INFLUENCE OF PORTFOLIO IN INVESTMENT DECISION

MAKING

ABSTRACT

Portfolio management can be defined and utilised in numerous ways since "the combination
of the many items that remain intact" is the primary definition of the word. I have therefore
reviewed and evaluated this from the perspective of the securities investment section.
From the investor's perspective, this portfolio is significant since, as a result, one can manage
the risk of investing in securities and so obtain good returns from the investment in diverse
securities, rather than placing all the money in a basket. Now a day's investors are very
careful in selecting the correct securities portfolio to prevent risks arising from market forces
and economic forces. This topic is chosen because one must follow certain processes in
portfolio management in order to obtain good and efficient returns by managing all risks.
This topic explains how to choose a certain portfolio for all returns on securities and thus the
overall portfolio return. This also includes the numerous portfolio assessment procedures
with respect to all uncertainties and delivers the proper choice. The aim of this topic is to
know how portfolio management is to achieve efficacy and to simultaneously make investors
aware of selecting the securities they wish to place in their portfolio. This also gives the edge
to reach the correct portfolio, rather than a single security, taking into account many
securities. The assignment is thoroughly undertaken to study my subject while
comprehending the various case studies to better understand the investors and myself.

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 CHAPTER I

INTRODUCTION

This project deals with the various investment decisions by various individuals and focuses

on the risk aspect in depth when investing in securities. It also illustrates how the portfolio

safeguards investment risk and provides optimal returns to a certain amount of risk. It also

provides a thorough study of the development, selection, revision and evaluation of the

portfolio. The report also provides various approaches of analysing securities, different

portfolio management theories, for effective and efficient portfolio building. It also provides

a short examination of how a portfolio might be evaluated.

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THE STUDY OBJECTIVE

· Help investors decide on an effective securities portfolio.

os Identify the finest securities portfolio.

· To research securities' function and impact in investment decisions.

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— To clearly define the selection procedure for the portfolio.

To choose the best portfolio.

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METHODOLOGY

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6
FIRST DATA

~ Data acquired from magazines and newspapers.

THEIR DATAS OF THE Internet.

• Towards data acquired by brokers.

T he data acquired from the company newspapers.

DATA SECONDARY

· Data gathered from different books and webpages.

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8
LIMITATIONS

— The data collected are primarily confined to secondary sources with very little primary

project data.

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· Back There is a time constraint for the research project.

· Information availability in the form of annual reports and price variations in corporations is

a major constraint on the study.

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Chapter II Chapter

REVIEW LITERATURE

MAKING INVESTMENT DECISION

Investment management involves the right decision-making process. As mentioned

previously, any investment is risky and it is difficult to choose such investment decisions.

The decision on investments is based on availability of money and knowledge on the

economy, industry and enterprises, and on the rules on share prices, and on market and

corporate expectations.

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MANGEMENT INVESTMENT

In the vernacular of the stock market, investment decision refers to the decision to purchase

and sell orders. As already mentioned, these decisions are driven by cash availability and

information flow. What is to be bought and sold will also depend on the fair value of a share

and its extent, valuation and expectation. For such a conclusion, common investors could

have to rely more on a fundamental study than on technical research, although the technical

aspects are more crucial. Moreover, even genuine investors must guard against mistaken

timing both in purchasing and selling decisions. A common investor must read the

Company's balancing sheet and annual report or analyse the company's quarterly and half-

yearly results and decide whether or not to purchase its shares. This is considered a

fundamental analysis, which eventually leads to scientific and rational decision making. The

chances of a high risk scenario will be reduced to a low risk scenario and long-term investors

won't lose out.

Investment Decision Criteria:

First, the decision on investment depends on the market atmosphere. According to the

empirical studies, share prices are only 50% depending on the foundations of the firm and the

rest are decided by a market mood and the company's expectations for performance and share

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price. These expectations depend on the analyst's ability to anticipate and forecast the

company's future performance. The current price paid for the share depends on the future

return flow, which the corporation expects. Second, and following on from the foregoing,

investment decisions will be based on the company's historical success, current work and

future expectations both operationally and financially. These will in turn affect stock prices.

Thirdly, investing decision depends on the investor's judgement of the fairness, overvaluation

or underestimation of current share price. If the price of the share is fair, he will hold it (Hold

Decision) if it is overstated, he will sell it (sell Decision) (Buy Decision). These are broad

norms, however there may be exceptions. Even if prices rise, some investors can buy because

their anticipation of an increase may overweight their view of surplus value. This indicates

that over-estimation or valuing concepts relate to time, place and man. What may have been

overrated some time ago is underrated in the wake of later developments; information, feeling

and mood can shift the entire market condition and share pricing. There are two further

decisions, namely average price increases and average price decreases. The decision on

investment may also depend on the tastes, emotions or fancies of the investor. Thus an

investor can spend and invest in companies' cats and dogs if he fancy or is overwhelmed with

money from lotteries or awards. However, a reasonable investor would take investment

decisions in a planned and scientific assessment of the company's underlying values.

At now, investors rely mainly on the recommendations of friends, relatives, sub-brokers etc

for the decision on the investment, but not on any scientific research of the fundamental

principles of the company. In view of the growing proliferation of mushrooms in companies

and the lack of track records by several developers, investment decision-making has become

the norm.

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RISK AND INVESTMENT:

Investment in the stock markets is dangerous and numerous types of investments exist, such

as equities, fixed deposits, debentures, etc. Diversifying investment into 10-15 companies can

lower corporate risk, also known as unsystematic risk. However, the systemic market risk

cannot be decreased, but can be controlled by choosing companies with the (high or low) risk

that an investor can bear.

OBJECTIVE INVESTMENT:

1) Return on or yields are the first fundamental purpose of investment. The higher the yields,

the higher the risk that investors take.

The lower risk is now the bank deposit rate of 9% or the bank rate of 6%. In this case, the risk

is less important because funds are safe and returns sure. 2) Secondly, every investor has its

own asset preferences and investing option. Some hazardous operators have put their funds

into deposits or deposits/certificates with co-operatives and PSUs in their bank or post office.

Some engage in real estate, land and construction while others mainly invest in gold, silver

and other precious stones, diamonds etc. 3) Thirdly, every investor is aiming to make home

furnishings, autos, consumer durables and other domestic requirements lowest comfort

possible. After he fulfilled these basic requirements, he plans his income and his insurance

savings (LIC and GIC etc.). In choosing these, the return is dependent on the investor's needs.

4) Finally, the remaining of the funds will be invested in financial assets, after meeting every

wants and requirement, to provide it with future revenues and capital appreciation to increase

its future standard of life. These can be investments in stock/capital markets.

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SUCCESSFUL INVESTING QUALITIES

Towards the contrary thinking

 Patience

 Composure

· Flexibility & Flexibility

 Openness

INVESTMENT Equity Guidelines

Equity shares are characterised by volatility in prices, which can lead to huge gains or serious

losses. Because of the volatility and dynamism of the stock market, investors need greater

ability and competence and a certain amount of luck to invest in shareholdings. Here are

some broad recommendations for playing equity, whether you are aggressive or conservative.

Adopt to the appropriate formula plan

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• Fix value anchors

Asses Psychology of the Market

• Combine basic and technical analyses

Sensibly diversify

· Review and improve your portfolio periodically

Management portfolio

INTRODUCTION:

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Portfolio can be defined in simple terms as a mix of securities which have their own return

and risk characteristics. The portfolio may or may not assume its separate portions' aggregate

characteristics. Collection of financial or physical assets such shareholdings, bonds, treasury

bills, debentures, etc. Portfolio Port folio is an asset combination or a securities collection.

These holdings arise from the individual preferences, risk, returns and a range of other

aspects decided by the holders. Portfolio management concerns the building and maintenance

of an investment collection. It involves primarily lowering risks and not enhancing returns.

Return is certainly significant, yet a portfolio manager's ultimate aim is to produce a good

return by immunising the risk.

MANAGEMENT PORTFOLY

Both profitable and enjoyable are investing in securities such as shares, debentures. It

actually includes a lot of danger. Very few investors invest their entire savings in single

security. Most of them, however, invest in a securities group; the securities group is termed a

portfolio. Portfolio creation helps limit risk without diminishing rewards. As the economic

and financial environment continues to change individual stocks and portfolios' risk return

characteristics. An investor invests in portfolio funds that predict good returns with little risk.

Portfolio management includes the activities involved in establishing and maintaining an

investment portfolio. Specifically, it deals with security analysis, portfolio analysis, portfolio

selection, portfolio review and portfolio assessment.

PORTFOLIO OBJECTIVES MANAGEMENT

Portfolio management's purpose is to invest in assets so that:

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a) Maximize your return and a)

b) Reduce risk

To fulfil our investing goals, a good portfolio should have several goals and strike a

reasonable balance between them. Any goal should not be given unfair significance at the

expense of others.

Some of the primary goals are set down below:

iv Investment security

Investment security or risk minimization is one of the portfolio management's major

objectives. There are several forms of hazards involved with equities investments, including

super inventories. We should remember that there is no investment with zero risk. In

addition, relatively low-risk investing yields proportionately smaller returns.

* Current Stable Returns:

The portfolio should produce constant current income after investment safety is verified. The

present returns should be at least equal to the cost of the investor's investment. What we are

talking about is current income through interest or dividends, not capital gains. The portfolio

should provide a consistent income return, i.e. interest or dividends. The returns must meet

the opposite cost of interest funds.

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 Marketability:

If our portfolio contains too many unlisted or inactive shares, we may confront difficulties in

enshrining them and moving from investment to investment.

 Liquidity

The portfolio should ensure that adequate money are accessible shortly to meet the liquidity

requirements of the investor. A loan line from a bank is useful if it is necessary to take part in

Right Issues or any other personal necessities.

Taking Tax Planning

Because taxation is a crucial planning variable. A solid portfolio should make it possible for

its owner to have a favourable tax shelter. The portfolio should be constructed with regard not

just to income tax but also to capital gains tax and gift tax. The objective of a healthy

portfolio is tax planning rather than tax evasion or evasion.

FRAMEWORK PORTFOLIO MANAGEMENT

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Investment management is often referred to as portfolio administration, a complex process or

activity organised into seven major phases:-

Five Investment Objectives and Constraints Specification.

