This chapter provides an overview of the stock market industry and stock exchanges in India. It discusses that a stock market, also known as the equity market or share market, is a market for shares issued by public companies. Stock exchanges provide a platform for buyers and sellers to trade in stocks and securities. Some key points discussed include:
- A brief history of stock markets dating back to 12th century France and the role of stock exchanges.
- The primary and secondary markets that make up the capital market. The secondary market is also known as the stock market.
- The purpose of a stock exchange is to facilitate trading of securities between buyers and sellers and provide price discovery. It also allows companies to raise capital and
The document provides background information on mutual funds in India including a brief history from 1964 to present. It discusses the entry and growth of public sector funds from 1987-1993, private sector funds from 1993-2003, and the bifurcation of UTI in 2003. The history is divided into four phases of growth for the mutual fund industry in India from its establishment to becoming a large industry with many public and private players.
This document contains a questionnaire about investors' preferences for investing in mutual funds. It asks about the types of investments preferred, factors considered while investing, experience investing in mutual funds including scheme details, features that attract investors to mutual funds, preferred mutual fund companies and sectors, and personal details. The questionnaire contains both multiple choice and open-ended questions to understand investors' knowledge of and experience with mutual funds.
This document provides information about a project report submitted by Hardeep Singh Hundal to Karnataka University, Dharwad on "A Study of Derivatives Market in India". It includes a certificate from the director of Global Business School certifying the project work was completed at Hindustan Financial Services from April to June 2012 under the guidance of Dr. Ramakant Kulkarni and Mr. Shankar Habib. It also includes a declaration by Hardeep Singh Hundal and an acknowledgement of those who provided guidance and support. The executive summary provides an overview of the project work analyzing investor behavior and understanding derivatives markets in India.
The banking sector in India plays an important role in the Indian economy, contributing 10% to GDP. It consists of public, private, and foreign banks as well as rural cooperatives. The Reserve Bank of India regulates the sector, controlling money supply and maintaining stability. It also acts as a controller, supervisor, and issuer of currency. Major public sector banks include SBI and PNB, while major private banks are HDFC Bank, ICICI Bank, and Axis Bank. Foreign banks have a smaller market share but this is projected to grow. Non-performing assets have declined while profitability has increased across all bank types. The sector offers opportunities for growth through financial inclusion, new licenses under Basel III, and a growing economy
The document provides a history of commodity markets in India, describing how organized commodity derivatives trading began in the late 19th century for cotton and expanded to other commodities over time. Commodity derivatives trading was banned in 1952 due to concerns about speculation but resumed in the new millennium. It then describes the major commodity exchanges in India today, focusing on an overview of the Multi Commodity Exchange of India, including its vision, mission, and technology infrastructure. Finally, it discusses five commodities and their price fluctuations in recent years, using gold as an example.
A project on derivatives market in indiaProjects Kart
A project on derivatives market in India report goes beyond that the local derivative in the emerging markets have witnessed widespread use of the derivative instrument for a variety of reasons. This continuous growth and development by the emerging market participants has resulted in capital inflows as well as helped the investors in risk protection through hedging. Visit: http://www.projectskart.com/p/contact-us.html for more information.
The study aims to understand the Indian gold loan market and examine the differences between gold loans and personal loans, as well as identify the main purposes that customers take out gold loans. It also seeks to evaluate the competitive position of India Infoline and ways to improve its gold loan services. Research methods include distributing a financial awareness survey to collect customer information and feedback.
A project report on fundamental & technical analysis of automobile sectorBabasab Patil
The document provides an executive summary of a study analyzing the automobile sector in India through fundamental and technical analysis. It discusses the scope, objectives, and methodology of the study, which included analyzing individual company scrips using economic, industry, and company factors. The study's tools included relative strength index, moving averages, and Japanese candlestick charts to predict stock price trends of Tata Motors and Maruti Suzuki. The findings showed the best times to buy and sell these stocks based on technical indicators. Fundamentally, the companies' financial performance was positive. The conclusion stated that India is growing fast in the automobile sector.
The document provides background information on mutual funds in India including a brief history from 1964 to present. It discusses the entry and growth of public sector funds from 1987-1993, private sector funds from 1993-2003, and the bifurcation of UTI in 2003. The history is divided into four phases of growth for the mutual fund industry in India from its establishment to becoming a large industry with many public and private players.
This document contains a questionnaire about investors' preferences for investing in mutual funds. It asks about the types of investments preferred, factors considered while investing, experience investing in mutual funds including scheme details, features that attract investors to mutual funds, preferred mutual fund companies and sectors, and personal details. The questionnaire contains both multiple choice and open-ended questions to understand investors' knowledge of and experience with mutual funds.
This document provides information about a project report submitted by Hardeep Singh Hundal to Karnataka University, Dharwad on "A Study of Derivatives Market in India". It includes a certificate from the director of Global Business School certifying the project work was completed at Hindustan Financial Services from April to June 2012 under the guidance of Dr. Ramakant Kulkarni and Mr. Shankar Habib. It also includes a declaration by Hardeep Singh Hundal and an acknowledgement of those who provided guidance and support. The executive summary provides an overview of the project work analyzing investor behavior and understanding derivatives markets in India.
The banking sector in India plays an important role in the Indian economy, contributing 10% to GDP. It consists of public, private, and foreign banks as well as rural cooperatives. The Reserve Bank of India regulates the sector, controlling money supply and maintaining stability. It also acts as a controller, supervisor, and issuer of currency. Major public sector banks include SBI and PNB, while major private banks are HDFC Bank, ICICI Bank, and Axis Bank. Foreign banks have a smaller market share but this is projected to grow. Non-performing assets have declined while profitability has increased across all bank types. The sector offers opportunities for growth through financial inclusion, new licenses under Basel III, and a growing economy
The document provides a history of commodity markets in India, describing how organized commodity derivatives trading began in the late 19th century for cotton and expanded to other commodities over time. Commodity derivatives trading was banned in 1952 due to concerns about speculation but resumed in the new millennium. It then describes the major commodity exchanges in India today, focusing on an overview of the Multi Commodity Exchange of India, including its vision, mission, and technology infrastructure. Finally, it discusses five commodities and their price fluctuations in recent years, using gold as an example.
A project on derivatives market in indiaProjects Kart
A project on derivatives market in India report goes beyond that the local derivative in the emerging markets have witnessed widespread use of the derivative instrument for a variety of reasons. This continuous growth and development by the emerging market participants has resulted in capital inflows as well as helped the investors in risk protection through hedging. Visit: http://www.projectskart.com/p/contact-us.html for more information.
The study aims to understand the Indian gold loan market and examine the differences between gold loans and personal loans, as well as identify the main purposes that customers take out gold loans. It also seeks to evaluate the competitive position of India Infoline and ways to improve its gold loan services. Research methods include distributing a financial awareness survey to collect customer information and feedback.
A project report on fundamental & technical analysis of automobile sectorBabasab Patil
The document provides an executive summary of a study analyzing the automobile sector in India through fundamental and technical analysis. It discusses the scope, objectives, and methodology of the study, which included analyzing individual company scrips using economic, industry, and company factors. The study's tools included relative strength index, moving averages, and Japanese candlestick charts to predict stock price trends of Tata Motors and Maruti Suzuki. The findings showed the best times to buy and sell these stocks based on technical indicators. Fundamentally, the companies' financial performance was positive. The conclusion stated that India is growing fast in the automobile sector.
This document provides an analysis of India's non-banking financial company (NBFC) sector. It discusses the industry structure, nature of business, and differences between NBFCs and banks. NBFCs complement the banking system and account for 12.7% of the financial system's total assets. The document also analyzes NBFCs' sources and uses of funds, financial performance metrics like return on assets and non-performing assets, and recent regulatory changes affecting the sector. Overall, it presents an overview of the NBFC industry in India.
This document provides frequently asked questions (FAQs) about the comprehensive project (CP) requirements for MBA students at Gujarat Technological University. Key details include:
- CP groups can have 2 students but exceptions may be made for 1 or 3 students depending on the project topic.
- Students are not required to work directly for a company but should visit to collect data. Problems identification for companies is not mandatory but providing solutions is recommended.
- Formal certificates from companies are not needed for CP like they are for internships.
- In semester 3, students should select a topic, get approval, make a plan and collect secondary/primary data. Their work will be evaluated internally for 50
Awareness of commodity market a project report on mba financeBabasab Patil
This document provides information about Karvy, a financial services firm in India. It discusses Karvy's history beginning in 1981 as a small group of accountants [1]. Over the past 20 years, Karvy has grown into a premier integrated financial services provider through quality services, innovations, and a focus on customers [2]. Karvy offers a wide range of financial services including stock broking, depository services, distribution of financial products, insurance broking, commodities broking, and more [3].
This document lists 50 potential finance project topics for an MBA in finance degree. The topics cover a wide range of areas including financial analysis of companies, mutual funds, banking, insurance, working capital management, derivatives, and capital markets.
This document provides a synopsis for a study analyzing the financial performance of L&T Finance Holdings using ratio analysis. The study aims to evaluate the company's liquidity, solvency, profitability, and overall financial position. It will collect primary data from company finance staff and secondary data from sources like journals and the internet. The analysis will be presented in chapters covering the company profile, research methodology, data analysis and interpretation, findings and suggestions.
The document provides an overview of the mutual fund industry in India. It discusses the history and evolution of mutual funds in India from the establishment of the Unit Trust of India in 1964 to the present day. Key developments include the entry of public sector funds in 1987, private funds in 1993, and increased regulation by SEBI. The document also outlines the structure of mutual funds in India, including the roles of sponsors, trustees, asset management companies, registrars and transfer agents.
Finance project on performance evaluation of indian mutual fundsProjects Kart
This document provides an executive summary of a report evaluating the performance of Indian mutual funds against the BSE Sensex stock market index over a 5-year period from 2004-2009. 21 open-ended equity growth mutual funds were selected for analysis. Statistical tools were used to calculate and compare the average returns, absolute returns, standard deviation, betas, and relative performance indexes of the funds versus the market. A Mann-Whitney U-test found that most funds' returns moved in sync with the market, except one fund that varied significantly. Cluster analysis grouped funds with similar performance metrics. The study concluded most funds provided returns similar to the market, with some variation during late 2005 to early 2006.
This report prepared in summer internship. The report can use for more information about customer perception & stock market. the report can not plagiarism.
The document is a student project analyzing the fundamentals of HDFC Bank. It includes an overview of HDFC Bank, its history, management, and financial details. It also analyzes the macroeconomic outlook for the Indian banking sector, including factors like inflation, interest rates, and regulatory changes. Finally, it examines the competitive landscape of the Indian banking industry, including trends among public sector banks, private banks, and foreign banks. The student conducted the analysis under the guidance of a professor to evaluate HDFC Bank as an investment.
An analysis of demat account and online tradingProjects Kart
This document provides an overview of online share trading and dematerialization in India. It includes an executive summary that outlines the key benefits of online trading and dematerialization, such as faster trading and reduced costs compared to physical brokers. It also lists the objectives and scope of the project report. The industrial overview provides background on the history of online trading. The company profile section gives details on Indiabulls Financial Services, including its history, profile, products/services and growth. Overall, the document aims to analyze awareness of online trading and dematerialization among investors in India.
WORKING CAPITAL MANAGEMENT OF TATA STEELVIVEK SHARMA
This document is a project report submitted by Vivek Kumar Sharma to Rashtrasant Tukdoji Maharaj Nagpur University in partial fulfillment of the requirements for a Bachelor of Business Administration degree. The report focuses on working capital management at Tata Steel Ltd and includes an introduction, company profile of Tata Steel, research methodology, objectives and scope, findings and interpretation, limitations, conclusion, bibliography, and annexure. It provides an overview of Tata Steel's history, acquisitions, products, subsidiaries, and facilities.
This document summarizes Jagruti Godambe's project on equity research in the banking sector completed as part of a one month internship with Birla Sun Life Insurance in 2012-2013. The project analyzed the banking sector through fundamental and technical analysis and examined four Indian banks. Jagruti conducted the project under the guidance of Mr. Subojeet Sen Gupta and acknowledges his support. The project includes analysis of the banking sector, tools used, profiles of sample banks, and recommendations.
A project report on commodity market with special reference to gold at karvy...Babasab Patil
This document discusses a study of the commodity market with a focus on gold. It provides an overview of Karvy Commodities Broking Limited and the services it offers. The study examines the gold commodity futures market in India, how it works, and the participants involved. It analyzes the impact of the spot gold market on future gold prices and the various economic factors that affect gold future prices. The study finds a positive correlation between spot and future gold prices. It suggests that Karvy provide more awareness and education on commodity trading to investors in order to attract more customers.
A STUDY OF ONLINE TRADING IN INDIAN STOCK MARKETMANSI DHINGRA
This document is a summer internship project report submitted by Mansi Dhingra to Dr. A.P.J. Abdul Kalam Technical University for her MBA program. The report provides an overview of Sumpoorna Portfolio Ltd, including its establishment, services offered, types of demat accounts, brokerage structure, and competitors. It also includes a SWOT analysis of the company and various tables and figures from the data analysis conducted as part of the internship project.
The document provides details about Manoj K Muliya's summer training project report on the scope of wealth advisory business model at NJ India Invest in Rajkot. The report includes an introduction, acknowledgements, executive summary, chapters on the theoretical perspective of wealth advisory models, research methodology, data analysis and findings. The report findings note the untapped potential in wealth advisory due to fewer advisors and lack of awareness, and provides suggestions to increase awareness of mutual funds and wealth management.
Customer perception towards mutual fundsProjects Kart
The document provides an overview of Karvy, an Indian financial services company. It details Karvy's various services including stock broking, distribution of financial products like mutual funds, depository services, advisory services, and more. It outlines Karvy's history and growth over the past 20 years to become a premier integrated financial services provider in India.
A project report on overview of portfolio management in indiaProjects Kart
This document is a student project on portfolio management in India submitted to the University of Mumbai. It includes an introduction to portfolio management and Kotak Securities Ltd., as well as chapters on the meaning of portfolio management, methodology, basic concepts and components, types of portfolio management, persons involved, risk-return analysis, asset allocation, a primary survey, findings, and conclusions. The project provides an overview of portfolio management in India for a Bachelor's degree program.
This document is a research report submitted by Smita Rastogi for her summer internship at India Infoline Ltd. It includes an executive summary that gives an overview of the Indian capital markets and dematerialization process. It also describes Smita's internship experience working in different departments at IIFL. The report contains chapters on IIFL's organization details, literature review on stock markets and related concepts, data collection and analysis from IIFL, recommendations, and concluding remarks.
