PROJECT REPORT A STUDY ON

EQUITY AND PORTFOLIO MANAGEMENT

Submitted in partial fulfillment of the requirements for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION

Submitted By, ARUN KUMAR JALAKAM 09MBMA39

Under the guidance of Dr. MARY JESSICA SCHOOL OF MANAGEMENT STUDIES, UNIVERSITY OF HYDERABAD.

DECLARATION

I ARUN KUMAR JALAKAM declare that the project report entitled A STUDY ON EQUITY AND PORTFOLIO MANAGEMENT is an original work done by me during the academic year 2009-2011. This is being submitted in the partial fulfilment of the requirement for the award of degree of the MASTER OF BUSINESS ADMINISTRATION in SCHOOL OF MANAGEMENT STUDIES, UNIVESITY OF HYDERABAD. The matter in this report has not been submitted for the award of any other degree or diploma.

Name of the Student: Date: Place:

Signature of the Student

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CERTIFICATE BY GUIDE

This is to certify that the Project Report titled A STUDY ON EQUITY AND PORTFOLIO MANAGEMENT is submitted in partial fulfillment for award of degree of Master of Business Administration was carried out by ARUN KUMAR JALAKAM, 09MBMA39 under my guidance. This has not been submitted to any other University or Institution for the award of any Degree / Diploma/ Certificate.

PLACE: HYDERABAD DATE:

Dr. MARY JESSICA, Project Guide, School of Management Studies,

University of Hyderabad.

ACKNOWLEDGEMENT

Acknowledgement is due to many, without whose valuable help the project would not have been a success. My sincere thanks to Dr. V. VENKATA RAMANA, DEAN, SCHOOL OF MANAGEMENT STUDIES, UNIVERSITY OF HYDERABAD for providing all necessary facilities to complete this dissertation. Support and facilities were essential ingredients for creating this documentation. I would, therefore, like to express my gratitude to my project guide, Dr. MARY JESSICA for her guidance, encouragement & support at all stages of the project work. Finally I take this opportunity to convey my sincere thanks to all those who have directly and indirectly contributed for successful completion of my project.

ARUN KUMAR JALAKAM (09MBMA39)

TABLE OF CONTENTS

CHAPTER NUMBER I

CHAPTER NAME INTRODUCTION 1.1 IMPORTANCE OF THE STUDY 1.2 NEED OF THE STUDY 1.3 OBJECTIVES OF THE STUDY 1.4 SCOPE OF THE STUDY 1.5 METHODOLOGY OF SAMPLING 1.6 SOURCES OF DATA 1.7 PERIOD OF STUDY 1.8 TOOLS OF ANALYSIS 1.9 LIMITATIONS OF THE STUDY LITERATURE REVIEW 2.1 INVESTMENT AND INVESTORS 2.2 SECURITIES 2.3 STOCK EXCHANGE NSE 2.4 PORTFOLIO MANAGEMENT 2.5 RISK 2.6 EFFICIENCY FRONTIER 2.7 MARKOWITZ PORTFOLIO SELECTION MODEL 2.8 PORTFOLIO DIVERSIFICATION ANALYSIS AND INFERENCE 3.1 STOCK PRICE CHANGES OF ICICI BANK 2007-2010 3.2 CALCULATION OF BETA, ALPHA, CORRELATION 3.3. STOCK PRICE CHANGES OF SBI 2007-2010 3.4 TWO-ASSET PORTFOLIO OF ICICI BANK AND SBI 3.5 PORTFOLIO FRONTIER FINDINGS AND CONCLUSION BIBLIOGRAPHY

PAGE NUMBER 6 7 7 7 8 8 8 9 9 9 10 11 18 20 21 23 25 26 33 34 35 41 43 51 55 56 58

II

III

IV V

CHAPTER-I

INTRODUCTION

IMPORTANCE OF PORTFOLIO MANAGEMENT: It is very important to having a portfolio of securities rather than holding a single security. The expected return from individual securities carries some degree of risk. The securities carry differing degrees of expected risk leads most investors to the notion of holding more than one security at a time, in an attempt to spread risks by not putting all their eggs into one basket. Diversification of ones holdings is intended to reduce risk in an economy in whichever assets returns are subject to some degree of uncertainty. Most investors hope that if they hold several assets, even if one goes bad, the other will provide some protection from an extreme loss. Best diversification comes through holding large numbers of securities scattered across industries.

NEED FOR THE STUDY:

The purpose of the study is to know the fluctuations in the share price of sample companies. The purpose of the study is to help the unknown investors for investing in securities. To update the portfolio reviewed and adjusted from time to time in tune with market condition. To analyze the risk and return on securities. To test portfolio strategies before taking decisions.

OBJECTIVES OF THE STUDY

The objectives of Equities and investment /portfolio management can be categorised as follows: To observe the rate of fluctuations of selected companies. The amount of risk involved in the securities of the sample companies. To make comparative study of risk and return of the sample companies.
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SCOPE OF THE STUDY The study covers all the information related to the Equity fund and the Portfolio management it also covers the investor risk in the investment in various securities. Identification of the investors objectives, constraints and preferences. Strategies are to be developed and implemented in tune with investment policy formulated. To reduce the future risk in advance. To earn maximum profit in the securities. Review and monitoring of the performance of the portfolio. Finally the evaluation of the portfolio.

METHODOLOGY OF SAMPLING Convenience sampling method is used for selecting samples for this study.

SOURCES OF DATA Primary Data: The data provided by the firm was been analyzes by using Markowitz model determines an efficient asset of portfolio return i.e. Return Standard deviation Coefficient of correlation

Secondary Data: The data that is used in this project is of secondary nature. The data is to be collected from secondary sources such as various websites, journals, newspapers, books, etc., the analysis used in this project has been done using selective technical tools. In Equity market, risk is analyzed and trading decisions are taken on basis of technical analysis. It is collecting share prices of selected companies for a period of four years.

PERIOD OF THE STUDY: This study is done for a period of four years (2007-2010).

TOOLS OF ANALYSIS: The following statistical tools are used for the analysis of collected data Rate of Return Standard Deviation Alpha Coefficient of Correlation

LIMITATIONS: Only a limited number of companies are selected for analysis. The analysis is done for a limited period of four years. The companies are selected on the basis of the performance. Expand or contract the size of the portfolio reflect the changes in investor risk disposition.

CHAPTER-II

LITERATURE REVIEW

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INVESTMENT: What is Investment? An Investment is a commitment of funds made in the expectation of some positive rate of return. If the investment is properly undertaken the return will be commensurate with the risk the investor assumes. Instead of keeping our savings idle we may like to use savings in order to get return on it in the future. Investments could be made into financial assets, like stocks, bonds, and similar instruments or into real assets, like houses, land, or commodities. Why should one invest? One needs to invest to Earn return on your idle resources. Generate a specified sum of money for a specific goal in life. Make a provision for an uncertain future.

One of the important reasons why one needs to invest wisely is to meet the cost of Inflation. Inflation is the rate at which the cost of living increases. The cost of living is simply what it costs to buy the goods and services you need to live. Inflation causes money to lose value because it will not buy the same amount of a good or a service in the future as it does now or did in the past. When to invest?

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The sooner one starts investing the better. By investing early you allow your investments more time to grow, whereby the concept of compounding (as we shall see later) increases your income, by accumulating the principal and the interest or dividend earned on it, year after year. The three golden rules for all investors are: Invest early Invest regularly Invest for long term and not short term

Before making any investment, one must ensure to: 1. Obtain written documents explaining the investment 2. Read and understand such documents 3. Verify the legitimacy of the investment 4. Find out the costs and benefits associated with the investment 5. Assess the risk-return profile of the investment 6. Know the liquidity and safety aspects of the investment 7. Ascertain if it is appropriate for your specific goals 8. Compare these details with other investment opportunities available 9. Examine if it fits in with other investments you are considering or you have already made 10. Deal only through an authorized intermediary 11. Seek all clarifications about the intermediary and the investment 12. Explore the options available to you if something were to go wrong, and then, if satisfied, make the investment.

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Interest: Interest is an amount charged to the borrower for the privilege of using the lenders money. Interest is usually calculated as a percentage of the principal balance (the amount of money borrowed). The percentage rate may be fixed for the life of the loan, or it may be variable, depending on the terms of the loan. The factors which govern these interest rates are mostly economy related and are commonly referred to as macroeconomic factors. Some of these factors are: Demand for money Level of Government borrowings Supply of money Inflation rate The Reserve Bank of India and the Government policies which determine some of the variables mentioned above

Investments generally involve real assets or financial assets. Real assets are tangible, material things such as buildings, automobiles, and commodities. Financial assets like fixed deposits with banks, small saving instruments with post offices, insurance/provident/pension fund etc. or securities market related instruments like shares, bonds, debentures etc.

