A

Summer Internship Project Report

On
Security Analysis and Portfolio Management
In the partial fulfillment of the Degree of
Masters in Management Studies
Under
University of Mumbai
By
Miss. Jain Nandini Ramkumar
MMS Semester III Roll No:13
Specialization :Finance
Batch: 2014-16
Under the Guidance of Prof. Dinesh Gabhane
External Guide Internal Guide
Mr./Mrs. Prof./ Dr./
Designation, Organization Designation

Rajeev Gandhi College of Management Studies

(PLOT NO.1, SECTOR 8, Ghansoli, Navi Mumbai-400701)
2015

1
 DECLARATION

I, Nandini Jain, Roll No. 13, student of MBA-Finance Management (2014-16)

at Rajeev Gandhi College on Management studies, Navi Mumbai hereby
declare that the Summer Training Report entitled A STUDY ON SECURITY
ANALYSIS AND PORTFOLIO MANAGEMENT is an original work and
the same has not been submitted to any other Institute for the award of any other
degree. A Seminar presentation of the Training Report was made on
_____________ and the suggestions as approved by the faculty were duly
incorporated.

Presentation In-Charge
Signature of the Candidate

Counter signed
Director/Principal of the Institute

2
 ACKNOWLEDGEMENT

An undertaking of work life - this is never an outcome of a single person;

rather it bears the imprints of a number of people who directly or indirectly

helped me in completing the present study. I would be failing in my duties

if I don't say a word of thanks to all those who made my training period

educative and pleasurable .

My special thanks to him for giving me the opportunity to do this project

and for his support throughout as a mentor. I must also thank my faculty

guide Mr. Dinesh Gabhane (Faculty, RGCMS) for his continuous support,

mellow criticism and able directional guidance during the project. I would

also like to thank all the respondents for giving their precious time and

relevant information and experience, I required, without which the Project

would have been incomplete. Finally I would like to thank all lecturers,

friends and my family for their kind support and to all who have directly or

indirectly helped me in preparing this project report. And at last I am

thankful to all divine light and my parents, who kept my motivation and

zest for knowledge always high through the tides of time.

3
 CERTIFICATE
This is to certify that the project entitled _____________________,submitted to Rajeev
Gandhi College Of Management Studies, Navi Mumbai in the partial fulfillment of the
requirements for the award of the degree of Master in Management Studies of University
of Mumbai embodies the results of bonafide project work carried out by ______________
under my guidance and supervision.
To the best of my knowledge the results embodied in this project have not been submitted to
any other university or institute for the award of Degree or Diploma. The assistance and help
received during the course of this investigation has been duly acknowledged.

Project Guide Director

Date:
Place: Navi Mumbai

4
 Executive Summary

The activities of large , internationally active financial institutions have grown increasingly
complex and diverse in recent years . The increasing complexity has necessarily been
accompanied by a process of innovation in how these institutions measure and monitor their
exposure of different kinds of risk .One set of risk management techniques that has attracted
a great deal of attention over the past several years , both among practitioners and regulators
is stress testing , which can be loosely defined as the examination of the potential effects
on a firms financial condition of a set of a specified changes in risk factors , corresponding
to exceptional but plausible events .

5
 A concept security analysis and portfolio management services has been very famous and
old among various institutions.
This report represents practice application of portfolio management techniques in the
portfolio section. Portfolio management is an integral and exhaustive of fundamental and
executive method which are used for calculation of annual return and earnings per share for
the portfolio.
Modern portfolio management theory suggest that the traditional approach to portfolio
analysis , selection and management may yield less than optimum results . Hence a more
scientific approach is required, based on estimates of risk and return of the portfolio and the
attitudes of the investor toward a risk-return trade -off stemming from the analysis of the
individual securities.

Table Of Content
Title Page
Declaration
Institute Certificate
Acknowledgment
Executive Summary
Introduction to Security Analysis & Portfolio Management
Security Analysis
Fundamental Analysis

6
 Technical Analysis
Portfolio Management
Need & Importance
Scope of study
Objective
Assumptions
Financial Assets
Research Methodology
Research Design
Data Collection
Aspects Of Portfolio Management
Review Of literature
Portfolio Management
Criteria for portfolio decisions
Five levels of project portfolio management
Qualities of portfolio manager
Risk & expected returns
Types of risks
Returns on financial assets
Components of returns
Portfolio analysis
Traditional Approach
Modern Approach
MARKOWITZ Model
CAPM
Security Market Line

7
 Data Analysis and Interpretations
Investment vs. Speculation
Competitors
What is IT IS
SWOT Analysis
Client & Project Overview
Project Workflow
Suggestion & Implementation
TCS Summary
Case Study & Conclusion

8
 A STUDY ON SECURITY ANALYSIS AND
PORTFOLIO MANAGEMENT

INTRODUCTION:
Traditional security analysis emphasis the projection of prices and dividends ac
cordingly the potential price the firms common stock and the future dividend seem
were to be forecast and the discount allowed 10%.

The traditional views are on the intensive and current market price of security if the
current market price security was the above value the analysis recommended same
conversely. If the Current market price of the security below the entrance value the
customer advise to purchase these traditional views have shifted their emphasis to
a modern approach which analysis risk and return off a common stock rather than
relevant price and dividend esteems.

SECURITY ANALYSIS:

For making proper investment involving both risk and return, the investor has to make
identify undervalues securities for buying and overvalues securities for selling is both an art
and a study of the alternative avenues of the investment-their risk and return characteristics,
and make a proper projection or expectation of the risk and return of the alternative
investments under consideration.

Investor has to tune the expectations to this preference of the risk and return for making a
proper investment choice. The process of analyzing the individual securities and the market
as a whole and estimating the risk and return expected from each of the investments called as
security analysis.

Security analysis in both traditional sense and modern sense involves the projection
of future dividend or ensuring flows, forecast of the share price in the future and
estimating the intrinsic value of a security based on the forecast of earnings or dividend.

Once the investment policy, has known the securities to be bought have to be scrutinized
through either Fundamental analysis or Technical analysis or Efficient Market Hypothesis
theory.

Definition of security analysis:

9
For making proper investment involving both risk and return, the investor has to make a
study of the alternative avenues of investment their risk and return characteristics and make
proper projection or expectation of the risk and return of the alternative investments under
consideration. He has to tune the expectations to his preferences of the risk and return for
making a proper investment choice. The process of analysing the individual securities and the
market as a whole and estimating the risk and return expected from each of the investments
with a view to identifying undervalued securities for buying and overvalued securities for
selling is both an art and a science and this is what is called security analysis.

