PORTFOLIO MANAGEMENT - RISK & RETURN ANALYSIS OF SELECTED SCRIPTS

Transcription

1 International Journal of Mechanical Engineering and Technology (IJMET) Volume 8, Issue 12, December 2017, pp , Article ID: IJMET_08_12_069 Available online at ISSN Print: and ISSN Online: IAEME Publication Scopus Indexed PORTFOLIO MANAGEMENT - RISK & RETURN ANALYSIS OF SELECTED SCRIPTS Dr. V. Sreehari Professor, Department of Management Studies, Vardhaman College of Engineering, Telangana, India G. Ramesh Associate Professor, Department of Management Studies, Vardhaman College of Engineering, Telangana, India G. Vinesh Kumar Assistant Professor, Department of Management Studies Vardhaman College of Engineering, Telangana, India K. Sandeep Kumar Assistant Professor, Department of Management Studies Vardhaman College of Engineering, Telangana, India ABSTRACT Portfolio management is a process of encompassing many activities of investing in assets and securities. It is a dynamic and flexible concept and involves regular and systematic analysis, judgement and action. A combination of securities held together will give a beneficial result if they grouped in a manner to secure higher returns after taking into consideration the risk elements. Key words: Portfolio Management, Return, Risk, Weights, Correlation. Cite this Article: Dr. V. Sreehari, G. Ramesh, G. Vinesh Kumar and K. Sandeep Kumar, Portfolio Management - Risk & Return Analysis of Selected Scripts, International Journal of Mechanical Engineering and Technology 8(12), 2017, pp INTRODUCTION Portfolios are combinations of assets held by the investors. These combinations may be of various asset classes like equity and debt and of different issuers like Government bond and corporate debt or of various instruments like discount bonds, warrants, debentures and Blue chip equity or scripts of emerging blue chip companies editor@iaeme.com

2 Dr. V. Sreehari, G. Ramesh, G. Vinesh Kumar and K. Sandeep Kumar Portfolio Management is the centralized management of the processes, methods and technologies used by project managers and project management offices (PMOs) to analyze and collectively manage current or proposed projects based on numerous key characteristics. Key capabilities of Portfolio management provides program and project managers in large program/project-driven organizations with the capabilities needed to manage the time, resources, skills and budgets necessary to accomplish all inter-related tasks. The traditional Portfolio Theory aims at the selection of such securities that would fit in well with the asset preferences, need and choice of investor. Modern Portfolio Theory postulates that maximization of return and or minimization of risk will yield optimal returns and choice and attitudes of investors are only a starting point for investment decision and that vigorous risk-return analysis is necessary for optimization of returns. 2. OBJECTIVES OF THE STUDY To analyze the risk return characteristics of sample scripts. To calculate correlation between different stocks. To ascertain portfolio weights. To compute portfolio returns and Risks. To construct effective portfolio to offer maximum return with minimum risks. 3. SCOPE OF THE STUDY The study covers analysis of selected scripts in diversified areas to study average return, standard deviation, correlation among scripts, weights, portfolio risk and portfolio return. 4. METHODOLOGY OF THE STUDY Research methodology is the procedure of collecting, analyzing and interpreting the data to diagnose the problem and react to the opportunity in such a way where the costs can be minimized and the desired level of accuracy can be achieved to arrive at a particular conclusion. 5. SOURCES OF DATA COLLECTION The methodology adopted or employed in this study was mostly on secondary data collection i.e., Companies Annual Reports Information from Internet Information provided by Inter Connected Stock Exchange. 6. LIMITATIONS OF THE STUDY Construction of Portfolio is restricted to two companies. Very few and randomly selected scripts are analyzed from BSE Listings. Data collection was strictly confined to secondary source. No primary data is associated with the project editor@iaeme.com

3 Portfolio Management - Risk & Return Analysis of Selected Scripts 7. DATA ANALYSIS AND INTERPRETATION Rate of Return Rate of Return is calculated by using formula R = Where: R is Rate of Return in percentage D is Dividend P1 is End period stock price P0 is Initial stock price TCS Year (P0) (P1) D (P1-P0) AVERAGE RETURN BAJAJ AUTO Year (P0) (P1) D (P1-P0) AVERAGE RETURN HDFC BANK Year (P0) (P1) D (P1-P0) AVERAGE RETURN editor@iaeme.com

