1.

1 INTRODUCTION
Portfolio management and investment decision as a concept
came to be familiar with the conclusion of second world war when thing can be in the
stock market can be liberally ruined the fortune of individual, companies ,even
government s it was then discovered that the investing in various scripts instead of
putting all the money in a single securities yielded

weather return with low risk

percentage, it goes to the credit of HARY MERKOWITZ, 1991 noble laurelled to have
pioneered the concept of combining high yielded securities with these low but steady
yielding securities to achieve optimum correlation coefficient of shares.
Portfolio management refers to the management of portfolios for others by
professional investment managers it refers to the management of an individual investors
portfolio by professionally qualified person ranging from merchant banker to specified
portfolio company.
Definition by SEBI
A portfolio management is the total holdings of securities belonging to any person.
Portfolio is a combination of securities that have returns and risk characteristics of their
own; port folio may not take on the aggregate characteristics of their individual parts.
Thus a portfolio is a combination of various assets and /or instruments of
investments. Combination may have different features of risk and return separate from
those of the components. The portfolio is also built up of the wealth or income of the
investor over a period of time with a view to suit is return or risk preference to that of the
portfolio that he holds. The portfolio analysis is thus an analysis is thus an analysis of risk
return characteristics of individual securities in the portfolio and changes that may take
place in combination with other securities due interaction among them and impact of
each on others. Security analysis is only a tool for efficient portfolio management; both of
them together and cannot be dissociated. Portfolios are combination of assets held by the
investors.
These combination may be various assets classed like equity and debt or of different
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issues like Govt. bonds and corporate debts are of various instruments like discount
bonds, debentures and blue chip equity nor scripts of emerging Blue chip companies.
Portfolio analysis includes portfolio construction, selection of securities revision
of portfolio evaluation and monitoring of the performance of the portfolio. All these are
part of the portfolio management.
The traditional portfolio theory aims at the selection of such securities that would
fit in will with the asset preferences, needs and choices of the investors. Thus, retired
executive invests in fixed income securities for a regular and fixed return. A business
executive or a

young aggressive investor on the other hand invests in and rowing

companies and in risky ventures.

The modern portfolio theory postulates that maximization of returns and
minimization of risk will yield optional returns and the choice and attitudes of investors
are only a starting point for investment decisions and that vigorous risk returns analysis is
necessary for optimization of returns. Portfolio analysis includes portfolio construction,
selection of securities, and revision of portfolio evaluation and monitoring of the
performance of the portfolio. All these are part of the portfolio management.
1.2 NEED OF STUDY

Portfolio management or investment helps investors in effective and efficient

management of their investment to achieve this goal. The rapid growth of capital markets
in India has opened up new investment avenues for investors.

The stock markets have become attractive investment options for the common
man. But the need is to be able to effectively and efficiently manage investments in order
to keep maximum returns with minimum risk.
Hence this study on portfolio management & investment decision to
examine the role process and merits of effective investment management and decision.

1.3 OBJECTIVES

To study the investment decision process.

To analysis the risk return characteristics of sample scripts.

To Ascertain portfolio weights.

To construct an effective portfolio which offers the maximum return for minimum risk.

1.4 SCOPE

Sample size : 5 years

To ascertain risk, return and weights.

1.5 METHODOLOGY
Primary source
Information gathered from interacting with various investors in the market how they
diversified their investments regards their Risks & Returns.
Secondary source
Daily prices of scripts from news papers and from the textbooks and other magazines
Websites.

1.6 LIMITATIONs

Only six samples have been selected for constructing a portfolio.

Share prices of scripts of 5 years period was taken from (2012-2016)

A portfolio is a collection of investments held by an institution or a private

individual. In building up an investment portfolio a financial institution will typically
conduct its own investment analysis, whilst a private individual may make use of the
services of a financial advisor or a financial institution which offers portfolio
management services. Holding a portfolio is part of an investment and risk-limiting
strategy called diversification. By owning several assets, certain types of risk (in
particular specific risk) can be reduced. The assets in the portfolio could include stocks,
bonds, options, warrants, gold certificates, real estate, futures contracts, production
facilities, or any other item that is expected to retain its value.
Portfolio management involves deciding what assets to include in the portfolio,
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given the goals of the portfolio owner and changing economic conditions. Selection
involves deciding what assets to purchase, how many to purchase, when to purchase
them, and what assets to divest. These decisions always involve some sort of performance
measurement, most typically expected return on the portfolio, and the risk associated with
this return (i.e. the standard deviation of the return). Typically the expected returns from
portfolios, comprised of different asset bundles are compared.
The unique goals and circumstances of the investor must also be considered. Some
investors are more risk averse than others. Mutual funds have developed particular
techniques to optimize their portfolio holdings.
Thus, portfolio management is all about strengths, weaknesses, opportunities and
threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety
and numerous other trade-offs encountered in the attempt to maximize return at a
given appetite for risk.
Aspects of Portfolio Management
Basically portfolio management involves

A proper investment decision making of what to buy & sell

Proper money management in terms of investment in a basket of assets so as to satisfy the

asset preferences of investors.

Reduce the risk and increase returns.

ELEMENTS
Portfolio Management is an on-going process involving the following basic tasks.

Identification of the investors objective, constrains and preferences which help

formulated the invest policy.

Strategies are to be developed and implemented in tune with invest policy formulated.
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This will help the selection of asset classes and securities in each class depending upon
their risk-return attributes.

Review and monitoring of the performance of the portfolio by continuous overview of

the market conditions, companys performance and investors circumstances.

Finally, the evaluation of portfolio for the results to compare with the targets and needed
adjustments have to be made in the portfolio to the emerging conditions and to make up
for any shortfalls in achievements (targets).