Security Analysis in both traditional sense and modern sense involves the projection of future
dividend, or earnings flows, forecast of the share price in the future and estimating the
intrinsic value of a security based on the forecast of earnings or dividends. Thus, security
analysis in traditional sense is essentially an analysis of the fundamental value of a share and
its forecast for the future through the calculation of its intrinsic worth of the share.

Modern security analysis relies on the fundamental analysis of the security, leading to its
intrinsic worth and also risk-return analysis depending on the variability of the returns,
covariance, safety of funds and the projections of the future returns. If the security analysis is
based on fundamental factors of the company, then the forecast of the share price has to take
into account inevitably the trends and the scenario in the economy, in the industry to which
the company belongs and finally the strengths and weaknesses of the company itself- its
management, promoters track record, financial results, projections of expansion,
diversification, tax planning etc. all these studies are only a part of the total security analysis
that the investor should aim at

FUNDAMENTAL ANALYSIS:
Fundamental analysis is really a logical and systematic approach to estimating the future
dividend and share price it is based on the basic premise that share price is determined by a
number of fundamental factors relating to the economy, industry and company.

TECHNICAL ANALYSIS:
According to technical analysis the investors believe that share prices are determined by the
demand and supply forces operating in the market. These demand and supply forces in turn
are influenced by a number of fundamental factors as well as certain psychological or
emotional factors. Many of these factors cannot be quantified. The technical analyst therefore
concentrates on the movement of share prices. He claims that by examining past share price
movements future share prices can be accurately predicted. Technical analysis is the name
given to forecasting techniques that utilize historical share price data. The rationale behind
technical analysis is that share price behavior repeats itself over time and the analyst attempts
to drive methods to predict this repetition.

PORTFOLIO MANAGEMENT:
To understand the term investment we need to have the knowledge on
Portfolios are combination of assets traditional portfolio management was The selection of
security to suit the particular requirement of an invested The modern
portfolio theories is based on a scientific approach and has The

10
scientific obligation based on the estimates of risk and return. The Portfolio attitudes of
the investor toward a risk return tradeoff through analysis and screening of individual
security.

time factor
return
risk and relationship

Hence to understand the essence of investment analysis this study is undertaken

NEED AND IMPORTANCE OF STUDY:

The Portfolio Management deals with the process of selection securities from the number of
opportunities available with different expected returns and carrying different levels of risk
and the selection of securities is made with a view to provide the investors the maximum
yield for a given level of risk or ensure minimum risk for a level of return.
Portfolio Management is a process encompassing many activities of investment in assets and
securities. It is a dynamics and flexible concept and involves regular and systematic analysis,
judgment and actions.
The objectives of this service are to help the unknown investors with the expertise of
professionals in investment Portfolio Management.
It involves construction of a portfolio based upon the investors objectives, constrains,
preferences for risk and return and liability.
The portfolio is reviewed and adjusted from time to time with the market conditions. The
evaluation of portfolio is to be done in terms of targets set for risk and return.
The changes in portfolio are to be effected to meet the changing conditions. Portfolio
Construction refers to the allocation of surplus funds in hand among a variety of financial
assets open for investment.
Portfolio theory concerns itself with the principles governing such allocation. The modern
view of investment is oriented towards the assembly of proper combinations held together
will give beneficial result if they are grouped in a manner to secure higher return after taking
into consideration the risk element.
The modern theory is the view that by diversification, risk can be reduced. The investor can
make diversification either by having a large number of shares of companies in different
regions, in different industries or those producing different types of product lines.

Modern theory believes in the perspectives of combination of securities under constraints of

risk and return.

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

11
individual securities involved in the portfolio. These percentages help in allocating the funds
available for investment based on risky portfolios.

OBJECTIVE OF STUDY
To calculate the return of various companies.
To calculate the risk of various companies.
To calculate the portfolio return of different portfolios designed for the combination of
various companies.
To understand, analyze and select the best portfolio.

ASSUMPTIONS OF THE STUDY:

This study assumes than an investor purchases the share at the beginning of the
month and he sells the share at the end of the month.
Investors make the decision on the basis of previous returns and risks that are
unsystematic risks.
For calculating the returns of each industry this study assumes that the indexes are
taken in to consideration.
The investors give preference to the securities that have given positive returns
previously.

Financial assets

Conducive economic environment attracts investment, which in turn influences the

development of the economy.
One of the essential criteria for the assessment of economic development is the quality and
quantity of assets in a nation at a specific time.
There are two broad types of assets:
(1) real assets,
(2) financial assets.

Real assets comprise the physical and intangible items available to a society.

Physical assets are used to generate activity and result in positive or negative contribution to
the owner of the asset.
Intangible assets also result in a positive or negative contribution to the owner, but are
different in that they do not have a physical shape or form. Besides real assets, the economy
is supported by another group of assets called financial assets.
The major component of the financial assets is cash, also called money. Financial assets help
the physical assets to generate activity. Some examples of financial assets besides cash are
deposits, debt instruments, shares, and foreign currency reserves.

Assets in any economy can thus be broadly grouped into physical, financial, and tangible
assets, based on their distinct characteristics.
Physical assets can be classified into fixed assets and working capital assets, based on the
length of their life.

12
Fixed assets, such as land, building, machinery and other infrastructure facilities, are utilised
by the society over a long period of time when compared with working capital assets.
Movable/circulating capital assets are produced and consumed by the society within a
financial year.
Examples of movable/ circulating capital assets include materials, merchandise, durable
goods, jewellery (gold), and similar items. Intangible assets are goodwill, patents, copyrights,
and royalties.
In a macro sense, financial assets are regulated by the government of a country.
Financial assets smoothen the trade and transaction of an economy and give the society a
standard measure of valuation. Money or cash is the basic financial asset created by the
government of an economy .

The extent of flow of this financial asset has to be regulated in a country for the demand for
and supply of funds to match the macro level, financial assets also represent the current/
future value of physical and intangible assets. The current/future value of financial assets
depends on the current/future return expectations from these financial instruments.
All the financial assets in an economy represent a real asset either in the present context or in
the context of the future. Their dependence on real assets requires the financial assets to be
valued differently. The distinctive value determination of financial instruments also requires a
specific market to patronise them.
Financial assets have specific properties that distinguish them from physical and intangible
assets. These properties are monetary value, divisibility, convertibility, reversibility, liquidity,
and cash flow.

