CERTIFICATE This is to certify that the project entitled “A Study on Risk-Return Analysis of HDFC and ICICI Securities” has been submitted by Ms.Aisha Begum (Reg. No. 10241E0003) in partial fulfillment of the requirements for the award of Master of Business Administration from Jawaharlal Nehru Technological University, Hyderabad. The results embodied in the project have not been submitted to any other University or Institution for the award of any Degree or Diploma.
(S.Ravindra Chary)
(KVS Raju)
Internal Guide Associate Professor Department of Management Studies GRIET
Professor & HOD Department of Management Studies GRIET
(S. Ravindra Chary)
(Project Coordinator) Associate Professor Department of Management Studies GRIET
DECLARATION 2
I hereby declare that the project entitled “ A Study On Risk-Return
Analysis of HDFC and ICICI Securities At Ventura Securities Ltd ” submitted in partial fulfillment of the requirements for award of the degree of MBA at Gokaraju Rangaraju Institute of Engineering and Technology, affiliated to
Jawaharlal Nehru Technological University, Hyderabad, is an authentic work and has not been submitted to any other University/Institute for award of any degree/diploma .
AISHA BEGUM
(10241E0003) MBA, GRIET HYDERABAD
ACKNOWLEDGEMENT
3
Firstly I would like to express our immense gratitude towards our institution Gokaraju Rangaraju Institute of Engineering & Technology, which created a great
platform to attain profound technical skills in the field of MBA, thereby fulfilling our most cherished goal. I would thank the Research analyst of VENTURA SECURITIES LTD specially Mr. Mohammed Akbar (Manager) and Mr.Vasiuddin (proprietor) of Franchise Ventura Securities Limited for guiding me and helping me in successful completion of the project
I am very much thankful to our Mr. S. Ravindra Chary (Internal Guide) sir for extending his cooperation in doing this project.
I am also thankful to our project coordinator Mr. S. Ravindra Chary for extending his cooperation in completion of Project.
I convey my thanks to my beloved parents and my faculty who helped me directly or indirectly in bringing this project successfully. successfully.
AISHA BEGUM (10241E0003)
INDEX
Chapters
Chapter 1
Contents
Page No:
Introduction 4
Chapter 2
Chapter 3
1.1 Introduction
2
1.2 Need of the study
3
1.3 Scope of the study
4
1.4 Objectives of the study
5
1.5 Research methodology
6
1.6 Limitations of the study
7
2.1 Industry profile
9
2.2 Company profile
22
Literature Review 3.1 Risk Analysis
32
3.2 Types of risks
34
3.3 Measurement of risk
39
3.4 Return Analysis
42
3.5 Risk and return Trade off
45
3.6 Risk-return relationship
46
Chapter 4
Data Analysis & Interpretation
49
Chapter 5
Findings & suggestion
67
Chapter 6
Bibliography
71
CHAPTER: 1
1.1 Introduction 1.2 Need of the study 1.3 Scope of the study 5
1.4 Objectives of the study 1.5 Research methodology 1.6 Limitations of the study
6
1.1 INTRODUCTION The risk/return relationship is a fundamental concept in not only financial analysis, but in every aspect of life. If decisions are to lead to benefit maximization, it is necessary that individuals/institutions consider the co mbined mbined influence on expected (future) return or benefit as well as on o n risk/cost. Return expresses the amount which an investor actually earned on an investment during a certain period. Return includes the interest, dividend and capital gains; while risk represents the uncertainty u ncertainty associated with a particular task. In financial terms, risk is the chance or probability that a certain investment may or may not deliver the actual/expected returns. The risk and return trade off says that the potential return rises with an increase in risk. It is important for an investor to decide on a balance between the desire for the lowest possible risk and highest possible return. retur n.
7
1.2 NEED FOR THE STUDY In the finance field, it is a common co mmon knowledge knowledge that money or finance is scarce and that investors try to maximize their retu rns. But when the return is higher, the risk ris k is also higher. higher. Return and risk go together and they the y have a tradeoff. The art of investment is to see that return is maximized with minimum risk. r isk. In the above discussion we concentrated c oncentrated on the word “investment” and to invest we need to analyze securities. Combination of securities with different risk-return characteristics will constitute the portfolio of the investor.
8
1.3 SCOPE OF THE STUDY The study covers all the information related to the investor risk-return relationship of securities. It is confined to five years data of ICICI and HDFC securities. It also includes the calculation of individual standard deviations which helps in al locating the funds available for investment based on risky portfolios.
9
1.4 OBJECTIVES OF THE STUDY
1. To study the fluctuations in share s hare prices of selected companies. 2. To study the risk involved in the securities of selected companies companies.. 3. To make comparative study of risk and return of ICICI& HDFC. 4. To study the systema s ystematic tic risk involved in the selected companies co mpanies securities. 5. To offer some suggestions to the investors.
10
1.5 METHODOLOGY OF THE STUDY The data used in this project is of secondar y nature. The data is collected from secondary secondar y sources such as various websites, journals, newspapers, books, etc., the analysis used in this project has been done using selective technical tools. In Equity market, risk is analyzed and trading decisions are taken on basis of technical analysis. It is collection of share prices of selected companies for a period of five years.
This is the stud y of Risk-Return analysis analysis for a period of five years (2007-2012).
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1.6 LIMITATIONS
This study has been conducted purely to understand Risk-return characteristics for investors.
The study is restricted to only two selected companies.
Very few and randomly selected scripts/compani scripts/co mpanies es are analy analyzed zed from BSE listings
The study is limited to banking companies only.
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CHAPTER: 2
2.1 INDUSTRY PROFILE
2.2 COMPANY PROFILE
13
INDUSTRY PROFILE Indian financial market consists of money mo ney market market and capital market. Money market is mainly for the short-term needs and capital cap ital market for long term needs.
CAPTAL MARKET AND ITS STRUCTURE STRUCTURE Capital market is a financial market, which provides and facilitates an orderly exchange of long term needs. The capital market in India is classified into •
Primary market
•
Secondary market
The primary market deals with new issue of long term securities. secu rities. Whereas the secondary market deals with bu ying and and selling o f old, second hand, existing securities, which are already listed in official trading list l ist of recognized stock exchange. Players of ‘New Issue Market’ are mainly, among them the most important are: •
Merchant banker’s
•
Registrars
•
Collecting and coordinating bankers
•
Underwriters and broker
Players of secondary market are: •
Issuers of securities like companies
•
Intermediaries like brokers, and sub-brokers etc.
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ABOUT NSE The National Stock Exchange (NSE) is India's leading stock exchange covering various cities and towns across the country. NSE was set up by leading institutions to provide a modern, fully automated screen-based trading system with national reach. The Exchange has brought about unparalleled transparency, speed & efficiency, safety and market integrity. It has set up facilities that serve as a model for the securities industry in terms of systems, practices and procedures. NSE has played a catalytic role in reforming the Indian securities market in terms of microstructure, market practices and trading volumes. The market today uses state-of-art information technology to provide an efficient and transparent trading, clearing and settlement mechanism, and has witnessed several innovations in products & services viz. demutualization of stock exchange governance, screen based trading, compression of settlement cycles, dematerialization and electronic transfer of securities, securities lending and borrowing, professionalization of trading members, fine-tuned risk management systems, emergence of clearing corporations to assume counterparty risks, market of debt and derivative instruments and intensive i ntensive use of information technology. technology. The National Stock Exchange of India Limited has genesis in the report of the High Powered Study Group on Establishment of New Stock Exchanges, which recommended promotion of a National Stock Exchange by financial institutions (FIs) to provide access to investors from all across the country on an equal footing. Based on the recommendations, NSE was promoted by leading Financial Institutions at the behest of the Government of India and was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country. On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital Market (Equities) segment commenced operations in November 1994 and operations in Derivatives segment commenced in Ju ne 2000.
