ASUMMER INTERNSHIP PROJECT REPORT

ON“RISK & RETURN IN INDIAN STOCK MARKET"

Submitted in Partial Fulfillment of the requirements for theAward of the degree of

Master of Business AdministrationFrom

University Of Kota, Kota, Rajasthan2008-2010

Performed at India Infoline Limited, Kota, Rajasthan

Guided By: Submitted By:Mr. Pramod Vijay Ashish vijay Enrolment No. 8/18773

Declaration

I hereby declare that I have taken up a project on “RISK &RETURN

IN INDIAN STOCK MARKET ” and this report is submitted to the

Department of Commerce & Management, University of Kota, for the

partial fulfillment of the continuous evaluation of the internal

assessment of Summer Internship Report MBA year 2008-2010.

The report is a record of original project work done by me for the

purpose of studying the Stock Market Functionalities and investment

Patterns from 6th Aug, 2009 to 30th Sep, 2009. at India Infoline Ltd.,

Kota Branch under the guidance of Mr. Pramod Vijay. This report has

never been submitted else for award of any degree or diploma.

ASHISH VIJAYDate:Place: Kota

ACKNOWLEDGEMENT

It plunge me in exhilaration in taking privilege in expressing our heart felt appreciation to Ms Shabnam Bano, Branch Manager, India Infoline, Kota Branch, for her admirable and valuable guidance, keen interest, encouragement and constructive suggestions during the course of the project.

I would like to express our gratitude to Mr. Pramod Vijay, Sr. Relationship Manager, India Infoline, Kota for providing us an opportunity to take this project work & under whose supervision & guidance whole of the project has got its shape.

I would also like to express thanks to Mr. Prateek Saxena and Ms Garima Arora, India Infoline Limited, who was closely associated with the project right from the beginning.

I consider my proud privilege to express deep sense of gratefulness to Dr. K.C. Goyal, Head of Department, Department of commerce and Management, University Of Kota, who is the strength and an encouragement behind me.

My sincere appreciation also go to those clients, investors and persons in India Infoline Ltd. who altruistically revealed important information regarding the Indian stock market and how they trade and invest with the intense help of their respective relationship managers and investment guides.

I am very grateful to my parents, family members and friends for their enthusiastic support.

Last but not least; report was completed successfully because of the grace of the Almighty God.

ASHISH VIJAY

EXECUTIVE SUMMARY

The project which is taken by me with the help of my Faculty and

industry Guide mainly focused on Indian Stock Market. The main focus

of my project is to gain knowledge about the core areas in which stock

market works and what are the trends and investment patterns available

in it.

Working with India Infoline Limited I really had a learning

experience basically related with the stock market the how various

components like, equities, stocks, IPOs, derivatives (Future and

options), Commodities and the Mutual Funds. These all are important

aspects of stock market. Other thing which has I learned that the stock

market is divided into two segments Primary market & Secondary

market. In the Primary market those companies who are unlisted and

who want capital from the public they issue their shares for the first time

in the market which is called Primary Market .Secondary market

includes Equity shares, Right issues, Bonus shares, Preference shares,

Cumulative Preference Shares, Cumulative Convertible Preference

Shares, Bonds. The share market which I had seen the guidance of my

Industry Guide is the most volatile market.

So, the whole project was directed towards how the stock markets

work in India and what are the core areas of functioning of the stock

market in order to maximum out of the minimum so that the profile of

mine and the project topic should match and more and more learning

can be done from them.

CONTENTS

CHAPTER 1- INTRODUCTION

Need of the study Objectives Scope

CHAPTER 2- PROFILE OF INDIAINFOLINE LIMITED

2.1 buCHAPTER 6- CONCLUSION, SUGGESTION AND LIMITATION OF THE STUDY

BIBLIOGRAPHY

WEBSITES ANNEXURE CHECKLIST ABBREVIATIONS

INTRODUCTION TO INVESTMENT

Investment may be defined as an activity that commits funds in any

financial form in the present with an expectation of receiving additional

return in the future. The expectations bring with it a probability that the

quantum of return may vary from a minimum to a maximum. This

possibility of variation in the actual return is known as investment risk.

Thus every investment involves a return and risk.

Investment is an activity that is undertaken by those who have

savings. Savings can be defined as the excess of income over

expenditure. An investor earns/expects to earn additional monetary

value from the mode of investment that could be in the form of financial

assets.

The three important characteristics of any financial asset are:

Return-the potential return possible from an asset.

Risk-the variability in returns of the asset form the chances of its

value going down/up.

Liquidity-the ease with which an asset can be converted into cash.

Investors tend to look at these three characteristics while deciding on

their individual preference pattern of investments. Each financial asset

will have a certain level of each of these characteristics.

NEED OF THE STUDY

We believe that our investors are better served by a disciplined

investment approach, which combines an understanding of the goals and

objectives of the investor with a fine tuned strategy backed by research.

Stock specific selection procedure based on fundamental research

for making sound investment decisions.

Focus on minimizing investment risk by following rigorous

valuation disciplines.

Capital preservation.

Selling discipline and use of Derivatives to control volatility.

Overall to enhance absolute return for investors.

The need of the study is to identify the different types of investment

alternatives available in the market and analyze their risk and return.

OBJECTIVES OF THE STUDY

Before starting a project, we should keep in mind the clear objective of

the project because in the absence of the objective one can’t reach the

conclusion or the end result of the project. Research objective answer

the question “Why this study is being conducted”

For every problem there is a research. As all the research is based on

some objective, our research has also some objectives which are as

follows:

To identify and study the demand and supply scenario.

To determine and understand dynamics of stock exchange and

different Investment alternative.

Primary Objective

To identify and analyze the portfolio management strategies in Indian Sock market.

To measure customers preference towards dealing in derivative market segment

The perception held by investors about the financial derivatives

Giving conclusion and recommendation.

Secondary Objective

To study which class mostly invest in stock market

Evaluate the various investment opportunities for investors

To study the behavior of investor during the market fluctuations

Scope of the study

To know the lack of awareness about stock market amongst

most of people.

To know the awareness about the portfolio investment.

To know problem faced by people in online trading because of

lack of knowledge about computers and internet.

To know the information regarding tax and many other

transactions cost from customers.

To know how investing money in stock market for short period

is risky. But if investment is made judiciously it gives good

returns.

To Identify the volatile stock market is more then other

country

CORPORATE PROFILE

COMPANY STRUCTURE

India Infoline Limited is listed on both the leading stock exchanges in India, viz. the Stock Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) and is also a member of both the exchanges. It is engaged in the businesses of Equities broking, Wealth Advisory Services and Portfolio Management Services. It offers broking services in the Cash and Derivatives segments of the NSE as well as the Cash segment of the BSE. It is registered with NSDL as well as CDSL as a depository participant, providing a one-stop solution for clients trading in the equities market. It has recently launched its Investment banking and Institutional Broking business.

INDIA INFOLINE GROUP

The India Infoline group, comprising the holding company, India Infoline Limited and its wholly-owned subsidiaries, straddle the entire financial services space with offerings ranging from Equity research, Equities and derivatives trading, Commodities trading, Portfolio Management Services, Mutual Funds, Life Insurance, Fixed deposits, GoI bonds and other small savings instruments to loan products and Investment banking. India Infoline also owns and manages the websites www.indiainfoline.com and www.5paisa.com

The company has a network of 976 business locations (branches and sub-brokers) spread across 365 cities and towns. It has more than 800,000 customers.

INDIA INFOLINE LTD

India Infoline Limited is listed on both the leading stock exchanges in India, viz. the Stock Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) and is also a member of both the exchanges. It is engaged in the businesses of Equities broking, Wealth Advisory Services and Portfolio Management Services. It offers broking services in the Cash and Derivatives segments of the NSE as well as the Cash segment of the BSE. It is registered with NSDL as well as CDSL as a depository participant, providing a one-stop solution for clients trading in the equities market. It has recently launched its Investment banking and Institutional Broking business.

A SEBI authorized Portfolio Manager; it offers Portfolio Management Services to clients. These services are offered to clients as different schemes, which are based on differing investment strategies made to reflect the varied risk-return preferences of clients.

INDIA INFOLINE MEDIA AND RESEARCH SERVICES LIMITED.

The content services represent a strong support that drives the broking, commodities, mutual fund and portfolio management services businesses. Revenue generation is through the sale of content to financial and media houses, Indian as well as global.

It undertakes equities research which is acknowledged by none other than Forbes as 'Best of the Web' and '…a must read for investors in Asia'. India Infoline's research is available not just over the internet but also on international wire services like Bloomberg (Code: IILL), Thomson First Call and Internet Securities where India Infoline is amongst the most read Indian brokers.

INDIA INFOLINE COMMODITIES LIMITED.

India Infoline Commodities Pvt Limited is engaged in the business of commodities broking. Our experience in securities broking empowered us with the requisite skills and technologies to allow us offer commodities broking as a contra-cyclical alternative to equities broking. We enjoy memberships with the MCX and NCDEX, two leading Indian commodities exchanges, and recently acquired membership of DGCX. We have a multi-channel delivery model, making it among the select few to offer online as well as offline trading facilities.

INDIA INFOLINE MARKETING & SERVICES

India Infoline Marketing and Services Limited is the holding company of India Infoline Insurance Services Limited and India Infoline Insurance Brokers Limited.

(a) India Infoline Insurance Services Limited is a registered Corporate Agent with the Insurance Regulatory and Development Authority (IRDA). It is the largest Corporate Agent for ICICI Prudential Life Insurance Co Limited, which is India's largest private Life Insurance Company. India Infoline was the first corporate agent to get licensed by IRDA in early 2001. (b) India Infoline Insurance Brokers Limited India Infoline Insurance Brokers Limited is a newly formed subsidiary which will carry out the business of Insurance broking. We have applied to IRDA for the insurance broking licence and the clearance for the same is awaited. Post the grant of license, we propose to also commence the general insurance distribution business.

INDIA INFOLINE INVESTMENT SERVICES LIMITED

Consolidated shareholdings of all the subsidiary companies engaged in loans and financing activities under one subsidiary. Recently, Orient Global, a Singapore-based investment institution invested USD 76.7 million for a 22.5% stake in India Infoline Investment Services. This will help focused expansion and capital raising in the said subsidiaries for various lending businesses like loans against securities, SME financing, distribution of retail loan products, consumer finance business and housing finance business. India Infoline Investment Services Private Limited consists of the following step-down subsidiaries.

(a) India Infoline Distribution Company Limited (distribution of retail loan products)

(b) Moneyline Credit Limited (consumer finance)

(c) India Infoline Housing Finance Limited (housing finance)

IIFL (ASIA) PTE LIMITED

IIFL (Asia) Pte Limited is wholly owned subsidiary which has been incorporated in Singapore to pursue financial sector activities in other Asian markets. Further to obtaining the necessary regulatory approvals, the company has been initially capitalized at 1 million Singapore dollars.