A financial market is a place/system where financial instruments are exchanged. Such

markets enhance the unique characteristics of the financial instruments.
Financial markets can be classified on the basis of the nature of instruments exchanged in the
economy. The instruments can be broadly divided into claim instruments and currency
instruments.
Claim instruments are subdivided into those that are fixed claims and those instruments that
get a residual or equity claim. Fixed claim markets that have very short durations, that is, less
than a year are traded in the money market while the fixed claims that have a maturity of
more than a year and equity claim instruments are traded in the capital markets.

Money markets are also referred to as a wholesale financial market while capital markets are
referred to as retail markets since the size of the transactions in the money market is quite
large when compared to that in the capital markets. The trading of currency instruments
among different countries is conducted through the foreign exchange market. The
subdivisions of the major markets are shown in Figure 1.1.

13
Securities are financial instruments that have been created to represent a legal obligation to
pay a sum in future in return for the current receipt of value. Securities thus represent the cash
or cash equivalent received from another person. The creation of a security is situation and
need specific, and many innovative instruments have been floated in the market.

The existence of such financial instruments is, however, within the legal regulations
governing the market in which they are floated. The securities market, hence, is place-
sensitive. The immediate classification of the securities market can be in terms of national
boundaries due to the legal environment. The securities market can be subdivided into
national and international markets. However, with technological innovations, international
agreements and standards, the line distinguishing a national from an international market is
fast disappearing.

14
RESEARCH METHODOLOGY:
A system of collecting data for research projects is known as research methodology. The data
may be collected for either theoretical or practical research. Research methodology is a way
to systematically solve the research problem. It may be understood as a science of studying
how research is done scientifically. In it we study the various steps that are generally adopted
by a researcher in studying his research problem along with the logic behind them.

RESEARCH DESIGN:
Task of defining the research problem is the preparation of the research project, popularly
known as the research design. Decisions regarding what, where, when, how much, by what
means concerning an inquiry or a research study constitute a research design.

A research design is the arrangement of conditions for collection and analysis of data in a
manner that aims to combine relevance to the research purpose with economy in procedure. It
is a framework or blueprint for conducting the marketing research project.

DATA COLLECTION:
Generally the available primary data is used wherever is not available within the time
permitted and so secondary data has been generated from secondary sources collected.

PRIMARY DATA:

It includes the data collected from the personal interaction with authorized manner of karvy.

SECONDARY DATA:
The secondary method includes the lectures delivered by the superintend of respective
dept. The Boucher and materials provided by karvy stock broking ltd & also collected
from www.moneycontrol.com & dallal street magazine.

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.
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.

15
NEED AND IMPORTANCE OF STUDY:

o The Portfolio Management deals with the process of selection securities from the
number of opportunities available with different expected returns and carrying
different levels of risk and the selection of securities is made with a view to provide
the investors the maximum yield for a given level of risk or ensure minimum risk for
a level of return.

o Portfolio Management is a process encompassing many activities of investment in

assets and securities. It is a dynamics and flexible concept and involves regular and
systematic analysis, judgment and actions.

o The objectives of this service are to help the unknown investors with the expertise of
professionals in investment Portfolio Management.

o It involves construction of a portfolio based upon the investors objectives, constrains,

preferences for risk and return and liability. The portfolio is reviewed and adjusted
from time to time with the market conditions.

o The evaluation of portfolio is to be done in terms of targets set for risk and return. The
changes in portfolio are to be effected to meet the changing conditions.

o Portfolio Construction refers to the allocation of surplus funds in hand among a

variety of financial assets open for investment. Portfolio theory concerns itself with
the principles governing such allocation. The modern view of investment is oriented
towards the assembly of proper combinations held together will give beneficial result
if they are grouped in a manner to secure higher return after taking into consideration
the risk element.

o The modern theory is the view that by diversification, risk can be reduced. The
investor can make diversification either by having a large number of shares of
companies in different regions, in different industries or those producing different
types of product lines.

o Modern theory believes in the perspectives of combination of securities under

constraints of risk and return.

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.

16
LIMITATIONS OF STUDY:
This study is limited to some selected industries (Pharmaceutical, Banking,
Information technologies &Automobile). This study is for the period May
2012 June 2012.
Dividend is not considered in the calculation of Return. Price change is
only taken into consideration.
Situations in stock market are always subject to change.
Time constraint

17
REVIEW OF LITERATURE
PORTFOLIO MANAGEMENT:

Specification and qualification of investor objectives, constraints, and preferences in

the form of an investment policy statement.
Determination and qualification of capital market expectations for the economy,
market sectors, industries and individual securities.
Allocation of assets and determination of appropriate portfolio strategies for each
asset class and selection of individual securities.
Performance measurement and evaluation to ensure attainment of investor objectives.
Monitoring portfolio factors and responding to changes in investor objectives,
constrains and / or capital market expectations.
Rebalancing the portfolio when necessary by repeating the asset allocation, portfolio
strategy and security selection.

CRITERIA FOR PORTFOLIO DECISIONS:

In portfolio management emphasis is put on identifying the collective importance of all

investors 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 portfolios
owner.

Diversification across securities will reduce a portfolios 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.

18
 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 optimize 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 minimize 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 Portfolio Management To sustain long-term
growth, companies manage a number of products and candidates at different stages of
maturity.
However, different product profiles and the therapeutic areas they serve have
disparate commercial opportunities.
Our portfolio prioritization, pipeline analysis, category franchise strategy, and
technology licensing assessments provide a systematic means of optimizing
development programs and product opportunities.

We outline and quantify the areas of greatest opportunity for your organization and
recommend actionable strategies that establish or expand your position in target markets. Key
portfolio management questions that we address:

Which technologies and product candidates have the greatest potential

commercial value?

How can we broaden and deepen our therapy penetration?

What actions can we take to maximize return on investment for individual

candidates and discoveries?
Which proprietary rights do we buy, co-market, license, or sell?
How do we balance short and long term product needs to maximize
therapeutic franchise value?

We detail the value of discoveries in clinical phases, candidates in the pipeline, and products
on the market. These individual and therapeutic category evaluations enable executives to
make strategic investment, licensing and prioritization decisions to realize their portfolio's
full potential.

19
Portfolio Management

you can now receive the same portfolio management services as many institutional
investors-whether it is a separately managed account or a mutual fund wrap portfolio.
Some benefits of managed portfolios include:
Providing access to top-tier investment management professionals Tailored portfolios
to meet specific investment needs Ownership of individual securities Ease of pre-
designed mutual fund portfolios Every investor is unique, and investment advisory
services provide you with professional investment advice and a personalized
investment strategy.