Choice of asset mix. Choice of asset mix.

· Portfolio Strategy formulation.

Selection of securities / selection of securities.

The execution of the portfolio.

· re-equilibrium portfolio.

See Performance Assessment.

Investment targets and constraints specification:-

The first step in the portfolio management process is to identify investing goals and

limitations. The common investment objectives are: - -

1. Income: - Providing regular interest/dividend payments for the constant flow of income.

2. Growth: - to improve the capital appreciation value of the principle amount.

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3. Stability: - Protection from loss risk of the capital amount deposited.

Indian Portfolio Management

Port folio management remains in its infancy in India. Until 1987, no other agency had expert

portfolio management save for several Indian and foreign banks and UTI.

After the setting up of mutual funds in the public sector, professional portfolio management

was organised from 1987 with the support of skilled research employees. Following the

success of mutual funds in portfolio management, a number of brokers and investment

advisors, including some professional managers, have become portfolio managers. They have

both discretionary and non-discretionary management of customer funds. Many of them,

including Mutual Funds, have ensured the minimal return or appreciation of capital and

employed various sorts of incentives presently banned by SEBI. They used trade and insider

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trading speculation, discounts etc. to accomplish their targeted returns to customers that are

also banned by SEBI.

The latest CBI test on the activities of numerous market dealers uncovered banks, dealers and

brokers in their portfolio operations in their dishonest tactics. The SEBI has established

harsher requirements including its registration, a code of conduct, minimum facilities,

experience, etc. My unemployed youth, retired people or self-styled consultants are no longer

able to participate in portfolio management without the licence of SEBI. The standards of

SEBI are designed to make Portfolio Management a responsible professional service for

specialists in the industry.

SEBI NORMS:

On behalf of the customer, SEBI has forbidden the Portfolio Manger from assuming

any risk. Also, the portfolio manager cannot ensure a fixed customer return.

The investments he makes or advises are subject to risks to be borne by the customer.

Investment advisory and management must be charged at rates that are initially fixed and

transparent according to the contract. Customers are not permitted to share earnings or

discounts or cash incentives. The Portfolio Manager is not allowed to provide loans, badlings

and discounts in accordance with SEBI standards. He can not invest the customer's cash,

which were not permitted by the contract, with the customer. Investment in the capital market

and money market instruments can normally be made. Customer money must be stored in a

separate public sector bank account and not mingled with its own cash or assets. All

agreements placed on a customer's account shall be in his name and contract notes, bills, etc.

shall all be handed on by his name. For all purchases/sales on behalf of the customer, a

separate ledger account is kept at the market price. Contract termination and termination shall

take place in accordance with the contract. During the contract time, the Portfolio Manager

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acts on a contractual and fiduciary basis alone. SEBI shall not allow a contract for less than

one year.

SEBI GUIDELINES AND THE MANAGERS PORTFOLIO:

On 7 January 1993 the Indian Securities Exchange Board released portfolio managers

regulations on the regulation by commercial bankers of portfolio management services. The

following are:

• Portfolio management services shall be of an investment type or advisory management at

the agreed cost at the risk of the client.

§ The portfolio manager shall not guarantee the fee's return, directly or indirectly, or the fee's

return-sharing basis shall not be dependent.

• Various terms and conditions of contracts, fees, risk disclosures and repayments should be

disclosed.

· Customer monies should be maintained separately on a customer-oriented account, which

should be audited.

• The manager should report customers no later than 6 months.

THE Portfolio Manager should maintain a high level of integrity and should not seek any

benefits from directly or indirectly forming customer funds.

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— The customer shall have the right to see the documents.

· The Portfolio Manager does not invest the customer's cash in badla financing, discounting

bills and lending operations.

· Customers' money can be invested in the instruments of money and the capital markets.

· Settlement on contract termination as stipulated in the contract.

§ The funds of the customer should be stored on a separate bank account at the planned

commercial bank.

– Buy or sell shares at the existing market price.

ANALYSIS PORTFOLY:

Portfolios, which are securities combinations, may or may not take over their separate

components. The analysis of the portfolio covers the determination of future risk and return

for owning various securities blends. An investor can lower portfolio risk sometimes by

adding another security with higher risks than any other item in the portfolio. This seeming

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unusual result comes from the fact that risk largely depends on the covariance of securities'

returns. An investor can lower expected risk and also estimate expected returns and expected

risk levels of a particular asset portfolio if the portfolio is properly diversified. There are main

approaches to portfolio analysis

1. Temporary method.

2. Modern approach, modern approach.

1) APPROACH TRADITONAL:

The typical approach essentially addresses two important decisions. Traditional safety

analysis emphasises the crucial importance of investor risk and return. Most classic

approaches recognise return as receipt of dividends and price increase over a future period.

However, the return for individual securities is not usually within the same holding period

and rates of return are not necessarily time adjusted. An analysis can well anticipate future

earnings and a future price for P/E. He is certainly going to estimate the dividend. In any

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event, given a return estimate, the analyst will likely consider and present risk as the likely

downside expectation of rice (ether by itself or relative to upside appreciation possibilities).

Each security closes with some harsh measurements of anticipated return and possible future

adverse risks. Portfolios or securities combinations are, nevertheless, used to diversify risk

across several securities. This is good. This is good. However, the relationship between

securities can only be broadly or nebulously described. For example, automotive stocks are

regarded as risk related to fire stocks: utility stocks show defensive price movements relative

to the market and cyclical stocks such as steel, and so forth. This does not mean that the usual

study of portfolios is unsuccessful. It means much of it may be defined more objectively in

specific terms They are as follows:

A) Determination of portfolio objectives.

a) Selection of the portfolio securities to be included

This is usually done in four to six steps. The limitations of the investor should be examined

before the objectives are formulated. Within the specified constraint framework, objectives

are formulated. The securities are then picked based on the objectives. The risk and return of

the securities should then be investigated. The investor must evaluate the primary risk

categories to be minimised. Risk compromise and non-risk considerations must be

implemented. Finally, relative portfolio weights are assigned and diversification is carried out

to instruments such as bonds, stocks and debentures.

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PORTFOLIO MODERN APPROACH:

The traditional approach is an integrated financial scheme for individual needs such as

housing, life insurance and pension schemes. But such financial planning procedures are not

conducted in Markowitz. Markowitz pays closer attention to the portfolio selection process.

Its design can be used more in selecting the common stock portfolio than in selecting the

bond portfolio. The equities are not selected on the basis of revenue or appreciation

requirements. However, the choice is dependent on the risk and return analysis. Return covers

the return on the market and dividends. The investor requires returns and might either be in

market return or in dividends.

The investor is supposed to maximise the projected return and minimise risk. Furthermore, in

a circumstance where it is appropriately paid, investors are believed to accept risks. This

means that individuals would want the most expected return portfolio for a certain amount of

risk.

The last step in the modern strategy is the asset allocation process, which is to select a

portfolio that satisfies the investor's requirements. The following are the main steps in this

process.

Process of Portfolio Management:

Towards safety analysis

The study of the portfolio

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— Downloading of securities

· revision of portfolio

· Performance assessment

ANALYSIS SECURITY:

Definition:

In order to make adequate investment combining both risk and return, the investor must

analyse its risks and returns on the other avenues of investment and create a correct

projection or anticipation of the risk and return of the alternative investment. He must adapt

his expectations to this risk preference and the return to make a right investment option. The

process of studying individual securities and the market and evaluating the projected risk and

return of each investment with a view to identifying undervalued securities for the purchase

and over-values for the sale of securities is a technique and a science that is called a security

analysis.

Security:

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The security includes shares, scripts, stocks, bonds, debenture stock or any marketable

securities of a similar character in or of any debentures of a firm or corporation, the

government or half-government corporation, etc.

Securities analysis:

The analysis of security, both traditionally and modernly, involves projection of future

dividends or assurance of flows, future share price forecasts and estimates of the inherent

value of the security based on profits or dividends forecasts. In the traditional sense, security

analysis is mainly based on an analysis of the fundamental value of shares and their

forecasting of the future by calculating their intrinsic value of the share.

The modern security analysis is based on the fundamental security analysis, leading to its

intrinsic value, and also to an increase-return analysis relying on the variability of returns,

covariance, fund security and future return projection. If the security analysis is based on the

basic factors of the enterprise, the share price forecast must inevitably take into consideration

trends and the business scenario, the industry to which the enterprise belongs and lastly the

forces and the weaknesses of the enterprise.

Approaches to Security Analysis:-

 Fundamental Analysis

 Technical Analysis

 Efficient Market Hypothesis

FUNDAMENTAL ANALYSIS

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 The inherent value of a share of equities depends on a number of things. The

company's earnings, the growth rate and the company's risk exposure directly influence the

share price. These criteria are, in turn, based on the numerous other factors such as the

economic environment, the industry in which they function, and eventually on the

performance of companies. The basic school of though evaluated the inherent worth of share

Towards Economic Analysis

Towards Industry Analysis

Towards Company Analysis

COMMISSION ANALYSIS:

The degree of economic activity has a variety of investments. If the economy grows quickly,

rapid growth and vice versa can also be predicted in the industry. When the economic level is

low, stock prices are low, and economic activity is high, stock prices reflect the successful

prognosis for businesses' sales and earnings. To understand stock price behaviour, an analysis

of the macroeconomic environment is important. The macroeconomic factors usually

considered are as follows:

a) domestic dross project

a) Investments and savings

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c) Inflation

d) Tariffs of interest

e) Budget

f) the structure of taxation

g) Payment balance

h) Monsoon and farming

I Facilities for infrastructure

j) Factors demographic

Analysis of Industry

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As said previously, the performance of a corporation depends largely on external elements of

economy and industry up to 50 percent. These externalities depend on the availability of

inputs, such as good work, water, power and the links between business, industry and the

corporation.

A well-diversified company performs better in this setting than one product company,

because while demand for some items may decrease, it may rise for others.

Likewise, input costs and cost factors vary from product line to product line, resulting in

varied margins, and a diverse enterprise is better for investors.

The industry study should take into account, amongst other aspects, the performance of the

company, whose shares are to be studied. You are as follows:

a) Line of products

c) Inputs and raw materials

c) Installed and used capacity

d) Features of the industry

e) Market and demand

f) Government industry policy f)

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c) Labor and other industrial issues

h) Management

ANALYSIS COMPANY:

Before making the investment, investors should know the company's outcomes correctly. The

investment selection depends on the best results of the following elements.

