# THE SURAT PEOPLE S BANK COLLEGE OF BUSINESS ADMINISTRATION

Markowitz Model

**Submitted to : Dr. Daisy Sheby Thekkanal Submitted By :
**

Vijay vaddoriya Abhishek varshney Himanshu patel

e. Markowitz model is also called as full covariance model. coefficient of correlation.The Modern portfolio theory was developed by Dr. It is a model based on theoretical frame work for analysis of risk and return. Markowitz in 1952. He also utilised the relationship between securities for selection of better asset mix in a portfolio. return. An efficient portfolio is expected to yield highest return for low level of risk. He generated a number of portfolios within a given amount of investible funds. His entire work lead to the concept of efficient portfolio. There are three important variables which are taken into consideration by Markowitz model. Harry M.
. He used the standard deviation for measurement of risk. standard deviation. i.

Assumptions of Markowitz model
The Markowitz model is based on the following assumptions. Investors are risk averse f. b. the return on various securities as to be correlated to each other. d. g. Investors will get a higher rate of return if they adopt the efficient portfolio model. Investors behave rationally. a. By combining all the financial assets.
. The markets are efficient and they absorb information quickly and perfectly e. h. Investor s decisions are based on expected return and their variance. Investors choose higher returns to lower level of risk. c. Investors can reduce their risk by adding new investments in the portfolio. Investors know all the information about the market situation. i.

Parameters of Markowitz diversification For building of efficient set of portfolio.
. Expected return Variability of returns as measured by standard deviation. we need to look into these important parameters. Co-variance or variance of one security return to other asset return.

The expected return is the uncertain return that an investor expects to get from his investment. The realized return is the certain return that an investor has actually obtained from his investment at the end of the holding period.Definition of Risk
Risk : Risk is the potential for variability in returns.
.

Types of Risk ?
Total Risk
= systematic risk + unsystematic risk
.

Thus. with weights representing the proportionate share of the security in the total investment
. the portfolio expected return is the weighted average of the expected returns from each of the securities.Definition Return
Each security in a portfolio contributes returns in the proportion of its investment in security.

If alpha is negative return.
Stock return
.
Beta
Beta Alpha
Market return(OR Market Index)
It is the difference between actual earned return and expected return at a level of systematic risk. than that scrip will have higher returns. If alpha is positive return. than that scrip will have lower returns compare to market index return.(Alpha)
Alpha is the distance between the horizontal axis and lines intersection with y axis. Measure the unsystematic risk.

the scrip risk is more than the market risk and if beta is less than 1. the scrip risk is less than the market risk. if beta is 1.(beta)
Beta is used to describe the relationship between the stock s return and market index s return. the scrip risk is the same as the market risk. If beta is zero.
. If beta=1 means 1% change in the market index shows that it is on an average accompanied by a 1% change in the stock price. If beta is greater than 1. stock price is unrelated to market index. % Price Change of a Scrip Return % Price change of the market index return =
In short. Beta may be positive or negative.

How to calculate expected Return :
Where. Rp is the return on the portfolio Ri is the return on asset
.

. where ij is the correlation coefficient between the returns on assets i and j.

For two assets portfolio : Portfolio Return :
Portfolio Variance :
.

For Three assets portfolio : Portfolio Return :
Portfolio Variance :
.