The document analyzes the risk involved in 10 banking stocks over a 10 year period. It finds that State Bank of India (SBI) had the lowest total risk or standard deviation of 0.1172, making it the lowest risk and most recommended stock for investment. SBI also had the lowest systematic/beta risk of 0.1054, indicating its returns were least affected by market movements. Oriental Bank of Commerce was found to have the lowest beta of 0.0158. Overall, the analysis showed banks had lower unsystematic than systematic risk, suggesting they managed internal risk factors effectively. SBI emerged as the lowest risk option based on this 10 year study of risk for 10 major Indian banks.

1. ASSIGNMENT
ON
PORTFOLIO MANAGEMENT
TOPIC:RISK ESTIMATION OF ONE TO TEN SECURITIES FOR TEN YEARS
DEPARTMENT OF COMMERCE, SCHOOL OF MANAGEMENT, PONDICHERRY UNIVERSITY
SUBMITTED TO
DR. DANIEL LAZAR
ASSOCIATE PROFESSOR
DEPARTMENT OF COMMERCE
SCHOOL OF MANAGEMENT
SUBMITTED BY
DARUN V (12351034)
SUMESH TP (12351048)
MUHAMMED SHAFI UK (12351056)
MCOM (BF) SECTION: A

2. RISK ESTIMATION OF ONE TO TEN SECURITIES FOR
TEN YEARS
INTRODUCTION
Risk refers to the possibility that the actual outcome of an
investment will differ from its expected outcome . there are two
classification of risk ie. Systematic and unsystematic risk. A proper
analysis of risk will helps the investors to diversify the risk involved it
and select proper company to invest hard earned money. Here we are
studying the risk involved in banking industry. Banks are selected on the
basis
of
market
capitalization.SBI,BOB,PNB,BOI,CANARA
BANK,IDBI,UNION BANK,SYNDICATE BANK,IOB,ORIENTAL BANK are the
banks we selected.
There is an general talk about stock market investment, 90% of
investors making losses because of lack of knowledge about
ascertainment and analysis of risk involved it.

3. OBJECTIVES
 To ascertain total risk or SD
 To ascertain systematic and unsystematic risk involved in securities
 To find out the company which has lowest and highest risk.
 To suggest a company for investment
RESERCH PROBLEM
Majority of investors in securities market making loss because of
lack of knowledge about the ascertainment or risk and return. There
are two types of risk systematic and unsystematic risk, unsystematic
risk can be diversifiable and the measurement of unsystematic risk will
help the investors to diversify risk and select suitable securities.
METHODOLOGY
 10 companies selected from banking industry on the basis of
market capitalization.
 Adjusted closing price of banks collected from yahoo finance
 Adjusted closing price of NIFTY collected in NSE
 Find security return and then find Standard deviation on it
 Find Beta by using security return and market return
 Unsystematic risk is calculated by taking the different between
Standard deviation and Beta
LIMITATION
 Only ten Banks are taken to study risk involved in Banking industry
 Study is based on ten years monthly closing price

4. RISK
Risk can be defined as the “Potential for variability in return”. Or it is the
possibility of variation between expected and realized return with regards to an
investment. Or the possibility that the return of holding securities less than the
return that were expected, Sources may be the failure of dividend or securities
price changes. Risk is the uncertainty that the expected return of investment may
not be realized
In other words risk is uncertainty that the expected return on investment
may not be realized .risk and return are highly proportional i.e. higher the rate of
return higher the rate of risk and vice versa.
ELEMENTS OF RISK
Following are the two elements of risk
A. Systematic risk
B. Unsystematic risk
Thus total risk should be
Total risk=Systematic risk + Unsystematic risk
A. SYSTEMATIC RISK
The risk inherent in nature or affect entire market and un-diversifiable is
known as systematic risk.
FEATURES
Following are the important features of systematic risk
 Un-diversifiable
 External
 Un-controllable
 Affect entire market

5. TYPES OF SYSTEMATIC RISK
1. INTEREST RATE RISK
It tell about the inverse relationship between the interest rate and stock price.
Speculators often resort to margin trading, as the increased rate of interest rate will
tightening the borrowing capacity of investors. Thus
 higher interest rate-stock price fall
 Lower interest rate-stock price increase.
 Affect directly to bonds and indirectly to shares
If interest rate is higher than the cost of borrowed capital will
increase, then the profitability of companies also decrease, which leads to
lower than and the price of share will decrease
If interest rate increases, the risk of securities increases under the following
ways.
a. Increase the interest based on companies, which caused lower
profitability and dividend and fall in the share price
b. Higher interest rate cause increase the cost of borrowed fund of
investors may not come forward to purchase or trade securities, which
result fall in demand and decrease the price of securities.
2. MARKET RISK
Variation in return caused by volatility of the stock market is referred to as
market risk.
 Indices such as SENSEX,NIFTY are the indicators
 It may not explain short-term movements but applicable in long term
movements
 Political, social, and economic factors influencing market risk.
Market rate risk is due to bull and bear phase in market, market risk
may cause of potential loss of principal by investor i.e., when investor sell
securities at lower price than the purchase.