PRODUCTS AND SERVICES

India Infoline is a one-stop financial services shop, most respected for quality of its advice, personalized service and cutting-edge technology. It provide a bouquet of products to its customer such as-

EQUITIES

India Infoline provided the prospect of researched investing to its clients, which was hitherto restricted only to the institutions. Research for the retail investor did not exist prior to India Infoline leveraged technology to bring the convenience of trading to the investor’s location of preference (residence or office) through computerized access. India Infoline made it possible for clients to view transaction costs and ledger updates in real time. Over the last five years, India Infoline sharpened its competitive edge through the following initiatives:

MULTI-CHANNEL DELIVERY MODEL

The Company is among the few financial intermediaries in India to offer a complement of online and offline broking. The Company’s network of branches also allows customers to place orders on phone or visit our branches for trading.

INTEGRATED MIDDLE AND BACK OFFICE The customer can trade on the BSE and NSE, in the cash as well as the derivatives segment all through the available multiple options of Internet, phone or branch presence.

MULTIPLE-TRADING OPTIONS

The Company harnessed technology to offer services at among the lowest rates in the business membership: The Company widened client reach in trading on the domestic and international exchanges.

TECHNOLOGY

The Company provides a prudent mix of proprietary and outsourced technologies, which facilitate business growth without a corresponding increase in costs.

CONTENT

The Company has leveraged its research capability to provide regular updates and investment picks across the short and long-term.

SERVICE

Clients can access the customer service team through various media like toll-free lines, emails and Internet- messenger chat for instant query resolution. The Company’s customer service executives proactively contact customers to inform them of key changes and initiatives taken by the Company. Business World rated the Company’s customer service as ‘Best’ in their survey of online trading sites carried out in December 2003.

KEY FEATURES

Membership on the Bombay Stock Exchange Limited (BSE ) and the National Stock Exchange (NSE)

Registered with the NSDL as well as CDSL as a depository participant, providing a one-stop solution for clients trading in the equities market

Broking services in cash and derivative segments, online as well as offline.

Presence across 350 cities and towns with a network of over 850 business locations Equity client base of over 500,000 clients

Provision of free and world-class research to all clients

PMS (PORTFOLIO MANAGEMENT SERVICE)

Our Portfolio Management Service is a product wherein an equity investment portfolio is created to suit the investment objectives of a client. We at India Infoline invest your resources into stocks from different sectors, depending on your risk-return profile. This service is particularly advisable for investors who cannot afford to give time or don't have that expertise for day-to-day management of their equity portfolio.

RESEARCH

Sound investment decisions depend upon reliable fundamental data and stock selection techniques. India Infoline Equity Research is proud of its reputation for, and we want you to find the facts that you need. Equity investment professionals routinely use our research and models as integral tools in their work. They choose Ford Equity Research when they can clear your doubts.

COMMODITIES

India Infoline’s extension into commodities trading reconciles its strategic intent to emerge as a one-stop solutions financial intermediary. Its experience in securities broking has empowered it with requisite skills and technologies. The Company’s commodities business provides a contra-cyclical alternative to equities broking. The Company was among the first to offer the facility of commodities trading in India’s young commodities market (the MCX commenced operations only in 2003). Average monthly turnover on the commodity exchanges increased from Rs 0.34 bn to Rs 20.02 bn. The commodities market has several products with different and non-correlated cycles. On the whole, the business is fairly insulated against cyclical gyrations in the business.

MORTGAGES

During the year under review, India Infoline acquired a 75% stake in Moneytree Consultancy Services to mark its foray into the business of mortgages and other loan products distribution. The business is still in the investing phase and at the time of the acquisition was present only in the cities of Mumbai and Pune. The Company brings on board expertise in the loans business coupled with existing relationships across a number of principals in the mortgage and personal loans businesses. India Infoline now has plans to roll the business out across its pan-Indian network to provide it with a truly national scale in operations.

HOME LOANS and PERSONAL LOANS

Loan against residential and commercial propertyExpert recommendationsEasy documentationQuick processing and disbursalNo guarantor requirement

ONLINE INVESTMENT

India Infoline has made investing in Mutual funds and primary market so effortless. All have to do is register with us and that’s all. No paperwork no queues and No registration charges.

INVEST IN MUTUAL FUNDS

India Infoline offers a host of mutual fund choices under one roof, backed by in-depth research and advice from research house and tools configured as investor friendly.

APPLY IN INITIAL PUBLIC OFFERS (IPO)

Client could also invest in Initial Public Offers (IPO’s) online without going through the hassles of filling ANY application form/ paperwork.

STOCK MESSAGING SERVICE (SMS)

Stay connected to the market remotely. The trader of today, you are constantly on the move. But how to stay connected to the market while on the move? Simple, subscribe to India Infoline's Stock Messaging Service and get Market on the Mobile of client! There are three products under

SMS Service:

Market on the move.

Best of the lot.

VAS (Value Added Service)

INSURANCE

An entry into this segment helped complete the client’s product basket; concurrently, it graduated the Company into a one-stop retail financial solutions provider. To ensure maximum reach to customers across India, we have employed a multi pronged approach and reach out to customers via our Network, Direct and Affiliate channels. Following the opening of the sector in 1999-2000, a number of private sector insurance service providers commenced operations aggressively and helped grow the market.

The Company’s entry into the insurance sector derisked the Company from a predominant dependence on broking and equity-linked revenues. The annuity based income generated from insurance intermediation result in solid core revenues across the tenure of the policy.

WEALTH MANGEMENT SERVICE

Imagine a financial firm with the heart and soul of a two-person organization. A world-leading wealth management company that sits down with you to understand your needs and goals. We offer you a dedicated group for giving you the most personal attention at every level.

NEWSLETTERS

The Daily Market Strategy is your morning dose on the health of the markets. Five intra-day ideas, unless the markets are really choppy coupled with a brief on the global markets and any other cues, which could impact the market. Occasionally an investment idea from the research team and a crisp round up of the previous day's top stories. That's not all. As a subscriber to the Daily Market Strategy, you even get research reports of India Infoline research team on a priority basis.

The India Infoline Weekly Newsletter is your flashback for the week gone by. A weekly outlook coupled with the best of the web stories from India Infoline and links to important investment ideas, Leader Speak and features is delivered in your inbox every Friday evening.

BUSINESS & OPERATIONS

BUSINESS

Over a period of time RSL has recorded a healthy growth rate both in

business volumes and profitability as it is one of the major players in

this line of business. The business thrust has been mainly in the

development of business from Financial Institutions, Mutual Funds and

Corporate.

OPERATIONS

The operations of the company are broadly organized along the following functions.

Research & Analysis

This group is focused on doing daily stock picks and periodical scrip

segment specific research. They provide the best of analysis in the

industry and are valued by both our Institutional and Retail clientele.

Marketing

This group is focused on tracking potential business opportunities and

converting them into business relationships. Evaluating the needs of the

clients and tailoring products to meet their specific requirements helps

the company to build lasting relationships

Dealing

Enabling the clients to procure the best rates on their transactions is the

core function of this group.

Back Office

This group ensures timely deliveries of securities traded, liaison with

stock exchange authorities on operational matters, statutory compliance,

handling tasks like pay-in, pay-out, etc. This section is fully automated

to enable the staff to focus on the technicalities of securities trading and

is manned by professionals having long experience in the field

INFRASTRUCTURE

Offices

The company has offices located at prime locations in Mumbai, New

Delhi, Kolkata and Chennai. The offices are centrally located to cater to

the requirements of institutional and corporate clients and retails clients,

and for ease of operations due to proximity to stock exchanges and

banks.

Communications

The company has its disposal, an efficient network of advance

communication system and intend to install CRM facility, besides this it

is implementing interactive client information dissemination system

which enables clients to view their latest client information on web. It

has an installed multiple WAN to interconnect the branches to

communicate on real time basis.

The company is equipped with most advanced systems to facilitate

smooth functioning of operations. It has installed its major application

on IBM machines and uses latest state of art financial software.

MANAGEMENT TEAM

Mr. Nirmal Jain Chairman & Managing DirectorIndia Infoline Ltd.

Nirmal Jain, MBA (IIM, Ahmedabad) and a Chartered and Cost Accountant, founded India’s leading financial services company India Infoline Ltd. in 1995, providing globally acclaimed financial services in equities and commodities broking, life insurance and mutual funds distribution, among others. Mr. Jain began his career in 1989 with Hindustan Lever’s commodity export business, contributing tremendously to its growth. He was also associated with Inquire-Indian Equity Research, which he co-founded in 1994 to set new standards in equity research in India.

Mr. R VenkataramanExecutive DirectorIndia Infoline Ltd.

R Venkataraman, co-promoter and Executive Director of India Infoline Ltd., is a B. Tech (Electronics and Electrical Communications Engineering, IIT Kharagpur) and an MBA (IIM Bangalore). He joined the India Infoline board in July 1999. He previously held senior managerial positions in ICICI Limited, including ICICI Securities Limited, their investment banking joint venture with J P Morgan of USA and with BZW and Taib Capital Corporation Limited. He was also Assistant Vice President with G E Capital Services India Limited in their private equity division, possessing a varied experience of more

than 16 years in the financial services sector.

The Board of Directors

Apart from Mr. Nirmal Jain and Mr. R Venkataraman, the Board of Directors of India Infoline Ltd. comprises:

Mr Nilesh Vikamsey Independent DirectorIndia Infoline Ltd.

Mr. Vikamsey, Board member since February 2005 - a practising Chartered Accountant and partner (Khimji Kunverji & Co., Chartered Accountants), a member firm of HLB International, headed the audit department till 1990 and thereafter also handles financial services, consultancy, investigations, mergers and acquisitions, valuations etc; an ICAI study group member for Proposed Accounting Standard — 30 on Financial Instruments Recognition and Management, Finance Committee of The Chamber of Tax Consultants (CTC), Law Review, Reforms and Rationalization Committee and Infotainment and Media Committee of Indian Merchants’ Chamber (IMC) and Insurance Committee and Legal Affairs Committee of Bombay Chamber of Commerce and Industry (BCCI). Mr. Vikamsey is a director of Miloni Consultants Private Limited, HLB Technologies (Mumbai) Private Limited and Chairman of HLB India.

Mr Sat Pal KhattarNon Executive DirectorIndia Infoline Ltd.