Whether you're seeking a tailored, professionally managed portfolio, or the

convenience and simplicity of a diversified mutual fund wrap program, your
investment choice should focus on meeting your financial goals.
During this process, you should consider current and future growth objectives, income
needs, time horizon and risk tolerance. These considerations form the blueprint for
developing a portfolio management strategy.

The process involves, but is not limited to, the following important stages.

a) Set investment objectives

b) Develop an asset allocation strategy
c) Evaluate/Select investment vehicle
d) Portfolio review

Ongoing portfolio monitoring Portfolio Management Maturity Summarizes five levels of

project portfolio management maturity .each level represents the adoption of an increasingly
comprehensive and effective subset of related solutions discussed in the previous parts of this
6-part paper for addressing the reasons that organizations choose the wrong projects.

Understanding organizational maturity with regard to project portfolio management is useful.

It facilitates identifying performance gaps, indicates reasonable performance targets, and
suggests an achievable path for improvement.

The fact that five maturity levels have been identified is not meant to suggest that all
organizations ought to strive for top-level performance.

Each organization needs to determine what level of performance is reasonable at the current
time based on business needs, resources available for engineering change, and organizational
ability to accept change.

Experience shows that achieving high levels of performance typically takes several years. It
is difficult to leap-frog several steps at once. Making progress is what counts.

20
 Five levels of project portfolio management

The detailed definitions of the levels, provided below, are not precise. Real organizations
will tend to be more advanced with regard to some characteristics and less advanced relative
to others. For most organizations, though, it is easy to pick one of the levels as characterizing
the current maturity of project portfolio management performance.

Level 1: Foundation Level

1 organizes work into discrete projects and tracks costs at the project level.

Project decisions are made project-by-project without adherence to formal project selection
criteria.
The portfolio concept may be recognized, but portfolio data are not centrally managed
and/or not regularly refreshed.
Roles and responsibilities have not been defined or are generic, and no value creation
framework has been established.
Only rarely are business case analyses conducted for projects, and the quality is often poor.
Project proposals reference business benefits generally, but estimates are nearly always
qualitative rather than quantitative.
There is little or no formal balancing between the supply and demand for project resources,
and there is little if any coordination of resources across projects, which often results in
resource conflicts.
Over-commitment of resources is common.
There may be a growing recognition that risks need to be managed, but there is little real
management of risk.

Level 1 organizations are not yet benefiting from project portfolio management, but they are
motivated to address the relevant problems and have the minimum foundation in place to
begin building project portfolio management capability. At this level, organizations should
focus on establishing consistent, repeatable processes for project scheduling, resource
assignment, time tracking, and general project oversight and support.

21
Level 2: Basics Level 2

replaces project-by-project decision making with the goal of identifying the best
collection of
projects to be conducted within the resources available. At a minimum this requires
aggregating project data into a central database, assigning responsibilities for project
portfolio management, and force-ranking projects.

Redundant projects are identified and eliminated or merged.

Business cases are conducted for larger projects, although quality may be inconsistent.
Individual departments may be establishing structures to oversee and coordinate their
projects.
There is some degree of options analysis (i.e., different versions of the project will be
considered).
Project selection criteria are explicitly defined, but the link to value creation is
sketchy.
Planning is mostly activity scheduling with limited performance forecasting.
There are attempts to quantify some non-financial benefits, but estimates are mostly
"guestimates" generated without the aid of standard techniques.
Overlap and double counting of benefits between projects is common.
Ongoing projects are still rarely terminated based on poor performance.
The PPM tools being used may have good data display and management capabilities,
but project prioritization algorithms may be simplistic and the results potentially
misleading to decision makers.
Portfolio data has an established refresh cycle or is regularly accessed and updated.
Resource requirements at the portfolio level are recognized but not systematically
managed.
Knowledge sharing is local and ad hoc.
Risk analysis may be conducted early in projects but is not maintained as a continual
management process. Uncertainties in project schedule, cost and benefits are not
quantified.
Schedule and cost overruns are still common, and the risks of project failure remain
large. Level 2 organizations are beginning to implement project portfolio
management, but most of the opportunity has not yet been realized. The focus should
be on formalizing the framework for evaluating and prioritizing projects and on
implementing tools and processes for supporting project budgeting, risk and issues
tracking, requirements tracking, and resource management.

22
Level 3: Value Management

Level 3, the most difficult step for most organizations, requires metrics, models, and tools for
quantifying the value to be derived from projects. Although project interdependencies and
portfolio risks may not be fully and rigorously addressed, analysis allows projects to be
ranked based on "bang-for-the-buck," often producing a good approximation of the value-
maximizing project portfolio.

o The principles of portfolio management are widely understood and accepted.

o The project portfolio has a well-defined perimeter, with clear demarcation and
understanding of what it contains and does not contain.
o Portfolio management processes are centrally defined and well documented, as
are roles and responsibility for governance and delivery.
o Portfolio management can demonstrate that its role in scrutinizing projects has
resulted in some initiatives being stopped or reshaped to increase portfolio
value.
o Executives are engaged, provide tradeoff weights for the value model, and
provide active and informed support.
o Plans are developed to a consistent standard and are outcome- or value-based.
o Effective estimation techniques are being used within planning and a range of
project alternatives are routinely considered.
o Data quality assurance processes are in place and independent reviews are
conducted.
o There is a common, consistent practice for project approval and monitoring.
o Project dependencies are identified, tracked, and managed.
o Decisions are made with the aid of a tool based on a defensible logic for
computing project value that generates the efficient frontier.
o Portfolio data are kept up-to-date and audit trails are maintained.
o Costs, expenditures and forecasts are monitored at the portfolio level in
accordance with established guidelines and procedures.
o Interfaces with financial and other related functions within the organization
have been defined.
o A process is in place for validating the realization of project benefits.
o There is a defined risk analysis and management process, with efforts
appropriate to risk significance, although some sources of risk are not
quantified in terms of probability and consequence.

Level 3 organizations demonstrate a commitment to proactive, standardized

project and project portfolio management. They are achieving significant return from their
investment, although more value is available.

