio (nd the cost structure r(tios m(. ()so be 1or/ed out+ To e2(mine the 'in(nci() so)-enc. or )i3uidit. o' the comp(n., the in-estment m(n(*er m(. 1or/ out current r(tio, )i3uidit. r(tio, debt e3uit.

)-

Reformers Business School Indore

r(tio, etc+ These r(tios 1i)) pro-ide (n o-er()) -ie1 o' the comp(n. to the in-estment (n().st+ He c(n (n().4e its stren*ths (nd 1e(/ness (nd see 1hether it is 1orth the ris/ or not+ Ei4 Fua;it@ 6> !ana<ement3 This is (n int(n*ib)e '(ctor+ #et it h(s ( -er. import(nt be(rin* on the -()ue o' the sh(res+ E-er. in-estment m(n(*er /no1s th(t the sh(res o' cert(in business houses comm(nd ( hi*her premium th(n those o' simi)(r comp(nies m(n(*ed b. other business houses+ This is bec(use o' the 3u()it. o' m(n(*ement, the con'idence th(t the in-estors h(-e in ( p(rticu)(r business house, its po)ic. -is5E5-is its re)(tionship 1ith the in-estors, di-idend (nd 'in(nci() per'orm(nce record o' other comp(nies in the s(me *roup, etc+ This is perh(ps the re(son th(t (n in-estment m(n(*er ()1(.s *i-es ( c)ose )oo/ to the m(n(*ement o' the comp(n. 1hose sh(res he is to in-est+ Fu()it. o' m(n(*ement h(s to be seen 1ith re'erence to the e2perience, s/i)) (nd inte*rit. o' the persons (t the he)m o' the (''(irs o' the comp(n.+ The po)ic. o' the m(n(*ement re*(rdin* re)(tionship 1ith the sh(re ho)ders is (n import(nt '(ctor since cert(in business houses be)ie-e in *enerous di-idend (nd bonus distributions 1hi)e others (re r(ther conser-(ti-e+

Eii4 L6:ati6n an9 ;a=6ur mana<ement re;ati6ns3 The )oc(tions o' the comp(n.?s m(nu'(cturin* '(ci)ities determine its economic -i(bi)it. 1hich depends on the (-(i)(bi)it. o' cruci() inputs )i/e po1er, s/i))ed )(bour (nd r(1 m(teri()s etc+ Ne(rness to m(r/et is ()so ( '(ctor to be considered+ In the p(st 'e1 .e(rs, the in-estment m(n(*er h(s be*un )oo/in* into the st(te o' )(bour m(n(*ement re)(tions in the comp(n. under consider(tion (nd the (re( 1here it is )oc(ted+
(iii) Pattern 6> Existin< St6:k H6;9in<3 !n (n().sis o' the p(ttern o' the e2istin* stoc/

ho)din*s o' the comp(n. 1ou)d ()so be re)e-(nt+ This 1ou)d sho1 the st(/e o' -(rious p(rties (ssoci(ted 1ith the comp(n.+ !n interestin* c(se in this re*(rd is th(t o' the $unj(b N(tion() B(n/ in 1hich the L+I+C+ (nd other 'in(nci() institutions h(d subst(nti() ho)din*s+ ,hen the b(n/ 1(s n(tion()i4ed, the residu() comp(n. proposed ( scheme 1hereb. those sh(reho)ders, 1ho 1ish to opt out, cou)d recei-e ( cert(in (mount (s compens(tion in c(sh+
).

Reformers Business School Indore

It 1(s on). (t the inst(nt (nd b(r*(inin* stren*th o' institution() in-estors th(t the compens(tion o''ered to the sh(reho)ders, 1ho 1ish to opt out o' the comp(n., 1(s r(ised consider(b).+
(iv) !arketa=i;it@ 6> the Shares3 !nother import(nt consider(tion 'or (n in-estment m(n(*er

is the m(r/et(bi)it. o' the sh(res o' the comp(n.+ Mere )istin* o' the sh(re on the stoc/ e2ch(n*e does not (utom(tic()). me(n th(t the sh(re c(n be so)d or purch(sed (t 1i))+ There (re m(n. sh(res 1hich rem(in in(cti-e 'or )on* periods 1ith no tr(ns(ctions bein* (''ected+

To purch(se or se)) such scripts is ( di''icu)t t(s/+ In this re*(rd, dispers() o' sh(re ho)din* 1ith speci() re'erence to the e2tent o' pub)ic ho)din* shou)d be seen+ The other re)e-(nt '(ctors (re the specu)(ti-e interest in the p(rticu)(r scrip, the p(rticu)(r stoc/ e2ch(n*e 1here it is tr(ded (nd the -o)ume o' tr(din*+ Fund(ment() (n().sis thus is b(sic()). (n e2(min(tion o' the economics (nd 'in(nci() (spects o' ( comp(n. 1ith the (im o' estim(tin* 'uture e(rnin*s (nd di-idend prospect+ It inc)uded (n (n().sis o' the m(cro economic (nd po)itic() '(ctors 1hich 1i)) h(-e (n imp(ct on the per'orm(nce o' the 'irm+ !'ter h(-in* (n().4ed ()) the re)e-(nt in'orm(tion (bout the comp(n. (nd its re)(ti-e stren*th -is5E5-is other 'irm in the industr., the in-estor is e2pected to decide 1hether he shou)d bu. or se)) the securities+

