CONSTRUCTION OF OPTIMAL PORTFOLIO

INTRODUCTION:

Investment in equity and equity linked schemes is a milky way of ensuring expected return rather opting investment vehicles that render risk free return. Apart from fixed income bearing securities there are umpteen numbers of financial products are seen in the modern financial supermarkets to create extraordinary return which has been integrated with uncertainty to the investors. So the rational investors could never ever ignore the risk factor which is fabricated in risk premium. All of us take risk in some form when we invest. But some investment avenues involve huge risk and some less risk. Risk can also be defined as the risk arising from the market forces which is known as systematic risk and measured in terms of beta and the unique risk known as unsystematic risk. The investors go for a collection of investment, which is known as a portfolio in order to diversify the unsystematic risk a great extent. Considering the level of systematic risk ( Beta Co- efficient or slope of straight line) the assets are priced in order to derive the expected return by means of Sharpe Lintner-Mossin form of capital asset pricing model CAPM.

MEANING OF INVESTMENTInvestment, in its broadest sense, means the sacrifice of cur-rent dollars for future dollars. Two different attributes are generally involved, time and risk. The sacrifice takes place in the present and it is certain. The reward comes later, if at all, and the reward is generally uncertain. In some cases the element of time predominates in terms of government bonds.

In other case risk is the dominant factor with reference to common stock. Postponement of present consumption is certain but the benefit of future is uncertain, and that uncertainty is known as risk. Risk is the chances of loosing or not getting the expected return.

INVESTMENT AVENUES:

TRADITIONAL PORTFOLIO THEORY (TPT)

Traditional portfolio theory deals with the evaluation of re-turn and risk conditions of each security. It reveals the subjective nature. The value of particular scrip depends upon the quantum of amounts of dividends declared by the company, the price earning ratio and the EPS of the holding period. It recognizes specific type of risk and non risk factors. The risk of each individual security is measured by calculating the standard deviation. The traditional approach recognizes several basic tenets for building a best portfolio. First, the investors prefer large to smaller returns from securities. Second, the way to achieve the goal is to make more risk. Third the ability to achieve higher return depends upon investors judgment of risk and his ability to assume specific risk. And it considers factors such as interest rate risk, purchasing power risk, financial risk, taxation and marketability. There are certain assumptions in traditional theory as listed hereunder.

The Market is inefficient Fundamentalists take advantage on market inefficiency Fundamentalists earn quick profits Fundamentalists will expect the potential growth of a particular company for predicting the future trend of the share price.

MODERN PORTFOLIO THEORY (MPT)According to research work done by Hary M Markowitz and William Sharpe the modern portfolio theory indicates the maximization of returns through a combination of different securities. This theory tells us that risk can be reduced by combining low risk securities with high risk. This theory de-pends upon the concept of diversification. Like traditional theory here also a set of assumptions available which are cited below. Free and perfect flow of information. Market is perfect and absorbs quick information The riskiness of a financial asset in portfolio is to be seen in the context of market related risk or portfolio risk, but not in isolation. MARKOWITZ THEORY OF PORTFOLIO MANAGEMENT (MTPM)

The modern portfolio theory was developed by Dr Hary M.Markowitz in 1952. It is a model based on a theoretical frame work for analysis of risk and return. He used the standard deviation for measurement of risk .He also utilized the relationship between securities for selection of better asset mix in a portfolio. His entire work led to the concept of efficient portfolio. An efficient portfolio is expected to yield the highest return for low level of risk .According to Markowitz A portfolio is said to be efficient, if it is expected to yield the highest possible return for the lowest risk or a given level of risk He further emphasized that the quality of a portfolio will depend upon the quality of individual assets in the portfolio .Therefore the combined risk of two differ-ent financial assets is not the same like the separate risk of two assets. Risk is measured by the dispersion of the distribution away from the mean return, which are called as standard deviation. As per the modern portfolio theory the expected return, the variance of these returns and co-variance of these returns of these securities with in the portfolio are to be considered for the choice of the portfolio.

Assumptions: Investors behave rationally. Investors know all the information about the market. Investors choose higher returns to lower level of risk. The markets are efficient and they absorb information quickly and perfectly.

CONCEPTUAL FRAME WORK OF SINGLE INDEX MODEL:

The observation of the stock prices over a period of time reveals that most of the stock prices move with the market index. When the sensex increases, stock price also tend to increase and vice-versa. This indicates that some underlying factors affect the market index as well as stock prices .Stock prices are related to the market index and this relationship could be used to estimate the return on stock. Towards this purpose the following equation can be used.

Ri = i + i ( Rm - R f ) Ei

Ri = Expected return

i =Intercept of the straight line or alpha co-efficient

i =Slope of straight line or beta co-efficient

Rm = Market return

Ei = Error Term

R f = Risk free rate of return

According to equation, the return of a stock can be divided in to two components, the return due to the market and the return independent of the market. i indicates the sen-sitiveness of the stock return to the changes in the market return. For example i of 1.5 means that the stock return is expected to increase by 1.5% when the market index return increase by 1% vise-versa. Likewise i of .5 expresses that the individual stock return would change by .5% when there is a change of 1% in the market return. of 1 indicates that the market return and security return are imoving in tandem. The estimates of i and i are obtained from regression analysis. The single index model is based on the assump-tion that stocks vary together because of the common move-ment in the stock market and there are no effects beyond the market(i.e any fundamental factor effects)that account the stocks co-movement. The expected return, standard devia-tion and co-variance of the single index model represent the joint movement of securities. The mean return is

The variance of securitys return, 2 = i 2 2m + 2ei

The variance of the security of the security has two compo-nents namely; systematic risk and unsystematic risk or unique risk. The variance explained by the index is referred to sys-tematic risk. The unexplained variance is called residual vari-ance or unsystematic risk.

Systematic risk =i2* variance of market index = i2 2m

Unsystematic risk = Total variance systematic risk

E2i(unsystematic risk) = 2i systematic risk

Thus the total risk = Systematic risk + Unsystematic risk

i2 2m + E2i

From this, the portfolio variance can be derived

OPTIMAL PORTFOLIO:The optimal portfolio concept falls under themodern portfolio theory. The theory assumes that investors fanatically try to minimizeriskwhile striving for the highest return possible. The theory states that investors will act rationally, always making decisions aimed at maximizing their return for their acceptable level of risk.

The optimal portfolio was used in 1952 by Harry Markowitz, and it shows us that it is possible for different portfolios to have varying levels of risk and return. Each investor must decide how much risk they can handle and then allocate (or diversify) their portfolio according to this decision.

The chart below illustrates how the optimal portfolio works. The optimal-risk portfolio is usually determined to be somewhere in the middle of the curve because as you go higher up the curve, you take on proportionately more risk for a lower incremental return. On the other end, low risk/low return portfolios are pointless because you can achieve a similar return by investing inrisk-free assets, like government securities.

You can choose how much volatility you are willing to bear in your portfolio by picking any other point that falls on theefficient frontier. This will give the maximum return for the amount of risk you wish to accept. Optimizing your portfolio is not something you can calculate in your head. There are computer programs that are dedicated to determining optimal portfolios by estimating hundreds (and sometimes thousands) of different expected returns for each given amount of riskEconomic liberalization and globalization of financial markets have accelerated to the pace of Indian securities market. The role of securities markets in mobilizing and channeling the private capital for the economic development of the country has increased over the years.

Introduction of computerized online trading and interconnected market system have lead to further growth. However, the huge success of IPOs, public issue of many companies and disinvestments of PSUs stake has proved this. FIIs have shown great interest in investing in Indian securities. Welcome change has been the active participation from retail investors. In this context, the security analysis and portfolio management has emerged as the most concerned aspect for rational investment, decision making. A portfolio is combination of securities held together as in investment. A portfolio tries to trade off the risk return preferences of an investor by not putting all eggs in single basket.

A portfolio allows for sufficient diversification. Traditionally diversification meant holding large numbers of securities scattered across industries. Many would feel that holding fifty such scattered stocks is five times more diversified than holding ten scattered stocks.

However modern portfolio doesnt believe in holding many stocks. It believes in having right kind of diversification, the right timing and the right reason. Markowitz was the first who laid foundation for Modern portfolio theory. He attempted to quantity risk. He provided analytical tools for analysis and selection of optimal portfolio. This portfolio approach won him Nobel Prize in 1990.

The work done by Markowitz was extended by William Sharpe. He simplified the amount and type of input data required to perform portfolio analysis. He made the numerous and complex computations easy which were essential to attain optimal portfolio. This simplification is achieved through single index model. This model proposed by Sharpe in the simplest and the most widely used one. The study focuses on finding out an optimal portfolio using single index model

CHAPTER 2RESEARCH DESIGN

STATEMENT OF THE PROBLEMEvery investor faces the dilemma, of which scripts to select for portfolio to get adequate return based on income, budget and convenience time frame. This Dissertation aims to reduce the dilemma faced by investors by constructing an Optimal Portfolio by using Markowitz Model and Sharpes Single Index Model. The study also evaluates the performance of the constructed Portfolios by using Sharpes Ratio, Treynors Ratio and Jenson Alpha.