Mr Sat Pal Khattar, - Board member since April 2001 - Presidential Council of Minority Rights member, Chairman of the Board of Trustee of Singapore Business Federation, is also a life trustee of SINDA, a non profit body, helping the under-privileged Indians in Singapore. He joined the India Infoline board in April 2001. Mr Khattar is a Director of public and private companies in Singapore, India and Hong Kong; Chairman of Guocoland Limited listed in Singapore and its parent Guoco Group Ltd listed in Hong Kong, a leading property company of

Singapore, China and Malaysia. A Board member of India Infoline Ltd, Gateway Distriparks Ltd — both listed — and a number of other companies he is also the Chairman of the Khattar Holding Group of Companies with investments in Singapore, India, UK and across the world.

Mr Kranti Sinha Independent DirectorIndia Infoline Ltd.

Mr. Kranti Sinha — Board member since January 2005 — completed his masters from the Agra University and started his career as a Class I officer with Life Insurance Corporation of India. He served as the Director and Chief Executive of LIC Housing Finance Limited from August 1998 to December 2002 and concurrently as the Managing Director of LICHFL Care Homes (a wholly owned subsidiary of LIC Housing Finance Limited). He retired from the permanent cadre of the Executive Director of LIC; served as the Deputy President of the Governing Council of Insurance Institute of India and as a member of the Governing Council of National Insurance Academy, Pune apart from various other such bodies. Mr. Sinha is also on the Board of Directors of Hindustan Motors Limited, Larsen & Toubro Limited, LICHFL Care Homes Limited, Gremach Infrastructure Equipments and Projects Limited and Cinemax (India) Limited.

Mr Arun K. PurvarIndependent DirectorIndia Infoline Ltd.

Mr. A.K. Purvar – Board member since March 2008 – completed his Masters degree in commerce from Allahabad University in 1966 and a diploma in Business Administration in 1967. Mr. Purwar joined the State Bank of India as a probationary officer in 1968, where he held several important and critical positions in retail, corporate and international banking, covering almost the entire range of commercial banking operations in his illustrious career. He also played a key role in co-coordinating the work for the Bank's entry into the field of insurance. After retiring from the Bank at end May 2006, Mr. Purwar is

now working as Member of Board of Governors of IIM-Lucknow, joined IIM–Indore as a visiting professor, joined as a Hon.-Professor in NMIMS and he is also a member of Advisory Board for Institute of Indian Economic Studies (IIES), Waseda University, Tokyo, Japan. He has now taken over as Chairman of IndiaVenture Advisors Pvt. Ltd., as well as IL & FS Renewable Energy Limited. He is also working as Independent Director in leading companies in Telecom, Steel, Textiles, Autoparts, Engineering and Consultancy.

Shabnam Bano

Branch Manager, Kota BranchIndia Infoline Ltd.

Ms. Shabnam Bano, Branch Manager India Infoline Limited, Kota Branch. She started her career from ICICI Personal Loans DST as a Sales Executive, After that she joined India Bulls Securities Ltd. As Assistant Relationship Manager. In Jan 2007, she join India Infoline Ltd. as Relationship Manager. Then she promoted as Branch Manager for Kota Branch of India Infoline Ltd. She had diploma in Civil Engineering, and MBA in Finance. She is an excellent Team Manager for her team. She is Mentor and guide in this project.

Pramod VijaySenior Relationship Manager, India Infoline Ltd. Kota

Mr. Pramod Vijay Sr. Relation Manager, working at Kota Branch of India Infoline Ltd. He join India Infoline as Marketing Executive in the year of 2006. After joining he continuously upgrade himself and got promoted to the designation of Sr. Relation Manager. He got his graduation from MDS University, Ajmer with flying colors. He always ready to lend a hand to his colleagues and team members. He provides excellent guidance in the accomplishment of the project report.

COMPETITIVE ADVANTAGES OF INDIA INFOLINE LTD.

Participant on the country’s premier exchange: INDIA INFOLINE LTD. is a member of the country’s premier stock exchange – The National Stock Exchange of India (NSE).

Clearing membership on Capital & Derivatives segments: It has clearing memberships on both the Capital Market and Derivatives segment of the exchange. We are also authorized to trade the retail debt market.

Depository Participants with NSDL & CDSL: We are depository participants with the country’s premier depository service - National Securities Depository Limited (NSDL), as well as with the only other depository with a countrywide reach - Central Depository Services Limited (CDSL).

Leading private sector bank as partner: Our banking partner is HDFC Bank, ICICI Bank, Citi Bank, Bank of Baroda – The foremost private sector bank in the country, which has the most technologically advanced infrastructure in the country, with Internet banking allowing access to information 24 X 7.

Bloomberg Information Services: The world’s two best information services are Bloomberg LP and Reuters. These are prohibitively expensive for all but mutual funds and financial institutions to own terminals of, and subscribe to. We however have two connections to the Bloomberg Information Service, the premier service, both in Delhi and Mumbai, and these provide us information ahead of the general public, and at par with the financial institutions.Access to breaking news from across the globe, and across asset classes, and superior research and analysis capabilities.

Prime Office Locations: We have prime office locations in the nation’s political capital and the business capital – Delhi and Mumbai, in the heart of the city.

Research Capabilities: We have a dedicated team of analysts in our Bombay office – They provide fundamental analysis of stocks and

markets, which are fundamentally strong, and provide above market returns to investors, but over a slightly longer time frame – Typically 6 months and above.

Technical Analysis: A daily technical newsletter is published by our in-house technical analyst, who is a recognized leading practitioner of the science. He has a success rate of over 73%. He tracks the progress of the calls on a real-time basis, and advises of any change in the profit points or stop loss levels.. All Services under one roof: India has moved to a T+2 settlement system, where all trades and settled on a rolling basis. However this gives the clients no time to arrange deliveries to their broker, through a separate depository participant. INDIA INFOLINE LTD., being a trading-clearing member, as well as a depository participant, allows seamless transfer of securities under the same roof, with minimum delay, and constant monitoring

INDIA INFOLINE LTD. PORTFOLIO MANAGEMENT SERVICE

India Infoline Ltd. offers PMS to address varying investment

preferences. As a focused service, PMS pays attention to details, and

portfolios are customized to suit the unique requirements of investment.

RISK

risk is a concept that denotes a potential negative impact to an asset or

some characteristic of value that may arise from some present process or

future event. In everyday usage, risk is often used synonymously with

the probability of a known loss. Risk is uncertainty of the income /

capital appreciation or loss of the both.

The total risk of an individual security comprises two components, the

market related risk called systematic risk also known as undiversifiable

risk and the unique risk of that particular security called unsystematic

risk or diversifiable risk.

Types of risk

Systematic risk (market) Unsystematic risk

(company risk)

Examples:

Interest rate risk

Market risk

Inflation risk

Demand

Government

policy

International

factors

Examples:

Labor troubles

Liquidity problems

Raw materials risks

Financial risks

Management

problems

CONCEPT OF RISK

The dictionary meaning of risk is “the possibility of loss or injury,the

degree or probability of such loss”. In investment analysis risk means

variability of possible returns associated with an investment.in other

words ,risk refers to the chance that the actual return from an investment

will differ from the expected return.

Risk and uncertainty

Risk and uncertainty are used interchangeably but they differ in

perception.risk and uncertainty go together.risk is a situation where

probabilities can be assingned to an event on the basis of facts and

figure available regarding the decision, while uncertainty is a situation

where either facts and figures are not available,or the probabilities can

not be assigned.

RISK

SYSTAMATIC RISK UNSYSTAMATIC RISK

MARET RISK BUSINESS RISKFINANCIAL RISK

INTEREST RATE RISK INTERNAL EXTERNAL

INFLATION RISK

SYSTAMATIC RISK

Systematic risk refers to that portion of variation in return caused by

factors that affect the price of all securities.the systematic risk can not

be eliminated by diversification of portfolio.

UNSYSTAMATIC RISK

Unsystematic risk refers to that portion of the risk which is caused due to factors unique or related to a firm or industry.the unsystematic risk can be eliminated or reduced by diversification of portfolio.

METHODOLOGY OF THE STUDY

Primary Data:

The data provided by the firm was been analyzes by using

Markowitz model determines an efficient asset of portfolio return

i.e.,

1. Return

2. Standard deviation

3. 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 five years.

PERIOD OF THE STUDY:

The study of Equity value and portfolio management for a period

of five years (2003-2007).

LIMITATIONS:

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.

SOURCE :

NCE, The standards set by NSE in terms of market practices and

technologies have become industry benchmarks and are being emulated

by other market participants. NSE is more than a mere market

facilitator. It's that force which is guiding the industry towards new

horizons and greater opportunities.

TOOLS & TECHNIQUES:

The following statistical techniques were used for measuring the

performance of the company’s funds.

1. Rate of Return (ROR)N2-N1

ROR = N1

Where, N1 is Close period at period1

N2 is Close period at period

2. Standard Deviation (SD) Σ [R-AVG(R)] SD =

N

Where, R is rate of return

N is total number of

months

3. Betan Σxy – Σx * Σy

Beta = n Σx2 – (Σx)2

4. Alpha

Alpha = Avg (y) – (beta*Avg (x))

5. Coefficient of Correlation

n Σxy – Σx * ΣyCoefficient of Correlation =

[(n Σy2 – (Σy) 2) (n Σx2 – (Σx) 2)] ½

6. Coefficient of Correlation

Coefficient of determination = (Coefficient of Correlation) 2

Dealing with Risk and Uncertainty

The future always brings surprises. Sometimes, the surprises are nice, but often they are unpleasant. Many people want ways to protect themselves from the unpleasant surprises. They are willing to

pay for protection against risk and uncertainty.1

Where some people consider risk a problem, others see it as an opportunity. A speculator is one who takes risks in the hope of making a profit, usually by trying to forecast future prices and betting his money that he is correct. If a speculator expects the price of gold to be higher in a year than it is now, he can buy gold and wait. If he is right, he will make a profit on his action, while if he is wrong, he will lose.

The speculator is widely regarded as someone who contributes nothing positive to the economy because he produces nothing. However, by buying when prices are low and selling when they are high, the successful speculator transfers goods from low-valued uses to high-valued ones, which is a useful task. He also smoothes price fluctuations because his purchases increases prices when they are low, and his sales when prices are high helps keep prices from going even higher.2

The development of futures markets allows anyone who wants to be a speculator to become one. In a futures market, agreements to buy and sell at a future date are made, with the price set when the agreement is made. There are futures markets for most major agricultural commodities. Farmers use them to fix the price of their crop long before harvest and millers and owners of feedlots use them to lock in the price they will pay for grain in the coming year. In fixing these prices with a futures contract, farmers and buyers of grain reduce the risk they take by hedging. They are able to reduce their risk because speculators are willing to take risk. Without speculators, a futures market could not function properly. The benefits that speculators provide others are not part of their intentions, an example of the unintended consequences in which economists delight.

