TITLE

“Risk Perception and Portfolio Management of Equity Investors)

NAME: LAVANGA SAIKRISHNA TPS

29-122

ABSTRACT
Identifying key factors influencing individual investor’s decision to make portfolio choices is important
to understand their different investment behavior. This paper explores individual investor’s preference
for portfolio choices and provisionally investigates impacts of risk tolerance and risk perception on
their investment decision. Specifically we decide socioeconomic status difference in investment
preference for portfolio choices with respect to investor’s age, income level. Using chi-square analysis
on investment experiments to obtain some evidences from a sample of 200 respondents in survey; our
results indicate that investor’s decisions to make their portfolio choices are significantly and negatively
related to personal income level. This finding implicates that investor with higher risk tolerance level
shows higher likelihood to make their investment decision on portfolio choices it is found that male
investor demonstrates much preference on portfolio choices with higher percentage of total return.

Keywords: Perception, Equity share, Risk, Investment

INTRODUCTION:
A portfolio is a collection of investments held by an institution or a private individual. In building up an
investment portfolio a financial institution will typically conduct its own investment analysis, whilst a
private individual may make use of the services of a financial advisor or a financial institution which
offers portfolio management services. Holding a portfolio is part of an investment and risk-limiting
strategy called diversification. By owning several assets, certain types of risk (in particular specific risk)
can be reduced. The assets in the portfolio could include stocks, bonds, options, warrants, gold
certificates, real estate, futures contracts, production facilities, or any other item that is expected to
retain its value.

Portfolio management involves deciding what assets to include in the portfolio, given the goals of the
portfolio owner and changing economic conditions. Selection involves deciding what assets to
purchase, how many to purchase, when to purchase them, and what assets to divest. These decisions
always involve some sort of performance measurement, most typically expected return on the portfolio,
and the risk associated with this return (i.e.the standard deviation of the return). Typically the expected
returns from portfolios, comprised of different asset bundles are compared.

The unique goals and circumstances of the investor must also be considered. Some investors are more
risk averse than others. Mutual funds have developed particular techniques to optimize their portfolio
holdings.
Thus, portfolio management is all about strengths, weaknesses, opportunities and threats in the choice of debt
vs. equity, domestic vs. international, growth vs. safety and numerous other trade-offs encountered in the
attempt to maximize return at a given appetite for risk.

Aspects of Portfolio Management:

Basically portfolio management involves

➢ A proper investment decision making of what to buy & sell

➢ Proper money management in terms of investment in a basket of assets so as to satisfy the asset
preferences of investors.
➢ Reduce the risk and increase returns.

OBJECTIVES OF PORTFOLIO MANAGEMENT:

The basic objective of Portfolio Management is to maximize yield and minimize risk. The other
ancillary objectives are as per needs of investors, namely:
• Regular income or stable return
 • Appreciation of capital
• Marketability and liquidity
• Safety of investment
• Minimizing of tax liability.

SCOPE OF STUDY:
This study covers the Markowitz model. The study covers the calculation of correlations between the
different securities in order to find out at what percentage funds should be invested among the
companies in the portfolio. Also the study includes the calculation of individual Standard Deviation of
securities and ends at the calculation of weights of individual securities involved in the portfolio. These
percentages help in allocating the funds available for investment based on risky portfolios.

OBJECTIVE OF STUDY

• How to analyze securities

• How portfolio management is done
• A study to find the returns, variance, & standard deviation of dividend and growth fund.
• Based on the returns I tried to correlate these two funds, to know whether there exist positive or
negative correlations.
• To study the investment pattern and its related risks & return
• To help the investors to choose wisely between alternative investment
• To understand, analyze and select the best portfolio

REVIEW OF LITERATURE:
Numerous studies and research have been conducted by various researchers and scholars of different
universities and research centers from all over the world to understand about investor’s perception and
psychology while investing in different markets. The literature relevant to risk perception was studied to
know the factors that are already been studied related to psychology of investors and conclusions drawn
by other researchers was also studied. Some scholars concluded that there is a direct relationship
between risk and investment which means that if an investor feels that there is huge risk involved in a
particular investment then he tends to buy more of that investment, whereas some researchers argued
that there is an indirect relationship between the two. Some researchers also observed from their
respective studies that, general factors like herding, over-reaction, cognitive basis, over and under-
confidence, demographic factors, have a greater impact on investor’s behaviour in the stock market, and
also these factors influence the individual investor’s decision making in the investment markets.
• In portfolio management emphasis is put on identifying the collective importance of all investor’s
holdings. The emphasis shifts from individual assets selection to a more balanced emphasis on
 diversification and risk-return interrelationships of individual assets within the portfolio. Individual
securities are important only to the extent they affect the aggregate portfolio. In short, all decisions
should focus on the impact which the decision will have on the aggregate portfolio of all the assets held.