A study on construction of optimal portfolio using sharpe’s single index modelProjects Kart
1. The document discusses constructing an optimal portfolio using Sharpe's single index model. It analyzes stock price movements and index values of companies over 5 years to calculate expected returns, standard deviation, and beta values.
2. The methodology uses secondary data sources and interprets the results using Sharpe's model to select stocks for the optimal portfolio.
3. The scope is limited to 30 Sensex companies over 5 years based only on share prices, indexes, interest rates, and beta values.
This document provides an analysis of India's non-banking financial company (NBFC) sector. It discusses the industry structure, nature of business, and differences between NBFCs and banks. NBFCs complement the banking system and account for 12.7% of the financial system's total assets. The document also analyzes NBFCs' sources and uses of funds, financial performance metrics like return on assets and non-performing assets, and recent regulatory changes affecting the sector. Overall, it presents an overview of the NBFC industry in India.
This document provides frequently asked questions (FAQs) about the comprehensive project (CP) requirements for MBA students at Gujarat Technological University. Key details include:
- CP groups can have 2 students but exceptions may be made for 1 or 3 students depending on the project topic.
- Students are not required to work directly for a company but should visit to collect data. Problems identification for companies is not mandatory but providing solutions is recommended.
- Formal certificates from companies are not needed for CP like they are for internships.
- In semester 3, students should select a topic, get approval, make a plan and collect secondary/primary data. Their work will be evaluated internally for 50
Awareness of commodity market a project report on mba financeBabasab Patil
This document provides information about Karvy, a financial services firm in India. It discusses Karvy's history beginning in 1981 as a small group of accountants [1]. Over the past 20 years, Karvy has grown into a premier integrated financial services provider through quality services, innovations, and a focus on customers [2]. Karvy offers a wide range of financial services including stock broking, depository services, distribution of financial products, insurance broking, commodities broking, and more [3].
This document lists 50 potential finance project topics for an MBA in finance degree. The topics cover a wide range of areas including financial analysis of companies, mutual funds, banking, insurance, working capital management, derivatives, and capital markets.
This document provides a synopsis for a study analyzing the financial performance of L&T Finance Holdings using ratio analysis. The study aims to evaluate the company's liquidity, solvency, profitability, and overall financial position. It will collect primary data from company finance staff and secondary data from sources like journals and the internet. The analysis will be presented in chapters covering the company profile, research methodology, data analysis and interpretation, findings and suggestions.
The document provides an overview of the mutual fund industry in India. It discusses the history and evolution of mutual funds in India from the establishment of the Unit Trust of India in 1964 to the present day. Key developments include the entry of public sector funds in 1987, private funds in 1993, and increased regulation by SEBI. The document also outlines the structure of mutual funds in India, including the roles of sponsors, trustees, asset management companies, registrars and transfer agents.
Finance project on performance evaluation of indian mutual fundsProjects Kart
This document provides an executive summary of a report evaluating the performance of Indian mutual funds against the BSE Sensex stock market index over a 5-year period from 2004-2009. 21 open-ended equity growth mutual funds were selected for analysis. Statistical tools were used to calculate and compare the average returns, absolute returns, standard deviation, betas, and relative performance indexes of the funds versus the market. A Mann-Whitney U-test found that most funds' returns moved in sync with the market, except one fund that varied significantly. Cluster analysis grouped funds with similar performance metrics. The study concluded most funds provided returns similar to the market, with some variation during late 2005 to early 2006.
This report prepared in summer internship. The report can use for more information about customer perception & stock market. the report can not plagiarism.
The document is a student project analyzing the fundamentals of HDFC Bank. It includes an overview of HDFC Bank, its history, management, and financial details. It also analyzes the macroeconomic outlook for the Indian banking sector, including factors like inflation, interest rates, and regulatory changes. Finally, it examines the competitive landscape of the Indian banking industry, including trends among public sector banks, private banks, and foreign banks. The student conducted the analysis under the guidance of a professor to evaluate HDFC Bank as an investment.
An analysis of demat account and online tradingProjects Kart
This document provides an overview of online share trading and dematerialization in India. It includes an executive summary that outlines the key benefits of online trading and dematerialization, such as faster trading and reduced costs compared to physical brokers. It also lists the objectives and scope of the project report. The industrial overview provides background on the history of online trading. The company profile section gives details on Indiabulls Financial Services, including its history, profile, products/services and growth. Overall, the document aims to analyze awareness of online trading and dematerialization among investors in India.
WORKING CAPITAL MANAGEMENT OF TATA STEELVIVEK SHARMA
This document is a project report submitted by Vivek Kumar Sharma to Rashtrasant Tukdoji Maharaj Nagpur University in partial fulfillment of the requirements for a Bachelor of Business Administration degree. The report focuses on working capital management at Tata Steel Ltd and includes an introduction, company profile of Tata Steel, research methodology, objectives and scope, findings and interpretation, limitations, conclusion, bibliography, and annexure. It provides an overview of Tata Steel's history, acquisitions, products, subsidiaries, and facilities.
This document summarizes Jagruti Godambe's project on equity research in the banking sector completed as part of a one month internship with Birla Sun Life Insurance in 2012-2013. The project analyzed the banking sector through fundamental and technical analysis and examined four Indian banks. Jagruti conducted the project under the guidance of Mr. Subojeet Sen Gupta and acknowledges his support. The project includes analysis of the banking sector, tools used, profiles of sample banks, and recommendations.
A project report on commodity market with special reference to gold at karvy...Babasab Patil
This document discusses a study of the commodity market with a focus on gold. It provides an overview of Karvy Commodities Broking Limited and the services it offers. The study examines the gold commodity futures market in India, how it works, and the participants involved. It analyzes the impact of the spot gold market on future gold prices and the various economic factors that affect gold future prices. The study finds a positive correlation between spot and future gold prices. It suggests that Karvy provide more awareness and education on commodity trading to investors in order to attract more customers.
A STUDY OF ONLINE TRADING IN INDIAN STOCK MARKETMANSI DHINGRA
This document is a summer internship project report submitted by Mansi Dhingra to Dr. A.P.J. Abdul Kalam Technical University for her MBA program. The report provides an overview of Sumpoorna Portfolio Ltd, including its establishment, services offered, types of demat accounts, brokerage structure, and competitors. It also includes a SWOT analysis of the company and various tables and figures from the data analysis conducted as part of the internship project.
The document provides details about Manoj K Muliya's summer training project report on the scope of wealth advisory business model at NJ India Invest in Rajkot. The report includes an introduction, acknowledgements, executive summary, chapters on the theoretical perspective of wealth advisory models, research methodology, data analysis and findings. The report findings note the untapped potential in wealth advisory due to fewer advisors and lack of awareness, and provides suggestions to increase awareness of mutual funds and wealth management.
Customer perception towards mutual fundsProjects Kart
The document provides an overview of Karvy, an Indian financial services company. It details Karvy's various services including stock broking, distribution of financial products like mutual funds, depository services, advisory services, and more. It outlines Karvy's history and growth over the past 20 years to become a premier integrated financial services provider in India.
A project report on overview of portfolio management in indiaProjects Kart
This document is a student project on portfolio management in India submitted to the University of Mumbai. It includes an introduction to portfolio management and Kotak Securities Ltd., as well as chapters on the meaning of portfolio management, methodology, basic concepts and components, types of portfolio management, persons involved, risk-return analysis, asset allocation, a primary survey, findings, and conclusions. The project provides an overview of portfolio management in India for a Bachelor's degree program.
This document is a research report submitted by Smita Rastogi for her summer internship at India Infoline Ltd. It includes an executive summary that gives an overview of the Indian capital markets and dematerialization process. It also describes Smita's internship experience working in different departments at IIFL. The report contains chapters on IIFL's organization details, literature review on stock markets and related concepts, data collection and analysis from IIFL, recommendations, and concluding remarks.
A study on construction of optimal portfolio using sharpe’s single index modelProjects Kart
1. The document discusses constructing an optimal portfolio using Sharpe's single index model. It analyzes stock price movements and index values of companies over 5 years to calculate expected returns, standard deviation, and beta values.
2. The methodology uses secondary data sources and interprets the results using Sharpe's model to select stocks for the optimal portfolio.
3. The scope is limited to 30 Sensex companies over 5 years based only on share prices, indexes, interest rates, and beta values.
SAPM - Portfolio Construction and Comparison for Securities on BSEBishnu Kumar
This document presents a study on portfolio construction and comparison of securities listed on the Bombay Stock Exchange (BSE). It begins with an introduction to modern portfolio theory and the single index model. It then discusses factors that impact company performance such as economic, industry and company-specific analyses. The document outlines the study's objectives, methodology and data analysis approach. It describes calculating beta and constructing optimal portfolios using the Sharpe single index model. The document compares the resulting portfolios and provides observations. Tables with portfolio construction worksheets are also included.
The document discusses the Sharp Index model for calculating the expected return of a portfolio. It provides the formula for calculating the Sharpe ratio which takes into account the variance of the market index, variance of individual stock movements not associated with the market, and the beta of each stock. It also mentions there are examples provided to demonstrate solving the Sharpe ratio formula.
The Sharpe model provides a simpler approach to portfolio optimization compared to the Markowitz model. It assumes the return of individual securities is linearly related to a single market index. This allows estimation of systematic and unsystematic risk for individual stocks based on their beta coefficient. An optimal portfolio is constructed by selecting stocks with the highest excess returns over the risk-free rate relative to their beta, up to the cutoff point where this ratio begins declining. The percentage invested in each stock is based on its beta and unsystematic risk. This results in a portfolio with the highest expected return for a given level of risk.
The document discusses the Sharpe index model for portfolio management. [1] It presents an equation that divides a stock's expected return into two parts: return due to market movements and return independent of the market. [2] Beta indicates a stock's sensitivity to market changes and can be used to estimate systematic and unsystematic risk. [3] The variance of a portfolio is calculated based on the systematic risk and unsystematic risk of the stocks within it.
A project report on investment strategies and portfolio management at standar...Projects Kart
The banking system in India has evolved significantly over time. The modern banking system originated during British rule in the 19th century. The banking sector is now divided into public sector banks, private sector banks, cooperative banks, and development banks. The Reserve Bank of India acts as the central bank, regulating all banking activities in the country. Common banking services offered include savings and current accounts, loans, money transfers, credit/debit cards, and safe deposit lockers. Non-resident Indians can also open NRO, NRE, and FCNR accounts.
The document is a report submitted by Mayank Pandey to the Bank of Baroda as part of a summer training project on studying the Indian stock market. It includes sections on the research methodology used, an overview of key entities like SEBI and stock exchanges, current trends in the Indian economy and stock market, analysis of foreign exchange and commodity markets, and a conclusion with suggestions. The report provides information on the structure and functioning of the Indian capital markets for new investors.
Here are the key reasons for the need of portfolio and portfolio management:
- Risk Reduction: Holding a diversified portfolio of different types of assets and securities helps reduce the overall risk of the portfolio. This is because different asset classes may perform differently in different market conditions.
- Return Maximization: Proper portfolio management aims to construct a portfolio that can generate maximum return for a given level of risk. A balanced mix of assets is required to achieve the optimal risk-return tradeoff.
- Liquidity Needs: Portfolio management helps investors meet regular expenses and other liquidity needs by investing in assets that can be easily liquidated when required.
- Tax Benefits: Certain portfolios are designed to maximize tax
A project report on portfolio managementProjects Kart
Portfolio management involves managing a group of investments to meet organizational goals and reduce risk. It includes deciding which investments to select and fund, and which to discontinue. The document discusses how portfolio management applies to managing software applications, products, and initiatives within an organization. It aims to maximize returns and diversify investments across different asset classes or types of projects.
Lisa, the accountant at Snowboard Company, explains cost-volume-profit analysis to Recilia, the vice president of sales. Snowboard Company manufactures one model of snowboard. Each snowboard sells for $250, with variable costs of $150 per unit and total fixed monthly costs of $50,000. Lisa calculates that the company needs to sell 500 snowboards to break even, as each additional unit sold beyond 500 contributes $100 to covering fixed costs and increasing profit. Recilia wants to know how many units must be sold to make a target profit of $30,000 per month. Lisa determines this would require sales of 800 units using the profit equation and contribution margin analysis.
Project report (2003) - Using Flash MX Cursor-control component to enhance co...Amir Dotan
1. The document describes a Cursor-control component developed for Macromedia Flash MX to enhance computer interaction for motion-impaired users. It was inspired by studies showing that taking control of the cursor can reduce time for target selection tasks.
2. The component replaces the system cursor with a virtual cursor that it can control. When the virtual cursor detects proximity to a target, it centers on the target and changes shape for easier clicking.
3. Future work includes adding a mechanism to trigger clicks after time delays to assist users who have difficulty clicking targets. The component is intended to make point-and-click tasks easier for people with limited motor control.
Testing Long Memory in Stock Market Return and Volatility during Global Finan...Amir Kheirollah
This paper aims to study the long memory behaviour of major equity markets globally with respect to long persistence characteristics of return and volatility during global financial crisis. For returns, the fractal dimension of these equity markets is estimated by employing the Levy stable distribution’s alpha and its special relationship to Hurst exponent. However, different estimation methods were undertaken to approximate the fractional parameter, d, in ARFIMA(p,d,q) model. With respect to volatility, the study is more extensive and considers the GARCH(p,q) for volatility persistence and EGARCH(p,q) for asymmetry and persistence in contrast with the fractionally integrated counterpart of GARCH model, FIGARCH(p,d,q) with two approaches of BBM and Chung. Similarly, the fractional component of major equity markets were tested using HYGARCH(p,d,q), and to also examine the stationarity condition of FIGARCHs. The behaviour of the markets in relation to efficient market hypothesis (EMH) is also highlighted in this study. The results from the empirical investigation confirmed the long memory in global financial markets’ return, while the results for volatility achieved in this study remained indeed controversial. Although traditional models GARCH and EGARCH approved the persistence in volatility, the fractional models fail to fulfil basic conditions. Similarities observed along the study between both markets, with regard to EMH.
Thesis(project work): portfolio construction using top down approach in indi...Mohammadali Surti
Thesis Project Work on Portfolio Management in Indian Stock Market. It talks about the quantitative aspects considered during the selection of company in portfolio.
The document provides an overview of Hindustan Unilever Limited (HUL), India's largest consumer goods company. It discusses that HUL is owned by Unilever and has a presence across India with over 16,500 employees and products in over 20 categories. The document also presents HUL's vision, mission, history, financial performance, SWOT analysis, value chain, competition and market share.