1) FORCE MARKETING:

Profit for manufacturing enterprises depends on marketing. If marketing is conducive, it can

be stated that the co. May in future years have more profit.

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Depending on the previous year's data, sales volatility or sales increases can be observed. If

trend investors are satisfied with expanding sales.

2) PROFILES ACCOUNTING

The organisation uses various accounting policies for the value of inventories and fixed

assets.

A) POLICY INVENTORY:

At year-end, raw materials and their value are computed with the use of FIFO, LIFO or any

other average methods. The method in question must be suitable for accessing the specific

raw material.

B) FIXED ASSET POLCY: at the conclusion of every year all fixed assets are appraised to

know the real value of the company.

NET VALUE OF FIXED ASSETS= ASSET VALUE at the start of the year.

Written value methods are utilised for income tax purposes in accordance with this distinct

asset schedule.

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3) SITUATION PROFITABILITY: a crucial investor factor. The company's profitability

must be better compared with industry. The efficiency of the profitability or operational

activity can be identified by considering the following factors

A) Brutal profit margin ratio: greater than 30%. However, other operating expenses should be

lower than operating revenues.

B) Operating profit and profit ratio: operating profit is the business' genuine income that is

computed before non-operating costs and income. It should be almost 20%. The net profit

ratio must exceed 10%

4) CAPTIAL EMPLOYED RETURN: evaluates the return rate on investment capital of the

company. The capital utilised comprises the shareholders' cash, long-term loans and other

firm accumulated funds

ROCE = [EXPLOYED OPERATING PROFIT] *100

A) Earnings per share: at the end of each financial year, it is computed by the enterprise. EPS

will increase in the event of higher profit and a lower number of shares.

B) Equity return: computed on total equity funds (equity share capital, general reserve and

other accumulated profits)

5) DIVIDENT POLITIES:

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It is determined for shareholdings at the general body meeting of the firm at the conclusion of

each year. The payout ratio of the dividend is established according to the dividend paid. The

policy on dividends is separated into two sorts.

I) Stable policy on dividends.

II) Unstable policy on dividends.

When enterprise reaches an optimal level, stable dividend policies are implemented,

indicating a stable growth rate, no volatility is estimated. Developing companies may utilise

unstable dividend policies. In such a circumstance, the market value of the share growth

research cannot be identified.

6) Company's CAPITAL STRUCTURE:

The company's general capital structure is made up of equity shares, preferential shares,

debentures and other long-term financing. Cost of capital is calculated on the basis of long-

term financial sources.

7) EFFICIECY OPERATING:

It is determined on the basis of a company's capital expenditure and operations. Capital

expenditure increases suggest an increase in operational efficiency. Incoming years may raise

expected profits. A company's operating efficiency directly influences a company's profits.

An expanding corporation that maintains high operating efficiency with low intervals gains

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more than the high intervals. Efficient utilisation of fixed assets with raw resources, labour

and management would increase sales income.

8) LEVERAGE OPERATING:

Company fixed costs are high in overall costs, and the company is deemed to have a high

operating leverage. High operating leverage means other elements are maintained constantly

and a relatively modest change in sales leads to a major change in equity return.

9) COMMUNICATION:

Good and capable management generates investors' profits. The management of the company

should plan, organise, implement and control the activities of the organisation efficiently.

Good management depends on the manager's qualities. Koontz and O'Donnell propose the

following as distinguishing features of a capable manager

The ability to keep up with people.

Leadership.

Analytical skills.

Industry

Judgment.

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10) ENALYSIS: 10)

The company's own financial statements are the finest source of financial information. This is

an important source of information for assessing investment prospects in the shares of the

particular company. The statement provides historical and current information on the

information aids of the company for the study of the current situation of the company. The

declarations of the man in the analysis are.

1) Sheet of balance

2) Profit and lose account account

SHEET BALANCE

The balance statement indicates all sources of finances for the company (liabilities and equity

shares) and use of funds at a given period. The balance sheet contains an account of the

company's capital structure. The balance sheet is known for its net value and its outstanding

long-term debt. The use of debt produces a financial leverage which benefits or harms

shareholders depending on their size and profit stability. It is better for the investor to avoid

accompanying its capital structure by excessive debt components.

Profit AND THE COUNTRY

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The revenue statement reports the flow of funds from business operations between two times.

It lists the revenue and expenditure items. The income-expenditure differential signifies profit

or loss for the period. It is sometimes called a statement of revenue and expenditure

Financial statements limitation.

1) Historical information in the financial statements. This information is useful, but an

investor should be more concerned with the future and the present.

(2) Financial statements shall be produced in accordance with specific accounting concepts

and procedures. An investor should know them. They should know them.

3) The declarations contain only information measurable in monetary terms. For example, a

company's loss caused by water or fire is included because it may be described monetarily.

Financial STATEMENT ANALYSIS

Analysis of financial statements shows the relationship between income and expenditure, the

sources and the use of cash. The following simple analysis can be used:

Comparative financial report:

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The comparative balance sheet figures for more than one ear are supplied. The comparative

financial statement offers the balance sheet statistics with a time perspective. The annual data

are compared in absolute terms with similar data from previous years.

Analysis of trends:

The percentages calculated here are based on the base year. This would provide insight into

how sales or profit have grown or declined over the years. Sometimes sales can continue to

rise and inventories can also increase. This would show the loss of market share for the

product of the specific company.

Common size statement:

The balance sheet of common size indicates the percentage of each asset for the total assets

and every liability for the total liabilities. Likewise, a statement of income of the common

size shows each expense item as a proportion of net sales. Comparisons can be conducted

between two companies of various sizes belonging to the same industry. Over the years, a

common size statement can be generated for the same organisation.

Analysis of fund flow:

The balance sheet provides a static picture of the position of the organisation on a specific

date. It does not reveal any changes that have taken place over a period in the unit's financial

status. The investor should be aware,

a) How are the proceeds used?

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a) Dividend financial source

c) Source of capital expenditure financing

d) Source of debt repayment financing

g) the destiny of the fixed assets' profits of sale and

f) Public utilisation of the proceeds of the share or debenture issue, or of the fixed deposits.

Statement of cash flow:

The investor wants to know the company's cash inflow and outflow. The balance sheet, the

revenue statement and certain additional information are used to produce the cash flow

statement. It can be prepared either vertically or horizontally. Operations and other

transactions associated cash flows are calculated.

The statement shows the causes of cash balance variations between the two balances. These

statements allow investors to evaluate the cash flows over a business cycle.

Analysis of the ratio:

Ratio is a mathematically defined relationship between two figures. Financial ration creates

numerical links between two financial data useful. The budget ratios and profit and loss

41
accounts are calculated. The relationship can be stated either as a percentage or as a quotient.

Financial classification ratios are as follows:

Ratio of liquidity:

Liquidity signifies that the company is capable of fulfilling its short-term obligations. The

most prominent ratios used to analyse liquidity are the current ratio and acid test ratios. The

liquidity ratio shows the liquidity and adequacy of working capital in a rough way.

Ratios of turnover:

The sales ratios reflect how well the assets and, if any, the extra inventories are employed.

These ratios are often known as ratios of activity or asset management. Sales to existing

assets, sales to fixed assets, sales to inventory, payables to sales and total assets to sales are

often calculated ratios.

The ratio of leverage:

Investors are often interested in finding out the debt component of the capital the debt

influences the payment for the dividend because of the interest outflow.

The leverage affects the risk and reward of holding shares. The total debt ratio to total assets

shows the percentage of loaned monies in the company's assets.

42
Coverage interest ratio

This illustrates how often the operating revenue covers the interest payment.

Ratio of profitability:

The profitability ratio of the organisation is associated with profit-generating variables The

investor is particularly aware of the net profit to sales, profit to total assets and profit to the

equities. The profitability ratios measure the company's overall efficiency.

Ratio of net profit margin

This ratio shows the net profit per sales rupee.

Back to assets:

The asset return measures the total efficiency of the capital invested in the company.

Equity return:

Net profit here is tied to the capital of the company.

Assessment ratios:

43
Shareholders would like to evaluate the worth of the shares. The share value depends on the

company's performance and the market circumstances. The company's performance in turn

depends on a large number of actors. The assessment ratios therefore provide a thorough

indication of the company's success. Some of the valuation ratios are discussed in length in

the next section.

Book value for each share:

This ratio represents the shareholder of shares after all its liabilities, creditors, debentures,

and preferential shareholders have been paid by the company.

Price income ratio:

The price earnings ratio (P/E) is one of the most prominent financial indicators used in the

stock market. It concerns the share price with income per share. In general, the investor

compares the company's P/E ratio to that of industry and the market.

Technical Analysis TECHNICal

44
The technical analysis involves identifying short-term share price movements. This study can

be done by brokers, distributors. They are considered technicians.

In technical analysis, the following are the main factors:

1) The results of the company are not analysed. National and international changes

concerning political and other variables.

2) Shares shall be exchanged immediately when the price level of shares changes somewhat.

3) Average industry results are recognised and considered as fundamental elements.

4) By holding the stock, brokers do not expect any dividend. Dividend is not a return for

greater return to the technicians estimated.

5) The holding time is much lower; it might range from hours to days. Holding periods may

generally not be more than one moth. In this respect, the technical analysis can be done by

identifying price movements of the specific share.

6) No capital gains anticipated by transfer of the share, so any capital gains have to be paid,

short-term return on the share exchange is not dealt with as a capital gain.

7) At the end of the financial year, EPS declared by the company and dividend issued can be

taken as the basic metrics for technical analysis.

45
8) Interim dividend where there is any dividend declared to sell the shares by the company to

be analysed.

9) The stock exchange will report the average result of day-to-day stocks traded.

32

10) Through technical analysis technicians, high levels of short-term profit are anticipated.

Average moving:

Analysis of the moving average script prices is another technique of technical analysis.

Generally, 7 days, days and 15 days are calculated with regard to scripts researched and

shown in graphs, together with similar moving market index averages, such as the BSE

Sensitive Index. Then there are two graphs to be examined and the script and the BSE market

inducements indicate equivalent average risks when trends are similar.