• Portfolio strategy should be molded to the unique needs and characteristics of the portfolio‘s
owner.Diversification across securities will reduce a portfolio‘s risk. If the risk and return are lower than
the desired level, leverages (borrowing) can be used to achieve the desired level.

• Larger portfolio returns come only with larger portfolio risk. The most important decision to make is the
amount of risk which is acceptable.

• The risk associated with a security type depends on when the investment will be liquidated. Risk is
reduced by selecting securities with a payoff close to when the portfolio is to be liquidated.

• Competition for abnormal returns is extensive, so one has to be careful in evaluating the risk and return
from securities. Imbalances do not last long and one has to act fast to profit from exceptional
opportunities.

• Provides user interfaces that allow for the extraction of data based on user defined parameters.
• Provides a comprehensive set of tools to perform portfolio and risk evaluation against parameters set
within the risk framework.

• Provides a set of tools to optimise portfolio value and risk position by:
• Considering various legs of different contracts to create an optimal trading strategy.
• The calculation of residual purchase requirements.
• Performs analysis that provides the relevant information to create hedge and trade plans.
• Performs analysis on current and potential trades.
• Evaluates the best mix of contracts on offer from counterparties to minimise the overall purchase cost
and maximize profits.

• Creates and maintains trading and hedge strategies by:

• Allocating trades to contracts and books.
• Maintaining trades against contracts and books.
• Reviewing trades against existing trading strategy.

• Maintains an audit trail of decisions taken and query resolution. • Produces accurate and timely
reports
Articles:
AUTHOR: Harry Markowitz
JOURNAL: The Journal of Finance (volume 7) no1 (March 2007) ABSTRACT:
The process of selecting a portfolio may be divided in two stages. The first stage starts with
observations and experience and ends with beliefs about the future performance of available securities.
The second stage starts with the relevant beliefs about future performance and ends with the choice of
portfolio. This paper is concerned with the second stage. We first consider the rule that the investor does
maximize discounted expected, returns. This rule is rejected both as a hypothesis to explain, and as a
maximum to guide investment behavior. We next consider the rule that the investor does consider
expected return a desirable thing and variance of return an undesirable thing. We illustrate geometrically
relations between beliefs and choice of portfolio according to the “expected returnsvariance of returns”
rule.

ARTICLE:2
TITLE: Reduction of risk through portfolio management.
AUTHOR: Fisher N & Hall GR,
JOURNAL: The Economic Challenger, no12, issue46 (March2010) ABSTRACT:
The rationale investor analyses the risks associated with the investment before investing his or her
wealth in various investment. Risk is the probability of occurrence of loss. It consists of two
components, Systematic risk and unsystematic risk. Systematic risk is the measurable part of total risk
and the techniques used in the evaluation of portfolios. Unsystematic risk is not measurable and so it is
not considered for portfolio evaluation.

ARTICLE:3
TITLE: Portfolio Management process.
AUTHOR: Prasanna Chandra
JOURNAL: Investment Analysis and portfolio management-2010 ABSTRACT:
Portfolio management is a complex activity which may be broken down into following. Specification of
investment objectives and constraints, the typical objectives sought by investors are current income
capital appreciation and safety of principal. Choice of the asset mix; this is concerned with proportion of
stocks and bonds on the portfolio. Formulation of the portfolio strategy; once a certain asset mix is
chosen an appropriate portfolio strategy has to be implemented.

ARTICLE:4
TITLE: Portfolio Management Services AUTHOR:

Dorota Maria.

JOURNAL: International Advance in Economic Research (2007).

ABSTRACT: In today competitive world where banks and financial institutions provide number of services which
provides a customer with a wide spectrum of investment opportunities. They in order to retain their customers
provide them special services beside traditional services. The invention of new technology and services by bank
and financial institution has given the customers a wide range of investment avenues to invest in one of the
special services brought out by objective of this program is to review the real meaning of portfolio management,
its objectives framework, responsibilities of portfolio manager and the study of various other issues related to it
such as its comparison with mutual funds with role of merchant.