A person involved in speculation is not engaged in arbitrage, he is not a middleman, nor is he an entrepreneur. Arbitrage is buying in a market where prices are low and simultaneously selling in a market in which

they are high. There is no risk involved in pure arbitrage. Arbitrage tends to equalize prices in various markets.

A middleman is part of a distribution or marketing network. Though frequently disparaged, the fact that sellers are willing to use middlemen indicates that they do perform a useful service. Middlemen generally try to keep risk to a minimum.

The entrepreneur deals in risk, but unlike the speculator who reduces the risk of those who do not want to bear it, the entrepreneur's risk is of his own making. The entrepreneur is the creative element in a market economy. His presence makes the system dynamic and ever-changing. Although the abstract theory of the exchange economy is a static theory, emphasizing equilibrium, real-world market economies are always changing. The entrepreneur, the innovator, is a source of change. He creates new products, develops new managerial techniques, introduces new ways of producing products, and finds new resources. His role can be understood if one looks at Darwin's view of the biological world, in which a species that finds a previously unoccupied ecological niche (or that better exploits one that is already occupied) prospers.

The entrepreneur is searching for unoccupied economic niches, opportunities to make a profit. The search is risky and usually ends in failure. But when it is successful, it can change the lives of all of us (just as when a new species evolves in nature, it can change the lives of all previously existing organisms). Most large corporations are the results of entrepreneurial effort, though they may no longer be performing much of the entrepreneurial function. Schumpeter who stressed the importance of the entrepreneur more than anyone before or since, suggested that there were no permanent triumphs in the search of entrepreneurs. In a process that he called "creative destruction," he suggested that all economic niches would eventually be eliminated by further discoveries of other entrepreneurs.

Another way to deal with risk is with insurance.

MEASURING EXPECTED RETURN AND RISK

Risk premiums Investor assume risk so that they are rewarded in the form of higher return. Hence

Equity Risk Premium: equity stocks as a class and the risk free rate

represented commonly by the return on treasury bills.

Bond Origin Premium: This is the difference between the return on

long term government bonds and the return on treasury bills.

Bond Default Premium: This is the difference between the return on

long term scorporate bonds (which have some probability of default)

and the return on long term government bonds (which are free from

default risk) .

SECURITY ANALYSIS AND VALUATIONS

1. FUNDAMENTAL ANALYSIS

A method of evaluating a security by attempting to measure its intrinsic

value by examining related economic, financial and other qualitative

and quantitative factors. Fundamental analysts attempt to study

everything that can affect the security's value, including macroeconomic

factors (like the overall economy and industry conditions) and

individually specific factors (like the financial condition and

management of companies). 

The end goal of performing fundamental analysis is to produce a value

that an investor can compare with the security's current price in hopes of

figuring out what sort of position to take with that security (under priced

= buy, overpriced = sell or short).

For example, an investor can perform fundamental analysis on a bond's

value by looking at economic factors, such as interest rates and the

overall state of the economy, and information about the bond issuer,

such as potential changes in credit ratings. For assessing stocks, this

method uses revenues, earnings, future growth, return on equity, profit

margins and other data to determine a company's underlying value and

potential for future growth. In terms of stocks,  fundamental

analysis focuses on the financial statements of a the company being

evaluated.

The biggest part of fundamental analysis involves delving into the

financial statements. Also known as quantitative analysis, this involves

looking at revenue, expenses, assets, liabilities and all the other financial

aspects of a company. Fundamental analysts look at this information to

gain insight on a company's future performance. A good part of this

tutorial will be spent learning about the balance sheet, income statement,

cash flow statement and how they all fit together.

When talking about stocks, fundamental analysis is a technique that

attempts to determine a security’s value by focusing on underlying

factors that affect a company's actual business and its future prospects.

On a broader scope, you can perform fundamental analysis on industries

or the economy as a whole. The term simply refers to the analysis of the

economic well-being of a financial entity as opposed to only its price

movements.

Why fundamental analysis :

Is the company’s revenue growing?

Is it actually making a profit?

Is it in a strong-enough position to beat out its competitors in the

future?

Is it able to repay its debts?

Is management trying to "cook the books"?

Fundamentals: Quantitative and Qualitative

The various fundamental factors can be grouped into two categories:

quantitative and qualitative. The financial meaning of these terms isn’t

all that different from their regular definitions.

Qualitative – It is related to or based on the quality or character of

something, often as opposed to its size or quantity.

These are the less tangible factors surrounding a business - things such

as the quality of a company’s board members and key executives, its

brand-name recognition, patents or proprietary technology

Quantitative – Quantitative fundamentals are numeric, measurable

characteristics about a business. It’s easy to see how the biggest source

of quantitative data is the financial statements. You can measure

revenue, profit, assets and more with great precision.

QUALITATIVE FACTORS :

The Industry

Each industry has differences in terms of its customer base, market

share among firms, industry-wide growth, competition, regulation and

business cycles. Learning about how the industry works will give an

investor a deeper understanding of a company's financial health.

Customers

Some companies serve only a handful of customers, while others serve

millions. In general, it's a red flag (a negative) if a business relies on a

small number of customers for a large portion of its sales because the

loss of each customer could dramatically affect revenues.

Market Share

Understanding a company's present market share can tell volumes about

the company's business. The fact that a company possesses an 85%

market share tells you that it is the largest player in its market by far.

Furthermore, this could also suggest that the company possesses some

sort of "economic moat," in other words, a competitive barrier serving

to protect its current and future earnings, along with its market share.

Market share is important because of economies of scale. When the firm

is bigger than the rest of its rivals, it is in a better position to absorb the

high fixed costs of a capital-intensive industry.

Industry Growth

One way of examining a company's growth potential is to first examine

whether the amount of customers in the overall market will grow. This

is crucial because without new customers, a company has to steal

market share in order to grow.

In some markets, there is zero or negative growth, a factor demanding

careful consideration.

Competition

Simply looking at the number of competitors goes a long way in

understanding the competitive landscape for a company. Industries that

have limited barriers to entry and a large number of competing firms

create a difficult operating environment for firms. One of the biggest

risks within a highly competitive industry is pricing power. This refers

to the ability of a supplier to increase prices and pass those costs on to

customers. Companies operating in industries with few alternatives have

the ability to pass on costs to their customers.

A great example of this is Wal-Mart. They are so dominant in the

retailing business, that Wal-Mart practically sets the price for any of the

suppliers wanting to do business with them. If you want to sell to Wal-

Mart, you have little, if any, pricing power.

Regulation

Certain industries are heavily regulated due to the importance or

severity of the industry's products and/or services. As important as some

of these regulations are to the public, they can drastically affect the

attractiveness of a company for investment purposes.

GDP

The monetary value of all the finished goods and services produced

within a country's borders in a specific time period, though GDP is

usually calculated on an annual basis. It includes all of private and

public consumption, government outlays, investments and exports less

imports that occur within a defined territory.

GDP = C + G + I + NX

where:

"C" is equal to all private consumption, or consumer spending, in a

nation's economy

"G" is the sum of government spending

"I" is the sum of all the country's businesses spending on capital

"NX" is the nation's total net exports, calculated as total exports minus

total imports. (NX = Exports - Imports)

Inflation:

The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. As the inflation rises, every dollar will buy a smaller percentage of a good. For example, if the inflation rate is 2%, then a $1 pack of gum will cost $1.02 in a year.

Most countries' central banks will try to sustain an inflation rate of 2-3%.

QUANTITATIVE FACTORS :

Financial Statements

Financial statements are the medium by which a company discloses

information concerning its financial performance. Followers

of fundamental analysis use the quantitative information gleaned from

financial statements to make investment decisions. Before we jump into

the specifics of the three most important financial statements - income

statements, balance sheets and cash flow statements - we will briefly

introduce each financial statement's specific function, along with where

they can be found.

The Balance Sheet The balance sheet represents a record of a company's assets, liabilities and equity at a particular

point in time. The balance sheet is named by the fact that a business's financial structure

balances in the following manner:

Assets = Liabilities +

Shareholders' Equity

Assets represent the resources that the business owns or controls at a

given point in time. This includes items such as cash, inventory,

machinery and buildings. The other side of the equation represents the

total value of the financing the company has used to acquire those

assets. Financing comes as a result of liabilities or equity. Liabilities

represent debt (which of course must be paid back), while equity

represents the total value of money that the owners have contributed to

the business - including retained earnings, which is the profit made in

previous years.

The Income Statement

While the balance sheet takes a snapshot approach in examining a

business, the income statement measures a company's performance over

a specific time frame. Technically, you could have a balance sheet for a

month or even a day, but you'll only see public companies report

quarterly and annually.

The income statement presents information about revenues, expenses

and profit that was generated as a result of the business' operations for

that period.

Statement of Cash Flows

The statement of cash flows represents a record of a business' cash

inflows and outflows over a period of time. Typically, a statement of

cash flows focuses on the following cash-related activities:

 Operating Cash Flow (OCF): Cash generated from day-to-day

business operations

Cash from investing (CFI): Cash used for investing in assets,

as well as the proceeds from the sale of other businesses, equipment or

long-term assets

Cash from financing (CFF): Cash paid or received from the

issuing and borrowing of funds

The cash flow statement is important because it's very difficult for a

business to manipulate its cash situation. There is plenty that aggressive

accountants can do to manipulate earnings, but it's tough to fake cash in

the bank. For this reason some investors use the cash flow statement as a

more conservative measure of a company's performance.

Balance Sheet's Main Three

Assets, liability and equity are the three main components of the balance

sheet. Carefully analyzed, they can tell investors a lot about a company's

fundamentals.

Assets

There are two main types of assets: current assets and non-current

assets. Current assets are likely to be used up or converted into cash

within one business cycle - usually treated as twelve months. Three very

important current asset items found on the balance sheet are: cash,

inventories and accounts receivables.

Investors normally are attracted to companies with plenty of cash on

their balance sheets. After all, cash offers protection against tough

times, and it also gives companies more options for future growth.

Growing cash reserves often signal strong company performance.

Indeed, it shows that cash is accumulating so quickly that management

doesn't have time to figure out how to make use of it

Liabilities

There are current liabilities and non-current liabilities. Current liabilities

are obligations the firm must pay within a year, such as payments owing

to suppliers. Non-current liabilities, meanwhile, represent what the

company owes in a year or more time. Typically, non-current liabilities

represent bank and bondholder debt.

You usually want to see a manageable amount of debt. When debt levels

are falling, that's a good sign. Generally speaking, if a company has

more assets than liabilities, then it is in decent condition. By contrast, a

company with a large amount of liabilities relative to assets ought to be

examined with more diligence. Having too much debt relative to cash

flows required to pay for interest and debt repayments is one way a

company can go bankrupt.