OBJECTIVES OF THE STUDY1. To analyze the risk-return and beta ratios of all 30 scripts listed in BSE SENSEX2. To construct an Optimal Portfolio using Markowitz Model.3. To construct an Optimal Portfolio using Sharpes Single Index Model.

RESEARCH DESIGN

Methodology: Analytical Research Methodology would be adopted as the study majorly involves analyzing facts and making critical examination

Data:Primary Data: -Primary data is collected by scheduling interviews with Stock Brokers, Investors, Managers and Employees of Investment Firms to support the findings.Secondary data: - Secondary data would be collected from relevant websites, Newspapers, Business Magazines, Journals, etc.

Index: BSE Sensex

Sample: 30 Scripts of BSE SensexMonthly closing price of Scripts from April 2009 to March 2014 would be used for analysis

PLAN OF ANALYSISPlan of Analysis would be structured in three sections: Markowitz Model Calculation, Sharpes Single Index Model Calculations and Portfolio Performance Evaluation Calculations

Section I: Markowitz Model CalculationFor each Scrip monthly closing data are collected from April 2009 to March 2014 and would be presented in Tables. Expected Return would be calculated by using equation:Ri = [(Pt Pt-1) / Pt-1] * 100%Where,Ri = Return of stock i in %Pt = Price of the stock at the time tPt-1 = Price of the stock at the time t-1The steps for finding the stocks to be included in the optimal portfolio are:1. Find out Variance(Risk) of each Stock 2. Determine Covariances and Correlations for pair of Stocks3. Construct the Efficient Portfolio

Section II: Sharpes Single Index Model CalculationFor each Script monthly closing data are collected from April 2009 to March 2014 and would be presented in Tables. Expected Return would be calculated by using equation :Ri = [(Pt Pt-1) / Pt-1] * 100%Where,Ri = Return of stock i in %Pt = Price of the stock at the time tPt-1 = Price of the stock at the time t-1

The steps for finding the stocks to be included in the optimal portfolio are:1. Find out the excess return to beta ratio for each stock under consideration.2. Rank them for the highest to the lowest.3. Proceed to calculated Ci for all stocks according to the ranked order using the following formula:Ci = 2m (Ri-Rf) i 2i1+s2m 2i 2 i

where,2m= variance of market 2i = variance of stock 4. The cumulative values of Ci start declining after a particular Ci and that point is taken as the cut-off point and that stock ratio is the cut-off ratio C.

Section III: Portfolio Performance Evaluation CalculationThe performance of constructed portfolios would be examined based on Sharpes Ratio, Treynors Ratio and Jenson Alpha

SCOPE OF THE STUDYThe study covers companies that are listed in BSE Sensex only. The findings of the study reduces dilemma of investors regarding inclusion of a Stock in Portfolio. The Findings would also facilitate investors in knowing the performance of their Portfolio. The Study could be extended to other indices and for larger time span of analyses (above 5 years). No other factor other than the price movement, index movement, rate of return on government securities and beta value for the securities for the past five years are taken for analysis. The findings of the Study would also be useful to Academicians, Research Scholars, Companies, etc.,

LIMITATION OF THE STUDY The study is restricted only to the companies that are listed in BSE. The Study is limited to monthly data of Scripts from April 2009 to March 2014

CHAPTER SCHEME:CHAPTER 1 - INTRODUCTIONCHAPTER 2 - RESEARCH DESIGNCHAPTER 3 - PROFILE OF THE COMPANIES LISTED IN BSE SENSEXCHAPTER 4 - DATA ANALYSIS AND INTERPRETATIONCHAPTER 5 SUMMARY OF FINDINGS, CONCLUSION AND SUGGESTIONSBIBLIOGRAPHYANNEXURE

Chapter 3PROFILE OF THE COMPANIES LISTED IN BSE SENSEX

History of Stock Exchanges In India:

In 1860, the exchange flourished with 60 brokers. In fact the 'Share Mania' in Indiabegan with the American Civil War broke and the cotton supply from the US to Europestopped. Further the brokers increased to 250.At the end of the war in 1874, the market found a place in a street (now called DalalStreet). In 1887, "Native Share and Stock Brokers' Association" was established. In 1895, theexchange acquired a premise in the street, which was inaugurated in 1899.

Objectives: Create a single integrated national level solution with access to multiple markets forproviding high cost-effective service to millions of investors across the country. Create a liquid and vibrant national level market for all listed companies in general andsmall capital companies in particular. Optimally utilize the existing infrastructure and other resources of Participating StockExchanges, which are under-utilized now. Provide a level playing field to small Traders and Dealers by offering an opportunity toparticipate in a national market having investment-oriented business. Reduce transaction cost. Provide clearing and settlement facilities to the Traders and Dealers across the Countryat their doorstep in a decentralized mode. Spread demat trading across the Country.Dr. Jyothirmayi Degree College (MBA), Adoni -- 35-- Dept. of ManagementOptimal Portfolio Performance Chapter - 4

The Role Of Stock ExchangesStock exchanges have multiple roles in the economy, this may include the following:

Raising capital for businesses:The Stock Exchange provides companies with the facility to raise capital for expansionthrough selling shares to the investing public.

Mobilizing savings for investment:When people draw their savings and invest in shares, it leads to a more rationalallocation of resources because funds, which could have been consumed, or kept in idledeposits with banks, are mobilized and redirected to promote business activity with benefitsfor several economic sectors such as agriculture, commerce and industry, resulting in astronger economic growth and higher productivity levels.

Facilitating company growth:Companies view acquisitions as an opportunity to expand product lines, increasedistribution channels, hedge against volatility, increase its market share, or acquire othernecessary business assets. A takeover bid or a merger agreement through the stock market isone of the simplest and most common ways for a company to grow by acquisition or fusion.

Redistribution of wealth:Stocks exchanges do not exist to redistribute wealth although casual and professionalstock investors through stock price increases and dividends get a chance to share in thewealth of profitable businesses.

BOMBAY STOCK EXCHANGEEstablished in 1875, BSE Ltd. (formerly known as Bombay Stock Exchange Ltd.), is Asias first Stock Exchange and one of Indias leading exchange groups. Over the past 137 years, BSE has facilitated the growth of the Indian corporate sector by providing it an efficient capital-raising platform. Popularly known as BSE, the bourse was established as "The Native Share & Stock Brokers' Association" in 1875. BSE is a corporatized and demutualised entity, with a broad shareholder-base which includes two leading global exchanges, Deutsche Bourse and Singapore Exchange as strategic partners. BSE provides an efficient and transparent market for trading in equity, debt instruments, derivatives, mutual funds. It also has a platform for trading in equities of small-and-medium enterprises (SME).

More than 5000 companies are listed on BSE making it world's No. 1 exchange in terms of listed members. The companies listed on BSE Ltd command a total market capitalization of USD 1.32 Trillion as of January 2013. It is also one of the worlds leading exchanges (3rd largest in December 2012) for Index options trading (Source: World Federation of Exchanges).

BSE also provides a host of other services to capital market participants including risk management, clearing, settlement, market data services and education. It has a global reach with customers around the world and a nation-wide presence. BSE systems and processes are designed to safeguard market integrity, drive the growth of the Indian capital market and stimulate innovation and competition across all market segments. BSE is the first exchange in India and second in the world to obtain an ISO 9001:2000 certification. 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 On-Line trading System (BOLT). It operates one of the most respected capital market educational institutes in the country (the BSE Institute Ltd.). BSE also provides depository services through its Central Depository Services Ltd. (CDSL) arm.

BSEs popular equity index - the S&P BSE SENSEX - is India's most widely tracked stock market benchmark index. It is traded internationally on the EUREX as well as leading exchanges of the BRCS nations (Brazil, Russia, China and South Africa).BSE has won several awards and recognitions that acknowledge the work done and progress made like The Golden Peacock Global CSR Award for its initiatives in Corporate Social Responsibility, NASSCOM - CNBC-TV18s IT User Awards, 2010 in Financial Services category, Skoch Virtual Corporation 2010 Award in the BSE StAR MF category and Responsibility Award (CSR) by the World Council of Corporate Governance. Its recent milestones include the launching of BRICSMART indices derivatives, BSE-SME Exchange platform, S&P BSE GREENEX to promote investments in Green India.

