CHAPTER 1INTRODUCTION

INTRODUCTION Economic 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 led 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 have emerged as themost concerned aspect for rational investment. A portfolio is combinationof 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. This study focuses on finding out an optimal portfolio using single index model and Markowitz model. The trend in Investment Management is to emphasize portfolio construction and to reduce the time spent on security selection. In India economic liberalization has accelerated the pace of development in the securities market, which has undergone a sea of change during the last two decade. Over the years, as investment in securities gathered momentum, the investment decisions were more often made by the whims and fancies of the investors and rumours heard rather than by rational analysis. Only recently Security Analysis and Portfolio Management has emerged as a separate academic discipline in India.

IMPORTANCE AND NEED OF THE STUDY It helps the investor in identifying the return risk involved in the share prices of the companys stocks in last year. Statistical use of standard deviation and expected rate of return help to quantify the risk. It helps the investor in making decision on buying and selling the securities according to the risk involved and the returns associated with the particular stock. It helps the investor to analyze and find out the possible yield from his investments.

Scope of the study As the stock market is highly volatile, it is very difficult for the ordinary investor or speculator to predict the movements of stock prices. The movements of stock prices are predicted where the investors could minimize the risk and there by maximize their profits.Once an investor is able to identify the trend, through this he can maximize his profits. In thisscenario many companies are available. Many people want to invest in shares in order to make huge profits. In this scenario many companies are available and the investors are in a dilemma to choose a particular company for investing which gives more returns for them rather than putting their hands in acompany, which is more risky. To assess the potential for an industry group, an investorwould like to consider the overall growth rate, market size and importance to the economy.While the individual company is still important, its industry group likely to exert just asmuch, or more, influence on the stock price. When stocks move, they usually move a group;there arte very few lone guns out there. Many times it is more important to be in the rightindustry than in the right stock. Once the industry is chosen, an investor would need to narrow the list of companies before proceeding to a more detailed analysis. Investors are usually interested in finding the leaders and the innovators within the group. The first task is to identify the current business and competitive environment within a group as well as the future trend. How do thecompanies rank according to market share, product position and competitive advantage?Success depends on an edge, be it marketing, technology, market share or innovation.Comparative analysis will help identify those companies, which are best to investwith an edge by using methods like expected rate of return, standard deviation and risk freerate of return calculation. The study is to construct an optimal portfolio by using Markowitz model and William Sharpes Single Index Model. The stocks chosen to include in portfolio are limited to 10stocks, which are constituents of NIFTY.

Objective of the studyPrimary objectiveThe study has been conducted to construct and select an optimal portfolio using Markowitz model and Single index model in Indian context.Secondary objectives Risk-return analysis of individual securities from NSE-NIFTY Risk return analysis of portfolios using Markowitz and single index model. Assist investors in portfolio selection process to make the right choice.

DATA AND METHODOLOGY The main purpose of this project is to construct and select an optimal portfolio by using Markowitz model and Sharpe's single-index model. For this purpose the daily closing prices of 10 companies listed in NIFTY 50 and all shares price index for the period of april 1st 2013 to april 4th 2014 have been considered. PRIMARY DATA AND SECONDARY DATA:The research method is descriptive in nature. The whole study is based on both primary and secondary data. They are:1. Information collected from the company and Internet.2. Data collected from newspaper, books and journals.3. Data collected from National Stock Exchange websites.SAMPLING :To constitute NSE-Nifty, are taken for construction of an optimal portfolio. Since the data is based on secondary data.SAMPLE SIZE:The stocks chosen to include in portfolio are limited to 10 stocks, which are constituents of NSE-NIFTY.Arithmetic average or mean:The arithmetic average measures the central tendency. The purpose of computing an average value for a set of observations is to obtain a single value, which is representative of all the items. The main objective of averaging is to arrive at a single value which is a representative of the characteristics of the entire mass of data and arithmetic average or mean of a series(usually denoted by x) is the value obtained by dividing the sum of the values of various items in a series (sigma x) divided by the number of items (N) constituting the series.Thus, if X1,X2..Xn are the given N observations. ThenX= X1+X2+.Xn/NRETURN(Current price-previous price)/ Previous price *100i.e P1-P0/P0*100STANDARD DEVIATION:The concept of standard deviation was first suggested by Karl Pearson in 1983.it may be defined as the positive square root of the arithmetic mean of the squares of deviations of the given observations from their arithmetic mean In short S.D may be defined as Root Mean Square Deviation from Mean It is by far the most important and widely used measure of studying dispersions.For a set of N observations X1,X2..Xn with mean X,Deviations from Mean: (X1-X),(X2-X),.(Xn-X)Mean-square deviations from Mean:= 1/N (X1-X)2+(X2-X)2+.+(Xn-X)2=1/N sigma(X-X)2Root-mean-square deviation from mean,i.e. 14VARIANCE:The square of standard deviation is known as Variance. Variance is the square root of the standard deviation:Variance = (S.D) 2Where, (S.D) is standard deviationCORRELATIONCorrelation is a statistical technique, which measures and analyses the degree or extent to which two or more variables fluctuate with reference to one another. Correlation thus denotes the inter-dependence amongst variables. The degrees are expressed by a coefficient, which ranges between 1 and +1. The direction of change is indicated by (+) or (-) signs. The former refers to a sympathetic movement in a same direction and the later in the opposite direction. Karl Pearsons method of calculating coefficient (r) is based on covariance of the concerned variables. It was devised by Karl Pearson a great British Biometrician. This measure known as Pearsonian correlation coefficient between two variables (series) X and Y usually denoted by r is a numerical measure of linear relationship and is defined as the ratio of the covariance between X and Y (written as Cov(X,Y) to the product of standard deviation of X and Y Symbolicallyr = Cov (X,Y)SD of X,Y= xy/N = XYSD of X,Y NWhere x =X-X, y=Y-Yxy = sum of the product of deviations in X and Y series calculated with reference totheir arithmetic means.X = standard deviation of the series X.Y = standard deviation of the series Y.WILLIAM SHARPEs SINGLE INDEX MODELThe return of an individual security is assumed to depend on the return on the marketindex. The return of an individual security may be expressed as:Ri = i + i Rm + eiWhere,i = The component of security is return that is independent of themarkets performance.Rm = The rate of return on the market indexi = The constant that measures the expected change in Ri given a change in Rm.ei = The error term representing the random or residual return.Portfolio return and riskR p pRpWhere,p R = Expected return on portfoliop a= Alpha of portfoliop b= Beta of portfoliom R = Expected return on market.The risk of a portfolio is measured as variance of portfolio returns.

LIMITATIONS OF THE PROJECT1. The project is limited to the extent of information available.2. Study is restricted to only 8 or 10 stocks, which are constituents of market portfolio i.e., NSE -NIFTY.3. Dividend incomes are not considered.4. Stock prices considered are restricted to only the previous 24-months closing prices.5. The study is purely of academic interest.6. Due to time constraint and lack of information, no gilt edged securities, mutual funds, debentures, etc. could be included in this portfolio.7. All the calculations could not be brought into the report.

CHAPTER-2

INDUSTRY PROFILE&COMPANY PROFILE

INDUSTRY PROFILEEvolutionIndian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200years ago. The earliest records of security dealings in India are meager and obscure. TheEast India Company was the dominant institution in those days and business in its loansecurities used to be transacted towards the close of the eighteenth century. By 1830's business on corporate stocks and shares in Bank and Cotton presses took place in Bombay. Though the trading list was broader in 1839, there were only half a dozenbrokers recognized by banks and merchants during 1840 and 1850. The 1850's witnessed a rapid development of commercial enterprise and brokerage business attracted many men into the field and by 1860 the number of brokers increasedinto 60. In 1860-61 the American Civil War broke out and cotton supply from United States of Europe was stopped; thus, the 'Share Mania' in India begun. The number of brokersincreased to about 200 to 250. However, at the end of the American Civil War, in 1865, adisastrous slump began (for example, Bank of Bombay Share which had touched Rs 2850could only be sold at Rs. 87). At the end of the American Civil War, the brokers who thrived out of Civil War in 1874, found a place in a street (now appropriately called as Dalal Street) where they would conveniently assemble and transact business. In 1887, they formally established inBombay, the "Native Share and Stock Brokers' Association" (which is alternativelyknown as " The Stock Exchange "). In 1895, the Stock Exchange acquired a premise inthe same street and it was inaugurated in 1899. Thus, the Stock Exchange at Bombay wasconsolidated.Other leading cities in stock market operations Ahmadabad gained importance next to Bombay with respect to cotton textile industry. After 1880, many mills originated from Ahmadabad and rapidly forged ahead. As newmills were floated, the need for a Stock Exchange at Ahmadabad was realized and in 1894 the brokers formed "The Ahmadabad Share and Stock Brokers' Association". What the cotton textile industry was to Bombay and Ahmadabad, the jute industry was to Calcutta. Also tea and coal industries were the other major industrial groups in Calcutta. After the Share Mania in 1861-65, in the 1870's there was a sharp boom in jute shares, which was followed by a boom in tea shares in the 1880's and 1890's; and a coal boom between 1904 and 1908. On June 1908, some leading brokers formed "The Calcutta Stock Exchange Association". In the beginning of the twentieth century, the industrial revolution was on the way in India with the Swadeshi Movement; and with the inauguration of the Tata Iron and SteelCompany Limited in 1907, an important stage in industrial advancement under Indianenterprise was reached. Indian cotton and jute textiles, steel, sugar, paper and flour mills and all companiesgenerally enjoyed phenomenal prosperity, due to the First World War. In 1920, the then demure city of Madras had the maiden thrill of a stock exchangefunctioning in its midst, under the name and style of "The Madras Stock Exchange" with 100 members. However, when boom faded, the number of members stood reduced from 100 to 3, by 1923, and so it went out of existence. In 1935, the stock market activity improved, especially in South India where there was a rapid increase in the number of textile mills and many plantation companies were floated.In 1937, a stock exchange was once again organized in Madras - Madras Stock ExchangeAssociation (Pvt) Limited. (In 1957 the name was changed to Madras Stock ExchangeLimited). Lahore Stock Exchange was formed in 1934 and it had a brief life. It was merged with the Punjab Stock Exchange Limited, which was incorporated in 1936.