SCHEMATIC DIAGRAM OF STAGES IN PORTFOLIO MANAGEMENT

Specification and quantification of investor objectives, constraints, and preferences

Portfolio policies and strategies
Capital market expectations
Relevant economic, social, political sector and security considerations
Monitoring investor related input factors
Portfolio construction and revision asset allocation, portfolio optimization, security
selection, implementation and execution
Monitoring economic and market input factors
Attainment of investor objectives
Performance measurement

Process of portfolio management

The Portfolio Program and Asset Management Program both follow a disciplined
process to establish and monitor an optimal investment mix. This six-stage process helps
ensure that the investments match investors unique needs, both now and in the future.

1. IDENTIFY GOALS AND OBJECTIVES

When will you need the money from your investments? What are you saving your
money for? With the assistance of financial advisor, the Investment Profile
Questionnaire will guide through a series of questions to help identify the goals and
objectives for the investments.

2. DETERMINE OPTIMAL INVESTMENT MIX

Once the Investment Profile Questionnaire is completed, investors optimal
investment mix or asset allocation will be determined. An asset allocation represents
the mix of investments (cash, fixed income and equities) that match individual risk
and return needs.
This step represents one of the most important decisions in your portfolio
construction, as asset allocation has been found to be the major determinant of longterm portfolio performance.

3. CREATE A CUSTOMIZED INVESTMENT POLICY STATEMENT

When the optimal investment mix is determined, the next step is to formalize our
goals and objectives in order to utilize them as a benchmark to monitor progress and
future updates.

4. SELECT INVESTMENTS
The customized portfolio is created using an allocation of select QFM Funds.
Each QFM Fund is designed to satisfy the requirements of a specific asset class, and
is selected in the necessary proportion to match the optimal investment mix.
5. MONITOR PROGRESS
Building an optimal investment mix is only part of the process. It is equally important
to maintain the optimal mix when varying market conditions cause investment mix to
drift away from its target. To ensure that mix of asset classes stays in line with
investors unique needs, the portfolio will be monitored and rebalanced back to the
optimal investment mix
6. REASSESS NEEDS AND GOALS
Just as markets shift, so do the goals and objectives of investors. With the flexibility
of the Portfolio Program and Asset Management Program, when the investors
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needs or other life circumstances change, the portfolio has the flexibility to
accommodate such changes.
RISK
Risk refers to the probability that the return and therefore the value of an asset or security
may have alternative outcomes. Risk is the uncertainty (today) surrounding the eventual
outcome of an event which will occur in the future. Risk is uncertainty of the
income/capital appreciation or loss of both. All investments are risky. The higher the risk
taken, the higher is the return. But proper management of risk involves the right choice of
investments whose risks are compensation.
RETURN
Return-yield or return differs from the nature of instruments, maturity period and the
creditor or debtor nature of the instrument and a host of other factors. The most important
factor influencing return is risk return is measured by taking the price income plus the
price change.
PORTFOLIO RISK
Risk on portfolio is different from the risk on individual securities. This risk is reflected
by in the variability of the returns from zero to infinity. The expected return depends on
probability of the returns and their weighted contribution to the risk of the portfolio.

RETURN ON PORTFOLIO
Each security in a portfolio contributes returns in the proportion of its investment in
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security. Thus the portfolio of expected returns, from each of the securities with weights
representing the proportionate share of security in the total investments.

RISK RETURN RELATIONSHIP

The risk/return relationship is a fundamental concept in not only financial analysis, but in
every aspect of life. If decisions are to lead to benefit maximization, it is necessary that
individuals/institutions consider the combined influence on expected (future) return or
benefit as well as on risk/cost. The requirement that expected return/benefit be
commensurate with risk/cost is known as the "risk/return trade-off" in finance.
All investments have some risks. An investment in shares of companies has its own risks
or uncertainty. These risks arise out of variability of returns or yields and uncertainty of
appreciation or depreciation of share prices, loss of liquidity etc. and the overtime can be
represented by the variance of the returns. Normally, higher the risk that the investors
take, the higher is the return.

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TYPES OF RISKS
Risk consists of two components. They are

1.

Systematic Risk

2.

Un-systematic Risk

1.SYSTEMATIC RISK
Systematic risk refers to that portion of total variability in return caused by factors
affecting the prices of all securities. Economic, Political and sociological changes are
sources of systematic risk. Their effect is to cause prices of nearly all individual common
stocks and/or all individual bonds to move together in the same manner.
i.

Market Risk
Variability in return on most common stocks that are due to basic sweeping changes in
investor expectations is referred to as market risk. Market risk is caused by investor
reaction to tangible as well as intangible events.

ii.

Interest rate-Risk
Interest rate risk refers to the uncertainty of future market values and of the size of
future income, caused by fluctuations in the general level of interest rates.

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iii.

Purchasing-Power Risk
Purchasing power risk is the uncertainty of the purchasing power of the amounts to be
received. In more events everyday terms, purchasing power risk refers to the impact of or
deflation on an investment.
3.UNSYSTEMATIC RISK
Unsystematic risk is the portion of total risk that is unique to a firm or industry.
Factors such as management capability, consumer preferences, and labor strikes Cause
systematic variability of return in a firm. Unsystematic factors are largely independent of
factors affecting securities markets in general. Because these factors affect one firm, they
must be examined for each firm.
Unsystematic risk that portion of risk that is unique or peculiar to a firm or an industry,
above and beyond that affecting securities markets in general. Factors such as
management capability, consumer preferences, and labor strikes can cause unsystematic
variability of return for a companys stock.

i.

Business Risk
Business risk is a function of the operating conditions faced by a firm and the variability
these conditions inject into operating income and expected dividends.
Business risk can be divided into two broad categories

a.
b.

Internal Business Risk

External Business Risk
a. Internal business risk is associated with the operational efficiency of the firm. The
operational efficiency differs from company to company. The efficiency of operation
is reflected on the companys achievement of its pre-set goals and the fulfillment of
the promises to its investors.
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b. External business risk is the result of operating conditions imposed on the firm by
circumstances beyond its control. The external environments in which it operates
exert some pressure on the firm. The external factors are social and regulatory factors,
monetary and fiscal policies of the government, business cycle and the general
economic environment within which a firm or an industry operates.
ii.