ACHIEVEMENTSAt par with international standards, BSE Ltd. has been a pioneer in several areas over the decades and has many firsts and key achievements to its credit. BSE is the first exchange in India to Launch a special platform for trading in SME securities Introduce Equity Derivatives Launch a Free Float Index - S&P BSE SENSEX Launch Exchange Enabled Internet Trading Platform Obtain ISO certification for a stock exchange Exclusive facility for financial training BSE Institute Ltd. Launch its website in Hindi and regional languages Host the popular opening-bell ceremony in Indian capital markets Launch mobile-based trading in India in Sept 2010 Become securities market infrastructure member of SWIFT in India and provide corporate actions to custodians in ISO 15022 format Launched S&P BSE SENSEX Realized S&P BSE Volatility (REALVOL) Index in Nov 2010

MILESTONE OF BSEIn its 137-year glorious history, BSE has crossed several milestones and been a driver of several key initiatives and developments in the Indian capital market.Table no 3.1: Table showing Milestone of BSE from 1875 to 19951875 To 1995DATEACHIEVEMENT

14th Mar 1995BSE On-Line Trading (BOLT) system introduced

1992Securities Appellate Tribunal (SAT) established

29th May 1992Capital Issues (Control) Act repealed

1st May 1992SEBI Act established

30th Mar 1992( An Act to protect, develop and regulate the securities market)

15th Jan 1992S&P BSE SENSEX closes above 4000

25th Jul 1990S&P BSE SENSEX closes above 2000

3rd Jan 1989S&P BSE SENSEX closes above 1000

10th Jul 1987BSE Training Institute (BTI) inaugurated

2nd Jan 1986Investor's Protection Fund (IPF) introduced

31st Aug 1957S&P BSE SENSEX , country's first equity index launched (Base Year:1978-79 )

2nd Feb 1921BSE granted permanent recognition under Securities Contracts (Regulation) Act (SCRA)

9th Jul 1875Clearing House started by Bank of India

The Native Share & Stock Broker's Association formed

Table no 3.2: Table showing Milestone of BSE from 1996 to 19951996 To 20009th Jun 2000Equity Derivatives introduced

11th Feb 2000S&P BSE SENSEX crosses 6000 intra-day

11th Oct 1999S&P BSE SENSEX closed above 5000

15th Jul 1999CDSL commences work

1st Jun 1999Interest Rate Swaps (IRS) / Forward Rate Agreements (FRA) allowed

22nd Mar 1999Central Depository Services Ltd.(CDSL) set up with other financial institutions

1997BSE On-Line Trading (BOLT) system expanded nation-wide

21st Jul 1997Brokers Contingency Fund (BCF) introduced

12th May 1997Trade Guarantee Fund (TGF) introduced

19th Aug 1996First major S&P BSE SENSEX revamp

Table no 3.3: Table showing Milestone of BSE from 2001 to 2005

2001 To 2005

9th Aug 2005BSE becomes a Corporate Entity

12th Aug 2005Certificate of Commencement of Business

8th Aug 2005Incorporation of Bombay Stock Exchange Limited

20th May 2005The BSE (Corporatisation and Demutualisation) Scheme, 2005

(the Scheme) announced by SEBI

17th May 2004Second biggest fall of all time, Circuit filters used twice in a day

(564.71 points, 11.14%)

2nd Jun 2004S&P BSE SENSEX closes over 6000 for the first time

1st Dec 2003T group launched

1st Sep 2003S&P BSE SENSEX shifted to free-float methodology

1st June 2003Bankex launched

1st Apr 2003T+2 settlement Introduced

16th Jan 2003Retail trading in G Sec

1st Jan 2003India 's first ETF on S&P BSE SENSEX - SPICE' introduced

1st Apr 2002T+3 settlement Introduced

15th Feb 2002Negotiated Dealing System (NDS) established

1st Feb 2002Two way fungibility for ADR/GDR

31st Dec 2001All securities turn to T+5

29th Nov 2001100% book building allowed

1st Nov 2001Stock futures launched

25th Jul 2001S&P BSE Dollex 30 launched

11th Jul 2001BSE Teck launched, India 's First free float index

9th Jul 2001Stock options launched

2nd Jul 2001VaR model introduced for margin requirement calculation

15th Jun 2001WDM operations at commenced

4th Jun 2001S&P BSE PSU index introduced

1st Jun 2001Index Options launched

1st Feb 2001BSE Webx Launched

1st Mar 2001Corporatisation of Exchanges proposed by the Union Govt.

Table no 3.4: Table showing Milestone of BSE from 2006 to 20102006 To 201027th Dec 2010Commencement of S&P BSE Shariah Index

10th Dec 2010Launch of SIP

22nd Nov 2010Launch of SLB

12th Nov 2010Commencement of S&P BSE Volatility Index

11th Oct 2010Launch of Fastrade on Web (FoW) - Exchange hosted platform

4th Oct 2010EUREX - S&P BSE SENSEX Futures launch

29th Sep 2010Introduction of Smart Order Routing (SOR)

21st Sep 2010First to introduce Mobile-based Trading

23rd July 2010Options on BOLT

12th May 2010Dissemination of Corporate Action information via SWIFT platform

22nd Apr 2010New DBM framework @ Rs.10 lakhs - 90% reduction in Membership Deposit

20 th Jan 2010S&P BSE PSU website launched

4th Jan 2010Market time changed to 9.0 a.m. - 3.30 p.m.

18th Dec 2009BSE's new derivatives rates to lower transaction costs for all

14th Dec 2009Marathi website launched

7th Dec 2009Launch of clearing and settlement of Corporate Bonds through Indian Clearing Corporation Ltd.

4th Dec 2009BSE Launches BSE StAR MF Mutual Fund trading platform

25th Nov 2009BSE launches FASTRADE - a new market access platform

5th Oct 2009BSE Introduces New Transaction Fee Structure for Cash Equity Segment

1st Oct 2009Bombay Stock Exchange introduces trade details facility for the Investors

24th Aug 2009S&P BSE IPO Index launched

7th Aug 2009BSE - USE Form Alliance to Develop Currency & Interest Rate

Derivatives Markets

18th May 2009The S&P BSE SENSEX raised 2110.70 points (17.34%) and Index-wide

upper circuit breaker applied

1st Oct 2008Currency Derivatives Introduced

10th Jan 2008S&P BSE SENSEX All-time high 21206.77

16th May 2007Appointed Date under the Scheme i.e. Date on which

Corporatisaton and Demutualisation was achieved.Notified by SEBI

in the Official Gazette on 29.06.2007

7th Mar 2007Singapore Exchange Limited entered into an agreement to invest in

a 5% stake in BSE

2nd Jan 2007Launch of Unified Corporate Bond Reporting platform : Indian Corporate Debt Market (ICDM)

2nd Nov 2006iShares S&P BSE SENSEX India Tracker listed at Hong Kong Stock Exchange

21 st Oct 2006BSE Hindi website launched

7th Jul 2006BSE Gujarati website launched

7th Feb 2006S&P BSE SENSEX closed above 10000

Table no 3.5: Table showing Milestone of BSE from 2011 to 2014

2011 To 2014DATEACHIVEMENT

28th Jan 2014Launch of Interest Rate Futures (BSE IRF)

28th Nov 2013Launch of Currency Derivatives (BSE CDX)

19th Feb 2013BSE enters into Strategic Partnership with S&P Dow Jones Indices

30th Mar 2012BSE launched trading in BRICSMART indices derivatives

13th Mar 2012Launch of BSE - SME Exchange Platform

22nd Feb 2012Launch of S&P BSE-GREENEX to promote investments in Green India

15th Jan 2011Co-location facility at BSE - tie up with Netmagic

7th Jan 2011BSE Training Institute Ltd. with IGNOU launched India's first 2 year full time MBA program specializing in Financial Market

17th Nov 2011Maharashtra and United Kingdom Environment Ministers launched Concept Note for S&P BSE Carbon Index

PROFILE OF THE COMPANIES LISTED IN BSE SENSEXAXIS BANK

Axis Bank Limited is an India-based bank. The Bank provides corporate and retail banking products. The Company operates in four segments: Treasury segment, which includes investments in sovereign and corporate debt, equity and mutual funds, trading operations, derivative trading and foreign exchange operations on the account and for customers and central funding; Retail Banking, which includes liability products, card services, Internet banking, automated teller machine (ATM) services, depository, financial advisory services and Non Resident Indian (NRI) services; Corporate/Wholesale Banking, which includes corporate relationships not included under Retail Banking, corporate advisory services, placements and syndication, management of public issue, project appraisals, capital market related services and cash management services, and Other Banking Business, which include para banking activities like third party product distribution and other banking transactions.

BAJAJ AUTO

Bajaj Auto Limited is a manufacturer of scooters, motorcycles and three-wheeler vehicles and spare parts thereof. The Company operates in two segments: Automotive and Investments. The Companys brands include Pulsar, Avenger, Discover, Platina and Ninja. Its commercial vehicles range include goods carriers, such as GC Max Diesel, GC Max CNG, RE600, and passenger carriers, such as RE 2S, RE 2S CNG, RE 2S LPG, RE 4S, RE 4S CNG, RE 4SLPG, RE Diesel, RE GDI and Mega Max. The Companys subsidiaries include Bajaj Auto International Holdings BV and PT. Bajaj Auto Indonesia.BHARTI AIRTEL

Bharti Airtel Limited is a leading global telecommunications company with operations in 20 countries across Asia and Africa. Headquartered in New Delhi, India, the company ranks amongst the top 4 mobile service providers globally in terms of subscribers. In India, the company's product offerings include 2G, 3G and 4G wireless services, mobile commerce, fixed line services, high speed DSL broadband, IPTV, DTH, enterprise services including national & international long distance services to carriers. In the rest of the geographies, it offers 2G, 3G wireless services and mobile commerce. Bharti Airtel had nearly 287 million customers across its operations at the end of Dec 2013.