Equity

Equity represents what shareholders own, so it is often called shareholder's equity. As described

above, equity is equal to total assets minus total liabilities.

Equity = Total Assets – Total

Liabilities

The two important equity items are paid-in capital and retained

earnings. Paid-in capital is the amount of money shareholders paid for

their shares when the stock was first offered to the public. It basically

represents how much money the firm received when it sold its shares. In

other words, retained earnings are a tally of the money the company has

chosen to reinvest in the business rather than pay to shareholders.

Investors should look closely at how a company puts retained capital to

use and how a company generates a return on it.

Most of the information about debt can be found on the balance sheet -

but some assets and debt obligations are not disclosed there. For starters,

companies often possess hard-to-measure intangible assets. Corporate

intellectual property (items such as patents, trademarks, copyrights and

business methodologies), goodwill and brand recognition are all

common assets in today's marketplace. But they are not listed on

company's balance sheets.

There is also off-balance sheet debt to be aware of. This is form of

financing in which large capital expenditures are kept off of a

company's balance sheet through various classification methods.

Companies will often use off-balance-sheet financing to keep the debt

levels low. Ther some fundamental ratios to analysis the investment.

Some of them are follows.

Profitability Ratios:

A class of financial metrics that are used to assess a business's ability to

generate earnings as compared to its expenses and other relevant costs

incurred during a specific period of time. For most of these ratios,

having a higher value relative to a competitor's ratio or the same ratio

from a previous period is indicative that the company is doing well.  

ratio of profitability calculated as net income divided by revenues, or net

profits divided by sales. It measures how much out of every dollar of

sales a company actually keeps in earnings.

Profit margin

Profit margin is very useful when comparing companies in similar

industries. A higher profit margin indicates a more profitable company

that has better control over its costs compared to its competitors. Profit

margin is displayed as a percentage; a 20% profit margin, for example,

means the company has a net income of $0.20 for each dollar of sales.  

Looking at the earnings of a company often doesn't tell the entire

story. Increased earnings are good, but an increase does not mean that

the profit margin of a company is improving. For instance, if a company

has costs that have increased at a greater rate than sales, it leads to a

lower profit margin. This is an indication that costs need to be under

better control.

Price-Earnings Ratio - P/E Ratio

A valuation ratio of a company's current share price compared to its per-

share earnings.

Calculated as:

 For example, if a company is currently trading at rs.43 a share and

earnings over the last 12 months were Rs.1.95 per share, the P/E ratio

for the stock would be 22.05 (Rs.43/ Rs 1.95).

EPS is usually from the last four quarters (trailing P/E), but sometimes it

can be taken from the estimates of earnings expected in the next four

quarters (projected or forward P/E). A third variation uses the sum of

the last two actual quarters and the estimates of the next two quarters.

 It would not be useful for investors using the P/E ratio as a basis for

their investment to compare the P/E of a technology company (high

P/E) to a utility company (low P/E) as each industry has much different

growth prospects.

The P/E is sometimes referred to as the "multiple", because it shows

how much investors are willing to pay per dollar of earnings. If a

company were currently trading at a multiple (P/E) of 20, the

interpretation is that an investor is willing to pay Rs. 20 for Rs 1 of 

current earnings

Return on Equity – ROE

A measure of a corporation's profitability that reveals how much profit a

company generates with the money shareholders have invested.  

Calculated as:

The ROE is useful for comparing the profitability of a company to that

of other firms in the same industry.

There are several variations on the formula that investors may use:

1. Investors wishing to see the return on common equity may modify the

formula above by subtracting preferred dividends from net income and

subtracting preferred equity from shareholders' equity, giving the

following: return on common equity (ROCE) = net income - preferred

dividends / common equity.

2. Return on equity may also be calculated by dividing net income by

average shareholders' equity. Average shareholders' equity is calculated

by adding the shareholders' equity at the beginning of a period to the

shareholders' equity at period's end and dividing the result by two.

Earnings per Share – EPS

The portion of a company's profit allocated to each outstanding share of

common stock. EPS serves as an indicator of a company's profitability.

Calculated as:

In the EPS calculation, it is more accurate to use a weighted average

number of shares outstanding over the reporting term, because

the number of shares outstanding can change over time

For example, assume that a company has a net income of rs.25 million.

If the company pays out $1 million in preferred dividends and has 10

million shares for half of the year and 15 million shares for the other

half, the EPS would be or example, assume that a company has a net

income of rs.25 million. If the company pays out or example, assume

that a company has a net income of rs.25 million. If the company pays

out rs.1 million in preferred dividends and has 10 million shares for half

of the year and 15 million shares for the other half, the EPS would be

rs.1.92 (24/12.5). First, the rs.1 million is deducted from the net income

to get rs.24 million, then a weighted average is taken to find the number

of shares outstanding (0.5 x 10M+ 0.5 x 15M = 12.5M).

An important aspect of EPS that's often ignored is the capital that is

required to generate the earnings (net income) in the calculation.

LIQUIDITY RATIO

A class of financial metrics that is used to determine a company's ability

to pay off its short-terms debts obligations. Generally, the higher the

value of the ratio, the larger the margin of safety that the company

possesses to cover short-term debts.

 Common liquidity ratios include the current ratio, the quick ratio and

the operating cash flow ratio. Different analysts consider different assets

to be relevant in calculating liquidity. Some analysts will calculate only

the sum of cash and equivalents divided by current liabilities

because they feel that they are the most liquid assets, and would be the

most likely to be used to cover short-term debts in an emergency.

Current ratio

A liquidity ratios are that measures a company's ability to pay short-

term obligations.

Calculated as:

The higher the current ratio, the more capable the company is of paying

its obligations. A ratio under 1 suggests that the

company would be unable to pay off its obligations if they came due at

that point. While this shows the company is not in good financial health,

it does not necessarily mean that it will go bankrupt - as there are many

ways to access financing - but it is definitely not a good sign.

Other ratio:

Stockholders' Equity Ratio  

Stockholders' Equity Ratio = Stockholders' Equity

Total Assets

Relative financial strength and long-run liquidity are approximated with this calculation. A low ratio points to trouble, while a high ratio suggests you will have less difficulty meeting fixed interest charges and maturing debt obligations.

Total Debt to Net Worth  

Total Debt to Net Worth Ratio = Current + Deferred Debt

Tangible Net Worth

Rarely should your business's total liabilities exceed its tangible net

worth. If it does, creditors assume more risk than stockholders. A

business handicapped with heavy interest charges will likely lose out to

its better financed competitors.

Portfolio Management

Portfolio (finance)

In finance, a portfolio is a collection of investments held by an institution or a private individual. In building up an investment portfolio a financial institution will typically conduct its own investment analysis, whilst a private individual may make use of the services of a financial advisor or a financial institution which offers portfolio management services. Holding a portfolio is part of an investment and risk-limiting strategy called diversification. By owning several assets, certain types of risk (in particular specific risk) can be reduced. The assets in the portfolio could include stocks, bonds, options, warrants, gold certificates, real estate, futures contracts, production facilities, or any other item that is expected to retain its value.

Management

Portfolio management involves deciding what assets to include in the portfolio, given the goals of the portfolio owner and changing economic conditions. Selection involves deciding what assets to purchase, how many to purchase, when to purchase them, and what assets to divest. These decisions always involve some sort of performance measurement, most typically expected return on the portfolio, and the risk associated with this return (i.e. the standard deviation of the return). Typically the expected return from portfolios comprised of different asset bundles are

compared. The unique goals and circumstances of the investor must also be considered. Some investors are more risk averse than other

Some of the financial models used in the process of Valuation, stock selection, and management of portfolios include:

Maximizing return, given an acceptable level of risk. Modern portfolio theory —a model proposed by Harry Markowitz among others. The single-index model of portfolio variance. Capital asset pricing model . Arbitrage pricing theory . The Jensen Index. The Sharpe Diagonal (or Index) model

RETURN

The return is the motivating force and the principle reward in the investment process.

EXPECTED RETURNThe expected return is the return which the invester anticipates to earn over some future period.

REALISED RETURN The realized return is the return which was actuaiiy earned in the form of dividend,interest, and capital gain due toprice changes.

REQUIRED RATE OF RETURNIt is the return the market deems appropriate for a given level of risk.

TOTAL RETURNThe total return from a securities comprises of two components the periodic cash receipts or income plus change in the price of the securities.

Portfolio returns can be calculated either in absolute manner or in relative manner. Absolute return calculation is very straight forward, where return is calculated by considering total investment and total final

value. Time duration and cash flow in portfolio doesn't influence final return.

To calculate more accurate return of your investments you have to use complicated statistical models like Internal rate of return or Modified Internal Rate of Return. The only problem with these models are that, they are very complicated and very difficult to compute by pen and paper. You need to have scientific calculator or some software. Both of these model consider all cash flow(Money In/Money Out) and provide more accurate returns than absolute return. Time is a major factor in these models.

Market Portfolio

A market portfolio is a portfolio consisting of a weighted sum of every asset in the market, with weights in the proportions that they exist in the market (with the necessary assumption that these assets are infinitely divisible).

Richard Roll's critique (1977) states that this is only a theoretical concept, as to create a market portfolio for investment purposes in practice would necessarily include every single possible available asset, including real estate, precious metals, stamp collections, jewelry, and anything with any worth, as the theoretical market being referred to would be the world market. As a result, proxies for the market (such as the FTSE100 in the UK or the S&P500 in the US) are used in practice by investors. Roll's critique states that these proxies cannot provide an accurate representation of the entire market.

The concept of a market portfolio plays an important role in many financial theories and models, including the Capital asset pricing model where it is the only fund in which investors need to invest, to be supplemented only by a risk-free asset (depending upon each investor's attitude towards risk).

Capital Asset Pricing Model - CAPM

A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities.

Assumptions of CAPM All investors have rational expectations.

There are no arbitrage opportunities.

Returns are distributed normally.

Fixed quantity of assets.

Perfectly efficient capital markets.

Investors are solely concerned with level and uncertainty of future

wealth

Separation of financial and production sectors.

Thus, production plans are fixed.

Risk-free rates exist with limitless borrowing capacity and

universal access.

The Risk-free borrowing and lending rates are equal.

No inflation and no change in the level of interest rate exists.

Perfect information, hence all investors have the same

expectations about security

returns for any given time period.

The general idea behind CAPM is that investors need to be compensated

in two ways: time value of money and risk. The time value of money is

represented by the risk-free (rf) rate in the formula and compensates the

investors for placing money in any investment over a period of time.