Financial Risk
Financial risk is associated with the way in which a company finances its activities.
Financial risk is avoided risk to the extent that management has the freedom to decide to
borrow or not to borrow funds. A firm with no debit financing has no financial risk
MARKOWITZ MODEL

THE MEAN VARIANCE CRITERION

Dr. Harry M. Markowitz is credited with developing the first modern portfolio analysis
model in order to arrange for the optimum allocation of assets with in portfolio. To reach
these objectives, Markowitz generated portfolio with in a reward risk context. In essence,
Markowitz model is a theoretical framework for the analysis of risk return choices.
Decisions are based on the concept of efficient portfolios.
Markowitz model is a theoretical framework for the analysis of risk, return choices
and this approach determines an efficient set of portfolio return through three important
variable that is,

Return
Standard Deviation
Coefficient of correlation
Markowitz model is also called as a Full Covariance Model. Through this model the
investor can find out the efficient set of portfolio by finding out the trade off between risk
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and return, between the limits of zero and infinity. According to this theory, the effect of
one security purchase over the effects of the other security purchase is taken into
consideration and then the results are evaluated. Markowitz had given up the single stock
portfolio and introduced diversification. The single stock portfolio would be preferable if
the investor is perfectly certain that his expectation of highest return would turn out to be
real. In the world of uncertainty, most of the risk averse investors would like to join
Markowitz rather than keeping a single stock, because diversification reduces the risk.
A portfolio is efficient when it is expected to yield the highest return for the level of risk
accepted or, alternatively the smallest portfolio risk for a specified level of expected
return level chosen, and asset are substituted until the portfolio combination expected
returns, set of efficient portfolio is generated.

Assumptions

The Markowitz model is based on several assumptions regarding investor behavior:

1.

Investors consider each investment alternative as being represented by a probability

2.

distribution of expected returns over some holding period.

Investors maximize one period-expected utility and possess utility curve, which

demonstrates diminishing marginal utility of wealth.

3. Individuals estimate risk on the basis of variability of expected return.
4. Investors base decisions solely on expected return and variance of return only.
5. For a given risk level, investors prefer high returns to lower returns. Similarly for a given
level of expected return, investors prefer less risk to more risk.
Under these assumptions, a single asset or portfolio of assets is considered to be
efficient if no other asset or portfolio of assets higher expected return with the same
expected return.

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THE SPECIFIC MODEL

In developing this model, Markowitz first disposed of the investor behavior rule that
the investor should maximize expected return. This rule implies non-diversified single
security analysis portfolio with the highest expected return is the most desirable portfolio.
Only by buying that single security portfolio would obviously be preferable if the
investor were perfectly certain that this highest expected return would turn out to be the
actual return. However, under real world conditions of uncertainty, most risk adverse
investors join with Markowitz in discarding the role of calling for maximizing the
expected returns. As an alternative, Markowitz offers the expected returns/variance
rule.
Markowitz has shown the effect of diversification by regarding the risk of securities.
According to him, the security with the covariance, which is either negative or low
amongst them, is the best manner to reduce risk. Markowitz has been able to show that
securities, which have, less than positive correlation will reduce risk with out, in any way,
bringing the return down. According to his research study a low correlation level between
securities in the portfolio will show less risk. According to him, investing in a large
number of securities is not the right method of investment. It is the right kind of security
that brings the maximum results.

Henry Markowitz has given the following formula for a two-security portfolio and three
security portfolios.

= (x1)2 (1)2 + (X2)2 (2)2 + 2(X1)(X2)(r12)(1) (2)

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= (x1)2(1)2+(X2)2(2)2 + (X3)2(3)2 +2(X1)(X2)(r12)(1) (2)+ 2(X1)(X3)(r13)(1)

(3)+ 2(X2)(X3)(r23)(2) (3)

p =

Standard deviation of the portfolio return

X1= proportion of the portfolio invested in security 1

X2= proportion of the portfolio invested in security 2
X3= proportion of the portfolio invested in security 3
1= standard deviation of the return on security 1
2= standard deviation of the return on security 2
3= standard deviation of the return on security 3
r12= coefficient of correlation between the returns on securities 1 and 2
r13= coefficient of correlation between the returns on securities 1 and 3
r23= coefficient of correlation between the returns on securities 2 and 3

CAPITAL ASSET PRICING MODEL: (CAPM)

The CAPM is a model for pricing an individual security (asset) or a portfolio. For
individual security perspective, the security market line (SML) is used and its relation to
expected return and systematic risk (beta) to show how the market must price individual
securities in relation to their security risk class. The SML enables us to calculate the
reward-to-risk ratio for any security in relation to that of the overall market. Therefore,
when the expected rate of return for any security is deflated by its beta coefficient, the
reward-to-risk ratio for any individual security in the market is equal to the market
reward-to-risk ratio, thus:

Individual securitys / beta =

Reward-to-risk ratio
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Markets securities (portfolio)

Reward-to-risk ratio

,
The Security Market Line, seen here in a graph, describes a relation between the beta and
the asset's expected rate of return

The market reward-to-risk ratio is effectively the market risk premium and by rearranging
the above equation and solving for E (Ri), we obtain the Capital Asset Pricing Model
(CAPM).

Where:
is the expected return on the capital asset

is the risk-free rate of interest

(the beta coefficient) the sensitivity of the asset returns to market returns, or also

,
is the expected return of the market

is sometimes known as the market premium or risk premium (the

18

difference between the expected market rate of return and the risk-free rate of return).
Beta measures the volatility of the security, relative to the asset class. The equation is
saying that investors require higher levels of expected returns to compensate them for
higher expected risk. We can think of the formula as predicting a security's behavior as a
function of beta:
CAPM says that if we know a security's beta then we know the value of r that
investors expect it to have.

Assumptions of CAPM

All investors have rational expectations.