23
Level 4: Optimization Level

4 is characterized by mature processes, superior analytics, and quantitatively managed

behavior.
Tools for optimizing the project portfolio correctly and fully account for project risks
and interdependencies.
The business processes of value creation have been modeled and measurement data is
collected to validate and refine the model.
The model is the basis for the logic for estimating project value, prioritizing projects,
making project funding and resource allocation decisions, and optimizing the project
portfolio.
The organization's tolerance for risk is known, and used to guide decisions that
determine the balance of risk and benefit across the portfolio.
There is clear accountability and ownership of risks.
External risks are monitored and evaluated as part of the investment management
process and common risks across the whole portfolio (which may not be visible to
individual projects) are quantified and in support of portfolio optimization.
Senior executives are committed, engaged, and proactively seek out innovative ways
to increase value.
There is likely to be an established training program to develop the skills and
knowledge of individuals so that they can more readily perform their designated roles.
An extensive range of communications channels and techniques are used for
collaboration and stakeholder management.
High-level reports on key aspects of portfolio are regularly delivered to executives
and the information is used to inform strategic decision making.
There is trend reporting on progress, actual and projected cost, value, and level of
risk.
Assessments of stakeholder confidence are collected and used for process
improvement.
Portfolio data is current and extensively referenced for better decision making.

Level 4 organizations are using quantitative analysis and

measurements to obtain efficient predictable and controllable project and project portfolio
management. They are obtaining the bulk of the value available from practicing project
portfolio management.

24
Level 5: Core Competency Level 5

occurs when the organization has made project portfolio management a core competency,
uses best-practice analytic tools, and has put processes in place for continuous learning
and improvement.
Portfolio management processes are proven and project decisions, including project
funding levels and timing, are routinely made based the value maximization value.
Processes are continually refined to take into account increasing knowledge, changing
business needs, and external factors.
Portfolio management drives the planning, development, and allocation of projects to
optimize the efficient use of resources in achieving the strategic objectives of the
organization.
High levels of competence are embedded in all portfolio management roles, and
portfolio management skills are seen as important for career advancement.
Portfolio gate reviews are used to proactively assess and manage portfolio value and
risk.

Portfolio management informs future capacity demands, capability requirements are

recognized, and resource levels are strategically managed.
Information is highly valued, and the organization's ability to mitigate external risks
and grasp opportunities is enhanced by identifying innovative ways to acquire and
better share knowledge.
Benefits management processes are embedded across the organization, with benefits
realization explicitly aligned with the value measurement framework.
The portfolio is actively managed to ensure the long term sustainability of the
enterprise.
Stakeholder engagement is embedded in the organization's culture, and stakeholder
management processes have been optimized.
Risk management underpins decision-making throughout the organization.
Quantitatively measurable goals for process improvement have been established and
performance against them tracked.
The relationship between the portfolio and strategic planning is understood and
managed.
Resource allocations to and from projects are intimately aligned so as the maximize
value creation.

Maturity

organizations are obtaining maximum possible value from project portfolio management. By
fully institutionalizing project portfolio management into their culture they free people to
become more creative and innovative in achieving business success.
Building Project Portfolio Management Maturity Experience shows that building project
portfolio management maturity takes time. As suggested by, significant short-term
performance gains can be achieved, but making step changes requires understanding current
weaknesses and the commitment of effort and resources.
Step changes can be made, but achieving high levels of maturity typically takes years.

25
QUALITIES OF PORTFOLIO MANAGER

1. SOUND GENERAL KNOWLEDGE: Portfolio management is an exciting and

challenging job. He has to work in an extremely uncertain and confliction environment. In the
stock market every new piece of information affects the value of the securities of different
industries in a different way. He must be able to judge and predict the effects of the
information he gets. He must have sharp memory, alertness, fast intuition and self-confidence
to arrive at quick decisions.
2. ANALYTICAL ABILITY: He must have his own theory to arrive at the intrinsic value of
the security. An analysis of the securitys values, company, etc. is s continuous job of the
portfolio manager. A good analyst makes a good financial consultant. The analyst can know
the strengths, weaknesses, opportunities of the economy, industry and the company.
3. MARKETING SKILLS: He must be good salesman. He has to convince the clients about
the particular security. He has to compete with the stock brokers in the stock market. In this
context, the marketing skills help him a lot.
4. EXPERIENCE: In the cyclical behavior of the stock market history is often repeated,
therefore the experience of the different phases helps to make rational decisions. The
experience of the different types of securities, clients, market trends, etc., makes a perfect
professional manager.

PORTFOLIO BUILDING:

Portfolio decisions for an individual investor are influenced by a wide variety of factors.
Individuals differ greatly in their circumstances and therefore, a financial programme well
suited to one individual may be inappropriate for another. Ideally, an individuals portfolio
should be tailor-made to fit ones individual needs. Investors Characteristics: An analysis of
an individuals investment situation requires a study of personal characteristics such as age,
health conditions, personal habits, family responsibilities, business or professional situation,
and tax status, all of which affect the investors willingness to assume risk.

Stage in the Life Cycle:

One of the most important factors affecting the individuals investment objective is his stage
in the life cycle. A young person may put greater emphasis on growth and lesser emphasis on
liquidity. He can afford to wait for realization of capital gains as his time horizon is large.

Family responsibilities: The investors marital status and his responsibilities towards
other members of the family can have a large impact on his investment needs and
goals.

Investors experience: The success of portfolio depends upon the investors

knowledge and experience in financial matters. If an investor has an aptitude for
financial affairs, he may wish to be more aggressive in his investments.

26
 Attitude towards Risk: A persons psychological make-up and financial position
dictate his ability to assume the risk. Different kinds of securities have different kinds
of risks. The higher the risk, the greater the opportunity for higher gain or loss.

Liquidity Needs: Liquidity needs vary considerably among individual investors.

Investors with regular income from other sources may not worry much about
instantaneous liquidity, but individuals who depend heavily upon investment for
meeting their general or specific needs, must plan portfolio to match their liquidity
needs.

Liquidity can be obtained in two ways:

By allocating an appropriate percentage
of the portfolio to bank deposits, and
By requiring that bonds and equities
purchased be highly marketable.

Tax considerations: Since different individuals, depending upon their incomes, are
subjected to different marginal rates of taxes, tax considerations become most
important factor in individuals portfolio strategy. There are differing tax treatments
for investment in various kinds of assets.

Time Horizon: In investment planning, time horizon becomes an important

consideration. It is highly variable from individual to individual. Individuals in their
young age have long time horizon for planning, they can smooth out and absorb the
ups and downs of risky combination. Individuals who are old have smaller time
horizon, they generally tend to avoid volatile portfolios.

Individuals Financial Objectives: In the initial stages, the primary objective of an

individual could be to accumulate wealth via regular monthly savings and have an
investment programmed to achieve long term capital gains.

Safety of Principal: The protection of the rupee value of the investment is of prime
importance to most investors. The original investment can be recovered only if the
security can be readily sold in the market without much loss of value.

Assurance of Income: `Different investors have different current income needs. If an

individual is dependent of its investment income for current consumption then income
received now in the form of dividend and interest payments become primary
objective.