Measuring the volatility of foreign exchange market in indiaAlexander Decker
This document summarizes a research study measuring the volatility of foreign exchange rates in the Indian market. The study analyzes daily exchange rate data for the US dollar, euro, and Japanese yen against the Indian rupee over time. The objectives are to measure the volatility of these currencies, examine their co-movement, analyze the volatility distribution, and measure skewness and kurtosis. Hypotheses are tested regarding the normality of volatility distributions. The results could help manage foreign exchange risk more effectively in India's increasingly globalized economy.
This interim report summarizes research on using crowdsourcing as a potential hiring pipeline for federal agencies. A simulated crowdsourcing application was developed and tested with volunteer applicants. Key findings include that crowdsourcing could identify candidates for specialized occupations, but commercial applications require customization. The test was successful, indicating crowdsourcing has potential as a recruitment tool to supplement existing methods. Recommendations include presenting findings to agency leaders and human resource organizations.
Ratio analysis at il&fs invest smart mba project financeBabasab Patil
The document provides an executive summary and table of contents for a report on analyzing the pharmaceutical companies Ranbaxy and Cipla. The table of contents lists 10 sections that will be covered in the report, including an executive summary, introduction, economic analysis, industry analysis, individual company analyses of Ranbaxy and Cipla, comparative ratio tables for each company, findings, and annexures/bibliography. The objective of the report is to measure and compare the performance and viability of Ranbaxy and Cipla through financial ratio analysis.
Each second month, KRDS India unveils to you a monthly Social Media Report highlighting the top 5 posts from select industries. This month, we have focused on Food Retail.
This document appears to be a student project report submitted for a Master's degree in business administration. It discusses capital markets, with a focus on stock exchanges in India. The 3-page document includes sections on the role of capital markets in India, factors affecting Indian capital markets, an overview of stock exchanges in India, concepts of efficiency in capital markets, and mutual funds as part of capital markets. It also lists topics that will be discussed in the project report such as investment strategies for mutual funds and the research methodology used.
Comparative study of investment in equity capital Shri Shakti
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115Title of Thesis(total number of volumes, if m.docxmoggdede
1
15
Title of Thesis
(total number of volumes, if more than 1 and the
number of the particular volume)
Full name of Author
Any qualifications
Submitted in fulfilment of the requirements of the
Degree of XXX
School of XXX, College of XXX
University of Glasgow
Month and year of deposition to the Library
Abstract
Table of Contents
1Chapter 1: Introduction
11.1 Research Background
41.2 Research Questions
41.3 Importance of the Study
61.4 Research Context
61.4.1 Overview of Omani economy
71.4.2 Private sector and the role of small and medium-sized enterprises
91.4.3 Challenges of SMEs sector in Oman
111.5 Research Overview
111.5.1 Definitions of research
111.5.1.1 International entrepreneurship (IE)
111.5.1.2 Internationalisation
121.5.1.3 SMEs
121.5.1.4 Resource based view
131.5.1.5 Entrepreneurial orientation
131.5.1.6 Social capital
131.5.2 Research approach
141.6 Thesis Structure
151.7 Summary
16Chapter 2: Literature Review
162.1 Introduction
162.2 Internalisation Theories
172.2.1 Economic approach of internationalisation
172.2.1.1 International product life cycle (IPLC) approach
182.2.1.2 Transaction cost approach (TCA)
182.2.1.3 Eclectic theory/OLI paradigm
202.2.2 Behavioural approaches of internationalisation
202.2.2.1 U-model (Uppsala model)
222.2.2.2 Innovation model
232.2.3. International entrepreneurship perspective
252.2.4 Resource based view theory (RBV)
292.3 Entrepreneurial Orientation
292.3.1 Overview
322.3.2 Definition of entrepreneurial orientation
342.3.3 Dimensions of entrepreneurial orientation
372.3.3.1 Innovativeness
392.3.3.2 Proactiveness
412.3.3.3 Risk taking
432.3.4. Relationship between entrepreneurial orientation and firm performance
512.4 Social Capital
512.4.1 Overview
522.4.2 Definition of social capital
562.4.3 Dimensions of social capital
572.4.3.1 Structural dimension
572.4.3.2 Relational dimension
582.4.3.3 Cognitive dimension
592.4.4 Social capital and international entrepreneurship
602.4.5 Drawbacks of social capital
602.5 Conclusion
62Chapter 3: Research Hypotheses and Framework
623.1 Introduction
623.2 Conceptual Framework and Hypotheses Development
643.3 Hypotheses
643.3.1 Entrepreneurial orientation – international performance of SMEs relationship
663.3.2 Moderators of entrepreneurial orientation behaviour – international performance of SMEs relationship
673.3.2.1 Moderating role of structural social capital between entrepreneurial orientation behaviour and international performance of SMEs relationship
693.3.2.2 The moderating role of relational social capital between entrepreneurial orientation behaviour and international performance of SMEs relationship
713.3.2.3 Moderating role of cognitive social capital between entrepreneurial orientation behaviour and international performance of SMEs relationship
743.4 Conclusion
75Chapter 4: Research Methodology
754.1 Introduction
754.2 Research Philosophy
764.3 Research Strategy and Design
774.3.1 Quantitative approach
774.3.1.1 Research population a ...
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This document provides an overview of HDFC Mutual Fund and analyzes its risk and return. It is divided into three sections. The first section introduces mutual funds and HDFC AMC, discussing categories, strategies, organization, distribution channels, and HDFC's profile. The second section covers measuring performance through risk, return, portfolio analysis, and statistical measures. The third section details the study methodology, data collection and interpretation, findings, and conclusions from analyzing HDFC's performance using various risk-adjusted return measures.
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Eldon Phukuile (2015) Customer value creation in the South African mobile tel...Eldon Phukuile
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Project report of axis mutual fund by kamalKamal Sharma
The document is a project report submitted for a post graduate diploma in management. It discusses channel management of Axis Mutual Fund and analyzes the preferences of investors for investing in mutual funds. The project was conducted at Axis Asset Management Company in Jaipur, India. It includes an acknowledgement section thanking those who provided guidance and support. The executive summary provides an overview of the project scope and methodology.
What Managers Think Of Capital Structure Theory: A SurveySudarshan Kadariya
This document summarizes a survey of US Fortune 500 company managers conducted in 1987 regarding their views on capital structure theory. The survey found that managers generally follow a financing hierarchy preferring internal equity, straight debt, convertible debt, and then external equity. Managers evaluated investment and financing decisions simultaneously and felt the most important inputs were projected cash flows from assets and avoiding dilution of shareholders. Static tradeoff models were found to be the least supported by managers. Tax factors were also not the primary determinants of capital structure decisions. Financial flexibility and long-term survivability were the most important planning principles for managers.
STUDY ON BEHAVIOR OF STOCK MARKET VOLATILITY IN PERSPECTIVE OF MALAYSIAWINGFEI CHAN
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Entrepreneurship Module BMET5103. Activity: Like Self-Check, the Activity component is also placed at various locations or junctures throughout the module. This component may require you to solve questions, explore short case studies, or conduct an observation or research. It may even require you to evaluate a given scenario. When you come across an Activity, you should try to reflect on what you have gathered from the module and apply it to real situations. You should, at the same time, engage yourself in higher order thinking where you might be required to analyse, synthesise and evaluate instead of only having to recall and define.
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2. 2
DEPARTMENT OF Phone : 0494-2400297
COMMERCE AND MANAGEMENT STUDIES 2407363
UNIVERSITY OF CALICUT Mobile: 9447123637
Calicut University P.O., PIN 673635
CERTIFICATE
This is to certify that Mr. SAID SALIM PALAYI (Enrolment No. 1292113, Reg.
No. IHAMDBA 044) is a bonafide student of the DCMS MBA Centre of the
School of Distance Education, University of Calicut and this project report
titled “A Study Of The Construction Of Optimal Portfolio Using Sharpe’s
Single Index Model With Special Reference To CNX Nifty Shares” has been
prepared by him and submitted in partial fulfilment of the requirements for
the award of the degree of Master of Business Administration of the
University of Calicut.
Place: University P.O Dr. M.A. Joseph
Date: Co-ordinator
SDE MBA Programme
3. 3
DR. M.K. RAMAKRISHNAN
Associate Professor& Head of the Department (Rtd.)
Department of Commerce
Zamorin’s Guruvayurappan College, Calicut
_____________________________________________________________________
CERTIFICATE
This is to certify that Mr. SAID SALIM PALAYI is a bonafide student of the
DCMS MBA Centre of the School of Distance Education, University of Calicut
and this project report titled “A Study Of The Construction Of Optimal
Portfolio Using Sharpe’s Single Index Model With Special Reference To
CNX Nifty Shares” is an authentic record of the project work done by him
under my supervision in partial fulfilment of the requirements for the award
of the degree of Master of Business Administration of the University of
Calicut.
Place: DR. M.K. RAMAKRISHNAN
Date:
4. 4
DECLARATION
I, SAID SALIM PALAYI, do hereby declare that the project titled “A Study Of
The Construction Of Optimal Portfolio Using Sharpe’s Single Index Model
With Special Reference To CNX Nifty Shares” is a bonafide record of work
done by me under the guidance of Dr. M.K. RAMAKRISHNAN. I further
declare that the study has not previously formed the basis for the award of
any study, research or the similar title or recognition.
Place: SAID SALIM PALAYI
Date:
5. 5
ACKNOWLEDGEMENT
This project would have been complete without acknowledging my sincere
gratitude to all persons who have helped me in carrying out study and in
preparation of this report.
I owe my sincere gratitude to Dr. M.A Joseph, co-ordinator, SDE MBA
Programme, DCMS, University of Calicut for providing me the opportunity to
take up this project work.
I wish to thank Dr. M.K. Ramakrishnan, Project guide who provided expert
guidance through out this project.
I take this opportunity to thank the all staffs and management of M/s. MOTILAL
OSWAL SECURITIES LTD., Manjeri for the valuable help in successfully completing
this project.
I wish to thank all faculty members of DCMS, University of Calicut and who
provided expert guidance through out the project.
I express my sincere thanks to all my friends and colleagues for their support in
completing project on time.
I thank my parents, wife and children for helping me and supporting me a lot in
completion of the project on time.
I thank the God, Almighty and most benevolent for giving me the courage and
wisdom to complete this project as per schedule.
SAID SALIM PALAYI
6. 6
CONTENTS
Chapter Title Page No.
1 Introduction 1-4
1.1 Introduction to Problem 1
1.2 Statement of Problem 1
1.3 Scope and Significance of the Study 2
1.4 Objectives of the Study 2
1.5 Research Methodology 2
1.6 Chapter Layout 3
1.7 Limitations of Study 4
2 Industry Profile 5-17
2.1 Introduction 5
2.2 Stock Market 5
2.3 Stock Exchange 6
2.4 History of Indian Stock Market 9
2.5 Major Stock Exchanges In India 10
2.6 Conclusion 16
3 Company Profile 18-26
3.1 Introduction 18
3.2 Overview 18
3.3 Mission 21
3.4 Values 21
3.5 Strengths 21
3.6 Board of Directors 24
3.7 Awards and Recognitions Won 24
3.8 Conclusion 25
4 Theoretical Framework 27-57
4.1 Introduction 27
4.2 Portfolio Construction 27
4.3 Approaches to Portfolio Construction 27
4.4 Traditional Approach 28
4.5 Security Analysis 28
7. 7
4.6 Portfolio Analysis 41
4.7 Portfolio Selection 41
4.8 Portfolio Revision 41
4.9 Portfolio Evaluation 42
4.10 Return and Risk Analysis of Portfolio 42
4.11 Modern Approaches to Portfolio Selection 45
4.12 Portfolio Evaluation Methods 53
4.13 Formulae Used For the Study 55
4.14 Conclusion. 57
5 Data Analysis & Interpretations 58-94
5.1 Introduction 58
5.2 List of CNX Nifty Index Shares 58
5.3 Analysis of Securities 60
5.4 Risk Analysis of Securities 62
5.5 Construction of Optimal Portfolio Using
Sharpe’s Single index model 68
5.6 Measuring Return and Risk of Optimal Portfolio 74
5.7 Construction of Portfolio #2 79
5.8 Construction of Portfolio # 3 84
5.9 Portfolio Evaluation. 89
5.10 Conclusion 92
5.11 Chapter Appendix-A 93
6 Conclusion 95-98
6.1 Introduction 95
6.2 Findings 95
6.3 Suggestions 96
6.4 Conclusion 98
Bibliography 99-100
8. 8
LIST OF TABLES
Table No. Details of Tables Page No.
2.1 Ranking of Stock Exchanges 8
3.1 Board of Directors of M/s. Motilal Oswal Securities 34
5.1 List of CNX Nifty 50 shares 59
5.2 Summary table showing risk and return of CNX NIFTY shares 61
5.3 Systematic risk of CNX NIFTY shares 63
5.4 Unsystematic risk of CNX NIFTY shares 65
5.5 Total risk of CNX NIFTY shares 67
5.6 Ranking of shares 69
5.7 Calculation of cut-off point 71
5.8 Calculation of optimal portfolio 73
5.9 Calculation of Alpha of optimal portfolio 74
5.10 Beta of optimal portfolio 75
5.11 Calculation of return of optimal portfolio 76
5.12 Calculation of unsystematic risk of optimal portfolio 77
5.13 Calculation of systematic risk of optimal portfolio 78
5.14 Calculation of total risk of optimal portfolio 79
5.15 Calculation of Portfolio #2 79
5.16 Calculation of alpha of portfolio #2 80
5.17 Calculation of beta of portfolio #2 81
5.18 Calculation of return of portfolio #2 81
5.19 Calculation of unsystematic risk of portfolio #2 82
9. 9
5.20 Calculation of systematic risk of portfolio #2 83
5.21 Calculation of total risk of portfolio #2 83
5.22 Calculation of Portfolio #3 84
5.23 Calculation of beta of portfolio #3 85
5.24 Calculation of unsystematic risk of portfolio #3 86
5.25 Calculation of systematic risk of portfolio #3 87
5.26 Calculation of total risk of portfolio #3 87
5.27 Calculation of alpha of portfolio #3 88
5.28 Calculation of return of portfolio #3 88
5.29 Calculation of Sharpe’s index of portfolios 89
5.30 Calculation of Treynor’s ratio of portfolios 90
5.31 Calculation of expected return of portfolios 91
5.32 Calculation of Jenson’s measure of portfolios 92
5.33 Calculation of average return and risk of Ambuja Cements 93
10. 10
LIST OF FIGURES& CHARTS
Figure No. Details Page No.