There are no arbitrage opportunities.
Returns are distributed normally.
Fixed quantity of assets.
Perfectly efficient capital markets.
Investors are solely concerned with level and uncertainty of future wealth
Separation of financial and production sectors. Thus, production plans are fixed.
Risk-free rates exist with limitless borrowing capacity and universal access.
The Risk-free borrowing and lending rates are equal.
No inflation and no change in the level of interest rate exists.
Perfect information, hence all investors have the same expectations about security returns
for any given time period.
Shortcomings Of CAPM

The model assumes that asset returns are (jointly) normally distributed random variables.
It is however frequently observed that returns in equity and other markets are not

normally distributed.
The model assumes that the variance of returns is an adequate measurement of risk.
The model does not appear to adequately explain the variation in stock returns.
The model assumes that given a certain expected return investors will prefer lower risk
(lower variance) to higher risk and conversely given a certain level of risk will prefer

higher returns to lower ones.

The model assumes that all investors have access to the same information and agree
about the risk and expected return of all assets. (Homogeneous expectations

assumption)
The model assumes that there are no taxes or transaction costs.
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The market portfolio consists of all assets in all markets, where each asset is weighted by
its market capitalization. This assumes no preference between markets and assets for
individual investors, and that investors choose assets solely as a function of their riskreturn profile. It also assumes that all assets are infinitely divisible as to the amount

which may be held or transacted.

The market portfolio should in theory include all types of assets that are held by anyone
as an investment (including works of art, real estate, human capital...)
Unfortunately, it has been shown that this substitution is not innocuous and can lead to
false inferences as to the validity of the CAPM, and it has been said that due to the in
observability of the true market portfolio, the CAPM might not be empirically testable.

The efficient frontier

The CAPM assumes that the risk-return profile of a portfolio can be optimized - an
optimal portfolio displays the lowest possible level of risk for its level of return.
Additionally, since each additional asset introduced into a portfolio further diversifies the
portfolio, the optimal portfolio must comprise every asset, with each asset valueweighted to achieve the above. All such optimal portfolios, i.e., one for each level of
return, comprise the efficient frontier.
A line created from the risk-reward graph, comprised of optimal portfolios.

20

The optimal portfolios plotted along the curve have the highest expected return
possible for the given amount of risk.

Because the unsystemic risk is diversifiable, the total risk of a portfolio can be viewed as
beta.

21

Note 1: The expected market rate of return is usually measured by looking at the
arithmetic average of the historical returns on a market portfolio.
Note 2: The risk free rate of return used for determining the risk premium is usually
the arithmetic average of historical risk free rates of return and not the current risk
free rate of return.
Measuring the Expected Return and Standard Deviation of a Portfolio

The expected return on a portfolio is the weighted average of the returns of individual
assets, where each asset's weight is determined by its weight in the portfolio.
The formula is:
E (Rp) = [WaX E (Ra)] + [WaX E (Ra)]
Where
E= is stands for expected
Rp= Return on the portfolio
Wa= Weight of asset n where n my stand for asset a, betc.
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Ra= Return on asset n where n may stand for asset a, betc

The portfolio standard deviation ( p) measure the risk associated with the expected return
of the portfolio.
The formula is p = wa2 2 + wa2 2 + 2wawbrab a b

The term rab represents the correlation between the returns of investments a and b. The
correlation coefficient, r, will always reduce the portfolio standard deviation as long as it
is less than +1.00.
Portfolio diversification
Diversification

occurs

when

different

assets

make

up

portfolio.

The benefit of diversification is risk reduction; the extent of this benefit depends upon
how the returns of various assets behave over time. The market rewards diversification.
We can lower risk without sacrificing expected return, and/or we can increase expected
return without having to assume more risk. Diversifying among different kinds of assets
is called asset allocation.
The diversification can either be vertical or horizontal.
In vertical diversification a portfolio can have scripts of different companies within the
same industry. In horizontal diversification one can have different scripts chosen from
different industries.
An important way to reduce the risk of investing is to diversify your investments.
Diversification is akin to "not putting all your eggs in one basket."
For example: If portfolio only consisted of stocks of technology companies, it would
likely face a substantial loss in value if a major event adversely affected the technology
industry.

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There are different ways to diversify a portfolio whose holdings are concentrated in one
industry. We can invest in the stocks of companies belonging to other industry groups.
We can allocate our portfolio among different categories of stocks, such as growth, value,
or income stocks. We can include bonds and cash investments in our asset-allocation
decisions. We can also diversify by investing in foreign stocks and bonds.
Diversification requires us to invest in securities whose investment returns do not
move together. In other words, the investment returns have a low correlation. The
correlation coefficient is used to measure the degree to which returns of two securities are
related. As we increase the number of securities in our portfolio, we reach a point where
likely diversified as much as reasonably possible. Diversification should neither be too
much or too less. It should be adequate according to the size of the portfolio.

The Efficient Frontier and Portfolio Diversification

The graph on the shows how volatility increases the risk of loss of principal, and how this
risk worsens as the time horizon shrinks. So all other things being equal, volatility is
24

minimized in the portfolio.

If we graph the return rates and standard deviations for a collection of securities, and for
all portfolios we can get by allocating among them. Markowitz showed that we get a
region bounded by an upward-sloping curve, which he called the efficient frontier.
It's clear that for any given value of standard deviation, we would like to choose a
portfolio that gives you the greatest possible rate of return; so we always want a portfolio
that lies up along the efficient frontier, rather than lower down, in the interior of the
region. This is the first important property of the efficient frontier: it's where the best
portfolios are.

The second important property of the efficient frontier is that it's curved, not straight.
If we take a 50/50 allocation between two securities, assuming that the year-to-year
performance of these two securities is not perfectly in sync -- that is, assuming that the
great years and the lousy years for Security 1 don't correspond perfectly to the great years
and lousy years for Security 2, but that their cycles are at least a little off -- then the
25

standard deviation of the 50/50 allocation will be less than the average of the standard
deviations of the two securities separately. Graphically, this stretches the possible
allocations to the left of the straight line joining the two securities

THE FOUR PILLARS OF DIVERSIFICATION

a.

The yield provided by an investment in a portfolio of assets will be closer to the Mean

b.
c.