Investment Risk: All investment decisions revolve around the trade-off between risk
and return. All rational investors want a substantial return from their investment. An
ability to understand, measure and properly manage investment risk is fundamental to
any intelligent investor or a speculator. Frequently, the risk associated with security
investment is ignored and only the rewards are emphasized. An investor who does not
fully appreciate the risks in security investments will find it difficult to obtain
continuing positive results.

RISK AND EXPECTED RETURN:

27
 There is a positive relationship between the amount of risk and the amount of expected
return i.e., the greater the risk, the larger the expected return and larger the chances of
substantial loss. One of the most difficult problems for an investor is to estimate the highest
level of risk he is able to assume.
Risk is measured along the horizontal axis and increases from the left to right.
Expected rate of return is measured on the vertical axis and rises from bottom to top.
The line from 0 to R (f) is called the rate of return or risk less investments commonly
associated with the yield on government securities.
The diagonal line form R (f) to E(r) illustrates the concept of expected rate of return
increasing as level of risk increases.

TYPES OF RISKS

Risk consists of two components. They are

Systematic Risk
Un-systematic Risk
1. Systematic Risk:
Systematic risk is caused by factors external to the particular company and uncontrollable by
the company. The systematic risk affects the market as a whole.
Factors affect the systematic risk are
economic conditions
political conditions
sociological changes

The systematic risk is unavoidable.

Systematic risk is further sub-divided into three types.
They are
a) Market Risk
b) Interest Rate Risk
c) Purchasing Power Risk

a). Market Risk One would notice that when the stock market surges up, most stocks post
higher price. On the other hand, when the market falls sharply, most common stocks will
drop. It is not uncommon to find stock prices falling from time to time while a companys
earnings are rising and vice-versa. The price of stock may fluctuate widely within a short
time even though earnings remain unchanged or relatively stable.

b). Interest Rate Risk: Interest rate risk is the risk of loss of principal brought about the
changes in the interest rate paid on new securities currently being issued.

c). Purchasing Power Risk: The typical investor seeks an investment which will give him
current income and / or capital appreciation in addition to his original investment.

2. Un-systematic Risk: Un-systematic risk is unique and peculiar to a firm or an industry.

The nature and mode of raising finance and paying back the loans, involve the risk element.
Financial leverage of the companies that is debt-equity portion of the companies differs from
each other.

28
 All these factors affect the un-systematic risk and contribute a portion in the total
variability of the return.
Managerial inefficiently Technological change in the production process
Availability of raw materials
Changes in the consumer preference
Labor problems
The nature and magnitude of the above mentioned factors differ from industry to industry
and company to company. They have to be analyzed separately for each industry and
firm.
Unsystematic risk can be broadly classified into:
Business Risk
Financial Risk

a. Business Risk: Business risk is that portion of the unsystematic

risk caused by the operating environment of the business.
Business risk arises from the inability of a firm to maintain its
competitive edge and growth or stability of the earnings. The
volatility in stock prices due to factors intrinsic to the company
itself is known as Business risk.
b. Business risk is concerned with the difference between revenue
and earnings before interest and tax. Business risk can be divided
into.
c. i). Internal Business Risk Internal business risk is associated with
the operational efficiency of the firm. The operational efficiency
differs from company to company. The efficiency of operation is
reflected on the companys achievement of its pre-set goals and
the fulfillment of the promises to its investors. ii).External
Business Risk External business risk is the result of operating
conditions imposed on the firm by circumstances beyond its
control. The external environments in which it operates exert
some pressure on the firm.
d. The external factors are social and regulatory factors, monetary
and fiscal policies of the government, business cycle and the
general economic environment within which a firm or an industry
operates. b. Financial Risk: It refers to the variability of the
income to the equity capital due to the debt capital. Financial risk
in a company is associated with the capital structure of the
company.
Capital structure of the company
consists of equity funds and borrowed funds.

29
Returns on financial assets
People want to maximize expected returns subject to their tolerance for risk. Return is the principal
reward in the investment process, and it provides the basis to investors in comparing alternative
investments. Measuring historical returns allows investors to assess how well they have done, and it
plays a part in the estimation of future, unknown returns.

We often use two terms regarding return from investments, realized return and expected return.
Realized return is after the fact returnreturn that was earned (or could have been earned). Realized
return is history. For example, a deposit of Rs. 5,00,000 in the Punjab National Bank on January 1 in a
certificate of deposit at a stated annual interest rate of 5 percent will be worth Rs. 525000 one year
later. The realized return for the year is Rs. 25000 or 5 percent.

Expected return is the return from an asset that investors anticipate they will earn over some future
period. It is a predicted return, and it may or may not occur .

Components of return
Return on a financial asset, generally, consists of two components. The principal component of return
is the periodic income on the investment, either in the form of interest or dividends. The second
component is the change in the price of the asset commonly called the capital gain or loss. This
element of return is the difference between the purchase price and the price at which the asset can be
or is sold. The price change may bring a gain or a loss as it may be in any side.

The income from an investment consists of one or more cash payments made at specified intervals of
time. Interest payments on most bonds are paid either semi-annually or yearly, whereas dividends on
common stocks are usually paid on yearly basis. The distinguishing feature of these payments is that
they are paid in cash by the issuer to the holder of the asset ,

We often use the term yield to express return. Yield refers to the income component in relation to
some price for a security. For our purposes, the price that is relevant is the purchase price of the
security. The yield on a Rs. 1,000 par value, 6 per cent coupon bond purchased for Rs. 950 is 6.31 per
cent (Rs. 1,000 par value, 6 percent coupon bond purchased for Rs. 950 is 6.31 percent (Rs. 60/Rs.
950). However, we need to remember that yield is not, for most purposes, the proper measure of
return from a security. The capital gain or loss must also be considered.

Equation 2.1 is a conceptual statement for total return.

Total return = Income + Price change (+/-)

Note that either component of return can be zero for a given security over any given time period. A
bond purchased for Rs. 800 and held to maturity provides both type of income: interest payments and

30
a price change. The purchase of a non-dividend-paying stock that is sold four months later produces
either a capital gain or a capital loss, but no income.

Thus, a measure of return must consider both dividend/interest income and price change. Returns over
time or from different securities can be measured and compared using the total return concept. The
total return for a given holding period relates all the cash flows received by an investor during any
designated time period to the amount of money invested in the asset. Total return is defined as

where, r = total return, Pt = price of an asset at time (t), Pt1 = price of an asset at time (t-1), D =
dividend or interest income in simple terms.