Types of Investments
Short-Term Investments: Savings Bank Account is often the first banking product people use, which offers low interest (for example 4%-5% p.a.), making them only marginally better than fixed deposits. Money Market or Liquid Funds are a specialized form of mutual funds that invest in extremely short-term fixed income instruments and thereby provide easy liquidity. Unlike most mutual funds, money market funds are primarily oriented towards protecting your capital and then, aim to maximize returns. Money market funds usually yield better returns than savings accounts, but lower than bank fixed deposits.
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Fixed Deposits with Banks are also referred to as term deposits and minimum investment period for bank FDs is 30 days. Fixed Deposits with banks are for investors with low risk appetite, and may be considered for 6-12 months investment period as normally interest on less than 6 months bank FDs is likely to be lower than money market fund returns.

Long-term Investment: Long-term investment plans like Post Office Savings Schemes, Public Provident Fund, Company Fixed Deposits, Bonds and Debentures, Mutual Funds etc. Post Office Savings: Post Office Monthly Income Scheme is a low risk saving instrument, which can be availed through any post office. It provides an interest rate of 8% per annum, which is paid monthly. Minimum amount, which can be invested, is Rs.1,000/- and additional investment in multiples of 1,000/-. Maximum amount is Rs.3,00,000/- (if Single) or Rs.6,00,000/- (if held Jointly) during a year. It has a maturity period of 6 years. Premature withdrawal is permitted if deposit is more than one year old. A deduction of 5% is levied from the principal amount if withdrawn prematurely. Public Provident Fund: A long term savings instrument with a maturity of 15 years and interest payable at 8% per annum compounded annually. A PPF account can be opened through a nationalized bank at any time during the year and is open all through the year for depositing money. Tax benefits can be availed for the amount invested and interest accrued is tax-free. A withdrawal is permissible every year from the seventh financial year of the date of opening of the account and the amount of withdrawal will be limited to 50% of the balance at credit at the end of the 4th year immediately preceding the year in which the amount is withdrawn or at the end of the preceding year whichever is lower the amount of loan if any. Company Fixed Deposits: These are short-term (six months) to medium-term (three to five years) borrowings by companies at a fixed rate of interest which is payable monthly, quarterly, semiannually or annually. They can also be cumulative fixed deposits where the entire principal along with the interest is paid at the end of the loan period. The rate of interest varies between 69% per annum for company FDs. The interest received is after deduction of taxes. Bonds: It is a fixed income (debt) instrument issued for a period of more than one year with the purpose of raising capital. The central or state government, corporations and similar institutions sell bonds. A bond is generally a promise to repay the principal along with a fixed rate of interest on a specified date, called the Maturity Date. Mutual Funds: These are funds operated by an investment company which raises money from the public and invests in a group of assets (shares, debentures etc.), in accordance with a stated set of objectives. It is a substitute for those who are unable to invest directly in equities or debt because
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of resource, time or knowledge constraints. Benefits include professional money management, buying in small amounts and diversification. Mutual fund units are issued and redeemed by the Fund Management Company based on the fund's net asset value (NAV), which is determined at the end of each trading session. NAV is calculated as the value of all the shares held by the fund, minus expenses, divided by the number of units issued. Mutual Funds are usually long term investment vehicle though there some categories of mutual funds, such as money market mutual funds which are short term instruments.

Types of Investors:
There is wide diversity among investors, depending on their investment styles, mandates, horizons, and assets under management. Primarily, investors are either individuals, in that they invest for themselves or institutions, where they invest on behalf of others. Risk appetites and return requirements greatly vary across investor classes and are key determinants of the investing styles and strategies followed as also the constraints faced. A quick look at the broad groups of investors in the market illustrates the point.

Individuals:
While in terms of numbers, individuals comprise the single largest group in most markets, the size of the portfolio of each investor is usually quite small. Individuals differ across their risk appetite and return requirements. Those averse to risk in their portfolios would be inclined towards safe investments like Government securities and bank deposits, while others may be risk takers who would like to invest and / or speculate in the equity markets. Requirements of individuals also evolve according to their life-cycle positioning. For example, in India, an individual in the 25-35 years age group may plan for purchase of a house and vehicle, an individual belonging to the age group of 35-45 years may plan for childrens education and childrens marriage, an individual in his or her fifties would be planning for post-retirement life. The investment portfolio then changes depending on the capital needed for these requirements.

Institutions:
Institutional investors comprise the largest active group in the financial markets. As mentioned earlier, institutions are representative organizations, i.e., they invest capital on behalf of others, like individuals or other institutions. Assets under management are generally large and managed professionally by fund managers. Examples of such organizations are mutual funds, pension funds, insurance companies, hedge funds, endowment funds, banks, private equity and venture capital firms and other financial institutions. We can briefly describe some of them as below.
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1. Mutual Funds: Individuals are usually constrained either by resources or by limits to their knowledge of the investment outlook of various financial assets (or both) and the difficulty of keeping abreast of changes taking place in a rapidly changing economic environment. Given the small portfolio size to manage, it may not be optimal for an individual to spend his or her time analyzing various possible investment strategies and devise investment plans and strategies accordingly. Instead, they could rely on professionals who possess the necessary expertise to manage their funds within a broad, pre-specified plan. Mutual funds pool investors money and invest according to prespecified, broad parameters. These funds are managed and operated by professionals whose remunerations are linked to the performance of the funds. The profit or capital gain from the funds, after paying the management fees and commission is distributed among the individual investors in proportion to their holdings in the fund. Mutual funds vary greatly, depending on their investment objectives, the set of asset classes they invest in, and the overall strategy they adopt towards investments. 2. Pension Funds: Pension funds are created (either by employers or employee unions) to manage the retirement funds of the employees of companies or the Government. Funds are contributed by the employers and employees during the working life of the employees and the objective is to provide benefits to the employees post their retirement. The management of pension funds may be in-house or through some financial intermediary. Pension funds of large organizations are usually very large and form a substantial investor group for various financial instruments. 3. Endowment funds: Endowment funds are generally non-profit organizations that manage funds to generate a steady return to help them fulfill their investment objectives. Endowment funds are usually initiated by a non-refundable capital contribution. The contributor generally specifies the purpose (specific or general) and appoints trustees to manage the funds. Such funds are usually managed by charitable organizations, educational organization, non-Government organizations, etc. The investment policy of endowment funds needs to be approved by the trustees of the funds. 4. Insurance companies (life and non-life): Insurance companies, both life and non-life, hold large portfolios from premiums contributed by policyholders to policies that these companies underwrite. There are many different kinds of insurance policies and the premiums differ accordingly. For example, unlike term insurance, assurance or endowment policies ensure a return of capital to the policyholder on maturity, along with the death benefits. The premium for such policies may be higher than term policies. The investment strategy of insurance companies depends on actuarial estimates of timing and amount of future claims. Insurance companies are generally conservative in their attitude towards risks and
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their asset investments are geared towards meeting current cash flow needs as well as meeting perceived future liabilities. 5. Banks: Assets of banks consist mainly of loans to businesses and consumers and their liabilities comprise of various forms of deposits from consumers. Their main source of income is from what is called as the interest rate spread, which is the difference between the lending rate (rate at which banks earn) and the deposit rate (rate at which banks pay). Banks generally do not lend 100% of their deposits. They are statutorily required to maintain a certain portion of the deposits as cash and another portion in the form of liquid and safe assets (generally Government securities), which yield a lower rate of return. These requirements, known as the Cash Reserve Ratio (CRR ratio) and Statutory Liquidity Ratio (SLR ratio) in India, are stipulated by the Reserve Bank of India and banks need to adhere to them. In addition to the broad categories mentioned above, investors in the markets are also classified based on the objectives with which they trade. Under this classification, there are hedgers, speculators and arbitrageurs. Hedgers invest to provide a cover for risks on a portfolio they already hold, speculators take additional risks to earn supernormal returns and arbitrageurs take simultaneous positions (say in two equivalent assets or same asset in two different markets etc.) to earn riskless profits arising out of the price differential if they exist. Another category of investors include day-traders who trade in order to profit from intra-day price changes. They generally take a position at the beginning of the trading session and square off their position later during the day, ensuring that they do not carry any open position to the next trading day. Traders in the markets not only invest directly in securities in the so called cash markets, they also invest in derivatives, instruments that derive their value from the underlying securities. CONSTRAINTS OF INVESTMENTS: Portfolio management is usually a constrained optimization exercise: Every investor has some constraint (limits) within which she wants the portfolio to lie, typical examples being the risk profile, the time horizon, the choice of securities, optimal use of tax rules etc. The professional portfolio advisor or manager also needs to consider the constraint set of the investors while designing the portfolio; besides having some constraints of his or her own, like liquidity, market risk, cash levels mandated across certain asset classes etc. 1. Liquidity: In investment decisions, liquidity refers to the marketability of the asset, i.e., the ability and ease of an asset to be converted into cash and vice versa. It is generally measured across two different parameters, viz., (i) market breadth, which measures the cost of transacting a given volume of the security, this is also referred to as the impact cost; and (ii) market depth, which measures the units
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that can be traded for a given price impact, simply put, the size of the transaction needed to bring about a unit change in the price. Adequate liquidity is usually characterized by high levels of trading activity. High demand and supply of the security would generally result in low impact costs of trading and reduce liquidity risk. 2. Investment Horizons: The investment horizon refers to the length of time for which an investor expects to remain invested in a particular security or portfolio, before realizing the returns. Knowing the investment horizon helps in security selection in that it gives an idea about investors income needs and desired risk exposure. In general, investors with shorter investment horizons prefer assets with low risk, like fixed-income securities, whereas for longer investment horizons investor look at riskier assets like equities. Risk-adjusted returns for equity are generally found to be higher for longer investment horizon, but lower in case of short investment horizons, largely due to the high volatility in the equity markets. Further, certain securities require commitment to invest for a certain minimum investment period, for example in India, the Post Office savings or Government small-saving schemes like the National Savings Certificate (NSC) have a minimum maturity of 3-6 years. Investment horizon also facilitates in making a decision between investing in a liquid or relatively illiquid investment. If an investor wants to invest for a longer period, liquidity costs may not be a significant factor, whereas if the investment horizon is a short period (say 1 month) then the impact cost (liquidity) becomes significant as it could form a meaningful component of the expected return.