2.1 Bombay Stock Exchange 11
2.2 National Stock Exchange 13
2.3 Cochin Stock Exchange 15
4.1 Steps in Fundamental Analysis 29
4.2 Trends in stock market 34
4.3 Moving Averages 35
4.4 Relative Strength Index 36
4.5 Line Chart 38
4.6 Bar Chart 38
4.7 Candlestick Chart 39
4.8 Point and Figure Chart 40
4.9 Efficient Frontier 49
4.10 CAPM Model 51
12. 12
CHAPTER 1
INTRODUCTION
1.1 INTRODUCTION TO THE PROBLEM
Due to the volatile nature of capital market the decision making process for an investor is
very difficult. The major factors to be considered while making investment decision are
risk and return. An informed investor has to seek an effective trade-off between these two
factors. Hence, portfolio management is a crucial decision for an investor. An investor
has to use various tools and techniques to find out optimal portfolio.
―A study on the construction of optimal portfolio using Sharpe‘s single index model with
special reference to CNX Nifty Shares‖ is an effort to construct an optimal portfolio from
50 shares which are constituents of CNX Nifty index. Five years historical data is used
analysis. This study is very helpful to get an awareness of various decisions in capital
market.
1.2 STATEMENT OF THE PROBLEM
High inflation rate prevailing in the economy erodes the value of investments in risk free
assets such as bank deposits and debt instruments. Hence, an investor has to allocate
some portion of his savings to high return instruments such as equity for achieving his
long term goals. However, the volatility of stock market makes the decision making a
complex process.
Hence, the problem under study is to construct an optimal portfolio using Sharpe‘s
optimization model and conduct an evaluation of the portfolio with other portfolios of
same return or risk to prove that this optimization model is simple and highly effective
for portfolio construction.
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1.3 SCOPE AND SIGNIFICANCE OF STUDY
The effectiveness of a portfolio is decided the collection of assets under portfolio and
their proportions. There for an investor who want to invest his own shall be thorough
with the methods of security analysis, portfolio analysis, portfolio selection, portfolio
evaluation and revision.
Since this study attempts to touch almost all the points required to reach optimal portfolio
it has very significance for an investor.
1.4 OBJECTIVES OF THE STUDY
1. To perform the risk return analysis of the CNX NIFTY Index shares.
2. To construct an optimal portfolio using Shape‘s optimization model and find out risk
and return of optimal portfolio.
3. Construct two random portfolios. One with same rate of return as optimal portfolio and
another with same risk as optimal portfolio.
4. To evaluate the performance of these three portfolios using Sharpe‘s ratio, Treynor‘s
ratio and Jensen Measure.
1.5 RESEARCH METHODOLOGY
The conceptual structure within which the research is conducted is described below.
Sample Design
The population involved in this project the 50 shares which constitutes in CNX Nifty
index.
Population Size
In this research the sample size constitutes 50 shares which constitute CNX Nifty Index.
14. 14
Survey Method
All the 50 Nos. of shares which constitute the CNX Nifty Index is used for the study.
Hence, the survey method used is census method.
Research Design
This project is based on analytical research design.
Area of Research
This research is to be conducted at the Branch of M/s. Motilal Oswal securities Ltd. at
Manjeri.
Sources of Data
The price movements of NSE CNX Nifty index and stock prices are the fundamental data
for the study. The main source of information is web sites, Magazines and journals.
Tools for Data Analysis
The data collected from sources has been analyzed using ratios and formulas .Tools like
Arithmetic mean, standard deviation, Alpha, Beta, Covariance, Sharpe Index, Treynor‘s
ratio and Jensen‘s measure are used.
The Microsoft Excel package is used for performing calculations and analysis.
1.6 CHAPTER LAYOUT
The study is presented in 6 chapters.
Chapter 1: Introduction
Chapter 2: Industry Profile
Chapter 3: Company Profile
Chapter 4: Theoretical Frame Work of study
Chapter 5: Analysis and Interpretations of Data
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Chapter 6: Summary, Findings and Conclusion.
The chapter six is followed by bibliography which contains the details of the books,
journals and web sites referred for this project.
1.7 LIMITATIONS OF THE STUDY
Duration of the study is limited hence extensive and deep study such as fundamental
analysis and technical analysis could not be possible.
The beta value changes from time to time. It may not reflect the future volatility of
returns. Hence the portfolio needs to be revised periodically.
An optimized portfolio cannot reduce systematic risk affecting the entire market. Hence,
the return from the portfolio varies with the general trend in the markets.
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CHAPTER 2
INDUSTRY PROFILE
2.1 INTRODUCTION
In the previous chapter brief introduction to the problem, scope and significance of the
problem and research methodology adopted was detailed.
In this chapter the stock market industry profile is described under following headings.
Stock Market, Stock Exchange, History of Indian Stock Market and Major Stock
Exchanges In India. A brief summary of the chapter is given in the Conclusion section.
2.2 STOCK MARKET
Capital market is the financial market for equity instruments and debt instruments with a
maturity greater than one year. The Capital market includes both primary market and
secondary markets.
The primary market is the market that deals with new securities, i.e., the securities that
are offered to the investing public for the first time. So it is a market for new issues.
Because of that, it is also called the new issues market.
The secondary market is the market in which existing securities are traded. This market is
also known as stock market.
2.2.1 History of Stock Market
In 12th century France the courretiers de change were concerned with managing and
regulating the debts of agricultural communities on behalf of the banks. Because these
men also traded with debts, they could be called the first brokers.
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In the middle of the 13th century, Venetian bankers began to trade in government
securities. Bankers in Pisa, Verona, Genoa and Florence also began trading in
government securities during the 14th century. Italian companies were also the first to
issue shares. Companies in England and the Low Countries followed in the 16th century.
The Dutch East India Company (founded in 1602) was the first joint-stock company to
get a fixed capital stock and as a result, continuous trade in company stock occurred on
the Amsterdam Exchange. Soon thereafter, a lively trade in various derivatives, among
which options and repos, emerged on the Amsterdam market. Dutch traders also
pioneered short selling.
There are now stock markets in virtually every developed and most developing
economies, with the world's largest markets being in the United States, United Kingdom,
Japan, India, Pakistan, China, Canada, Germany, France, South Korea and the
Netherlands.
2.3 STOCK EXCHANGE
A stock exchange is a place which aggregates buyers and sellers. In the stock exchanges
buying and selling of long term securities such as stocks and bonds takes place.
Exchanges may also cover other types of security such as derivatives, commodities and
currencies, etc.
2.3.1 Function and the Purpose of Stock Market
The purpose of a stock exchange is to facilitate the exchange of securities between buyers
and sellers, thus providing a marketplace (virtual or real). The exchanges provide real-
time trading information on the listed securities, facilitating price discovery.
The stock market is one of the most important ways for companies to raise money. This
allows businesses to be publicly traded, and raise additional financial capital for
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expansion by selling shares of ownership of the company in a public market. Companies
may want to get their stock listed on a stock exchange for liquidity of shares and increase
share holder value. The liquidity that an exchange affords the investors enables their
holders to quickly and easily sell securities. This is an attractive feature of investing in
stocks, compared to other less liquid investments such as property and other immoveable
assets.
Exchanges also act as the clearinghouse for each transaction, meaning that they collect
and deliver the shares, and guarantee payment to the seller of a security. This eliminates
the risk to an individual buyer or seller that the counterparty could default on the
transaction.
2.3.2 Physical and Electronic Exchanges
Some exchanges are physical locations where transactions are carried out on a trading
floor, by a method known as open outcry. An example of such an exchange is the New
York Stock Exchange. The other type of stock exchange is a virtual kind, composed of a
network of computers where trades are made electronically by traders. An example of
such an exchange is the National Stock Exchange of India (NSE).
The National Stock Exchange of India (NSE) is a virtual listed exchange, where all of the
trading is done over a computer network. The buyers and sellers are electronically
matched. One or more market makers will always provide a bid and ask price at which
they will always purchase or sell 'their' stock. People trading in big exchanges get greater
number of potential counterparties (buyers for a seller, sellers for a buyer), and probably
the best price.
2. 3.4 Size of the Market
At the close of 2012, the size of the world stock market (total market capitalization) was
about US$55 trillion. By country, the largest market was the United States (about 34%),
followed by Japan (about 6%) and the United Kingdom (about 6%).
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The table below represents the list of largest stock exchanges around the world. New
York stock exchange (NYSE) is the biggest stock exchange in the world in terms of
market capitalization. Bombay Stock Exchange (BSE) holds the 10th
place and National
Stock Exchange of India (NSE) holds 11th
place.
Table 2.1: Ranking of Stock Exchanges
based on Market capitalization
Rank Stock Exchange
Market Cap
(in US$ trillion)
1 NYSE 19.2
2 NASDAQ 6.84
3 Tokyo Stock Exchange 4.43
4 Euronext 3.37
5 Hong Kong Stock Exchange 3.26
6 Shanghai Stock Exchange 2.96
7 TMX, Canada 2.14
8 Shenzhen Stock Exchange 1.95
9 Deutsche Borse 1.69
10 BSE India 1.58
11 National Stock Exchange India 1.55
12 Swiss Exchange 1.51
13 Australian Stock Exchange 1.41
14 Korea Exchange 1.23
(Source: www.wikipedia.com)
2.3.5 Behaviour of the Stock Market
According to interpretation of the efficient-market hypothesis (EMH), only changes in
fundamental factors, such as the outlook for margins, profits or dividends, ought to affect
share prices beyond the short term, where random 'noise' in the system may prevail.
The excessive optimism may drive prices unduly high or excessive pessimism may drive
prices unduly low. A succession of good news items about a company may lead investors
to overreact positively (unjustifiably driving the price up). A period of good returns also
boosts the investors' self-confidence, reducing their (psychological) risk threshold.
Emotions can drive prices up and down, people are generally not as rational as they think,
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and the reasons for buying and selling are generally obscure. There have been famous
stock market crashes that have ended in the loss of billions of dollars and wealth
destruction on a massive scale. An increasing number of people are involved in the stock
market, especially since the social security and retirement plans are being increasingly
privatized and linked to stocks and bonds and other elements of the market.
2.3.6 Stock Market Index
The movements of the prices in a market or section of a market are captured in price
indices called stock market indices, of which there are many, e.g., the S&P, BSE
SENSEX, CNX NIFTY indices. Such indices are usually market capitalization weighted,
with the weights reflecting the contribution of the stock to the index. The constituents of
the index are reviewed frequently to include/exclude stocks in order to reflect the
changing business environment.
2.3.7 Derivative Instruments
Financial innovation has brought many new financial instruments whose values depend
on the prices of stocks. Some examples are exchange-traded funds (ETFs), stock index
and stock options, single-stock futures, and stock index futures.
2.4 HISTORY OF INDIAN STOCK MARKET
The Indian stock market has a history of about 299 years old. It was in early 18th
Century, the main institution that is dealing in the trading of shares and stocks is the East
India Company. Later by around 1830′s the main dealing in the shares and stocks
(mainly in bank and cotton) was initiated in Bombay. However, the items in which the
trading took place increased tremendously by the end of 1839. There after the concept of
broker business was started which show momentum in the mid 18th century. This
concept has attracted nmember of people to indulge in the trading of items. By 1860, the
number of brokers who are dealing in the trading of items goes up to 60 in number.
Further, the number of brokers increased from 60 to 250 in around 1862-1863.
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People who need to trade generally gathered on the street which was popularly known as
the Dalal Street and the trading and the transaction used to take place from the Dalal
Street. It was in year 1875 that the first stock exchange was formulated in the name of
―The Native Share and Stock Brokers Association‖ which is presently known as the
Bombay stock exchange there after it was in year 1908, that the stock exchange in
Calcutta was formulated known as‖ The Calcutta Stock Exchange Association‖. The
formation of the Madras Stock exchange took place in 1920 which was started with
around 100 brokers who are trading in the madras Stock exchange. It was in 1934 when
the Lahore Stock exchange was established. The Uttar Pradesh stock exchange and the
Nagpur stock Exchange were established in year 1940. In year 1944, the Hyderabad stock
exchange was established. It was in year 1947 that the ―Delhi Stock and Share Broker
Association Limited‖ and ―The Delhi stocks and Shares exchange Limited‖ was
established in Delhi.
There was shutdown of various stock exchanges in India due to the depression that took
place after Independence. It was under the Securities Contracts (Regulations) Act, 1956
that various stock exchanges has got a recognition as a recognized stock exchange such
as Bombay, Delhi, Hyderabad, Indore etc. there are several other stock exchanges that
were established post independence.
2.5 MAJOR STOCK EXCHANGES IN INDIA
The Major stock exchanges in India such as Bombay Stock Exchange (BSE), Calcutta
Stock Exchange, National Stock Exchange, Interconnected Stock Exchange (ISE),
OTCEI, Cochin Stock Exchange Ltd. is detailed below.
2.5.1 The Bombay Stock Exchange
The Bombay Stock Exchange is the oldest exchange in Asia. It traces its history to 1855,
when four Gujarati and one Parsi stockbroker would gather under banyan trees in front of
Mumbai's Town Hall. The location of these meetings changed many times as the number
of brokers constantly increased. The group eventually moved to Dalal Street in 1874 and
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in 1875 became an official organization known as "The Native Share & Stock Brokers
Association". Figure below shows Bombay Stock Exchange
Fig 2.1 Bombay Stock Exchange
On 31 August 1957, the BSE became the first stock exchange to be recognized by the
Indian Government under the Securities Contracts Regulation Act. In 1980, the exchange
moved to the Fort area. In 1986, it developed the BSE SENSEX index, giving the BSE a
means to measure overall performance of the exchange. In 2000, the BSE used this index
to open its derivatives market, trading SENSEX futures contracts. The development of
SENSEX options along with equity derivatives followed in 2001 and 2002, expanding
the BSE's trading platform.
Historically an open outcry floor trading exchange, the Bombay Stock Exchange
switched to an electronic trading system in 1995. This automated, screen based trading
platform called BSE On-line trading (BOLT) had a capacity of 8 million orders per day.
The BSE has also introduced a centralized exchange-based internet trading system,
bsewebex.co.in to enable investors anywhere in the world to trade on the BSE platform.
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At present BSE has 5696 listed companies with a market capitalization of Rs.1,03,15,342
crores. It has 2,81,37,285 number of registered investors.
2.5.2 Calcutta Stock Exchange
Calcutta Stock Exchange is located at the Lyons Range, Kolkata is the oldest stock
exchange in South Asia. It was incorporated in 1908 and was the second largest stock
market in India.