BHARAT HEAVY ELECTRICALS LIMITED

Bharat Heavy Electricals Limited (BHEL) owned by Government of India, is a power plant equipment manufacturer and operates as anengineeringand manufacturing company based inNew Delhi, India. BHEL was established in 1964, ushering in the indigenous Heavy Electrical Equipment industry in India.The company has been earning profits continuously since 1971-72and paying dividends since 1976-77.One of the five Maharatna Companies declared by Govt. of India and celebrating 50 years (1964-2014) of engineering excellence.Public Sector Undertakings(PSUs) of India clubbed under the esteemed "Maharatna" status, which it received in February 2013.CIPLA

Cipla Limitedis apharmaceutical companybased inMumbai,India. Cipla makes drugs to treatcardiovascular disease,arthritis,diabetes,weight control,depressionand many other health conditions. On 31 March 2013, itsmarket capitalisationwas INR 305 billion (US$ 5.6 billion), making it India's 41st largest publicly traded company bymarket value.

DR. REDDY'S LABORATORIES LTD

Dr. Reddy's Laboratories Ltd, is a pharmaceutical company based inHyderabad,Andhra Pradesh, India. The company was founded byAnji Reddy, who had previously worked in the publicly ownedIndian Drugs and Pharmaceuticals Limited, ofHyderabad, India. Dr. Reddy's manufactures and markets a wide range of pharmaceuticals in India and overseas. The company has over 190 medications, 60active pharmaceutical ingredients(APIs) for drug manufacture, diagnostic kits,critical care, and biotechnology products.Dr. Reddy's began as a supplier to Indian drug manufacturers, but it soon started exporting to other less-regulated markets that had the advantage of not having to spend time and money on amanufacturing plantthat would gain approval from a drug licensing body such as theU.S. Food and Drug Administration(FDA). By the early 1990s, the expanded scale and profitability from these unregulated markets enabled the company to begin focusing on getting approval from drug regulators for their formulations and bulk drug manufacturing plants in more-developed economies. This allowed their movement into regulated markets such as the US and Europe.GAIL

GAIL (India) Limitedis the largest state-owned natural gas processing and distribution company in India, It is headquartered inNew Delhi. It has following business segments: Natural Gas, Liquid Hydrocarbon,Liquefied petroleum gasTransmission,Petrochemical, City Gas Distribution, Exploration and Production, GAILTEL andElectricity Generation. GAIL has been conferred with theMaharatna status on 1 Feb 2013, by the Government of India. Only six other Public Sector Enterprises (PSEs) enjoy this coveted status amongst all central CPSEs.

HDFC

HDFCis anIndianfinancialconglomeratebased inMumbai, India.[2][3]It is a major player for housing finance in India. It also has a presence in banking, life and general insurance, asset management, venture capital and education loans. HDFC BANK

HDFC Bank Limitedis an Indianfinancial servicescompany based inMumbai, Maharashtra. It was incorporated in 1994.HDFC Bank is the fifth largest bank in India by assets. It is the largest bank in India bymarket capitalizationas of 24 February 2014. As on Jan 2 2014, the market cap value of HDFC was around USD 26.88B, as compared toCredit Suisse Groupwith USD 47.63B.The bank was promoted by theHousing Development Finance Corporation, a premier housing finance company (set up in 1977) of India.As of 31 March 2013, the bank had assets of INR 4.08trillion.For the fiscal year 2012-13, the bank has reported net profit of INR 69billion, up 31% from the previous fiscal year.Its customer base stood at 28.7millioncustomers on 31 March 2013.[2]HDFC was advised by premier Indian law firm AMSS on India's first issuance of NCD plus warrant issuance through the QIP.

HERO MOTORS

Hero Motorsis a formermopedandscootermanufacturer based inDelhi, India. It is a part of multinational companyHero Group, which also currently ownsHero Motocorp(formerlyHero Honda) andHero Cycles, among others. Hero Motors was started in the 1960s to manufacture 50cc two-stroke mopeds but gradually diversified into making larger mopeds,mokicksand scooters in the 1980s and the 1990s. Noteworthy collaborators and technical partners werePuchof Austria andMalagutiof Italy. Due to tightening emission regulations and poor sales, Hero motors have discontinued the manufacture of all gasoline powered vehicles and transformed itself into an electric two-wheeler and auto parts manufacturer.HINDALCO INDUSTRIES LTD.

Hindalco Industries Ltd.is analuminiummanufacturing company and is a subsidiary of theAditya Birla Group. Its headquarters is atMumbai, Maharashtra, India.The company has annual sales ofUS$15 billion and employs around 20,000 people.[4]It is listed in theForbes Global 2000at 895th rank.Its market capitalisation by the end of May 2013 wasUS$3.4 billion.Hindalco is one of the world's largest aluminum rolling companies and one of the biggest producers of primary aluminum in Asia.

HINDUSTAN UNILEVER LIMITED(HUL)

Hindustan Unilever Limited(HUL) is an Indianconsumer goodscompany based inMumbai, Maharashtra. It is owned by Anglo-Dutch companyUnileverwhich owns a 67% controlling share in HUL. HUL's products include foods, beverages,cleaning agentsand personal care products.HUL was established in 1933 as Lever Brothers India Limited and, in 1956, became known as Hindustan Lever Limited, as a result of a merger betweenLever Brothers, Hindustan Vanaspati Mfg. Co. Ltd. and United Traders Ltd. It is headquartered inMumbai, India and employs over 16,500 workers,whilst also indirectly helping to facilitate the employment of over 65,000 people.The company was renamed in June 2007as "Hindustan Unilever Limited".Lever Brothers first commenced operations in India in the summer of 1888, when crates full of Sunlight soap bars, embossed with the words "Made in England by Lever Brothers" were shipped to the Kolkata harbour and it began an era of marketing branded Fast Moving Consumer Goods (FMCG). Hindustan Unilever's distribution covers over 2 million retail outlets across India directly and its products are available in over 6.4 million outlets in the country. As per Nielsen market research data, two out of three Indians use HUL products.

ICICI BANK

ICICI Bank is an Indian multinationalbankingandfinancial servicescompany headquartered inMumbai. It is the second largest bank in India by assets and bymarket capitalzation, as of 2014. It offers a wide range of banking products and financial services to corporate andretail customersthrough a variety of delivery channels and through its specialized subsidiaries in the areas of investment banking,life,non-life insurance,venture capitalandasset management. The Bank has a network of 3,539 branches and 11,162ATMsin India, and has a presence in 19 countries. ICICI Bank is one of theBig Four banksof India, along withState Bank of India,Punjab National BankandBank of Baroda. The bank has subsidiaries in the United Kingdom, Russia, and Canada; branches in United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International Finance Centre; and representative offices in United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. The company's UK subsidiary has also established branches in Belgium and Germany.

INFOSYS

Infosys(formerly Infosys Technologies) is an Indianmultinationalthat providesbusiness consulting,information technology,software engineeringandoutsourcingservices. It is headquartered inBengaluru,Karnataka.Infosys is thethird-largest India-based IT services companyby 2014 revenues,and the second largest employer ofH-1B visa professionals in the United States, as of 2012.On 31 March 2014, itsmarket capitalisationwas $30.95 billion, making it India's fifth largest publicly traded company.

ITC LIMITED

ITC Limited orITCis an Indianconglomerateheadquartered inKolkata, West Bengal.Its diversified business includes five segments:Fast Moving Consumer Goods(FMCG), Hotels, Paperboards & Packaging, Agri Business & Information Technology.In 2012-13, the company had an annual turnover of US$ 8.31 billionand amarket capitalisationof US$ 45 billion.It employs over 25,000 peopleat more than 60 locations across India and is part ofForbes 2000list.ITC claims that it is the only company in the world of comparable dimensions to be Carbon Positive, Water Positive and Solid Waste Recycling Positive. ITC Limited completed 100 years on 24 August 2010.LARSEN & TOUBRO LIMITED

Larsen & Toubro Limited, also known asL&T, is an Indianmultinationalconglomerateheadquartered inMumbai, India.It was founded by Danish engineers and funding. The company has business interests in engineering, construction, manufacturing goods, information technology and financial services, and also has an office in the Middle East and other parts of Asia.L&T is India's largest engineering and construction company.Considered to be the "bellwetherof India's engineering & construction sector",[6]L&T was recognized as theCompany of the Yearin Economic Times 2010 awards.