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MISSION OF NSE
NSE's mission is setting the agenda for change in the securities markets in India. OBJECTIVES OF NSE
The NSE was set-up with the main objectives of: •
Establishing a nation-wide trading facility for equities, d ebt instruments and hybrids,
•
Ensuring equal access to investors all over the country through an appropriate communication network,
•
Providing a fair, efficient and transparent securities market to investors using electronic trading systems,
•
Enabling shorter settlement cycles and book entry settlements s ystems, and
•
Meeting the current international standards of securities markets.
The standards set by NSE in terms of market practices and technology has become industry benchmarks and is being emulated by other market participants. NSE is more than a mere market facilitator. It's that force which is guiding the industry towards new horizons and greater opportunities.
16
PROMOTERS NSE has been promoted by leading financial institutions, banks, insurance companies and other financial intermediaries:
Industrial Development Bank of India Limited
Industrial Finance Corporation of India Limited
Life Insurance Corporation of India
State Bank of India
ICICI Bank Limited
IL & FS Trust Company Limited
Stock Holding Corporation of India Limited
SBI Capital Markets Limited
The Administrator of the Specified Undertaking of Unit Tru st of India
Bank of Baroda
Canara Bank
General Insurance Corporation of India
National Insurance Company Limited
The New India Assurance Company Limited
The Oriental Insurance Company Limited
United India Insurance Company Limited
Punjab National Bank
Oriental Bank of Commerce
Corporation Bank
Indian Bank
Union Bank of India
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Logo The logo of the NSE symbolizes a single nationwide securities tradi ng facility ensuring equal and fair access to investors, trading members and issuers all o ver the country. The initials of the Exchange viz., N, S and E have been etched on the logo and are distinctly visible. The logo symbolizes use of state of the art information technology technology and satellite connectivity to bring about the change within the securities secur ities industry. The logo symbolizes vibrancy and unleashing of creative energy to constantly bring about change through innovation.
CORPORATE STRUCTURE
NSE is one of t he first de-metalized stock exchanges in the cou ntry, ntry, where the ownership o wnership and management of the Exchange is completely divorced from the right to trade on it. Though the impetus for its establishment came from policy makers in the country, it has been set up as a public limited company, owned by b y the the leading institutio nal investors in the country. From day one, NSE has adopted the form of a demutualised exchange - the ownership, management and trading is in the hands of three different sets of people. NSE is owned by a set of leading financial institutions, banks, insurance companies and other financial intermediaries and is managed by professionals, who do not directly or indirectly trade on the Exchange. This has completely eliminated any conflict of interest and helped NSE in aggressively pursuing policies and practices within a p ublic interest framework. The NSE model however, does not preclude, but in fact accommodates involvement, support and contribution of trading members in a variety of ways. Its Board comprises of senior executives from promoter institutions, eminent professionals in the fields of law, economics, accountancy, finance, taxation, etc, public representatives, nominees of SEBI and one full time executive of the Exchange. While the Board deals with broad policy issues, decisions relating to market operations are delegated by the Board to various committees constituted by it. Such committees include representatives from trading members, professionals, the public and the management. The day-to-day management of the Exchange is delegated to the Managing Director who is supported by a team of professional staff.
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COMMITTEES
The Exchange has constituted various committees to advise it on areas such as good market practices, settlement procedures, risk containment systems etc. These committees are manned by industry professionals, trading members, Exchange staff as also representatives from the market regulator. •
Executive Committee
•
Committee On Trade Related Issues (COTI)
•
Advisory Committee - Listing of Securities
Executive Committee:
Objective: To manage the day-to-day day-to-da y operations operations of the Exchange Composition. Committee On Trade Related Issues (COTI):
Objective: To provide guidance on trade related issues which crop up during the day-to-day da y-to-day functioning of the Exchange Composition. Advisory Committee - Listing of Securities:
Objective: To advise NSE on •
The suitability of the Companies for listing o n the Exchange within the parameters set out by the listing agreement
•
To ensure that the applicant company has complied with all the conditions set out in the listing agreement as well as other formalities, SEBI regulations, etc.
•
Systems and procedures to be adopted for listing of securities
19
ABOUT BSE Bombay Stock Exchange Limited is the oldest stock exchange in Asia with a rich heritage. Popularly known as "BSE", it was established as "The Native Share & Stock Brokers Association" in 1875. It is the first stock exchange in the country to obtain permanent recognition in 1956 from the Government of India under the Securities Contracts (Regulation) Act, 1956.The Exchange's pivotal and pre-eminent role in the development of the Indian capital market is widely recognized and its index, SENSEX, is tracked worldwide. Earlier an Association of Persons (AOP), the Exchange is now a demutualised and corporatized entity incorporated under the provisions of the Companies Act, 1956, pursuant to the BSE (Corporatization and Demutualization) Scheme, 2005 notified by the Securities and Exchange Board of India (SEBI). With demutualization, the trading rights and ownership rights have been d e-linked effectively addressing concerns regarding perceived and real conflicts of interest. The Exchange is professionally managed under the overall direction of the Board of Directors. The Board comprises eminent professionals, representatives of Trading Members and the Managing Director of the Exchange. The Board is inclusive and is designed to benefit from the participation of market intermediaries. In terms of organization structure, the Board formulates larger policy issues and exercises over-all control. The committees constituted by the Board are broad-based. The day-to-day operations of the Exchange are managed by the Managing Director and a management team of professionals. The Exchange has a nation-wide reach with a presence in 417 cities and towns of India. The systems and processes of the Exchange are designed to safeguard market integrity and enhance transparency in operations. During the year 2004-2005, the trading volumes on the Exchange showed robust growth. The Exchange provides an efficient and transparent market for trading in equity, debt instruments and derivatives. The BSE's On Line Trading System (BOLT) is a proprietary system of the Exchange and is BS 7799-2-2002 certified. The surveillance and clearing & settlement functions of the Exchange are ISO 9001:2000 certified.
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HERITAGE
The oldest exchange in Asia and the first exchange in the country to be granted permanent recognition under the Securities Contract Regulation Act, 1956, Bombay Stock Exchange Limited (BSE) have had an interesting rise to prominence over the past 130 years. While the BSE is now synonymous with Dalal Street, it wasn’t always so. In fact the first venues of the earliest stock broker meetings in the 1850s were amidst rather natural environs - under banyan trees - in front of the Town Hall, where Horniman Circle is now situated. A decade later, the brokers moved their venue to another set of foliage, this time under banyan trees at the junction of Meadows Street and Mahatma Gandhi Road. As the number of brokers increased, they had to shift from place to place, and wherever they went, through sheer habit, they overflowed in to the streets. At last, in 1874, found a permanent place, and one that they could, quite literally, call their own. The new place was, aptly, called Dalal Street. The journey of BSE is as eventful and interesting as the history of India’s securities markets. India’s biggest bourse, in terms of listed companies and market capitalization, BSE has played a pioneering role in the Indian Securities Market - one of the oldest in the world. Much before actual legislations were enacted, BSE had formulated comprehensive set of Rules and Regulations for the Indian Capital Markets. It also laid down best practices adopted by the Indian Capital Markets after India gained its Independence. Perhaps, there would not be any leading corporate in India, which has not sourced BSE’s services in resource mobilization. mobilization.
21
BSE as a brand is synonymous with capital markets in India. The BSE SENSEX is the benchmark equity index that reflects the robustness of the economy and finance. At par with international standards, BSE has been a pioneer in several areas. It has several firsts to its credit even in an intensely intensel y competitive environment.
First in India to introduce Equity Derivatives
First in India to launch a Free Float Index
First in India to launch US$ version of BSE Sensex
First in India to launch Exchange Exchange Enabled Internet Trading T rading Platform
First in India to obtain ISO certification for Surveillance, Clearing & Settlement
'BSE On-Line Trading System’ (BOLT) has been awarded the globally recognized
the
Information
Security
Management
System
standard
BS7799-2: 2002.