In 1830, the bourse activities in Kolkata used to conduct under a neem tree. In 1908, the
stock exchange was incorporated and consisted of 150 members. The present building at
the Lyons Range was constructed in 1928. The Calcutta Stock Exchange Ltd was granted
permanent recognition by the Government of India with effect from April 14, 1980 under
the relevant provisions of the Securities Contracts (Regulation) Act, 1956. The Calcutta
Stock Exchange followed the familiar outcry system for stock trading up until 1997,
when it was replaced by an electronic trading system known as C-STAR (CSE Screen
Based Trading And Reporting).
2.5.3 National Stock Exchange of India (NSE)
The National Stock Exchange of India Limited (NSE) is the leading stock exchange of
India, located in Mumbai. NSE was the first exchange in the country to provide a
modern, fully automated screen-based electronic trading system which offered easy
trading facility to the investors spread across the length and breadth of the country.
NSE was set up by a group of leading Indian financial institutions at the behest of the
government of India to bring transparency to the Indian capital market. Based on the
recommendations laid out by the government committee, NSE has been established with
a diversified shareholding comprising domestic and global investors. The key domestic
investors include Life Insurance Corporation of India, State Bank of India, IFCI Limited
IDFC Limited and Stock Holding Corporation of India Limited. And the key global
investors are Gagil FDI Limited, GS Strategic Investments Limited, SAIF II SE
25. 25
Investments Mauritius Limited, Aranda Investments (Mauritius) Pte. Limited and PI
Opportunities Fund I.
The exchange was incorporated in 1992 as a company and was recognized as a stock
exchange in 1993 under the Securities Contracts (Regulation) Act, 1956. NSE
commenced operations in the Wholesale Debt Market (WDM) segment in June 1994.
The capital market (equities) segment of the NSE commenced operations in November
1994, while operations in the derivatives segment commenced in June 2000. The photo of
National Stock Exchange is given below.
Fig 2.2 National Stock Exchange
NSE has a market capitalization of more than US$1.65 trillion, making it the world‘s
12th-largest stock exchange as of 23 January 2015. NSE's flagship index, the CNX
Nifty, the 50 stock index is used extensively by investors in India and around the world
as a barometer of the Indian capital markets.
The National Stock Exchange of India Limited (NSE) commenced trading in derivatives
with the launch of index futures on 12 June 2000. The futures and options segment of
NSE has made a global mark. In the Futures and Options segment, trading in CNX Nifty
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Index, CNX IT index, Bank Nifty Index, Nifty Midcap 50 index and single stock futures
are available. Trading in Mini Nifty Futures & Options and Long term Options on CNX
Nifty are also available. The average daily turnover in the F&O Segment of the Exchange
during the financial year April 2013 to March 2014 stood at Rs 1,52,236 Crores.
NSE‘s trading systems, is a state of-the-art application. It has an up time record of
99.99% and processes more than 450 million messages every day with sub millisecond
response time. Today NSE can handle 1, 60,000 orders/messages per second, with
infinite ability to scale up at short notice, NSE have continuously worked towards
ensuring that the settlement cycle comes down. Settlements have always been handled
smoothly. The settlement cycle has been reduced from T+5 to T+2/T+1.
2.5.4 Cochin Stock Exchange Ltd.
COCHIN STOCK EXCHANGE LTD. is situated in Cochin in Kerala State, established
in the year 1978. The exchange had a humble beginning with just 5 companies listed in
1978 -79, and had only 14 members. Today the Exchange has more than 508 members
and 240 listed companies. In 1980 the Exchange computerized its offices. In order to
keep pace with the changing scenario in the capital market, CSE took various steps
including trading in dematerialized shares. CSE introduced the facility for computerized
trading - "Cochin Online Trading (COLT)" on March 17, 1997.
CSE was one of the promoters of the "Interconnected Stock Exchange of India (ISE)".
The objective was to consolidate the small, fragmented and less liquid markets into a
national level integrated liquid market. With the enforcement of efficient margin system
and surveillance, CSE has successfully prevented defaults. Introduction of fast track
system made CSE the stock exchange with the shortest settlement cycle in the country at
that time.
To face this challenge CSE promoted a 100% subsidiary called the "Cochin Stock
Brokers Ltd. (CSBL)" and started trading in the National Stock Exchange (NSE) and
Bombay Stock Exchange (BSE). CSBL is the first subsidiary of a stock exchange to get
membership in both NSE & BSE. CSBL also became a depository participant in the
27. 27
Central Depository Services Ltd. The CSE has been playing a vital role in the economic
development of Kerala. A photo of Cochin Stock Exchange is given below.
Figure 2.3 Cochin Stock Exchange
The Cochin Stock Exchange is directly under the control and supervision of Securities &
Exchange Board of India (the SEBI), and is today a demutualized entity in accordance
with the Cochin Stock Exchange (Demutualization) Scheme, 2005 approved
and notified by SEBI on 29th
of August 2005. Demutualization essentially means de-
linking and separation of ownership and trading rights and restructuring the Board in
accordance with the provisions of the scheme.
The policy decisions of the CSE are taken by the Board of Directors. The Board is
constituted with 12 members of whom less than one-fourth are elected from amongst the
trading member of CSE, another one fourth are Public Interest Directors selected by
SEBI from the panel submitted by the Exchange and the remaining are Shareholder
Directors. The Board appoints the Executive Director who functions as an ex-
officio member of the Board and takes charge of the administration of the Exchange.
28. 28
2.5.5 OTCEI
Started in 1992 with the object of providing market for smaller companies that could not
afford the listing free of larger exchanges and which did not fulfill the minimum capital
requirement for listing. It aimed at creating fully decentralized and transparent market.
OTC means trading across the counter in scripts. The member or dealer of OTCEI
counters are linked to the central OTCEI computer where every counter is treated as
trading floor for the OTCEI where the investor can buy and sell.
The OTCEI is incorporated as a company under section 25 of the companies act 1956
promoted by UTI, ICICI, IDBI, IFCI, LIC, GIC, SBI capital markets and Can Bank
Financial Service. OTCEI have special feature of screen based trading with wide network
coverage rolling settlement and market making. (Market makers in securities quote the
prices at which members are willing to buy and sell the specified number of securities.
NSE is supporting OTCEI in terms of systems and hardware.
2.5.6 Inter Connected Stock Exchange (ISE)
Started in the year 1998with the main objective to interlink the 15 odd regional Stock
Exchanges throughout the country [Bangalore, Bhuvaneswar, Chennai, Kochi,
Coimbatore, Guwahati, Hyderabad, Jaipur, Ludhiana, Indore, Magadh, Mangalore,
Saurashtra (Kutch), Uttar Pradesh (Kanpur) and Vadodara] to ensure liquidity.
The total cost of ISE was 15 crores that were shared equally by participating Stock
Exchanges. The membership fees to ISE costs Rs 16000/- along with the capital
adequacy deposit of Rs 4 lakhs as stipulated by SEBI. Another important objective of ISE
is to minimize the cost of regional exchanges as they are incurring huge costs by
supporting a very illiquid market.
2.6 CONCLUSION
In this chapter the history of world stock market, function and purpose of stock market,
important stock exchanges in the world, and physical and electronic trading systems were
29. 29
detailed. Finally, the history of Indian stock exchanges and important stock exchanges in
India is detailed.
In the next chapter titled company profile, the overview of company, its subsidiaries,
vision, mission, values and strengths of the company will be discussed. Details of the
directors, awards and recognition won by the company are also described.
31. 31
CHAPTER 3
COMPANY PROFILE
3.1 INTRODUCTION
In the previous chapter the history of world stock market, function and purpose of stock
market, important stock exchanges in the world, and physical and electronic trading
systems were detailed. Finally, the history of Indian stock exchanges and important stock
exchanges in India was detailed.
In this chapter, the company profile is discussed under following headings. Overview of
the Company, Mission of the Company , Values of the Company. Strengths of the
Company, Board of Directors of the Company, Awards and Recognitions Won By M/S.
MOSL. This chapter ends with a conclusion section in which a brief summary of this
chapter is given.
3.2 OVERVIEW OF THE COMPANY
M/s. Motilal Oswal Securities Limited (MOSL) is a well-diversified financial services
firm offering a range of financial products and services such as retail wealth management
(including securities and commodities broking), portfolio management services,
institutional broking, venture capital management and investment banking services. As a
leading Indian domestic brokerage house, M/s. Motilal Oswal Securities Limited have a
diversified client base that includes retail customers (including high net worth
individuals), mutual funds, foreign institutional investors, financial institutions and
corporate clients. M/s. Motilal Oswal Securities Limited is headquartered in Mumbai and
as of December 31, 2006, had a network spread across 363 cities and towns comprising
1,160 Business Locations operated by the company and Business Associates.
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Motilal Oswal Financial Services Limited is the holding company and also provides
financing for our retail broking customers. M/s. MOSL operate through the following
four subsidiaries:
• Motilal Oswal Securities Limited (MOSL)
• Motilal Oswal Commodities Brokers Private Limited (MOCB)
• Motilal Oswal Venture Capital Advisors Private Limited (MOVC)
• Motilal Oswal Investment Advisors Private Limited (MOIA).
Since inception, the business has primarily focused on retail wealth management and
institutional broking. In 2006, company diversified into investment banking and venture
capital management.
The principal business activities of the M/s. MOSL are:
Retail wealth management
Institutional broking
Investment banking
Venture capital management and advisory.
Retail wealth management business provides broking and financing services to retail
customers as well as investment advisory, financial planning and portfolio management
services. As at December 31, 2006, M/s. MOSL had 213,624 registered retail equity
broking clients and 3,572 registered commodity broking clients whom M/s. MOSL
classify into three segments, being ―mass retail‖, ―mid-tier millionaire‖ and ―private
client group(PCG)‖. M/s. MOSL offer retail clients investment products across the major
asset classes including equities, derivatives, commodities and the distribution of third-
party products such as mutual fund schemes and primary equity offerings. M/s. MOSL
distribute these products through the Business Locations and online channel.
Institutional broking business offers equity broking services in the cash and derivative
segments to institutional clients in India and overseas. As at December 31, 2014, M/s.
MOSL was empanelled with 2402 institutional clients including 150 FIIs. M/s. MOSL
33. 33
service these clients through dedicated sales teams across different time zones. Retail
wealth management and institutional brokerage businesses are supported by dedicated
research teams. Research teams are focused on cash equities, equity derivatives and
commodities.
Investment banking business offers financial advisory, capital raising and other
investment banking services to corporate clients, financial sponsors and other institutions.
Financial advisory includes advisory assignments with respect to mergers and
acquisitions (domestic and cross-border), divestitures, restructurings and spin-offs.
Capital raising and other investment banking services include management of public
offerings, rights issues, share buybacks, open offers/delisting, private placements
(including qualified institutional placements) and syndication of debt and equity.
The current organization structure of the company is set forth below.
Motilal Oswal Securities Limited (MOSL)
M/s. MOSL was incorporated on July 5, 1994. This subsidiary focuses on the Stock
Broking (Institutional & Retail) business. MOSL also acts as a holding company of other
subsidiaries.
Motilal Oswal Financial Services Limited (MOFSL)
M/s. MOSFL was incorporated on May 18, 2005. This subsidiary focuses in providing
financial services to corporate.
Motilal Oswal Commodities Brokers Private Limited (MOCB)
M/s. MOCB was incorporated on March 26, 1991. This subsidiary provides commodity
broking services to its clients.
Motilal Oswal Venture Capital Advisors Private Limited (MOVC)
M/s. MOVC was incorporated on April 13, 2006. The subsidiary manages Private Equity
Investments.
34. 34
Motilal Oswal Investment Advisors Private Limited (MOIA)
M.s MOIA was incorporated on March 20, 2006. This subsidiary focuses on providing
Investment & Merchant Banking services.
3.3 MISSION OF THE COMPANY
The mission of M/s. MOSL is to be a well respected and preferred global financial
services organisation enabling wealth creation for all customers.
3.4 VALUES OF THE COMPANY
Key corporate values of the M/s. MOSL are:
Integrity
Teamwork
Meritocracy
Passion and attitude
Excellence in execution.
3.5 STRENGTHS OF THE COMPANY
The company achieved a prominent place in the Indian financial services company due to
following strengths.
3.5.1 Large and Diverse Distribution Network
Company‘s financial products and services are distributed through a pan-India network.
The business has grown from a single location to a nationwide network spread across
1,160 Business Locations operated by us and Business Associates in 363 cities and
towns. Extensive distribution network provides the company with opportunities to cross-
sell products and services, particularly when diversifying into new business streams. In
35. 35
addition to the geographical spread, M/s. MOSL offer an online channel to service the
customers.
3.5.2 Strong research and sales teams
M/s. MOSL believes that understanding of equity as an asset class and business
fundamentals drives the quality of their research and differentiates them from
competitors. Their research teams are focused on cash equities, equity derivatives and
commodities. As at December 31, 2014, M/s. MOSL had 28 equity research analysts
covering 208 companies in 25 sectors and 5 analysts covering 18 commodities. M/s.
MOSL have 1,964 employees, including 739 on a contract basis.
M/s. MOSL believes that research enables them to identify market trends and stocks with
high growth potential, which facilitates more informed and timely decision making by
their clients. This helps to build and promote their brand image and to acquire and retain
institutional and retail customers. Their research is complemented by a strong sales and
dealing team. Each member of institutional sales team has significant research
experience. M/s. MOSL believe that this experience enables sales team to effectively
market ideas generated by the research team to client base and to build stronger client
relationships.
3.5.3 Experienced top management
Both Promoters of the company, Mr. Motilal Oswal and Mr. Raamdeo Agarwal, are
qualified chartered accountants with over two decades of experience each in the financial
services industry. In addition, the top management team comprises qualified and
experienced professionals with a successful track record. M/s. MOSL We believe that our
management‘s entrepreneurial spirit, strong technical expertise, leadership skills, insight
into the market and customer needs provide with a competitive strength which will help
to implement their business strategies.
36. 36
3.5.4 Well-established brand
―Motilal Oswal‖ is a well established brand among retail and institutional investors in
India. M/s. MOSL believes that this brand is associated with high quality research and
advice as well as good corporate values, like integrity and excellence in execution. M/s.
MOSL have been able to leverage the brand awareness to grow their businesses, build
relationships and attract and retain talented individuals which is important in the financial
services industry.
3.5.6 Wide range of financial products and services
The following products and services are offered by the company;
Equity Broking
PMS (Portfolio Management Service)
Investment
Banking
PE (Private Equity)
Investments
MF (Mutual Funds)
Investments
Commodity
Broking
M/s. MOSL offer a portfolio of products to satisfy the diverse investment and strategic
requirements of retail, institutional and corporate clients. M/s. MOSL believes that wide
range of products and services enables to build stronger relationships with, and increase
business volumes from, their clients. In addition, their diverse portfolio reduces
dependence on any particular product, service or customer and allows exploiting
synergies across their businesses.