Yield than an investment in a single asset.

When the yields are independent - most yields will be concentrated around the Mean.
When all yields react similarly - the portfolio's variance will equal the variance of its

d.

underlying assets.
If the yields are dependent - the portfolio's variance will be equal to or less than the
lowest
Market portfolio
The efficient frontier is a collection of portfolios, each one optimal for a given
amount of risk. A quantity known as the Sharpe ratio represents a measure of the amount
of additional return (above the risk-free rate) a portfolio provides compared to the risk it
carries. The portfolio on the efficient frontier with the highest Sharpe Ratio is known as
the market portfolio, or sometimes the super-efficient portfolio.
This portfolio has the property that any combination of it and the risk-free asset
will produce a return that is above the efficient frontier - offering a larger return for a
given amount of risk than a portfolio of risky assets on the frontier would.

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PORTFOLIO PERFORMANCE EVALUATION

A Portfolio manager evaluates his portfolio performance 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 last stage of investment process, it is a continuous
process. There are number of situations in which an evaluation becomes necessary and
important.
Evaluation has to take into account:

Rate of returns, or excess return over risk free rate.

Level of risk both systematic (beta) and unsystematic and residual risks through proper
diversification.
Some of the models used to evaluate portfolio performance are:

Sharpes ratio
Treynors ratio
Jensens alpha
Sharpes ratio

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A ratio developed by Nobel Laureate William F. Sharpe to measure risk-adjusted

performance. It is calculated by subtracting the risk-free rate from the rate of return for a
portfolio and dividing the result by the standard deviation of the portfolio returns.

The Sharpe ratio tells us whether the returns of a portfolio are due to smart investment
decisions or a result of excess risk. This measurement is very useful because although one
portfolio or fund can reap higher returns than its peers, it is only a good investment if
those higher returns do not come with too much additional risk. The greater a portfolio's
Sharpe ratio, the better its risk-adjusted performance has been.

Treynors ratio
The Treynor ratio is a measurement of the returns earned in excess of that which could
have been earned on a risk less investment.
The Treynor ratio is also called reward-to-volatility ratio. It relates excess return over the
risk-free rate to the additional risk taken; however systematic risk instead of total risk is
used. The higher the Treynor ratio, the better is the performance under analysis.
Treynors ratio = (Average Return of the Portfolio - Average Return of the Risk-Free
Rate) / Beta of the Portfolio
Like the Sharpe ratio, the Treynor ratio (T) does not quantify the value added, if any, of
active portfolio management. It is a ranking criterion only. A ranking of portfolios based
on the Treynor Ratio is only useful if the portfolios under consideration are sub-portfolios
28

of a broader, fully diversified portfolio. If this is not the case, portfolios with identical
systematic risk, but different total risk, will be rated the same.
Jensens alpha
An alternative method of ranking portfolio management is Jensen's alpha, which
quantifies the added return as the excess return above the security market line in the
capital asset pricing model. Jensen's alpha (or Jensen's Performance Index) is used to
determine the excess return of a stock, other security, or portfolio over the security's
required rate of return as determined by the Capital Asset Pricing Model. This model is
used to adjust for the level of beta risk, so that riskier securities are expected to have
higher returns. The measure was first used in the evaluation of mutual fund managers by
Michael Jensen in the 1970's.
To calculate alpha, the following inputs are needed:
The realized return (on the portfolio),

The market return,

The risk-free rate of return, and

The beta of the portfolio.

Rjt - Rft = j + j (RMt - Rft)

Where
Rjt = average return on portfolio j for period oft
Rft = risk free rate of return for period oft
j = intercept that measures the forecasting ability to the manager
j = systematic risk measure
RMt = average return on the market portfolio for periodt

Portfolio management in India:

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In India, portfolio management is still in its infancy. Barring a few Indian banks, and
foreign banks and UTI, no other agency had professional portfolio managementuntil1987.
After the setting up of public sector Mutual Funds, since 1987, professional portfolio
management, backed by competent research staff became the order of the day. After the
success of mutual funds in portfolio management, a number of brokers and investment
consultants some of whom are also professionally qualified have become portfolio
managers. They have managed the funds of clients on both discretionary and nondiscretionary basis.
The recent CBI probe into the operations of many market dealers has revealed the
unscrupulous practices by banks, dealers and brokers in their portfolio operations. The
SEBI has then imposed stricter rules, which included their registration, a code of conduct
and minimum infrastructure, experience and expertise etc.
The guidelines of SEBI are in the direction of making portfolio management a
responsible professional service to be rendered by experts in the field.
PORTFOLIO ANALYSIS
Portfolio analysis includes portfolio construction, selection of
securities, revision of portfolio evaluation and monitoring the performance of the
portfolio. All these are part of subject of portfolio management which is a dynamic
concept. Individual securities have risk-return characteristics of their own. Portfolios,
which are combinations of securities may or may not take on the aggregate characteristics
of their individuals parts.
Portfolio analysis considers the determination of future risk and return in holding
various blends of individual securities. As we know that expected return from individual
securities carries some degree of risk. Various 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
30

Traditional approach

Modern approach
TRADITIONAL APPROACH
Traditional approach was based on the fact that risk could be measured on each
individual security through the process of finding out the standard deviation and that
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
for the situation. Traditional approach is a comprehensive financial plan for the
individual. It takes into account the individual needs such as housing, life insurance
and pension plans.
Traditional approach basically deals with two major decisions. They are

a.
b.

Determining the objectives of the portfolio

Selection of securities to be included in the portfolio
MODERN APPROACH
Modern approach theory was brought out by Markowitz and Sharpe. It is the
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 approach discusses the
relationship between different securities and then draws inter-relationships of risks
between them. Markowitz gives more attention to the process of selecting the portfolio. It
does not deal with the individual needs.