)/

Reformers Business School Indore EC4 TI!ING OF P$RCH"SES3#

The timin* o' de()in*s in the securities, speci()). sh(res is o' cruci() import(nce, bec(use ('ter correct). identi'.in* the comp(nies one m(. )ose mone. i' the timin* is b(d due to 1ide ')uctu(tion in the price o' sh(res o' th(t comp(nies+ The decision re*(rdin* timin* o' purch(ses is p(rticu)(r). di''icu)t bec(use o' cert(in ps.cho)o*ic() '(ctors+ It is ob-ious th(t i' ( person 1ishes to m(/e (n. *(ins, he shou)d bu. che(p (nd se)) de(r, i+e+ bu. 1hen the sh(re (re se))in* (t ( )o1 price (nd se)) 1hen the. (re (t ( hi*her price+ But in pr(ctic() it is ( di''icu)t t(s/+ ,hen the prices (re risin* in the m(r/et i+e+ there is bu)) ph(se, e-er.bod. joins in bu.in* 1ithout (n. de)(. bec(use e-er. d(. the prices touch ( ne1 hi*h+ L(ter 1hen the be(r '(ce st(rts, prices tumb)e do1n e-er. d(. (nd e-er.bod. st(rts countin* the )osses+ The ordin(r. in-estor re*retted such situ(tion b. thin/in* 1h. he did not se)) his sh(res in pre-ious d(. (nd u)tim(te). se)) (t ( )o1er price+ This /ind o' in-estment decision is entire). de-oid o' (n. sense o' timin*+ In sh6rt Ae :an :6n:;u9e =@ sa@in< that In5estment mana<ement is a :6m?;ex a:ti5it@ Ahi:h ma@ =e =r6ken 96An int6 the >6;;6Ain< ste?s3 4 S?e:i>i:ati6n O> In5estment O=Be:ti5es "n9 C6nstraints@ The t.pic() objecti-es sou*ht b. in-estors (re current income, c(pit() (ppreci(tion, (nd s('et. o' princip)e+ The re)(ti-e import(nce o' these objecti-es shou)d be speci'ied 'urther the constr(ints (risin* 'rom )i3uidit., time hori4on, t(2 (nd speci() circumst(nces must be identi'ied+ '4 Ch6i:e O> The "sset !ix 3 The most import(nt decision in port'o)io m(n(*ement is the (sset mi2 decision -er. bro(d).= this is concerned 1ith the proportions o' Gstoc/s? %e3uit. sh(res (nd unitsAsh(res o' e3uit.5oriented mutu() 'unds& (nd Gbonds? in the port'o)io+ The (ppropri(te Gstoc/5bond? mi2 depends m(in). on the ris/ to)er(nce (nd in-estment hori4on o' the in-estor+

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Reformers Business School Indore

ELE!ENTS OF PORTFOLIO !"N"GE!ENT3

P6rt>6;i6 mana<ement is 6n#<6in< ?r6:ess in56;5in< the >6;;6Ain< =asi: tasks@ Identi'ic(tion o' the in-estor?s objecti-es, constr(ints (nd pre'erences+ Str(te*ies (re to be de-e)oped (nd imp)emented in tune 1ith in-estment po)ic. 'ormu)(ted+

Re-ie1 (nd monitorin* o' the per'orm(nce o' the port'o)io+

Fin()). the e-()u(tion o' the port'o)io

Te:hniDue7s O> P6rt>6;i6 !ana<ement3

!s o' no1 the under noted techni3ue o' port'o)io m(n(*ement@ (re in -o*ue in our countr.+ 4 EDuit@ P6rt>6;i63 It is in')uenced b. intern() (nd e2tern() '(ctors the intern() '(ctors (''ect the inner 1or/in* o' the comp(n.?s *ro1th p)(ns (re (n().4ed 1ith re'erenced to B()(nce sheet, pro'it ; )oss (Ac %(ccount& o' the comp(n.+ !mon* the e2tern() '(ctor (re ch(n*es in the *o-ernment po)icies, Tr(de c.c)e?s, $o)itic() st(bi)it. etc+ '4 EDuit@ St6:k "na;@sis@ Under this method the prob(b)e 'uture -()ue o' ( sh(re o' ( comp(n. is determined it c(n be done b. r(tio?s o' e(rnin* per sh(re o' the comp(n. (nd price e(rnin*s r(tio

E"RNING PER SH"RE G H PROFIT "FTER T"XHH NO. OF EF$IT( SH"RES

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PRICE E"RNING R"TIO G H!"R-ET PRICE EPER SH"RE4H E"RNING PER SH"RE

One c(n estim(te trend o' e(rnin* b. E$S, 1hich re')ects trends o' e(rnin* 3u()it. o' comp(n., di-idend po)ic., (nd 3u()it. o' m(n(*ement+ $rice E(rnin*s r(tio indic(te ( con'idence o' m(r/et (bout the comp(n. 'uture, ( hi*h r(tin* is pre'er(b)e+ The >6;;6Ain< ?6ints must =e :6nsi9ere9 =@ ?6rt>6;i6 mana<ers Ahi;e ana;@zin< the se:urities. 4 Nature 6> the in9ustr@ an9 its ?r69u:t3 Lon* term trends o' industries, competition 1ithin, (nd outside the industr., Technic() ch(n*es, )(bour re)(tions, sensiti-it., to Tr(de c.c)e+

'4 In9ustria; ana;@sis 6> ?r6s?e:ti5e earnin<sI :ash >;6AsI A6rkin< :a?ita;I 9i5i9en9sI et:.

*4 Rati6 ana;@sis3 Rati6s such (s debt e3uit. r(tio, current r(tio, net 1orth, pro'it e(rnin*s r(tio, returns on in-estment, (re 1or/ed out to decide the port'o)io+

The 1ise princip)e o' port'o)io m(n(*ement su**ests th(t J2u@ Ahen the market is ;6A 6r 2E"RISHI an9 se;; Ahen the market is risin< 6r 2$LLISHK. Stoc/ m(r/et oper(tion c(n be (n().4ed b.@ (& Fun9amenta; a??r6a:h3 # B(sed on intrinsic -()ue o' sh(res+ b& Te:hni:a; a??r6a:h3 # B(sed on o1 Hone?s Theor., R(ndom ,()/ Theor., etc+

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Reformers Business School Indore

Pri:es are =ase9 u?6n 9eman9 an9 su??;@ 6> the market+ Objecti-es (re m(2imi4(tion o' 1e()th (nd minimi4(tion o' ris/+ i-ersi'ic(tion reduces ris/ (nd -o)(ti)it.+ "(ri(b)e returns, hi*h i))i3uidit.= etc+

CHAPTER - 4
RIS- . RET$RN "N"L(SIS
RIS- ON PORTFOLIO 3
The e2pected returns 'rom indi-idu() securities c(rr. some de*ree o' ris/+ Ris/ on the port'o)io is di''erent 'rom the ris/ on indi-idu() securities+ The ris/ is re')ected in the -(ri(bi)it. o' the returns 'rom 4ero to in'init.+ Ris/ o' the indi-idu() (ssets or ( port'o)io is me(sured b. the -(ri(nce o' its return+ The e2pected return depends on the prob(bi)it. o' the returns (nd their 1ei*hted contribution to the ris/ o' the port'o)io+ These (re t1o me(sures o' ris/ in this conte2t one is the (bso)ute de-i(tion (nd other st(nd(rd de-i(tion+ Most in-estors in-est in ( port'o)io o' (ssets, bec(use (s to spre(d ris/ b. not puttin* ()) e**s in one b(s/et+ Hence, 1h(t re()). m(tters to them is not the ris/ (nd return o' stoc/s in iso)(tion, but the ris/ (nd return o' the port'o)io (s ( 1ho)e+ Ris/ is m(in). reduced b. i-ersi'ic(tion+