37. 37
3.6 BOARD OF DIRECTORS OF THE COMPANY
The list of Board of Directors is given below.
Table 3.1: Board of Directors
CMD & CEO Motilal Oswal
Joint Managing Director Raamdeo Agrawal
Directors
Navin Agarwal ,
Balkumar Agarwal
Vivek Paranjpe ,
Praveen Tripathi
Additional Independent Director Sharda Agarwal
(Source: www.motilaloswal.com)
3.7 AWARDS AND RECOGNITIONS WON BY M/S. MOSL
M/s. Motilal Oswal Securities won the Best Performing Equity Broker (National) Award
at CNBC TV18 Financial Advisor Awards 2013 held in Mumbai.
M/s. Motilal Oswal Financial Services Ltd's Analyst Mr. Jinesh Gandhi won the Best
Market Analyst Award for the categories Equity-Auto at ‗India`s Best Market Analyst
Awards 2013 organized by Zee Business.
M/s. Motilal Oswal Securities was declared "Best Equity Broker" at Bloomberg UTV
Financial Leadership Awards in April 2012.
M/s. Motilal Oswal Securities was awarded with Best Performing National Financial
Advisor Equity Broker Award in 2012, second time in succession.
M/s. Motilal Oswal Financial Services was honoured with an award for Best Use in PR in
Financial Services Category at India PR & Corporate Communications Awards 2012.
M/s. Motilal Oswal Securities received Best Equity Broking House Award by BSE IPF-
D&B Equity Broking Awards 2011.
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M/s. Motilal Oswal Mutual Fund's MOSt Shares M50 ETF was adjudged Most
Innovative Fund of the Year by CNBC TV18 CRISIL Mutual Fund Award 2011.
CNBC TV18 awarded M/s. Motilal Oswal the Best Performing Equity Broker Award in
2010 at CNBC TV18 Financial Advisor Awards 2010.
Best Capital Markets & Related NBFC Award for FY11 by CNBC TV18 India Best
Banks & Financial Institutions Awards 2011.
M/s. Motilal Oswal IB team won the Asia Pacific Cross Border Deal of the year award in
2010 and the CEO Ashutosh Maheshvari got India M&A Investment Banker of the Year
award.
M/s. Motilal Oswal Securities Ltd. rated as No.1 Broker in ET Now – Starmine Analyst
Awards 2009.
M/s. MOSL was awarded 'The Best Franchisor in Financial Services' by Franchisee
World Magazine 2008 for the second consecutive year.
M/s. Motilal Oswal Securities Ltd. wins the ―Best Research as Research Showcase
Partner‖ at RESEARCHBYTES IC AWARDS 2014. The winners were selected from a
poll of over 1500 Fund Managers/Analysts.
M/s. Motilal Oswal Securities received two awards for its equity research in IT and
commodity (forex) segments at India's Best Market Analyst Awards 2014, India's biggest
Financial Market Awards also called as ZEE Business Awards 2014.
3.8 CONCLUSION
In this chapter, the brief overview of the company, its vision, mission, values and
strengths is detailed. The details of Director Board and awards and recognitions received
by the company are also detailed.
39. 39
In the next chapter titled theoretical framework, traditional approach and modern
approach to portfolio management is described. The portfolio construction by traditional
method is detailed. Tools used for fundamental analysis and Technical analysis are
described. The steps in portfolio construction using Sharpe‘s single index model, the
formula used for portfolio evaluation, Risk and return calculations shall be discussed.
41. 41
CHAPTER 4
THEORETICAL FRAMEWORK
4.1 INTRODUCTION
In the previous chapter, the brief overview of the company, its vision, mission, values and
strengths were detailed. The details of Director Board and awards and recognitions
received by the company were also detailed.
In this chapter the theoretical frame work of the study is discussed under following
headings. Portfolio Construction, Traditional Approach, Security Analysis, Portfolio Analysis,
Portfolio Selection, Portfolio Revision, Portfolio Evaluation, Return and Risk Analysis of
Portfolio, Modern Approaches to Portfolio Selection, Portfolio Evaluation Methods,
Formulae Used For the Study. A brief summary of this chapter is given in the Conclusion
section.
4.2 PORTFOLIO CONSTRUCTION
Portfolio is a combination of securities such as stocks bonds and money market
instruments. Diversification of investments over different assets helps to reduce risk
without sacrificing return. When determining a proper asset allocation one aims at
maximizing the expected return and minimizing the risk. The process of blending
together the broad asset classes so as to obtain optimum return with minimum risk is
called portfolio construction.
4.3 APPROACHES TO PORTFOLIO CONSTRUCTION
There are two approaches to portfolio construction of the portfolio of securities viz,
Traditional approach
Modern approach
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In traditional approach, investor‘s needs in terms of income and capital appreciation are
evaluated and appropriate securities are selected to meet the needs of the investor. The
common practice in the traditional approach is to evaluate the entire financial plan of the
individual.
In modern approach, portfolios are constructed to maximize the expected return for a
given level of risk. It views the portfolio construction in terms of the expected return and
the risk associated with obtaining the expected return.
4.4 TRADITIONAL APPROACH OF PROTFOLIO
CONSTRUCTION
The construction of portfolio by traditional method is carried out in 5 steps.
The five steps are
1. Security analysis
2. Portfolio analysis
3. Portfolio selection
4. Portfolio revision
5. Portfolio evaluation
These steps are detailed below under separate headings.
4.5 SECURITY ANALYSIS
Security analysis is the initial step of portfolio management. Security analysis is a method
which helps to calculate the value of various assets. There are two alternate approaches
to security analysis namely fundamental analysis and technical analysis.
4.5.1 Fundamental Analysis
The fundamental analysis tries to appraise intrinsic value of shares through economic,
industry and company analyses. If the price of share is lower than the intrinsic value, an
investor buys it. If he finds the price of the share higher than the intrinsic value, the
investor sells the share and makes profit.
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Fig 4.1: Steps in Fundamental Analysis
a. Economic Analysis
Economic Analysis is a systematic approach in which economists and other professionals
will estimate the economic environment and its strengths and weaknesses. The level of
economic activity has an impact on investment in many ways. When the level of
economic activity is low, the stock prices are low, and when the level of economic
activity is high, stock prices are high reflecting the prosperous outlook for sales and
profits of the firm. The commonly analysed macroeconomic factors are as follows;
Gross domestic product (GDP)
Savings and investment
Inflation
Interest rates
Budget
Tax structure
Balance of payment
Monsoon and agriculture
Infrastructure facilities
Demographic factors
Economic forecasts
Economic indicators
Economic Analysis
Industry Analysis
Company Analysis
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The state of economy determines the growth of GDP and investment opportunities. An
economy with favourable savings, investments, stable prices, balance of payments, and
infrastructure facilities provides a best environment for stock investment. A rising stock
market indicates a strong economy ahead.
b. Industry Analysis
An industry is a group of firms that have similar technological structure of production
and produce similar products. An industry analysis consists of three major elements: the
underlying forces at work in the industry; the overall attractiveness of the industry; and
the critical factors that determine a company's success within the industry.
The first step in performing an industry analysis is to assess the impact of Porter's five
forces. "The collective strength of these forces determines the ultimate profit potential in
the industry, where profit potential is measured in terms of long term return on invested
capital," Porter stated. "The goal of competitive strategy for a business unit in an industry
is to find a position in the industry where the company can best defend itself against these
competitive forces or can influence them in its favor."
Understanding the underlying forces determining the structure of the industry can
highlight the strengths and weaknesses of a business, show where strategic changes can
make the greatest difference, and illuminate areas where industry trends may turn into
opportunities or threats.
i) Ease of Entry
Ease of entry refers to how easy or difficult it is for a new firm to begin competing in the
industry. The ease of entry into an industry is important because it determines the
likelihood that a company will face new competitors. In industries that are easy to enter,
sources of competitive advantage tend to wane quickly. On the other hand, in industries
that are difficult to enter, sources of competitive advantage last longer, and firms also
tend to benefit from having a constant set of competitors.
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ii) Power of Suppliers
Suppliers can gain bargaining power within an industry through a number of different
situations. For example, suppliers gain power when an industry relies on just a few
suppliers, when there are no substitutes available for the suppliers' product, when there
are switching costs associated with changing suppliers. Supplier power can affect the
relationship between a business and its customers by influencing the quality and price of
the final product.
iii) Power of Buyers
Powerful buyers can exert pressure on small businesses by demanding lower prices,
higher quality, or additional services, or by playing competitors off one another. The
power of buyers tends to increase when single customers account for large volumes of the
business's product, when substitutes are available for the product, when the costs
associated with switching suppliers are low.
iv) Availability of Substitutes
Substitutes limit the potential returns of an industry by placing a ceiling on the prices
firms in the industry can profitably charge. Product substitution occurs when a business's
customer comes to believe that a similar product can perform the same function at a
better price.
v) Competitors
The intensity of competition tends to increase when an industry is characterized by a
number of well-balanced competitors, a slow rate of industry growth, high fixed costs, or
a lack of differentiation between products. Another factor increasing the intensity of
competition is high exit barriers—including specialized assets, emotional ties,
government or social restrictions, strategic interrelationships with other business units,
labor agreements, or other fixed costs which make competitors stay and fight even when
they find the industry unprofitable.
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vi) Industry attractiveness and industry success factors
Industry attractiveness is the presence or absence of threats exhibited by each of the
industry forces, the greater the threat posed by an industry force, the less attractive the
industry becomes.
Success factors are those elements that determine whether a company succeeds or fails in
a given industry. They vary greatly by industry. Some examples of possible success
factors include quick response to market changes, a complete product line, fair prices,
excellent product quality or performance, knowledgeable sales support, a good record for
deliveries, solid financial standing, or a strong management team.
Industrial growth follows life cycle patterns. Buying shares beyond the pioneering stage
and selling of shares before the stagnation stage are ideal for investors. The cost structure,
R&D and the government policies regarding the industries influence the growth and
profitability of the industries. SWOT analysis reveals the real status of the industry.
c. Company Analysis
Company analysis is a process carried out by investors to evaluate securities, collecting
data related to the company‘s profile, products and services as well as profitability. A
company analysis looks into the goods and services proffered by the company. If the
company is involved in manufacturing activities, the analysis studies the products
produced by the company and also analyzes the demand and quality of these products. If
it is a service business, the investor studies the services put forward.
In the company analysis, the investor analyses information related to the company and
evaluates the present and future values of the stock. The present and future values are
affected by a number of factors and they are given below.
Factors that affect present share values are
Historic stock price
Price/Equity Ratio
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Economic condition
Stock market condition
Factors that affect future share prices are
Competitive Edge of the company
Earnings of the company
Capital structure of the company
Management quality of the company
Operating efficiency of the company
Financial performance of the company
The competitive edge of the company could be measured with the company‘s market
share, growth and stability of sales.
The financial statement reveals information about the financial state of the company.
Fund flow and cash flow statement is used to analyze the financial health of the
company.
The ratio analysis helps the investor to study the individual parameters like profitability,
liquidity, leverage, and the value of stock.
4.5.2 Technical Analysis
It is the process identifying trend reversals at an earlier stage to formulate the buying and
selling strategy. With the help of several indicators, the analyst analyses the relationship
between price-volume and supply demand for overall market and individual stock.
The generally used technical tools are
Dow theory
Volume of trading
Short selling
Bars and charts
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Moving averages
Oscillators
4.5.2.1 Dow Theory
The market moves in a general direction called trend. According to ―Dow Theory‖ the
trend is divided in to primary, intermediate and short term trend. The primary trend may
be the broad upward or downward movement that may last for a year or two. The
intermediate trends are corrective movements that may last for three weeks to three
months. The short term trend refers to day-to-day price movement.
Fig 4.2: Trends in stock market
Source: www.fidelity.com
Dow gives special emphasis on volume. Volume expands along with the bull market and
narrows along with the bear market. Large volume with rise in price indicates bull
market. Large volume with fall in price indicates bear market.
4.2.5.2 Breadth of the market
The net difference between the number of stocks advanced and number of stocks
declined is the breadth of the market. A ratio of 0.75 indicates short-term buying
opportunity and there will be an intermediate rally in the beginning of bearish trend. A
rise above 1.25 indicates selling opportunities.
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4.5.2.3 Short selling
Short selling is a technical indicator referring to selling of shares that are not owned. If the
short selling ratio is less than 1 it indicates that the market is overbought and a decline can be
expected. Value above 1 indicates bullish trend and if it is above 2 the market is oversold.
4.5.2.4 Moving Averages
Moving averages indicates the underlying trend in the scrip. For identifying short term trend
10 to 30 day moving averages are used. In the case of medium term trend, 50 to 125 day are
adopted, 200-day moving average is used to identify long-term trend.
The chart below shows the moving averages for 50 and 200 days.
Fig 4.3: Moving Averages
(Source: www.onlinetradingconcepts.com)
4.5.2.5 Oscillators
Oscillators such as Relative strength index (RSI) and Rate of change (ROC) indicate the
market momentum or scrip momentum. The oscillators indicate overbought and oversold
conditions, possible trend reversal, rise or decline in stock momentum.
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4.5.2.6 Relative Strength Index
A technical momentum indicator that compares the magnitude of recent gains to recent
losses in an attempt to determine overbought and oversold conditions of an asset. It is
calculated using the following formula:
RSI = 100 - 100/ (1 + RS*)
*Where RS = Average of x days' up closes / Average of x days' down closes.
Fig 4.4: Relative Strength Index
(Source: www.investopedia.com)
From the chart, the RSI ranges from 0 to 100. An asset is deemed to be overbought once
the RSI approaches the 70 level, meaning that it may be getting overvalued and is a good
candidate for a pullback. Likewise, if the RSI approaches 30, it is an indication that the
asset may be getting oversold and therefore likely to become undervalued.
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4.5.2.7 Rate- Of-Change (ROC) Indicator
The Rate-of-Change (ROC) indicator, which is also referred to as simply Momentum, is a
pure momentum oscillator that measures the percent change in price from one period to
the next. The ROC calculation compares the current price with the price ―n‖ periods ago.
The plot forms an oscillator that fluctuates above and below the zero line as the Rate-of-
Change moves from positive to negative. As a momentum oscillator, ROC signals
overbought-oversold conditions.
4.5.2.8 Charts
Charts are valuable and easiest tools in the technical analysis. The graphic presentation of
the data helps the investor to find out the trend of the price without the difficulty. The
charts indicate past historic price movement, current trend, important support and
resistance, and probable future action of the market by projection.
