Portfolio Management

Portfolio Construction Optimization

Group Assignment Submission

Submitted by
 
1. Rajani Nair - 2019B1PGPMX025
2. Paresh Kerkar    - 2019B1PGPMX023
3. Jayasekharan Unnikrishnan - 2019B1PGPMX015
Portfolio Construction

With the help of the last 10 years of data and the risk profile of the investors a list of six
stocks were identified for the construction of the portfolio. On the basis of portfolio
optimisation exercise on the solver we were able to conclude on 4 stock which would give
us the required returns as per the risk profiles of the investors.
The investors are planning for long term investment for around 8 to 10 Years. The
monitoring of the portfolio is being observed fortnightly to check if there is any significant
change in the market conditions.
On the basis of the above exercise the following stocks were identified with their Weights in
the portfolio.

Expected
Return
Stock Names Weights (W) (ER)
Infosys 0.06466 0.005
ITC 0.02436 0.007
SBI 0.00000 0.000
HUL 0.40534 0.015
Britania 0.50563 0.022
Exide 0.00000 0.001
  1  

Snapshot of our Portfoloio worth 100 crores from 1st March till 1st
April 2021

As per the inputs from the Portfolio construction exercise an Initial Investment on 1 st March 2021
worth 100 Crore’s was done in the identified stocks as per the weights.
Tracking of the Portfolio -
The portfolio was then tracked on 12th of April 2021

It shows that there is an increase in the portfolio valuation by Rs 31,24,209.85 – which is an increase
by 0.31% in 12 days.

We have decided to liquidate our portfolio on 1st April 2021

The current valuation of the portfolio as on 1st April 2021 is Rs 1,086,862,282 with an overall gain in
valuation in Rs 86,862,345 which is a percentage increase 8.69% over initial investment of
999,999,938.

This is the return of investment in one month for the portfolio.

Portfolio Measurement Analysis

In order to determine the investment valuation a portfolio measurement analysis was
carried out on the Portfolio.

A step-by-step approach was done for the same as follows.

Please refer the attached Excel for the detail calculations and analysis.

Group2_PM_Part
2_Assignment_Final

Determining the Beta of our portfolio.

Beta of the portfolio was calculated by running regression market return with portfolio
return - refer sheet Beta of Portfolio (X Co-efficient 1)
Raw data from sheet Portfolio return analysis ( Y Co-efficient - column Q and X Co-efficient
Column H)
Beta of the portfolio 0.52133
5

Beta is Highlighted in Yellow.

A beta of less than or equal to 1 indicates that the stock/portfolio should be less reactive
than the overall market. Since the beta of the portfolio 0.521335 is less than 1 which means
that it is less volatile than the market. This shows the portfolio is stable in nature.

Treynor Ratio
The Treynor Ratio is a portfolio performance measure that adjusts for systematic risk. The Treynor
ratio uses the Portfolio Beta, which is a measure of systematic risk.

Treynor ratio = (RP-RF) / Beta of the portfolio

RP = Return of portfolio
RF = Risk free Rate.
Beta = Beta of the portfolio

Portfolio Measure Analysis Notes

RF (Risk free rate) 3.25% 0.27% 3.25 is the ninety-one day Risk free rate for the month of
March1st to April 1st 2021, .027 is the risk free monthly rate

RP Return of portfolio 8.69% This is the value of the return on portfolio for the period of
March 1st to April 1st 2021
Beta of the portfolio 0.521335 Beta of the portfolio was calculated by running regression
market return with portfolio return - refer sheet Beta of
Portfolio (X Co-efficient 1)
Raw data from sheet Portfolio return analysis ( Y Co-efficient -
column Q and X Co-efficient Column H)
Treynor Ratio 0.161492455
The Treynor Ratio for the Portfolio is 0.1614 , which is the excess return over the risk-free rate the
Treynor Ratio is not high, which shows that the investment style is conservative and not too risky.
This is in line with the profiles of the investors.

Sharpe Ratio
The Sharpe Ratio is commonly used to gauge the performance of an investment by adjusting for its
risk. The higher the ratio, the greater the investment return relative to the amount of risk taken, and
thus, the better the investment.

Sharpe Ratio = (RP-RF) / Sigma of the portfolio

Rp = Expected portfolio return
Rf = Risk-free rate of return
Sigma = Standard deviation of portfolio

Sigma of the Portfolio 0.047896 Sigma was taken from sheet Mean_Var_Optimisation (Column
1 - Portfolio Std. Deviation )

RP - RF 8.42%
Sharpe Ratio 1.757817

Sharpe Ratio - higher the ratio, the greater the investment return relative to the amount of risk
taken, and thus, the better the investment.

Sharpe Ratio Grading Thresholds:

Less than 1: Bad

1 – 1.99: Adequate/good

2 – 2.99: Very good

Greater than 3: Excellent

As the Ratio is 1.757 for the portfolio which is the range of adequate and good

Jensen’s Alpha
Jensen’s Alpha, also known as the Jensen’s Performance Index, is a measure of the excess returns
earned by the portfolio compared to returns suggested by the CAPM model. It represents by the
symbol α.
Jensen Alpha 0.0118 Jensen Alpha of the portfolio was calculated by running
regression (RP-RF)(Excess on portfolio retrurn) of last 10 years
with (RM-RF)(Excess on Market return) of the last 10 years -
refer sheet Jensen Alpha od portfolio (Intercept)
Raw data from sheet Portfolio return analysis ( Y Co-efficient -
column S (RP-RF) and X Co-efficient Column T (RM-RF) )
Jensen’s Alpha is Highlighted in Yellow.

If the Jensens Alpha value is positive, then the portfolio is earning excess returns. The Value for the
portfolio is 0.0118, so has earned some amount of excess returns.

Information Ratio
The information ratio measures the risk-adjusted returns of a financial asset or portfolio relative to a
certain benchmark. This ratio aims to show excess returns relative to the benchmark, as well as the
consistency in generating the excess returns. The consistency of generating excess returns is
measured by the tracking error.

The Information ratio for the portfolio was calculated as follows

Unsystemic Risk 0.041832 Standard deviation of Residuals while calculation Jensen
Alpha - refer sheet Jensen Alpha of Portfolio (Row number 25
E)

Jensen Alpha 0.0118 Jensen Alpha of the portfolio was calculated by running
regression (RP-RF)(Excess on portfolio retrurn) of last 10 years
with (RM-RF)(Excess on Market return) of the last 10 years -
refer sheet Jensen Alpha od portfolio (Intercept)
Raw data from sheet Portfolio return analysis ( Y Co-efficient -
column S (RP-RF) and X Co-efficient Column T (RM-RF) )

Information Ratio 0.282078 Jensen Alpha / Unsystemic Risk

Information Ratio for the portfolio – 0.282078.

An information ratio of less than 0.4 means that a portfolio was unable to produce excess returns,
But this was only calculated for a month and the stocks selected were on the profiles of the
investors. And the investors had a horizon of 8 to 10 years. There is a potential for the portfolio to
go beyond 0.8 on the information ratio.
Portfolio Construction Evaluation and Analysis.
The portfolio has shown an increase 8.69% over the initial investment, the investors have made
money , though there were not excess returns for the investors as per the market shown in the step
by step approach done in the Portfolio measurement analysis, but it was adequate in terms of the
profiles of the investors who were highly risk averse.