Calculation of average returns

The total return is an acceptable measure of return for a specified period of time. But
we also need statistics to describe a series of returns. For example, investing in a
particular stock for ten years or a different stock in each of ten years could result in 10
total returns, which must be described mathematically.
There are two generally used methods of calculating the average return, namely, the
arithmetic average and geometric average. The statistics familiar to most people is the
arithmetic average. The arithmetic average, customarily designated by the symbol X =
X\ n , or the sum of each of the values being considered divided by the total number
of values.
Risk in holding securities
Risk is generally associated with the possibility that realized returns of securities will
be less than the returns that were expected. The source of such risk is the failure of
dividends (interest) and/or the securitys price to materialize as expected.
There are numerous forces that contribute to variations in return price or dividend
(interest). These forces are termed as elements of risk. Some factors are external to the
firm and cannot be controlled. These factors affect large numbers of securities. In
investments, those forces that are uncontrollable, external, and broad in their effect are
called sources of systematic risk. Other forces are internal to the firm and are
controllable to a large degree. The controllable, internal factors somewhat peculiar to
industries and/or firms are referred to as sources of unsystematic risk.
That portion of total variability in return caused by factors affecting the prices of all
securities is known as systematic risk. Economic, political, and sociological changes
are sources of systematic risk. Their effect is to cause prices of nearly all individual
common stocks and/or all individual bonds to move together in the same manner. For
example, if the economy is moving toward inflation and corporate profits shift
upward, stock prices may rise across a broad front. Nearly all stocks listed on the
National Stock Exchange (NSE) move in the same direction as the S & P Nifty index
of NSE. Studies have shown that on the average, 50 percent of the variation in a
stocks price can be explained by variation in the market index.
Conversely, the portion of total risk that is unique to a firm or industry is called
unsystematic risk. Factors such as management capability, consumer preferences, and

31
 labour strikes cause unsystematic variability of returns in a firm. Unsystematic factors
are largely independent of factors affecting securities markets in general. Because
these factors affect one firm, they must be examined for each firm.
Risk measurement
Understanding the nature and types of risk is not adequate unless the investor or
analyst is capable of measuring it in some quantitative terms. The quantitative
expression of the risk of a stock would make it comparable with other stocks.
However, the risk measurements cannot be considered fully accurate as it is caused by
multiplicity of factors such as social, political, economic and managerial aspects.
Risk is measured by the variability of returns. The statistical tool often used to
measure risk is the standard deviation. We know, standard deviation is a measure of
the values of the variables around its mean or it is the square root of the sum of the
squared deviations from the mean divided by the number of observations. This can be
illustrated with an example.

We may note from the above information the expected returns (means) are same in case of
both the companies. The return of the Rani Ltd. ranges between 5 percent and 13 percent
while that of Raja Ltd. ranges between 5 percent and 11 percent. The standard deviation and
variance may be calculated as follows:

32
PORTFOLIO ANALYSIS:

Various groups of securities when held together behave in a different manner and give
interest payments and dividends also, which are different to the analysis of individual
securities. A combination of securities held together will give a beneficial result if they are
grouped in a manner to secure higher return after taking into consideration the risk element.
54 There are two approaches in construction of the portfolio of securities.
They are
Traditional approach
Modern approach

TRADITIONAL APPROACH:

Traditional approach was based on the fact that risk could be measured on each
individual security through the process of finding out the standard deviation and that security
should be chosen where the deviation was the lowest. Traditional approach believes that the
market is inefficient and the fundamental analyst can take advantage of the situation.
Traditional
approach is a comprehensive financial plan for the individual. It takes into account the
individual need such as housing, life insurance and pension plans. Traditional approach
basically
deals with two major decisions. They are
a) Determining the objectives of the portfolio
b) Selection of securities to be included in the portfolio

MODERN APPROACH:

Modern approach theory was brought out by Markowitz and Sharpe. It is the combination
of securities to get the most efficient portfolio. Combination of securities can be made in
many
ways. Markowitz developed the theory of diversification through scientific reasoning and
method. Modern portfolio theory believes in the maximization of return through a
combination
of securities. The modern approach discusses the relationship between different securities and
then draws inter-relationships of risks between them. Markowitz gives more attention to the
process of selecting the portfolio. It does not deal with the individual needs.

MARKOWITZ MODEL:

Markowitz model is a theoretical framework for analysis of risk and return and their
relationships. He used statistical analysis for the measurement of risk and mathematical

33
programming for selection of assets in a portfolio in an efficient manner. Markowitz apporach
determines for the investor the efficient set of portfolio through three important variables i.e.
Return
Standard deviation
Co-efficient of correlation

Markowitz model is also called as an Full Covariance Model. Through this model the
investor can find out the efficient set of portfolio by finding out the trade off between risk and
return, between the limits of zero and infinity. According to this theory, the effects of one
security purchase over the effects of the other security purchase are taken into consideration
and
then the results are evaluated. Most people agree that holding two stocks is less risky than
holding one stock.
For example, holding stocks from textile, banking and electronic companies is
better than investing all the money on the textile companys stock.

Markowitz had given up the single stock portfolio and introduced diversification. The
single stock portfolio would be preferable if the investor is perfectly certain that his
expectation
of highest return would turn out to be real. In the world of uncertainty, most of the risk
adverse
investors would like to join Markowitz rather than keeping a single stock, because
diversification
reduces the risk.

ASSUMPTIONS:

All investors would like to earn the maximum rate of return that they can achieve
from their investments.
All investors have the same expected single period investment horizon.
All investors before making any investments have a common goal. This is the
avoidance of risk because Investors are risk-averse.
Investors base their investment decisions on the expected return and standard
deviation of returns from a possible investment.
Perfect markets are assumed (e.g. no taxes and no transition costs)
The investor assumes that greater or larger the return that he achieves on his
investments, the higher the risk factor surrounds him. On the contrary when risks are
low the return can also be expected to be low.
The investor can reduce his risk if he adds investments to his portfolio.
An investor should be able to get higher return for each level of risk by determining
the efficient set of securities.
An individual seller or buyer cannot affect the price of a stock.

This assumption is the basic assumption of the perfectly competitive market .

Investors make their decisions only on the basis of the expected returns, standard
deviation and covariances of all pairs of securities.
Investors are assumed to have homogenous expectations during the decision-making
Period

34
The investor can lend or borrow any amount of funds at the risk less rate of interest. The
risk less rate of interest is the rate of interest offered for the treasury bills or Government
securities.
Investors are risk-averse, so when given a choice between two otherwise identical
portfolios, they will choose the one with the lower standard deviation.
There is a risk free rate at which an investor may either lend (i.e. invest) money or borrow
money.
There is no transaction cost i.e. no cost involved in buying and selling of stocks.
There is no personal income tax. Hence, the investor is indifferent to the form of return either
capital gain or dividend.