There are four main types of charts that are used by investors and traders depending on
the information that they are seeking and their individual skill levels. The chart types are:
the line chart, the bar chart, the candlestick chart and the point and figure chart. In the
following sections, we will focus on the S&P 500 Index during the period of January
2006 through May 2006. Notice how the data used to create the charts is the same, but
the way the data is plotted and shown in the charts is different.
a. Line Chart
The most basic of the four charts is the line chart because it represents only the closing
prices over a set period of time. The line is formed by connecting the closing prices over
the time frame. Line charts do not provide visual information of the trading range for the
individual points such as the high, low and opening prices. However, the closing price is
often considered to be the most important price in stock data compared to the high and
low for the day and this is why it is the only value used in line charts. A line chart is
shown in the figure below.
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Fig 4.5: Line Chart
(Source: www.investopedia.com)
b. Bar Charts
The bar chart expands on the line chart by adding several more key pieces of information
to each data point. A bar chart is shown in the figure below.
Fig 4.6: Bar Chart
(Source: www.investopedia.com)
The chart is made up of a series of vertical lines that represent each data point. This
vertical line represents the high and low for the trading period, along with the closing
53. 53
price. The close and open are represented on the vertical line by a horizontal dash. The
opening price on a bar chart is illustrated by the dash that is located on the left side of the
vertical bar. Conversely, the close is represented by the dash on the right. Generally, if
the left dash (open) is lower than the right dash (close) then the bar will be shaded black,
representing an up period for the stock, which means it has gained value. A bar that is
colored red signals that the stock has gone down in value over that period. When this is
the case, the dash on the right (close) is lower than the dash on the left (open).
c. Candlestick Charts
The candlestick chart is similar to a bar chart, but it differs in the way that it is visually
constructed. Similar to the bar chart, the candlestick also has a thin vertical line showing
the period's trading range. A candlestick chart is shown below.
Fig 4.7: Candlestick Chart
(Source: www.investopedia.com)
The difference comes in the formation of a wide bar on the vertical line, which illustrates
the difference between the open and close. And, like bar charts, candlesticks also rely
heavily on the use of colors to explain what has happened during the trading period. A
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major problem with the candlestick color configuration, however, is that different sites
use different standards; therefore, it is important to understand the candlestick
configuration used at the chart site you are working with. There are two color constructs
for days up and one for days that the price falls. When the price of the stock is up and
closes above the opening trade, the candlestick will usually be white or clear. If the stock
has traded down for the period, then the candlestick will usually be red or black,
depending on the site. If the stock's price has closed above the previous day's close but
below the day's open, the candlestick will be black or filled with the color that is used to
indicate an up day.
d. Point and Figure Charts
The point and figure chart has a long history of use dating back to the first technical
traders. This type of chart reflects price movements and is not as concerned about time
and volume in the formulation of the points. The point and figure chart removes the
noise, or insignificant price movements, in the stock, which can distort traders' views of
the price trends. These types of charts also try to neutralize the skewing effect that time
has on chart analysis.
Fig 4.8: Point and figure Chart
( Source:www.investopedia.com)
55. 55
The Xs represent upward price trends and the Os represent downward price trends. There
are also numbers and letters in the chart; these represent months, and give investors an
idea of the date. Each box on the chart represents the price scale, which adjusts
depending on the price of the stock: the higher the stock's price the more each box
represents. On most charts where the price is between $20 and $100, a box represents $1,
or 1 point for the stock. The other critical point of a point and figure chart is the reversal
criteria. This is usually set at three but it can also be set according to the chartist's
discretion. The reversal criteria set how much the price has to move away from the high
or low in the price trend to create a new trend or, in other words, how much the price has
to move in order for a column of Xs to become a column of Os, or vice versa. When the
price trend has moved from one trend to another, it shifts to the right, signaling a trend
change.
4.6 PORTFOLIO ANALYSIS
Security analysis provides a set of securities suitable for investment. From these
securities a large number of portfolios can be constructed by choosing different set of
securities and also by varying weight of securities. The diversification has the effect of
reducing the portfolio risk by minimizing the unsystematic risk which affects individual
security or industry. Whereas over diversification reduces the return from portfolio. A
rational investor has to find out the most efficient portfolio by choosing appropriate
trade-off between risk and return.
4.7 PORTFOLIO SELECTION
Portfolio analysis gives different portfolios available for investment. From these
portfolios an optimal portfolio is selected for investment.
4.8 PORTFOLIO REVISION
As the economy and business environment changes the return from securities also
changes. The portfolio has to include new securities which promises high return and
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exclude securities which has become underperformer. Hence, after constructing an
optimal portfolio the investor has to periodically monitor the portfolio to ensure that it
remains optimal.
4.9 PORTFOLIO EVALUATION
The evaluation of portfolio provides feedback about performance to evolve better
management strategy. The return and risk of portfolio over a period of time is evaluated.
These values are compared with standard values such as market index to assess the
relative performance of the portfolio.
4.10 RETURN AND RISK ANALYSIS OF PORTFOLIO
Portfolio‘s performance analysis consists of examining the risk-return characteristics of
the portfolio.
4.10.1 Return
The return of a portfolio is measured by its average total return over a standard holding
period, usually one year. The total return consists of investment income such as dividends
plus capital gain/loss. The rate of return earned by the portfolio is calculated compared
with the bench mark like market index.
The return of a portfolio is given by
n
Rp = Σ Xi Ri
i=1
Where
Rp = Portfolio average return
Xi = Weight or proportion of security ‗i‘ in portfolio
Ri = Expected return of Security i
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4.10.2 Risk
Risk is the possibility of not realizing return or realizing return less than expected. The
risk is broadly classified into two types;
1. Systematic Risk
2. Unsystematic Risk
4.10.2.1 Systematic Risk
Systematic risk refers to that portion of variation in return caused by factors that affect
the price of all securities. The effect of systematic risk is to move prices of all individual
securities in same direction. The systematic risk arises due to following reasons.
a. Market Risk: Variation in prices arises out of changes in demand and supply
pressures in the market following the changing flow of news and expectations.
b. Interest Rate risk: The market perception is influenced by changes in interest rates
which in-turn affects the riskiness of investments due to their effects on returns
expectations and the total principal amount due to be refunded.
c. Purchasing Power Risk: Purchasing power risk is the uncertainty of the purchasing
power of the amounts to be received due to both inflation and deflation.
4.10.2.2 Unsystematic Risk
Unsystematic risk refers to that portion of risk which is caused due to factors unique or
related to a firm or industry. This type of risk can be divided further in to the following
types.
a. Business Risk: Business risk may be due to internal factors or external factors.
Internal risk is caused by factors such as improper product mix, non availability of
raw material, incompetence to face competence, absence of strategic management,
etc. External risks arise due to factors which are beyond the control of the firm e.g.
58. 58
business cycles, government controls, changes in laws, international market
conditions.
b. Financial Risk: Financial risk is associated with the capital structure of the company.
The extent of risk depends on the leverage of the firm‘s capital structure.
c. Credit of Default Risk: Credit risk is associated with probability of a buyer will
default. The borrower‘s credit rating might have fallen suddenly and he may become
default prone. Proper management of credit risk reduces the chances of non- payment
and reduces credit risk.
d. Other Risks: In addition to above risk there are many more risks particularly
associated with foreign securities. These are monetary value risk, political risk, and
foreign government indebtedness risk.
4.10.3 Calculation of Risk on a Portfolio
Risk on a portfolio is not same as risk on individual securities. Portfolios standard
deviation is a good indicator of the risk of the portfolio. The portfolio risk of a portfolio
of 2 securities can be calculated using the following formula:
σp = √W1
2
σ1
2
+ W2
2
σ2
2
+ 2 W1 W2 (r12 σ1 σ2)
Where
σp= Standard deviation of portfolio
W1 = Weight or proportion of security 1 in portfolio
W2 = Weight or proportion of security 2 in portfolio
σ1= Standard deviation of security 1
σ2= Standard deviation of security 2
r12 = Correlation co-efficient of returns of security 1 and security 2
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4.11 MODERN APPROACHES TO PORTFOLIO SELECTION
In modern approach of portfolio selection the stocks are not selected based on the need
for income or appreciation. The selection is based on the risk and return analysis. Modern
Portfolio Theory (MPT) approaches investing by examining the entire market and the
whole economy. The theory is an alternative to the older method of analyzing each
investment‘s individual merits. MPT places a large emphasis on the correlation between
investments. Correlation is the amount we can expect various investments – and various
asset classes – to change in value compared with each other. The commonly used models
are given below.
Sharpe‘s single index model
Markowitz mean-variance optimization model
Capital Asset Pricing Model (CAPM)
Arbitrage Pricing Theory
4.11.1 Sharpe’s Single Index Model
Sharpe‘s single index model was developed by William Sharpe for the construction of
optimal portfolio using less number of inputs. The simplicity is the most important
feature of the Sharpes‘s single index model over Markowit‘z model. Markowitz‘s model
uses large number of covariance. Taking idea from the Markowit‘z, suggested that index
to which securities are related can be used for covariance generation, William Sharpe
formulated single index model.
The regression equation is
Ri =αi +βi*Rm+ei
Where,
Ri = Return on security i
αi = Constant term (Securities return when market excess return is zero)
βi = Beta of security
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ei = error term.
The key assumptions are
1. The error term ei is zero mean and had finite variance.
2. The securities are related through common response to return of market index.
Meaning the error term of one security is not correlated with error term of any other
security. COV (ei, ej) = 0
3.There is no correlation between error term and return on market index.
COV (ei, Rm)=0
The expected return of security is
Ri =αi +βi*Rm+ei
As ei zero in value so,
Ri =αi +βi*Rm
The variance of the return of the security is
σi
2
= σei2+ βi
2 *
σm
2
The major assumption of Sharpe‘s single model is that the co-variation of the security can
be explained by one single factor known as index.
COV (i, j) = βi
*
βj*σm
2
Where,
COV (i, j) = Covariance between security i and j.
βi = Beta of security i
βj = Beta of security j.
σm
2
= Variance of the return of market index.
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Steps in Construction of Optimal Portfolio Using Single Index Model
This model firstly ranks the securities based on their excess return to beta ratio. After that
all securities are arranged according to their ranks. Then cutoff rate is calculated and it is
compared with excess return to beta for deciding whether to select the security for
investment or not. The model explains the weight that should be allocated to each
security to obtain optimal portfolio.
Step 1: Calculate excess return to beta ratio for each security under consideration
Excess return to beta ratio = (Ri-Rf)/βi
Where
Ri = Expected return of Security i
Rf = Risk free rate of return
Present MIBOR rate is taken as risk free rate Rf
βi = the Beta co-efficient of the security or excess return of the security over
market index
Step 2: Rank the securities based on the excess return to beta ratio.
Step 3: Calculate the cut of rate using the formulae. Highest cut off rate will be regarded
as C*
Where
σm2
= Market variance
Ri - Rf = Market risk premium
σei2 =
Unsystematic risk of the security
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Step 4: Selection of securities for investment. If (Ri- Rf)/βi is greater than cut off rate then
the security will be included in the portfolio.
Step 5: Calculate the proportion to be invested in each security is calculated.
Where
C* is the cut off rate
4.11.2 Markowitz Mean-Variance Optimization Model (Tangency
Model)
Harry Markowitz developed algorithms to minimize portfolio risk. His study was first
published in Journal of Finance in March 1952. Markowitz indicated the importance of
correlation among the returns of different stocks in construction of a stock portfolio.
Markowitz Model
The theory assumes that investors prefer to minimize risk. The theory assumes that given
the choice of two portfolios with equal returns, investors will choose the one with the
least risk. If investors take on additional risk, they will expect to be compensated with
additional return. According to MPT, risk comes in two major categories:
Systematic Risk – the possibility that the entire market and economy will show
losses negatively affecting nearly every investment; also called market risk.
Unsystematic Risk – the possibility that an investment or a category of investments
will decline in value without having a major impact upon the entire market
Diversification generally does not protect against systematic risk because a drop in the
entire market and economy typically affects all investments. However, diversification is
63. 63
designed to decrease unsystematic risk. Since unsystematic risk is the possibility that one
single thing will decline in value, having a portfolio invested in a variety of stocks, a
variety of asset classes and a variety of sectors will lower the risk of losing much money
when one investment type declines in value.
The Efficient Frontier
In order to compare investment options, Markowitz developed a system to describe each
investment or each asset class with math, using unsystematic risk statistics. Then he
further applied that to the portfolios that contain the investment options. He looked at the
expected rate-of-return and the expected volatility for each investment. He named his
risk-reward equation The Efficient Frontier. The graph below is an example of what the
Efficient Frontier equation looks like when plotted. The purpose of The Efficient Frontier
is to maximize returns while minimizing volatility.
Fig 4.9: Efficient Frontier
(Source: www.investopedia.com)
64. 64
Portfolios along The Efficient Frontier should have higher returns than is typical, on
average, for the level of risk the portfolio assumes.
The Efficient Frontier line starts with lower expected risks and returns, and it moves
upward to higher expected risks and returns. So people with different Investor Profiles
(tolerance for risk and personal preferences) can find an appropriate portfolio anywhere
along the Efficient Frontier line. The optimal portfolio is the Tangent Portfolio that is the
mix found where the straight line is tangent to the Efficient Frontier portfolio.
4.11.3 Capital Asset Pricing Model (CAPM)
William F. Sharpe developed CAPM. He emphasized that the risk factor in portfolio
theory is a combination of two risks, the systematic risk and unsystematic risk. The total
risk of the portfolio is reduced with increase in number of securities in a portfolio. This is
due in the unsystematic risk distributed over a number of securities.
Beta Coefficient
CAPM calculates a required return based on a risk measurement. To do this, the model
relies on a risk multiplier called the beta coefficient. Beta coefficient is a measure of the
volatility or systematic risk, of a security or a portfolio in comparison to the market as a
whole. Beta is the tendency of a security's returns to respond to swings in the market.
A beta of 1 indicates that the security's price will move with the market. A security with
beta of less than 1 will be less volatile than the market. A beta of greater than 1 indicates
that the security's price will be more volatile than the market. For example, if a stock's
beta is 1.2, it's theoretically 20% more volatile than the market.
Assumptions of CAPM
The CAPM depends on certain assumptions. The original assumptions were:
1. Investors are wealth maximizers who select investments based on expected return and
standard deviation.
65. 65
2. Investors can borrow or lend unlimited amounts at a risk-free (or zero risk) rate.
3. There are no restrictions on short sales (selling securities that you don't yet own) of
any financial asset.
4. All investors have the same expectations related to the market.
5. All financial assets are fully divisible (you can buy and sell as much or as little as you
like) and can be sold at any time at the market price.