First to have have an exclusive facility for financial training
Moved from Open Outcry to Electronic Trading within just 50 days
An equally important accomplishment of BSE is the launch of a nationwide investor awareness campaign - Safe Investing in the Stock Market - under which nationwide awareness campaigns and dissemination of information through print and electronic medium was undertaken. BSE also actively promoted the securities market awareness campaign o f the Securities and Exchange Board of India. In 2002, the name The Stock Exchange, Mumbai, was changed to BSE. BSE, which had introduced securities trading in India, replaced its open outcry system of trading in 1995, when the totally automated trading through the BSE Online trading (BOLT) system was put into practice. The BOLT network was expanded, nationwide, in 1997. It was at the BSE's International Convention Hall that India’s 1st Bell ringing ceremony in the history Capital Markets was held on February 18th, 2002. It was the listing ceremony o f Bharti Tele ventures Ltd. BSE with its long history of capital market development is fully geared to continue its contributions to further the growth of the securities sec urities markets of the country, thus helping India increase its sphere of influence in international financial markets.
22
For the premier Stock Exchange that pioneered the stock broking activity in India, 125 years of experience seem to be a proud milestone. A lot has changed since 1875 when 318 persons became members of what today is called "Bombay Stock Exchange Limited" by paying a princely amount of Re1. Since then, the stock market in the country has passed through both good and bad periods. The journey in the 20th century has not been an easy one. Till the decade of eighties, there was no measure or scale that could precisely measure measu re the various ups and downs in the Indian stock market. Bombay Stock Exchange Limited (BSE) in 1986 came out with a Stock Index that subsequently became the barometer of the Indian Stock Market. BSE-SENSEX, first compiled in 1986 is a "Market Capitalization-Weighted" index of 30 component stocks representing a sample of large, well-established and financially sound companies. The base year of BSE-SENSEX is 1978-79. The index is widely reported in both domestic and international markets through print as well as electronic media. BSE-SENSEX is not only scientifically designed but also based on globally accepted construction and review methodology. The "Market Capitalization-Weighted" methodology is a widely followed index construction methodology on which majority of global equity benchmarks are based. The growth of equity markets in India has been phenomenal in the decade gone by. Right from early nineties the stock market witnessed heightened activity in terms of various bull and bear runs. More recently, the bourses in India witnessed a similar frenzy in the 'TMT' sectors. The BSE-SENSEX captured all these happenings in the most judicial manner. One can identify the booms and bust bu st of the Indian equity market through BSE-SENSEX.
23
The launch of BSE-SENSEX in 1986 was later followed up in January 1989 by introduction of BSE National Index (Base: 1983-84 = 100). It comprised of 100 stocks listed at five major stock exchanges in India at Mumbai, Calcutta, Delhi, Ahmedabad and Madras. The BSE National Index was renamed as BSE-100 Index from October 14, 1996 and since then it is calculated taking into consideration only the prices of stocks listed at BSE. With a view to provide a better representation of the increased number of companies listed, increased market capitalization and the new industry groups, the Exchange constructed and launched on 27th May, 1994, two new index series viz., the 'BSE-200' and the 'DOLLEX200' indices. Since then, BSE has come a long way in attuning itself to the varied needs of investors and market participants. In order to fulfill the need of the market participants for still broader, segment-specific and sector-specific indices, the Exchange has continuously been increasing the range of its indices. The launch of BSE-200 Index in 1994 was followed by the launch of BSE-500 Index and 5 sectoral indices in 1999. In 2001, BSE launched the BSE-PSU Index, DOLLEX-30 and the country's first free-float based index - the BSE TECk Index taking the family of BSE Indices to 13. The Exchange also disseminates the Price-Earnings Ratio, the Price to Book Value Ratio and the Dividend Yield Percentage on day-to-day basis of all its major indices. The values of all BSE indices (except the Dollar version of indices) are updated every 15 seconds during the market hours and displayed through the BOLT system, BSE website and news wire agencies. All BSE-Indices are reviewed periodically by the "Index Committee" of the Exchange. The committee frames the broad policy guidelines for the development and maintenance of all BSE indices. The Index Cell of the Exchange carries out the day to day maintenance of all indices and conducts research on development of new indices.
24
LISTING OF SECURITIES
Listing means admission of the securities to dealings on a recognized stock exchange. The securities may be of any public limited company, Central or State Government, quasigovernmental and other financial institutions/corporations, municipalities, etc. The objectives of listing are mainly to : •
Provide liquidity to securities;
•
Mobilize savings for economic development;
•
Protect interest of investors b y ensuring full disclosures.
The Exchange has a separate Listing Department to grant approval for listing of securities of companies in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956, Securities Contracts (Regulation) Rules, 1957, Companies Act, 1956, Guidelines issued by SEBI and Rules, Bye-laws and Regulations of the Exchange. A company intending to have its securities listed on the Exchange has to comply with the listing requirements prescribed by the Exchange. Some o f the requirements are as under: 1. Minimum Listing Requirements for new companies 2. Minimum Requirements for companies delisted by this Exchange seeking relisting of this Exchange
3. Minimum Requirements for companies delisted by this Exchange seeking relisting of this Exchange Ex change in an Issuer Company's prospectus 4. Permission to use the name of the Exchange
5. Submission of Letter of Application 6. Allotment of Securities 7. Trading Permission 8. Requirement of 1% Security 9. Payment of Listing Fees 10. Compliance with Listing Agreement 11. "Z" Group 12. Cash Management Services (CMS) - Collection of Listing Fees . 25
The Cheque should be drawn in favour of Bombay Stock Exchange Limited , and should be payable, locally .Companies are requested to mention in the deposit slip, the financial year(s) for which listing fee is being paid. Payment made through any other slips would not be considered. The above slips will have to be filled in quadruplicate. One acknowledged copy would be provided to the depositor b y the the HDFC Bank. Ba nk.
26
COMPANY PROFILE
•
Ventura Securities Ltd., is a leading stock broking organization
•
Promoted and managed by professionals having exceptional knowledge of Capital Market.
•
Ventura believes in philosophy that the key to their business is service which will result in total satisfaction to the clients.
VENTURA – PROMOTERS
Sajid Malik, Director, is a member of the Institute of Chartered Accountants of India.He has
nearly fifteen years of varied experience in corporate advisorystructured finance and private equity transaction. He has an international exposure to developed markets in Europe, US and the Far East and has been personally involved in international equity offerings and cross border acquisitions. He is the CEO of Genesys International, a company focused on outsourcing of GIS and engineering design services. He is a non-executive director of Ventura Securities.
HemantMajethia, Director is member of the Institute of Chartered Accountant of India. He
has nearly fifteen years of rich experience in the capital markets intermediation, equity research and has a wide cross section of market relationships. Mr. Majethia is the CEO of Ventura Securities. It was his vision to create an all India network of brokers’ relationship and build the distribution strength of Ventura. Ve ntura.
COMPANY'S GOAL
We aim to add value and provide our clients with an unrivalled and specialized service which reflects the expertise and efficiency efficienc y of our dedicated support teams.
27
HISTORY FOUNDATION OF VENTURA
Founded in 1994 by Chartered Accountants Sajid Malik and HemantMajethia. They are the first generation entrepreneurs and are the principal promoters of Ventura.
A dedicated and efficient team of senior managers assists Mr. Majethia the CEO of the company.
Ventura is a full-service domestic brokerage house providing value-based advisory services to Institutions (Foreign and Domestic), High Net Worth and Retail Investors with its core area of operations being stock-broking.
Ventura have considerable strength strength and domain knowledge knowledge in the booming derivatives market.
Ventura has achieved a reputation for innovative and unbiased research along with excellent technical analysis and execution capabilities.