Indian Stock Exchanges - An Umbrella GrowthThe Second World War broke out in 1939. It gave a sharp boom which was followed by aslump. But, in 1943, the situation changed radically, when India was fully mobilized as asupply base. On account of the restrictive controls on cotton, bullion, seeds and other commodities, those dealing in them found in the stock market as the only outlet for their activities. They were anxious to join the trade and their number was swelled by numerous others.Many new associations were constituted for the purpose and Stock Exchanges in all partsof the country were floated. The Uttar Pradesh Stock Exchange Limited (1940), Nagpur Stock Exchange Limited (1940) and Hyderabad Stock Exchange Limited (1944) were incorporated. In Delhi two stock exchanges - Delhi Stock and Share Brokers' Association Limited and the Delhi Stocks and Shares Exchange Limited - were floated and later in June 1947, amalgamated into the Delhi Stock Exchange Association Limited.Post-independence ScenarioMost of the exchanges suffered almost a total eclipse during depression. Lahore Exchange was closed during partition of the country and later migrated to Delhi and merged with Delhi Stock Exchange. Bangalore Stock Exchange Limited was registered in 1957 and recognized in 1963. Most of the other exchanges languished till 1957 when they applied to the CentralGovernment for recognition under the Securities Contracts (Regulation) Act, 1956. OnlyBombay, Calcutta, Madras, Ahmadabad, Delhi, Hyderabad and Indore, the wellestablished exchanges, were recognized under the Act. Some of the members of the otherAssociations were required to be admitted by the recognized stock exchanges on aconcessional basis, but acting on the principle of unitary control, all these pseudo stock20 exchanges were refused recognition by the Government of India and they thereuponceased to function. Thus, during early sixties there were eight recognized stock exchanges in India(mentioned above). The number virtually remained unchanged, for nearly two decades. During eighties, however, many stock exchanges were established: Cochin Stock Exchange (1980), Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982), and Pune Stock Exchange Limited (1982), Ludhiana Stock Exchange Association Limited (1983), Gauhati Stock Exchange Limited (1984), Kanara Stock Exchange Limited (at Mangalore, 1985), Magadh Stock Exchange Association (at Patna, 1986), Jaipur Stock Exchange Limited (1989), Bhubaneswar Stock Exchange Association Limited (1989), Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989), Vadodara Stock Exchange Limited (at Baroda, 1990) and recently established exchanges -Coimbatore and Meerut. Thus, at present, there are totally twenty one recognized stock exchanges in India excluding the Over The Counter Exchange of India Limited (OTCEI)and the National Stock Exchange of India Limited (NSEIL). The Table given below portrays the overall growth pattern of Indian stock markets since independence. It is quite evident from the Table that Indian stock markets have not onlygrown just in number of exchanges, but also in number of listed companies and in capitalof listed companies. The remarkable growth after 1985 can be clearly seen from the Table, and this was due to the favoring government policies towards security market industry.Trading Pattern of the Indian Stock Market Trading in Indian stock exchanges are limited to listed securities of public limitedcompanies. They are broadly divided into two categories, namely, specified securities (forward list) and non-specified securities (cash list). Equity shares of dividend paying, growth-oriented companies with a paid-up capital of atleast Rs.50 million and a market capitalization of atleast Rs.100 million and having more than 20,000 shareholders are, normally, put in the specified group and the balance in non-specified group. Two types of transactions can be carried out on the Indian stock exchanges: (a) spot delivery transactions "for delivery and payment within the time or on the date stipulatedwhen entering into the contract which shall not be more than 14 days following the date of the contract" : and (b) forward transactions "delivery and payment can be extended by further period of 14 days each so that the overall period does not exceed 90 days from the date of the contract". The latter is permitted only in the case of specified shares. The brokers who carry over the outstanding pay carry over charges (cantango or backwardation) which are usually determined by the rates of interest prevailing. A member broker in an Indian stock exchange can act as an agent, buy and sell securities for his clients on a commission basis and also can act as a trader or dealer as a principal, buy and sell securities on his own account and risk, in contrast with the practiceprevailing on New York and London Stock Exchanges, where a member can act as a jobber or a broker only. The nature of trading on Indian Stock Exchanges are that of age old conventional style of face-to-face trading with bids and offers being made by open outcry. However, there is agreat amount of effort to modernize the Indian stock exchanges in the very recent times. Over The Counter Exchange of India (OTCEI)The traditional trading mechanism prevailed in the Indian stock markets gave way to many functional inefficiencies, such as, absence of liquidity, lack of transparency, undulylong settlement periods and benami transactions, which affected the small investors to agreat extent. To provide improved services to investors, the country's first ringless,scripless, electronic stock exchange - OTCEI - was created in 1992 by country's premierfinancial institutions - Unit Trust of India, Industrial Credit and Investment Corporationof India, Industrial Development Bank of India, SBI Capital Markets, Industrial FinanceCorporation of India, General Insurance Corporation and its subsidiaries and CanBankFinancial Services. Trading at OTCEI is done over the centres spread across the country. Securities traded on the OTCEI are classified into: Listed Securities - The shares and debentures of the companies listed on the OTCcan be bought or sold at any OTC counter all over the country and they should notbe listed anywhere else Permitted Securities - Certain shares and debentures listed on other exchanges andunits of mutual funds are allowed to be traded Initiated debentures - Any equity holding at least one lakh debentures of a particular scrip can offer them for trading on the OTC. OTC has a unique feature of trading compared to other traditional exchanges. That is, certificates of listed securities and initiated debentures are not traded at OTC. Theoriginal certificate will be safely with the custodian. But, a counter receipt is generatedout at the counter which substitutes the share certificate and is used for all transactions. In the case of permitted securities, the system is similar to a traditional stock exchange. The difference is that the delivery and payment procedure will be completed within 14days.Compared to the traditional Exchanges, OTC Exchange network has the following advantages: OTCEI has widely dispersed trading mechanism across the country whichprovides greater liquidity and lesser risk of intermediary charges. Greater transparency and accuracy of prices is obtained due to the screen-basedscripless trading. Since the exact price of the transaction is shown on the computer screen, theinvestor gets to know the exact price at which s/he is trading. Faster settlement and transfer process compared to other exchanges. In the case of an OTC issue (new issue), the allotment procedure is completed in amonth and trading commences after a month of the issue closure, whereas it takes a longer period for the same with respect to other exchanges.Thus, with the superior trading mechanism coupled with information transparencyinvestors are gradually becoming aware of the manifold advantages of the OTCEI.National Stock Exchange (NSE)With the liberalization of the Indian economy, it was found inevitable to lift the Indianstock market trading system on par with the international standards. On the basis of therecommendations of high powered Pherwani Committee, the National Stock Exchangewas incorporated in 1992 by Industrial Development Bank of India, Industrial Credit andInvestment Corporation of India, Industrial Finance Corporation of India, all InsuranceCorporations, selected commercial banks and others.Trading at NSE can be classified under two broad categories:(a) Wholesale debt market and(b) Capital market. Wholesale debt market operations are similar to money market operations - institutionsand corporate bodies enter into high value transactions in financial instruments such asgovernment securities, treasury bills, public sector unit bonds, commercial paper,certificate of deposit, etc.There are two kinds of players in NSE:(a) trading members and(b) participants. Recognized members of NSE are called trading members who trade on behalf ofthemselves and their clients. Participants include trading members and large players likebanks who take direct settlement responsibility. Trading at NSE takes place through a fully automated screen-based trading mechanismwhich adopts the principle of an order-driven market. Trading members can stay at their24 offices and execute the trading, since they are linked through a communication network.The prices at which the buyer and seller are willing to transact will appear on the screen.When the prices match the transaction will be completed and a confirmation slip will beprinted at the office of the trading member.NSE has several advantages over the traditional trading exchanges. They are as follows: NSE brings an integrated stock market trading network across the nation. Investors can trade at the same price from anywhere in the country since intermarketoperations are streamlined coupled with the countrywide access to the securities. Delays in communication, late payments and the malpractices prevailing in thetraditional trading mechanism can be done away with greater operational efficiency and informational transparency in the stock market operations, with the support of total computerized network. Unless stock markets provide professionalized service, small investors and foreign investors will not be interested in capital market operations. And capital market being one of the major source of long-term finance for industrial projects, India cannot afford to damage the capital market path. In this regard NSE gains vital importance in the Indian capital market system.Preamble Often, in the economic literature we find the terms development and growth are used interchangeably. However, there is a difference. Economic growth refers to the sustained increase in per capita or total income, while the term economic development implies sustained structural change, including all the complex effects of economic growth. In other words, growth is associated with free enterprise, where as development requires some sort of control and regulation of the forces affecting development. Thus, economic development is a process and growth is a phenomenon. Economic planning is very critical for a nation, especially a developing country like India to take the country in the path of economic development to attain economic growth.Why Economic Planning for India? One of the major objective of planning in India is to increase the rate of economic development, implying that increasing the rate of capital formation by raising the levels of income, saving and investment. However, increasing the rate of capital formation inIndia is beset with a number of difficulties. People are poverty ridden. Their capacity to save is extremely low due to low levels of income and high propensity to consume. Therefore, the rate of investment is low which leads to capital deficiency and low productivity. Low productivity means low income and the vicious circle continues. Thus, to break this vicious economic circle, planning is inevitable for India. The market mechanism works imperfectly in developing nations due to the ignorance andm unfamiliarity with it. Therefore, to improve and strengthen market mechanism planning is very vital. In India, a large portion of the economy is non-monitised; the product, factors of production, money and capital markets is not organized properly. Thus the prevailingprice mechanism fails to bring about adjustments between aggregate demand and supply of goods and services. Thus, to improve the economy, market imperfections has to be removed; available resources has to be mobilized and utilized efficiently; and structural rigidities has to be overcome. These can be attained only through planning. In India, capital is scarce; and unemployment and disguised unemployment is prevalent. Thus, where capital was being scarce and labour being abundant, providing usefulemployment opportunities to an increasing labour force is a difficult exercise. Only a centralized planning model can solve this macro problem of India. Further, in a country like India where agricultural dependence is very high, one cannot ignore this segment in the process of economic development. Therefore, an economic development model has to consider a balanced approach to link both agriculture and industry and lead for a paralleled growth. Not to mention, both agriculture and industry cannot develop without adequate infrastructural facilities which only the state can provide and this is possible only through a well carved out planning strategy. The governments role in providing infrastructure is unavoidable due to the fact that the role of private sector in infrastructural development of India is very minimal since these infrastructureprojects are considered as unprofitable by the private sector. Further, India is a clear case of income disparity. Thus, it is the duty of the state to reduce the prevailing income inequalities. This is possible only through planning.Planning History of India The development of planning in India began prior to the first Five Year Plan ofindependent India, long before independence even. The idea of central directions of resources to overcome persistent poverty gradually, because one of the main policies advocated by nationalists early in the century. The Congress Party worked out a program for economic advancement during the 1920s, and 1930s and by the 1938 they formed a National Planning Committee under the chairmanship of future Prime Minister Nehru. The Committee had little time to do anything but prepare programs and reports before the Second World War which put an end to it. But it was already more than an academic exercise remote from administration. Provisional government had been elected in 1938, and the Congress Party leaders held positions of responsibility. After the war, the Interim government of the pre-independence years appointed an Advisory Planning Board. The Board produced a number of somewhat disconnected Plans itself. But, more important in the long run, it recommended the appointment of a Planning Commission. The Planning Commission did not start work properly until 1950. During the first three years of independent India, the state and economy scarcely had a stable structure at all,while millions of refugees crossed the newly established borders of India and Pakistan, and while ex-princely states (over 500 of them) were being merged into India or Pakistan. The Planning Commission as it now exists, was not set up until the new India had adopted its Constitution in January 1950.Objectives of Indian PlanningThe Planning Commission was set up the following Directive principles : To make an assessment of the material, capital and human resources of thecountry, including technical personnel, and investigate the possibilities ofaugmenting such of these resources as are found to be deficient in relation to thenations requirement. To formulate a plan for the most effective and balanced use of the countrysresources. Having determined the priorities, to define the stages in which the plan should becarried out, and propose the allocation of resources for the completion of eachstage. To indicate the factors which are tending to retard economic development, anddetermine the conditions which, in view of the current social and politicalsituation, should be established for the successful execution of the Plan. To determine the nature of the machinery this will be necessary for securing thesuccessful implementation of each stage of Plan in all its aspects. To appraise from time to time the progress achieved in the execution of each stageof the Plan and recommend the adjustments of policy and measures that suchappraisals may show to be necessary. To make such interim or auxiliary recommendations as appear to it to beappropriate either for facilitating the discharge of the duties assigned to it or on aconsideration of the prevailing economic conditions, current policies, measuresand development programs; or on an examination of such specific problems asmay be referred to it for advice by Central or State Governments.The long-term general objectives of Indian Planning are as follows: Increasing National Income Reducing inequalities in the distribution of income and wealth Elimination of poverty Providing additional employment; and Alleviating bottlenecks in the areas of : agricultural production, manufacturingcapacity for producers goods and balance of payments. Economic growth, as the primary objective has remained in focus in all Five Year Plans. Approximately, economic growth has been targeted at a rate of five per cent per annum.High priority to economic growth in Indian Plans looks very much justified in view of long period of stagnation during the British rule.