Oscillators:

Oscillators show the market momentum or the momentum of the script. Oscillator illustrates

the price movement of shares over a reference point from end to end.

CHARTS:

46
Charts are the most effective and simple technical analytical tools. The graphical presentation

of the data helps investors to easily identify the price trend. The diagrams also have the

following applications.

è Spots the current purchasing and selling trend.

Terrain Indicates the expected future market activity by projection.

THE FOUR Shows the historic movement of the past.

− The major regions of support and resistance are indicated.

The charts are not located but interpretation changes depending on their talents and

experience from analyst to analysis.

Charts of points and figures:

The technical analyst uses point and figure charts to predict the extent and direction of price

movements of a certain stock or stock market indexes. These P.F charts are one-dimensional

and no time or volume is indicated. Changes in pricing are shown in proportion to previous

47
prices. The price direction variations can be interpreted. The diagrams are drawn in the

governing paper.

Charts of bars:

The bar chart is a technical analyst's smallest and most commonly used tool. The bar a dot is

entered to represent the highest stock price on that day, week or month. Another point will

then be entered, indicating the lowest price on the given date. A line is drawn to connect the

points that are drawn to the closing price at the horizontal cloud.

The two main components to be examined during a portfolio construction are

1. Portfolio risk

2. Back to a portfolio

RISK

The existence of volatility when an incident occurs is called risk. The greater the

unpredictability, the greater the risk. The risk may involve money or not. Risk involving

financial matters is significant in investment management; the financial sense of risk can be

explained as the volatility of expected future incomes or results. Risk can produce a positive

or a negative outcome. If it is a positive unimagined incident, then people have a pleasant

surprise.

48
It is difficult but not impossible to take a negative risk with the same mind if proper risk

management techniques are followed.

Risk is an uncertainty in the appreciation of income/capital or loss of both. The two main

types of risk are: systemic risk and market risks and unsystematic risks or risks associated

with the company.

The systematic risks are the market problems raw materials availability, tax Policy or any

Government policy, inflation risk, interest rate risk and financial risk. The Unsystematic risks

are mismanagement, increasing inventory, wrong financial policy.

Types of risk

There are two components to the risk, systematic risk and unsystematic risk. The

systemic risk is created by forces outside the company and uncontrollable by the company.

The systemic risk affects the entire market. In the case of unsystematic risk, the elements are

specific, unique and relevant to the industry.

Systematic risk affects the whole market. RISK SYSTEMATIC: In the newspaper, we often

read that the stock is either in the bear hug or in the bull grasp. This shows that the whole

market is down or rising in a particular way. The security market is influenced by economic

conditions, political conditions and societal developments. The economic recession has an

impact on the profit prospects of business and the stock market. The risk is systematically

split into 3 sorts, as follows.

1) RISK MARKET:

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Jack Clark Francis has defined market risk as the total return variability of the alternating bull

and bear market dynamics. The variables affecting the stock market are tangible and

intangible occurrences, such as an earthquake, war and political uncertainty, and are

declining in currency values.

2) RATE RISK INTEREST:

The risk of interest rate is a variance in the rate of return for a single period induced by

market interest rate fluctuations. The danger of interest rates most typically influences bond,

debenture and inventory prices. The changes in government monetary policy and changes in

the interest rate of treasury bills and government bonds are causing oscillations in interest

rates.

3) POWER PURCHASING RISK:

Return variations are also induced by the loss of currency purchasing power. Inflation is the

cause of the purchasing power loss. The inflation level proceeds quicker than the capital

increase. The risk of buying power is the likely decline in the purchasing power of the returns

obtained.

UNSYSTEMATIC HISTORY

As discussed before, unsystematic risk is unique and specific to a company or industry.

Management inefficiency, ethnological changes in manufacturing processes, availability of

raw materials, changes in consumer preference and labour problems are a result of systematic

50
risk. The type and scope of the above criteria vary from industry to industry and business to

business. They must be studied individually for each industry and company.

1) RISK BUSINESS:

Business risk is the part of the unsystematic risk produced by the business environment. The

business risk stems from a company's failure to sustain its competitive edge and growth and

profit stability. The change in the predicted operating income reflects the company risk.

Corporate risk can be separated into external business risk and internal corporate risk.

a) Intra-commercial risk:

Internal business risk is related to the company's operational efficiency. The next are the few,

1) Sales fluctuations

2) Development and research

3) Management of staff.

4) Corrected costs

5) One product

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c) External hazard:

External risk stems from operating conditions which factors beyond the control of the

company impose. There is some strain on the company in the external environment in which

it operates.

1) Social and regulatory considerations

2) Policy risk

3) Cycle of business

2) DRICK FINANCE:

It refers to the unpredictability in revenue from capital to equity capital. A company's

financial risk is related with the company's capital structure. The company's capital structure

is made up of equity and borrowed funds.

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3) CREDIT OR RISK DELIVED:

Credit risk addresses the likelihood of a default. It is quite likely that buyers are defaulting.

The odds of the borrower not paying may be based on a number of factors.

Portfolio risk:

The risk in the portfolio differs from that in each security. This risk is reflected in the return

variability from zero to infinity. The expected return depends on the likelihood of the returns

and their weighted contribution to the portfolio risk. In this context, there are two risk metrics

— one is the absolute deviation and the other standard deviation.

Portfolio Return:

Each securities in a portfolio provides a return on the share of their security investment. The

expected return on the portfolio thus corresponds to the weighted average expected return

from each security with weights indicating a proportionate percentage of the total investment

securities. Why has an investor in his portfolio so many securities? The answer to this issue is

the investor's sense of investment risk, its income, security, appreciation, liquidity, and

money-loss protection objectives etc.,

This investment pattern in many categories of assets security categories Instrument types, etc.

would be specified in the diversification title aiming to reduce or even eliminate non-

systematic or company-related risks and achieve special goals of investors.

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Portfolio Management Services allow investors choose between different investment without

post-training difficulties. This service provides investors with an optimum return by

continuously moving their portfolios from one arrangement to another or from one brand to

another within the same arrangement. Each portfolio manager must specify in their offer

maximum returns, optimum returns and risk, capital valuation, security etc. Securities from

the return aspect can be categorised into two

1. Securities of fixed income:

· Debt – partially convertible and non-cabriable debt with marketable guarantees

Preference Shares Preference Shares

· Securities and bonds of the government

Up Other debt instruments. Other debt instruments.

2. Securities of variable income:

· Contract Equity Shares

Towards the money market Towards Securities such as T-bills, trade papers.

Portfolio managers must decide on the securities mix on the basis of the customer contract

and portfolio goal.

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Portfolio managers in the Indian context were brokers (great brokers), who are the ones who

managed funds or portfolios based on their experience, market trend, insider trading, personal

contacts or speculations.

Analysis of risk and return:

There are certain essential assumptions of the traditional method to portfolio construction.

First, the person favours larger to smaller securities returns. In order to reach this level, the

investor must assume greater risk. The ability to generate higher returns depends on his

ability to assess risk and his ability to take certain risks; these risks include the risk of interest

rates, the risk of purchasing power, financial risk and market risk. The investor analyses the

different levels of risk and builds his portfolio. At first, he set minimum income that must be

avoided in the worst economic circumstances and then decides the risk that income loss can

be allowed. After assessing main risk categories, the investor makes a series of compromises

on risk and non-risk considerations including taxation and marketability.

Alpha:

Alpha is the distance from the horizontal axis to the y axis of the line It assesses the

company's unsystematic risk. If alpha is a positive return, the script will be returned higher. If

alpha=0, then the line of regression travels through the source and its return depends only on

the beta times the market returns.

Beta: Beta describes the link between the return on equities and the returns on the market

index. It can be both beneficial and negative. It is the percentage price change that has been

reduced (or linked) to the market index percentage changes. If beta is I, a change in the

market index for one percent leads to a change in stock price for one percent. If beta is 0, the

55
stock price is not associated with the market index and if the market increases by +1%, the

stock price falls by 1%. Beta gauges the systemic market risk that diversification cannot

reduce. If the portfolio is efficient, Beta effectively measures the systematic risk. Alpha and

Epsilon, on the other hand, assess the unsystematic risk, which may be decreased through

effective diversification.

RISK MEASUREMENT:

The driving power of systematic and non-systematic risk leads to changes in securities

returns. Researchers, analysts, theorists and academics in the field of investment should make

efforts to develop methodologies for quantifying risk in the evaluation of return on

investment.

Complete risk:

The total investment risk includes diversifiable risk and non-diversifiable risk and can be

calculated through the summation of Diversifiable risk and Undiversifiable risk.

Diversified risk:

Any risk that can be diversified is known as a diversified risk. This risk can be completely

minimised through securities diversification.

Securities diversification implies mixing a wide range of assets into a portfolio. The exact

risk measure for a single asset is its contribution to the asset market portfolio, which

56
coincides with the market portfolio. This method does not require any extra cash costs, but

requires a little caution. It is an undiversifiable risk to particular assets, which is harder to

address.

Traditional accounting approach & risk premium assignment method.

Risk premium allocation is one of the conventional accounting approaches. The basic

principle of financial management is to trade between risk and return; the return of the

holding stock securities comes from the dividend stream and fluctuations in prices. The

necessary rate should be expressed according to methodologies for evaluating risk and

estimating the expected rates of return

r=i+p+b+f+m+o

Where r = the rate of return necessary

I = real rate of interest (risk free rate)

p = risk allowance for purchasing power

b = company risk allowance

f = allocation for financial risk

m = market risk benefit

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o = other risk allowances

Modern risk quantification methods:

The quantification of risk is needed to ensure that alternative investment opportunities are

uniformly interpreted and comparable. A reasonable technique for estimating risk and return

is the prerequisite for an objective assessment and comparative study of different investment

possibilities. The distribution of probability returns is particularly helpful in determining

expected returns and risk. The spread of the probability distribution dispersion can also be

quantified by the degree of variance from the expected return.

Deviation = outcome – Return expected

Results on investments or not equal probability occur, thus, by probability, it requires weights

for each difference.

Probability X (Expected Return Outcome)

For the purposes of calculating variance, differences should be squared before probabilities

are multiplied.