Not only has Ventura provided value-added services to the gamut of India-based funds, it has also developed the advice-driven business of high net worth and corporate clients.
WHY VENTURA?
•
Ventura’s services are offered under total confidentiality and integrity with the sole purpose of maximizing returns for their clients.
•
Equity Broking - Corporate Member of The Stock Exchange, Mumbai (BSE) and National Stock Exchange of India Ltd. (NSE).
•
Pan India reach - 380 terminals spread across 75 different locations, in semi urban, urban and metropolitan areas.
•
More than 100,000 retail clients serviced from the above locations
•
Ventura have heavily invested in technology (customized and and ready to use software) involving front and back end operations offering seamless process and flawless execution and raising our service levels.
•
Ventura operate on an alert and well-defined system in risk management and settlement mechanism 28
OFFERINGS
29
RESEARCH COMPETENCY
•
Market Outlooks and Strategy Analysis Market research at Ventura is structured to meet a wide variety of customer cu stomer needs.
•
Services in this area range from the intra-day analysis of the most recent fundamental and technical developments affecting pricing to longer-term strategic research of supply, demand, and inventory trends.
•
Along with its price forecasting capability, the Team undertakes analytical research on hedging and trading strategies.
•
The Team also publishes monographs on topics of broad interest to its customers, such as the impact of changing accounting standards, developments in risk management, and current hedge activities and strategic thought in the various sectors of the market.
MARKETS IN WHICH VENTURA DEALS: EQUITY & DERIVATIVES
Equity and derivatives go hand in hand as the y help maximize return and minimize risk at the same time! Ventura Securities Ltd clients are assisted in protecting the downside risk to their portfolio using appropriate combination of options. Our advisory is skilled to help you in maximizing your gains from your existing corpus using numerous strategies based on the direction and intensity of the views. Ventura Securities Ltd ensures that you get the one of the finest trading experiences through: An experienced and qualified team of Equity professionals offering unbiased advice on equity investment decisions. All members having immense experience and each of them being professionally certified by the National Stock Exchange. A high level of personalized and confidential service. Constant Constant monitoring of client portfolio so that the returns are maximized and the risks are minimized Secure, integrated broking system 30
Powerful Research & Analytics Ventura Securities Ltd has a great retail network, with its presence through more than 150 branches across more than 10 states. This means, you can walk into any of these branches and get in touch with o ur highly skilled and dedicated staff to get t he best services. COMMODITIES
Commodities are now an asset class! For those w ho want to diversify their portfolios beyond shares, bonds and real estate, commodities are an excellent op tion. Commodities are one of the easiest investment avenues to understand as they are based on the fundamentals of demand and supply. Historically, prices in commodities futures have been less volatile compared with equity and a nd bonds, thus providing an efficient p ortfolio diversification option. Ventura Securities Ltd helps investors understand the risks and advantages of trading in commodities futures before take they take the big leap. It provides clients with an effective platform to participate and trade t rade in Commodities with both the leading Commodity Exchanges of the country. Ventura Securities Ltd commodity services are a class apart and the following features differentiate our services from others: Professionally Professionally qualified analysts with rich industry experience Research on Agro, Precious Metals, Base Metals, Energy products and Polymers Market watch for MCX and NCDEX with BSE / NSE Streaming Streaming quotes and live updates, Relationship management d esk Educating clients on commodities futures market
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DEPOSITORY
Ventura Securities Ltd is a d epository participant participant with Central Depository Depositor y Services Services (India) Limited (CDSL) and uses the latest in technology to deliver DP Services in a hassle free, secure and transparent transparent environment. There are two main reasons why you should use Ventura Securities Ltd’s DP services: Ventura Securities Ltd ensures that its c lients focus on investment investment and trading decisions rather than the t he drudgery of operational and transactional processes. processes. Ventura Securities Ltd offers a risk r isk free, prompt and efficient depository process. Depository Services provided by Ventura Securities Ltd include: Account Account Opening Dematerialization Rematerialisation Account Account Transfer Nomination Pledging
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INSTITUTIONAL SERVICES
Dedicated institutional desks at Mumbai and Chennai cater to our rapidly growing Institutional clientele, which include includ e FIIs, Mutual Funds, Banks, Insurance Companies, Corporate clients and Overseas Corporate Bodies With our dedicated and superior quality service to our clients, Ventura Securities Ltd is being recognized as the broker of choice among various institutional investors Some of our esteemed clients include: Allsec Technologies Limited Videsh Sanchar Sanchar Nigam N igam Limited Power Trading Co Limited Star Health and Allied Insurance Indian Overseas Bank Ramakrishna Ramakrishna Mission NRI SERVICES
The NRI Services' Department is an exclusive arm o f Ventura Securities Ltd dedicated to impart professional advice to NRIs the world o ver. Our exclusive single-window single-window NRI Services’ Department integrates and simplifies multiple processes into one - opening of NRI bank account, demat account and trading account NRI’s, NRO’s (Non-Resident of Indian Origin) and OCB’s (Overseas Corporate Bodies) can now exploit multiple opportunities to profit from India's NRI-friendly investment environment and a booming Indian economy Ventura Securities Ltd enables all operations from trading to settlement in an absolutely hassle-free manner Pro-activeness Pro-activeness right from fro m opening necessary accounts to advising ad vising tax payments on capital gains. Prompt response response to queries or step b y step guiding through a business process.
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INVESTMENT ADVISORY
Ventura Securities Ltd has a dedicated d edicated team of professionals handling the the investment advisory services of the firm. These experts use their knowledge o f investments, tax laws, and insurance to recommend financial options to clients in accordance with t heir short-term and long-term goals. Some of the issues that the specialists address are general investments, retirement planning, tax planning and child education & welfare p lanning. Our certified Investment Advisory Managers strive to u nderstand each individual client’s needs, risk profiles and investment goals to provide the best advice. Apart from advising, they help clients build and track their investments. They also regularly monitor report and reco mmend changes based on the performance of the portfolio. Investment Advisory helps you in the following ways: Provides you you with the information to make fruitful and timely financial decisions. Helps you understand how each financial decision other areas of your finances. Aids you in assessing the level of risk that is suited to your lifestyle and financial situation. Facilitates you to manage your finances based on the goals that you are looking to achieve. Facilitates you to manage your finances based on the goals that you are looking to achieve. We offer advice on and help invest in the following products: Mutual Funds Insurance - Life & Non - Life Bonds Deposits IPO’s Small Savings Instruments
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RESEARCH
Our primary strengths lie in research and operational efficiency. The d ay-to-day operations are managed by b y some of the best professionals in the industry industr y having in-depth understanding of underlying market trends and sound business practices The Research Team comprises of competent professionals with vast experience, insightful anal ytical abilities and high standards of integrity. Some of our research reports are as below: b elow: Economic Outlook and Updates Sector & Company Reports Technical Technical Recommendations Daily Market Report Daily Technical Outlook Reports on New Fund Offerings Weekly analysis of mutual funds – Fund Focus Weekly debt report: Debt Dose Monthly Newsletter - Ventura Securities Ltd Investment Flash Monthly 4 Pager - Ventura Securities Ltd Wealth Wise We also offer daily technical calls through t hrough SMS to our clients free of charge .
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CHAPTER: 3
LITERATURE REVIEW
3.1 Risk Analysis 3.2 Types of risks 3.3 Measurement of risk 3.4 Return Analysis 3.5 Risk and return Trade off 3.6 Risk-return relationship
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Risk Analysis
Risk in investment exists because b ecause of the inability to make p erfect or accurate forecasts. Risk in investment is defined as the variability that is likely to occur in future cash flows from an investment. The greater variability of these cash flows indicates greater risk. Variance or standard deviation measures the deviation d eviation about expected cash flows of each of the possible cash flows and is known as the absolute measure of risk; while co-efficient of variation is a relative measure of risk.