THE EFFECT OF COMBINING TWO SECURITIES:

It is believed that holding two securities is less risky than by having only one investment
in a persons portfolio. When two stocks are taken on a portfolio and if they have negative
correlation then risk can be completely reduced because the gain on one can offset the loss on
the
other. This can be shown with the help of following example:

INTER- ACTIVE RISK THROUGH COVARIANCE:

Covariance of the securities will help in finding out the inter-active risk. When the
covariance will be positive then the rates of return of securities move together either upwards
or
downwards. Alternatively it can also be said that the inter-active risk is positive. Secondly,
covariance will be zero on two investments if the rates of return are independent.
Holding two securities may reduce the portfolio risk too. The portfolio risk can be
calculated with the help of the following formula:

CAPITAL ASSET PRICING MODEL (CAPM):

Markowitz, William Sharpe, John Lintner and Jan Mossin provided the basic structure of
Capital Asset Pricing Model. It is a model of linear general equilibrium return. In the CAPM
theory, the required rate return of an asset is having a linear relationship with assets beta
value
i.e. un-diversifiable or systematic risk (i.e. market related risk) because non market risk can
be
eliminated by diversification and systematic risk measured by beta. Therefore, the
relationship between an assets return and its systematic risk can be expressed by the CAPM,
which is also called the Security Market Line.

R = Rf Xf+ Rm(1- Xf)

Rp = Portfolio return
Xf =The proportion of funds invested in risk free assets
1- Xf = The proportion of funds invested in risky assets
Rf = Risk free rate of return
Rm = Return on risky assets
Formula can be used to calculate the expected returns for different situations, like mixing

35
risk less assets with risky assets, investing only in the risky asset and mixing the borrowing
with
risky assets.

THE CONCEPT:

According to CAPM, all investors hold only the market portfolio and risk less securities.
The market portfolio is a portfolio comprised of all stocks in the market. Each asset is held in
proportion to its market value to the total value of all risky assets.
For example, if wipro Industry share represents 15% of all risky assets, then the market
portfolio of the individual investor contains 15% of wipro Industry shares. At this stage, the
investor has the ability to borrow or lend any amount of money at the risk less rate of interest.
E.g.: assume that borrowing and lending rate to be 12.5% and the return from the risky
assets to be 20%. There is a trade off between the expected return and risk. If an investor
invests
in risk free assets and risky assets, his risk may be less than what he invests in the risky asset
alone. But if he borrows to invest in risky assets, his risk would increase more than he invests
his
own money in the risky assets. When he borrows to invest, we call it financial leverage. If he
invests 50% in risk free assets and 50% in risky assets, his expected return of the portfolio
would
be
Rp= Rf Xf+ Rm(1- Xf)
= (12.5 x 0.5) + 20 (1-0.5)
= 6.25 + 10
= 16.25%
if there is a zero investment in risk free asset and 100% in risky asset, the return is
Rp= Rf Xf+ Rm(1- Xf)
= 0 + 20%
= 20%

if -0.5 in risk free asset and 1.5 in risky asset, the return is
Rp= Rf Xf+ Rm(1- Xf)
= (12.5 x -0.5) + 20 (1.5)
= -6.25+ 30
= 23.75%

Security Market Line (SML)

When the Capital Asset Pricing Model is drawn graphically, we get the S.M.L., which is
shown in the chart below. If the investor wants to decide on an investment with an expected
return he would know the level of risk he has to take or alternatively given the level of risk,
he has preferred to take, he would know the expected return from this chart. The investor has
to assess whether it is worth taking a level of risk, if he has a target return which involves that
risk, as he is assumed to be generally risk averse. Thus, CAPM and SML help the investor in
evaluating risk for a return, in making any investment decision. The principle of the higher
the risk, the higher is the return is embodied in this Model .

36
DATA ANALYSIS AND INTERPRETATION

37
CALCULATION OF AVERAGE RETURN OF COMPANIES:
_

Average Return (R) = (R)/N

(P0) = Opening price of the share
(P1) = Closing price of the share
D = Dividend

WIPRO:
Year (P0) (P1) D (P1-P0)
D+(P1-P0)/
P0*100

38
Average Return = 45.63/5 = 9.12

DR REDDY LABORATORIES LTD:

39
DIAGRAMATIC PRESENTATION

40
CALCULATION OF STANDARD DEVIATION:

41
42
43
44
CALCULATION OF PORTFOLIO RETURN:

45
CALCULATION OF PORTFOLIO RETURN OF DR REDDY &
OTHER COMPANIES

46
Investment vs. Speculation

Investment and speculation both involve the purchase of assets such as shares and
securities, with an expectation of return. However, investment can be distinguished
from speculation by risk bearing capacity, return expectations, and duration of trade.
The capacity to bear risk distinguishes an investor from a speculator. An investor
prefers low risk investments, whereas a speculator is prepared to take higher risks for
higher returns. Speculation focuses more on returns than safety, thereby encouraging
frequent trading without any intention of owning the investment.
The speculators motive is to achieve profits through price change, that is, capital
gains are more important than the direct income from an investment. Thus,
speculation is associated with buying low and selling high with the hope of making
large capital gains. Investors are careful while selecting securities for trading.
Investments, in most instances, expect an income in addition to the capital gains that
may accrue when the securities are traded in the market.
Investment is long term in nature. An investor commits funds for a longer period in
the expectation of holding period gains. However, a speculator trades frequently;
hence, the holding period of securities is very short.
The identification of these distinctions helps to define the role of the investor and the
speculator in the market. The investor can be said to be interested in a good rate of
return on a consistent basis over a relatively longer duration. For this purpose the
investor computes the real worth of the security before investing in it. The speculator
seeks very large returns from the market quickly. For a speculator, market
expectations and price movements are the main factors influencing a buy or sell
decision. Speculation, thus, is more risky than investment.
In any stock exchange, there are two main categories of speculators called the bulls
and bears. A bull buys shares in the expectation of selling them at a higher price.
When there is a bullish tendency in the market, share prices tend to go up since the
demand for the shares is high. A bear sells shares in the expectation of a fall in price
with the intention of buying the shares at a lower price at a future date. These bearish
tendencies result in a fall in the price of shares.
A share market needs both investment and speculative activities. Speculative activity
adds to the market liquidity. A wider distribution of shareholders makes it necessary
for a market to exist.

47