Probability X (Returns Expected) ^2

CONSTRUCTION PORTFOLIO:

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Portfolio consists of a combination of securities including stocks, bonds and financial market

instruments. The process of combining the broad asset classes to achieve optimal returns with

minimal risk is called the creation of the portfolio.

Risk Minimization

The company's particular risks (insystematic risks) can be decreased by diversifying across

other firms of diverse industries, asset groups, or other instruments such as equities, bonds,

debentures, etc. Thus, asset classes are bank deposits, corporate deposits, gold, silver, land,

property, equities etc., industry group such as tea, sugar, cement, steel, power etc. Each has

various risk-return features. Based on the individual's risk preference, investments must be

made. The second kind of risk (systematic risk) is addressed by beta of various firm shares.

Portfolio construction approaches:

Two ways are common in the creation of the securities portfolio: the traditional approach and

Markowitz's efficient frontier approach. The traditional approach evaluates the demands of

investors in terms of income and capital appreciation, selecting appropriate securities to meet

investors' needs. In the traditional approach, the normal practise is to assess the individual's

whole financial plan Portfolios are designed to optimise the expected return on a given degree

of risk under the current approach. It looks at the construction of the portfolio in terms of the

expected return and the risk associated with the expected return.

Strong portfolio:

59
In order to build an efficient portfolio, several investment combinations in a basket are to be

conceptualised and designated as 'N' portfolio one. The predicted returns from these

portfolios must then be developed and portfolios measured by assessing the standard

deviation of various portfolio returns. In order to lower risks, investors must diversify into a

range of securities with varying risk-return profiles. A single asset or asset portfolio is called

"efficient" if no alternative asset has the same risk or the same expected return with higher

expected returns. A portfolio is considered to be efficient when the maximum returns are

predicted for the allowed level of risk or, alternately, for the smallest portfolio risk or a

certain level of expected return risk.

Main characteristic of an efficient portfolio set:

1. The investor determines an efficient set of portfolios from a universe of n securities,

whereas the sub-set of n securities is an efficient portfolio.

2. An investor selects the specific efficient portfolio which gives him or her the most

appropriate combination or risk of return.

PORTFOLIO MODERN APPROACH:

MODEL MARKOWITZ

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Harry M. Markowitz has acknowledged and introduced the new risk assessment concept and

its application to portfolio selection. He started with the premise that investors are at risk and

that they want to maximise projected returns with the lowest risk. The Markowitz model is a

theoretical framework for the examination and linkages between risk and return. He

employed statistical analyses to gauge risk and mathematical programming efficiently to

select assets in a portfolio. Its foundation led to the concept of efficient portfolios, which are

anticipated to offer the maximum return on risk or risk for a specific return level. Risk and

return two investment aspects that investors examine. The predicted return may vary very

much on the assumptions. The risk index is assessed by the variance or distribution around

the mean of its portfolio etc. And the choice of stocks focuses historically on lesser

variability, where Markowitz stresses that a combination of securities whose overall

variability is lower is needed to maximise returns. There is a different risk to each security

and a good mix of securities, known as diversification, allows one to construct a portfolio,

where the other counters the risk of one security in part and in full. In other words, the

variability of each security and covariance expressed by its interrelationship should be taken

into consideration. Therefore, for the choosing of a portfolio, predicted returns and the

covariance of securities returns within the portfolio have to be taken into account. A series of

efficient portfolios can be created by combining the aforesaid process of various assets whose

combined risks for the same amount of investment are lower than those for which the

investor is capable of the theory of Markowitz, according to the number of assumptions as

indicated above.

ASSUMPTIONS OF MARKOWITZ THEORY

The Markowitz model's analytical framework work is built on many assumptions

regarding investor behaviour:

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1. For a specific time known as the holding period, the investor invests his money

2.

He will sell the investments at the end of the holding period.

3. Then he spends the money for either the aim of consumption, reinvestment or both. The

strategy consequently works well for a short period.

4. The effectiveness of the market insofar as all investors are adequately informed on all the

stock market facts.

5. As the portfolio is a securities collection, a judgement on an optimal portfolio from a set of

alternative portfolios is necessary.

6. Security returns are unknown throughout the next period, so the investor can only estimate

the expected return (ER).

7. All investors are unwilling to risk.

8. Investors examine how the security returns co-relate and combine the assets to offer

maximum income with the lowest risk in an optimum approach.

9. He would select the best depending on the relative size of the two factors.

62
10. Investors are based on the price-earning ratio for their judgments. Standard deviation

from the expected rate of return for an investment is one of the major variables that investors

consider in the choice of different securities.

DIVERSIFICATION FACILITIES

Markowitz argued that the purpose of diversification was not just to reduce the risk of a

security by reducing its variability or standard deviation, but also to reduce the covariance or

interactive risk of 2 or more portfolio assets. Theoretically, by combining multiple securities,

a range of risks vary from zero to infinity. In order to reduce the covariance to null if

possible, the Markowitz theory of portfolio diversification attaches great importance to the

standard deviation so as to have the maximum negative interactive effect between portfolio

securities and the correlation coefficient to -1 (negative), so that the overall Portfolio risk as a

whole is nil or minimal. The securities must then be pooled in a way that the standard

deviation is zero.

Frontier Efficient:

The minimal variable portfolio for the Markowitz model is used to determine the proportion

of first security and second security investments. It signifies that the portfolio is made up of

only two stocks. When different portfolios and their expected returns and standard deviation

risk rates are utilised to determine the optimal effective portfolio border. Efficient frontier is

graphical representation on the idea that the portfolio can select the best returns at the lowest

risk. The investor can then choose a portfolio. This holding duration can be used to determine

the portfolio. The portfolio risk rate for the "X" axis (s.d.of p) and portfolio returns for the

63
"Y" axis should be shown. Calculate portfolio return and standard portfolio deviation for

different weight combinations of two assets. Various returns are displayed on the graph and

the ideal point is identified.

Expected Return Calculation (ERR)

· Calculate the proportion of the total investment of each Security.

è It gives the weights for each Securities component.

· Multiply the weights of the monies invested in each component.

THERE It gives the starting market worth or riches.

Rp = w1R1 +w2R2 + w3R3 +............... 

Where Rp = Expected portfolio return

= Proportional weight invested w1, w2, w3, w4

R1, R2, R3, R4 = anticipated securities returns

Portfolio return rates are always the average weighted securities in the portfolio.

PORTFOLIO RISK STIMATION

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A useful risk measure should take into account both the probability and related magnitude of

various conceivable malfunctions. The degree to which the actual result will deviate from the

expected outcome would be estimated instead of assessing the likelihood of a number of

various possible outcomes and the optimum measurement of risk.

For this aim, two measures are used:

1. Absolute average deviation.

2. Default deviation.

Several estimates are needed to evaluate the total risk of an asset portfolio:

a) The forecast portfolio return is only a weighted average of the expected securities returns

by using the proportionate values as weights.

b) The portfolio risk not only depends on the risk of securities thought to be isolated, but also

on the amount to which underlying events affect them in a comparable way.

c) the deviation from the expected value of each security is determined and the product of the

two is obtained.

d) the variance is a weighted average of such products that use event probabilities as weights

65
Combining effect of two securities:

The distribution of the portfolio in two securities is regarded to be less risky than the

concentration of only one security. If two stocks that have a negative correlation are picked

on the basis of a portfolio risk, the gain in one would fully compensate for the loss in the

other. The influence on each other of two securities, one more risky and the other less

dangerous, can also be investigated. The theory of Markowitz is also used for multiple

securities.

Ports of Corners: Corner:

A number of efficiency portfolios are corner portfolios, new securities or securities or

securities that have been lost from prior efficient portfolios. The predicted return of the

portfolio could be enhanced without a risk shift by swapping one security with another.

Principle of dominance:

It was built to conceptually grasp the trade in risk returns. Efficient frontier analysis assumes

investors prefer returns and risk dislikes.

Markowitz Theory Criticism:

The Markowitz model has various critiques, both theoretical and practical,

a) A computer is quite tiresome and constantly required to make various computations

66
b) Another critique relates to the sensible investor of this approach could avert risk.

c) Most works stimulated by Markowitz use short-term volatility to determine if a high, or

low expected variance should be assigned to the expected rates of return on the security, but

if an investor has restricted limited liquidity and is a true long-term owner, price volatility per

se doesn't really pose a risk. In this scenario, rather than intermediate volatility, the question

is one of eventual price realisation.

d) Another obvious barrier is the fact that it was difficult for practitioners of investment

managers to understand the conceptual mathematics involved in computing different risk and

return measures. There has been considerable criticism of the inherently faulty academic

approach to portfolio management.

e) Security analysts are not comfortably able to calculate the covariance between securities

while assessing possible error ranges.

CAPITAL ASSETS PRICING MODEL (CAPM)

Under CAPM model the changes in prices of capital assets in stock exchanges can be

measured by sung the relationship between security return and market return. So it is an

economic model describes how the securities are priced in the market place. By using CAPM

model the return of security can be calculated by comparing return of security with market

rate. The difference of return of security and market can be treated as highest return and the

risk premium of the investor is identified. It is the difference between return of security and

risk free rte of return.

[Risk premium = Return of security – Risk free rate of return]

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So the CAPM attempts to measure the risk of a security in the portfolio sense.

Assumptions:

The CAPM model depends on the following assumptions, which are to be considered

while calculating rate of return.

 The investors are basically average risk assumers and diversification is needed to

reduce the risk factor.

 All investors want to maximize the return by assuming expected return of each

security.

 All investors assume increase of net wealth of the security.

 All investors can borrow or lend an unlimited amount of fund at risk free rate of

interest.

 There are no transaction costs and no taxes at the time of transfer of security.

 All investors have identical estimation of risk and return of all securities. All the

securities are divisible and tradable in capital market

 Systematic risk factor can be calculated and it is assumed perfectly by the investor.

 Capital market information must be available to all the investor.

Beta:

Beta describes the relationship between the stock return and the Market index returns.

This can be positive and negative. It is the percentage change is the price of he stock

regressed (or related) to the percentage changes in the market index If beta is 1, a one-

percentage change in Market index will lead to one percentage change in price of the stock. If

Beta is0, stock price is unrelated to the Market Index and if the market goes u by a +1%, the

stock price will fall by 1% Beta measures the systematic market related risk, which cannot be

eliminated by diversification. If the portfolio is efficient, Beta measures the systematic risk

effectively.