ARTICLE:5

TITLE: Portfolio Management process.

AUTHOR: Prasanna Chandra

JOURNAL: Investment Analysis and portfolio management-2010 ABSTRACT:

Portfolio management is a complex activity which may be broken down into following. Specification of
investment objectives and constraints, the typical objectives sought by investors are current income
capital appreciation and safety of principal. Choice of the asset mix; this is concerned with proportion
of stocks and bonds on the portfolio. Formulation of the portfolio strategy; once a certain asset mix is

chosen an appropriate portfolio strategy has to be implemented.

RESEARCH METHODOLOGY:
DATA COLLECTION METHODS:
The data collection method secondary collection method.

Secondary collection methods:

The secondary collection methods includes the lectures of the superintend of the department of market

operations and so on., also the data collected from the news, magazines and different books issues of

this study Superintend

Arithmetic average or mean: The arithmetic average measures the central tendency. The purpose of
computing an average value for a set of observations is to obtain a single value, which is representative
of all the items. The main objective of averaging is to arrive at a single value which is a representative
of the characteristics of the entire mass of data and arithmetic average or mean of a series (usually
denoted by x) is the value obtained by dividing the sum of the values of various items in a series (sigma
x) divided by the number of items (N) constituting the series.

STANDARD DEVIATION: The concept of standard deviation was first suggested by Karl Pearson in
1983.it may be defined as the positive square root of the arithmetic mean of the squares of deviations of
the given observations from their arithmetic mean In short S.D may be defined as “Root Mean Square
Deviation from Mean

VARIANCE: The square of standard deviation is known as Variance. Variance is the square root of the
standard deviation:

CORRELATION
Correlation is a statistical technique, which measures and analyses the degree or extent to which
two or more variables fluctuate with reference to one another. Correlation thus denotes the
interdependence amongst variables. The degrees are expressed by a coefficient, which ranges between –
1 and +1. The direction of change is indicated by (+) or (-) signs. The former refers to a sympathetic
movement in a same direction and the later in the opposite direction.

DATA ANALYSIS:
MARUTI SUZIKI:
 Year (P0) (P1) D (P1-P0) D+(P1-P0)/ P0*150

2015-16 924 992 4.5 68 16.86

2016-17 992 520 5 -472 -42.58

2017-18 520 2060 3.5 1,040 203.50

2018-19 2060 1921 6 -189 -2.91

2019-20 1921 935 7.5 -486 -26.70

AVERAGE RETURN 28.63

ACC CEMENTS:

D+(P1-P0)/

Year (P0) (P1) D (P1-P0) P0*150

2015-16 1574 1528 20 -46 20.72

2016-17 1528 478 20 -550 -33.50

2017-18 478 872 23 394 155.43

2018-19 872 1576 30.5 204 53.89

2019-20 1576 1686 16 60 16.58

AVERAGE RETURN 31.62

HDFC BANK:
 D+(P1-P0)/

Year (P0) (P1) D (P1-P0) P0*150

2015-16 899 1731 15 332 46.93

2016-17 1731 448 16 -783 -52.61

2017-18 448 876 16 428 156.54

2018-19 876 1695 17 269 42.71

2019-20 1695 684 19 -461 -26.26

AVERAGE RETURN 23.46

RELIANCE:

D+(P1-P0)/

Year (P0) (P1) D (P1-P0) P0*150

2015-16 638 1924 16 786 184.20

2016-17 1924 620 18 -809 -43.81

2017-18 620 1589 18 474 90.07

2018-19 1589 1558 7 -31 4.20

2019-20 1558 692 8 -366 -26.59

AVERAGE RETURN 31.60

Comparative Returns on Selected Scrips:

 Returns
Rate of Return (%)

60.00
50.00
40.00 31.62 31.60
28.63
30.00 23.46
20.00
10.00
0.00
Maruti ACC HDFC Reliance
Companies

Scrip Rate of Return (%)

Maruti 28.63

ACC 31.62

HDFC 23.46

Reliance 31.60

CALCULATION OF STANDARD DEVIATION:

Standard Deviation = Variance

Variance = 1/n (R-R)2

MARUTI:
 Avg. Return (R)
Year Return (R) (R-R) (R-R)2

2015-16 16.86 28.63 -16.77 281.37

2016-17 -42.58 28.63 -71.21 5071.44

2017-18 203.50 28.63 174.87 30578.32

2018-19 -2.91 28.63 -31.54 995.00

2019-20 -26.70 28.63 -55.33 3061.93

TOTAL 39988.07

Variance = 1/n (R-R)2 = 1/5 (39988.07) = 7997.618162

Standard Deviation = Variance

= 7997.618162
= 89.43

ACC CEMENTS:

Avg. Return (R)

Year Return (R) (R-R) (R-R)2
 2015-16 20.72 31.62 -20.91 252.99

2016-17 -33.50 31.62 -65.17 4241.19

2017-18 155.43 31.62 73.80 5447.07

2018-19 53.89 31.62 22.27 496.04

2019-20 16.58 31.62 -20.05 226.39

TOTAL 15663.68

Variance = 1/n (R-R) 2 = 1/5 (15663.68) = 2182.73

Standard Deviation = Variance = 2182.73 = 46.18 HDFC

BANK:

Avg. Return (R)

Year Return (R) (R-R) (R-R)2

2015-16 46.93 23.46 23.47 550.79

2016-17 -52.61 23.46 -76.07 5786.30

2017-18 156.54 23.46 83.07 6901.42

2018-19 42.71 23.46 19.25 370.44

2019-20 -26.26 23.46 -49.72 2472.37

TOTAL 16081.33

__

Variance = 1/n (R-R)2 = 1/5 (16081.33) = 3216.26

Standard Deviation = Variance = 3216.26 = 56.717
RELIANCE:

Avg. Return (R)

Year Return (R) (R-R)2
 (R-R)

2015-16 184.20 31.60 152.59 15525.48

2016-17 -43.81 31.60 -75.42 5687.50

2017-18 90.07 31.60 58.47 3418.68

2018-19 4.20 31.60 -27.45 753.52

2019-20 -26.59 31.60 -58.20 3386.93

TOTAL 23772.16

__

Variance = 1/n.(R-R)2 = 1/5 (23772.16) = 4754.42

Standard Deviation = Variance = 4754.42 = 68.95 DIAGRAMATIC PRESENTATION OF COMPANIES RISK

Scrip Risk

100.00 89.43

80.00 68.95
56.71
Risk (%)

60.00
46.18
40.00

20.00

0.00
Maruti ACC ICICI Reliance
Companies

Scrip Risk (%)

Maruti 89.43

ACC 46.18

HDFC 56.71

Reliance 68.95

CALCULATION OF CORRELATION:
 Covariance (COV ab) = 1/n (RA-RA)(RB-RB)

Correlation Coefficient = COV ab/ a* b

MARUTI WITH OTHER COMPANIES

MARUTI (RA) & ACC (RB)

YEAR (RA-RA) (RB-RB) (RA-RA) (RB-RB)

2007 -16.77 -20.91 266.8016

2008 -71.21 -65.17 4637.777

2009 174.87 73.80 17905.9

2015 -31.54 22.27 -702.541

2016 -55.33 -20.05 832.5818

17940.52

Covariance (COV ab) = 1/5 (17940.52) = 3588.1

Correlation Coefficient = COV ab/ a* b

a = 89.43 ; b = 46.18

= 3588/(89.43)(46.18) = 0.868 MARUTI (RA) & HDFC (RB)

(RA-RA) (RB-RB)
YEAR (RA-RA) (RB-RB)

2007 -16.77 23.47 -393.672

2008 -71.21 -76.07 5417.093

2009 174.87 83.07 19527.01

2015 -31.54 19.25 -607.167

2016 -55.33 -49.72 2751.403

21694.71

Covariance (COV ab) = 1/5 (21695) = 4339

Correlation Coefficient = COV ab/ a* b a

= 89.43; b = 56.71

= 4339/ (89.43) (56.71) = 0.855

MARUTI (RA) & RELIANCE (RB)

(RA-RA) (RB-RB)
YEAR (RA-RA) (RB-RB)