MARUTI SUZUKI INDIA LIMITED

Maruti Suzuki India Limited (maruti suzuki), commonly referred to asMarutiand formerly knownasMaruti Udyog Limited, is an automobile manufacturer in India. It is a subsidiary of Japanese automobile and motorcycle manufacturerSuzuki.As of November 2012, it had a market share of 37% of the Indian passenger car market.Maruti Suzuki manufactures and sells a complete range of cars from the entry levelAlto, to the hatchbackRitz,A-Star,Swift,Wagon R,Zenand sedansDZire,KizashiandSX4, in the 'C' segmentEeco,Omni, Multi Purpose vehicle SuzukiErtigaand Sports Utility vehicleGrand Vitara. The company's headquarters are at No 1,Nelson Mandela Road,New Delhi.[2]In February 2012, the company sold its ten millionth vehicles in India MAHINDRA & MAHINDRA LIMITED

Mahindra & Mahindra(M&M) is an Indianmultinationalautomobilemanufacturingcorporation headquartered in Mumbai.It is one of the largest vehicle manufacturers by production inIndiaand the largest seller of tractors across the world.It is a part ofMahindra Group, an Indianconglomerate.It was ranked as the 10th most trusted brand in India, byThe Brand Trust Report, India Study 2014. It was ranked 21st in the list of top companies of India inFortune India 500in 2011.Its major competitors in the Indian market includeMaruti Suzuki,Tata Motors,Ashok Leyland,Toyota,Hyundai,Mercedes-Benz (Merc)and others.

NTPC LIMITED

National Thermal Power Corporation Limited is a Central Public Sector Undertaking (CPSU) under the Ministry of Power, Government of India, engaged in the business of generation of electricity and allied activities. It is a company incorporated under the Companies Act 1956 and a "Government Company" within the meaning of the act. The headquarters of the company is situated at New Delhi. NTPC's core business is generation and sale of electricity to state-owned power distribution companies and State Electricity Boards in India. The company also undertakes consultancy and turnkey project contracts that comprise of engineering, project management, construction management and operation and management of power plants. The company has also ventured into oil and gas exploration and coal mining activities. It is the largest power company in India with an electric power generating capacity of 42,964 MW.[4]Although the company has approx. 18% of the total national capacity it contributes to over 27% of total power generation due to its focus on operating its power plants at higher efficiency levels It was founded byGovernment of Indiain 1975, which held 75% of its equity shares on 31 March 2013[4](after divestment of its stake in 2004, 2010 and 2013).

OIL AND NATURAL GAS CORPORATION LIMITED

(ONGC) is an Indianmultinationaloilandgascompany headquartered inDehradun, India. It is aPublic Sector Undertaking(PSU) of theGovernment of India, under the administrative control of theMinistry of Petroleum and Natural Gas. It is India's largestoil and gas explorationand production company. It produces around 69% of India'scrude oil(equivalent to around 30% of the country's total demand) and around 62% of itsnatural gas. On 31 March 2013, itsmarket capitalisationwasINR2.6trillion(US$ 48.98billion), making it India's second largest publicly traded company. In a government survey for FY 2011-12, it was ranked as the largest profit making PSU in India.[5]ONGC has been ranked 357th in theFortune Global 500list of the world's biggest corporations for the year 2012.[6]It is ranked 22nd among the Top 250 Global Energy Companies byPlatts. ONGC was founded on 14 August 1956 by Government of India, which currently holds a 69.23% equity stake. It is involved in exploring for and exploiting hydrocarbons in 26sedimentary basinsof India, and owns and operates over 11,000kilometersof pipelines in the country. Its international subsidiary ONGC Videsh currently has projects in 15 countries. ONGC has discovered 6 of the 7 commercially-producing Indian Basins, in the last 50 years, adding over 7.1 billiontonsof In-place Oil & Gas volume of hydrocarbons in Indian basins. Against a global decline of production from matured fields, ONGC has maintained production from its brown fields like Mumbai High, with the help of aggressive investments in various IOR (Improved Oil Recovery) and EOR (Enhanced Oil Recovery) schemes. ONGC has many matured fields with a current recovery factor of 25-33%. Its Reserve Replacement Ratio for between 2005 and 2013, has been more than one.During FY 2012-13, ONGC had to share the highest ever under-recovery of INR 494.2 million (an increase of INR 49.6 billion over the previous financial year) towards the under-recoveries of Oil Marketing Companies (IOC,BPCLandHPCL) .

RIL

Reliance Industries Limited (RIL)is anIndianconglomerateholding companyheadquartered inMumbai, Maharashtra, India. The company operates in five major segments:exploration and production,refining and marketing,petrochemicals,retailand telecommunications. RIL is the second-largestpublicly traded companyin India bymarket capitalisationand is the second largest company in India by revenue after the state-runIndian Oil Corporation.The company is ranked No. 107 on theFortune Global 500list of the world's biggest corporations, as of 2013.RIL contributes approximately 14% ofIndia's total exports.

SBI

State Bank of India(SBI) is a multinationalbankingandfinancial servicescompany based in India. It is agovernment-owned corporationwith its headquarters inMumbai, Maharashtra. As of December 2013, it had assets ofUS$388 billion and 17,000 branches, including 190 foreign offices, making it the largest banking and financial services company in India by assets. State Bank of India is one of theBig Four banksof India, along withICICI Bank,Punjab National BankandHDFC Bank.The bank traces its ancestry toBritish India, through theImperial Bank of India, to the founding in 1806 of theBank of Calcutta, making it the oldest commercial bank in theIndian Subcontinent. Bank of Madras merged into the other two presidency banksBank of Calcuttaand Bank of Bombayto form the Imperial Bank of India, which in turn became the State Bank of India.Government of Indiaowned the Imperial Bank of India in 1955, withReserve Bank of Indiataking a 60% stake, and renamed it the State Bank of India. In 2008, the government took over the stake held by the Reserve Bank of India.SBI is a regional banking behemoth and has 20% market share in deposits and loans among Indian commercial banks.

SUN PHARMACEUTICAL INDUSTRIES LIMITED

Sun Pharmaceutical Industries Limited(NSE:SUNPHARMA,BSE:524715) is a multinationalpharmaceuticalcompany headquartered inMumbai, Maharashtrathat manufactures and sells pharmaceutical formulations and active pharmaceutical ingredients (APIs) primarily in India and the United States. The company offers formulations in various therapeutic areas, such ascardiology,psychiatry,neurology,gastroenterologyanddiabetology. It also provides APIs such as warfarin, carbamazepine, etodolac, and clorazepate, as well as anticancers, steroids, peptides, sex hormones, and controlled substances.

TATA MOTORS LIMITED

Tata Motors Limited (formerlyTELCO, short forTata Engineering and Locomotive Company) is an Indianmultinational automotivemanufacturing company headquartered inMumbai, Maharashtra, India and a subsidiary of theTata Group. Its products include passenger cars, trucks, vans, coaches, buses, construction equipment and military vehicles. It is theworld's seventeenth-largest motor vehiclemanufacturing company, fourth-largest truck manufacturer and second-largest bus manufacturer by volume.Tata Motors has auto manufacturing and assembly plants inJamshedpur,Pantnagar,Lucknow,Sanand,DharwadandPunein India, as well as in Argentina, South Africa, Thailand and the United Kingdom. It has research and development centres in Pune, Jamshedpur, Lucknow and Dharwad, India, and in South Korea, Spain, and the United Kingdom. Tata Motors' principal subsidiaries include the British premium car makerJaguar Land Rover(the maker of Jaguar, Land Rover and Range Rover cars) and the South Korean commercial vehicle manufactuerTata Daewoo. Tata Motors has a bus manufacturing joint venture withMarcopolo S.A.(Tata Marcopolo), a construction equipment manufacturing joint venture withHitachi(Tata Hitachi Construction Machinery), and a joint venture withFiatwhich manufactures automotive components and Fiat and Tata branded vehicles.

TATA POWER

Tata Power is an Indianelectric utilitycompany based inMumbai, Maharastra, India and is part of theTata Group.The core business of the company is to generate, transmit and distribute electricity.With an installed electricity generation capacity of about 8500MW, it is India's largest private power producer.At the end of August 2013, its market capitalisation was $2.74 billion (INR 182billion).

TATA STEEL LIMITED

Tata Steel Limited(formerly Tata Iron and Steel Company Limited (TISCO)) is anIndianmultinationalsteel-making company headquartered inMumbai, Maharashtra, India, and a subsidiary of theTata Group. It was the12th largest steel producing company in the worldin 2012, with an annualcrude steelcapacity of 23.8 million tons, and the second largest private-sector steel company in India (measured by domestic production) with an annual capacity of 9.7 million tonnes afterSAILTata Steel has manufacturing operations in 26 countries, including Australia, China, India, the Netherlands, Singapore, Thailand and the United Kingdom, and employs around 80,500 people.Its largest plant is located inJamshedpur,Jharkhand. In 2007 Tata Steel acquired the UK-based steel maker Corus which was the largest international acquisition by an Indian company till that date. It was ranked 471st in the 2013Fortune Global 500ranking of the world's biggest corporations.It was the seventh most valuable Indian brand of 2013 as perBrand Finance. On February 12, 2012 Tata Steel completed 100 years of steel making in India.