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Evaluation process:

1. Risk is the variance of expected return of portfolio.

2. Two types of risk are assumed they are

a) Systematic risk

b) Unsystematic risk

3. Systematic risk is calculated by the investor by comparison of security return with

market return.

 = Co – Variance of security and market

Variance of Market

Higher value of beta indicates higher systematic risk and vice versa. When numbers

of securities are holded by the investor, composite beta or portfolio can be calculated by the

use of weights of security and individual beta.

4) Risk free rate of return is identified on the basis of the market conditions.

The following 2 methods are used for calculation of return of security or portfolio.

Capital market Line:

Under CAPM model capital market line determined the relationship between risk and

return of efficient portfolio. When the risk rates of market and portfolio risk are given,

expected return of security or portfolio can be calculated by using the following formula.

ERP = T +p (Rpm – T)

M

ERP = Expected return of portfolio

T = risk free rate of return

p = Portfolio of standard deviation

Rpm = Return of portfolio and market

M = Risk rate of the market.

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Security Market Line:

Identifies the relationship of return on security and risk free rate of return. Beta is

used to identify the systematic risk of the premium. The following equation is used for

expected return.

ERP = T + (Rm – T)

Rm = Return of market

T = Risk free rate

Limitations of CAPM:

In practical purpose CAPM can’t be applied due to the following limitations.

1. The calculation of beta factor is not possible in certain situation due to more assets

are traded in the market.

2. The assumption of unlimited borrowings at risk free rate is not certain. For every

individual investor borrowing facilities are restricted.

3. The wealth of the share holder or investor is assessed by sing security return. But

it is not only the factor for calculation of wealth of the investor.

4. For every transfer of security transition cost is required on every return tax must

be paid.

TECHNIQUES OF PORTFOLIO MANAGEMENT

As of now the under noted techniques of Portfolio Management are in vogue in our

country:

1. Equity Portfolio:

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 Equity portfolio is influenced buy internal and external factors. Internal factors affect

inner working of the company. The company’s growth plans are analyzed with respect to

Balance sheet and Profit & Loss Accounts of the company. External factors are changes

in Government Policies, Trade cycles, Political stability etc.

2. Equity analysis:

Under this method future value of shares of a company is determined. It can be done

by ratios of earning per shares and price earning ratio.

EPS = Profit after tax

No. of Equity Shares

P/E Ratio = Market Price per Share

No. of equity Shares

One can estimate the trend of earning by analyzing EPS which reflects the trend of

earnings, quality of earning, dividend policy and quality of management. Further price

earnings ratio indicates the confidence of market about company’s future.

SELECTION OF PORTFOLIO

Certain assumptions were made in the traditional approach for portfolio selection,

which are discussed below:

1. Investors prefer large to smaller returns from securities and take more risk.

2. Ability to achieve higher returns depends upon investors judgment of risk.

3. Spreading money among many securities can reduce risk.

An investor can select the best portfolio to meet his requirements from the efficient frontier,

by following the theory propounded by Markowitz. Selection process is based on the

satisfaction level that can be achieved from various investment avenues.

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STAGES IN THE SELECTION PROCESS:

The process of selecting a portfolio is very crucial in the investment management and

involves four stages which are given below:

1. Determination of assets, which are eligible for constructing of a portfolio.

2. Computation of the expected Return for the eligible assets over a holding period.

3. Arriving at an acceptable balance between risk and return for constructing

optimum a portfolio i.e. selecting such a portfolio for which there is highest return

for each level of risk.

SELECTING THE BEST PORTFOLIO MIX

When an infinite number of portfolios are available, investor selects the best portfolio

by using the Markowitz Portfolio Theory. The investors base their selection on the Expected

return and Standard Deviation of the portfolio and decide the best portfolio mix taking the

magnitude of these parameters. The investors need not evaluate all the portfolios however he

can look at only the available portfolios, which lie on the Efficient Frontier.

The required features of the subset of portfolio are:

They should offer maximum Expected Return for varying levels of risk, and also offer

minimum risk for varying levels of Expected Returns.

If the above two conditions are satisfied then it is deemed as an efficient set, from this set

investors have to select the best setoff portfolios

Construction of efficient set of portfolios.

Considerable effort is required to construct a efficient set of portfolios.

72
Following parameters are essential for constructing the efficient set:

1. Expected returns for each security must be estimated.

2. Variance of each security must be calculated.

Optimum Portfolio:

Sharpe has identified the optimal portfolio through his single index model, according

to Sharpe; the beta ratio is the most important in portfolio selection.

The optimal portfolio is said to relate directly to the beta value. It is the excess return to the

beta ratio. The optimal portfolio is selected by finding out he cu-off rate [c]. The stock where

the excess return to the beta ratio is greater than cutoff rate should only be selected for

inclusion in the optimal portfolio. Sharp proposed that desirability of any stock is directly

referred to its excess returns to betas coefficient.

Ri – Rf

Where

Ri = Expected return on stock

Rf = Return on risk free asset

 = Expected change in the rate of return on stock 1 associated with 1% change in the

market runt

Following procedure is involved to select he stocks for the optimum portfolios.

1. Finding out the stocks of different risk – return ratios

2. Calculate excess return beta ratio for each stock and rank them from highest to

lowest

3. Finding out the cur-off rate for each security.

73
 4. Selecting securities of high rank above the cur-off rate which is common to all

stocks

Thus, the optimum portfolio consists of all stocks for which (Ri – Rf) is grater than a

particular cut-off point[C*]. The selection number of stocks depends upon the unique cut-off

rate, where all stocks with higher rate (Ri – Rf) will be selected and stocks with lower rates

will be eliminated.

PORTFOLIO REVISION

Having constructed the optimal portfolio, the investor has to constantly monitor the

portfolio to ensure that it continues to be optimal. As the economy and financial markets are

dynamic, the changes take place almost daily. The investor now has to revise his portfolio.

The revision leads to purchase of new securities and sale of some of the existing securities

from the portfolio.

NEED FOR REVISION:-

 Availability of additional funds for investment

 Availability of new investment avenues

 Change in the risk tolerance

 Change in the time horizon

 Change in investment goals

 Change in liquidity needs

 Changes in taxes

PORTFOLIO EVALUATION

74
 Portfolio managers and investors who manage their own portfolios continuously

monitor and review the performance of the portfolio. The evaluation of each portfolio,

followed by revision and reconstruction are all steps in the portfolio management.

The ability to diversify with a view to reduce and even eliminate all unsystematic risk and

expertise in managing the systematic risk related to the market by use of appropriate risk

measures, namely, Betas. Selection of proper securities is thus the first requirement.

Methods of Evaluation:

 Sharpe index model: it depends on total risk rate of the portfolio. Return of the

security compare with risk free rate of return, the excess return of security is

treated as premium or reward to the investor. The risk of the premium is

calculated by comparing portfolio risk rate. While calculating return on security

any one of the previous methods is used. If there is no premium Sharpe index

shows negative value (-). In such a case the portfolio is not treated as efficient

portfolio.

Sharpe’s ratio (Sp) = rp-rf/p

Where,

Sp= Sharpe index performance model

rp= return of portfolio

rf= risk free rate of return

p= portfolio standard deviation

This method is also called “Reward to Variability” method. When more then one

portfolio is evaluated highest index is treated as first rank. That portfolio can be treated as

better portfolio compare to other portfolios. Ranks are prepared on the basis of

descending order.

75
 Treynors index model:

It is another method to measure the portfolio performance. Where systematic

risk rate is used to compare the unsystematic risk rate. Systematic risk rate is measure

by beta. It is also called “Reward to Systematic Risk”.

Treynors Ratio (Tp) = rp – rf/p

Where,
Tp= Treynors portfolio performance model
rp= return of portfolio
rf = risk free rate of return
p = portfolio standard deviation.
If the beta portfolio is not given market beta is considered for calculation of the

performance index. Highest value of index portfolio is accepted.

 Jensen’s index model:

It is different method compared to the previous methods. It depends on return

of security which is calculated by using CAPM. If the actual security returns is less

than the expected return of CAPM the difference is treated as negative (-) then the

portfolio is treated as inefficient portfolio.

Jp= rp-[rf+p (rm-rf)]

Where,

Jp= Jensen’s index performance model

rf= risk free rate of return

rp= return of portfolio

p= portfolio standard deviation

rm= return on market

This method is also called “reward to variability” method. When more than one

portfolio is evaluated highest index is treated as first rank. That portfolio can be

76
 treated as better portfolio compared to other portfolios. Ranks are prepared on the

basis of descending order.

CHAPTER III
INDUSTRY PROFILE & COMPANY PROFILE

INDUSTRY PROFILE
Following diagram gives the structure of Indian financial system:

77
FINANCIAL MARKET

Financial markets are helpful to provide liquidity in the system and for smooth
functioning of the system. These markets are the centers that provide facilities for buying

78
and selling of financial claims and services. The financial markets match the demands of
investment with the supply of capital from various sources.

According to functional basis financial markets are classified into two types.
They are:
 Money markets (short-term)
 Capital markets (long-term)
According to institutional basis again classified in to two types. They are
 Organized financial market
 Non-organized financial market.

The organized market comprises of official market represented by recognized institutions,

bank and government (SEBI) registered/controlled activities and intermediaries. The
unorganized market is composed of indigenous bankers, moneylenders, individual
professional and non-professionals.

MONEY MARKET:
Money market is a place where we can raise short-term capital.
Again the money market is classified in to
 Inter bank call money market
 Bill market and
 Bank loan market Etc.
 E.g.; treasury bills, commercial papers, CD's etc.

CAPITAL MARKET:
Capital market is a place where we can raise long-term capital.
Again the capital market is classified in to two types and they are
 Primary market and
 Secondary market.
E.g.: Shares, Debentures, and Loans etc.