F6;;6Ain< are the s6me 6> the t@?es 6> Risk3 4 Interest Rate Risk3 This (rises due to the -(ri(bi)it. in the interest r(tes 'rom time to time+ ! ch(n*e in the interest r(te est(b)ishes (n in-erse re)(tionship in the price o' the securit. i+e+ price o' the securit. tends to mo-e in-erse). 1ith ch(n*e in r(te o' interest, )on* term securities sho1 *re(ter -(ri(bi)it. in the price 1ith respect to interest r(te ch(n*es th(n short term securities+

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Reformers Business School Indore

Interest r(te ris/ -u)ner(bi)it. 'or di''erent securities is (s under@ T(PES C(sh E3ui-()ent Lon* Term Bonds RIS- EXTENT Less -u)ner(b)e to interest r(te ris/+ More -u)ner(b)e to interest r(te ris/+

'4 Pur:hasin< P6Aer Risk3 It is ()so /no1n (s in')(tion ris/ ()so em(n(tes 'rom the -er. '(ct th(t in')(tion (''ects the purch(sin* po1er (d-erse).+ Nomin() return cont(ins both the re() return component (nd (n in')(tion premium in ( tr(ns(ction in-o)-in* ris/ o' the (bo-e t.pe to compens(te 'or in')(tion o-er (n in-estment ho)din* period+ In')(tion r(tes -(r. o-er time (nd in-estors (re c(u*ht un(1(re 1hen r(te o' in')(tion ch(n*es une2pected). c(usin* erosion in the -()ue o' re()i4ed r(te o' return (nd e2pected return+ $urch(sin* po1er ris/ is more in in')(tion(r. conditions especi()). in respect o' bonds (nd 'i2ed income securities+ It is not desir(b)e to in-est in such securities durin* in')(tion(r. periods+ $urch(sin* po1er ris/ is ho1e-er, )ess in ')e2ib)e income securities )i/e e3uit. sh(res or common stoc/ 1here rise in di-idend income o''5sets incre(se in the r(te o' in')(tion (nd pro-ides (d-(nt(*e o' c(pit() *(ins+

*4 2usiness Risk3 Business ris/ em(n(tes 'rom s()e (nd purch(se o' securities (''ected b. business c.c)es, techno)o*ic() ch(n*es etc+ Business c.c)es (''ect ()) t.pes o' securities i+e+ there is cheer'u) mo-ement in boom due to bu))ish trend in stoc/ prices 1here(s be(rish trend in depression brin*s do1n '()) in the prices o' ()) t.pes o' securities durin* depression due to dec)ine in their m(r/et price+

&4 Finan:ia; Risk3 It (rises due to ch(n*es in the c(pit() structure o' the comp(n.+ It is ()so /no1n (s )e-er(*ed ris/ (nd e2pressed in terms o' debt5e3uit. r(tio+ E2cess o' ris/ -is5E5 -is e3uit. in the c(pit() structure indic(tes th(t the comp(n. is hi*h). *e(red+ !)thou*h (
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Reformers Business School Indore

)e-er(*ed comp(n.?s e(rnin*s per sh(re (re more but dependence on borro1in*s e2poses it to ris/ o' 1indin* up 'or its in(bi)it. to honor its commitments to1(rds )ender or creditors+ The ris/ is /no1n (s )e-er(*ed or 'in(nci() ris/ o' 1hich in-estors shou)d be (1(re (nd port'o)io m(n(*ers shou)d be -er. c(re'u)+ %4 S@stemati: Risk 6r !arket Re;ate9 Risk3 S.stem(tic ris/s (''ected 'rom the entire m(r/et (re %the prob)ems, r(1 m(teri() (-(i)(bi)it., t(2 po)ic. or *o-ernment po)ic., in')(tion ris/, interest ris/ (nd 'in(nci() ris/&+ It is m(n(*ed b. the use o' Bet( o' di''erent comp(n. sh(res+ 04 $ns@stemati: Risks3 The uns.stem(tic ris/s (re mism(n(*ement, incre(sin* in-entor., 1ron* 'in(nci() po)ic., de'ecti-e m(r/etin* etc+ this is di-ersi'i(b)e or (-oid(b)e bec(use it is possib)e to e)imin(te or di-ersi'. (1(. this component o' ris/ to ( consider(b)e e2tent b. in-estin* in ( )(r*e port'o)io o' securities+ The uns.stem(tic ris/ stems 'rom ine''icienc. m(*nitude o' those '(ctors di''erent 'orm one comp(n. to (nother+

RIS- RET$RN "N"L(SIS3

!)) in-estment h(s some ris/+ In-estment in sh(res o' comp(nies h(s its o1n ris/ or uncert(int.= these ris/s (rise out o' -(ri(bi)it. o' .ie)ds (nd uncert(int. o' (ppreci(tion or depreci(tion o' sh(re prices, )osses o' )i3uidit. etc The risk 65er time c(n be represented b. the -(ri(nce o' the returns 1hi)e the return 65er time is c(pit() (ppreci(tion p)us p(.out, di-ided b. the purch(se price o' the sh(re+

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Reformers Business School Indore

Norm())., the hi*her the ris/ th(t the in-estor t(/es, the hi*her is the return+ There is, ho1e-er, ( ris/ )ess return on c(pit() o' (bout 76I 1hich is the b(n/, r(te ch(r*ed b. the R+B+I or )on* term, .ie)ded on *o-ernment securities (t (round 79I to 7JI+ This ris/ )ess return re'ers to )(c/ o' -(ri(bi)it. o' return (nd no uncert(int. in the rep(.ment or c(pit()+ But other ris/s such (s )oss o' )i3uidit. due to p(rtin* 1ith mone. etc+, m(. ho1e-er rem(in, but (re re1(rded b. the tot() return on the c(pit()+ Ris/5return is subject to -(ri(tion (nd the objecti-es o' the port'o)io m(n(*er (re to reduce th(t -(ri(bi)it. (nd thus reduce the ris/ b. choosin* (n (ppropri(te port'o)io+ Tr(dition() (ppro(ch (d-oc(tes th(t one securit. ho)ds the better, it is (ccordin* to the modern (ppro(ch di-ersi'ic(tion shou)d not be 3u(ntit. th(t shou)d be re)(ted to the 3u()it. o' scripts 1hich )e(ds to 3u()it. o' port'o)io+ E2perience h(s sho1n th(t be.ond the cert(in securities b. (ddin* more securities e2pensi-e+