For carrying out risk analysis, following methods are usedPayback [How long will it take to recover the investment] Certainty equivalent [The amount that will certainly come to you] Risk adjusted discount rate [Present value i.e. PV of future inflows with discount rate]
However in practice, sensitivity analysis anal ysis and conservative forecast techniques being simpler and easier to handle, are u sed for risk analysis. Sensitivity analysis anal ysis [a variation of break even analysis] allows estimating the impact of change in the behavior be havior of critical variables on the investment cash flows. Conservative forecasts include u sing short payback or higher discount rates for discounting cash flows.
Types of risks:
Investment Risks: Investment risk is related to the probability of earning a low or negative negative actual retu rn as compared to the return that is estimated. There are 2 types of investments risks:
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Stand-alone risk: This risk is associated with a single asset, me aning that the risk will cease to exist if that particular asset is not held. The impact of stand alone risk can be mitigated by diversifying the portfolio. Stand-alone risk = Market risk + Firm specific risk Where,
Market risk is a portion of the security's stand-alone risk that ca nnot be eliminated trough diversification and it is measured by beta
Firm risk is a portion of a security's stand-alone risk that can be eliminated through proper diversification
Portfolio risk This is the risk involved in a certain combination of assets in a portfolio which fails to deliver the overall objective of the portfolio. Risk can be minimized but cannot be eliminated, whether the portfolio is balanced or not. A balanced portfolio reduces risk while a nonbalanced portfolio increases risk.
Sources of risks:
Inflation Business cycle Interest rates Management Business risk Financial risk
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Types of Risk Unfortunately, the the concept of risk is not a simple concept in finance. There are many different types of risk identified and some types are relatively more or relatively less important in different different situations and applications. In some theoretical models of economic economic or financial processes, for example, some types of risks or even all risk ma y be entirely eliminated. For the practitioner practitioner operating in the real world, however, however, risk can never be entirely eliminated. It is ever-present ever-present and must be identified and dealt with. with. In the study of finance, there are a number of differen d ifferentt types of risk has been identified. It is important to remember, however, that all types t ypes of risks exhibit the same positive po sitive risk-return relationship. Systematic Risk Vs Unsystematic Risk
There is one more way to classify financial risk – is risk will impact whole economy or particular company or a sector. Systematic Risk – it is also known as market risk or economic risk or non diversifiable risk
& it impacts full economy or share market. Let’s say if interest rate will increase whole economy will slow down & there is no way to hide from this impact. As such there is no way to reduce systematic risk other o ther than investing your money in some o ther country. country. Beta can be helpful in understanding this.
Unsystematic Risk – it affects a small part of economy or sometime even single company.
Bad management or low demand in some particular sector will impact a single company or a single sector – such risks can be reduced by diversifying once investments. So this is also called Diversifiable Risk.
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40
Systematic risk 1. Interest Rate Risk
The uncertainty associated with the effects of changes in market market interest rates. There are two types of interest rate risk identified; identified; price risk and reinvestment reinvestment rate risk. The price risk is sometimes referred to as maturity risk since the greater the maturity matu rity of an investment, the greater the change change in price for a given change in interest rates. Both types types of interest rate risks are important in investments, corporate financial planning, and banking.
Price Risk: The uncertainty associated with potential changes in the price of an asset
caused by changes in interest rate levels and rates of o f return in the economy. This risk occurs because changes in interest rates affect changes in discount rates r ates which, in turn, affect the present present value of future cash flows. The relationship is an inverse inverse relationship. If interest interest rates (and (and discount rates) rise, prices fall. The reverse is is also true.
Since interest rates directly affect d iscount rates and present values of future cash flows represent underlying economic value, we have the following relationships.
Reinvestment Rate Risk : The uncertainty associated with the impact that changing
interest rates have on available rates of return when reinvesting cash flows received from an earlier earlier investment. It is a direct or positive relationship. relationship.
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2. Market risk
This is the risk ris k that the value of a portfolio, either an investment portfolio or a trading portfolio, will decrease due to the change in market risk factors. The four standard market risk factors are stock prices, interest rates, foreign exchange rates, and commodity prices:
Equity risk is the risk that stock prices in general (not related to a particular company or industry) or the implied volatility will change.
Interest rate risk is the risk that interest rates o r the implied volatility volatility will change.
Currency risk is the risk t hat foreign exchange rates or the implied volatility wil l change, which affects, for example, the value o f an asset held in that t hat currency.
Commodity risk is the risk t hat commodity prices (e.g. corn, copper, crude oil) or implied volatility will change.
3. Inflation Risk (Purchasing Power Risk)
Inflation risk is the loss of purchasing purchasing power due to the effects effects of inflation. When inflation inflation is present, the currency loses loses its value due to the rising price level in the economy. economy. The higher the inflation rate, the faster the money loses its value.
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Unsystematic risk 1. Business risk The uncertainty associated with a business b usiness firm's operating environment and reflected in the variability of earnings before before interest and taxes (EBIT). Since this earnings measure has not not had financing expenses removed, it reflects the risk associated with business op erations rather than methods of debt financing. financing. This risk is often discussed in General Business Management courses. 2. Financial risk The uncertainty brought about by the choice of a firm’s financing methods and reflected in the variability of earnings before taxes (EBT), a measure of earnings that has been adjusted for and is influenced influenced by the cost of debt financing. financing. This risk is often discussed discussed within the context of the Capital Structure topics.
Total Risk
While there are many different types of specific risk, we said earlier that in the most general sense, risk is the possibility of experiencing an outcome that is d ifferent ifferent from what is expected. If we focus on this this definition of risk, we can define define what is referred to as total risk. In financial terms, terms, this total risk reflects the variability of returns from from some type of financial investment. Measures of Total Risk
The standard deviation is often referred to as a "measure of total risk" because it captures the variation of possible outcomes about about the expected value (or (or mean). In financial asset asset pricing theory the Capital Asset Pricing P ricing Model (CAPM) separates this "total risk" ris k" into two different types of risk (systematic risk and and unsystematic risk). Another related related measure of total risk is the "coefficient of variation" which is calculated calcu lated as the standard deviation divided by b y the expected value. It is often referred referred to as a scaled measure of total risk or a relative measure of total risk. The following notes will discuss these these concepts in more detail. 43
Measurement of risks
Statistical measures that are historical predictors of investment risk and volatility and major components in modern portfolio theory (MPT) . MPT is a standard financial and academic methodology for assessing the performance of a stock or a stock fund fu nd compared to its benchmark index. There are five principal risk measures:
Alpha: Measures risk relative to the market or benchmark index Beta: Measures volatility or s ystemic risk compared to the market or the benchmark benchmark index R-Squared: Measures the percentage of an investment's movement that are attributable to
movements in its benchmark index a n investment is deviating from the t he Standard Deviation: Measures how much return on an expected normal or average returns Sharpe Ratio: An indicator of whether an investment's return is due to smart investing
decisions or a result of excess risk. Each risk measure is unique in how it measures risk. When comparing comp aring two or more potential investments, an investor should always compare the same risk measures to each different potential investment to get a relative performance.
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Definition of 'Beta'
A measure of the volatility, or systematic risk of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta b eta and expected market returns. Also known as "beta coefficient" co efficient"..
Beta is calculated using regression analysis, and you can think of beta as 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. If beta is less than 1 m eans that the security 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.
Many utilities stocks have a beta of less than 1. Conversely, Conversely, most high-tech Nasdaq-based stocks have a beta of greater than 1, offering the possibility of a higher rate of return, but also posing more risk.