TATA CONSULTANCY SERVICES LIMITED (TCSL)

Tata Consultancy Services Limited (TCSL) is amultinationalinformation technology (IT) service, consulting and business solutions company headquartered in India.TCS operates in 46 countries. It is a subsidiary of theTata Groupand is listed on theBombay Stock Exchangeand theNational Stock Exchange of India. TCS is the largest Indian company bymarket capitalization and is thelargest India-based IT services companyby 2013 revenues. TCS is now placed among the Big 4 most valuable IT services brands worldwide. TCS is ranked 40th overall in theForbesWorld's Most Innovative Companies ranking, making it both the highest-ranked IT services company and the top Indian company.It is the world's 10th largest IT services provider, measured by revenues. WIPRO LIMITED

Wipro Limited(formerly Western India Products Limited) is amultinationalIT ConsultingandSystem Integration services company headquartered inBangalore, Karnataka,India.As of March 2014, the company has 146,000 employees servicing over 900 large enterprise corporations with a presence in 61 countries. On 31 March 2014, its market capitalizationwas approximately 1.27 trillion ($20.8 billion), making it one of India's largest publicly traded company. Azim Premjiis a major shareholder in Wipro with over 50% of shareholding.To focus on core IT Business, it demerged its non-IT businesses into a separate company named Wipro Enterprises Limited with effect from 31 March 2013.The demerged company offers consumer care, lighting, healthcare and infrastructure engineering and contributed to approx. 10% of the revenues of Wipro Limited in previous financial year.

CHAPTER 4DATA ANALYSIS AND INTERPRETATION

PORTFOLIO MANAGEMENT

Investing in securities such as shares, debentures and bonds are profitable as well as exciting. It is needed rewarding, but involves a great deal of risk and calls for scientific knowledge as well as artistic skill. In such investments, both rational as well as emotional responses are involved. Investing in financial securities is now considered to be one of the best avenues for investing one's savings while it is acknowledged to be one of the most risky avenues of investment. It is rare to find investors investing their entire savings in a single security. Instead, they tend to invest in a group of securities. Such a group of securities are called portfolio management. Creation of a portfolio helps to reduce risk without sacrificing returns. Portfolio management deals with the analysis of individual securities as well as with the theory and practice of optimally combining securities into portfolios. The risk and return characteristics of a portfolio differ from those of individual securities combining to form a portfolio. The investor tries to choose the optimal portfolio taking into consideration the risk-return characteristics of all possible portfolios.

PHASES IN PORTFOLIO MANAGEMENTThere are five phases in portfolio management Security Analysis Portfolio Analysis Portfolio Selection Portfolio Revision Portfolio Evaluation

PORTFOLIO ANALYSISA portfolio is a group of securities held together as investment. Investors invest their funds in a portfolio of securities rather than in a single security because they are risk-averse. By constructing a portfolio investors attempt to spread risk by not putting all their eggs into one basket. Diversification of one's holdings is intended to reduce risk in the investment.

By the security analysis process an investor can reach at asset of worth while or desirable securities. From these set of securities an indefinitely large number of portfolios can be constructed by choosing different set of securities and also by varying the proportion of investment in each security. Each individual security has its own risk return characteristics, which can be measured and expressed punitively. Each portfolio constructed by combining the individual securities has its own specific risk return characteristics, which have not just the aggregate of individual securitys characteristics. The risk and return of each portfolio has to be calculated mathematically and expressed quantitatively. Portfolio analysis phase of portfolio management consists of identifying the range of portfolios that can be constituted from a given set of securities and calculating their return and risk for further analysis.

PORTFOLIO SELECTIONPortfolio analysis provides the input for the next phase of portfolio management, which is portfolio selection. The proper goal of portfolio construction is to generate a portfolio that provides highest return at a given level of risk. A portfolio having these characteristics is known as efficient portfolio. Impute from portfolio analysis can be used to identify the set of efficient portfolios. From these set of portfolios, optimal portfolio has to be selected for investment.

PORTFOLIO REVISIONHaving constructed the optimal portfolio; the investor has to constantly monitor the portfolio to ensure that it continues to be optimal. As the economy and the financial markets are dynamic, changes take almost daily. As time passes securities which were ones attractive may seize to so. New securities, which promise high returns and low risk, may emerge. The investor has to revise his portfolio in the light of the developments in the market. This leads to purchase of some new securities and sale of some of the existing securities from the portfolio. The mix of securities and their proportion in their portfolio changes as a result of the revision. Whatever is the reason for portfolio revision it has to be done scientifically and objectively so as to ensure the optimality of revised portfolio. Portfolio revision is not a casual process to be casual out without much care. In fact, in the entire process of portfolio management, portfolio revision is as important as portfolio analysis and selection.

PORTFOLIO EVALUATIONThe objective of constructing a portfolio and revising periodically is to earn a maximum return with a minimum risk. Portfolio evaluation is a process, which is concerned with assessing the performance of the portfolio. Alternative measures of Performance evaluations have been developed for the use of investors and portfolio managers. Portfolio evaluation is useful in yet another way. It provides mechanism for identifying weakness in the investment process and for improving these deficient areas. It provides the feedback mechanism for improving the entire portfolio management process. It is an ongoing process. It starts with security analysis proceeds to portfolio construction and continues with portfolio revision and evaluation. The evaluation provides the necessary feedback for better designing of the next time around. Superior performance is achieved through continual refinement of portfolio management skills.Portfolio evaluation refers to the evaluation of the performance of portfolio. It is the process of comparing the return earned on a portfolio with the return earned on one or more portfolios or a benchmark portfolio..

RISK AND RETURN OF SECURITIESRisk means possibility of loss or injury. Often the risk is interchangeably used with uncertainty. In uncertainty, the possible events and probabilities of their occurrence are not known. Before investing his or her invisible wealth in the stock, he or she analyses the risk associated with the particular stock. The actual return he receives from a stock may vary from his expected return and the risk is expressed in terms of variability of return.Whereas return is the after effect of the risk. It is directly related with the risk factor. The return is calculated upon the amount of risk suffered by the investor. The return from the security includes both current income and capital gain caused by the appreciation of the price. The income and capital gain are expressed as a percentage of money invested in the beginning. Return and risk has a direct relationship. When risk of a security is high the return will also be in a high level and vice versa. While analyzing the securities an investor will select such type of securities which are affordable to him in terms of risk and return. He will select the point where there is a tradeoff between risk and return.

BETA of SecurityThe Beta value indicates the measure of systematic risk of the security. Beta describes the relationship between the stock return and the market index return. Beta of security may be positive, negative, or zero. The beta of an asset is a measure of variability of that asset relative to the variability of the market as a whole. Beta is an index of the systematic risk of an asset.

Where;N = Number of Observations Y = Current Stock Price Yesterdays Stock Price 100 Yesterdays Stock Price

X = Current Market Index Yesterdays Market Index 100 Yesterdays Market IndexALPHA of SecurityThe alpha value indicates the extra return earned by the stock over and above the market return. Alpha measures the unsystematic risk of a security. Return of Stock= Alpha + (Beta Market return )

Ri = i + (i Rm)

So,Alpha (i) = Ri - (i Rm)Where,i=Alpha of the securityRi=Return of the securityi=Beta of the securityRm=Return of the market

RISK AND RETURN OF PORTFOLIOWhen we consider risk and return of a portfolio it is somewhat related with the risk and return of securities. Simply because, portfolio is a collection of securities. The risk and return of a security will reflect in a portfolio directly. But the difference will happen when we combine different securities having different risk and return into a single portfolio. The risk of the securities is traded off with each other and it will reduce the risk and increase the return. The process of reducing the risk of a portfolio by varying the securities and their proportion is known as diversification of risk. The risk and return of portfolios are calculated as follows;

Portfolio ReturnRp=p + (p Rm)Where;p=Alpha value of the portfoliop=Beta value of the portfolioRm=Return of the market indexPortfolio Risk

p2=p2m2 + i2ei2Where;p=Beta value of the portfoliom2=Variance of market indexi=Weight of the securityei2=Residual variance of the security

POTRFOLIO EVALUATIONEvaluation is the appraisal of the performance. Portfolio evaluation refers to the evaluation of the performance of the portfolio. It is the process of comparing the return earned on a portfolio with the return earned on one or more other portfolios.The different methods used for evaluation are; Sharpe Ratio Treynor Ratio Jensen MeasureSharpe RatioThe performance measured by William Sharpe is referred to as the Sharpe ratio or the reward to variability ratio. It is the reward or risk premium to the variability of return or risk as measured by the standard deviation of return. If the portfolios are not well diversified then this ratio is an appropriate measure of portfolio evaluation.Sharpe Ratio (SR)=Rp Rf pWhere;Rp=Realized return on the portfolioRf=Risk free rate of returnp=Standard deviation of portfolio returnTreynor RatioThe performance measure developed by Jack Treynor is referred to as Treynor ratio or reward to volatility ratio. It is the ratio of the reward or risk premium to volatility of return as measured by the portfolio beta.Treynor Ratio (TR)=Rp Rf pWhere;Rp=Realized return on the portfolioRf=Risk free rate of returnp=Portfolio beta

Jensen MeasureAnother type of risk adjusted performance measure has been developed by Michael Jensen and is referred to as Jensen Measure ratio or Differential return. This ratio attempts to measure the differential between actual return earned on a portfolio and the return expected from the portfolio given its level of risk.Jensen Measure, p=Rp E(Rp)Where;p=Differential return earned (Jensen ratio)Rp=Actual return earned on the portfolioE(Rp)=Expected returnExpected return of the portfolio can be calculated as follows.E(Rp)=Rf + p (Rm Rf)Where;E(Rp)=Expected portfolio returnRf=Risk-free rateRm=Return on market indexp=Systematic risk of the portfolioThe alpha value in Jensen measure can be tested for its degree of significance from a value of zero by statistical methods. This means, an analyst can determine whether the differential return could have occurred by chance or whether it is significantly different from zero in a statistical sense.