3. Taxation: The investment decision is also affected by the taxation laws of the land. Investors are always concerned with the net and not gross returns and therefore tax-free investments or investments subject to lower tax rate may trade at a premium as compared to investments with taxable returns. 4. Goals of Investors: There are specific needs for all types of investors. For individual investors, retirement, childrens marriage / education, housing etc. are major event triggers that cause an increase in the demands for funds. An investment decision will depend on the investors plans for the above needs. Similarly, there are certain specific needs for institutional investors also. For example, for a pension fund the investment policy will depend on the average age of the plans participants.

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In addition to the few mentioned here, there are other constraints like the level of requisite knowledge (investors may not be aware of certain financial instruments and their pricing), investment size (e.g., small investors may not be able to invest in Certificate of Deposits), regulatory provisions (country may impose restriction on investments in foreign countries) etc. which also serve to outline the investment choices faced by investors.

SECURITIES AND STOCK EXCHANGE: The Securities Contract (Regulation) Act, 1956 [SCRA] defines Stock Exchange as anybody of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities. Stock exchange could be a regional stock exchange whose area of operation/jurisdiction is specified at the time of its recognition or national exchanges, which are permitted to have nationwide trading since inception. NSE was incorporated as a national stock exchange. Securities: The definition of Securities as per the Securities Contracts Regulation Act (SCRA), 1956, includes instruments such as shares, bonds, scripts, stocks or other marketable securities of similar nature in or of any incorporate company or body corporate, government securities, derivatives of securities, units of collective investment scheme, interest and rights in securities, security receipt or any other instruments so declared by the Central Government.

Securities Markets is a place where buyers and sellers of securities can enter into transactions to purchase and sell shares, bonds, debentures etc. Further, it performs an important role of enabling corporates, entrepreneurs to raise resources for their companies and business ventures through public issues. Transfer of resources from those having idle resources (investors) to others who have a need for them (corporates) is most efficiently achieved through the securities market. Stated formally, securities markets provide channels for reallocation of savings to investments and entrepreneurship. Savings are linked to investments by a variety of intermediaries, through a range of financial products, called Securities. The different types of securities in which one can invest are Shares Government Securities Derivative products
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Units of Mutual Funds

The absence of conditions of perfect competition in the securities market makes the role of the Regulator extremely important. The regulator ensures that the market participants behave in a desired manner so that securities market continues to be a major source of finance for corporate and government and the interest of investors are protected. The responsibility for regulating the securities market is shared by Department of Economic Affairs (DEA), Department of Company Affairs (DCA), Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI). The Securities and Exchange Board of India (SEBI) is the regulatory authority in India established under Section 3 of SEBI Act, 1992. SEBI Act, 1992 provides for establishment of Securities and Exchange Board of India (SEBI) with statutory powers for (a) Protecting the interests of investors in securities (b) Promoting the development of the securities market and (c) Regulating the securities market. Its regulatory jurisdiction extends over corporates in the issuance of capital and transfer of securities, in addition to all intermediaries and persons associated with securities market. SEBI has been obligated to perform the aforesaid functions by such measures as it thinks fit.

In particular it has the following powers Regulating the business in stock exchanges and any other securities markets Registering and regulating the working of stock brokers, subbrokers etc. Promoting and regulating self-regulatory organizations Prohibiting fraudulent and unfair trade practices Calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, intermediaries, self-regulatory organizations, mutual funds and other persons associated with the securities market.

Participants:
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The securities market essentially has three categories of participants, namely, the issuers of securities, investors in securities and the intermediaries, such as merchant bankers, brokers etc. While the corporate and government raise resources from the securities market to meet their obligations, it is households that invest their savings in the securities market. It is advisable to conduct transactions through an intermediary. For example you need to transact through a trading member of a stock exchange if you intend to buy or sell any security on stock exchanges. We need to maintain an account with a depository if you intend to hold securities in demat form. We need to deposit money with a banker to an issue if you are subscribing to public issues. We can get guidance if we are transacting through an intermediary. We must chose a SEBI registered intermediary, as he is accountable for its activities. The list of registered intermediaries is available with exchanges, industry associations etc. The securities market has two interdependent segments: the primary (new issues) market and the secondary market. The primary market provides the channel for sale of new securities while the secondary market deals in securities previously issued.

NATIONAL STOCK EXCHANGE OF INDIA: It is located at Mumbai. It is the 9th largest stock exchange in the world by market capitalization and largest in India by daily turnover and number of trades, for both equities and derivative trading. NSE has a market capitalization of around US$1.59 trillion and over 1,552 listings as of December 2010. Though a number of other exchanges exist, NSE and the Bombay Stock Exchange are the two most significant stock exchanges in India and between them are responsible for the vast majority of share transactions. The NSE's key index is the S&P CNX Nifty, known as the NSE NIFTY (National Stock Exchange Fifty), an index of fifty major stocks weighted by market capitalization. NSE is mutually-owned by a set of leading financial institutions, banks, insurance companies and other financial intermediaries in India but its ownership and management operate as separate entities. There are at least 2 foreign investors NYSE Euronext and Goldman Sachs who have taken a stake in the NSE. As of 2006, the NSE VSAT terminals, 2799 in total, cover more than 1500 cities across India. NSE is the third largest Stock Exchange in the world in terms of the number of trades in equities. It is the second fastest growing stock exchange in the world with a recorded growth of 16.6%.

PORTFOLIO MANAGEMENT: Portfolio:

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A portfolio is a collection of securities since it is really desirable to invest the entire funds of an individual or an institution or a single security, it is essential that every security be viewed in a portfolio context. Thus it seems logical that the expected return of the portfolio. Portfolio analysis considers the determine of future risk and return in holding various blends of individual securities Portfolio expected return is a weighted average of the expected return of the individual securities but portfolio variance, in short contrast, can be something reduced portfolio risk is because risk depends greatly on the co-variance among returns of individual securities. Portfolios, which are combination of securities, may or may not take on the aggregate characteristics of their individual parts. Since portfolios expected return is a weighted average of the expected return of its securities, the contribution of each security the portfolios expected returns depends on its expected returns and its proportionate share of the initial portfolios market value. It follows that an investor who simply wants the greatest possible expected return should hold one security; the one which is considered to have a greatest expected return. Very few investors do this, and very few investment advisors would counsel such an extreme policy instead, investors should diversify, meaning that their portfolio should include more than one security. Objectives of Portfolio Management: The main objective of investment portfolio management is to maximize the returns from the investment and to minimize the risk involved in investment. Moreover, risk in price or inflation erodes the value of money and hence investment must provide a protection against inflation. The other ancillary objectives are Regular return. Stable income. Appreciation of capital. More liquidity. Safety of investment. Tax benefits.