Definition of 'Alpha'
1. A measure of o f performance on a risk-adjusted basis. Alpha takes t he volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a b ench enchmark mark index. The excess return of the fund relative to the return of the benchmark index is a fund's alpha. 2. The abnormal rate of return on a security or portfolio in excess of what would be predicted p redicted by an equilibrium model like the capital asset pricing model (CAPM). 3. Alpha is one o ne of five technical risk ratios; t he others are beta, standard deviation, R-squared, and the Sharpe ratio. T hese are all statistical measurements used in modern portfolio theory (MPT). All of these indicators are intended to help investors d etermine etermine the risk-reward r isk-reward profile of a mutual fund. Simply stated, alpha is often considered to r epresent the value that a portfolio manager adds to or subtracts from a fund's return. A positive alpha of 1.0 1 .0 means the fund has outperformed its bench b enchmark mark index by b y 1%. Correspondingly, Correspondingly, a similar negative alpha would indicate an underperformance of 1%. 4. If a CAPM analysis estimates that a portfolio should ea rn 10% based on the risk of the portfolio but the portfolio actually earns 15%, the portfolio's alpha would be 5%. This 5% is the excess return over what was predicted in the CAPM model.
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Definition of 'Standard Deviation'
1. A measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is calcu lated as the square root of variance.
2. In finance, standard deviation is applied app lied to the annual rate of return of an investment to measure the investment's volatility. Standard d eviation is also known as historical volatilit y and is used by investors as a gauge for the amount of expected volatility.
Standard deviation is a statistical measurement that sheds light on historical volatility. For example, a volatile stock will have a high standard deviation while the deviation of a stable blue chip stock will be lower. A large dispersion tells us how much the return on the fund is deviating from the expected normal returns.
Definition of 'R-Squared'
A statistical measure that represents the percentage of a fund or security's movements that can be explained by movements in a benchmark index. For fixed-income securities, the benchmark is the T-bill. For equities, the benchmark is the S&P 500.
R-squared values range from 0 to 100. An A n R-squared of 100 means that all movements of of a security are completely explained by b y movements movements in the t he index. A high R-squared (between 85 and 100) indicates the fund's p erformance erformance patterns have been in line with the index. A fund with a low R-squared (70 or less) doesn't act much mu ch like the index.
A higher R-squared value will indicate a more useful beta figure. For example, if a fund has an R-squared value of close to 100 but has a beta b eta below 1, it is most likely offering higher risk-adjusted returns. A low R-squared means means you should ignore the beta.
When most people think of investments they the y think of stocks or mutual funds. An investment is more than this. An investment requires one to set aside an amount today with the expectation of receiving a larger sum in the future.
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Return Analysis An investment is the cu current rrent commitment of funds done in the expectation of earning greater amount in future. Returns are subject to uncertainty or variance Longer the period of investment, greater will be the returns sought. An investor will also like to ensure that the returns are greater than the rate of inflation. An investor will look forward to getting compensated by way of an expected return b ased on 3 factors Risk involved Duration of investment [Time value of o f money] Expected price levels [Inflation]
The basic rate or time value of money is the real risk free rate [RRFR] which is free of any risk premium and inflation. This rate generally re mains stable; but in t he long run there could be gradual changes in the RRFR depending dep ending upon factors such as consumption trends, economic growth and openness of the economy. If we include the t he component of inflation into the RRFR without the risk premium, such a return will be known as nominal risk free rate [NRFR] NRFR = ( 1 + RRFR ) * ( 1 + expected rate of inflation ) - 1 Third component is the risk p remium that represents all kinds of uncertainties and is calculated as follows Expected return = NRFR + Risk premium.
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Any investor who lays aside money m oney today expects to get more in return later. How much is more? Well, the best way to calculate this is to look at your rate of return. In its simplest form, you would take the ending value of your investment, divide it by your initial investment, take the n root of o f it (where n= the number of o f years you held the investment), and minus one. Confused? Well, let's give an a n example. If I invested $100 for three years and after this period it was worth $150, my rate of o f return would be [150/100^ (1/3)]-1=14.47%. Don't worry we'll look at this concept more when we study present and future values. Now that you have your rate of return you may be asking, "How much is enough?" Well, looking at past market history, equities on average returned 10% annually, small caps 12%, bonds 5%, and t-bills around 3-4%. We will ignore all this for now and state the required return more formally. Firstly, investors should be compensated for the real interest rate and inflation (note: the real rate plus inflation=nominal rate). This nominal rate is the rate o f return on US Government bonds. Investors expect at least this when they buy a stock. The reason? A stock has risk and government bonds don't. If stock does not outperform bonds then investors will prefer the bonds. The second component of required return is inflation which is a lready incorporated into our nominal rate. Lastly we have a premium for risk. Since investors do not know for sure if their investment investment will make them money, they want to t o be compensated for this additional add itional risk with additional return.
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Return on security (single asset) consists of two parts: Return = dividend + capital gain rate R = D1 + (P1 – P0) P0 WHERE R = RATE OF RETURN IN YEAR 1 D1 = DIVIDEND PER SHARE IN YEAR 1 P0 = PRICE OF SHARE IN THE BEGINNING OF THE YEAR P1 = PRICE OF SHARE IN THE END OF THE YEAR YE AR Average rate of return R = 1 [ R1+R2+……+Rn] n R =1ΣRtnt=1 Where, R = average rate of return. Rt = Realised rates of return in periods 1,2, …..t n = total no. of periods
Expected rate of return:
It is the weighted we ighted average of all possible returns multiplied b y their respective probabilities. E(R) = R1P1 + R2P2 + ………+ RnPn E(R) = ΣRiPii Where, Ri is the outcome i, Pi is the probability of occurrence of i. n= No of periods
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Risk and return trade off: Investors make investment with the objective ob jective of earning some tangible benefit. This benefit in financial terminology is termed as a s return and is a reward for taking a specified amount of risk. Risk is defined as the possibility of the actual return ret urn being different from the expected return on an investment over the period p eriod of investment. Low risk leads to low returns. For instance, incase of government securities, while the rate of return is low, the risk of defaulting is also low. High risks lead to higher potential returns, but may also lead to higher losses. Long-term returns on stocks are much higher than the returns on Government securities, but t he risk of losing money is also higher. higher. Rate of return on an investment cal b e calculated using the following formulaReturn = (Amount received - Amount invested) / Amount invested He risk and return trade off says that the potential rises with an increase in risk. An investor must decide a balance between the desire for the lowest po possible ssible risk and highest possible return.
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Risk-Return relationship By now you should understand that even with the most conservative investments you face some element of risk. However, not investing your money is also risk y. For example, putting your money under the mattress invites the risk of theft and the loss in purchasing power if prices of goods and services rise in the economy. When you recognize the different levels of risk for each type of investment asset, you can better manage the total risk in your investment portfolio.
A direct correlation exists between b etween risk and return and is illustrated in Figure. The greater the risk, the greater is t he potential return. However, investing in securities with t he greatest return and, therefore, the greatest risk can lead to financial ruin if everything does not go according to plan. Risk and Return
Understanding the risks pertaining to the different investments is of little consequence unless you’re aware of your attitude toward risk. How Ho w much risk you can tolerate depends d epends on many factors, such as the t ype of person you are, your investment objectives, the dollar amount o f your total assets, the s ize of your portfolio, and the t ime horizon for your investments.
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How nervous are you about your investments? investments? Will you check the prices of your stocks daily? Can you sleep at night if your stocks decline in price b elow their acquisition prices? Will you call your broker every time a stock falls by a point or two? If so, you do not tolerate risk well, and your portfolio should be geared toward conservative investments that generate income through capital preservation. The percentage of your portfolio allocated to stocks may be low to zero depending on your your comfort co mfort zone. If you are not bothered when your stocks decline in price because with a long holding period you can wait ou t the decline, your portfolio of investments can be designed with a higher percentage of stocks. Figure 2 illustrates the continuum of risk to lerance.