The other half of the formula represents risk and calculates the amount

of compensation the investor needs for taking on additional risk. This is

calculated by taking a risk measure (beta) that compares the returns of

the asset to the market over a period of time and to the market premium.

Using the CAPM model and the following assumptions, we can

compute the expected return of a stock: if the risk-free rate is 3%, the

beta (risk measure) of the stock is 2 and the expected market return over

the period is 10%, the stock is expected to return 17%(3%+2(10%-

3%)).capital asset pricing model

Fig.3.7: risk free rate of return

The Security Market Line, seen here in a graph, describes a relation

between the beta and the asset's expected rate of return.

The Capital Asset Pricing Model (CAPM) is used in finance to

determine a theoretically appropriate required rate of return (and thus

the price if expected cash flows can be estimated) of an asset, if that

asset is to be added to an already well-diversified portfolio, given that

asset's non-diversifiable risk. The CAPM formula takes into account the

asset's sensitivity to non-diversifiable risk (also known as systematic

risk or market risk), in a number often referred to as beta (β) in the

financial industry, as well as the expected return of the market and the

expected return of a theoretical risk-free asset.

The model was introduced by Jack Treynor, William Sharpe, John

Lintner and Jan Mossin independently, building on the earlier work of

Harry Markowitz on diversification and modern portfolio theory. Sharpe

received the Nobel Memorial Prize in Economics (jointly with Harry

Markowitz and Merton Miller) for this contribution to

The formula

The CAPM is a model for pricing an individual security (asset) or a

portfolio. For individual security perspective, we made use of the

security market line (SML) and its relation to expected return and

systematic risk (beta) to show how the market must price individual

securities in relation to their security risk class. The SML enables us to

calculate the reward-to-risk ratio for any security in relation to that of

the overall market. Therefore, when the expected rate of return for any

security is deflated by its beta coefficient, the reward-to-risk ratio for

any individual security in the market is equal to the market reward-to-

risk ratio, thus:

Individual security’beta = Market’s securities (portfolio)

Reward-to-risk ratio =

,

The market reward-to-risk ratio is effectively the market risk premium

and by rearranging the above equation and solving for E(Ri), we obtain

the Capital Asset Pricing Model (CAPM).

Where:

is the expected return on the capital asset

is the risk-free rate of interest

(the beta coefficient) the sensitivity of the asset returns to

market returns, or also,

is the expected return of the market

is sometimes known as the market premium or risk

premium (the difference between the expected market rate of return and

the risk-free rate of return). Note 1: the expected market rate of return is

usually measured by looking at the arithmetic average of the historical

returns on a market portfolio (i.e. S&P 500). Note 2: the risk free rate of

return used for determining the risk premium is usually the arithmetic

average of historical risk free rates of return and not the current risk free

rate of return. An estimation of the CAPM and the Security Market Line

(purple) for the Dow Jones Industrial Average over the last 3 years for

monthly data.

Asset pricing

Once the expected return, E(Ri), is calculated using CAPM, the future

cash flows of the asset can be discounted to their present value using

this rate (E(Ri)), to establish the correct price for the asset.

In theory, therefore, an asset is correctly priced when its observed price

is the same as its value calculated using the CAPM derived discount

rate. If the observed price is higher than the valuation, then the asset is

overvalued (and undervalued when the observed price is below the

CAPM valuation).

Alternatively, one can "solve for the discount rate" for the observed

price given a particular valuation model and compare that discount rate

with the CAPM rate. If the discount rate in the model is lower than the

CAPM rate then the asset is overvalued (and undervalued for a too high

discount rate).

\Asset-specific required return

The CAPM returns the asset-appropriate required return or discount rate

- i.e. the rate at which future cash flows produced by the asset should be

discounted given that asset's relative riskiness. Betas exceeding one

signify more than average "riskiness"; betas below one indicate lower

than average. Thus a more risky stock will have a higher beta and will

be discounted at a higher rate; less sensitive stocks will have lower betas

and be discounted at a lower rate. The CAPM is consistent with

intuition - investors (should) require a higher return for holding a more

risky asset.

Since beta reflects asset-specific sensitivity to non-diversifiable, i.e.

market risk, the market as a whole, by definition, has a beta of one.

Stock market indices are frequently used as local proxies for the market

- and in that case (by definition) have a beta of one. An investor in a

large, diversified portfolio (such as a mutual fund) therefore expects

performance in line with the market.

Risk and diversification

Investors purchase financial assets such as shares of stock because they desire to increase their wealth, i.e., earn a positive rate of return on their investments. The future, however, is uncertain; investors do not know what rate of return their investments will realize.

In finance, we assume that individuals base their decisions on what they expect to happen and their assessment of how likely it is that what actually occurs will be close to what they expected to happen. When evaluating potential investments in financial assets, these two dimensions of the decision making process are called expected return and risk.

The concepts presented in this paper include the development of measures of expected return and risk on an indivdual financial asset and on a portfolio of financial assets, the principle of diversification, and the Captial Asset Pricing Model (CAPM).

Expected Return

The future is uncertain. Investors do not know with certainty whether the economy will be growing rapidly or be in recession. As such, they do not know what rate of return their investments will yield. Therefore, they base their decisions on their expectations concerning the future.

The expected rate of return on a stock represents the mean of a probability distribution of possible future returns on the stock. The table below provides a probability distribution for the returns on stocks A and B.

Table3.1:return probability chart

State ProbabilityReturn onStock A

Return onStock B

1 20% 5% 50%

2 30% 10% 30%

3 30% 15% 10%

3 20% 20% -10%

In this probability distribution, there are four possible states of the world one period into the future. For example, state 1 may correspond to a recession. A probability is assigned to each state. The probability reflects how likely it is that the state will occur. The sum of the probabilities must equal 100%, indicating that something must happen. The last two columns present the returns or outcomes for stocks A and B that will occur in the four states.

Given a probability distribution of returns, the expected return can be calculated using the following equation:

where

E[R] = the expected return on the stock, N = the number of states, pi = the probability of state i, and Ri = the return on the stock in state i.

Expected Return on Stocks A and B

Stock A

Stock B

So we see that Stock B offers a higher expected return than Stock A. However, that is only part of the story; we haven't yet considered risk.

Measures of Risk - Variance and Standard Deviation

Risk reflects the chance that the actual return on an investment may be very different than the expected return. One way to measure risk is to calculate the variance and standard deviation of the distribution of returns.

Consider the probability distribution for the returns on stocks A and B provided below.

State ProbabilityReturn onStock A

Return onStock B

1 20% 5% 50%

2 30% 10% 30%

3 30% 15% 10%

3 20% 20% -10%

Table3.2: Return probability chart

The expected returns on stocks A and B were calculated on the Expected Return page. The expected return on Stock A was found to be 12.5% and the expected return on Stock B was found to be 20%.

Given an asset's expected return, its variance can be calculated using the following equation:

where

N = the number of states, pi = the probability of state i, Ri = the return on the stock in state i, and E[R] = the expected return on the stock.

The standard deviation is calculated as the positive square root of the variance.

Variance and Standard Deviation on Stocks A and B

Note: E[RA] = 12.5% and E[RB] = 20%

Stock A

Stock B

Although Stock B offers a higher expected return than Stock A, it also is riskier since its variance and standard deviation are greater than Stock A's. This, however, is only part of the picture because most investors choose to hold securities as part of a diversified portfolio..

Portfolio Risk and Return

Most investors do not hold stocks in isolation. Instead, they choose to hold a portfolio of several stocks. When this is the case, a portion of an individual stock's risk can be eliminated, i.e., diversified away. This principle is presented on the Diversification page. First, the computation of the expected return, variance, and standard deviation of a portfolio must be illustrated.

Once again, we will be using the probability distribution for the returns on stocks A and B.

State ProbabilityReturn onStock A

Return onStock B

1 20% 5% 50%

2 30% 10% 30%

3 30% 15% 10%

3 20% 20% -10%

Table3.3:Return probability chart

From the Expected Return and Measures of Risk pages we know that the expected return on Stock A is 12.5%, the expected return on Stock B is 20%, the variance on Stock A is .00263, the variance on Stock B is .04200, the standard deviation on Stock S is 5.12%, and the standard deviation on Stock B is 20.49%.

Portfolio Expected Return

The Expected Return on a Portfolio is computed as the weighted average of the expected returns on the stocks which comprise the portfolio. The weights reflect the proportion of the portfolio invested in the stocks. This can be expressed as follows:

where

E[Rp] = the expected return on the portfolio, N = the number of stocks in the portfolio, wi = the proportion of the portfolio invested in stock i, and E[Ri] = the expected return on stock i.

For a portfolio consisting of two assets, the above equation can be expressed as

Expected Return on a Portfolio of Stocks A and B

Note: E[RA] = 12.5% and E[RB] = 20%

Portfolio consisting of 50% Stock A and 50% Stock B

Portfolio consisting of 75% Stock A and 25% Stock B

Portfolio Variance and Standard Deviation

The variance/standard deviation of a portfolio reflects not only the variance/standard deviation of the stocks that make up the portfolio but also how the returns on the stocks which comprise the portfolio vary together. Two measures of how the returns on a pair of stocks vary together are the covariance and the correlation coefficient.

The Covariance between the returns on two stocks can be calculated using the following equation:

where

s12 = the covariance between the returns on stocks 1 and 2, N = the number of states, pi = the probability of state i, R1i = the return on stock 1 in state i, E[R1] = the expected return on stock 1, R2i = the return on stock 2 in state i, and E[R2] = the expected return on stock 2.

The Correlation Coefficient between the returns on two stocks can be calculated using the following equation:

where

r12 = the correlation coefficient between the returns on stocks 1 and 2, s12 = the covariance between the returns on stocks 1 and 2, s1 = the standard deviation on stock 1, and s2 = the standard deviation on stock 2.

Covariance and Correlation Coefficent between the Returns on Stocks A and B

Note: E[RA] = 12.5%, E[RB] = 20%, sA = 5.12%, and sB = 20.49%.

Using either the correlation coefficient or the covariance, the Variance on a Two-Asset Portfolio can be calculated as follows:

The standard deviation on the portfolio equals the positive square root of the the variance.

Variance and Standard Deviation on a Portfolio of Stocks A and B

Note: E[RA] = 12.5%, E[RB] = 20%, sA = 5.12%, sB = 20.49%, and rAB = -1.

Portfolio consisting of 50% Stock A and 50% Stock B

Portfolio consisting of 75% Stock A and 25% Stock B

Notice that the portfolio formed by investing 75% in Stock A and 25% in Stock B has a lower variance and standard deviation than either Stocks A or B and the portfolio has a higher expected return than Stock

A. This is the essence of Diversification, by forming portfolios some of the risk inherent in the individual stocks can be eliminated.