PRIMARY MARKET:

79
 Primary market is generally referred to the market of new issues or market for
mobilization of resources by the companies and government undertakings, for new
projects as also for expansion, modernization, addition, diversification and up gradation.
Primary market is also referred to as New Issue Market. Primary market operations
include new issues of shares by new and existing companies, further and right issues to
existing shareholders, public offers, and issue of debt instruments such as debentures,
bonds, etc.
The primary market is regulated by the Securities and Exchange Board of India (SEBI a
government regulated authority).
Function:
The main services of the primary market are origination, underwriting, and distribution.
Origination deals with the origin of the new issue. Underwriting contract make the shares
predictable and remove the element of uncertainty in the subscription. Distribution refers
to the sale of securities to the investors.
The following are the market intermediaries associated with the market:
1. Merchant banker/book building lead manager
2. Registrar and transfer agent
3. Underwriter/broker to the issue
4. Adviser to the issue
5. Banker to the issue
6. Depository
7. Depository participant
Investors’ protection in the primary market:
To ensure healthy growth of primary market, the investing public should be protected.
The term investor protection has a wider meaning in the primary market. The principal
ingredients of investors’ protection are:
 Provision of all the relevant information
 Provision of accurate information and
 Transparent allotment procedures without any bias.

SECONDARY MARKET

80
 The primary market deals with the new issues of securities. Outstanding securities are
traded in the secondary market, which is commonly known as stock market or stock
exchange. “The secondary market is a market where scrip’s are traded”. It is a
market place which provides liquidity to the scrip’s issued in the primary market. Thus,
the growth of secondary market depends on the primary market. More the number of
companies entering the primary market, the greater are the volume of trade at the
secondary market. Trading activities in the secondary market are done through the
recognized stock exchanges which are 23 in number including Over The Counter
Exchange of India (OTCE), National Stock Exchange of India and Interconnected Stock
Exchange of India.
Secondary market operations involve buying and selling of securities on the stock
exchange through its members. The companies hitting the primary market are mandatory
to list their shares on one or more stock exchanges in India. Listing of scrip’s provides
liquidity and offers an opportunity to the investors to buy or sell the scrip’s.
The following are the intermediaries in the secondary market:
1. Broker/member of stock exchange – buyers broker and sellers broker
2. Portfolio Manager
3. Investment advisor
4. Share transfer agent
5. Depository
6. Depository participants.

Stock Markets in India

Stock exchanges are the perfect type of market securities whether of

government and semi- government bodies or public bodies as also for shares
and debentures issued by the joint stock companies. In the stock market,
purchases and sale of shares are affected in conditions of free competition.
Government securities are traded outside the trading ring in the form of
over the
counter sales or purchase. The bargains that are struck in the trading ring by
the members of the stock exchanges are the fairest prices determined by the
basic laws of supply and demand.

81
Definition of Stock Exchange

Stock exchange means anybody or individuals whether incorporated or not

constituted for the purpose of assisting, regulating or controlling the business
of buying, selling or dealing in securities. The securities include:

➢ Shares of public company

➢ Government securities

➢ Bonds

History of Stock Exchanges

The only stock exchanges operating in the 19th century were those of Mumbai
setup in 1875 and Ahmadabad in 1973. During the war boom, a number of
stock exchanges were organized. Soon after it became a central subject,
central legislation was proposed and a committee headed by
A.D. Gorwala went into the bill for securities regulation. On the basis of the
committee’s recommendations and public discussion, the securities contract
(regulation) act became law in 1956.

Functions of Stock Exchanges

Stock exchanges provide liquidity to the listed companies; they help in

trading and raise funds from the market. Over the 120yrs during which the
stock exchanges have existed in this country and through their medium, the
central and the state government had raised cores of rupees by floating public
loans. Municipal corporations, trust and local bodies have obtained from the
public their financial requirements, and industry, trade and commerce the
backbone of the country’s economy have secured capital of cores of rupees
through the issue of stocks, shares, debentures for financing their day to day
activities, organizing new ventures and completing projects of expansion,
diversification and modernization. By obtaining listing and trading facilities,
public investment increased and companies were able to raise more funds.
The quoted companies with wide public interest have enjoyed some benefits
and assets valuation has become easier for tax and other purposes.

82
BOMBAY STOCK EXCHANGE (BSE)

The Bombay Stock Exchange Limited is the oldest stock exchange not only
in the country, but also in Asia with a rich heritage of over 133 years of
existence. In the early days BSE was established as “The Native Share and
Stock Brokers Association.”

It was established in the year 1857 and became the first stock exchange in the
country to be recognized by the government. In 1956, BSE obtained a
permanent recognition from the government of India under the securities
contract (Regulation) Act 1956.

Today, BSE is the world No1 exchange in terms of number of listed

companies and the world’s fifth in handling the transactions through its
electronic trading system.

The companies listed on BSE command a total market capitalization of USD

Trillion 1.06 as of July 2011. BSE reaches to over 400 cities and town
nation-wide and has around 4937 listed companies; with over 7745 script’s
being traded as on 31st July 2011.

The BSE Index, SENSEX, is India’s first and most popular stock market
benchmark index. The BSE SENSEX (Sensitiveindex), also called the “BSE
30”, is a widely used market index in India and Asia. Sensex is tracked
worldwide. It constitutes 30 stocks representing 12major sectors. The
SENSEX is constructed on a ‘free-float’ methodology, and is sensitive to
market moments and market realities. Apart from the SENSEX, BSE offers
23 indices, including 13 sectorial indices. BSE provides an efficient and
transparent market for trading in equity, debt instruments and derivatives.

BSE is the first exchange in India and the second in the world to obtain an
ISO 9001:2000 certifications. It is also the first exchange in the country and
second in the world to receive Information Security Management System
Standard BS 7799-2-2002 certification for its BSE On-Line Trading System
(BOLT). BSE continues to innovate. In 2006, it became the first national
stock exchange to launch its website in Gujarati and Hindi and now Marathi

83
 to reach out to a larger number of investors.

BSE On-Line Trading (BOLT)

BSE On-Line Trading (BOLT) facilities on-line screen based trading in

securities. BOLT is currently operating in 25000 Trader workstations located
across over 359 cities in India.

BSE Vision

The vision of Bombay Stock Exchange:

“To emerge as the premier Indian Stock Exchange by establishing global benchmarks".

BSE Profile

MD & CEO : Mr. Madhu Kannan

Address : Phiroze Jeejeebhoy Towers, Dalal Street

Mumbai-400001, India Telephone : 91-22-227212334

Website : www.bseindia.com

Trading Hours : Monday-

Friday, 9:15am to 3:30pm Securities :

Stocks, Derivatives

and Debt Trading System : Electronic

Indices of BSE

▪ SENSEX

▪ BSE 100 (This covers Banking Sector)

▪ BSE 200 (This covers Capital Goods)

▪ BSE 500 (This covers Consumer Goods)

▪ BSE mid-cap index

84
 ▪ BSE small-cap index
BSE mid-cap index covers the FMCG sector and BSE small-cap index covers
the IT, Metal, Oil & Gas, Power Industry, PSU’s etc. BSE disseminates
information on the Price Earnings Ratio, the Price to Book Value Ratio and
the Dividend Yield Percentage on day to day basis of all its major indices.

The values of all BSE indices are updated every 15 seconds during market
hours and displayed through the BOLT system, BSE website and news wire
agencies. All BSE Indices are reviewed periodically by the BSE Index
Committee. This committee which comprises eminent independent finance
professionals frames the broad policy guidelines for the development and
maintenance of all BSE Indices. The BSE Index cell carries out the day to
day maintenance of all indices and conducts research on development of new
indices.

Awards Achieved by BSE

❖ The World Council of Corporate Governance has awarded a Golden

Peacock Global CSR Award for BSE’s initiatives in Corporate Social
Responsibility (CSR).

❖ ICIA Award for excellence in financial reporting for the year 2006-2007.

❖ BSE has won the Asia-Pacific award HRM awards for its efforts in
employer branding through talent management at work, health
management at work and excellence in HR through technology.

NATIONAL STOCK EXCHANGE (NSE)

HISTORY OF NSE

Capital Market reforms in India and the launch of Securities and Exchange
Board of India (SEBI) accelerated the incorporation of the second Indian
Stock Exchange called National Stock Exchange (NSE) in 1992. After few
years of operations, the NSE has become the largest stock exchange in India.
Three segments of the NSE trading platform were established one after

85
another. The Wholesale Debt Market (WDM) commenced operation in June
1994. Finally, the Futures and Options segment began in operating 2000.
Today the NSE takes 14th position in the top 40 futures exchanges in the
world.In 1996, the National Stock Exchange of India launched S&P CNX
Nifty and CNX Junior Indices that make up 100 most liquid stocks in India.
CNX Nifty is a diversified index of 50 stocks from 25 different economy
sectors. The indices are owned and managed by India Index Services and
Products Limited (IISL) that has a consulting and licensing agreement with
Standard and Poor’s.

In 1998, The National Stock Exchange of India launched its website and
was the first exchange in India that started trading stock on the internet in
2000. The NSE has also proved its leadership in the Indian Financial Market
by gaining many awards such as ‘Best IT Usage Award’ by Computer
Society in India (in 1996 and 1997) and CHIP Web Award by CHIP
magazine (1999).

The National Stock Exchange of India Limited is the Mumbai-based stock

exchange. It is the largest stock exchange in India in terms of daily turnover
and number of trades, for both equities and derivatives trading.

NSE has a capitalization of around ` 47, 01,923 core and is expected to

become biggest stock exchange in India in terms of market capitalization.
Though a number of other exchanges exist, NSE and Bombay Stock
Exchange are the two most significant stock exchanges in India and between
them are responsible for the vast majority of share transactions.

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

insurance companies and other financial intermediaries in India but its
ownership and management operate as separate entities.

There are at least 2 foreign investor NYSE Euro next and Goldman Sachs
who have taken a stake in the NSE. As of 2010, the NSE VSAT terminals,
2799 total, cover more than 1500 cities across India. In October 2011, the
equity market capitalization of the companies listed on NSE was US$ 1.46
trillion, making it the second largest stock exchange in South Asia. NSE is

86
 the third largest Stock Exchange in the world in terms of number of trades in
equities. It is the second fastest growing stock exchange in the world with a
recorded growth of 16.6%.

ORIGINS

The National Stock Exchange of India was promoted by leading financial

institutions at the behest of the Government of India, and was incorporated
in November 1992 as a tax paying
company. In April 1993, it was recognized as a Stock Exchange under the
Securities Contracts (Regulation) Act, 1956. NSE commenced operations in
the Wholesale Debt Market (WDM) segment in June 1994. The Capital
Market (Equities) segment of NSE commenced operations in November
1994, while operations in the Derivatives segment commenced in June 2000.