28 SCRIPTS CHOSEN FOR PORTFOLIO CONSTRUCTION:Table 4.1: Table showing 28 scripts used for portfolio constructionSl NoScript Name

1Axis Bank

2Bajaj Auto

3Bharti Airtel

4BHEL

5Cipla

6Dr Reddy's Lab

7Gail India

8HDFC

9HDFC Bank

10Hero Motocorp

11Hindalco Inds

12HUL

13ICICI Bank

14Infosys

15ITC

16L & T

17Mahindra & Mahindra

18Maruti Suzuki

19NTPC

20ONGC

21Relince Industries Ltd

22SBI

23Sun Pharma

24Tata Motors

25Tata Power

26Tata Steel

27TCS

28Wipro

STEPS TO CALCULATE OPTIMAL PORTFOLIO

1. Rank the various securities from the highest to the lowest after finding ou the excess return to beta

2. Calculate (Ri-Rf)i ei2

3. Take the cumulative of the above to get (Ri - Rf)i ei2

4. Multiply the above resultant with market variance

5. Calculate i2 ei2

6. Take the cumulative of the above to get i2 ei27. Multiply the above resultant with market variance and add one to get the value of the denominator.

8. Divide the step 4 value with the step 7

9. The resultant value is the cut off rate C*

10. The securities ranked above C* have high excess return to beta than the cut off Ci and all the stock ranked below C* have low excess return to beta.

TABLE 4.2: Table showing closing price of Axis Bank to calculate i,i & i

MonthAXIS BANKRETURNBSERETURNR1 R1

RM - RM

(R1 R1) (RM RM)

(RM - RM) 2(R1 R1)2

close price %closePrice%

Apr-09400.111,403.25

May-0956942.214446414,625.2528.2551027139.067627.6961082.016032767.06841526.277

Jun-09677.319.033391914,493.84-0.89851455515.8865-1.4576-23.156510192.124651252.3821

Jul-09705.154.1119149615,670.318.1170345470.965067.557937.29387298857.122320.931345

Aug-09797.113.039778815,666.64-0.0234200859.89293-0.5825-5.762865160.33933497.86998

Sep-0987910.27474617,126.849.3204413967.127898.7613462.4498786476.7610450.80686

Oct-099002.389078515,896.28-7.184979833-0.7578-7.74415.86826753659.970830.574222

Nov-09889.25-1.194444416,926.226.479125934-4.34135.92002-25.7005760135.0466618.84686

Dec-09919.23.3680067517,464.813.1819862910.221152.622880.5800608256.8795130.048909

Jan-10967.155.216492616,357.96-6.3376011532.06964-6.8967-14.2736949647.564544.283409

Feb-10995.52.9312929716,429.550.437646259-0.2156-0.12150.0261813550.0147520.046466

Mar-101098.210.316423917,527.776.6844192327.169576.1253243.9158849237.5194951.40275

Apr-1011292.8045893317,558.710.176519888-0.3423-0.38260.1309444810.146370.117144

May-101146.61.5589016816,944.63-3.497295644-1.588-4.05646.4413639516.454382.521589

Jun-101173.22.3199023217,700.904.463183911-0.8273.90408-3.22848096915.241840.683847

Jul-101216.053.6524036817,868.290.945658130.505550.386550.1954229090.1494240.255582

Aug-101278.255.1149212617,971.120.5754887571.968070.016390.0322468190.0002683.873293

Sep-1013324.2049677320,069.1211.67428631.0581111.115211.76114059123.54731.119607

Oct-101432.57.5450450520,032.34-0.1832666314.39819-0.7424-3.2650876410.55111419.3441

Nov-101296.5-9.493891819,521.25-2.551324508-12.641-3.110439.318129189.674764159.7884

Dec-101231.35-5.025067520,509.095.06033169-8.17194.50123-36.7836759520.2610566.78028

Jan-111196-2.870832818,327.76-10.63591802-6.0177-11.19567.36812161125.328536.21254

Feb-111149-3.929765917,823.40-2.75189112-7.0766-3.31123.4306481610.9626950.07853

Mar-1112337.3107049619,445.229.09938624.163858.5402835.5604735372.9364217.33766

Apr-1112703.0008110319,135.96-1.590416565-0.146-2.14950.3139197534.6204380.021328

May-111175.6-7.433070918,503.28-3.306236008-10.58-3.865340.8949995714.94085111.9348

Jun-111201.12.1691051418,845.871.85150957-0.97771.29241-1.2636467731.6703130.95599

Jul-111023.4-14.79477118,197.20-3.441974289-17.942-4.001171.7858387816.00863321.9019

Aug-11992.1-3.058432716,676.75-8.355406326-6.2053-8.914555.3170798979.4684938.50557

Sep-111015.12.3183146916,453.76-1.337131036-0.8285-1.89621.5711027933.5957060.686475

Oct-11946.35-6.772731817,705.017.604644774-9.91967.04554-69.8888399249.6396598.39816

Nov-11921.1-2.66814616,123.46-8.932782303-5.815-9.491955.1953063390.095933.81421

Dec-11803-12.82162615,454.92-4.146380492-15.968-4.705575.1394268222.14158254.9923

Jan-12784.5-2.303860517,193.5511.24968618-5.450710.6906-58.27130013114.288629.71028

Feb-12105334.225621417,752.683.25197530531.07882.6928783.691132027.251557965.8899

Mar-121095.13.9981006617,404.20-1.9629712250.85125-2.5221-2.1469109336.3608620.724623

Apr-121075.9-1.753264517,318.81-0.490628699-4.9001-1.04975.1438121681.10193824.01115

May-12922-14.30430316,218.53-6.353092389-17.451-6.9122120.625814347.77846304.5429

Jun-12944.32.418655117,429.987.469542554-0.72826.91044-5.03216566847.754160.530272

Jul-12993.15.167849217,236.18-1.1118773522.021-1.671-3.3770467862.7921784.084426

Aug-12990-0.312153917,429.561.121942333-3.4590.56284-1.9468624150.31678711.96473

Sep-12926.9-6.373737418,762.747.648959584-9.52067.08986-67.4996118150.2660690.64164

Oct-12108016.517423718,505.38-1.37165467313.3706-1.9308-25.81534233.727828178.7722

Nov-121176.958.9768518519,339.904.5096074765.833.950523.0314329915.6064833.98889

Dec-121303.210.726878819,426.710.4488647827.58003-0.1102-0.8356142270.01215357.45679

Jan-1313443.1307550619,894.982.410444177-0.01611.85134-0.029802393.4274610.000259

Feb-131334-0.744047618,861.54-5.194476194-3.8909-5.753622.3866066233.1036815.13911

Mar-131276-4.347826118,835.77-0.136627232-7.4947-0.69575.2142802870.48404256.17021

Apr-131195-6.347962419,504.183.548620524-9.49482.98952-28.384909278.93721190.15152

May-131411.818.142259419,760.301.31315441114.99540.7540511.30729630.568592224.8622

Jun-131209.4-14.33630819,395.81-1.844557016-17.483-2.403742.023588275.777585305.6609

Jul-131017.3-15.88390919,345.70-0.258354768-19.031-0.817515.556858620.668238362.1699

Aug-13785.6-22.77597618,619.72-3.752668552-25.923-4.3118111.773333518.59138671.993

Sep-13764-2.749490819,379.774.081962564-5.89633.52286-20.7719861612.4105334.76687

Oct-131012.732.55235621,164.529.20934562229.40558.65024254.364715374.82668864.6836

Nov-131011.65-0.103683220,791.93-1.760446256-3.2505-2.31967.5397808495.38031210.56598

Dec-131160.514.713586721,170.681.82162021511.56671.2625214.603192041.593948133.7893

Jan-141105.8-4.713485620,513.85-3.102545596-7.8603-3.661628.7818028313.4076861.78492

Feb-141083.4-2.025682821,120.122.955417925-5.17252.39631-12.39502035.74232226.75512

Mar-141247.315.128299822,339.975.77577210711.98145.2166762.5032354427.21363143.5551

TOTAL R1 151.455404 RM78.229242832085.3232742277.2377927.159

MEANR1

2.56704075RM

1.32591937

111.591316812134.35863

M6.21266812M238.597245

10.915725

11.35286324

e12101.992818

Table 4.29: Table showing excess return to betaSl NoScript Nameii2iiei2Ri Excess Return to Ratio