RISK RETURN TRADE OFF

The risk/return tradeoff could easily be called the "ability-to-sleep-at-

night test." While some people can handle the equivalent of financial

skydiving without batting an eye, others are terrified to climb the

financial ladder without a secure harness. Deciding what amount of risk

you can take while remaining comfortable with your investments is very

important.

In the investing world, the dictionary definition of risk is the chance that

an investment's actual return will be different than expected.

Technically, this is measured in statistics by standard deviation. Risk

means you have the possibility of losing some, or even all, of our

original investment. Low levels of uncertainty (low risk) are associated

with low potential returns. High levels of uncertainty (high risk) are

associated with high potential returns.

The risk/return tradeoff is the balance between the desire for the lowest possible risk and

the highest possible return. This is demonstrated graphically in the chart below. A higher

standard deviation means a higher risk and higher possible return.

Fig.3.8: risk return trade off

Diversification

A portfolio formed from risky securities can have a lower standard deviation than either of the individual securities. The benefits of diversification, i.e., the reduction in risk, depends upon the correlation coefficient (or covariance) between the returns on the securities comprising the portfolio.

Consider stocks C and D. Stock C has an expected return of 8% and a standard deviation of 10%. Stock D has an expected return of 16% and a standard deviation of 20%. The concept of diversification will be illustrated by forming portfolios of stocks C and D under three different assumptions regarding the correlation coefficient between the returns on stocks C and D.

Correlation Coefficient = 1

The table below provides the expected return and standard deviation for portfolios formed from stocks C and D under the assumption that the correlation coefficient between their returns equals

Table3.4 expected return

Weight ofStock C

PortfolioExpectedReturn

PortfolioStandardDeviation

100% 8% 10%

90% 8.8% 11%

80% 9.6% 12%

70% 10.4% 13%

60% 11.2% 14%

50% 12% 15%

40% 12.8% 16%

30% 13.6% 17%

20% 14.4% 18%

10% 15.2% 19%

0% 16% 20%

 

Fig3.9 expected return graph

When the correlation coefficient between the returns on two securities is equal to +1 the returns are said to be perfectly positively correlated. As can be seen from the table and the plot of the opportunity set, when the returns on two securities are perfectly positively correlated, none of the risk of the individual stocks can be eliminated by diversification. In this case, forming a portfolio of stocks C and D simply provides additional risk/return choices for investors.

Correlation Coefficient = -1 The table below provides the expected return and standard deviation for portfolios formed from stocks C and D under the assumption that the correlation coefficient between their returns equals -1.

Table3.5 Expected Return on stock

Weight ofStock C

PortfolioExpectedReturn

PortfolioStandardDeviation

100% 8% 10%

90% 8.8% 7%

80% 9.6% 4%

70% 10.4% 1%

66.67% 10.67% 0%

60% 11.2% 2%

50% 12% 5%

40% 12.8% 8%

30% 13.6% 11%

20% 14.4% 14%

10% 15.2% 17%

0% 16% 20%

Fig3.10: expected return graph

When the correlation coefficient between the returns on two securities is equal to -1 the returns are said to be perfectly negatively correlated or perfectly inversely correlated. When this is the case, all risk can be eliminated by investing a positive amount in the two stocks. This is shown in the table above when the weight of Stock C is 66.67%.

Shortcomings of CAPM

The model assumes that asset returns are (jointly) normally

distributed random variables. It is however frequently observed that

returns in equity and other markets are not normally distributed. As a

result, large swings (3 to 6 standard deviations from the mean) occur

in the market more frequently than the normal distribution

assumption would expect.

The model assumes that the variance of returns is an adequate

measurement of risk. This might be justified under the assumption of

normally distributed returns, but for general return distributions other

risk measures (like coherent risk measures) will likely reflect the

investors' preferences more adequately.

The model does not appear to adequately explain the variation in

stock returns. Empirical studies show that low beta stocks may offer

higher returns than the model would predict. Some data to this effect

was presented as early as a 1969 conference in Buffalo, New York in

a paper by Fischer Black, Michael Jensen, and Myron Scholes. Either

that fact is itself rational (which saves the efficient markets

hypothesis but makes CAPM wrong), or it is irrational (which saves

CAPM, but makes EMH wrong – indeed, this possibility makes

volatility arbitrage a strategy for reliably beating the market).

The model assumes that given a certain expected return investors will

prefer lower risk (lower variance) to higher risk and conversely given a

certain level of risk will prefer higher returns to lower ones. It does not

allow for investors who will accept lower returns for higher risk. Casino

gamblers clearly pay for risk, and it is possible that some stock traders

will pay for risk as well.

The model assumes that all investors have access to the same

information and agree about the risk and expected return of all assets.

(Homogeneous expectations assumption)

The model assumes that there are no taxes or transaction costs, although

this assumption may be relaxed with more complicated versions of the

model.

The market portfolio consists of all assets in all markets, where each

asset is weighted by its market capitalization. This assumes no

preference between markets and assets for individual investors, and that

investors choose assets solely as a function of their risk-return profile. It

also assumes that all assets are infinitely divisible as to the amount

which may be held or transacted.

The market portfolio should in theory include all types of assets that are held by anyone as an investment (including works of art, real estate, human capital...) In practice, such a market portfolio is unobservable and people usually substitute a stock index as a proxy for the true market portfolio. Unfortunately, it has been shown that this substitution is not innocuous and can lead to false inferences as to the validity of the CAPM, and it has been said that due to the in absorbability of the true market portfolio, the CAPM might not be empirically testable. This was presented in greater depth in a paper by Richard Roll in 1977, and is generally referred to as Roll's Critique. Theories such as the Arbitrage Pricing Theory (APT) have since been formulated to circumvent this problem. Because CAPM prices a stock in terms of all stocks and bonds, it is really an arbitrage pricing model which throws no light on how a firm's beta gets determined.

Modern Portfolio Theory - MPT

A theory on how risk-averse investors can construct portfolios to optimize or maximize expected return based on a given level of market risk, emphasizing that risk is an inherent part of higher reward.

Investopedia Says:

According to the theory, it's possible to construct an "efficient frontier" of optimal portfolios offering the maximum possible expected return for a given level of risk. This theory was pioneered by Harry Markowitz in his paper "Portfolio Selection," published in 1952.

There are four basic steps involved in portfolio construction:-Security valuation-Asset allocation-Portfolio optimization-Performance measurement

Capital Market Line - CML

A line used in the capital asset pricing model to illustrate the rates of return for efficient portfolios depending on the risk-free rate of return and the level of risk (standard deviation) for a particular portfolio.

fig3.11: determination of market port folio

Investopedia Says:The CML is derived by drawing a tangent line from the intercept point on the efficient frontier to the point where the expected return equals the risk-free rate of return.

The CML is considered to be superior to the efficient frontier since it takes into account the inclusion of a risk-free asset in the portfolio. The capital asset pricing model (CAPM) demonstrates that the market

portfolio is essentially the efficient frontier. This is achieved visually through the security market line (SML).

Security Market Line - SML

The line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky marketable securities.

The SML essentially graphs the results from the capital asset pricing model (CAPM) formula. 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.

It is a useful tool in determining if an asset being considered for a portfolio offers a reasonable expected return for risk. Individual securities are plotted on the SML graph. If the security's risk versus expected return is plotted above the SML, it is undervalued since the investor can expect a greater return for the inherent risk. And a security plotted below the SML is overvalued since the investor would be accepting less return for the amount of risk assumed.

Optimal portfolio theory

On proportionately more risk for a lower incremental return. On the other end, low risk/low return portfolios are pointless because you can achieve a similar return by The optimal portfolio concept falls under the modern portfolio theory. The theory assumes (among other things) that investors fanatically try to minimize risk while striving for the highest return possible. The theory states that investors will act rationally, always making decisions aimed at maximizing their return for their acceptable level of risk.

The optimal portfolio was used in 1952 by Harry Markowitz, and it shows us that it is possible for different portfolios to have varying levels of risk and return. Each investor must decide how much risk they can

handle and than allocate (or diversify) their portfolio according to this decision.

The chart below illustrates how the optimal portfolio works. The optimal-risk portfolio is usually determined to be somewhere in the middle of the curve because as you go higher up the curve, you take investing in risk-free assets, like government securities.

fig3.12: optimal portfolio strategyYou can choose how much volatility you are willing to bear in your portfolio by picking any other point that falls on the efficient frontier. This will give you the maximum return for the amount of risk you wish to accept. Optimizing your portfolio is not something you can calculate in your head. There are computer programs that are dedicated to determining optimal portfolios by estimating hundreds (and sometimes thousands) of different expected returns for each given amount of risk.Diversification

An investor can reduce portfolio risk simply by holding instruments which are not perfectly correlated. In other words, investors can reduce their exposure to individual asset risk by holding a diversified portfolio of assets. Diversification will allow for the same portfolio return with reduced risk.

If all the assets of a portfolio have a correlation of 1, i.e., perfect correlation, the portfolio volatility (standard deviation) will be equal to the weighted sum of the individual asset volatilities. Hence the portfolio variance will be equal to the square of the total weighted sum of the individual asset volatilities.

If all the assets have a correlation of 0, i.e., perfectly uncorrelated, the portfolio variance is the sum of the individual asset weights squared times the individual asset variance (and volatility is the square root of this sum).

If correlation is less than zero, i.e., the assets are inversely correlated, the portfolio variance and hence volatility will be less than if the correlation is 0. The lowest possible portfolio variance, and hence volatility, occurs when all the assets have a correlation of −1, i.e., perfect inverse correlation.

Capital allocation line

The capital allocation line (CAL) is the line of expected return plotted against risk (standard deviation) that connects all portfolios that can be formed using a risky asset and a riskless asset. It can be proven that it is a straight line and that it has the following equation

CAL: E( rc ) = rf +σc [E(rp)- rf]/ σ p

In formula P is the risky portfolio, F is the riskless portfolio, C is the combination of P & F.

Applications to Project Portfolios and Other "Non-Financial" Assets

Some experts apply MPT to portfolios of projects and other assets besides financial instruments. When MPT is applied outside of traditional financial portfolios, some differences between the different types of portfolios must be considered.

1. The assets in financial portfolios are, for practical purposes, continuously divisible while portfolios of projects like new software development are "lumpy". For example, while we can compute that the optimal portfolio position for 3 stocks is, say, 44%, 35%, 21%, the

optimal position for an IT portfolio may not allow us to simply change the amount spent on a project. IT projects might be all or nothing or, at least, have logical units that cannot be separated. A portfolio optimization method would have to take the discrete nature of some IT projects into account. 2. The assets of financial portfolios are liquid can be assessed or re-assessed at any point in time while opportunities for new projects may be limited and may appear in limited windows of time and projects that have already been initiated cannot be abandoned without the loss of the sunk costs (i.e., there is little or no recovery/salvage value of a half-complete IT project).

