International Journal of Engineering Technology Science and Research

IJETSR
www.ijetsr.com
ISSN 2394 – 3386
Volume 5, Issue 3
March 2018

Analysis of Portfolio Risk and Return with reference to

Securities Market- A Study

Dr. G. Sabitha,
Associate Professor, Dept. of MBA,
Anurag Group of Institutions, Hyderabad.

Abstract:
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.The process of investment management begins with an evaluation of the available investment opportunities. The
investor must have a clear picture of the current investment. He should be able to design a framework for evaluation of
risk return profile of various securities. This paper discusses the evaluation techniques of risk and return of selected
portfolio.
Key Words: Assets, Correlation,Portfolio Return, Portfolio Risk, Securities.

INTRODUCTION
Portfolio analysis includes analyzing the range of possible portfolios that can be constituted from a given set
of securities. A combination of securities with different risk- return characteristics will constitute the portfolio
of the investor. A portfolio is a combination of various assets and/or instruments of investments. The portfolio
is also built up out of the wealth or income of the investor over a period of time with a view to suit his risk and
return preferences to that of the portfolio that he holds. The portfolio analysis is an analysis of the risk-return
characteristics of individual securities in the portfolio and changes that may take place in combination with
other securities due to interactions among themselves and impact of each one of them on others.

NEED FOR THE STUDY

Individuals act and react based on their perception, not on the basis of objectives of reality. Thus, individual
perceptions are much important to the marketer than the knowledge of objective reality. Perception is defined
as the process by which an individual selects, organizes and interprets stimuli into a meaningful and coherent
picture of the world. A stimulus is any unit of input to any of the sense. Identification of assets or securities,
allocation of funds and also identifying the classes of assets are also be done for the purpose of
investment.They have to decide the major weights, proportion of different assets in the portfolio by taking into
consideration the related risk factors. Return and minimize risk in the investment even if there are unlimited
risks in the market. Keep the security, safety of principle sum intact both in terms of money as well as its
purchasing power. Stability of the flow of income is more accurate and systematic to reinvestment or
consumption of income.

SCOPE OF THE STUDY

The study covers the calculation of correlations between the different securities in order to find out at what
percentage funds should be invested among the companies in the portfolio. Also the study includes the

52 Dr. G. Sabitha
 International Journal of Engineering Technology Science and Research
IJETSR
www.ijetsr.com
ISSN 2394 – 3386
Volume 5, Issue 3
March 2018

calculation of individual Standard Deviation of securities and ends at the calculation of weights of individual
securities involved in the portfolio. These percentages help in allocating the funds available for investment
based on risky portfolios.

OBJECTIVES OF THE STUDY

1. To analyze the investment pattern, which gave optimal return at a minimize risk to the investor for the
selected securities.
2. To analyze whether the portfolio risk is less than individual risk and also to understand the constituents of
portfolio.
3. To understand portfolio selection process and select the best portfolio.

RESEARCH METHODOLOGY
Research design or research methodology is the procedure of collecting, analyzing and interpreting the data to
diagnose the problem and react to the opportunity in such a way where the costs can be minimized and the
desired level of accuracy can be achieved to arrive at a particular conclusion.
The methodology used in the study for the completion of the project and the fulfillment of the project
objectives, is as follows:
 Market prices of the companies have been taken for the years of different dates, there by dividing the
companies into 5 sectors.
 A final portfolio is made at the end of the year to know the changes (increase/decrease) in the portfolio at
the end of the year.
Sources of the data:
The secondary data was collected from various financial books, magazines and from stock lists of various
newspapers.

LIMITATIONS OF THE STUDY

 This study has been conducted purely to understand Portfolio Management for
investors.
 Construction of Portfolio is restricted to two companies based on Markowitz model.
 Very few and randomly selected scrip’s / companies are analyzed from BSE listings.
 Detailed study of the topic was not possible due to limited size of the project.
 There was a constraint with regard to time allocation for the research study i.e. for a period of 45 days.