6. Market risk is caused by investor reaction to tangible as well as intangible
events.
Tangible events
 Economic factors
 Political factors
 Social factors
Intangible events
 Market psychology
Emotional instability of investors acting collectively leads to an
inner banking overreaction
3. PURCHASING POWER RISK
Variation in investors returns caused by inflation because inflation lowering
the purchasing power of money or purchasing power of investment.
Purchasing power risk also called as inflation risk. It is arises due to risking
general price level, which leads to lowering the purchasing power of currency and
decrease the demand for particular security and reduce the price for it. Inflation
also influences the profitability of concerned organization and reduced the level of
return.
B. UNSYSTEMATIC RISK
The return from a security sometimes vary, because of certain factors
affecting only the company issuing such security is known as unsystematic risk.
Examples are raw material scarcity, labor strike management inefficiency etc.

7. FEATURES
 Diversifiable
 Internal
 Controllable
TYPES OF UNSYSTEMATIC RISK
1) BUSINESS RISK
Business risk is function of variability in the operating condition of a firm,
these conditions inject into operating income and dividends.
Business risk are classified into two internal and external
 Internal business risk: Efficiency of firms operation within the
operating environment of firm.
 External business risk:Beyond the control of firm
2) FINANCIAL RISK
Financial risk is a function of financial leverage. Variability in EPS due to
presence of debt capital in capital structure of a company is referred to as
financial risk.
Financial risk is based on capital structure of firm. A firm with no debt
financing has no financial risk ,if it has debt capital in its capital structure which
increase the burden of company in the form of fixed interest which influence the
dividend payment capacity of firm and its market price negatively.

8. MEASUREMENT OF RISK
Risk in investment is associated with Return, which cannot be measured
without the measurement of return.
Return:Income received on an investment plus any change in market price,
usually expressed as a percent of the beginning market price of the investment.
MEASUREMENT OF STANDARD DEVIATION OR TOTAL RISK
Standard deviation is the total risk involved in securities or it is the summation
of systematic risk and unsystematic risk.
MEASUREMENT OF BETA
Beta is the systematic risk or undiversifiable risk. This can be calculated by the
following formula.

9. INTERPRETATION OF BETA
Following is the table showing the interpretation of Beta. Beta shows the
changes or variation in return in relation to variation in market return, I.e. how
much will be the changes in security return caused by variation in market index.
Value of Beta
ß<0
ß=0
0<ß<1
ß=1
ß>1
Interpretation
Asset generally moves in the opposite direction as compared to the index
Movement of the asset is uncorrelated with the movement of the benchmark
Movement of the asset is generally in the same direction as, but less than the movement of the benchmark
Movement of the asset is generally in the same direction as, and about the same amount as the movement of the benchmark
Movement of the asset is generally in the same direction as, but more than the movement of the benchmark
UNSYSTEMATIC RISK
Standard Deviation is the total risk and beta is the systematic risk, so here
the different is taken as the unsystematic risk. Unsystematic risk is the different
between Standard deviation and systematic risk.

10. ANALYSIS
 STANDARD DEVIATION/TOTAL RISK
Following is the table showing the total risk involved in the banking
securities over the past ten years from 2003-04 to 2012-13. Average risk of
securities for the ten years also calculated.
Highest average Standard deviation highlighted in Red color and lowest
standard deviation is highlighted by sky-blue.

11. AVERAGE STANDARD DEVIATION
Following table showing average standard deviation of banks for past ten years
SD FOR 10 YEARS
0.2
0.15
0.1
0.05
SD FOR 10 YEARS
0
INTERPRETATION
Highest SD showed by IDBI at .1805 it indicates higher variation of return of
IDBI and lowest SD showed by SBI at .1200 it indicates lowest variation of return
of SBI.
 BETA/SYSTEMATIC RISK
Following is the table showing systematic risk of banking companies for the
past ten years from 2003-04 to 2012-13, with average Beta value for the ten
years. Highest Average beta highlighted in red colour and lowest beta highlighted
in skyblue

12. 10 YEARS AVERAGE BETA
Following is the table showing ten years average beta of ten banking companies.
BETA-10 YEARS
0.25
0.2
0.15
0.1
0.05
BETA-10 YEARS
0
INTERPRETATION
Highest beta showed by IDBI at .2430, it indicates 1 % change in index return
would cause .2430 change in IDBI stock return and lowest beta showed by PNB at
.0754
 UNSYSTEMATIC RISK
Following is the table showing Unsystematic risk of the ten banking
companies for past ten years from 2003-04 to 2012-13.Average risk for the ten
years also showed here. Highest value is highlighted in red color and lowest is
highlighted in sky blue.

13. 10 YEARS AVERAGE UNSYSTEMATIC RISK
Following is the graphical representation of average unsystematic risk for
past ten years
UNSYSTEMATIC RISK -10 YEARS
0.06
0.04
0.02
0
-0.02
UNSYSTEMATIC RISK -10 YEARS
-0.04
-0.06
-0.08
-0.1
INTERPRETATION
Highest unsystematic risk showed by PNB at .0569 and lowest unsystematic risk
showed by SBI at -0988

14. FINDINGS





Lowest sd showed by sbi at .1172
SD of banks falling over the period of time
Oriental bank has lowest beta of .0158
Lowest unsystematic ris is showed by pnb at .0325
Unsystematic risk in banks is lower than systematic risk means the internal
factors affecting return of security are well managed
CONCLUSION
Here the estimation of Risk of ten securities for ten years suggest SBI for
investment purpose because it shows lowest SD .Unsystematic risk of banks are
lower than the systematic risk. Which shows the internal factors that affect
Banking companies return are effectively managed.