Neither of these necessarily eliminate the possibility of using MPT and such portfolios. They simply indicate the need to run the optimization with an additional set of mathematically-expressed constraints that would not normally apply to financial portfolios.

Furthermore, some of the simplest elements of MPT are applicable to virtually any kind of portfolio. The concept of capturing the risk tolerance of an investor by documenting how much risk is acceptable for a given return could be and is applied to a variety of decision analysis problems. MPT, however, uses historical variance as a measure of risk and portfolios of assets like IT projects don't usually have an "historical variance" for a new piece of software. In this case, the MPT investment boundary can be expressed in more general terms like "chance of an ROI less than cost of capital" or "chance of losing more than half of the investment". When risk is put in terms of uncertainty about forecasts and possible losses then the concept is perfectly transferable to any type of investment.

Some tools applied in portfolio management

Jensen's Alpha

In finance, Jensen's alpha (or Jensen's Performance Index) is used to determine the excess return of a stock, other security, or portfolio over the security's required rate of return as determined by the Capital Asset Pricing Model. This model is used to adjust for the level of beta risk, so

that riskier securities are expected to have higher returns. The measure was first used in the evaluation of mutual fund managers by Michael Jensen in the 1970's.

To calculate alpha, the following inputs are needed:

the realized return (on the portfolio), the market return, the risk-free rate of return, and the beta of the portfolio.

Jensen's alpha = Portfolio Return - (Risk Free Rate + Portfolio Beta * (Market Return - Risk Free Rate)

)

Alpha is still widely used to evaluate mutual fund and portfolio manager performance, often in conjunction with the Sharpe ratio and the Treynor ratio.

Treynor ratio

The Treynor ratio is a measurement of the returns earned in excess of that which could have been earned on a riskless investment (i.e. Treasury Bill) (per each unit of market risk assumed).

The Trey nor ratio (sometimes called reward-to-volatility ratio) relates excess return over the risk-free rate to the additional risk taken; however systematic risk instead of total risk is used. The higher the Treynor ratio, the better the performance under analysis.

T = ( rp - rf)/ ß

Where:

T= Treynor

rp= Portfolio return

rf = Risk free return

ß = Portfolio beta

Like the Sharpe ratio, the Treynor ratio (T) does not quantify the value added, if any, of active portfolio management. It is a ranking criterion only. A ranking of portfolios based on the Treynor Ratio is only useful if the portfolios under consideration are sub-portfolios of a broader, fully diversified portfolio. If this is not the case, portfolios with identical systematic risk, but different total risk, will be rated the same. But the portfolio with a higher total risk is less diversified and therefore has a higher unsystematic risk which is not priced in the market.

An alternative method of ranking portfolio management is Jensen's alpha, which quantifies the added return as the excess return above the security market line in the capital asset pricing model.

Sharpe ratio

The Sharpe ratio or Sharpe index or Sharpe measure or reward-to-variability ratio is a measure of the excess return (or Risk Premium) per unit of risk in an investment asset or a trading strategy. Since its revision made by the original author in 1994, it is defined as :

S = E[R-Rf ] / σ = E[ R- Rf ]/√ var[ R- Rf ]

where R is the asset return, Rf is the return on a benchmark asset, such as the risk free rate of return, E[R − Rf] is the expected value of the excess of the asset return over the benchmark return, and σ is the standard deviation of the excess return (Sharpe 1994).

Note, if Rf is a constant risk free return throughout the period,

√ var[R-Rf] = √ var[R]

Sharpe's 1994 revision acknowledged that the risk free rate changes with time. Prior to this revision the definition was S = (E[R]-R f) / σ assuming a constant Rf.

The Sharpe ratio is used to characterize how well the return of an asset compensates the investor for the risk taken. When comparing two assets each with the expected return E[R] against the same benchmark with return Rf, the asset with the higher Sharpe ratio gives more return for the

same risk. Investors are often advised to pick investments with high Sharpe ratios.

Sharpe ratios, along with Treynor ratios and Jensen's alphas, are often used to rank the performance of portfolio or mutual fund managers.

This ratio was developed by William Forsyth Sharpe in 1966. Sharpe originally called it the "reward-to-variability" ratio in before it began being called the Sharpe Ratio by later academics and financial professionals. Recently, the (original) Sharpe ratio has often been challenged with regard to its appropriateness as a fund performance measure during evaluation periods of declining markets (Scholz 2007).

EPILOGUE

SWOT ANALYSISCONCLUSIONRECOMMENDATIONS

Strengths1) Provides the most important resource i.e. is finance. 2) Contributes to the economic growth of the country. 3) Balances the balance of payment position.

Weakness1) Focuses more on developing countries.2) Hampering the progress due to anytime withdrawal. 3) Provides only short term opportunities.4) Provides more returns than in domestic countries. 5) Develops relationship between two countries.

Opportunities1) Better infrastructure. 2) Exploitation of resources to the maximum. 3) Better technology available.

Threats1) Anytime withdrawal of investments. 2) Investments made in Foreign countries poses threat to the Indian companies. 3) Increased returns.

SWOT ANALYSIS

STRENGTHS:

1. Provides most important resource i.e. finance: To start any business and to make the idea to be actually implemented it needs finance. The FIIs brings the inflow of money into the country. Many projects that require funding is done with the help of FIIs. Today in this world, the Finance is the only resource, which has the capability to be easily transferred from one place to another, and hence providing as a base for business opportunities .Free flow of capital is conducive to both the total world welfare and to the welfare of each individual.

2. Contributes to the economic growth of the country: When FIIs enters the domestic country they bring in the money and acts as the facilitator of the business development. As money comes into the country, it provides various benefits to the leading sectors and ultimately results into the development of various sectors. E.g. in India I.T sector is the most booming sector and has shown the signs of improvement thus attracting the FIIs.

3. Balances the balance of payments: In the initial phase of economic development, the under developing countries need much larger imports. As a result, the balance of payment position generally turns adverse. This creates gap between earnings and foreign exchange. The foreign capital presents short run solution to the problem. So in order to balance the Balance of Payment Foreign Investment is needed.

4. Provides more returns than in domestic countries: FIIs provide more returns to the investors as compared to the domestic country. This is one of the most important strength of FIIs. The main reason is that the countries in which th Foreign Institutional Investors invest their money, provides more opportunities and many benefits. So investors invest in foreign countries rather than in the domestic countries.

5. Develops relationship between two countries: Due to FIIs the investors from different countries come into picture and various people also come into the contact with each other. This develops a sense of relationship between different people and develops a nice intra-cultural atmosphere.

WEAKNESSES:

1. Focuses more on developing countries: The main weakness of foreign institutional investments is that they provide opportunities to only the developing and developed countries. The Foreign institutional investors focuses on the developing countries rather than on the underdeveloped countries and because of this the under developed countries remain underdeveloped. So this drawback of the FIIs should be improved upon by making their investments in the under developed countries.

2. Hampering the progress due to anytime withdrawal: The FIIs do not provide any guarantee i.e. the Foreign institutional investors can anytime withdraw their money when they want to so this makes the nature of the FIIs unpredictable and ultimately hampering the progress of the economy of that country. The very good example of this is the mass withdrawal of the FIIs in the far eastern countries like Malaysia, Indonesia etc in 1996-97.

3. Provides only the short term opportunities : FIIs provide only the short term opportunities i.e. they do not provide the long term opportunities as they are very much supple in nature and there by limiting its scope to short term opportunities. As far as the market seems to be good the FIIs are attracted and after that they are not predictable. So FIIs are bound to provide only the short term opportunities.

OPPORTUNITIES:

1. Better infrastructure: Better infrastructure is available only when there is adequate finance available and this comes with the help of

FIIs. Infrastructure covers many dimensions, ranging from roads, ports, railways and telecommunication systems to institutional development (e.g. accounting, legal services, etc.) studies in china reveal the extent of transport facilities and the proximity to major ports as having a positive significant effect on the location of FII within the country. Poor infrastructure can be developed with the help of the foreign investment. Foreign investors also point potential for attracting significant FII if host country government permits more substantial foreign participation in the infrastructure sector.

2. Exploitation of resources to the maximum: The major resources i.e. manpower,material and machines can be utilized to its fullest so as to get the maximum benefit out of it. Through FIIs, the reserves or the resources that are untapped because of the lack of funds can be exploited. Potential areas for exploration ventures include gold, diamonds, copper, lead zinc, cobalt silver, tin etc. There is also scope for setting up manufacturing units for value added products.

3. Better technology available: Technology is the main aspect on which the growth of the country is determined. Developing countries has a very low level of technology. Their technology is not up to the standards and they lack in modern technology. Developing countries possess a strong urge for industrialization to develop their economies and to wriggle out of the low-level equilibrium trap in which they are caught. This raises the necessity for importing technologies from advanced countries. Such technology usually comes with foreign capital.

THREATS:

1. Anytime withdrawal of investments: The FIIs are more flexible in nature i.e. unlike FDI they are not guaranteed. Foreign Institutional Investors can withdraw at any time they want. Foreign Direct Investment is for a fixed period and the investments could not be withdrawn until a specified period. The recent example was the net outflows of the money from the stock market that affected the whole

economy and its consequences are very much appalling resulting into posing threats to the economy.

2. Investments made in Foreign Companies poses threat to Indian companies: Many MNCs have their set up in India and these MNCs provide a stiff competition to the domestic industries. The Foreign Institutional Investors invest their money in these MNCs and they are equipped with the latest technology to provide products at cheaper rates. Moreover, the Indian laborers are opposing the use of modern technology as the company downsizes the number of workers that substitutes the modern technology.

3. Increased returns results in outflow of money: Increased returns can pose a threat to the domestic country as the money flows out of the country and this may affect the economy of the domestic country. The returns that the Foreign Institutional Investors are getting are very much high and this returns they take to their home country and this leads to the outflow of money from domestic country to the foreign country.

Books:

1. NCFM- Derivatives market module

2. Richard I. Levin, David S. Rubin, Statistics For

Management; Prentice Halt Publication, 7th edition 2006

3. Schindler & Kooper, Research Methods In Business;

PearsonEducation Publication, 6h edition 2007

References & Bibliography

Websites:-

1. www.nseindia.com/

2. http://www.bseindia.com/

3. http://www.indiainfoline.com/

4. http://www.moneycontrol.com/

5. http://google.com/finance

6. http://www.bseindia.com/

7. www.derivativesindia.com/

8. www.capitalmarket.com/

9. www.wikipedia.com/

10. http://www.equitypandit.com/

11. www.bloomberg.com/