Need for Portfolio: Portfolio management is a process encompassing many activities of investment in assets and securities. It is a dynamic and flexible concept and involves regular and systematic analysis, judgment and action. The objective of this service is to help the unknown and investors with the expertise of professionals in investment portfolio management. It involves construction of a
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portfolio based upon the investors objectives, constraints, preferences for risk and returns and tax liability. The portfolio is reviewed and adjusted from time to time in tune with the market conditions. The evaluation of portfolio is to be done in terms of targets set for risk and returns. The changes in the portfolio are to be effected to meet the changing condition. 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 more go towards the assembly of proper combination of individual securities to form investment portfolio. A combination of securities held together will give a beneficial result if they grouped in a manner to secure higher returns after taking into consideration the risk elements. The modern theory is the view that by diversification risk can be reduced. Diversification can be made by the investor 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 perspective of combination of securities under constraints of risk and returns Portfolio Management Process: Investment management is a complex activity which may be broken down into the following steps: Specification of investment objectives and constraints: The typical objectives sought by investors are current income, capital appreciation, and safety of principle. The relative importance of these objectives should be specified further the constraints arising from liquidity, time horizon, tax and special circumstances must be identified. Choice of asset mix: The most important decision in portfolio management is the asset mix decision very broadly; this is concerned with the proportions of stocks (equity shares and units/shares of equity-oriented mutual funds) and bonds in the portfolio. The appropriate stock-bond mix depends mainly on the risk tolerance and investment horizon of the investor.

Elements of Portfolio Management: Portfolio management is an on-going process which involves the following tasks Identification of the investors objectives, constraints and preferences. Strategies are to be developed and implemented in tune with investment policy formulated.
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Review and monitoring of the performance of the portfolio. Finally the evaluation of the portfolio

RISK: Risk is uncertainty of the income /capital appreciation or loss or both. All investments are risky. The higher the risk taken, the higher is the return. But proper management of risk involves the right choice of investments whose risks are compensating. The total risks of two companies may be different and even lower than the risk of a group of two companies if their companies are offset by each other. The two major types of risks are Systematic Risk Unsystematic Risk

The Systematic risks affected from the entire market are (the problems, raw material availability, tax policy or government policy, inflation risk, interest risk and financial risk). It is managed by the use of Beta of different company shares. The unsystematic risks are mismanagement, increasing inventory, wrong financial policy, defective marketing etc. this is diversifiable or avoidable because it is possible to eliminate or diversify away this component of risk to a considerable extent by investing in a large portfolio of securities. The unsystematic risk stems from inefficiency magnitude of those factors different form one company to another. Returns on Portfolio: Each security in a portfolio contributes return in the proportion of its investments in security. Thus the portfolio expected return is the weighted average of the expected return, from each of the securities, with weights representing the proportions share of the security in the total investment. Why does an investor have so many securities in his portfolio? If the security ABC gives the maximum return why not he invests in that security all his funds and thus maximize return? The answer to this questions lie in the investors perception of risk attached to investments, his objectives of income, safety, appreciation, liquidity and hedge against loss of value of money etc. this pattern of investment in different asset categories, types of investment, etc., would all be described under the caption of diversification, which aims at the reduction or even elimination of non-systematic risks and achieve the specific objectives of investors. Risk on Portfolio:
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The expected returns from individual securities carry some degree of risk. Risk on the portfolio is different from the risk on individual securities. The risk is reflected in the variability of the returns from zero to infinity. Risk of the individual assets or a portfolio is measured by the variance of its return. The expected return depends on the probability of the returns and their weighted contribution to the risk of the portfolio. These are two measures of risk in this context one is the absolute deviation and other standard deviation. Most investors invest in a portfolio of assets, because as to spread risk by not putting all eggs in one basket. Hence, what really matters to them is not the risk and return of stocks in isolation, but the risk and return of the portfolio as a whole. Risk is mainly reduced by Diversification. Risk-Return Analysis: All investment has some risk. Investment in shares of companies has its own risk or uncertainty; these risks arise out of variability of yields and uncertainty of appreciation or depreciation of share prices, losses of liquidity etc. The risk over time can be represented by the variance of the returns. While the return over time is capital appreciation plus payout, divided by the purchase price of the share.

Normally, the higher the risk that the investor takes, the higher is the return. There is, how ever, a risk less return on capital of about 12% which is the bank, rate charged by the R.B.I or long term, yielded on government securities at around 13% to 14%. This risk less return refers to lack of variability of return and no uncertainty in the repayment or capital. But other risks such as loss of liquidity due to parting with money etc., may however remain, but are rewarded by the total return on the capital. Risk-return is subject to variation and the objectives of the portfolio manager are to reduce that variability and thus reduce the risky by choosing an appropriate portfolio.

25

Traditional approach advocates that one security holds the better, it is according to the modern approach diversification should not be quantity that should be related to the quality of scripts which leads to quality of portfolio. Experience has shown that beyond the certain securities by adding more securities expensive. An assets total risk can be divided into systematic plus unsystematic risk, as shown below: Total Risk = Systematic risk (undiversified risk) + Unsystematic risk (diversified risk) = Var (r) Unsystematic risk is that portion of the risk that is unique to the firm (for example, risk due to strikes and management errors.) Unsystematic risk can be reduced to zero by simple diversification. Simple diversification is the random selection of securities that are to be added to a portfolio. As the number of randomly selected securities added to a portfolio is increased, the level of unsystematic risk approaches zero. However market related systematic risk cannot be reduced by simple diversification. This risk is common to all securities. Efficiency Frontier: A combination of assets, i.e. a portfolio, is referred to as "efficient" if it has the best possible expected level of return for its level of risk (standard deviation of the portfolio's return). Here, every possible combination of risky assets, without including any holdings of the risk-free asset, can be plotted in risk-expected return space, and the collection of all such possible portfolios defines a region in this space. The left boundary of this region, a hyperbola, is then called the "Efficient Frontier".

26

MARKOWITZ PORTFOLIO SELECTION MODEL The basic portfolio model, developed by Harry Markowitz, derived the expected rate of return for a portfolio of assets and an expected risk measure. Markowitz showed that the variance of the rate of return was meaning full measure of risk under a reasonable set of assumptions and derives the formulas for computing the variance of the portfolio. This portfolio variance formulation indicated the importance of diversification for reducing risk, and showed how to properly diversify. Parameters of Markowitz: The Mean Variance Criterion: Based on his research, for building up the efficient set of portfolio, as laid down by Markowitz, we need to look into these important parameters. 1. Expected return. 2. Variability of returns as measured by standard deviation from the mean. 3. Covariance or variance of one asset return to other asset returns. Assumptions of Markowitz Model: 1. Investors consider each investment alternative as being represented by a probability distribution of expected returns over some holding period. 2. Investors maximize one period expected utility and possess utility curves that demonstrate diminishing marginal utility of wealth. 3. Individuals estimate risk on the basis of the variability of expected returns. 4. Investors base decisions solely on expected return and risk; i.e, their utility curves are a function of expected return and variance (or standard deviation) of returns only. 5. For a given risk level, investors prefer higher returns to lower returns. Similarly, for a given level of expected return, investors prefer less risk to more risk. Expected Risk Calculation:

27

PORTFOLIORISK = SQRT [((XX2*SDX2)+(XY2*SDY2)+(2*XX*XY*(rXY*SDX2*SDY2)))] Where,

Xx, Xy = proportion of total portfolio invested in security X& Y respectively SDx, SDy = standard deviation of stock X & stock Y respectively

rxy = correlation coefficient of x & y

Expected Return Of A Portfolio Calculation:

PORTFOLIO RETURN =[(XX*RX)+(XY*RY)] Where, XX = proportion of total portfolio invested

in security X Y

XY = proportion of total portfolio invested in security RX = expected return RY = expected

to security X

return to security Y

Formulae Used in Markowitz Model:

Arithmetic return:

Where

Vi is the initial investment value and Vf is the final investment value

28

This return has the following characteristics:

ROIArith = + 1.00 = + 100% when the final value is twice the initial value ROIArith > 0 when the investment is profitable ROIArith < 0 when the investment is at a loss ROIArith = 1.00 = 100% when investment can no longer be recovered

Standard Deviation: = Square root ((mean return -expected return)^2/N) Covariance: COV (X, Y)=1/N[(RX-RX)(RY-RY) Beta: The Beta coefficient, in terms of finance and investing, is a measure of a stock (or portfolio)s volatility in relation to the rest of the market. Beta is calculated for individual companies using regression analysis. The beta coefficient is a key parameter in the capital asset pricing model (CAPM). It measures the part of the asset's statistical variance that cannot be mitigated by the diversification provided by the portfolio of many risky assets, because it is correlated with the return of the other assets that are in the portfolio. For example, if every stock in the New York Stock Exchange was uncorrelated with every other stock, then every stock would have a Beta of zero, and it would be possible to create a portfolio that was nearly risk free, simply by diversifying it sufficiently so that the variations in the individual stocks' prices averaged out. In reality, investments tend to be correlated, more so within an industry, or when considering a single asset class (such as equities). This correlated risk, measured by Beta, is what actually creates almost all of the risk in a diversified portfolio. The formula for the Beta of an asset within a portfolio is