COMPANY PROFILEBackground: Karvy Consultants Limited was started in the year 1981, with the vision and enterprise of a small group of practicing Chartered Accountants. Initially it was started with consulting and financial accounting automation, and carved inroads into the field of registry and share accounting by 1985. Since then, it has utilized its experience and superlative expertise to go from strength to strengthto better its services, to provide new ones, to innovate, diversify and in the process, evolved as one of Indias premier integrated financial service enterprise. Today, Karvy has access to millions of Indian shareholders, besides companies,banks, financial institutions and regulatory agencies. Over the past one and half decades, Karvy has evolved as a veritable link between industry, finance and people. In January 1998, Karvy became the first Depository Participant in Andhra Pradesh. An ISO 9002 company, Karvy's commitment to quality and retail reach has made it an integrated financial services company.

An Overview: KARVY, is a premier integrated financial services provider, and ranked among the top five in the country in all its business segments, services over 16 million individual investors in various capacities, and provides investor services to over 300 corporates, comprising the who is who of Corporate India. KARVY covers the entire spectrum of financial services such as Stock broking, Depository Participants, Distribution of financial products - mutual funds, bonds, fixed deposit, equities, Insurance Broking, Commodities Broking, Personal Finance Advisory Services, Merchant Banking & Corporate Finance, placement of equity, IPOs, among others. Karvy has a professional management team and ranks among the best in technology, operations and research of various industrial segments. Today, Karvy service over 6 lakhs customer accounts spread across over 250 cities/towns in India and serves more than 75 million shareholders across 7000 corporate clients and makes its presence felt in over 12 countries across 5 continents. All of Karvy services arealso backed by strong quality aspects, which have helped Karvy to be certified as an ISO9002 company by DNV.