1Axis Bank11.6134.358631.350.9161022.5672.71046521

2Bajaj Auto12.5155.795051.341.098109.32.7962.46966497

3Bharti Airtel12.1147.12566-1.360.524136.5-0.665-1.4315368

4BHEL15225.92038-2.660.708206.6-1.723-2.5550004

5Cipla6.8246.5185550.760.18645.191.00194.93885089

6Dr Reddy's Lab7.150.4148432.250.48441.362.8975.80557387

7Gail India7.0349.3830420.040.62434.370.86371.24877138

8HDFC12.8163.56566-0.740.866134.60.40740.37227306

9HDFC Bank13.3177.49907-0.481.1551261.05290.83768062

10Hero Motocorp8.3569.7171310.620.6254.91.44572.1958678

11Hindalco Inds13.2175.082670.331.58578.152.42941.47934262

12HUL7.0950.3373031.650.14749.51.849211.9808048

13ICICI Bank12.4152.75003-0.031.77131.632.3231.2633517

14Infosys8.5372.6979471.030.49663.211.68393.22510133

15ITC9.2685.7707711.150.31182.041.56194.74751862

16L & T13.1172.34951-0.711.59174.621.39590.82383829

17Mahindra & Mahindra10.8116.422620.690.86287.721.83192.02563356

18Maruti Suzuki11.9141.953460.361.36869.672.17351.52613516

19NTPC7.8661.745287-1.410.65945-0.541-0.9499197

20ONGC13.5183.28879-0.780.996145-0.177-0.2635851

21Relince Industries Ltd10.6112.10928-1.640.81586.47-0.56-0.791265

22SBI11.6134.09252-0.581.40957.431.28690.85277759

23Sun Pharma14.1198.45755-0.230.4961890.4260.68723974

24Tata Motors17.5304.687750.791.736188.33.09161.73152455

25Tata Power15.1226.78213-2.531.008187.5-1.193-1.2673552

26Tata Steel15.6242.18822-0.71.96892.761.90920.92710463

27TCS9.8196.2175432.050.44388.642.63815.76235291

28Wipro10.8116.514720.850.465108.21.46262.96400083

Interpretation: From the above table it can be inferred that HUL has very high Excess return to beta and the least being BHEL.

Table 4.30 : Table showing excess return to beta from highest to lowest.Sl NoScript NameExcess Return to Ratio

1HUL11.9808048

2Dr Reddy's Lab5.80557387

3TCS5.76235291

4Cipla4.93885089

5ITC4.74751862

6Infosys3.22510133

7Wipro2.96400083

8Axis Bank2.71046521

9Bajaj Auto2.46966497

10Hero Motocorp2.1958678

11Mahindra & Mahindra2.02563356

12Tata Motors1.73152455

13Maruti Suzuki1.52613516

14Hindalco Inds1.47934262

15ICICI Bank1.2633517

16Gail India1.24877138

17Tata Steel0.92710463

18SBI0.85277759

19HDFC Bank0.83768062

20L & T0.82383829

21Sun Pharma0.68723974

22HDFC0.37227306

23ONGC-0.26358506

24Relince Industries Ltd-0.79126502

25NTPC-0.94991971

26Tata Power-1.26735518

27Bharti Airtel-1.43153678

28BHEL-2.55500044

TABLE 4.31: Table showing calculation of cut off point for the portfolio

RM 1.32591937

M6.212668123

M238.59724521

Sl NoScript Nameiei2Ri (Ri - Rf)i / ei2(Ri - Rf)i / ei2M2 (Ri - Rf)i / ei2i2 / ei2(i2 / ei2)1 + M2(i2 / ei2)Cut-off Rate C

1HUL0.14749.51.850.0052478960.0052478960.334425360.000440.0004381.027913430.32534

2Dr Reddy's Lab0.48441.3592.90.0329323480.0381802442.4330591590.005670.0061111.3893994521.75116

3TCS0.44388.6412.640.0127610710.0509413163.2462661520.002210.0083251.5305235732.12102

4Cipla0.18645.18810.0037668240.054708143.4863093180.000760.0090881.5791266132.20775

5ITC0.31182.0351.560.0056005640.0603087053.8432086780.001180.0102671.6543025922.32316

6Infosys0.49663.2111.680.0125406220.0728493264.642367380.003890.0141561.9020959542.44066

7Wipro0.465108.181.460.0059185050.0787678325.0195277090.0020.0161532.0293429932.47347

8Axis Bank0.916101.992.5670.0222845770.1010524086.4396258350.008220.0243742.5532745012.5221

9Bajaj Auto1.098109.292.80.0272294250.1282818338.1748374230.011030.03543.2558846152.51079

10Hero Motocorp0.6254.8951.450.01536080.1436426339.1537136630.0070.0423953.701665662.47286

11M&M0.86287.7181.830.0171740530.16081668610.248140570.008480.0508744.241954352.4159

12Tata Motors1.736188.323.090.0277216690.18853835512.014720710.016010.0668845.2621998592.28321

13Maruti Suzuki1.36869.672.170.0410235520.22956190714.628971370.026880.0937646.9751875012.09729

14Hindalco Inds1.58578.1482.430.0475419860.27710389217.658613160.032140.1259029.0231524161.95703

15ICICI Bank1.77131.6282.320.1253494110.40245330425.646580210.099220.22512115.345989541.67122

16Gail India0.62434.3740.860.0141270190.41658032226.546833030.011310.23643416.066900381.65227

17Tata Steel1.96892.7591.910.0386950220.45527534529.012696720.041740.27817218.726647321.54927

18SBI1.40957.4291.290.0294941720.0294941721.8795339620.034590.0345863.2040142540.58662

19HDFC Bank1.155125.971.050.0088768870.0383710592.4452189360.01060.0451833.8793133580.63032

20L & T1.59174.62321.40.0279526520.0279526521.7812996530.033930.033933.1621957580.56331

21Sun Pharma0.496188.9570.430.0008952150.0288478671.8383477860.00130.0352323.2452062840.56648

22HDFC0.866134.6150.410.0020743070.0020743070.1321864910.005570.0055721.3550793930.09755

Interpretation: The cut off rate is 2.47347. Hence the securities ranked above C* have high excess return to beta than the cut off Ci and all the stock ranked below C* have low excess return . So the securities HUL, Dr Reddys Laboratories, TCS, Cipla, ITC, Infosys and Wipro are the best option for the investor to select.

CHAPTER 5SUMMARY OF FINDINGS SUGGESTION & CONCLUSION

FINDINGSThe Study has pointed out many finding throughout the study. The highlights of the study are briefed below:Risk & Return of Securities: Tata Motors has the maximum return (3.0916) BHEL has the minimum return (-1.723) Tata Motors has the maximum risk (17.5) Cipla has the minimum risk (6.82) Alpha: Dr Reddys Laboratories Ltd has the maximum alpha 2.25 , an indicator of return for the security in excess of the market return BHEL has the minimum Alpha value -2.7 Beta: Tata Motors has maximum beta value of 1.968 HUL has minimum beta value of 0.147Cut off Point From the analysis it is found that the cutoff rate is 2.47347. So the stocks above this point are good for investment The market return is estimated to be RM =1.32591937

SUGGESTIONSThe study reveals that different portfolio evaluation measures like Sharpe ratio, Treynor ratio, Jensen measure, Net selectivity can be applied for scientific selection of investment portfolios. So the investors are strongly recommended to use the different portfolio construction techniques and performance measurement for structuring the portfolio.The companys share prices are decreasing in the recession period market and the study revealed that, the price will increase in the future. So it is suggested that the investors should invest as soon as possible to get more advantage in price movement and dont expect the price to come down in the near future.It is suggested that all the potential investors should take necessary precautions and read the offer document carefully before investing to avoid systematic and unsystematic risks.

conclusion The project entitled A Study on Construction of Optimal Portfolio among 30 stocks of BSE deals with the construction of different stocks in the portfolio on the basis of risk-return evaluation and loss minimization.

The companies are selected from the top list of BSE. The study gives a better understanding of security analysis and portfolio construction and evaluation.

The problem under study is to construct different portfolios considering the risk return factors of the securities and the market as a whole and to evaluate then to find out best out of them.

From the above evaluation process it is clear that portfolio comprising of HUL, Dr Reddys Laboratories, TCS, Cipla, ITC, Infosys and Wipro is the best option for the investor to select.Detailed risk-return analysis should be done and scientific performance measures like Sharpe ratio, Treynor ratio and Jensen Measure should be used. Study revealed the use of portfolio construction and evaluation technique in the portfolio selection process and diversification of risk.

The Market is volatile as is in the present scenario; Investors have to make care full analysis before making any investment decision. For this purpose investors should use analytical and scientific method for construction and selection of portfolio, in order to diversify the portfolio risk.

Bibliography

Books Punithavathi Pandian- Security analysis and Portfolio management- Vikas Publishing House.Prasanna Chandra Investment Analysis and Portfolio Management. TMH- 2 edition,2005News PaperEconomic TimesBusiness lineWebsiteswww.google.comwww.moneycontrol.comwww.bseindia.com www.yahoo.com/finance

ANNEXURES

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