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Business Statistics

Case 1- Portfolio Creation

Group 4:
Abhinav Kashyap Josyula: 17PGDM126
Amay Singh: 17PGDM134
Anurag Gupta: 17PGDM137
Shivangi Jain: 17PGDM168
Srichandra A Velpuri: 17PGDM176

Case- Portfolio Creation
Infosys, Reliance Infrastructure, Maruti, M&M

Table of Contents

S. No Particulars Page No.

1 The Case
2 Objective
3 Data and Methodology used
4 Analysis
5 Interpretations

Case at a Glance:
Ms. Kuheli, an employee of McKinsey knowledge center has received a bonus of Rs.
5,00,000. Being a risk-averse person, she has decided to make a long-term investment for an
amount of Rs. 1,00,000 in the stock market. She hopes that the market would improve post
the Lok Sabha elections in 2014. For this purpose, she has shortlisted the following stocks:
Infosys, Reliance Infrastructure, Maruti and M&M. She is however, uncertain as to the
amount to be invested in these stocks. For this purpose, she has computed the monthly
returns for all these stocks during a 60-month period. (January 2001 to December 2006).

She has then narrowed down her choices to the following three plans

Rs. 25000 in each stock

Infosys Rs. 10000, Reliance Rs. 20000, Maruti Rs. 30000, M&M Rs. 40000
Infosys Rs. 10000, Reliance Rs. 50000, Maruti Rs. 30000, M&M Rs. 10000

Her main objective is to choose the portfolio which:

1- Maximizes her return.

2- Minimizes the risk.

Methodology Used:

Step 1: Various parameters of the data are calculated using MS Excel.

Step 2: Calculation of Covariance.

Covariance is a measure of the degree to which returns on two risky assets move in tandem
Covariance calculations are used to formulate a balanced portfolio since the movement of
two stocks can be linked using covariance.

Step 3: Calculation of Expected Return of stocks

Step 4: Calculation of Expected value of portfolio -It is the weighted average of the likely
profits of the assets in the portfolio, weighted by the likely profits of each asset class


Where, wi=Weight(i=1,2,3,4) and ri=Return of each stock

Step 5: Calculation of Variance using:

Var(aX+bY) (Portfolio Variance) =a2Var(X)+b2Var(Y)+ab Cov (X, Y)

Where, X and Y are any two stocks

This is done to determine the risk involved in the portfolio. Since variance tells the variability
of the results from the average.

Step 6: Calculation of Standard Deviation

This is the square root of variance.

Data Used:

The monthly return of all the four stocks (Reliance, Infosys, Maruti and M&M) during a 60-
month period (1st Dec,2012-1st Dec, 2017).


1-Out of the three plans, Plan 3 is ruled out first because plan 3 has the least mean. Here,
least mean is interpreted as least expected return.

2-Next, Plan 2 is ruled out because plan 2 has a higher standard deviation than plan 1.

3-Thus, Plan 1 is the optimal choice with Maximum expected return and least standard


a. Weights of stocks in portfolios play a major role in determining the optimal portfolio.
b. Covariance helps investors in selecting stocks that complement each other( by analyzing
their movement). This reduces the overall risk and uncertainty.

c. The variance of a portfolio's return is a function of:
1-The variance of the component assets
2- Covariance between each of the assets.

d. Nature of investor determines the choice of portfolio. A risk averse investor and a risk
taker investor are likely to invest in different portfolios.


Thus, Ms. Kuheli should invest in Plan 1 of the given portfolios.