ACHIEVEMENTS: Among the top 5 stock brokers in India (4% of NSE volumes) India's No. 1 Registrar & Securities Transfer Agents Among the top 3 Depository Participants Largest Network of Branches & Business Associates ISO 9001:2000 certified operations by DNV Among top 10 Investment bankers Largest Distributor of Financial Products Adjudged as one of the top 50 IT uses in India by MIS Asia Full Fledged IT driven operations First ISO-9002 Certified Registrars in India Ranked as The Most Admired Registrar by MARG Largest mobilize of funds as per PRIME DATABASE First depository participant from Andhra Pradesh. Handled over 500 public issues as Registrars. Handling the Reliance account, which accounts for nearly 10 million account holders?Range of services: Stock broking services Distribution of Financial Products (investments & loan products) Depository Participant services IT enabled services Personal finance Advisory Services Private Client Group Debt market services Insurance & merchant banking Mutual Fund Services Corporate Shareholder Services Other global services Besides these, they also offer special portfolio analysis packages that provide daily technical advice on scrips for successful portfolio management and provide customized advisory services to help customers make the right financial moves that are specifically suited to their portfolio. They are continually engaged in designing the right investment portfolio for each customer according to individual needs and budget considerations. Karvy Consultants limited deals in Registrar and Investment Services. Karvy is one of the early entrants registered as Depository Participant with NSDL (National Securities Depository Limited), the first Depository in the country and then with CDSL (CentralDepository Services Limited). Karvy stock broking is a member of National Stock Exchange (NSE), The Bombay Stock Exchange (BSE), and The Hyderabad Stock Exchange (HSE). The services provided are multi dimensional and multi-focused in their scope: to analyze the latest stock market trends and to take a close looks at the various investment options and products availablein the market. Besides this, they also offer special portfolio analysis packages. The paradigm shift from pure selling to knowledge based selling drives the business today. The monthly magazine, Finapolis, provides up-dated market information on market trends, investment options, opinions etc. Thus empowering the investor to base every financial move on rational thought and prudent analysis and embark on the path to wealth creation. Karvy is recognized as a leading merchant banker in the country, Karvy is registered with SEBI as a Category I merchant banker. This reputation was built by capitalizing on opportunities in corporate consolidations, mergers and acquisitions and corporate restructuring. Karvy has a tie up with the worlds largest transfer agent, the leading Australian company, Computer share Limited. It has attained a position of immense strength as aprovider of across-the-board transfer agency services to AMCs, Distributors and Investors. Besides providing the entire back office processing, it also provides the link between various Mutual Funds and the investor. Karvy global services limited covers Banking, Financial and Insurance Services (BFIS), Retail and Merchandising, Leisure and Entertainment, Energy and Utility andHealthcare sectors. Karvy comtrade limited trades in all goods and products of agricultural and mineral origin that include lucrative commodities like gold and silver and popular items like oil,pulses and cotton through a well-systematized trading platform. Karvy Insurance Broking Pvt. Ltd. provides both life and non-life insurance products to retail individuals, high net-worth clients and corporates. With Indian markets seeing a sea change, both in terms of investment pattern and attitude of investors, insurance is no more seen as only a tax saving product but also as an investment product. Karvy Inc. is located in New York to provide various financial products andinformation on Indian equities to potential foreign institutional investors (FIIs) in the region. This entity would extensively facilitate various businesses of Karvy viz., stock broking (Indian equities), research and investment by QIBs in Indian markets for both secondary and primary offerings.Quality Policy: To achieve and retain leadership, Karvy shall aim for complete customer satisfaction, by combining its human and technological resources, to provide superior quality financial services. In the process, Karvy will strive to exceed Customer's expectations.

Quality Objectives As per the Quality Policy, Karvy will: Build in-house processes that will ensure transparent and harmonious relationships with its clients and investors to provide high quality of services. Establish a partner relationship with its investor service agents and vendors that will help in keeping up its commitments to the customers. Provide high quality of work life for all its employees and equip them with adequate knowledge & skills so as to respond to customer's needs. Continue to uphold the values of honesty & integrity and strive to establish unparalleled standards in business ethics. Use state-of-the art information technology in developing new and innovative financial products and services to meet the changing needs of investors and clients. Strive to be a reliable source of value-added financial products and services and constantly guide the individuals and institutions in making a judicious choice of same.Strive to keep all stake-holders (shareholders, clients, investors, employees, suppliers andregulatory authorities) proud and satisfied.

CHAPTER 3REVIEW OF LITRATURE

OVERVIEW OF CAPITAL MARKET Capital Market is a wide term used to comprise all operations in the New Issues and Stock Market. New Issues made by companies constitute the Primary Market, while trading in the existing securities relates to the Secondary Market. While we can only buy in the PrimaryMarket, we can buy and sell securities in the Secondary Market. Capital Market encompassesall operations of F.I.I., Banks etc., at the long end of spectrum of maturities. It is concerned with those private savings that are turned into investments through new capital issues and also new public loans floated by government and semi-government bodies. Capital Market is a market for borrowing and lending of funds of more than one year. This market supplies funds for financing the fixed capital requirements of trade and commerce as well as the long-term requirements of the government. Developing banks andInsurance companies play a dominant role in the capital market. Transactions in the capital market have to be conducted only through authorized dealers.Primary Market: Primary market is a market for new issues or new financial claims. Hence, it is also called Initial Public Offering (IPO). Primary market deals with those securities, which areissued to the public for the first time. In the primary market, the borrower exchange new financial securities for long-term funds. Thus primary market facilitates capital formation.There are three ways by which a company may raise capital in the primary market. They are: Primary issue, Rights issue, & Private placement. The most common method of raising capital by new companies is through sale of securities to the public. It is called public issue or Initial Public Offering (IPO). When an existing company wants to raise additional capital, securities are first offered to the existing shareholders on a pre-emptive basis. It is called rights issue. Private placement is a way of selling securities privately to a small group of investors.

Secondary Market: Secondary market is a market for secondary sale of securities. Securities that arealready traded in the new issue market are traded in this market. Generally such securities arequoted in the Stock Exchanges and it provides a continuous and regular market for buyingand selling of securities. This market consists of all stock exchanges recognized by theGovernment of India.The stock exchanges in India are regulated under the Securities Contracts (Regulation) Act, 1956. The Bombay Stock Exchange is the principal stock exchange in India, which sets the tone of the other stock markets.Structure of the Market: There are various sub-markets in the Capital Market in India. The structure has undergone vast changes in recent years. New instruments and new institutions have emerged on the scene. The sub-markets in the Capital Market are-1. Market for Corporate securities-for new issues and old securities,2. Market for Government securities,3. Market for Debt instruments-debentures and bonds of private corporate sector, bond of public sector undertakings, public financial institutions, etc.4. Mutual fund schemes and UTI schemes, etc.So far as the individual investors are concerned, the market for Corporate securitiesand Mutual funds schemes are more relevant. They satisfy requirements of investors namely,appreciation of capital, safety, liquidity and hedge against inflation.Importance of Capital Market: Absence of a capital market acts as a hindrance to the capital formation and economic growth. Resources would remain idle if finances were not funneled through capital market.The importance of capital market can be briefly summarized as- The capital market serves as an important source for the productive use of the economys savings. It mobilizes the savings of the people for further investment and thus avoids their wastage in unproductive uses. It provides incentives to savings and facilitates capital formation by offering suitable rates of interest as per the price of capital. It provides an avenue for investors, particularly the household sector to invest if financial assets which are more productive then physical assets. It facilitates increase in production and productivity in the economy and thus enhances the economic welfare of the society. Thus, it facilitates the movement of stream of command over capital to the point of highest yield towards those who can apply them productively and profitably to enhance the national income in the aggregate. The operations of different institutions in the capital market induce economic growth. They give qualitative and quantitative directions to the flow of funds and bring about rational allocation of scarce resources. A healthy capital market consisting of expert intermediaries promotes stability in values of securities representing capital funds.Capital Market Instruments:The main capital market instruments one can invest in and include in his portfolio are: 1. Equity Shares,2. Preference Shares,3. Debentures (convertible and non-convertible),4. Secured Premium Notes,5. Zero Coupon Bonds, &6. Discount Bonds and Deep Discount Bonds.7. Mutual Funds.

STOCK EXCHANGE: A stock exchange or share market is a corporation or mutual organization which provides facilities for stock brokers and traders, to trade company stocks and other securities. Stock exchanges also provide facilities for the issue and redemption of securities, as well as, other financial instruments and capital events including the payment of income and dividends. The securities traded on a stock exchange include: shares issued by companies, unit trusts and other pooled investment products and bonds. To be able to trade a security on a certain stock exchange, it has to be listed there. Usually there is a local & central location at least for record keeping, but trade is less and less linked to such a physical place, as modern markets are electronic networks, which gives them advantages of speed and cost of transactions. Trade on an exchange is by members only & stock & share holders. The initialoffering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary market. A stock exchange is often the most important component of a stock market.Supply and demand in stock markets is driven by various factors which, as in all free markets, affect the price of stocks (see stock valuation). There is usually no compulsion to issue stock via the stock exchange itself, normust stock be subsequently traded on the exchange. Such trading is said to be off exchange or over-the-counter. This is the usual way that bonds are traded. Increasingly, stock exchanges are part of a global market for securities.

