Financial Puzzle with NIFTY Junior PRANAY VEER, VAMSHI KRISHNA
OUTLINE CNX NIFTY Junior index1 Procedure2 Portfolio Construction Process3 Different Scenarios Developed4 Risk – Return of Different scenarios5 Observations and Issues6
CNX NIFTY Junior • CNX Nifty Junior was introduced on January 1, 1997 • Most liquid securities after the first 50 Securities in NIFTY50 • Methodology - Free Float Market capitalization • S&P CNX Nifty & CNX Nifty Junior = 100 most liquid stocks in India • Index represents about 12.48% of the free float market Capitalization of the stocks listed on NSE as on Mar. 30, 2012.
Selection CriteriaNifty Junior 14.32% of the traded value of all stocks listed on NSE • Liquidity Market (Impact Cost) Capitalization Floating Other Stock
Index Statistics1.• Introduced on: January 1, 1997• Base date: November 3, 1996• Base index value: 1000
ASSUMPTIONS •Replacement of stocks in NIFTY Junior is not considered •We have considered only the existing 47 stocks Nifty Junior + 3 stocks from Nifty 50 •As the data was not available for GMR Infra, Adani Ports And Titan Industries we have replaced it with least weighted stocks on NIFTY(SAIL,DLF,SIEMENS) •Free float Market Capitalization as on June 2012 is considered as MCAP •As the data collected has some missing elements, for normalcy, the elements were corrected •There is a small possibility of minor errors in the data
PROCEDURE • Data Source: Yahoo Finance website • Frequency: Weekly closing prices DataSource • NSE data - Most of the stocks (else BSE data) • Corporate Actions effect (stock splits) - Negated it byEvent multiplying it with the Stock Split Ratio (LIC Finance, CromptonEffect Greaves) (1:5 ratio) • 47 stocks are considered from Nifty Junior • 3 other stocks are selected from S&P CNX Nifty 50 - Least FreeStocks Float Market Capitalization (June 2012). • Initially - 1 June 2007 to 1 July 2012 No 5 stocks dataPeriod • New Data period - 31 March 2008 to 25 June 2012.
SCENARIO BuildingDifferent Portfolio’s constructed: • Value Based Portfolio • Return Based Portfolio • Standard Deviation Based Portfolio • Finance Stocks Portfolio • Score Based Portfolio • DART Board Approach • Best 25 return Based
Construction - Different Portfolios • The weightages are assigned using the Return % on a proportionate basis to the total return. Return Based • The Top 10 stocks with optimal standard deviations are selected in this scenarioBest 10 - SD • All the 15 finance stocks in the Nifty Junior isFinance selected for this scenario Stocks
Construction - Different Portfolios • The returns of the Best 25 stocks are selected in this scenarioBest 25Return • Randomly 25 stocks are selected in this scenarioDARTBoard • 3 parameters - Mean, SD and MCAP (Weights) • Score - 10Score • Weights - 1/3 is assigned to each parameter (optimal basis)Based
CNX NIFTY Junior Return for different Portfolio’s Portfolio Portfolio 70 Portfolio MeanS.No. Type Mean 60 1 Return 64.51 SD- Optimal 50 2 10 20.13 40 Top 25 3 Return 34.82 30 20 4 Random 15.56 10 5 Score 17.59 0 6 Finance 44.59 0 1 2 3 4 5 6
Issues & Observations The data in Yahoo Finance has minor errors Risk and Return in Nifty Junior is very high Standalone risk of some stocks may hamper Portfolio risk (Eg: Indus India Bank Ltd.) Unsystematic risk is also high in Nifty Junior, as most of the companies are not as much established in Nifty 50 The return and risk is quite decent in Return based portfolio Though Finance -15 has 35% share in current market capitalization, the portfolio has the highest Standard deviation