RET$RNS ON PORTFOLIO@
E(ch securit. in ( port'o)io contributes return in the proportion o' its in-estments in securit.+ Thus the port'o)io e2pected return is the 1ei*hted (-er(*e o' the e2pected return, 'rom e(ch o' the securities, 1ith 1ei*hts representin* the proportions sh(re o' the securit. in the tot() in-estment+ ,h. does (n in-estor h(-e so m(n. securities in his port'o)ioD I' the securit. !BC
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Reformers Business School Indore

*i-es the m(2imum return 1h. not he in-ests in th(t securit. ()) his 'unds (nd thus m(2imi4e returnD The (ns1er to this 3uestions )ie in the in-estor?s perception o' ris/ (tt(ched to in-estments, his objecti-es o' income, s('et., (ppreci(tion, )i3uidit. (nd hed*e (*(inst )oss o' -()ue o' mone. etc+ this p(ttern o' in-estment in di''erent (sset c(te*ories, t.pes o' in-estment, etc+, 1ou)d ()) be described under the c(ption o' di-ersi'ic(tion, 1hich (ims (t the reduction or e-en e)imin(tion o' non5s.stem(tic ris/s (nd (chie-e the speci'ic objecti-es o' in-estors+

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Reformers Business School Indore

CHAPTER: 5
PORTFOLIO THEORIES
I. DO8 JONES THEOR(3
The O, HONES THEOR# is prob(b). the most popu)(r theor. re*(rdin* the beh(-ior o'

stoc/ m(r/et prices+ The theor. deri-es its n(me 'rom Ch(r)es H+ o1, 1ho est(b)ished the o1 Hones ; Co+ (nd 1(s the 'irst editor o' the ,()) Street Hourn() K ( )e(din* pub)ic(tion on 'in(nci() (nd economic m(tters in the U+S+!+ !)thou*h o1 ne-er *(-e ( proper sh(pe to the theor., ide(s h(-e been e2p(nded (nd (rticu)(ted b. m(n. o' his successors+ The o1 Hones theor. c)(ssi'ies the mo-ement o' the prices on the sh(re m(r/et into three m(jor c(te*ories@ . $rim(r. Mo-ements, '. Second(r. Mo-ements (nd *. (i). F)uctu(tions+ 4 Primar@ !65ements3 The. re')ect the trend o' the stoc/ m(r/et (nd )(st 'rom one .e(r to three .e(rs, or sometimes e-en more+ I' the )on* r(n*e beh(-ior o' m(r/et prices is seen, it 1i)) be obser-ed th(t the sh(re m(r/ets *o throu*h de'inite ph(ses 1here the prices (re consistent). risin* or '())in*+ These ph(ses (re /no1n (s bu)) (nd be(r ph(ses+ $9 $6 $7 T6 T7 Gra?h T9

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Reformers Business School Indore

urin* ( bu)) ph(se, the b(sic trend is th(t o' rise in prices+ Br(ph 7 (bo-e sho1s the beh(-ior o' stoc/ m(r/et prices in bu)) ph(se+ #ou 1ou)d notice 'rom the *r(ph th(t ()thou*h the prices '()) ('ter e(ch rise, the b(sic trend is th(t o' risin* prices+ !s c(n be seen 'rom the *r(ph th(t e(ch tr6u<h prices re(ch, is (t ( hi*her )e-e) th(n the e(r)ier one+ Simi)(r)., e(ch pe(/ th(t the prices re(ch is on ( hi*her )e-e) th(n the e(r)ier one+ Thus $6 is hi*her th(n $7 (nd T6 is hi*her th(n T7+ This me(ns th(t prices do not rise consistent). e-en in ( bu)) ph(se+ The. rise 'or some time (nd ('ter e(ch rise, the. '())+ Ho1e-er, the '())s (re o' ( )o1er m(*nitude then e(r)ier+ !s ( resu)t, prices re(ch hi*her )e-e)s 1ith e(ch rise+ Once the prices h(-e risen -er. hi*h, the be(r ph(se in bound to st(rt i+e+, price 1i)) st(rt '())in*+ Br(ph 6 sho1s the t.pic() beh(-ior o' prices on the stoc/ e2ch(n*e in the c(se o' ( $9

$6 T7 T6 T9 $7

Gra?h ' Be(r ph(se+ It 1ou)d be seen th(t prices (re not '())in* consistent). (nd, ('ter e(ch '()), there is ( rise in prices+ Ho1e-er, the rise is not much (s to t(/e the prices hi*her th(n the pre-ious pe(/+ It me(ns th(t e(ch pe(/ (nd tr6u<h is no1 )o1er th(n the pre-ious pe(/ (nd trou*h+ The theor. (r*ues th(t prim(r. mo-ements indic(te b(sic trends in the m(r/et+ It st(tes th(t i' c.c)ic() s1in*s o' stoc/ m(r/et prices indices (re successi-e). hi*her, the m(r/et trend is up (nd there is ( bu)) m(r/et+ On the contr(r., i' successi-e hi*hs (nd )o1 (re successi-e). )o1er, the m(r/et is on ( do1n1(rd trend (nd 1e (re in be(r m(r/et+ This

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Reformers Business School Indore

theor. thus re)ies upon ( beh(-ior o' the indices o' sh(re m(r/et prices in percei-in* the trend in the m(r/et+ '4 Se:6n9ar@ !65ements3 ,e h(-e seen th(t e-en 1hen the prim(r. trend is up1(rd, there (re ()so do1n1(rd mo-ements o' prices+ Simi)(r)., e-en 1here the prim(r. trend is do1n1(rd, there is up1(rd mo-ement o' prices ()so+ These mo-ements (re /no1n (s second(r. mo-ements (nd (re shorter in dur(tion (nd (re opposite in direction to the prim(r. mo-ements+ These mo-ements norm()). )(st 'rom three 1ee/s to three months (nd retr(ce 7A9 to 6A9 o' the pre-ious (d-(nce in ( bu)) m(r/et o' pre-ious '()) in the be(r m(r/et+