List of Stock Exchanges In India: Bombay Stock Exchange National Stock Exchange Regional Stock Exchange Ahmedabad Stock Exchange Bangalore Stock Exchang Bhubaneshwar Stock Exchange Calcutta Stock Exchange Cochin Stock Exchange Coimbatore Stock Exchange Delhi Stock Exchang Guwahati Stock Exchange Hyderabad Stock Exchange Jaipur Stock Exchange Ludhiana Stock Exchange Madhya Pradesh Stock Exchange Madras Stock Exchange Magadh Stock Exchange Mangalore Stock Exchange Meerut Stock Exchange OTC Exchange Of India Pune Stock Exchange Saurashtra Kutch Stock Exchange Uttar Pradesh Stock Exchange

.PORTFOLIO MANAGEMENT A portfolio consists of any combination of assets, the outcome of which cannot be defined with certainty. A portfolio goes with a saying that A wise man never puts all hiseggs in one basket. A portfolio is a collection of securities. Since it is rarely desirable toinvest the entire funds of an individual or an institution in a single security, it is essential thatevery security be viewed in a portfolio context. Two basic principles of finance form the basis for portfolio theory. Namely, Time value of money and the Safety of money. A rupee today is worth more tan a rupee tomorrow or a year later, and as parting with money involves the loss of present consumption, it has to be rewarded by a return commensurate with time of waiting. Secondly a safe rupee is preferred to an unsafe rupee at any point of time. Due to risk aversion of investors, they feel risk is inconvenient and has to be rewarded by a return. The larger the risk, the higher should be the return.Objectives of a Portfolio:The objective of a portfolio theory is two folded-1. To optimize risk for a given level of yield or2. To optimize return for a given level or risk.Dr. Jyothirmayi Degree College (MBA), Adoni -- 49-- Dept. of ManagementOptimal Portfolio Performance Chapter - 4This objective of portfolio management is termed as a search for Efficient Portfolio. It isuseful here to clarify what an efficient portfolio. A portfolio is efficient if and only if there isno alternative with-1. The same return at a lower risk or2. The same risk at a lower return or3. A higher return and a lower risk.A portfolio theory is based on two assumptions, other things remaining the same-1. Investors prefer higher rate of return to a lower rate of return.2. Investors are risk averse, i.e., not willing to take risk.The traditional portfolio managers diversified their funds over a large number of securities to strike a balance between risk and return. However this was done on intuition without really understanding the magnitude of risk reduction. The 1950s saw a body of knowledge being developed, which measures the expected rate of return and risk associated with combining assets. This study came to be known as Portfolio Theory.The important portfolio theories have been developed by-1. Harry M. Markowitz2. William SharpePortfolio Management: Portfolio Management is a process encompassing many activities of investment inassets and securities. It is a dynamic and flexible concept and involves continuous and systematic analysis, judgment and operations. The objective of portfolio management is to help the investors with the expertise of professionals. Portfolio Management is the management of large investible funds with a view to maximizing return and minimizing risk. Portfolio Management is an art and requires high degree of expertise. It is essentially asystematic method of managing ones investment efficiently.Basically Portfolio Management involves;1. A proper investment decision-making of what to buy and sell;2. Proper money management in terms of investment in a basket of assets so as to satisfythe asset preferences of investors;3. Reduce the risk and increase returns.Objective of Portfolio Management:The objective of portfolio management is to maximize the return and minimize therisk. A portfolio is a basket of investments or assets held by an individual or a corporatebody.Phases of Portfolio Management: Portfolio Management is a process encompassing many activities aimed at optimizing the investment of ones funds. Five phases can be identified in the portfolio management process-1. Security Analysis,2. Portfolio Analysis,3. Portfolio Selection,4. Portfolio Revision5. And Portfolio Evaluation.Each phase is an integral part of the whole process and the success of portfolio management depends upon the efficiency in carrying out each of these phases.1. Security Analysis: Security analysis is the initial phase of the portfolio management process. This stepconsists of examining the risk-return characteristics of individual securities. A basic strategy in securities investment is to buy under priced securities and sell overpriced securities. But the problem is how to identify these under priced and overpriced securities. This is whatsecurity analysis is all about. There are two alternative approaches to security analysis, name FundamentalAnalysis and Technical Analysis.Fundamental Analysis provides and analytical framework for rational investment decision-making. It concentrates Fundamental analysis studies not only the fundamental factors affecting the company but also the fundamental factors affecting the industry to which the company belongs and also the economy fundamentals. Fundamental analysis works out intrinsic value of a security based on its fundamentals; then compares this intrinsic value with the current market price. Fundamental Analysis helps to identify fundamentally strong companies whose shares is worth to be included in the investors portfolio.Technical Analysis believes that share price movements are systematic and exhibit certain consistent patterns. It studies the past movements in the prices of shares to identify trends and patterns and then tries to predict the future price movements. Technical analysis ignores the fundamental of shares.2. Portfolio Analysis: A 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 to spread risk by not puttingall their eggs in one basket. The return and risk of each portfolio has to be calculated mathematically and expressed quantitatively. Portfolio analysis phase of portfolio management consists of identifying the range of possible portfolios that can be constituted from a given set of securities and calculating their return and risk for further analysis.

3. Portfolio Selection: Portfolio selection is the process of finding the optimal portfolio. The main goal of portfolio selection is to generate a portfolio that provides the highest return and the lowestrisk. The portfolio having this characteristic is known as efficient portfolio. The portfolio selection problem is the process of delineating the efficient portfolios and then selection the best portfolio from the set. The selection of the optimal portfolio depends upon the investorsrisk aversion or conversely on his risk tolerance.4. Portfolio Revision: Having constructed the optimal portfolio, the investor has to monitor it constantly to ensure that it continues to be optimal. The investor has to revise his portfolio in the light of the developments in the market. This revision 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 changes as a result of the revision. Portfolio revision may also be necessitated by some investor related changes such as availability of additional funds, change in risk attitude,need of cash for other alternative use, etc. Portfolio revision has to be done scientifically and objectively so as to ensure the optimality of the revised portfolio. Portfolio revision is as important as portfolio analysis andselection and hence the revision process has to be carried out with much care.5. Portfolio Evaluation: Portfolio evaluation is the process, which is concerned with assessing the performance of the portfolio over a selected period of time in terms of return and risk. This involves quantitative measurement of actual return realized and the risk borne by the portfolio over the period of investment. Alternative measures of performance evaluation have been developed for use by investors and portfolio managers. Portfolio evaluation provides a mechanism for identifying weaknesses in the investment process and for improving these deficit areas. It provides a feedback mechanism for improving the entire portfolio management process.

Role of Portfolio Management: Portfolio management is now a familiar term and is widely practiced in India. The theories and concepts relating to portfolio management now find their way in the front pagesof financial newspapers and the cover pages of investment journals in India. In the beginning of the nineties India embarked on a program of economic liberalization and globalization. This reform process has made the Indian capital markets active. The Indian stock markets are steadily moving towards higher efficiency, with rapid computerization, increasing market transparency, better infrastructure, better customer service, closer integration and higher volumes. Large institutional investors with their diversified portfolios dominate the markets. A large number of mutual funds have been set up in the country since 1987. With this development, investment in securities has gained considerable momentum. Along with the spread of securities investment among ordinary investors, the acceptance of quantitative techniques by the investment community changed the investment scenario in India. Professional portfolio management, backed by competent research, began to be practiced by mutual funds, investment consultants and big brokers.RISK AND RETURN IN PORTFOLIO THEORY Risk is the uncertainty of the income and capital appreciation or loss of both. Risk is inherent in any investment. This risk may relate to loss or delay in repayment of the principal capital or loss on non-payment of interest or variability of returns. While some securities are almost risk less like Government securities others are more risky. The degree of risk however varies on the basis of the features of the assets, investment instrument, the mode of investment, the issuer of security, etc. The uncertainty associated with the returns from an investment introduces risk into an investment. The possibility of variation of the actual return from the expected return is termed as risk. An investment whose returns are fairly stable is considered as low-risk investment, whereas an investment whose returns fluctuate significantly is considered to be a high-risk instrument.

Risk depends on the following factors:1. Wrong decision of what to invest in,2. Wrong timings of investments,3. Nature of the instruments invested in,4. Creditworthiness of the issuer,5. Maturity period or the length of investment, &6. Amount of investment.Calculation of Risk: The most popular measure of risk is the variance or standard deviation of profitability distribution of possible returns. Variance is usually denoted by 2.Elements of Risk: The essence of risk in an investment is the variation in its returns. This variation inreturns of a security is caused by a number of factors that constitute the elements of risk. The total variability in returns of a security represents the total risk of that security. Systematic risk and Unsystematic risk are two components of total risk. Thus Total Risk = Systematic Risk + Unsystematic RiskSystematic Risk: Systematic risk is the variability in the security returns caused by changes in theeconomy or market. All securities are affected by such risks to some extent. The systematic risk of a security can be measured by relating that securitys variability with the variability in the stock market index. Systematic risks are the market problems, tax policy or any Government policy, inflation risk, interest rate risk and financial risk. Systematic risk is further sub-divided into interest rate risk, market risk and purchasing power risk.i. Interest rate risk: The variation in bond prices caused due to the variations in the interest rates is known as interest rate risk. Interest rate risk affects bonds directly and shares indirectly.ii. Market risk: Market risk is the increased variability of the investor returns due to thealternating movements of the share market. In other words, the variation in returns caused by the volatility of the stock market is referred to as market risk.iii. Purchasing power risk: Purchasing power risk refers to the variation in investor returns caused by inflation.