29

Where, ra measures the rate of return of the asset, rp measures the rate of return of the portfolio of which the asset is a part And Cov (ra, rp) is the covariance between the rates of return. In the CAPM formulation, the portfolio is the market portfolio that contains all risky assets, and so the rp terms in the formula are replaced by rm, the rate of return of the market. The beta movement should be distinguished from the actual returns of the stocks. For example, a sector may be performing well and may have good prospects, but the fact that its movement does not correlate well with the broader market index may decrease its beta. Beta is a measure of risk and not to be confused with the attractiveness of the investment. The Security Market Line: The Security Market Line (SML) is the graphical representation of the Capital Asset Pricing Model. It displays the expected rate of return for an overall market as a function of systematic (non-diversifiable) risk (beta). The x-axis represents the risk (beta), and the y-axis represents the expected return. The market risk premium is determined from the slope of the SML. The securities market line can be regarded as representing a single-factor model of the asset price, where Beta is exposure to changes in value of the Market. The equation of the SML is thus:

30

Persons Involved in Portfolio management: Investors Portfolio Managers

A Discretionary Portfolio Manager is one who exercise under a contract relating to a portfolio management exercise any degree of discretion as to the investment or management of portfolio or securities or funds of clients as the case may be. The relationship between an investor and portfolio manager is of a highly interactive nature The portfolio manager carries out all the transactions pertaining to the investor under the power of attorney during the last two decades, and increasing complexity was witnessed in the capital market and its trading procedures in this context a key (uninformed) investor formed ) investor found himself in a tricky situation , to keep track of market movement ,update his knowledge, yet stay in the capital market and make money, therefore in looked forward to resuming help from portfolio manager to do the job for him. The portfolio management seeks to strike a balance between risks and return. The generally rule in that greater risk more of the profits but S.E.B.I. in its guidelines prohibits portfolio managers to promise any return to investor. Portfolio management is not a substitute to the inherent risks associated with equity investment. Who can be a portfolio manager? Only those who are registered and pay the required license fee are eligible to operate as portfolio managers. An applicant for this purpose should have necessary infrastructure with professionally qualified persons and with a minimum of two persons with experience in this business and a minimum net worth of Rs. 50lakhs. The certificate once granted is valid for three years. Fees payable for registration are Rs 2.5lakhs every for two years and Rs.1lakhs for the third year.
31

From the fourth year onwards, renewal fees per annum are Rs 75000. These are subjected to change by the S.E.B.I. The S.E.B.I. has imposed a number of obligations and a code of conduct on them. The portfolio manager should have a high standard of integrity, honesty and should not have been convicted of any economic offence or moral turpitude. He should not resort to rigging up of prices, insider trading or creating false markets, etc. their books of accounts are subject to inspection to inspection and audit by S.E.B.I... The observance of the code of conduct and guidelines given by the S.E.B.I. are subject to inspection and penalties for violation are imposed. The manager has to submit periodical returns and documents as may be required by the SEBI from time-to- time. Functions of Portfolio Managers: The major functions of a portfolio manager are Advisory role: advice new investments, review the existing ones, identification of objectives, recommending high yield securities etc. Conducting market and economic service: this is essential for recommending good yielding securities they have to study the current fiscal policy, budget proposal; individual policies etc further portfolio manager should take in to account the credit policy, industrial growth, foreign exchange possible change in corporate laws etc. Financial analysis: he should evaluate the financial statement of company in order to understand, their net worth future earnings, prospectus and strength. Study of stock market: he should observe the trends at various stock exchange and analysis scripts so that he is able to identify the right securities for investment. Study of industry: he should study the industry to know its future prospects, technical changes etc, required for investment proposal he should also see the problems of the industry. Decide the type of portfolio: keeping in mind the objectives of portfolio a portfolio manager has to decide whether the portfolio should comprise equity preference shares, debentures, convertibles, non-convertibles or partly convertibles, money market, securities etc or a mix of more than one type of proper mix ensures higher safety, yield and liquidity coupled with balanced risk techniques of portfolio management. A portfolio manager in the Indian context has been Brokers (Big brokers) who on the basis of their experience, market trends, Insider trader, helps the limited knowledge persons. The one who use to manage the funds of portfolio, now being managed by the portfolio of Merchant Banks, professionals like MBAs, CAs and many financial institutions have entered the market in a big way to manage portfolio for their clients. According to SEBI rules it is mandatory for portfolio managers to get them self registered. Registered merchant bankers can act as portfolio managers.
32

Investors must look forward, for qualification and performance and ability and research base of the portfolio managers. The widely used techniques of portfolio management are Equity portfolio: is influenced by internal and external factors the internal factors affect the inner working of the companys growth plans are analyzed with referenced to Balance sheet, profit & loss a/c (account) of the company. Among the external factor are changes in the government policies, Trade cycles, Political stability etc.

Equity stock analysis: under this method the probable future value of a share of a company is determined it can be done by ratios of earning per share of the company and price earnings ratio

Earnings per Share, EPS =

PROFIT AFTER TAX NO. OF EQUITY SHARES

Price Earnings Ratio (P/E) =

MARKET PRICE E.P.S

One can estimate trends of earning by EPS, which reflects trends of earning quality of company, dividend policy, and quality of management. Price earnings ratio indicate a confidence of market about the company future, a high rating is preferable. Portfolio Diversification: Combinations of securities that have high risk and return features make up a portfolio. Portfolios may or may not take on the aggregate characteristics of individual part, portfolio analysis takes various components of risk and return for each industry and consider the effort of combined security. Portfolio selection involves choosing the best portfolio to suit the risk return preferences of portfolio investor management of portfolio is a dynamic activity of evaluating and revising the portfolio in terms of portfolios objectives. It is widely accepted that returns from individual scripts

33

carry certain rate of risk .portfolio held in spreading the risk in many security then the risk is reduced. The basic principle is that of a port folio holds several assets or securities It may include in cash also, even if one goes bad the other will provide protection from the loss even cash is subject to inflation the diversification can be either vertical or horizontal the vertical diversification portfolio can have script of different companies with in the same industry. In horizontal diversification one can have different scripts chosen from different industries.

CEMENT INDUSTRY Madras Cements Ultratech Cement Birla Cement Ramco Cement

BANKING INDUSTRY State Bank of India ICICI Bank Andhra Bank HDFC Bank

POWER INDUSTRY Adani Power Power Grid Reliance Power Tata Power

CONSTRUCTION INDUSTRY HCC Nagarjuna Constructions Lanco Infra Simplex Infra

Ideal portfolio involves selecting securities from different sectors. It should be an adequate diversification looking in to the size of portfolio. Traditional approach advocates the more security one holds in a portfolio, the better it is according to modern approach diversification should not be quantified but should be related to the quality of scripts which leads to the quality and portfolio subsequently experience can show that beyond a certain number of securities adding more securities become expensive. Investment in a fixed return securities in the current market scenario which is passing through a an uncertain phase investors are facing the problem of lack of liquidity combined with minimum returns the important point to both is that the equity market and debt market moves in opposite direction .where the stock market is booming, equities perform better where as in depressed market the assured returns related securities market outperform equities.

34

CHAPTER-III

ANALYSIS AND INFERENCE

35

STOCK PRICE CHANGES OF ICICI BANK FROM 2007 TO 2010

ICICI BANK-2007

Date

Open

High

Low

Close

Volume

Adj Close 36

1/1/2007 2/1/2007 3/1/2007 4/2/2007 5/1/2007 6/1/2007 7/2/2007 8/1/2007 9/3/2007 10/1/2007 11/1/2007 12/3/2007

891.5 951 840 820.6 865.85 919.15 981.5 920 890.1 1068 1270 1180

1000 1010 990 994.7 964 966.75 1010 920 1069.9 1293.95 1349 1326.6

872.2 801.5 793.25 791 822.15 888 901 805 882 975 1080 1130.25

941.1 829.5 853.35 865.85 919.15 955.45 927.45 885 1060.2 1265 1175 1235

1182000 171740 0 1552900 1423200 139910 0 1129500 190580 0 317600 0 310010 0 386390 0 2829100 2290000

831.34 732.75 753.82 764.86 811.95 853.35 828.34 792.23 949.06 1132.4 1051.83 1105.54

ICICI-2008
37

Date 1/1/2008 2/1/2008 3/3/2008 4/1/2008 5/1/2008 6/2/2008 7/1/2008 8/1/2008 9/1/2008 10/1/2008 11/3/2008 12/1/2008

Open 1240 1157 1060 793.9 881 830 630 615 657 526.1 415 358

High 1455.5 1244.9 1060 960 971 835 764.9 789 750 564.9 492.1 481.5

Low 1001.65 999 720.05 726.55 778.2 611.35 514 610 460.05 283.1 306.1 308.25

Close

Volume

1147 5153000 1077.65 3019500 769 5568400 881 4152400 786.55 4313400 635 4666500 633 8069600 670.65 7381500 540 12725900 399.5 1419950 0 354 1174530 0 447.6 9784600

Adj Close 1026.77 964.69 688.39 788.65 704.1 568.44 577.28 611.62 492.47 364.34 322.84 408.2