6. There are no transaction costs.
7. There are no taxes.
8. No investor's activities can influence market prices.
9. The quantities of all financial assets are given and fixed.
CAPM Formula
The CAPM formula is sometimes called the Security Market Line formula and consists
of the following equation:
r* = Rf + β(Rm - Rf)
It is basically the equation of a line, where:
r* = required return , Rf = the risk-free rate , Rm = the average market return
β = the beta coefficient of the security
Fig 4.10: CAPM Model
(Source: www.investopedia.com)
66. 66
The Rm – Rf term is called the market risk premium.
The risk-free rate (Rf) is the return that an investment with no risks should earn,
commonly returns on Treasury securities is used as risk-free rate.
Limitations of CAPM
1. The CAPM is based on the expectations about the future.
2. The beta coefficient is unstable. It may not reflect the future volatility of returns.
3. CAPM focuses attention only to systematic (market related) risk. However, total risk is
more relevant and related to returns.
4. Investors do not follow postulation of CAPM and do not diversify in a planned
manner.
5. SML is not applicable to bond analysis, although bonds are a part of portfolio of
investors.
4.11.4 Arbitrage Pricing Theory (APT)
Arbitrage pricing theory (APT) was developed by Stephen Ross in 1976. It is a method of
estimating the price of an asset. The theory assumes an asset's return is dependent on
various macroeconomic, market and security-specific factors.
The APT formula is:
E (rj) = rf + bj1RP1 + bj2RP2 + bj3RP3 + bj4RP4 + ... + bjnRPn
Where:
E (rj) = the asset's expected rate of return
rf = the risk-free rate
bj = the sensitivity of the asset's return to the particular factor
RP = the risk premium associated with the particular factor
There are an infinite number of security-specific influences for any given security
including inflation, production measures, investor confidence, exchange rates,
67. 67
market indices or changes in interest rates. It is up to the analyst to decide which
influences are relevant to the asset being analyzed.
Once the analyst derives the asset's expected rate of return from the APT model, he or she
can determine what the "correct" price of the asset by using discounted cash flow model. .
The APT allows the user to adapt the model to the security being analyzed. And as with
other pricing models, it helps the user decide whether a security is undervalued or
overvalued and so he or she can profit from this information. APT is also very useful for
building portfolios because it allows managers to test whether their portfolios are exposed
to certain factors.
4.12 PORTFOLIO EVALUATION METHODS
The different evaluation methods commonly used for portfolio evaluation are
1. Sharpe‘s Ratio
2. Treynor‘s Ratio
3. Jenson‘s Performance Index
4.12.1 Sharpe’s Ratio
Sharpe‘s performance index or Sharpe‘s ratio was developed by William Sharpe and
gives a single value to be used for the performance ranking of various portfolios. The
index assigns highest value to the portfolio which has best risk-adjusted average rate of
return.
Sharpe‘s ratio measures risk premium of the portfolio relative to the total amount of risk
in the portfolio. The risk premium is the difference between the portfolio‘s average rate
of return and riskless rate of return. The standard deviation of the portfolio indicates the
risk.
Sharpe Ratio = Rp-Rf
σp
68. 68
Where;
Rp = Portfolio average return
Rf = Risk free rate of return
σp = Standard deviation of the portfolio return
4.12.2 Treynor’s Ratio
Treynor‘s ratio was developed by Jack Treynor. It is the ratio of risk premium to the
volatility of return. The risk premium is the difference between average return of the
portfolio riskless rate of return. Volatility of portfolio is measured by the portfolio beta.
Treynor‘s Ratio = Rp-Rf
βp
Where;
Rp = Portfolio average return
Rf = Risk free rate of return
βp = the Beta co-efficient of the portfolio
4.12.3 Jensen’s Measure
This absolute risk adjusted return measure was developed by Michael Jensen. This ratio
attempts to measure the differential between actual return of the portfolio and the
expected return of the portfolio.
Jensen‘s Measure = Rp - E(Rp)
E (Rp) = α + βp (Rm - Rf)
Where;
Rp = Portfolio average return
E (Rp) = Expected return of portfolio
Rm = Average market return
Rf = Risk free rate of return
βp = Beta co-efficient of the portfolio
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4.13 FORMULAE USED FOR THE STUDY
The formulas used for the study are detailed below.
4.13.1 Portfolio Construction
Return = (Today‘s price- Last year‘s price)*100
Last year‘s price
Alpha = Stock return- (Beta * Market return)
αi = Ri – (βi*Rm)
βi = nΣxy- ΣxΣy
n Σx2
- (Σx)2
n
Portfolio Alpha (αp) = Σ wi αi
i=1
Where wi = the proportion of security in the portfolio
n
Portfolio Beta (βp) = Σ wi βi
i=1
Portfolio return = Portfolio Alpha + (Portfolio Beta * Market return)
Rp = αp+ (βp* Rm)
Portfolio Systematic Risk= βp
2
σm
2
n
Portfolio Beta (βp) = Σ wi σei
2
i=1
n
Total risk of Portfolio = βp
2
σm
2 +
Σ wi σei
2
i=1
4.13.2 Portfolio Evaluation
1. Sharpe’s Ratio
Sharpe‘s ratio = Portfolio Return- Risk free rate
Portfolio standard deviation
70. 70
Sharpe Ratio = Rp-Rf
σp
Where;
Rp = Portfolio average return
Rf = Risk free rate of return
σp = Standard deviation of the portfolio return
2. Treynor’s Ratio
Treynor‘s Ratio = Portfolio Return – Risk free rate of return
Portfolio Beta
Treynor‘s Ratio = Rp-Rf
βp
Where;
Rp = Portfolio average return
Rf = Risk free rate of return
βp = the Beta co-efficient of the portfolio
3. Jensen’s Measure
Jensen‘s Measure = Rp - E(Rp)
E (Rp) = α + βp (Rm - Rf)
Where;
Rp = Portfolio average return
E (Rp) = Expected return of portfolio
Rm = Average market return
Rf = Risk free rate of return
βp = Beta co-efficient of the portfolio
71. 71
4.14 CONCLUSION
In this chapter the traditional approaches and modern approaches to portfolio
management is described. The portfolio construction by traditional method is detailed.
Tools of fundamental analysis and Technical analysis are described.
The steps in portfolio construction using Sharpe‘s single index model, the formula used
for portfolio evaluation, risk and return calculations are detailed. Finally, an abstract of
formulae used for this study is given.
In the next chapter titled Analysis and Interpretation, the data collected will be analyzed
and optimal portfolio using Sharpe‘s single index model is constructed. Along with, a
portfolio having same return as optimal portfolio and another portfolio with same risk as
optimal portfolio is constructed. The portfolios are evaluated using Sharpe‘s ratio,
Treynor‘s ratio and Jensen Measure.
73. 73
CHAPTER 5
ANALYSIS AND INTERPRETATIONS
5.1 INTRODUCTION
In the previous chapter the traditional approaches and modern approaches to portfolio
management is described. The portfolio construction by traditional method is detailed.
Tools of fundamental analysis and Technical analysis are described. The steps in
portfolio construction using Sharpe‘s single index model, the formula used for portfolio
evaluation, risk and return calculations are detailed. Finally, an abstract of formulae used
for this study is given.
The data for study, mainly stock prices for the last five years were collected from the
Motilal Oswal Securities, Manjeri. The analysis done using those data and its
interpretations are discussed under following headings. CNX Nifty Index Shares,
Analysis of Securities, Analysis of Risk of Securities, Construction of Optimal Portfolio
Using Sharpe‘s Single Index model, Measuring Return and Risk of Optimal Portfolio,
Construction of Portfolio #2 with Same Return as Optimal Portfolio, Construction of
Portfolio # 3 with Same Risk as Optimal Portfolio. The three portfolios are evaluated in
the section called portfolio evaluation using three ratios viz, Sharpe‘s index, Treynor‘s
ratio and Jensen Measure. A brief summary of this chapter is provided in the conclusion
section.
5.2 CNX NIFTY INDEX SHARES
The CNX NIFTY 50 Index comprises of 50 companies from various sectors, which ranks
high in market capitalization. The weight of stocks in the index is determined by the
market capitalization of free floating shares of the respective companies.
CNX Nifty index is used as a barometer of Indian stock market and economy. The list of
50 shares which constitutes the index is shown the table 5.1given in the next page.
74. 74
Table 5.1: List of CNX Nifty 50 shares
SLNo Security SLNo. Security
1 ACC 26 Infosys
2 Ambuja Cements 27 ITC
3 Asian Paints 28 Jindal Steel& Power (JSP)
4 Axis Bank 29 Kotak Bank
5 Bajaj Auto 30 L&T
6 Bharti Airtel 31 Lupin
7 BHEL 32
Mahindra &Mahindra
(M&M)
8 BoB 33 Maruti Suzuki
9 BPCL 34 NMDC
10 Cairn Energy 35 NTPC
11 Cipla 36 ONGC
12 Coal India 37 Power Grid
13 DLF 38 PNB
14
Dr. Reddy's Laboratories
(DRL)
39 Reliance Industries
15 GAIL 40 SBI
16 Grasim 41 Sesa Sterlite
17 HCL Tech 42 Sun pharma
18 HDFC 43 Tata Motors
19 HDFC Bank 44 Tata Power
20 Hero Motor Corporation 45 Tata Steel
21 Hindalco 46 TCS
22
Hindustan Unilever Ltd.
(HUL)
47 Tech Mahindra
23 ICICI Bank 48 Ultratech Cements
24 IDFC 49 Wipro
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25 IndusInd bank 50 Zee Entertainment.
(Source: www.nse.com)
5.3 ANALYSIS OF SECURITES
Here all of the 50 CNX NIFTY index stocks are used for study. Security analysis
involves calculation of average return, variance, alpha and beta of the securities. These
values form the basic secondary data for the formation of optimal portfolio.
Security analysis on all the CNX Nifty shares were conducted and average return,
variance, alpha and beta of the security of the shares were calculated using Microsoft
Excel
Return = (Today‘s price- Last year‘s price)*100
Last year‘s price
Average return of security Ri‘= Σ Ri/n
Average return of the market Rm = Σ Rm/n
Variance of security σi
2
= Σ (Ri-Ri‘)2
/(n-1)
Variance of market σm
2 = Σ
(Rm-Rm‘)2
/(n-1)
Covariance of Security & Market COV R,M = Σ(Ri-Ri‘)*(Rm-Rm‘)/ (n-1)
Beta of security β = COV R, M / σm
2
Alpha of security α = Ri‘- β Rm‘
A Microsoft Excel work sheet was prepared with above formulae and calculations were
done using computers. A sample calculation of Ambuja Cements is shown in the
Chapter Appendix –A (Page.93). The table below shows the summary of calculation of
all shares.
5.3.1 Summary Table Showing Return and Risk
76. 76
The table 5.2 given in the next page shows the return, alpha, beta and variance of CNX
Nifty shares.
78. 78
Inferences:
Form the above table following inferences are made.
Asian Paints has highest return (42.05 %) and Sesa Sterlite has lowest return
(-24.44 %).
Mahindra & Mahindra has highest Alpha (45.39) and BHEL has lowest Alpha
(-26.53).
Maruti Suzuki has highest Beta (2.06) and Mahindra and Mahindra has lowest
Beta (-1.70).
Asian Paints has highest Variance (3723.36 %2
) and Tata Power has lowest
variance (65.75%2
).
The return of CNX Nifty index was 10.2476 % for the period and market risk was
149.25 % 2
.
5.4 RISK ANALYSIS OF SECURITIES
The total risk of securities is divided in to two; the systematic risk which cannot be
diversified and unsystematic or security specific risk which can be reduced by
diversification. Systematic and unsystematic risks are measured by using Sharpe‘s index
model.
5.4.1 Systematic Risk of Securities
The systematic risk indicates non diversifiable part of the risk of a security. It is
calculated using the following formulae.
Systematic risk = βi2 σm
2
Where σm2 = Variance of Market
Market is represented by CNX NIFTY, from table No. 5.2 = 149.25 %2
.
The calculations are performed using Microsoft excel software. The result of calculation
of systematic risk of securities is given in the table below.
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Inference:
From the above table it is inferred that Hindustan Unilever has minimum systematic risk
(0.02 %2
) and Axis bank has highest systematic risk (975.06 %2
).
It means Hindustan Unilever is less affected by ups and downs in market and Axis Bank
share price is highly influenced by volatility in the market.
5.4.2 Unsystematic Risk of the Securities
Unsystematic risk refers to that portion of risk which is caused due to factors unique or
related to a firm or industry.
The total Risk of the security is the sum of systematic risk and non-systematic risk, the
unsystematic risk is fond out by deducting systematic risk from total risk. i.e.
Unsystematic risk = Variance of security- Systematic risk.
The unsystematic risk is calculated using the formula,
Unsystematic risk = σi
2
- βi
2
σm
2.
Where
σi
2
= Variance of security
βi = Beta of Security
σm
2 =
The variance of market index
Market is represented by CNX NIFTY INDEX
From Summary table 5.2, σm 2
= 149.25(%2
)
The table 5.4 given in the next page shows the calculation of unsystematic risk of
securities.
82. 82
Inference:
From the table it is inferred that the Asian Paints has highest unsystematic risk (3317.02
%2
) and Dr. Reddy‘s lab has lowest unsystematic risk (100.77 %2
).
5.4.3 Total Risk of Securities
Total risk of a security is the sum of systematic and unsystematic risks.
Total Risk = Systematic Risk + Unsystematic Risk.
The table 5.5 given in the next page shows the total risk of securities.
84. 84
Inference:
From the above table it is inferred that, the Asian Paints has highest total risk (3723.36
%2
) and Hindustan Uniliver Ltd (130.88 %2
) has lowest total risk.
5.5 CONSTRUCTION OF OPTIMAL PORTFOLIO USING
SHARPE’S OPTIMIZATION MODEL
The construction of optimal portfolio using Sharpe‘s single index model involves
following steps.
1. Ranking of the securities based on excess return over risk i.e. (Ri - Rf)/ β ratio.
2. Calculation of Cut-off point
3. Selection of securities based on the cut-off point
4. Calculation of Weight of each security in the portfolio.
5.5.1 Ranking of Securities
The CNX NIFTY securities are ranked based on (Ri - Rf)/ β ratio.
Where;
Ri= Return of the security
Rf = the risk free rate.
The latest MIBOR (Mumbai Inter Bank Offer Rate) is taken as risk free rate Rf. The
present rate is 7.21 %. Hence, 7.21% is taken as risk free rate for calculation.
The table 5.6 given in the next page shows the rank of securities based on (Ri - Rf)/ β
ratio.