Unsystematic Risk: Unsystematic risk is the risk that is specific or unique to a company. This is associated with the security of a particular company and can be reduced by combining it with another security having opposite characteristics. The investor does not seek to measure the unsystematic risk of a security as it can be reduced through diversification. Unsystematic risks are mismanagement, increasing inventory, wrong financial policy, defective marketing, etc. The unsystematic or unique risk affecting specific securities arises from two sources:i. The operating environment of the company, andii. The financing pattern adopted by the company.These two types of risks are referred to as business risk and financial risk.i. Business risk: Business risk is a function of operating conditions faced by a company and is the variability in operating income caused by the operating conditions of the company like sales, income, profits, market conditions for product mix, input supplies, strength of competitors, etc. Business risk may be sometimes external to the company or sometimes due to internalfactors.

ii. Financial risk: Financial risk relates to the method of financing adopted by the company, delayed receivables, fall in current assets or rise in current liabilities and such other factors. Financial risk is avoidable and these risks could no doubt be solved but they may lead to fluctuations in earnings, profits and dividends to the shareholders. Proper financial planning and other adjustments can used to correct financial risks.Minimization of risk: The company specific risk (unsystematic risk) can be reduced by diversifying into a few companies belonging to various industry groups (tea, sugar, paper, cement, steel, etc.) or asset groups (bank deposits, gold bonds, land, real estate, shares, etc.). Each of them has different risk return characteristics and investments are to be made based on individuals risk preferences. The second category of risk (systematic risk) can be managed by the use of Beta (b ) of different company shares.

Diversification of risk: It is clear that systematic risk is unavailable and it is common to all the securities. But unsystematic risk is stock specific. Unsystematic risk associated with the security of a particular company can be reduced by combining it with another security having opposite characteristics. This process is known as diversification. Diversifications can serve unsystematic risk to zero.

What is Return? Return is the income plus capital appreciation. The difference between purchase priceand sale price is capital appreciation. The return on a security depends upon the amount of risk taken. Higher the risk taken, the higher will be the risk. We can distinguish between expected return and realized return from an investment. The expected return is the uncertain future return that an investor expects to get from his investment. The realized return, on the contrary, is the certain return that an investor has actually obtained from his investment at the end of the holding period. Return on a typical investment consists of two components: Income or current yield capital gain/capital losses yield.Income or current yield is in the form of interest or dividends. Capital gain/loss is thecharge in the price of asset-the difference between purchase price and the price at which theasset can be or is sold. In symbols:

Harry Markowitz ModelHarry Markowitz put forward this model in 1952. It assists in the selection of the most efficient by analyzing various possible portfolios of the given securities. By choosing securities that do not 'move' exactly together, the HM model shows investors how to reduce their risk. The HM model is also called Mean-Variance Model due to the fact that it is based on expected returns (mean) and the standard deviation (variance) of the various portfolios. Harry Markowitz made the following assumption while developing the HM model, which were:1. Risk of a portfolio is based on the variability of returns from the said portfolio.2. An investor is risk averse.3. An investor prefers to increase consumption.4. The investor's utility function is concave and increasing, due to his risk aversion and consumption preference.5. Analysis is based on single period model of investment6. An investor either maximizes his portfolio return for a given level of risk or maximum return for minimum risk.7. An investor is rational in nature.To choose the best portfolio from a number of possible portfolios, each with different return and risk, two separate decisions are to be made:1. Determination a set of efficient portfolios.2. Selection of best portfolio out of the efficient set.

Determining the Efficient SetA portfolio that gives maximum return for a given risk, or minimum risk for given return is an efficient portfolio. Thus, portfolios are selected as follows:(a) From the portfolios that have the same return, the investor will prefer the portfolio with lower risk, and(b) From the portfolios that have the same risk level, an investor will prefer the portfolio with higher rate of return.Markovitz Efficient FrontierFig.1As the investor is rational, they would like to have higher return. And as he is risk averse, he wants to have lower risk. In Figure 1, the shaded area PVWP includes all the possible securities an investor can invest in. The efficient portfolios are the ones that lie on the boundary of PQVW. For example, at risk level x2, there are three portfolios S, T, U. But portfolio S is called the efficient portfolio as it has the highest return, y2, compared to T and U. All the portfolios that lie on the boundary of PQVW are efficient portfolios for a given risk level.The boundary PQVW is called the Efficient Frontier. All portfolios that lie below the Efficient Frontier are not good enough because the return would be lower for the given risk. Portfolios that lie to the right of the Efficient Frontier would not be good enough, as there is higher risk for a given rate of return. All portfolios lying on the boundary of PQVW are called Efficient Portfolios. The Efficient Frontier is the same for all investors, as all investors want maximum return with the lowest possible risk and they are risk averse.Assumptions of the single-Index Model by SharpeTo simplify analysis, the single-index model assumes that there is only one macroeconomic factor that causes the systematic risk affecting all stock returns and this factor can be represented by the rate of return on a market index, such as the S&P CNX NIFTY. According to this model, the return of any stock can be decomposed into the expected excess return of the individual stock due to firm-specific factors, commonly denoted by its alpha coefficient (), the return due to macroeconomic events that affect the market, and the unexpected microeconomic events that affect only the firm.The term i(rm rf) represents the movement of the market modified by the stock's beta, while ei represents the unsystematic risk of the security due to firm-specific factors. Macroeconomic events, such as changes in interest rates or the cost of labor, causes the systematic risk that affects the returns of all stocks, and the firm-specific events are the unexpected microeconomic events that affect the returns of specific firms, such as the death of key people or the lowering of the firm's credit rating, that would affect the firm, but would have a negligible effect on the economy. In a portfolio, the unsystematic risk due to firm-specific factors can be reduced to zero by diversification.The index model is based on the following: Most stocks have a positive covariance because they all respond similarly to macroeconomic factors. However, some firms are more sensitive to these factors than others, and this firm-specific variance is typically denoted by its beta (), which measures its variance compared to the market for one or more economic factors. Covariances among securities result from differing responses to macroeconomic factors. Hence, the covariance of each stock can be found by multiplying their betas and the market variance: Cov(Ri,Rk) = ik2. This last equation greatly reduces the computations required to determine covariance because otherwise the covariance of the securities within a portfolio must be calculated using historical returns, and the covariance of each possible pair of securities in the portfolio must be calculated independently. With this equation, only the betas of the individual securities and the market variance need to be estimated to calculate covariance. Hence, the index model greatly reduces the number of calculations that would otherwise have to be made to model a large portfolio of thousands of securities.

Chapter 4ANALYSIS AND INTERPRITTATION

The following 10 stocks, which constitute of NSE-Nifty, are taken for construction of an optimal portfolio.

Table 1 : 10 securities across the sectors.

COMPANYSECTOR

ACC LtdCement and Cement Products

Bharat Heavy Electricals LtdElectrical Equipement

Bharath Petroleum Corporation LtdRefineries

Cipla LtdPharmaceuticals

Coal india LtdMining

HDFC Bank LtdBanks

ITC LtdCigarettes

Oil and Natural Gas Corporation LtdOil Eploration/Production

Tata Motors LtdAutomobile-4 Wheelers

Wipro LtdComputers-Software

The expected rate of return and standard deviation values of each Securities and their graph are given below.

TABLE 2: Mean return and standard deviation of selected securities

INTERPRITATION The returns of the selected companies is concerned, TATA MOTORS is comparatively performing well in isolation where as COAL INDIA is performing very poor. The Standard deviation of the selected companies is concerned, BHEL is very high where as CIPLA is giving less risk.

Finding correlation between the returns of securities

TABLE 3:Correlation between return of securities

Construction of Portfolio as per Markovtiz Model Two securities combination Assumed weight 50%TABLE 4:RETURN ANS STANDARED DEVIATION OF PORTFOLIOS

INTERPRITATION

The returns of the portfolios of selected companies is concerned, TATAMOTORS&WIPRO are comparatively performing well where as CIPLA& COAL INDIA are performing very poor. The Standard deviation of the selected companies is concerned, BHEL&BPCL are very high where as COAL INDIA&WIPRO are giving less risk.

Efficient Frontier

Portfolios selected

INTERPRITATION The above is a concave curve is the risk-return space that extends from the minimum variance portfolio to the maximum return portfolio From the above efficient frontier portfolio COALINDIA,WIPRO represents global minimum variance portfolio and portfolio of TATAMOTORS,WIPRO represents maximum return portfolio

.Selecting efficient portfolio by single index model Equations used Market varianceX Cumilative (Ri-Rf)/ei^2)*iCut off Rate= 1+(mkt variance*cumila (i^2/ei^2)

Calculation for construct optimal portfolio from selected securities using sharpes single index modelTABLE 5:CALCULATION OF SINGLE INDEX MODEL

INTERPRITATION From the above calculations we can select the qualified securities are; Tata Motors Ltd

Wipro Ltd

Bharath Petroleum Corporation Ltd

TABLE 6:RESULT OF WEIGHTS AMOUNT INVESTED IN QUALIFIED SECURITIES

INTERPRITATION The above table shows weights of amount which invested in qualified securities and return and beta value of qualified securities. This shows 78.23% amount invested in TATAMOTORS, 20.83% amount invested in wipro and 0.94% amount invested in BPCL while making an optimal portfolio using these securities.

TABLE 7:Return and risk of More diversified portfolios constructed from selected securities,

INTERPRITATION The above table shows the return and risk of the more diversified portfolio constructed from the selected qualified securities. Here portfolio of TATAMOTORS,WIPRO,BPCL having high return and portfolio of CIPLA,COALINDIA,HDFC having lower return. Here portfolio of ACC,BHEL,BPCL having high risk and portfolio of CIPLA,COALINDIA,HDFC having lower risk.