38

ICICI BANK-2009

Date 1/1/2009 2/2/2009 3/2/2009 4/1/2009 5/1/2009 6/1/2009 7/1/2009 8/3/2009 9/1/2009 10/1/2009 11/2/2009 12/1/2009

Open 450 402.55 324.7 349.7 481 758.7 720 763.95 752.2 818 793 876

High 538.6 442 387.8 484.5 800 779.6 807.7 803.9 927.6 969.8 932 917.45

Low 331.55 311.05 252.3 323.65 481 675.05 606.15 690.2 723 756.65 774.05 800.5

Close 415.25 333 333.8 481 736 725.6 759.95 751.6 904.95 793 863.05 880

Volume 9052200 1007570 0 22892500 1462010 0 1396340 0 9339900 9623600 5514700 5202600 6047900 5191100 4217500

Adj Close 378.7 303.69 304.42 438.66 671.22 714.86 748.71 740.69 891.81 781.49 850.52 867.22

39

ICICI BANK-2010

Date 1/4/2010 2/1/2010 3/1/2010 4/1/2010 5/3/2010 6/1/2010 7/1/2010 8/2/2010 9/1/2010 10/1/2010 11/1/2010 12/1/2010

Open 877 820.1 869 957 946.1 851.65 854.45 912 980.35 1117.05 1186.25 1150

High 907.35 887 970.8 1009.7 957.95 910 932 1024 1148 1177 1279 1202

Low 775 786 856 902.55 802.35 712 833.2 911 980.35 1074 1091.25 1041.1

Close 829.55 869 955 948.2 866 860.1 901.35 978.15 1118 1164.1 1148.8 1139.3

Volume 516490 0 424660 0 394580 0 397830 0 468560 0 402460 0 2979700 416670 0 369410 0 405710 0 457040 0 377170 0

Adj Close 817.51 856.38 941.13 934.43 853.43 860.1 901.35 978.15 1118 1164.1 1148.8 1139.3

40

TOTAL STOCK PRICE CHANGES OF ICICI BANK 2007-2010

S&P CNX NIFTY 2007-2010

41

Date 1/1/2007 2/1/2007 3/1/2007 4/2/2007 5/1/2007 6/1/2007 7/2/2007 8/1/2007 9/3/2007 10/1/2007 11/1/2007 12/3/2007 1/1/2008 2/1/2008 3/3/2008 4/1/2008 5/1/2008 6/2/2008 7/1/2008 ROR(X) 0.055637 -0.12776 0.015893 0.055143 0.061558 0.039493 -0.05507 -0.03804 0.191102 0.184457 -0.0748 0.04661 -0.075 -0.06858 -0.27453 0.109712 -0.10721 -0.23494 0.004762 ROR(Y) 0.044882 -0.03769 -0.00209 0.116027 0.006118 0.010457 0.044483 -0.03639 0.005487 0.063518 0.034694 0.004759 0.032016 0.068004 -0.07381 0.090462 0.006107 0.080178 -0.03579 X*X 0.003095 0.016323 0.000253 0.003041 0.003789 0.00156 0.003033 0.001447 0.03652 0.034024 0.005595 0.002172 0.005625 0.004703 0.075367 0.012037 0.011494 0.055197 2.27E-05 Y*Y 0.002014 0.001421 4.37E-06 0.013462 3.74E-05 0.000109 0.001979 0.001324 3.01E-05 0.004035 0.001204 2.26E-05 0.001025 0.004625 0.005448 0.008183 3.73E-05 0.006429 0.001281 X*Y 0.002497 0.004815 -3.3E-05 0.006398 0.000377 0.000413 -0.00245 0.001384 0.001049 0.011716 -0.0026 0.000222 -0.0024 -0.00466 0.020263 0.009925 -0.00065 -0.01884 -0.00017

R= XAVG(X) 0.040681 -0.14272 0.000937 0.040187 0.046602 0.024537 -0.07003 -0.053 0.176146 0.169501 -0.08976 0.031654 -0.08996 -0.08354 -0.28949 0.094756 -0.12217 -0.2499 -0.01019

T= YAVG(Y) 0.031853 -0.05072 -0.01512 0.102998 -0.00691 -0.00257 0.031454 -0.04942 -0.00754 0.050489 0.021665 -0.00827 0.018987 0.054975 -0.08684 0.077433 -0.00692 0.067149 -0.04882

RSQUARE 0.001655 0.020368 8.79E-07 0.001615 0.002172 0.000602 0.004904 0.002809 0.031028 0.028731 0.008056 0.001002 0.008092 0.006978 0.083802 0.008979 0.014924 0.062448 0.000104

TSQUARE 0.001015 0.002572 0.000229 0.010609 4.78E-05 6.62E-06 0.000989 0.002442 5.69E-05 0.002549 0.000469 6.84E-05 0.000361 0.003022 0.007541 0.005996 4.79E-05 0.004509 0.002383

42

8/1/2008 9/1/2008 10/1/2008 11/3/2008 12/1/2008 1/1/2009 2/2/2009 3/2/2009 4/1/2009 5/1/2009 6/1/2009 7/1/2009 8/3/2009 9/1/2009 10/1/2009 11/2/2009 12/1/2009 1/4/2010 2/1/2010 3/1/2010 4/1/2010 5/3/2010 6/1/2010 7/1/2010 8/2/2010 9/1/2010 10/1/2010 11/1/2010 12/1/2010

0.090488 -0.17808 -0.24064 -0.14699 0.250279 -0.07722 -0.17277 0.028026 0.375465 0.530146 -0.04363 0.055486 -0.01617 0.203071 -0.03056 0.088335 0.004566 -0.0541 0.059627 0.098964 -0.0092 -0.08466 0.009922 0.054889 0.072533 0.140409 0.04212 -0.03157 -0.0093

0.278912 0.14885 0.092726 -0.03784 -0.02987 0.074043 -0.04516 -0.26422 -0.09984 0.006556 0.072579 -0.17019 -0.07506 0.090853 -0.09349 0.016127 -0.16284 0.064722 -0.02389 0.175077 0.124187 -0.0152 0.052242 -0.01023 0.079035 -0.03082 0.07513 -0.11778 0.02936

0.008188 0.031712 0.057908 0.021606 0.06264 0.005963 0.029849 0.000785 0.140974 0.281055 0.001904 0.003079 0.000261 0.041238 0.000934 0.007803 2.08E-05 0.002927 0.003555 0.009794 8.46E-05 0.007167 9.84E-05 0.003013 0.005261 0.019715 0.001774 0.000997 8.65E-05

0.077792 0.022156 0.008598 0.001432 0.000892 0.005482 0.002039 0.069812 0.009968 4.3E-05 0.005268 0.028965 0.005634 0.008254 0.00874 0.00026 0.026517 0.004189 0.000571 0.030652 0.015422 0.000231 0.002729 0.000105 0.006247 0.00095 0.005645 0.013872 0.000862

0.025238 -0.02651 -0.02231 0.005562 -0.00748 -0.00572 0.007802 -0.00741 -0.03749 0.003476 -0.00317 -0.00944 0.001214 0.01845 0.002857 0.001425 -0.00074 -0.0035 -0.00142 0.017326 -0.00114 0.001287 0.000518 -0.00056 0.005733 -0.00433 0.003164 0.003718 -0.00027

0.075532 -0.19304 -0.2556 -0.16195 0.235323 -0.09218 -0.18773 0.01307 0.360509 0.51519 -0.05859 0.04053 -0.03113 0.188115 -0.04552 0.073379 -0.01039 -0.06906 0.044671 0.084008 -0.02416 -0.09962 -0.00503 0.039933 0.057577 0.125453 0.027164 -0.04653 -0.02426

0.265883 0.135821 0.079697 -0.05087 -0.0429 0.061014 -0.05819 -0.27725 -0.11287 -0.00647 0.05955 -0.18322 -0.08809 0.077824 -0.10652 0.003098 -0.17587 0.051693 -0.03692 0.162048 0.111158 -0.02823 0.039213 -0.02326 0.066006 -0.04385 0.062101 -0.13081 0.016331

0.005705 0.037263 0.065329 0.026226 0.055377 0.008496 0.035241 0.000171 0.129967 0.265421 0.003432 0.001643 0.000969 0.035387 0.002072 0.005385 0.000108 0.004769 0.001996 0.007057 0.000583 0.009923 2.53E-05 0.001595 0.003315 0.015739 0.000738 0.002165 0.000588

0.070694 0.018447 0.006352 0.002588 0.00184 0.003723 0.003386 0.076867 0.012739 4.19E-05 0.003546 0.033569 0.00776 0.006057 0.011346 9.6E-06 0.03093 0.002672 0.001363 0.02626 0.012356 0.000797 0.001538 0.000541 0.004357 0.001923 0.003857 0.017111 0.000267