THE DESCRIPTION OF PORTFOLIOS

Richard Grinold,provides a general framework for the description of various aspects of a portfolio using a
set of factors. The work is cousin to the well –worn topic of performance analysis and attribution, and in that
sense, is fairly represented as being old wine in new bottles the scope is much more general, however Grinold
first provides a theoretical structure with a model that describes various aspects of a portfolio as either the
allocation of a portfolio’s variance or as the results in terms of the risk and correlation of portfolios. The
expanded framework and portfolio focus opens up a wide range of problems that can be studied with the same
framework. Grinold uses exampled to illustrate what the methodology can accomplish and as a guide to sense
when we are asking too much from the model.
Roger Clarke, Harindra de Silva and Steven Thorley, Empirical studies document that equity portfolios
constructed to have the lowest possible risk have a surprisingly high average returns. Roger Clarke, Harindra
de Silva and Steven 53horley derive an analytic solution for the long-only Minimum-variance portfolio under

53 Dr. G. Sabitha
 International Journal of Engineering Technology Science and Research
IJETSR
www.ijetsr.com
ISSN 2394 – 3386
Volume 5, Issue 3
March 2018

the assumption of a single-factor covariance matrix. The equation for the optimal security weights has simple
and intuitive form that provides several insights on minimum – variance portfolio composition. . The
relatively small set of securities that remains has market betas below an analytically specified threshold beta.
The ratio of portfolio beta to threshold beta dictates the portion of ex-ante portfolio variance that is market
factor related. The authors verify and illustrate the portfolio mathematics using historical data on the U.S.
equity market and explore how the single factor analytic results compare to numerical optimization under a
generalized covariance matrix. The analytic and empirical results of this study suggest that minimum –
variance portfolio performance is largely a function of the long – standing empirical critique of the traditional
CAPM that low – beta stock have relatively high average returns.
Martin L. Leibowitz and Anthony Bova, An institutional fund typically has a multi- asset allocation the
policy portfolio that is maintained overtime. When allocation shifts, the fund rebalances back to the policy
portfolio. The discipline of the policy portfolio has many benefits: simplicity, convenient benchmarking, and a
minimum of organizational frictions. It’s very routine nature can lead, however, to an over emphasis on
relative returns and insensitivity to fundamental changes in fund status and market structure. In 2003, the late
Peter Bernstein questioned whether rigid adherence to the policy made sense, given frequent market
dislocations and high levels of volatility. In this article Leibowitz and Bova attempt to shed further light on the
Bernstein question by analyzing the risk tolerance and return assumption of a basic two- asset fund. One key
finding is that policy portfolio rebalancing implicitly assumes that the risk tolerance and return premiums
remain fixed overtime. But few funds have the sponsorship, liquidity, or organizational convictions to keep
such a constant risk tolerance in the face of severely adverse markets.
Robert A. Jarrow, It is commonly believed that active portfolio management can generate positive alphas.
This is partly based on the beliefs that positive alphas represent disequilibrium returns, which can exist in
complex financial markets. In contradiction, this article shows that positive alphas represent arbitrage
opportunities, not just disequilibrium returns. As persistent and frequent arbitrage opportunities much rarer,
even in complex markets, Jarrow argues that positive alphas are more fantasy than fact. He introduces the
notion of an unobservable factor that can generate false positive alphas, and which resolves the inconsistency
between common belief and the sparsity of positive alphas.
Eric H. Sorensen, Jing Shi, Ronald Hua and Edward Qian, Fiduciary institutions are forging ahead to
remove the traditional – only handcuffs that constrain the delivery of maximum net alpha by their equity
managers. The proliferation of 130/30 managers promotes a question as to the optimal ratio for this
constrained long – short strategies. Analysis of the range from long – only to fully unconstrained will help
find the optimal solution that maximizes the risk – adjusted return. The ratio that maximize net information
ratio depends largely on the risk budget, the chosen benchmark, leveraging costs, and the transaction cost
associated with turnover. In the case of normal active risk (3%-5%) more alpha leverage is better than less.
That is, despite the declining marginal benefits of higher leverage, 150/5 may be better than 120/20,
approximating a pure market line neutral strategy.
Data analysis and interpretation:
Deriving the minimum risk portfolio, the following formula is used:

Wa = (sb) 2–rab (sa) (σb)

(sa) 2 + (sb) 2 – 2rab (sa) (sb)
Where,
Xa is the proportion of security A
Xb is the proportion of security B
σa = standard deviation of security A
σb = standard deviation of security B
rab = correlation co-efficient between A&B

54 Dr. G. Sabitha
 International Journal of Engineering Technology Science and Research
IJETSR
www.ijetsr.com
ISSN 2394 – 3386
Volume 5, Issue 3
March 2018

Companies Minimum Risk Portfolio

Security A Security B

NCL & L&T 0.42 0.58

MATRIX & HETERO DRUGS 0.55 0.45

BSNL & TATA

1.37 -0.37
COMMUNICATIONS

HDFC & BANK OF INDIA: 0.45 0.55

TCS & HCL 0.60 0.40

CALCULATION OF PORTFOLIO RISK:

For two securities:

σP = sa2*(Xa) 2 + sb2*(Xb) 2 + 2rab*sa*sb*Xa*Xb

Where,
σP= portfolio risk
Xa = proportion of investment in security A
Xb = proportion of investment in security B
R12 = correlation co-efficient between security 1 & 2
σa = standard deviation of security 1
σb = standard deviation of security 2

Companies Portfolio Risk

NCL & L&T 22.34

MATRIX & HETERO DRUGS 12.36

BSNL & TATA
19.58
COMMUNICATIONS
HDFC & BANK OF INDIA: 26.94

TCS & HCL 18.20

55 Dr. G. Sabitha
 International Journal of Engineering Technology Science and Research
IJETSR
www.ijetsr.com
ISSN 2394 – 3386
Volume 5, Issue 3
March 2018

INTERPRETATION: According portfolio risk MATRIX & HETERO DRUGS performance is good
because those companies facing low risk (12.36) when compared to other portfolios.
CALCULATION OF PORTFOLIO RETURN:
Rp = W1R1 + W2R2 (for two securities)
Rp = W1R1+ W2R2 + W3R3 (for three securities)
Where,
W1, W2, W3 are the weights of the securities
R1, R2, R3 are the Average returns

Companies Portfolio Return

NCL & L&T 23.67
MATRIX & HETERO DRUGS -13.1765
BSNL & TATA COMMUNICATIONS -24.83
HDFC & BANK OF INDIA: 9.014
TCS & HCL - 10.43
Interpretation: According portfolio return NCL & L&T performance is good because those companies gain
high return (23.67) when compared to other portfolios.

STATEMENT OF COMPANY WISE AVERAGE RETURNS AND STANDARD DEVIATIONS

Company name Average returns (%) Standard deviations (%)

CEMENT INDUSTRY
NCL -4.59 60.38
L&T 44.14 45.73
PHARMACEUTICAL INDUSTRY
MATRIX -8.242 35.66
HETERO DRUGS -19.21 43.26
TELECOM INDUSTRY
BSNL -3.80 22.32
TATA COMMUNICATIONS 53.03 44.01
BANKING INDUSTRY
HDFC -6.76 37.99
BANK OF INDIA 21.92 34.87
I.T. INDUSTRY
TCS -20.51 33.33
HCL 4.72 45.61

56 Dr. G. Sabitha
 International Journal of Engineering Technology Science and Research
IJETSR
www.ijetsr.com
ISSN 2394 – 3386
Volume 5, Issue 3
March 2018

Interpretation: According to average retuns and standard deviarion of above companies reveals that L&T ,
BANK OF INDIA,TATA COMMUNICATIONS and HCL these companies are gained better returns as
much as other companies. So those return gained companies performance is good by the securities invest in
KARVY STOCK BROKING LIMITED.