New efficient frontier of More diversified portfolios constructed from selected securities,

Cipla,coalindia,hdfcONGC,itc,wiproTatamototrs,wipro,bpcl INTERPRITATION The above a concave curve is the new efficient frontier of more diversified portfolios constructed from selected securities. The above graph shows the portfolio of TATAMOTORS,WIPRO and BPCL are a maximum return portfolio and then optimal portfolio that we can constructed from selected securities using single index model.

CHAPTER 5 FINDINGS

FINDINGS The study was to construct an optimal portfolio using Markowitz model & Sharpe single index model. The securities considered for study were 10 stocks, which constitutes NSE-Nifty. As far as the returns of the selected companies are concerned, TATA MOTORS is comparatively performing well in isolation where as COAL INDIA is performing very poor. As far as the Standard deviation of the selected companies is concerned, BHEL is very high where as CIPLA is giving less risk. Portfolio consist TATAMOTORS and WIPRO are selected as a optimal portfolio from Markowitz model. Portfolio consist TATAMOTORS,WIPRO&BPCL is selected as a optimal portfolio from single index model. The data are considered for study are the closing prices of each security for year (from April 2013-April 2014). The risk free rate of return arrived at was 8.83%. Securities having low correlation with other securities showing dominancy in efficient frontier for example, TATAMOTORS and WIPRO. Single index model is much easier to construct an optimal portolio compared to Markowitz model. Single Index model is superior in determining efficient portfolios compared to Markovitz model. While incorporating Single index model with markovitz, securities qualified by former method dominates the Efficient frontier.

CHAPTER 6SUGGESTIONS

SUGGESTIONS The investor should read news papers, business journals, websites, etc. to get the awareness about the potential risk factors and return prospects. He should also give key attention to the activities of major players in the market. Wherever possible securities have to be selected from different sectors,thus can enjoy the benefits of diversification. The investor should not stick to one strategy in the whole time, he should change his strategies according to their market situations. Risk reduction strategy,helps investors to know upto what extent the risks can be reduced.

CHAPTER 7CONCLUSION

CONCLUSION The share market is more challenging, fulfilling and rewarding to resourceful investors willing to learn the trade for having effective returns with minimum risk involved. The optimal portfolio analysis and risk, return trade off are determined by the challenging attitudes of investors towards a variety of economic, monetary, political and psychological forces prevailing in the stock market. By studying the nature of previous market turning points it is possible to develop some characteristics that can help to identify major markets tops and bottoms (i.e., highs and lows). From this analysis the investor gets a correct view of the volatility of the shares prices and hence can make decisions or selling the securities.

BIBLIOGRAPHY

BIBLIOGRAPHYREFERENCE BOOKS: 1. Donald E.Fischer, Ronald J. Jordan, Security Analysis and Portfolio Management 2. ICFAI University Press, Introduction to Security Analysis 3. Punithavathy Pandian, Security Analysis and Portfolio Management. NEWSPAPERS: 1. Business Lin 2. Economic Times WEBSITES: 1. www.moneycontrol.com 2. www.nseindia.com 3. www.standardcharteredwealthmanagers.com

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Sheet1COMPANYMEAN RETURNSDVARIANCEBETABETA2unsystematic risk(ei)ei^2Ri-RfRi-Rf/%RankACC7.50%1.6597632.75481321620.880.77440.72247785620.5219742527-1.33%-0.0150768886-1.530%5Bharat Heavy Electricals Ltd4.73%2.9569170128.74335821591.041.08165.904807175934.866747784-4.10%-0.0394451399-3.964%6Bharath Petroleum Corporation Ltd9.05%2.3916033195.71976643550.890.79213.640979195513.25672950170.22%0.00251040610.229%3Cipla Ltd2.90%1.4255542.03220420690.240.05761.88103876693.5383068426-5.93%-0.2470708333-24.790%10Coal india Ltd-1.14%1.9282950923.71832196180.70.492.43236596185.9164041723-9.97%-0.1423716014-14.266%9HDFC Bank Ltd7.40%1.8280208583.34166025731.061.12360.39288441730.1543581653-1.43%-0.0135227415-1.3711%4ITC Ltd5.72%1.5998093362.55938991160.340.11562.25600927165.0895778333-3.11%-0.0915735265-9.2162%8Oil and Natural Gas Corporation Ltd4.20%2.091247314.37331531160.950.90252.00479431164.0192002318-4.63%-0.0486851442-4.8896%7Tata Motors Ltd18.89%2.1134461044.46665443451.652.7225-2.67827456557.173154648110.06%0.06097360486.0852%1Wipro Ltd11.22%1.8473194593.41258918360.580.33642.52974102366.39958964652.39%0.04120069834.0856%2Market SD1.62%Market Variance2.6244RisK free return8.83%Securities ranked(Ri-Rf)*/ei^2Cumilative^2/ei^2CumilativeM*2(Ri-Rf)*/ei^2Z scoreWeightReturnBetaTata Motors Ltd0.02314192950.0303662210.37954012340.37954012340.07969311040*0.014025411878.231871489614.77850496351.287Wipro Ltd0.00216575060.03253197160.0906308110.47017093440.08537690620*0.003734052720.82804659842.33683195150.116Bharath Petroleum Corporation Ltd0.00014999870.03268197030.05975078540.52992171980.08577056290*C0.00016853790.9400819120.00001525850.007565HDFC Bank Ltd-0.0984343933-0.0657524237.27917436377.8090960835-0.17256065900.017928002410017.11535217351.410565ACC-0.0223680431-0.08812046611.48359808189.2926941654-0.23126335120Bharat Heavy Electricals Ltd-0.0012236261-0.08934409220.03102096039.3237151257-0.23447463560Oil and Natural Gas Corporation Ltd-0.0109321109-0.10027620310.22454716069.5482622863-0.26316486740ITC Ltd-0.002079917-0.10235612010.02271308239.5709753686-0.26862340170Coal india Ltd-0.011791298-0.11414741810.08282057589.6537959443-0.29956848420Cipla Ltd-0.0040220593-0.11816947750.01627897269.6700749169-0.310123976607.403773572total riskunsystematic Risk6.987660755614.3914343276Tata Motors Ltd5.5950606255Wipro Ltd1.27991792930.1126822008

systematic risk of portfolio

Bharath Petroleum Corporation Ltd

Sheet2COMPANYMEAN RETURNSDPORTFOLIORETURNRISKportfolioRETURNsdACC7.50%1.659763Bharat Heavy Electricals Ltd4.73%2.9569170121ACC&BHEL6.11545272.112988754146ACC,BHEL,BPCL7.02384058054.3883198079Bharath Petroleum Corporation Ltd9.05%2.3916033192ACC&BPCL8.278313051.861594150947cipla,coalindia,hdfc3.0230895091.0859180978Cipla Ltd2.90%1.4255543ACC&CIPLA5.201750.94398531448ongc,itc,wipro6.9765471271.0143875707Coal india Ltd-1.14%1.9282950924ACC&COAL INDAIA3.183593951.544663520348tata,wipro,bpcl12.92402477712.2840212669HDFC Bank Ltd7.40%1.8280208585ACC&HDFC7.44989471.589258709149ACC,BPCL,TATA11.69761056612.0170680523ITC Ltd5.72%1.5998093366ACC&ITC6.609850051.4412447759Oil and Natural Gas Corporation Ltd4.20%2.091247317ACC&ONGC5.854055651.7805744272Tata Motors Ltd18.89%2.1134461048ACC&TATAMOTORS13.19692241.1943392079Wipro Ltd11.22%1.8473194599ACC&WIPRO9.361420250.921393782810BHEL&BPCL6.890565752.539375174911BHEL&CIPLA3.81400271.380885769212BHEL&COAL INDIA1.795846652.105528469713BHEL&HDFC6.06214742.237772540814BHEL&ITC5.222102751.84476472915BHEL&ONGC4.466308352.427585014616BHEL&TATAMOTORS11.80917511.713647257717BHEL&WIPRO7.973672951.491870406618BPCL&CIPLA5.976863051.158372044719BPCL&COAL INDIA3.9587071.728863372120BPCL&HDFC8.225007752.016720930321BPCL&ITC7.38496311.61320215622BPCL&ONGC6.62916871.667011128123BPCL&TATAMOTORS13.972035451.370911791124BPCL&WIPRO10.13653331.122317303525CIPLA &COAL INDIA0.882143951.272221455326CIPLA &HDFC5.14844470.982324072527CIPLA &ITC4.308400051.179015843228CIPLA &ONGC3.552605651.056947789729CIPLA &TATAMOTORS10.89547241.233577646830CIPLA &WIPRO7.059970251.172331262531COAL INDIA&HDFC3.130288651.477316322932COAL INDIA&ITC2.2902441.346156847233COAL INDIA&ONGC1.53444961.774062223534COAL INDIA&TATAMOTORS8.877316351.020770914335COAL INDIA&WIPRO5.04181420.706775666236HDFC&ITC6.556544751.471849832837HDFC&ONGC5.800750351.81346139438HDFC&TATAMOTORS13.14361711.621557142739HDFC&WIPRO9.308114951.30960042740ITC&ONGC4.96070571.49327725441ITC&TATAMOTORS12.303572451.381141247342ITC&WIPRO8.46807031.167506485543ONGC&TATAMOTORS11.547778051.270159612944ONGC&WIPRO7.71227590.976975758745TATAMOTORS&WIPRO15.055142651.8859026598ACCBHELBPCLCIPLACOAL INDIAHDFCITCONGCTATA MOTORSWIPRO