X=1.03 Y=1.216 (X*X) = 1.339 (Y*Y) = 3.298 (X*Y) = 0.825

BETA = 0.6085 ALPHA = AVG(Y) [BETA * AVG(X)] 43

ALPHA = 0.02026 + (0.6085*0.4896) =0.26366 COEFFICIENT OF CORRELATION = 0.045 COEFFFICIENT OF DETERMINATION = SUARE OF COEFFICIENT OF CORRELATION = 0.002025 STANDARD DEVIATION, SDx = 0.1483 SDy = 0.2305 VARIANCE, Vx = 0.022 Vy = 0.05313

STOCK PRICE CHANGES OF SBI FROM 2007 TO 2010

44

SBI 2007

Date 1/2/2007 2/1/2007 3/1/2007 4/2/2007 5/3/2007 6/4/2007 7/2/2007 8/1/2007 9/3/2007 10/1/2007 11/1/2007

Open 1250 1158 1042 979.4 1110 1400 1530 1610 1619 1952 2167

High 1282.25 1230 1074.4 1165.8 1364 1531.7 1799 1734.8 1961.95 2175 2450

Low 1132 971.5 898.1 915 1070 1280.2 1470.1 1407 1580 1600 2000

Close 1140.45 1041.85 994.45 1101.9 1353.65 1525.8 1623.85 1596 1957.05 2081 2305

Volume 113240 0 141030 0 147190 0 134650 0 168150 0 195380 0 1592600 207450 0 147830 0 195310 0 1622800

Adj Close 960.45 877.42 837.5 927.99 1140.01 1298.63 1382.08 1358.38 1665.68 1771.17 1961.82 45

12/3/2007

2330

2476

2227

2365

763800

2012.89

SBI 2008

Date 1/1/2008 2/1/2008 3/3/2008 4/1/2008 5/2/2008 6/2/2008 7/1/2008

Open 2380 2244.7 2001 1605 1799.95 1427 1115

High 2574 2339.7 2052.4 1821 1840 1498 1574

Low 1830 1945 1581 1561.35 1435.35 1101 965.65

Close 2165 2088.8 1608 1781 1445 1107 1406

Volume 111060 0 963200 139510 0 924700 101540 0 109130 0 167690 0

Adj Close 1842.67 1777.81 1368.59 1515.84 1247.39 955.61 1213.72 46

8/1/2008 9/1/2008 10/1/2008 11/3/2008 12/1/2008

1391.8 1390 1484.8 1164 1090

1639 1620 1589.8 1380 1324

1300.55 1352 985 1021.25 995.55

1404.55 2019500 243040 1472 0 344550 1114 0 394560 1085.05 0 391430 1290 0

1212.47 1270.7 961.66 936.67 1113.59

SBI 2009

Date 1/1/2009 2/2/2009 3/2/2009

Open 1329 1139 1014.7

High 1388.7 1205.95 1134

Low 1031.1 996.15 891.5

Close

Volume

1148 2899600 241590 1022.9 0 1055 401290

Adj Close 991.01 883.01 910.72 47

4/1/2009 5/4/2009 6/1/2009 7/1/2009 8/3/2009 9/1/2009 10/1/2009 11/3/2009 12/1/2009

1076.15 1325.25 2039.7 1731 1820 1761 2191.55 2187 2246

1355 1892.15 2039.7 1839.9 1888 2219 2499 2384.5 2375

1023.3 1219.45 1598.95 1510.6 1671.35 1715 2047 2057.4 2125.25

1291.15 1870 1748.05 1819 1745.95 2212 2181.2 2235.1 2270.05

0 392840 0 334410 0 2520900 2412800 1792000 2169700 336510 0 264450 0 199370 0

1114.58 1614.27 1726.61 1796.68 1724.53 2184.86 2154.44 2207.68 2242.2

SBI 2010

48

Date 1/4/2010 2/11/2010 3/2/2010 4/1/2010 5/3/2010 6/1/2010 7/1/2010 8/2/2010 9/1/2010 10/1/2010 11/1/2010 12/1/2010

Open 2275 1923.9 1990.55 2080 2290 2251.1 2291.1 2519.95 2775 3239.4 3195 2999

High 2315 2032 2121.95 2318.9 2349 2630.1 2522 2884.8 3274.7 3324.85 3515 3173.6

Low 2136.8 1886.3 1974.2 2012 2138 2202.1 2253.55 2512 2737.25 3076 2775 2655.5

Close 2173 1968 2078 2300 2263 2305 2503 2765 3220 3157 2994.8 2809

Volume 166740 0 195110 0 146060 0 1826300 184470 0 141160 0 142490 0 179350 0 198860 0 1202200 284770 0 2661200

Adj Close 2146.34 1950.8 2059.84 2279.9 2243.23 2305 2503 2765 3220 3157 2994.8 2809

49

TOTAL STOCK PRICE CHANGES OF SBI 2007-2010

50

Date 1/1/2007 2/1/2007 3/1/2007 4/2/2007 5/1/2007 6/1/2007 7/2/2007 8/1/2007 9/3/2007 10/1/2007 11/1/2007 12/3/2007 1/1/2008 2/1/2008 3/3/2008 4/1/2008 5/1/2008 6/2/2008 7/1/2008 8/1/2008 9/1/2008 10/1/2008 11/3/2008 12/1/2008 1/1/2009 2/2/2009 3/2/2009 4/1/2009 5/1/2009 6/1/2009 7/1/2009 8/3/2009 9/1/2009 10/1/2009 11/2/2009 12/1/2009 1/4/2010 2/1/2010 3/1/2010

ROR(X) -0.08764 -0.1003 -0.04563 0.125077 0.219505 0.089857 0.06134 -0.0087 0.208802 0.066086 0.063683 0.015021 -0.09034 -0.06945 -0.1964 0.109657 -0.1972 -0.22425 0.260987 0.009161 0.058993 -0.24973 -0.06783 0.183486 -0.13619 -0.10193 0.039716 0.199786 0.411055 -0.14299 0.050838 -0.04069 0.256104 -0.00472 0.021994 0.010708 -0.04484 0.022922 0.043933

ROR(Y) 0.044882 -0.03769 -0.00209 0.116027 0.006118 0.010457 0.044483 -0.03639 0.005487 0.063518 0.034694 0.004759 0.032016 0.068004 -0.07381 0.090462 0.006107 0.080178 -0.03579 0.278912 0.14885 0.092726 -0.03784 -0.02987 0.074043 -0.04516 -0.26422 -0.09984 0.006556 0.072579 -0.17019 -0.07506 0.090853 -0.09349 0.016127 -0.16284 0.064722 -0.02389 0.175077

X*X 0.007681 0.01006 0.002082 0.015644 0.048182 0.008074 0.003763 7.57E-05 0.043598 0.004367 0.004056 0.000226 0.008161 0.004823 0.038573 0.012025 0.038888 0.050288 0.068114 8.39E-05 0.00348 0.062365 0.004601 0.033667 0.018548 0.01039 0.001577 0.039914 0.168966 0.020446 0.002585 0.001656 0.065589 2.23E-05 0.000484 0.000115 0.002011 0.000525 0.00193

Y*Y 0.002014 0.001421 4.37E-06 0.013462 3.74E-05 0.000109 0.001979 0.001324 3.01E-05 0.004035 0.001204 2.26E-05 0.001025 0.004625 0.005448 0.008183 3.73E-05 0.006429 0.001281 0.077792 0.022156 0.008598 0.001432 0.000892 0.005482 0.002039 0.069812 0.009968 4.3E-05 0.005268 0.028965 0.005634 0.008254 0.00874 0.00026 0.026517 0.004189 0.000571 0.030652

X*Y -0.00393 0.00378 9.54E-05 0.014512 0.001343 0.00094 0.002729 0.000317 0.001146 0.004198 0.002209 7.15E-05 -0.00289 -0.00472 0.014496 0.00992 -0.0012 -0.01798 -0.00934 0.002555 0.008781 -0.02316 0.002567 -0.00548 -0.01008 0.004603 -0.01049 -0.01995 0.002695 -0.01038 -0.00865 0.003054 0.023268 0.000441 0.000355 -0.00174 -0.0029 -0.00055 0.007692

XAVG(X) -0.1026 -0.11526 -0.06059 0.110121 0.204549 0.074901 0.046384 -0.02366 0.193846 0.05113 0.048727 6.53E-05 -0.1053 -0.08441 -0.21136 0.094701 -0.21216 -0.23921 0.246031 -0.00579 0.044037 -0.26469 -0.08279 0.16853 -0.15115 -0.11689 0.02476 0.18483 0.396099 -0.15795 0.035882 -0.05565 0.241148 -0.01968 0.007038 -0.00425 -0.0598 0.007966 0.028977