*4 Dai;@ !65ements3 There (re irre*u)(r ')uctu(tions 1hich occur e-er. d(. in the m(r/et+ These ')uctu(tions (re 1ithout (n. de'inite trend+ Thus is the d(i). sh(re m(r/et price inde2 'or ( 'e1 months (re p)otted on the *r(ph it 1i)) sho1 both up1(rd (nd do1n1(rd ')uctu(tions+ These ')uctu(tions (re the resu)t o' specu)(ti-e '(ctor+ !n in-estment m(n*er re()). is not interested in the short run ')uctu(tions in sh(re prices since he is not ( specu)(tor+ It m(. be reiter(ted th(t (n.one 1ho tries to *(in 'rom short run ')uctu(tions in the stoc/ m(r/et, c(n m(/e mone. on). be sheer ch(nce+ The in-estment m(n(*er shou)d scrupu)ous). /eep (1(. 'rom the d(i). ')uctu(tions o' the m(r/et+ He is not ( specu)(tor (nd shou)d ()1(.s resist the tempt(tion o' specu)(tin*+ Such ( tempt(tion is ()1(.s -er. (ttr(cti-e but must ()1(.s be resisted+ Specu)(tion is be.ond the scope o' the job o' (n in-estment m(n(*er+

Timin< 6> in5estment 9e:isi6ns 6n the =asis 6> D6A J6nes The6r@3 Ide()). spe(/in* the in-estment m(n(*e 1ou)d )i/e to purch(se sh(res (t ( time 1hen the. h(-e re(ched the )o1est tr6u<h (nd se)) them (t ( time 1hen the. re(ch the hi*hest pe(/+ Ho1e-er, in pr(ctice, this se)dom h(ppens+ E-en the most (stute in-estment m(n(*er c(n ne-er /no1 1hen the hi*hest pe(/ or the )o1est throu*h h(-e been re(ched+ There'ore, he h(s to time his decision in such ( m(nner th(t he bu.s the sh(res 1hen the. (re on the rise (nd se))s then 1hen the. (re

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on the '())+ It me(ns th(t he shou)d be (b)e to identi'. e2(ct). 1hen the '())in* or the risin* trend h(s be*un+ This is technic()). /no1n (s identi'ic(tion o' the turn in the sh(re m(r/et prices+ Identi'ic(tion o' this turn is di''icu)t in pr(ctice bec(use o' the '(ct th(t, e-en in ( risin* m(r/et, prices /eep on '())in* (s ( p(rt o' the second(r. mo-ement+ Simi)(r). e-en in ( '())in* m(r/et prices /eep on risin* tempor(ri).+ Ho1 to be cert(in th(t the rise in prices or '()) in the s(me in due to ( re() turn in prices 'rom ( bu))ish to ( be(rish ph(se or -ice -ers( or th(t it is due on). to short run specu)(ti-e trendsD o1 Hones Theor. identi'ies the turn in the m(r/et prices b. seein* 1hether the successi-e pe(/s (nd trou*hs (re hi*her or )o1er th(n e(r)ier+

II. R"NDO! 8"L- THEOR(3

The 'irst speci'ic(tion o' e''icient m(r/ets (nd their re)(tionship to the r(ndomness o' prices 'or thin*s tr(ded in the m(r/et *oes to S(mue)son (nd M(nde)brot+ JSamue;s6n has ?r65e9 in ,0% that i> a market has zer6 transa:ti6n :6stsI i> a;; a5ai;a=;e in>6rmati6n is >ree t6 a;; intereste9 ?artiesI an9 i> a;; market ?arti:i?ants an9 ?6tentia; ?arti:i?ants ha5e the same h6riz6ns an9 ex?e:tati6ns a=6ut ?ri:esI the market Ai;; =e e>>i:ient an9 ?ri:es Ai;; >;u:tuate ran96m;@.K !ccordin* to the R(ndom ,()/ Theor., the ch(n*es in prices o' stoc/ sho1 independent beh(-ior (nd (re dependent on the ne1 pieces o' in'orm(tion th(t (re recei-ed but 1ithin themse)-es (re independent o' e(ch other+ ,hene-er ( ne1 price o' in'orm(tion is recei-ed in the stoc/ m(r/et, the m(r/et independent). recei-es this in'orm(tion (nd it is independent (nd sep(r(te 'rom ()) the other prices o' in'orm(tion+ For e2(mp)e, ( stoc/ is se))in* (t Rs+ JL b(sed on e2istin* in'orm(tion /no1n to ()) in-estors+ !'ter1(rds, the ne1s o' ( stri/e in th(t comp(n. 1i)) brin* do1n the stoc/ price to Rs+ 9L the ne2t d(.+ The stoc/ price 'urther *oes do1n to Rs+ 6M+ Thus, the 'irst '()) in stoc/ price 'rom Rs+ JL to Rs+ 9L is c(used bec(use o' some in'orm(tion (bout the stri/e+ But the second '()) in the price o' ( stoc/ 'rom Rs+ 9L to Rs+ 6M is due to (ddition() in'orm(tion on the t.pe o' stri/e+ There'ore, e(ch price ch(n*e is independent o' the
+2

Reformers Business School Indore

other bec(use e(ch in'orm(tion h(s been t(/en in, b. the stoc/ m(r/et (nd sep(r(te). dissemin(ted+ Ho1e-er, independent pieces o' in'orm(tion, 1hen the. come to*ether immedi(te). ('ter e(ch other sho1 th(t the price is '())in* but e(ch price '()) is independent o' the other price '())+ The b(sic essenti() '(ct o' the R(ndom ,()/ Theor. is th(t the in'orm(tion on stoc/ prices is immedi(te). (nd 'u)). spre(d o-er th(t other in-estors h(-e 'u)) /no1)ed*e o' the in'orm(tion+ The response m(/es the mo-ement o' prices independent o' e(ch other+ Thus, it m(. be s(id th(t the prices h(-e (n independent n(ture (nd there'ore, the price o' e(ch d(. is di''erent+ The theor. 'urther st(tes th(t the 'in(nci() m(r/ets (re so competiti-e th(t there is immedi(te price (djustment+ It is due to the e''ecti-e communic(tion s.stem throu*h 1hich in'orm(tion c(n be disturbed ()most (n.1here in the countr.+ This speed o' in'orm(tion determines the e''icienc. o' the m(r/et+
III.