DATA ANALYSIS
31

Calculation of return of ICICI

Year

Beginning

Ending price(Rs) Dividend(Rs)

price(Rs)
2012
2013
2014
2015
2016

141.45
297.90
375.00
587.70
892.00

295.45
371.35
585.05
891.5
1238.7

7.50
7.50
8.50
8.50
10.00

Table 4.1

Return = Dividend + (Ending Price-Beginning price) 100

Beginning Price

Return (2012) = 7.50+(295.45-141.45) * 100

= 114.17%

141.45
Return (2013) = 7.50+(371.35-297.90)

* 100

= 27.17%

297.90
Return (2014) = 8.50+(585.05-375)

* 100

= 58.28%

375

Return (2015) = 8.50+(891.5-587.70)

587.70
32

* 100

= 53.13%

Return (2016) = 10.00+(1238.7-892)

= 39.98%

* 100

892
Calculation of return of HDFC

Year
2012
2013
2014
2015
2016

Beginning

Ending price

Dividend

Price
358.5
645.9
771
1195
1630

645.55
769.05
1207
1626.9
2877.75

3
3.50
4.50
5.50
7.00

Table 4.2

Return

Dividend + (Ending Price-Beginning price) 100

Beginning Price

Return (2012)

3+(645.55-358.5)

* 100

= 80.9%

358.5

Return (2013)

3.50 + (769.05-645.9) * 100

= 19.60%

645.9
Return (2014)
33

4.50+(1207-771)

* 100

= 57.13%

771
Return (2015)

5.00+(1626.9-1195)

* 100

= 36.6%

1195.9
Return (2016)

7.00+(2877.75-1630)

* 100

76.97%

1630

Calculation of return of ITC

Year

Beginning

Ending price(Rs) Dividend(Rs)

price(Rs)
2012
2013
2014
2015
2016

667
990
1318.95
142
176.5

983.5
1310.75
142.1
176.1
209.45

15
20
31.80
2.65
3.10

Table 4.3

Return

Dividend + (Ending Price-Beginning price) 100

Beginning Price

34

Return(2012)

15 + (983.5-667) * 100

49.7%

667

Return(2013) =

20+ (1310.75-990) *

100

= 34.4%

990

Return(2014)

31+ (142.1-1318.95)*100 =

86.87%

1318.95
Return(2015)

2.65+ (176.1-142) * 100

= 25.8%

142
Return(2016)

3.10+(209.45-176.5) *100 =

20.45

176.5

Calculation of return of COLGATE & PALMOLIVE

Year

Beginning

Ending price(Rs) Dividend(Rs)

price(Rs)
2012
2013
2014
35

133.65
161.5
179.2

159.7
179.1
269.15

6.75
6.75
7.25

2015
2016

270.5
390.9

388.45
382.1

6.00
11.25

Table 4.4

Return

Dividend + (Ending Price-Beginning price) 100

Beginning Price

Return(2012)

6.75+(159.7-133.65) * 100

= 24.5%

133.65

Return(2013) =

6.75+ (179.1-161.5) *

100

= 13.58

161.5

Return(2014)

7.25+(269.15-179.2) * 100

= 54.2

179.2
Return(2015)

6.00+(388.45-270.5) * 100

= 45.8

11.25+(382.1-390.9) * 100

= 0.62

270.5
Return(2016)

390.9
Calculation of return of CIPLA

Year

Beginning

Ending price(Rs) Dividend(Rs)

price(Rs)
2012
36

898.00

1371.05

10.00

2013
2014
2015
2016

1334.00
320.00
447.95
251.5

317.8
448
251.35
212.65

3.00
3.50
2.00
2.00

Table 4.5

Return

Dividend + (Ending Price-Beginning price) 100

Beginning Price

Return(2012)

10.00+(1375.05-898.00) * 100 =

54.23%

898.00

Return(2013)

3.00+(317.8-1334.00)

* 100

-75.95%

41.09%

1334
Return(2014)

3.50+(448-320.00)

* 100

320
Return(2015)

2.00+(251.35-447.95)

* 100

-43.44%

-14.65%

447.95
Return(2016)

2.00+(212.65-251.5)

* 100

251.5
Calculation of return of RANBAXY
Year

Beginning
price(Rs)

37

Ending price(Rs) Dividend(Rs)

2012
2013
2014
2015
2016

598.45
1109.00
1268
363
391

1095.25
1251.15
362.75
391.8
425.5

15.00
17.00
14.50
8.50
8.50

Table 4.6

Return

Dividend + (Ending Price-Beginning price) 100

Beginning Price

Return(2012)

15.00+(1095.25-598.45) * 100

85.52%

14.35%

-70.24%

10.27%

10.99%

598..45

Return(2013)

17.00+(1251.15-1109.00)

* 100

1109
Return(2014) =

14.50+(362.75-1268.00)

* 100

1268.00
Return(2015) =

8.50+(391.8-363)

* 100

363
Return(2016) =

8.50+(425.5-391.00)
391.00

Calculation of standard deviation of ICICI

38

* 100

Year

Return (R)

2012
2013
2014
2015
2016

114.7
27.17
58.28
53.13
39.98
293.26

R-R

58.652
58.652
58.652
58.652
58.652

56.048
-31.482
-0.372
-5.522
-18.672

Table 4.7
_
Average (R) =

= 293.26 = 58.65

_
Variance =

1 (R-R) 2
n-1

Standard Deviation =

Variance

1
4

39

34.846

(11905.379)

_
( R-R )2
3486.6
991.11
0.138384
30.492
348.64
4856.98

Calculation of standard deviation of HDFC

Year

Return (R)

2012
2013
2014
2015
2016

80.9
19.60
57.13
36.6
76.97
271.2

R-R

( R-R )2

54.24
54.24
54.24
54.24
54.24

26.66
-34.64
2.89
-17.64
22.73

710.75
1199.92
8.3521
311.16
516.65
2476.8

Table 4.8
_
Average (R) = R = 271.2 = 54.24
N

_
Variance =

1 (R-R) 2
n-1

Standard Deviation =
40

Variance

(2476.8)

5-1

24.88

Calculation of standard deviation of ITC

Year

Return (R)