A wide range of returns re turns is associated with each t ype of security. For example, the many types of common stocks, such as blue-chip stocks, growth stocks, income stocks, and sp eculative stocks, react differently. Income stocks generally are lower risk and offer returns mainly in the form of dividends, whereas growth stocks are riskier and usually offer higher returns in the form of capital gains. Similarly, a broad range of risks and returns can be found for the different types of bonds. You should be aware of this broad range of risks and returns for the different types of securities so that you can find an acceptable level of risk for yourself.
Figure 2: Continuum of Risk Tolerance
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CHAPTER: 4
INTERPRETATION
AND
ANALYSIS
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HDFC: Analysis of Return
Rate of Return =
Share price in the closing – Share price at the opening Share price in the opening
Year
Opening
Closing value
value (P0)
(P1)
(P1(P1-P0)
P0)/P0*100
2007-08
186
286.99
100.99
54.30
2008-09
264
189
-75
-28.41
2009-10
202.4
381.28
178.88
88.38
2010-11
387.8
467.57
79.77
20.57
2011-12
469.22
510.7
41.48
8.84
Total return
143.68
Average return =143.68/5 =28.74 600 500 400
387.8
381.28
300
286.99
200
186
100
100.99 54.30 1
opening value (P0)
264
202.4 178.88
189
closing value (P1) (P1-P0)
88.38
(P1-P0)/P0*100
79.77 41.48 8.84
20.57
0 -100
510.7 469.22
467.57
2
-28.41 -75
3
4
5
-200
Interpretation: The average returns of HDFC are 28.74 wherein the maximum returns are in
the third year i.e. 2009-10. 54
ICICI:
Analysis of Return Opening value (P0)
Year
2007-08 2008-09 2009-10 2010-11 2011-12
Closing value (P1)
823 799.95 360 952 1110
(P1P0)/P0*100
(P1-P0)
835.2 337.85 960.05 1107.25 856.05
12.2 -462.1 600.05 155.25 -253.95
1.48 -57.77 166.68 16.31 -22.88 103.83
Total return Average return =103.83/5 = 20.77
1200 1107.25 1110 1000
960.05 835.2 823
800
856.05
799.95
600
600.05
400
360
closing value (P1)
166.68 12.2 1.48
0
-400
opening value (P0)
337.85
200
-200
952
1
2
-57.77
(P1-P0)
155.25
103.83
16.31 3
4
(P1-P0)/P0*100
-22.88 5
6 -253.95
-462.1
-600
Interpretation: The average returns of ICICI are 20.77 wherein the maximum returns are in
the third year i.e. 2009-10. Investment in HDFC is more profitable to the investor as the average returns are comparatively more than the average returns of ICICI. Thus, a n investor who is only concerned about the returns in long run should invest in HDFC securities.
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RISK ANALYSIS Standard Deviation
This is the most commonly used measure of risk in fiancé. Its square also is widely used to find out the risk associated with a security. n
Computation of Variance =
∑ ( Ri
R
−
)2 or d 2
i =1
n
σ
Standard Deviation =
−
1
2
HDFC:
Analysis of risk:
Square Avg return (R Year
Return (R )
)
deviations(R-R) Deviations(R-R)
d
2
2007-08
54.3
28.74
25.564
653.52
2008-09
-28.41
28.74
-57.146
3265.67
2009-10
88.38
28.74
59.644
3557.41
2010-11
20.57
28.74
-8.166
66.68
2011-12
8.84
28.74
-19.896
395.85
Total
143.68
7939.12
2
Variance = 1/n-1 ( ∑d ) = 1/5-1 (7939.12)
= 1984.78 Standard deviation=√variance
=√1984.78 = 44.55
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ICICI:
Analysis of Risk:
Square deviations(R-R) Year
Return (R )
Avg Return (R )
Deviations(R-R) Deviations(R-R)
d
2
2007-08
1.48
20.77 20.77
-19.286
371.95
2008-09
-57.77
20.77
-78.536
6167.90
2009-10
166.68
20.77
145.914
21290.90
2010-11
16.31
20.77
-4.456
19.86
2011-12
-22.88
20.77
-43.646
1904.97
Total
103.83
29755.58
1 /5-1 (29755.58) Variance = 1/n-1 ( ∑d2) = 1/5-1 = 7438.89 Risk=Standard deviation=√variance
=√7438.89 =86.25
in vestment in long run is less for fo r the HDFC Interpretation: Risk associated with the investment securities when compared to ICICI. Thus, when an investor is only considering risk factor, it is advisable to invest in HDFC securities.
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AVERAGE RETURN OF BOTH COMPANIES:
S.No
COMPANY
AVERAGE RETURN
STANDARD DEVIATION
1
HDFC
28.74
44.55
2
ICICI
20.77
86.25
Standard deviation 100 90
86.25
80 e c i r p s e r a h S
70 60 50 40
44.55
Standard deviation
30 20 10 0 HDFC
ICICI
Interpretation: From the above table and graph it can be understood by considering both
risk and return factors that the returns are more and risk is less for HDFC securities.
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CALCULATION OF COVARIANCES
[RA -RA] [RB-RB]) / N COVARIANCE = COV. AB = (∑[RA-RA] WHERE: RA = Return on A RB = Return on B RA = Expected return on A RB = Expected return on B N = Number of securities
COVARIANCE OF BANK SECURITIES PORTFOLIO: CovA,B = ∑(r iA-r A) (riB-rB) / n-1
HDFC & ICICI Years
DEVIATIONS OF
DEVIATIONS OF
COMBINED
HDFC (RA-RA)
ICICI (RB-RB)
DEVIATIONS
2007-08
25.564
-19.286
-493.027
2008-09
-57.146
-78.536
4488.018
2009-10
59.644
145.914
8702.895
2010-11
-8.166
-4.456
36.3877
2011-12
-19.896
-43.646
868.3808 13602.65
TOTAL
COVARIANCE (COVAB) = 13602.65/5 = 2720.531
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CALCULATION OF COEFFICIENT CORRELATION
Coefficient of Correlation
Coefficient of Correlation is a statistical technique, which measures the degree or extent to which two or more variables fluctuate with reference to one another. Correlation analysis helps in determining the degree of relationship between two variables but correlation does not always imply cause a nd effect relationship The Coefficient of Correlation is essentially the covariance taken not as an absolute value but relative to the standard deviations of the individual securities. It indicates, in effect, how much x and y vary together as a proportion of their combined individual variations, measured by SD of x multiplied by SD of Y
Coefficient of Correlation:
ICICI AND HDFC
Correlation coefficient (PAB) =
COV AB
(Std.A)(Std.B)
(COVAB) = 13602.65 /5 = 2720.531
(PAB) =
2720.531
(86.25)(44.55)
= 0.70802172
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PORTFOLIO
I.
COMPANY
S.D
HDFC
44.55
ICICI
86.25
COVARI
COMBINED S.D
ANCE
(Std.A)(Std.B)
CO-EF. CORRELATION (COV/C.S.D)
3842.44 2720.531
0.70802172
CONCLUSION FOR CORRELATION:
In case of perfectly correlated securities or stocks, the risk can be reduced to a minimum point. In case of negatively correlated securities, secu rities, the risk can be reduced redu ced to a zero (which is company’s risk) but market risk prevails the same for the securities or stock in the portfolio.
Interpretation:
In case of portfolio management, negatively correlated assets are most profitable. In the above calculated correlation, the companies’ correlation is 0 .7080, which means both these combinations of portfolio’s are at a good position to gain in future. So, the t he investor may invest their money for long run.