C"PIT"L "SSETS PRICING !ODEL EC"P!43 C!$M pro-ides (

conceptu() 'r(me1or/ 'or e-()u(tin* (n. in-estment decision+ It is used to estim(te the e2pected return o' (n. port'o)io 1ith the 'o))o1in* 'ormu)(@

E ER?4 G R> L2? EEE Rm4 . R> 4 8hereI EER?4 R> 2? EERm4 MEERm4#R>N N N N N E2pected return o' the port'o)io Ris/ 'ree r(te o' return Bet( port'o)io i+e+ m(r/et sensiti-it. inde2 E2pected return on m(r/et port'o)io

N M(r/et ris/ premium

The (bo-e mode) o' port'o)io m(n(*ement c(n be used e''ecti-e). to@5

+(

Reformers Business School Indore

Estim(te the re3uired r(te o' return to in-estors on comp(n.?s common stoc/+

E-()u(te ris/. in-estment projects in-o)-in* re() !ssets+

E2p)(in 1h. the use o' borro1ed 'und incre(ses the ris/ (nd incre(ses the r(te o' return+

Reduce the ris/ o' the 'irm b. di-ersi'.in* its project port'o)io+

IV. !O1ING "1ER"GE3 It re'ers to the me(n o' the c)osin* price 1hich ch(n*es
const(nt). (nd mo-es (he(d in time, there b. encomp(sses the most recent d(.s (nd de)etes the o)d one+

V. !ODERN PORTFOLIO THEOR(3 Modern $ort'o)io Theor. 3u(nti'ies the

re)(tionship bet1een ris/ (nd return (nd (ssumes th(t (n in-estor must be compens(ted 'or (ssumin* ris/+ It be)ie-es in the m(2imi4(tion o' return throu*h ( combin(tion o' securities+ The theor. st(tes th(t b. combinin* securities o' )o1 ris/s 1ith securities o' hi*h ris/s success c(n be (chie-ed in m(/in* ( choice o' in-estments+ There c(n be -(rious combin(tions o' securities+ The modern theor. points out th(t the ris/ o' port'o)io c(n be reduced b. di-ersi'ic(tion+ Harr@ !ark6Aitz (nd 8i;;iam Shar?e h(-e de-e)oped this theor.+

VI. !"R-O8ITO THEOR(3 M(r/o1it4 h(s su**ested ( s.stem(tic se(rch 'or optim()
port'o)io+ !ccordin* to him, the port'o)io m(n(*er h(s to m(/e prob(bi)istic estim(tes o' the 'uture per'orm(nces o' the securities (nd (n().se these estim(tes to determine (n e''icient set o' port'o)ios+ Then the optimum set o' port'o)io c(n be se)ected in order to suit the needs o' the in-estors+ The 'o))o1in* (re the (ssumptions o' M(r/o1it4 Theor.@

In-estors m(/e decisions on the b(sis o' e2pected uti)it. m(2imi4(tion+ +)

Reformers Business School Indore

In (n e''icient m(r/et, ()) in-estors re(ct 1ith 'u)) '(cts (bout ()) securities in the

m(r/et+
In-estors? uti)it. is the 'unction o' ris/ (nd return on securities+

The securit. returns (re co5re)(ted to e(ch other b. combinin* the di''erent securities+ The combin(tion o' securities is m(de in such ( 1(. th(t the in-estor *ets m(2imum return 1ith minimum o' ris/+ !n e''icient port'o)io e2ists, 1hen there is )o1est )e-e) o' ris/ 'or ( speci'ied )e-e) o' e2pected return (nd hi*hest e2pected return 'or ( speci'ied (mount o' port'o)io ris/+ The ris/ o' port'o)io c(n be reduced b. (ddin* in-estments in the port'o)io+

VII.

SH"RPE7S THEOR(3 ,i))i(m Sh(rpe h(s su**ested ( simp)i'ied method o'

di-ersi'ic(tion o' port'o)ios+ He h(s m(de the estim(tes o' the e2pected return (nd -(ri(nce o' inde2es 1hich (re re)(ted to economic (cti-it.+ Sh(rpe?s Theor. (ssumes th(t securities returns (re re)(ted to e(ch other on). throu*h common re)(tionships 1ith b(sic under).in* '(ctor i+e+ m(r/et return inde2+ Indi-idu() securities return is determined so)e). b. r(ndom '(ctors (nd on its re)(tionship to this under).in* '(ctor 1ith the 'o))o1in* 'ormu)(@ Ri G ai L 2i I L ei

8here, Ri re'ers to e2pected return on securit. ai G the intercept o' ( str(i*ht )ine or ()ph( coe''icient 2i G s)ope o' str(i*ht5)ine or bet( coe''icient I G )e-e) o' m(r/et return inde2 ei G error, i+e+ residu() ris/ o' the comp(n.+

+*

Reformers Business School Indore

R$LES TO 2E FOLLO8ED 2EFORE IN1EST!ENT IN PORTFOLIO7S

4 Compi)e the 'in(nci()s o' the comp(nies in the immedi(te p(st 9 .e(rs such (s turno-er, *ross pro'it, net pro'it be'ore t(2, comp(re the pro'it e(rnin* o' comp(n. 1ith th(t o' the industr. (-er(*e n(ture o' product m(nu'(cture ser-ice render (nd it 'uture dem(nd ,/no1 (bout the promoters (nd their b(c/ *round, di-idend tr(c/ record, bonus sh(res in the p(st 9 to M .e(rs ,re')ects comp(n.?s commitment to sh(re ho)ders the re)e-(nt in'orm(tion c(n be (ccessed 'rom the R C %Re*istr(nt o' Comp(nies& pub)ished 'in(nci() resu)ts 'in(nced 3u(rters, journ()s (nd )ed*ers+

'4 ,(tch out the hi*hs (nd )o1s o' the scripts 'or the p(st 6 to 9 .e(rs (nd their timin* c.c)ic() scripts h(-e ( tendenc. to repe(t their per'orm(nce, this h.pothesis c(n be true o' ()) other 'in(nci(),

*4 The hi*her the tr(din* -o)ume hi*her is )i3uidit. (nd sti)) hi*her the ch(nce o' specu)(tion, it is 'uti)e to in-est in such sh(res 1ho?s d(i). mo-ements c(nnot be /ept tr(c/, i' .ou 1(nt to re(p rich returns /eep in-estment o-er ()on* hori4on (nd it 1i)) o''set the 1i)d intr(d(. tr(din* ')uctu(tion?s, the minor mo-ement o' scripts m(. be i*nored, 1e must remember th(t sh(re m(r/et mo-es in ph(ses (nd the sp(n o' e(ch ph(se is O months to M .e(rs+