YAVG(Y) 0.031853 -0.05072 -0.01512 0.102998 -0.00691 -0.00257 0.031454 -0.04942 -0.00754 0.050489 0.021665 -0.00827 0.018987 0.054975 -0.08684 0.077433 -0.00692 0.067149 -0.04882 0.265883 0.135821 0.079697 -0.05087 -0.0429 0.061014 -0.05819 -0.27725 -0.11287 -0.00647 0.05955 -0.18322 -0.08809 0.077824 -0.10652 0.003098 -0.17587 0.051693 -0.03692 0.162048

RSQUARE 0.010526 0.013284 0.003671 0.012127 0.04184 0.00561 0.002152 0.00056 0.037576 0.002614 0.002374 4.27E-09 0.011087 0.007124 0.044671 0.008968 0.04501 0.057219 0.060531 3.36E-05 0.001939 0.070059 0.006853 0.028402 0.022845 0.013662 0.000613 0.034162 0.156895 0.024947 0.001288 0.003096 0.058153 0.000387 4.95E-05 1.8E-05 0.003576 6.35E-05 0.00084

TSQUARE 0.001015 0.002572 0.000229 0.010609 4.78E-05 6.62E-06 0.000989 0.002442 5.69E-05 0.002549 0.000469 6.84E-05 0.000361 0.003022 0.007541 0.005996 4.79E-05 0.004509 0.002383 0.070694 0.018447 0.006352 0.002588 0.00184 0.003723 0.003386 0.076867 0.012739 4.19E-05 0.003546 0.033569 0.00776 0.006057 0.011346 9.6E-06 0.03093 0.002672 0.001363 0.02626

51

4/1/2010 5/3/2010 6/1/2010 7/1/2010 8/2/2010 9/1/2010 10/1/2010 11/1/2010 12/1/2010

0.105769 -0.01179 0.023944 0.092488 0.097244 0.16036 -0.02544 -0.06266 -0.06335

0.124187 -0.0152 0.052242 -0.01023 0.079035 -0.03082 0.07513 -0.11778 0.02936

0.011187 0.000139 0.000573 0.008554 0.009456 0.025715 0.000647 0.003926 0.004013

0.015422 0.000231 0.002729 0.000105 0.006247 0.00095 0.005645 0.013872 0.000862

0.013135 0.000179 0.001251 -0.00095 0.007686 -0.00494 -0.00191 0.00738 -0.00186

0.090813 -0.02675 0.008988 0.077532 0.082288 0.145404 -0.0404 -0.07762 -0.07831

0.111158 -0.02823 0.039213 -0.02326 0.066006 -0.04385 0.062101 -0.13081 0.016331

0.008247 0.000715 8.08E-05 0.006011 0.006771 0.021142 0.001632 0.006024 0.006132

0.012356 0.000797 0.001538 0.000541 0.004357 0.001923 0.003857 0.017111 0.000267

X = 1.0298 Y = 1.4911 (X*X) = 1.3385 (Y*Y) = 2.2235 (X*Y) = 1.114

BETA = 0.824 ALPHA = AVG(Y) [BETA * AVG(X)] ALPHA = 0.0249 (0.824*0.0172) = 0.0107272 COEFFICIENT OF CORRELATION = 0.64047 COEFFFICIENT OF DETERMINATION = 0.4102

BETA VALUE
0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 ICICI BANK SBI BANK 0.6085 0.824

52

TWO-ASSET PORTFOLIO:
RETURNS OF SBI 2007-2010

Date 3/1/2007 6/4/2007 9/3/2007 12/3/2007 3/3/2008 6/2/2008 9/1/2008 12/1/2008 3/2/2009 6/1/2009 9/1/2009 12/1/2009 3/2/2010 6/1/2010 9/1/2010 12/1/2010

Price 994.45 1525.8 1957.05 2365 1608 1107 1472 1290 1055 1748.05 2212 2270.05 2078 2305 3220 2809

Return 53.43% 28.26% 20.84% -32.01% -31.16% 32.97% -12.36% -18.22% 65.69% 26.54% 2.62% -8.46% 10.92% 39.7% -12.76%

AVERAGE RETURN = 11.07%

VARIANCE OF RETURN = 0.085162

STANDARD DEVIATION = 29.18%

53

RETURNS OF ICICI 2007-2010

Date PRICE RETURN (%) 3/1/2007 853.35 6/4/2007 955.45 11.96 9/3/2007 1060.2 10.96 12/3/2007 1235 16.48 3/3/2008 769 -37.73 6/2/2008 635 -17.42 9/1/2008 540 -14.96 12/1/2008 447.6 -17.11 3/2/2009 333.8 -25.42 6/1/2009 725.6 117.37 9/1/2009 904.95 24.71 12/1/2009 880 -2.75 3/2/2010 955 8.52 6/1/2010 860.1 -9.93 9/1/2010 1118 29.98 12/1/2010 1139.3 1.90

AVERAGE RETURN = 6.44%

VARIANCE OF RETURN = 0.1218

STANDARD DEVIATION OF RETURNS = 34.9%

COVARIANCE BETWEEN THE TWO RETURNS = 0.07667

54

PORTFOLIO WEIGHTS:

LET US CONSIDER EQUAL PROPORTION i.e. 1:1 PROPORTION OF SBI, W1 = 0.5 PROPORTION OF ICICI, W2 = 0.5 RETURN ON PORTFOLIO, R = W1*R1+W2*R2

Date 3/1/2007 6/4/2007 9/3/2007 12/3/2007 3/3/2008 6/2/2008 9/1/2008 12/1/2008 3/2/2009 6/1/2009 9/1/2009 12/1/2009 3/2/2010 6/1/2010 9/1/2010 12/1/2010

Return on SBI (%) 53.43155 28.26386 20.84515 -32.0085 -31.1567 32.972 -12.3641 -18.2171 65.69194 26.541 2.624322 -8.46017 10.92397 39.69631 -12.764

Return on ICICI (%) 11.96461 10.96342 16.48746 -37.7328 -17.4252 -14.9606 -17.1111 -25.4245 117.3757 24.71748 -2.75706 8.522727 -9.93717 29.98489 1.905188

Return on Portfolio (%) 32.6981 19.6136 18.6663 -34.871 -24.291 9.0057 -14.738 -21.821 91.5338 25.6292 -0.066 0.0313 0.4934 34.8406 -5.429

MEAN RETURN OF PORTFOLIO = 8.75% VARIANCE = 0.090083 STANDARD DEVIATION = 0.300138 CORRELATION = COVARIANCE / (STANDARD DEVIATION 1* STANDARD DEVIATIN 2)

MEAN

SBI 0.11068

ICICI 0.06438 55

VARIANCE 0.085162 0.121824 S.D 0.291826 0.349033 CORRELATION 0.752747 PORTFOLIO VARIANCE = (W1^2*VAR1) + ( W2^2*VAR2) + ( 2*W1*W2*SD1*SD2*CORRELATION) PORTFOLIO STANDARD DEVIATION = SQRT (PORTFOLIO VARIANCE) PORTFOLIO MEAN RETURN = W1*MEAN1 + W2*MEAN2

Portfolio Weight of SBI 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Portfolio Weight of ICICI 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Portfolio Variance 0.121824 0.11333 0.105909 0.099561 0.094285 0.090083 0.086953 0.084896 0.083912 0.084001 0.085162

Portfolio Standard Deviation 0.349033 0.336645 0.325437 0.315533 0.307059 0.300138 0.294878 0.291369 0.289675 0.289828 0.291825

Portfolio Mean 0.06438 0.06901 0.07364 0.07827 0.0829 0.08753 0.09216 0.09679 0.10142 0.10605 0.11068

THE PORTFOLIO MIX OF 80% OF SBI AND 20% OF ICICI WILL HAVE LESS RISK AS IT IS HAVING LESS STANDARD DEVIATION.

PORTFOLIO FRONTIER
56

57

CHAPTER-IV

FINDINGS AND CONCLUSION

The market was down in the year 2008 and picked up well in 2009 and 2010.

58

 ICICI and SBI also followed the market trend but they are less reactive to the market.

Since standard deviation of SBI equity and ICICI equity is less than its market, the risk is likely less compared to that of market.

Since Beta (0.6085) of ICICI Bank is less than that of markets beta, so it reacts less than

the market reaction. Also beta indicates that the funds returns would increase or decrease by 0.6% for every 1 % increase or decrease in the market returns. This also means that the mutual fund fluctuates 4% less than the market index.

SBI is giving more returns than ICICI for the observed period of time.

It makes an ideal portfolio for the investors.

Portfolio Frontier tells that portfolio with weights of 80% for SBI and 20% for ICICI is

having less risk compared to other weight combinations.

59

BIBLIOGRAPHY:
www.nseindia.com www.in.finance.yahoo.com www.moneycontrol.com www.in.reuters.com Donald E. Fischer, Ronald A. Jordan (2006). SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT.

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