2012
2013
2014
2015
2016

49.7
34.4
-86.87
25.8
20.4
43.43

R-R

8.686
8.686
8.686
8.686
8.686

41.04
25.714
-95.556
17.114
11.714

Table 4.9
_
Average (R) = R
N
41

43.43
5

= 8.686

_
( R-R )2
1682.14
661.209
9130.94
293.88
137.21
11905.379

_
Variance =

1 (R-R) 2
n-1

Standard Deviation

Variance

(11905.379)

5-1

S.D

54.55

Calculation of standard deviation of COLGATE&PALMOLIVE

Year

Return (R)

2012
2013
2014
2015
2016

24.5
13.58
54.2
45.8
0.62
138.7

42

R-R

( R-R )2

27.74
27.74
27.74
27.74
27.74
27.74

-3.24
-14.16
26.46
18.06
-27.12

10.5
200.5
700.13
326.16
735.5
1972.79

Table 4.10
__
Average R =

R
N

138.7 = 27.74
5
_

variance

(R-R )2

1
n-1

Standard Deviation

Variance

1 (1972.79)
=

22.2

Calculation of standard deviation of CIPLA

_

R-R

_
( R-R )2

Year

Return (R)

2012

54.23

-7.744

61.974

3840

2013

-75.95

-7.744

-68.206

4652

2014

41.09

-7.744

48.834

2384

43

2015

-43.44

-7.744

-35.696

1274

2016

-14.65

-7.744

-6.906

47.692

-38.72

12197.692

Table 4.11
_
Average (R) = R

-38.72 = -7.744

5
_

Variance

= 1/n-1 (R-R)2

Standard Deviation =

Variance

1 (12197.692)
4
=

55.22

Calculation of standard deviation of RANBAXY

Year

Return (R)

2012
2013
2014
2015
2016

85.52
14.35
-70.24
10.27
10.99
50.89

Table 4.12
_
44

R-R

( R-R )2

75.34
4.17
-80.42
0.09
0.81

5676
17.39
6467
0.0081
0.6561
12161

10.18
10.18
10.18
10.18
10.18

Average (R) = R

= 50.89 = 10.18

N
_

Variance

= 1 (R-R) 2
n-1

Standard Deviation

Variance

(12161)

55.13

Correlation between HDFC & ICICI

DEVIATIONOFHDFC
Year

2012
2013
2014
2015
2016
45

DEVIATION OF ICICI

___

__

RA-RA

RB-RB

26.66
-34.64
2.89
-17.64
22.73

56.048
-31.482
-0.372
-5.522
-18.672

COMBINED DEVIATION
___

___

(RA-RA ) (RB-RB)
1494.24
1090.5
-1.075
97.41
-424.4
2256.675

Table 4.13

__

__

Co-variance (COVAB ) = 1/n (RA-RA) (RB-RB)

t=1

Co-variance (COVAB ) = 1/5 (2256.675)

=

451.335

Correlation Coefficient (PAB) =

COV AB
(Std. A) (Std. B)

451.335
(24.88) (34.846)

46

0.5206

Correlation between ITC&COLGATE - PALMOLIVE

DEVIATIONOF ITC
Year

PALMOLIVE

RA-RA

__

41.04
25.714
-95.556
17.114
11.714

RB-RB
-3.24
-14.16
26.46
18.06
-27.12

__

-132.97
-364.1
-2528.4
309.07
-317.68
-3034.08

__

Co-variance (COVAB ) = 1/n (RA-RA) (RB-RB)

t=1

Co-variance(COVAB )

= 1/5 (-3034.08)
= -606.816

___

___

(RA-RA ) (RB-RB)

Table 4.14

47

COMBINED DEVIATION

COLGATE___

2012
2013
2014
2015
2016

DEVIATION OF

Correlation Coefficient (PAB)

COV AB
(Std. A) (Std. B)

= -

606.816
(54.55) (22.21)

= - 0.5008

Correlation between CIPLA & RANBAXI

Year

2012
2013
2014
2015
2016

DEVIATION 0F

DEVIATION OF

CIPLA

RANBAXI

___

__

RA-RA
61.974
-68.206
48.834
-35.696
-6.906

RB-RB
75.34
4.17
-80.42
0.09
0.81

___

48

__

___

(RA-RA ) (RB-RB)
4669.12
-284.42
-3927.23
-3.213
-5.59
448.667

Table 4.15
n

COMBINED DEVIATION

__

Co-variance (COVAB )

= 1/n (RA-RA) (RB-RB)

t=1

Co-variance(COVAB )

= 1/5 (448.667)
= 89.7334

Correlation Coefficient (PAB) =

COV AB
(Std. A) (Std. B)

89.7334
(55.22)(55.13)

= 0.0295
Correlation between CIPLA& HDFC

DEVIATION OF
Year

2012
2013
2014
2015
2016

Table 4.16

49

DEVIATION OF HDFC

COMBINED DEVIATION

CIPLA
___

__

RA-RA
61.974
-68.206
48.834
-35.696
-6.906

RB-RB
26.06
-34.64
2.89
-17.64
22.73

___

___

(RA-RA ) (RB-RB)
1615.04
2362.66
141.13
629.68
-156.97
4591.54

n
Co-variance (COVAB )

__

= 1/n (RA-RA) (RB-RB)

t=1

Co-variance(COVAB )

= 1/5 (4591.54)
=

Correlation Coefficient (PAB) =

918.31

COV AB
(Std. A) (Std. B)

918.31
(55.22) (24.88)

0.668

STANDARD DEVIATION

COMPANY
50

__

STANDARED DEVIATION

ITC
COLEGATE-

54.55
22.21

PALMOLIVE
HDFC
ICICI
RANBAXY
CIPLA
Table 4.17

24.88
34.846
55.13
55.22

.
Graph 4.1

AVERAGE

51

COMPANY

AVERAGE

ITC
COLGATE&PALMOLIVE
HDFC
ICICI
RANBAXY
CIPLA

8.686
27.74
54.24
58.652
10.18
-7.744

Table 4.18

Table 4.19

52

COMPANY

HDFC&ICICI
ITC&COLGATE
CIPLA&RANBAXY
CIPLA&HDFC

0.5206
0.5008
0.0295
0.668

PORTFOLIO WEIGHTS
HDFC&ICICI

Formula
Xa

(Std.b) 2 p ab (std.a ) (std.b)