++

Reformers Business School Indore

CHAPTER 6
PERSONS IN1OL1ED IN PORTFOLIO !"N"GE!ENT
4 IN1ESTOR3 !re the peop)e 1ho (re interested in in-estin* their 'undsD '4 PORTFOLIO !"N"GERS3 Is ( person 1ho is in the 1(/e o' ( contr(ct (*reement 1ith ( c)ient, (d-ices or directs or undert(/es on beh()' o' the c)ients, the m(n(*ement or distribution or m(n(*ement o' the 'unds o' the c)ient (s the c(se m(. be+ *4 DISCRETION"R( PORTFOLIO !"N"GER3 Me(ns ( m(n(*er 1ho e2ercise under ( contr(ct re)(tin* to ( port'o)io m(n(*ement e2ercise (n. de*ree o' discretion (s to the in-estment or m(n(*ement o' port'o)io or securities or 'unds o' c)ients (s the c(se m(. be+ The re)(tionship bet1een (n in-estor (nd port'o)io m(n(*er is o' ( hi*h). inter(cti-e n(ture+ The port'o)io m(n(*er c(rries out ()) the tr(ns(ctions pert(inin* to the in-estor under the po1er o' (ttorne. durin* the )(st t1o dec(des, (nd incre(sin* comp)e2it. 1(s 1itnessed in the c(pit() m(r/et (nd its tr(din* procedures in this conte2t ( /e. %unin'ormed& in-estor 'ormed & in-estor 'ound himse)' in ( tric/. situ(tion , to /eep tr(c/ o' m(r/et mo-ement ,upd(te his /no1)ed*e, .et st(. in the c(pit() m(r/et (nd m(/e mone. , there'ore in )oo/ed 'or1(rd to resumin* he)p 'rom port'o)io m(n(*er to do the job 'or him + The port'o)io m(n(*ement see/s to stri/e ( b()(nce bet1een ris/?s (nd return+ The *ener()). ru)e in th(t *re(ter ris/ more o' the pro'its but S+E+B+I+ in its *uide)ines prohibits port'o)io m(n(*ers to promise (n. return to in-estor+ $ort'o)io m(n(*ement is not ( substitute to the inherent ris/s (ssoci(ted 1ith e3uit. in-estment+

+,

Reformers Business School Indore 8HO C"N 2E " PORTFOLIO !"N"GERP

On). those 1ho (re re*istered (nd p(. the re3uired )icense 'ee (re e)i*ib)e to oper(te (s port'o)io m(n(*ers+ !n (pp)ic(nt 'or this purpose shou)d h(-e necess(r. in'r(structure 1ith pro'ession()). 3u()i'ied persons (nd 1ith ( minimum o' t1o persons 1ith e2perience in this business (nd ( minimum net 1orth o' Rs+ ML)(/h?s+ The certi'ic(te once *r(nted is -()id 'or three .e(rs+ Fees p(.(b)e 'or re*istr(tion (re Rs 6+M)(/h?s e-er. 'or t1o .e(rs (nd Rs+7)(/h?s 'or the third .e(r+ From the 'ourth .e(r on1(rds, rene1() 'ees per (nnum (re Rs PMLLL+ These (re subjected to ch(n*e b. the S+E+B+I+

The S+E+B+I+ h(s imposed ( number o' ob)i*(tions (nd ( code o' conduct on them+ The port'o)io m(n(*er shou)d h(-e ( hi*h st(nd(rd o' inte*rit., honest. (nd shou)d not h(-e been con-icted o' (n. economic o''ence or mor() turpitude+ He shou)d not resort to ri**in* up o' prices, insider tr(din* or cre(tin* '()se m(r/ets, etc+ their boo/s o' (ccounts (re subject to inspection to inspection (nd (udit b. S+E+B+I+++ The obser-(nce o' the code o' conduct (nd *uide)ines *i-en b. the S+E+B+I+ (re subject to inspection (nd pen()ties 'or -io)(tion (re imposed+ The m(n(*er h(s to submit periodic() returns (nd documents (s m(. be re3uired b. the SEBI 'rom time5to5 time+

+-

Reformers Business School Indore F$NCTIONS OF PORTFOLIO !"N"GERS3

"95is6r@ r6;e3 !d-ice ne1 in-estments, re-ie1 the e2istin* ones, identi'ic(tion o' objecti-es, recommendin* hi*h .ie)d securities etc+ C6n9u:tin< market an9 e:6n6mi: ser5i:e3 This is essenti() 'or recommendin* *ood .ie)din* securities the. h(-e to stud. the current 'isc() po)ic., bud*et propos()= indi-idu() po)icies etc 'urther port'o)io m(n(*er shou)d t(/e in to (ccount the credit po)ic., industri() *ro1th, 'orei*n e2ch(n*e possib)e ch(n*e in corpor(te )(1?s etc+ Finan:ia; ana;@sis3 He shou)d e-()u(te the 'in(nci() st(tement o' comp(n. in order to underst(nd, their net 1orth 'uture e(rnin*s, prospectus (nd stren*th+ Stu9@ 6> st6:k market 3 He shou)d obser-e the trends (t -(rious stoc/ e2ch(n*e (nd (n().sis scripts so th(t he is (b)e to identi'. the ri*ht securities 'or in-estment Stu9@ 6> in9ustr@3 He shou)d stud. the industr. to /no1 its 'uture prospects, technic() ch(n*es etc, re3uired 'or in-estment propos() he shou)d ()so see the prob)em?s o' the industr.+ De:i9e the t@?e 6> ?6rt >6;i63 0eepin* in mind the objecti-es o' port'o)io ( port'o)io m(n(*er h(s to decide 1hether the port'o)io shou)d comprise e3uit. pre'erence sh(res, debentures, con-ertib)es, non5con-ertib)es or p(rt). con-ertib)es, mone. m(r/et, securities etc or ( mi2 o' more th(n one t.pe o' proper mi2 ensures hi*her s('et., .ie)d (nd )i3uidit. coup)ed 1ith b()(nced ris/ techni3ues o' port'o)io m(n(*ement+ ! port'o)io m(n(*er in the Indi(n conte2t h(s been Bro/ers %Bi* bro/ers& 1ho on the b(sis o' their e2perience, m(r/et trends, Insider tr(der, he)ps the )imited /no1)ed*e persons+ The one?s 1ho use to m(n(*e the 'unds o' port'o)io, no1 bein* m(n(*ed b. the port'o)io o' Merch(nt B(n/?s, pro'ession()?s )i/e MB!?s C!?s !nd m(n. 'in(nci() institution?s h(-e entered the m(r/et in ( bi* 1(. to m(n(*e port'o)io 'or their c)ients+ !ccordin* to S+E+B+I+ ru)es it is m(nd(tor. 'or port'o)io m(n(*ers to *et them se)'?s re*istered+ Re*istered merch(nt b(n/ers c(n (ct?s (s port'o)io m(n(*ers+ In-estor?s must )oo/ 'or1(rd, 'or 3u()i'ic(tion (nd per'orm(nce (nd (bi)it. (nd rese(rch b(se o' the port'o)io m(n(*ers+
+.