MARKETS

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

 Equity

 Futures and Options

 Retail Debt Market

 Wholesale Debt Market

 Currency Futures

NSE has become the first Stock Exchange to get approval for the interest rate
futures as recommended by SEBI-RBI committee, on 31August 2009, a
futures contract based on 7% 10 year GOI Bond (NOTIONAL) was launched
with quarterly maturities.

HOURS

NSE’s normal trading sessions are conducted from 9:00 am India Time to
3:30 pm India Time on all days of the week except Saturdays, Sundays and

87
 Official Holidays declared by the Exchange (or by the Government of India)
in advance. The exchange in association with BSE (Bombay Stock Exchange
Ltd) thinking to revise its timings from 9:00 am India Time till 5:00 pm India
Time. However, on Dec 17, 2009, after strong protest from brokers, the
Exchange decided to postpone the change in trading hours till Jan 04, 2010.
NSE new market timing from Jan 04, 2010 is 9:00 am till 3:30 pm India
Time.

NSE GROUP

✓ National Securities Cleaning Corporation Ltd (NSCCL)

✓ National Securities Depository Ltd (NSDL)

✓ India Index Service & Products Ltd (IISL)

✓ NSE.IT Ltd

✓ DotEx International Limited

Indices of NSE

NSE also set up as index services firm known as India Index Services &
Products Limited (IISL) and has launched several stock indices, including:

 S&P CNX Nifty (Standard & Poor’s CRISIL NSE Index)

 CNX Nifty Junior

 CNX 100 (= S&P CNX Nifty + CNX Nifty Junior)

 S&P CNX 500 (= CNX 100 + 400 major players across 72 industries)

 CNX Midcap (introduced on 18 July 2005 replacing CNX Midcap 200)

MISSION OF NSE

NSE’s mission is setting the agenda for change in the securities markets in
India. The NSE was set up with the main objectives of:

88
  Establishing a nation-wide trading facility for equities, debt instruments and
hybrids.

 Ensuring equal access to investors all over the country through an

appropriate communication network.

 Providing a fair, efficient and transparent securities market to

investors using electronic trading system.

 Enabling shorter settlement cycles and book entry settlements system

CD EQUISEARCH COMPANY PROFILE

CD Equisearch is one of the leading brokerage houses with a strong presence in the
institutional and HNI broking segment

With over 40 years of experience, you could be sure of the best in class research, operations,
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At CD Equisearch, people are not weighed down by tradition. Rather, we are inspired by the
rich heritage of the company. Here, business is conducted by building long term relationships
with our clients and associates by laying emphasis on ethical and clean dealings. Here, people
practice the gentle art of finance with professionalism, skill and transparency. At CD
Equisearch, we do business quietly.

Continued growth which is so essential in today’s fast paced and ever changing capital
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our most important asset, over the years.

Our Products
Equity & Derivatives

Investing in shares or stock market is inarguably the best route to long-term wealth
accumulation. However, it can also be a very risky proposition due to high risk-return trade-
off prevalent in the stock market. Hence, it is more appropriate to take help of an experienced

89
 and trustworthy expert who will guide you as to when, where and how to invest. Our sole
purpose is to assist you, the investor, to make deliberate and calculated decisions that will
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 Excellent trade execution capabilities on BSE, NSE

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CD helps you identify the opportunities in market and make money out of them.

You merely have to open an account with CD and then trade in any of the following 3 ways:

Currency

Currency Derivatives have evolved into a reliable asset class due to its deep liquidity,
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Depository Participant

CD is a registered member / Depository Participant of CDSL (Central Depository Services

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Mutual Funds

90
 Investing in a Mutual Funds is the most sensible route to utilize the best fund- management
talents available in the country. CD presents its Mutual fund services that strive to meet all
your mutual fund investment needs. We have a wide spectrum of investment schemes from
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in a diversified and professionally managed basket of securities at a relatively low cost.

IPO

An Initial Public offer (IPO) is the selling of securities to the public in the primary market. It
is when an unlisted company makes either a fresh issue of securities or an offer for sale from
its existing securities or both for the first time to the public. This paves the way for listing and
trading of the issuer’s securities. The sale of securities can be either through book building or
through normal public issue.

Why do companies go for an IPO or become public?

 )An IPO raises capital for the company.

 )It dilutes equity holdings of founders and investors and brings public investors.
 )It gives capital to companies for expansion.
 )It is a moment of pride for the company as it boosts corporate image.
How does an IPO take place?

 )When a company wants to go public, the first thing it does is hire a financial advisor
or an investment bank to manage the public issue.
 )The company and the investment bank meet to discuss the amount of money the
company would raise, the type of securities to be issued, and all details in the underwriting
agreement.

91
 CHAPTER IV

DATA ANALYSIS INTEREETATION

PRACTICAL ANALYSIS

Portfolio A

C=
Un Excess Cumulative
(Ri-Rf)  Cu n
Beta Syste Return _____________ mulative 2  2 m2t=1 (Ri-Rf) 
(Ri-Rf) 
__________ ____________________
2e
__________

SecuritiesReturns Valuesmetic Over ( 2e

_____________ e 2
2e
R% Risk Ri – Rf 2e n
() _____________
1+ m t=1 2
2

2e (%)  ________

2e
Bharti 14.2 0.88 29 10.5 0.2822 0.2822 0.0286 0.0288 2.19
Airtel
ITC 10.1 0.99 18.65 5.2 0.2654 0.5476 0.1133 0.1420 2.26
Guj 10.5 1.03 35 4.5 0.1618 0.7094 0.0303 0.1723 2.606
Amb.com
ICICI 8.8 0.91 12.33 4.3 0.2878 0.9972 0.0801 0.2524 2.830
Bank
BHEL 9.4 1.06 30.5 4.24 0.1564 1.1536 0.0368 0.2892 2.964
HDFC 9.1 0.96 14.83 4.2 0.2590 1.4126 0.1908 0.4799 2.45
Bajaj 8.4 1.03 14 3.39 0.2575 1.6701 0.1326 0.6124 2.34
Auto
Acc 8.6 1.06 28 3.30 0.1325 1.8026 0.0401 0.6526 2.39
Hindalco8.3 1.29 12 2.7 0.3762 2.1788 0.1664 0.8190 2.37

HDFC 6.6 0.82 32 2.39 0.0461 2.2249 0.0210 0.84 2.36 c*

Bank
HLL 7.1 1.03 26 1.9 0.0792 2.3041 0.0408 0.8808 2.34
Dr. 6.1 0.69 20 1.5 0.0345 2.3386 0.0238 0.9046 2.32
Reddys

Note: -C* is the cut-off point to include the securities in to portfolio.

92
INTERPRETATION:

 Construction of optimal portfolio starts with determines which securities are included in the

portfolio, for this the following steps necessary.

 Calculation of’ excess return to beta ratio’ for each securities under review and rank from

highest to lowest.

 The above table shows that the construction of optimal portfolio from BSE SENSEX scripts.

 In the above table all the securities whose ‘excess return to beta ‘ratio are above the cut-off

rate are selected and all those whose ratios are below are rejected.

 For the portfolio-A selected scripts are 10 out of twelve whose “excess return to beta” ratio

are above the cutoff rate (2.36 C*) are included in the portfolio basket. HLL (1.9 < 2.34)

Dr.Reddy’s (1.5 < 2.32) securities excess return to beta ratios are less than the cut-off so

those are excluded from the portfolio.

93
 PORTFOLIO B

Note: -C* is the cut-off point to include the securities in to portfolio

INTERPRETATION:

 The desirability of any securities to include in the portfolio is directly related to excess return

to beta ratio and cut-off rate.

 The above information shows that for securities of Satyam computers to NTPC Ri – Rf /  is

less than C*. While securities 11&12 are less than C*. So from Satyam computers to NTPC

 all the ten securities are included in the portfolio and ONGC & TATA consultancy services

are not added in the optimal portfolio.

94
 PORTFOLIO C:

INTERPRETATION

 For the portfolio-C selected scripts are 12companies and portfolio basket consists of all the

selected scripts whose excess return to beta ratios are always greater than cutoff rates.

95
 So the optimal portfolio consists of selected all 12 securities.

CHAPTER V

FINDINGS

 The investor can recognize and analyze the risk and return of the shares by using this

analysis.

 The investor who bears high risk will be getting high returns.

 The investor who is having optimum portfolio will be taking optimum returns with

minimum risk.

 The investor should include all securities which are undervalued in their portfolio and

remove those securities that are over valued.

 The investor has to maintain a portfolio of diversified sector stocks rather than

investing in a single sector of different stocks.

 People who are investing in them mostly depend on the advice of their friends,

relatives and financial advisors.

 People generally invest their savings in fixed deposits, recurring deposits, and

national savings certificate and government securities as they are less risky and the

returns are guarantied.

 Every investor invests in basic necessities. They plan to invest in insurance (LIC,

GIC) and pension funds as these give guarantied returns and are less risky.

 Most of the investors feel that investing in stock/capital market is of high risk

therefore they don’t invest in them.

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 CONCLUSIONS

 When compared to other portfolios, portfolio-C gives him the maximum return with

twelve scripts.

 The diversification of funds in different company scripts is possible from the portfolio-C

when compared to others.

 Market risk is also less when compared to the other portfolio.

 If the portfolio manager is efficient and the investor is risk tolerant person and the

investment is a long term perspective then it is better to invest in the MID-Caps &

SMALL-Caps companies securities, where the growth of returns are higher than the

LARGE-Caps .

 If investor is not risk tolerant person & short-term perspective it’s good to invest in large

caps companies’ securities.

 I feel that this year small cap and mid cap companies will be performing well when

compared to large cap as we have observed last year.

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 BIBLIOGRAPHY

TEXT BOOKS

Investments

By SHARPE & ALEXANDER

Security Analysis and Portfolio Management

By FISCHER & JORDAN

Investment Analysis and Portfolio Management.

By PRASANNA CHANDRA

WEBSITES

www.bseindia.com

www.nseindia.co

www.economictimes.com

www.moneycontrol.com

www.yahoofinance.com

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