(std.a) 2 + (std.b) 2 - 2 pab (std.a) (std.b)

Xb

= 1Xa

Where X a
Xb

= ICICI

Std.a

= 24.88

Std.b

p ab

= 0.5206

Xa
53

HDFC

34.85

(34.85) 2 (0.5206) (24.88 )(34.85)

(24.88) 2 + (34.85)
Xb

= 1Xa

Xa

= 0.8199

Xb

- 2 (0.5206) (24.88) (34.85)

0.1801

PORTFOLIO WEIGHTS
ITC&COLGATE

Formula:
Xa

(Std.b) 2 p ab (std.a ) (std.b)

(std.a) 2 + (std.b) 2 - 2 pab (std.a) (std.b)

Xb

1Xa

Where X a

ITC

COLGATE

Std.a

54.55

54

Xb

Std.b

22.21

p ab

0.5008

Xa

(22.21) 2 (0.5008) (54.55 )(22.21)

(54.55) 2 + (22.21)

Xb

- 2 (0.5008) (54.55) (22.21)

1Xa

Xa

= 0.0503

Xb

0.9497

PORTFOLIO WEIGHTS
CIPLA&RANBAXY

Formula

Xa

(Std.b) 2 p ab (std.a ) (std.b)

(std.a) 2 + (std.b) 2 - 2 pab (std.a) (std.b)

55

Xb

1Xa

Where X a
Xb

CIPLA

RANBAXY

Std.a

55.22

Std.b

55.13

p ab

= 0.0295

(55.13) 2 0.0295 (55.22) (55.13

Xa =

(55.22) 2 + (55.13)

- 2 (0.0295) (55.22) (55.13)

Xb = 1Xa
Xa

0.49916

Xb

= 0.50084

Two Portfolios

Correlation

COMPANY Xa

COMPANY Xb

Coefficient

PORTFOLIO

PORTFOLO

RETURN Rp

RISK
p

ICICI&HDFC
ITC&COLGATE
CIPLA&RANBAXI
56

0.5206
0.5008
0.605

0.8199
0.0563
0.49916

..0.1801
0.9497
0.50084

114.24
26.835
1.2335

31.14
22.77
49.43

Table 4.20

__
PORTFOLIO RETURN

PORTFOLIO RISK=

__

( Rp)=(Ra)(Xa) + (Rb) (Xb)

___________________________________

p = X1^21^2+X2^22^2+2(X1)(X2)(X12)12

Portfolio return Rp

ICICI&HDFC
ITC&COLGATE
CIPLA&RANBAXI

57

114.24
26.835
1.234

Table 4.21

.
Graph 4.3

Portfolio risk
ICICI&HDFC
ITC&COLGATE
CIPLA&RANBAXI
Table 4.22

58

31.14
22.77
49.43

Graph 4.4

FINDINGS
As the study shows the following findings for portfolio construction

Investor would be able to achieve when the returns of shares and debentures

Resultant portfolio would be known as diversified portfolio .

59

Thus Portfolio construction would be addressed itself to three major via.

Selectivity, timing and diversification

Incase of portfolio management negatively correlated assets are most profitable.

Investors may invest their money for long run as the both combinations are most suitable
portfolios.

A rational investor would constantly examine his chosen portfolio both for average
return and risk.

CONCLUSION

60

ICICI&HDFC

The combination of ICICI and HDFC gives the proportion of

investment is 1.1801 and 0.8199 for ICICI and HDFC, based on the
standard deviations The standard deviation for ICICI is 34.846 and for
HDFC is 24.88.

Hence the investor should invest their funds more in HDFC when
compared to ICICI as the risk involved in HDFC is less than ICICI as the
standard deviation of HDFC is less than that of ICICI.

ITC & COLGATE PALMOLIVE

The combination of ITC and COLGATE gives the proportion of investment is 0.0563
and 0.50084 for ITC and COLGATE, based on the standard deviations The standard
deviation for ITC is 54.55 and for COLGATE is 22.2.

Hence the investor should invest their funds more in COLGATE when compared to ITC
as the risk involved in COLGATE is less than ITC as the standard deviation of
61

COLGATE is less than that of ITC.

CIPLA&RANBAXY

The combination of CIPLA and RANBAXY gives the proportion of investment is

0.49916 and 0.50084 for CIPLA and RANBAXY, based on the standard deviations The
standard deviation for CIPLA is 55.22 and for RANBAXY is 55.13. When compared

to

both the risk is almost same, hence the risk is same when invested in either of the
security.

SUGGESTIONS

Select your investments on economic grounds

Public knowledge is no advantage.

Buy stock with a disparity and discrepancy between the situation of the firm and the

expectation and appraisal of the public

Buy stocks in companies with potential for surprises.
Take advantage of volatility before reaching a new equilibrium
Dont put your trust in only one investment. It is like putting all eggs in one basket.
This will help lessen the risk in long term .
62

The investor must select the right advisory body which is has sound knowledge about the

product which they are offering.

Professionalized advisory is the most important feature to the investor.
Professionalized research, analysis which will be helpful for reducing any kind of
risk to over come.

BIBLIOGRAPHY

BOOKS
1.

DONALDE, FISHER & RONALD J.JODON

SECURITIES ANALYSIS AND PORTFOLIO MANAGEMENT,6TH EDITION

2.

V.K.BHALLA
63

INVESTMENTS MANAGEMENT S. CHAND PUBLICATION.

3.V.A.AVADHANI.
INVESTMENT MANAGEMENT

Website
4.WWW. Investopedia.com
5.www.nseindia.com
6.www.bseindia.com.
Newspapers& magazine
7. DAILY NEWS PAPERS.ECONOMIC TIMES, FINANCIAL EXPRESS

64