Reformers Business School Indore NEED "ND ROLE OF PORTFOLIO !"N"GER3

,ith the de-e)opment o' Indi(n Securities m(r/et (nd 1ith (ppreci(tion in m(r/et price o' e3uit. sh(re o' pro'it m(/in* comp(nies, in-estment in the securities o' such comp(nies h(s become 3uite (ttr(cti-e+ !t the s(me time, the stoc/ m(r/et becomin* -o)(ti)e on (ccount o' -(rious '(cts, ( )(.m(n is pu44)ed (s to ho1 to m(/e his in-estments 1ithout )osin* the s(me+ He h(s 'e)t the need o' (n e2pert *uid(nce in this respect+ Simi)(r). non resident Indi(ns (re e(*er to m(/e their in-estments in Indi(n comp(nies+ The. h(-e ()so to comp). 1ith the conditions speci'ied b. the RESER"E B!N0 OF IN I! under -(rious schemes 'or in-estment b. the non residents+ The port'o)io m(n(*er 1ith his b(c/*round (nd e2pertise meets the needs o' such in-estors b. renderin* ser-ice in he)pin* them to in-est their 'undAs pro'it(b).+

PORTFOLIO !"N"GER7S O2LIG"TION3

The port'o)io m(n(*er h(s number o' ob)i*(tions to1(rds his c)ients, some o' them (re@ He sh()) tr(ns(ct in securities 1ithin the )imit p)(ced b. the c)ient himse)' 1ith re*(rd to de()in* in securities under the pro-isions o' Reser-e B(n/ o' Indi( !ct, 789J+ He sh()) not deri-e (n. direct or indirect bene'it out o' the c)ient?s 'unds or securities+ He sh()) not p)ed*e or *i-e on )o(n securities he)d on beh()' o' his c)ient to ( third person 1ithout obt(inin* ( 1ritten permission 'rom such c)ients+ ,hi)e de()in* 1ith his c)ient?s 'unds, he sh()) not indu)*e in specu)(ti-e tr(ns(ctions+ He m(. ho)d the securities in the port'o)io (ccount in his o1n n(me on beh()' o' his c)ient?s on). i' the contr(ct so pro-ides+ In such ( c(se, his records (nd his report to his c)ients shou)d c)e(r). indic(te th(t such securities (re he)d b. him on beh()' o' his c)ient+ He sh()) dep)o. the mone. recei-ed 'rom his c)ient 'or (n in-estment purpose (s soon (s possib)e 'or th(t purpose+ He sh()) p(. the mone. due (nd p(.(b)e to ( c)ient 'orth1ith+ He sh()) not p)(ce his interest (bo-e those o' his c)ients+ He sh()) not disc)ose to (n. person or (n. con'identi() in'orm(tion (bout his c)ient, 1hich h(s come to his /no1)ed*e+
+/

Reformers Business School Indore

CONCL$SION
From the (bo-e discussion it is c)e(r th(t port'o)io 'unctionin* is b(sed on m(r/et ris/, so one c(n *et the he)p 'rom the pro'ession() port'o)io m(n(*er or the Merch(nt b(n/er i' re3uired be'ore in-estment bec(use (pp)ic(bi)it. o' pr(ctic() /no1)ed*e throu*h technic() (n().sis c(n he)p (n in-estor to reduce ris/+ In other 1ords Securit. prices (re determined b. mone. m(n(*er (nd home m(n(*ers, students (nd stri/ers, doctors (nd do* c(tchers, )(1.ers (nd )(ndsc(pers, the 1e()th. (nd the 1(ntin*+ This bre(dth o' m(r/et p(rticip(nts *u(r(ntees (n e)ement o' unpredict(bi)it. (nd e2citement+ I' 1e 1ere ()) tot()). )o*ic() (nd cou)d sep(r(te our emotions 'rom our in-estment decisions then, the determin(tion o' price b(sed on 'uture e(rnin*s 1ou)d 1or/ m(*ni'icent).+ !nd since 1e 1ou)d ()) h(-e the s(me comp)ete). )o*ic() e2pect(tions, price 1ou)d on). ch(n*e 1hen 3u(rter). reports or re)e-(nt ne1s 1(s re)e(sed+

:I be)ie-e the 'uture is on). the p(st (*(in, entered throu*h (nother *(te< KSir !rthur 1in* $inero+ 7Q89+

I' price (re b(sed on in-estors? e2pect(tions, then /no1in* 1h(t ( securit. shou)d se)) 'or become )ess import(nt th(n /no1in* 1h(t other in-estors e2pect it to se)) 'or+ :There (re t1o times o' ( m(n?s )i'e 1hen he shou)d not specu)(te= 1hen he c(n?t (''ord it (nd 1hen he c(n< K M(r/ T1in, 7Q8P+

! C(sino m(/e mone. on ( rou)ette 1hee), not b. /no1in* 1h(t number 1i)) come up ne2t, but b. s)i*ht). impro-in* their odds 1ith the (ddition o' ( :L< (nd :LL<+ #et m(n. in-estors bu. securities 1ithout (ttemptin* to contro) the odds+ I' 1e be)ie-e th(t this de()in*s is not ( GB(mb)in*< 1e h(-e to st(rt up it 1ith inte))i*ent 1(.+

+1

Reformers Business School Indore

I c(n conc)ude 'rom this project th(t port'o)io m(n(*ement h(s become (n import(nt ser-ice 'or the in-estors to identi'. the comp(nies 1ith *ro1th potenti()+ $ort'o)io m(n(*ers c(n pro-ide the pro'ession() (d-ice to the in-estors to m(/e (n inte))i*ent (nd in'ormed in-estment+

$ort'o)io m(n(*ement ro)e is sti)) not identi'ied in the recent time but due it e2p(nsion o' in-estors m(r/et (nd *ro1in* comp)e2ities o' the in-estors the ser-ices o' the port'o)io m(n(*ers 1i)) be in *re(t dem(nd in the ne(r 'uture+

Tod(. the indi-idu() in-estors do not sho1 interest in t(/in* pro'ession() he)p but sure). 1ith the *ro1in* import(nce (nd (1(reness re*(rdin* port'o)io?s m(n(*er?s peop)e 1i)) de'inite). pre'er to t(/e pro'ession() he)p+

,2

Reformers Business School Indore

BIBLIOGRAPHY

REFERENCE 2OO-S3
Se:urit@ "na;@sis an9 P6rt>6;i6 !ana<ement # Dr. P.-.2"NDG"R In5estment "na;@sis an9 P6rt>6;i6 !ana<ement

WEBLIOGRAPHY
SO$RCES3
AAA.<66<;e.:6m AAA.@ah66.:6m AAA.Aiki?e9ia.:6m

,(