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BETA VALUES
SENSEX:
Years
Price
Returns (R
Average
)
returns ( R (In %)
-
( R- R)
(R – R)
-
-
2
)
2007-2008 2007-200 8
16371.29
2008-2009 2008-200 9
9568.14
-41.555 10.095
-51.6504
2667.761
2009-2010 2009-201 0
17590.17
83.841 10.095
73.74606
5438.481
2010-2011 2010-201 1
19290.18
9.665 10.095
-0.43045
0.185291
2011-2012 2011-201 2
17058.61
-11.568 10.095
-21.6634
469.304
Total
-
40.383
8575.731
Standard Deviation = √ Variance Variance
= 1/ (n-1) (R-R) = 1/ (4-1) (8575.731) = 1/3(8575.731) 1/3(8575.731) = 2858.57
Standard Deviation = √2858.57 = 53.465
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Correlation between Sensex and HDFC:
Date
Deviations of sensex
Deviations of
Combined
Dsensex = (R-R)
HDFC
Deviations
DHDFC = (R-R)
Dsensex DHDFC
2007-2008 2007-200 8
-
-
-
2008-2009
-51.650
-57.146
2951.59
2009-2010
73.746
59.644
4398.50
2010-2011
-0.430
-8.166
3.5113
2011-2012
-21.663
-19.896
431.00
Total
7784.61
Correlation between Sensex and ICICI:
Date
2007-2008 2007-200 8
Deviations of sensex
Deviations of
Combined
Dsensex = (R-R)
ICICI
Deviations
DICICI = (R-R)
Dsensex DICICI
-
-
-
2008-2009
-51.650
-78.536
4056.384
2009-2010
73.746
145.914
10760.57
2010-2011
-0.430
-4.456
1.91
2011-2012
-21.663
-43.646
945.50
Total
15764.38
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Calculation of Beta Values: 2
β = COV AB / σ m
Where COVAB = 1/ n-1 (D1D2)
σ m2 = Variance Variance sensex 1. HDFC:-
β = COV sensex, HDFC /Variance sensex
COV sensex, HDFC
= 1/ 4-1 (7784.61) = 2594.87
Variance sensex = 2858.57
β = 2594.87/ 2858.57 β = 0.907
2. ICICI:-
β = COV sensex, ICICI /Variance sensex
COV sensex, ICICI = 1/ 4-1 4 -1 (15764.38) = 5254.793
Variance sensex = 2858.57
β = 5254.793/ 2858.57 β = 1.83
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Calculated Beta Values:
COMPANY NAME
BETA VALUE
HDFC
0.907
ICICI
1.838
CONCEPT OF BETA:
It is a measure of movement of share price with the movement of market.
Beta is positive, if share s hare price moves in the direction of the movement of market.
Beta is negative, if share s hare price moves opposite to the direction of m arket.
Table Depicting All Calculated Values:
ICICI
HDFC
Average returns
20.77
28.74
Standard deviation
86.25
44.55
Covariance
2720.531
2720.531
Coefficient correlation
0.708
0.708
Beta
1.838
0.907
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HDFC Bank
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Interpretation: From the above table b y considering the opening and closing values it can be
clearly stated that almost in 4 years years the share value is increasing whereas only in 2008-09 share price has reduced.
Profit/Loss: Profit/loss 200
178.88
150 100.99 e c i r P s e r a h S
100
79.77 41.48
50
Profit/loss
0 1
2
3
4
5
-50 -100
-75 Years
Interpretation: From the above table it can be clearly stated that investor has enjoyed more
profits in 2009-10 and bears loss in 2008-09 as the opening and closing share values fluctuate. 66
Maximum Profit:
Maximum profit 200 180 160 e 140 c i r 120 P s 100 e r 80 a h S 60 40 20 0
184.83
179
115.8 68.28 51
1
Maximum profit
2
3
4
5
Years
ope ning Interpretation: From the above table it can b e stated that with the fluctuations in the opening value and highest share price, 2009-10 is the most profitable year for the investor.
Maximum Loss:
Maximum loss 20
4
-3.9
0 e c i r p s e r a h S
-20
2007-08
2008-09
2009-10
-40
2010-11
2011-12
-30.8 Maximum loss
-60 -68.77
-80 -100 -120
-109.2
Years
difference between opening value Interpretation: From the above table b y considering the difference and lowest share price, it can be stated that in 2008-09 there was huge loss to investors. 67
ICICI bank
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b y considering considering the opening and closing values it can b e Interpretation: From the above table by clearly stated that in the year 2007-08 there was a slight change in the market share value and in 2008-09 the share value decreased to Rs.462.1 whereas whereas in 2009-10 it again increased by Rs.600.05. In 2010-11 it increased by Rs.155.25 and again fell down by Rs.253.95 in 201112. If the investor is read y to bear more risk then, 2009-10 is favorable year with high returns.
68
Profit/Loss
Profit/loss 800 600.05
600 e c i r P s e r a h S
400 155.25
200 12.2
Profit/loss
0 -200
2007-08
2008-09
2009-10
2010-11
2011-12 -253.95
-400 -462.1
-600
Years
Interpretation: From the above table it can be clearly stated that investor can enjoy more
profits in 2009-10 and bear high loss in 2008-09 as the opening and closing s hare values fluctuate.
Maximum Profit
Maximum profit 700
642
608.5
600 e c i r p s e r a h S
500 400
325 Maximum profit
300 160.95
200 100
27.9
0 2007-08
2008-09
2009-10 Years
2010-11
2011-12
ope ning Interpretation: From the above table it can b e stated that with the fluctuations in the opening value and highest share price, 2007-08 is the most profitable year for the investor.
69
Maximum Loss
Maximum loss 100
30.6
0 e c i r p s e r a h S
-100 -200
2007-08
2008-09
2009-10
-103
2010-11
2011-12
-143.9 Maximum loss
-300 -400 -500 -600
-469 -547.2
Years
difference between opening value Interpretation: From the above table b y considering the difference and lowest share price, it can be stated that 2008-09 is most unfavorable year for the investor with huge loss.
70
CHAPTER 4:
FINDINGS AND SUGGESTIONS
71
FINDINGS:
As far as the returns of the selected companies is concerned, HDFC is comparatively performing well in isolation where as ICICI is performing very poor.
As far as the Standard deviation of the selected companies is concerned, ICICI is very high where as HDFC is giving less risk. This means that higher the risk, the higher the returns.
As far as the Correlation co-efficient of ICICI and HDFC is concerned, it is 0.7080.
The covariance of the ICICI and HDFC is 2720.531.
The systematic risk (Beta) of HDFC is 0.907.
The systematic risk (Beta) of ICICI is 1.838.
72
SUGGESTIONS: The investor should consider the securities with maximum returns and minimum risk. Thus, it is advisable to invest in HDFC securities.
Investors should hold securities which give high returns with less risk.
As an investor, see that there is a negative correlation among the securities.
Do not relay completely on technical analysis. ana lysis.
Investors should give importance to fundamental analysis of securities.
Industrial policy also has a major m ajor role in facilitating the growth of the economy.
Holding two or more securities secu rities reduce the unsystematic risk.
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CONCLUSIONS: In the recent past the market has reached great heights as a result of expansion of business and much more of globalization, the increased percentage of Foreign Direct Investment which has a direct d irect affect on the demand and supply of the t he shares of a particular company co mpany.. In this way the index of o f the stock market has reached to the maximum. With the boom in the market there are many investors who are willing to take more risk and so to cover the risk.
Financial sector is booming and the need for Risk-Return Analysis is growing. Also because of the very tricky stock market behaviors b ehaviors it has become mandatory to manage portfolio so as to reduce the risk while maximizing max imizing the returns. Taking into consideration the investor’s riskreturn requirements portfolio should be b e constructed and reviewed regularly.
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CHAPTER: 6
BIBLIOGRAPHY
75
BIBLIOGRAPHY Book References: 1. Financial management -
M Y Khan and P K Jain Ja in
2. Investments - William F. Sharpe, Gordon J.Alexander & Jeffery V. V . Baily 3. Security Analysis and Portfolio Management -
Prasanna Chandra
4. GRIET Library
Web References:
www.nseindia.com
www.moneycontrol.com
www.indiamart.com
www.google.com
www.ventural.com
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