STATEMENT OF PORTFOLIO RETURNS AND RISKS OF COMPANIES

Company name Returns (%) Risks (%) Correlation coefficient®
CEMENT
NCL
L&T 23.67 22.34 -0.63
PHARMACEUTICAL
MATRIX
HETERO DRUGS -13.1765 12.36 -0.80
TELECOM
BSNL
TATA
-24.83 19.58 0.82
COMMUNICATIONS
BANKING
HDFC
BANK OF INDIA 9.014 26.94 0.10
I.T.

TCS
-10.43 18.20 -0.55
HCL

STATEMENT OF PORTFOLIO RETURNS AND RISKS OF COMPANIES

Companies Correlation coefficient ®coefficient®

NCL
L&T -0.63
MATRIX
HETERO DRUGS -0.80
HDFC
BANK OF INDIA 0.82
BSNL
0.10
TATA COMMUNICATIONS
TCS
HCL -0.55

57 Dr. G. Sabitha
 International Journal of Engineering Technology Science and Research
IJETSR
www.ijetsr.com
ISSN 2394 – 3386
Volume 5, Issue 3
March 2018

Interpretation: According to above graph in banking sector having positive correlation and telecom industry
also having positive correlation. So these companies facing no risk. The remaing industries having negative
correlation so they are facing less risk.

FINDINGS
The primary objective of these securities combination is to reduce risk of portfolio and to gaining the optimum
return. The analytical part of the study reveals the following interpretations:
 As far as the average returns of the selected companies are concerned, TATA communications are
performing well whereas other companies are concerned average return in isolation for the period of the
study is very poor.
 The investors who are very much concern about the risk, can invest their funds in this combination. Rest
of the portfolio combinations fall under the moderate risk category.
 Portfolio management is aimed at reducing inefficiencies that occur when undertaking a project and
eliminating potential risks, which can occur due to lack of information or systems available.
 It helps the organization to align its project work to meet the projects whilst utilizing its resources to the
maximum.
 Sector portfolio has given negative return in the month of the study as there is systemic risk as very high
in the sector portfolio because of non diversification.
 All the individual companies and the portfolio showing very steady chart, there is very little movement in
the performance chart.

SUGGESTIONS
 Select your investments on economic grounds. Public knowledge is no advantage.
 Buy stock with a disparity and discrepancy between the situation of the firm – and the expectations and
appraisal of the public (Contrarian approach vs. Consensus approach).
 Buy stocks in companies with potential for surprises.
 Take advantage of volatility before reaching a new equilibrium.
 Listen to rumors and tips, check for yourself.
 Don’t put your trust in only one investment. It is like “putting all the eggs in one basket “. This will help
lessen the risk in the long term.
 The investor must select the right advisory body which is has sound knowledge about the product which
they are offering.
 Professionalized advisory is the most important feature to the investors. Professionalized research,
analysis which will be helpful for reducing any kind of risk to overcome.

CONCLUSION
 From the overall analysis of portfolio performance, it is observed that the NCL & L&T has highest
portfolio returnRs of 23.67% with portfolio risk of 22.3 percent which indicates a better combination for
investment.
 The investor who is a risk taker it is advise to go with the combination of HDFC & BANK OF INDIA
which has a portfolio return of Rp 9.014 with portfolio risk σp
 Of 26.94 and as well as correlation coefficient of 0.10 which indicates a better combination for
investment.

58 Dr. G. Sabitha
 International Journal of Engineering Technology Science and Research
IJETSR
www.ijetsr.com
ISSN 2394 – 3386
Volume 5, Issue 3
March 2018

 It can be concluded from the project that future of portfolio management is bright provided proper
regulations prevail and investor’s needs are satisfied by providing variety of schemes.
 To manage stocks in that company is benefit to overall organization.

REFERENCES:
1. Daily news papers
2. NSE and BSE websites
3. ROBBINS, Security Analysis & Portfolio Management, Tagore Publications,6th Edition

59 Dr. G. Sabitha