ACC2.75481321623.18035723352.6937757394-0.61129216531.53540319282.00324975231.49727144432.776826318-0.7578415383-1.3857681938BHEL3.18035723358.74335821595.6652902324-1.57409019622.63566018433.97274265221.15493974715.2280012425-0.7318324777-1.6266190798BPCL2.69377573945.66529023245.7197664355-1.19233373331.25889292023.60361327491.06526421893.95105825810.8545509243-0.3409091505CIPLA-0.6112921653-1.5740901962-1.19233373332.03220420690.3618317781-0.75701106510.4843596579-0.968482499-0.20600169930.0263244826COAL INDIA1.53540319282.63566018431.25889292020.36183177813.71832196180.83493592630.48542057812.2487749087-2.0085416792-2.566391888HDFC2.00324975233.97274265223.6036132749-0.75701106510.83493592633.34166025731.38215877592.71979667061.35473778830.0529818362ITC1.49727144431.15493974711.06526421890.48435965790.48542057811.38215877592.55938991160.99340130330.3020801172-0.25984676ONGC2.7768263185.22800124253.9510582581-0.9684824992.24877490872.71979667060.99340130334.3733153116-1.1933739888-1.9839889816TATA MOTORS-0.7578415383-0.73183247770.8545509243-0.2060016993-2.00854167921.35473778830.3020801172-1.19337398884.46665443453.1736358756WIPRO-1.3857681938-1.6266190798-0.34090915050.0263244826-2.5663918880.0529818362-0.25984676-0.51356078693.17363587563.4125891836portfolioRETURNvariancesd46ACC,BHEL,BPCL7.02384058054.38831980792.0948316896ACC,BPCL,TATA2.017068052347cipla,coalindia,hdfc3.0230895091.08591809781.042073940748ongc,itc,wipro4.2311647621.01438757071.007168094548tata,wipro,bpcl12.92402477712.28402126691.511297875

Sheet3PORTFOLIORETURNRISK1ACC&BHEL6.11545272.11298875412ACC&BPCL8.278313051.86159415093ACC&CIPLA5.201750.9439853144ACC&COAL INDAIA3.183593951.54466352035ACC&HDFC7.44989471.58925870916ACC&ITC6.609850051.44124477597ACC&ONGC5.854055651.78057442728ACC&TATAMOTORS13.19692241.19433920799ACC&WIPRO9.361420250.921393782810BHEL&BPCL6.890565752.539375174911BHEL&CIPLA3.81400271.380885769212BHEL&COAL INDIA1.795846652.105528469713BHEL&HDFC6.06214742.237772540814BHEL&ITC5.222102751.84476472915BHEL&ONGC4.466308352.427585014616BHEL&TATAMOTORS11.80917511.713647257717BHEL&WIPRO7.973672951.491870406618BPCL&CIPLA5.976863051.158372044719BPCL&COAL INDIA3.9587071.728863372120BPCL&HDFC8.225007752.016720930321BPCL&ITC7.38496311.61320215622BPCL&ONGC6.62916871.667011128123BPCL&TATAMOTORS13.972035451.370911791124BPCL&WIPRO10.13653331.122317303525CIPLA &COAL INDIA0.882143951.272221455326CIPLA &HDFC5.14844470.982324072527CIPLA &ITC4.308400051.179015843228CIPLA &ONGC3.552605651.056947789729CIPLA &TATAMOTORS10.89547241.233577646830CIPLA &WIPRO7.059970251.172331262531COAL INDIA&HDFC3.130288651.477316322932COAL INDIA&ITC2.2902441.346156847233COAL INDIA&ONGC1.53444961.774062223534COAL INDIA&TATAMOTORS8.877316351.020770914335COAL INDIA&WIPRO5.04181420.706775666236HDFC&ITC6.556544751.471849832837HDFC&ONGC5.800750351.81346139438HDFC&TATAMOTORS13.14361711.621557142739HDFC&WIPRO9.308114951.30960042740ITC&ONGC4.96070571.49327725441ITC&TATAMOTORS12.303572451.381141247342ITC&WIPRO8.46807031.167506485543ONGC&TATAMOTORS11.547778051.270159612944ONGC&WIPRO7.71227590.976975758745TATAMOTORS&WIPRO15.055142651.885902659846ACC,BHEL,BPCL7.02384058054.388319807947cipla,coalindia,hdfc3.0230895091.085918097848ongc,itc,wipro6.9765471271.08719948648tata,wipro,bpcl12.92402477712.2840212669

Sheet4

Sheet5portfolioRETURNsd46ACC,BHEL,BPCL7.02384058052.094831689647cipla,coalindia,hdfc3.0230895091.042073940748ongc,itc,wipro4.2311647621.007168094548tata,wipro,bpcl12.92402477711.511297875

Sheet1

ACCBHELBPCLCIPLACOAL INDIAHDFCITCONGCTATA MOTORSWIPROACC ltd10.64802340230.6786193063-0.25835631280.47973661290.66024918230.56387940930.8000133653-0.2160434728-0.45196260720.648023402310.8011131863-0.37342793670.46224985560.73497091040.2441473220.8454562732-0.1171065983-0.29778630520.67861930630.80111318631-0.34972365660.27297705740.82426694470.27841970270.78998508270.169066524-0.0771627161CIPLA ltd-0.2583563128-0.3734279367-0.349723656610.1316283803-0.29049416120.2123811968-0.3248648388-0.06837478170.0099961823Coal India ltd0.47973661290.46224985560.27297705740.131628380310.23686369830.15735351920.5576569199-0.492851605-0.7204560174HDFC ltd0.66024918230.73497091040.8242669447-0.29049416120.236863698310.47261615430.71145902960.35065732950.0156893104ITC0.56387940930.2441473220.27841970270.21238119680.15735351920.472616154310.29692796590.0893434538-0.08792392640.80001336530.84545627320.7899850827-0.32486483880.55765691990.71145902960.29692796591-0.2700100909-0.5135607869Tata Motors ltd-0.2160434728-0.11710659830.169066524-0.0683747817-0.4928516050.35065732950.0893434538-0.270010090910.8128752765Wipro ltd-0.4519626072-0.2977863052-0.07716271610.0099961823-0.72045601740.0156893104-0.0879239264-0.51356078690.81287527651

Bharath heavy electricals ltdBharath petroleucorporation ltdOil & Natural Gas Corporation ltd

Sheet2

Sheet3

Sheet1PORTFOLIORETURNSD

ACC&BHEL6.11545272.1129887541ACC&BPCL8.278313051.8615941509ACC&CIPLA5.201750.943985314ACC&COAL INDAIA3.183593951.5446635203ACC&HDFC7.44989471.5892587091ACC&ITC6.609850051.4412447759ACC&ONGC5.854055651.7805744272ACC&TATAMOTORS13.19692241.1943392079ACC&WIPRO9.361420250.9213937828BHEL&BPCL6.890565752.5393751749BHEL&CIPLA3.81400271.3808857692BHEL&COAL INDIA1.795846652.1055284697BHEL&HDFC6.06214742.2377725408BHEL&ITC5.222102751.844764729BHEL&ONGC4.466308352.4275850146BHEL&TATAMOTORS11.80917511.7136472577BHEL&WIPRO7.973672951.4918704066BPCL&CIPLA5.976863051.1583720447BPCL&COAL INDIA3.9587071.7288633721BPCL&HDFC8.225007752.0167209303BPCL&ITC7.38496311.613202156BPCL&ONGC6.62916871.6670111281BPCL&TATAMOTORS13.972035451.3709117911BPCL&WIPRO10.13653331.1223173035CIPLA &COAL INDIA0.882143951.2722214553CIPLA &HDFC5.14844470.9823240725CIPLA &ITC4.308400051.1790158432CIPLA &ONGC3.552605651.0569477897CIPLA &TATAMOTORS10.89547241.2335776468CIPLA &WIPRO7.059970251.1723312625COAL INDIA&HDFC3.130288651.4773163229COAL INDIA&ITC2.2902441.3461568472COAL INDIA&ONGC1.53444961.7740622235COAL INDIA&TATAMOTORS8.877316351.0207709143COAL INDIA&WIPRO5.04181420.7067756662HDFC&ITC6.556544751.4718498328HDFC&ONGC5.800750351.813461394HDFC&TATAMOTORS13.14361711.6215571427HDFC&WIPRO9.308114951.309600427ITC&ONGC4.96070571.493277254ITC&TATAMOTORS12.303572451.3811412473IT