Risk Analysis of Single Stock and different

Stock Portfolio through various approaches

GROUP 18.
Arindam Mandal M335-21
Deepakshi M345-21
Dharsha R M346-21
Dipra Chakravorty M347-21
Kumar Abhinav M358-21
Submitted To- Professor Manish Bansal
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i) Single Stock SD Approach:

Average yearly return for Dr. Reddy’s Laboratories stock: 15.92%

Average yearly market return: 16.22%
Only by looking at the yearly return we cannot decide whether to invest in a particular stock or not. We
need the value of standard deviation.
Standard deviation for Reddy’s stock: 0.0241
Standard deviation of market return: 0.0138
Standard deviation helps us determine the volatility of a stock. When the share price of a stock moves
wildly, standard deviation is high and that means the investment will be risky.
So, we can conclude that investing in Dr. Reddy’s stock will be riskier as it has a higher value of standard
deviation than the market.
Although, this approach is one of the many approaches that measure stock risks and should not be trusted
blindly.

(ii) Single Stock Regression Approach:

Beta approach helps us understand the expected movement of a stock with respect to the overall market.
From the excel sheet, we can see that the β = 0.5866. A beta value less than 1 means the stock is less
volatile than the market.
We can also interpret that the stock is expected to be 0.5866 times as volatile as the market.
Low beta stocks have lesser risk but also lower return.

(iii) Two Stocks Portfolio SD Approach and minimizing portfolio variance:

When an investor is investing in more than one stock, the main goal is to minimize the portfolio variance
with a well-diversified portfolio that will result in lowest possible risk when both the stocks are traded
together and return rate is as expected. Initially, 50% of total investment is assigned to each of the stocks
and the portfolio variance is calculated.
In the excel, the portfolio variance is minimized with the help of the solver.
Minimized portfolio variance = 0.00049
Correlation = 0.139286 (positively correlated, i.e. movement is on the same direction)
Stock correlation is important as it is the indicator of how the stocks in the portfolio move with respect to
one another. Below are the weightage assigned by the solver to the two stocks in the portfolio,
Apollo Hospitals Enterprise Ltd. = 52.38%
Havells India Ltd. = 47.62%
By investing 52.38% in Apollo Ltd. and 47.62% in Havells India Ltd, an investor can have expected
portfolio return at lower risk.

Sharpe Ratio = 11.6648 means, for every 1% risk that the investor is willing to take in the portfolio, the
average return earned in excess of the risk-free rate is 11.6648%. (Risk free return = 6.90%)
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(iv)Two Stocks Portfolio Regression Approach:

We perform linear regression on two securities. The dependent variable is Apollo Hospitals Enterprise
Ltd. and the independent variables are market return and Havells India Ltd. The beta value is 0.6677.
Also, we can see that initially when regression is performed only on one stock i.e. Apollo Hospitals
Enterprise Ltd, the beta value is 0.6798. In both the cases, the stocks are defensive in nature. That means
the risk is low.
From above, we can conclude that when we keep including more stocks in the portfolio, the beta value
decreases, that means risk becomes less.

(v) Five Securities Portfolio SD Approach:

This approach is more or less same as the two stocks standard deviation approach. The main goal is to
minimize the portfolio variance with the help of the solver by diversifying the portfolio. Initially, 20% of
total investment is assigned to each of the five stocks and the portfolio variance is calculated.
In the excel, the portfolio variance is minimized with the help of the solver.
Minimized portfolio variance = 0.000239. Below are the weightage assigned by the solver to the five
stocks in the portfolio,
Apollo Hospitals = 19.61%
Bombay Dyeing = 2.89%
Crisil = 31.60%
Dr. Reddy’s = 29.65%
Havells = 16.25%
If an investor invests in these five stocks according to the above mentioned ratio, risk will be much lower.

Sharpe Ratio = 10.20 means, for every 1% risk that the investor is willing to take in the portfolio, the
average return earned in excess of the risk-free rate is 10.20%. (Risk free return = 6.90%)

(vi) Five Securities Portfolio Capital asset pricing model (CAPM):

In this approach, we calculate β (beta). Beta is a relative measure of systematic risk. It indicates the
sensitivity of the return on a share with the return on the market.

The formula for CAPM is – Ri = Rf + βi (Rm – Rf)

Where Ri is the expected return on the investment,

βi is the beta of the investment,
Rf is the risk free rate
Rm is the expected return of the market.

Risk free return considered as 6.9 %

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Company Apollo Bombay Crisil Dr. Reddy’s Havells

Dyeing

Beta 0.680 1.398 0.513 0.587 0.835

Cost of Equity 13% 20% 12% 12% 15%

(CAPM)

Here we can conclude that Bombay share has the highest beta i.e. 1.398 and highest CAPM i.e. 20%. So,
Bombay stock is more aggressive and has the highest rate of return.
This result is matched with Five Securities Portfolio SD Approach as the weightage is lowest to the high
risk stock i.e. Bombay.