2007 -16.77 152.59 -1720.92

2008 -71.21 -75.42 5370.647

 2009 174.87 58.47 15224.35

2015 -31.54 -27.45 865.886

2016 -55.33 -58.20 3220.33

17960.29

Covariance (COV ab) = 1/5 (17960) = 3592

Correlation Coefficient = COV ab/ a* b

a = 89.43; b = 68.95

= 3592/ (89.43) (68.95) = 0.582

ACC WITH OTHER COMPANIES

ACC (RA) & HDFC (RB)

(RA-RA) (RB-RB)
YEAR (RA-RA) (RB-RB)

2007 -20.91 23.47 -373.288

2008 -65.17 -76.07 4953.869

2009 73.80 83.07 6181.276

2015 22.27 19.25 428.6658

2016 -20.05 -49.72 748.1954

16888.67

Covariance (COV ab) = 1/5 (16889) = 2378

Correlation Coefficient = COV ab/ a* b a

= 46.18; b = 56.71
 = 2378/ (46.18) (56.71) = 0.908

ACC (RA) & RELIANCE (RB)

(RA-RA) (RB-RB)
YEAR (RA-RA) (RB-RB)

2007 -20.91 152.59 -1631.81

2008 -65.17 -75.42 4916.394

2009 73.80 58.47 4320.295

2015 22.27 -27.45 -616.375

2016 -20.05 -58.20 875.6534

7859.208

Covariance (COV ab) = 1/5 (7859) = 2071

Correlation Coefficient = COV ab/ a* b

a = 46.18; b = 68.95

= 1608 / (46.18)(68.95) = 0.505

HDFC WITH OTHER COMPANIES (HDFC (RA) & RELIANCE (RB))

YEAR

(RA-RA) (RB-RB)
 (RA-RA) (RB-RB)

2007 23.47 152.59 2407.774

2008 -76.07 -75.42 5736.688

2009 83.07 58.47 4857.337

2015 19.25 -27.45 -528.333

2016 -49.72 -58.20 2893.74

20367.21

Covariance (COV ab) = 1/5 (20367) = 3073

Correlation Coefficient = COV ab/ a* b

a = 56.71; b = 68.95

= 3073/ (56.71)(68.95) = 0.785

• FINDINGS AND CONCLUSIONS:

• Individual returns on the selected stocks including Maruti, ACC, HDFC, Reliance are 28.63%,
31.62%, 23.46%, 31.60% respectively.
• Individual risks on the selected stocks including Maruti, ACC, HDFC, Reliance are 89.43%,
46.18%, 56.71%, 68.95% respectively.
• Correlation between all the companies is positive which means all the combinations of portfolios
are at good position to gain in future.
• Portfolios Returns of followed by ACC & HDFC (35%) and Maruti & ACC (33.08%) stood on
the top while Portfolio Returns of Maruti & HDFC (21.2%) and HDFC & Reliance (24.15)
stood at the bottom.

CONCLUSIONS:
The main objective of the Portfolio management is to help the investors to make wise choice between
alternate investments without a post trading shares. Any portfolio management must specify the
objectives like Maximum returns, Optimum Returns, Capital appreciation, Safety etc., in the same
prospectus. This service renders optimum returns to the investors by proper selection and continuous
shifting of portfolio from one scheme to another scheme of from one plan to another plan within the
same.

Portfolio management is a process of encompassing many activities of investment assets and securities. It is a
dynamic and flexible concept and involves regular and systematic analysis, judgment, and action. A combination
of securities held together will give a beneficial result if they grouped in a manner to secure higher returns after
taking into consideration the risk elements.

REFERENCES& BIBLIOGRAPHY:

• Investment Analysis and Portfolio Management, written by M.Ranganathan, R.Madhumathi

published by Dorling Kindersley (India) Pvt. Ltd., 3rd Edition.
• Investment Analysis and Portfolio Management, written by Prasanna Chandra Published by Tata
Mc.Graw-Hill, 3rd Edition.
• Security Analysis and Portfolio Management, written by V.A.Avadhani, Published by Himalaya
Publishing house Pvt.Ltd.9th Revised Editon.
• Security Analysis and Portfolio Management, Published by McGraw-Hill, Written by
Punithavathi Pandian, 8th Edition.

Web-sites:

• www.nseindia.com,http://www.answers.com/topics/national_stock_exchange_of_india.
• www.bseindia.com,http;//www.answers.com/topics/bombay _stock_exchange_of_india.
• www.money control.com/nifty/nse
• www.moneycontrol.com/sensex/bse
• www.iifl.com