4 HINDUSTAN UNILEVER Dr. V. Sreehari, G. Ramesh, G. Vinesh Kumar and K. Sandeep Kumar Year (P0) (P1) D (P1-P0) AVERAGE RETURN AMBUJA CEMENT Year (P0) (P1) D (P1-P0) AVERAGE RETURN Interpretation Average return of Hindustan Unilever (28.91%) is more compared to companies of TCS, Bajaj Auto, HDFC Bank and Ambuja Cement. So, it is safe to invest in Hindustan Unilever to avail greater average return. Standard Deviation Standard Deviation of a portfolio is calculated by using formula Standard Deviation = Variance Variance 2 = 2 Where n is numbers of years R is Return & is Average Return TCS Year Return (R) Average Return( ) ( ( TOTAL Variance Variance 2 = 2 = 2 = Standard Deviation = Variance = = editor@iaeme.com

5 Portfolio Management - Risk & Return Analysis of Selected Scripts BAJAJ AUTO Variance Year Return (R) Average Return( ) ( ) ( TOTAL = 2 = = Standard Deviation = Variance = = HDFC BANK Variance Year Return (R) Average Return( ) ( ) ( TOTAL = 2 = = Standard Deviation = Variance = = HINDUSTAN UNILEVER Variance Year Return (R) Average Return( ) ( ) ( TOTAL = 2 = ) = Standard Deviation = Variance = = AMBUJA CEMENT Variance Year Return (R) Average Return( ) ( ) ( TOTAL = 2 = = Standard Deviation = Variance = = editor@iaeme.com

6 Dr. V. Sreehari, G. Ramesh, G. Vinesh Kumar and K. Sandeep Kumar Interpretation Standard Deviation of Bajaj Auto (12.78) is lower compared to companies of TCS, HDFC Bank, Hindustan Unilever and Ambuja Cement. So, it is safe to invest in Bajaj Auto as the deviation is low. Calculation of Correlation Correlation is calculated using Correlation Coefficient Where Correlation Coefficient = Covariance (COV ab) = (R A - A) (R B - B) n is Number of years R A - A is Average Return of Script A R B - B is Average Return of Script B is Standard Deviation of Script A is Standard Deviation of Script B Correlation of TCS with other Companies TCS (R A ) & BAJAJ AUTO (R B ) Covariance (COV ab)= (R A - A) (R B - B) = ( ) = σ a = ; σ b = Correlation Coefficient= = = TCS (R A ) & HDFC BANK (R B ) Covariance (COV ab) = (R A - A) (R B - B) = (2.152) = σ a = 18.43; σ b = Correlation Coefficient = = = editor@iaeme.com

7 Portfolio Management - Risk & Return Analysis of Selected Scripts TCS (R A ) & Hindustan Unilever (R B ) Covariance (COV ab) = (R A - A) (R B - B) = ( ) = σ a =18.43; b = Correlation Coefficient= = = TCS (R A ) & AMBUJA CEMENT (R B ) Covariance (COV ab) = (R A - A) (R B - B) = ( ) = σ a = 18.43; σ b = Correlation Coefficient= = = Correlation of Bajaj Auto with other Companies BAJAJ AUTO (R A ) & HDFC BANK (R B ) Covariance (COV ab) = (R A - A) (R B - B) = ( ) = σ a = 12.78; b = Correlation Coefficient= = = editor@iaeme.com

8 Dr. V. Sreehari, G. Ramesh, G. Vinesh Kumar and K. Sandeep Kumar BAJAJ AUTO (R A ) & HINDUSTAN UNILEVER (R B ) Covariance (COV ab) = (R A - A) (R B - B) = ( ) = σ a = 12.78; b = Correlation Coefficient= = = BAJAJ AUTO (R A ) & AMBUJA CEMENT (R B ) Covariance (COV ab) = (R A - A) (R B - B) = ( ) = σ a = 12.78; σ b = Correlation Coefficient = = = Correlation of HDFC Bank with other Companies HDFC BANK (R A ) &HINDUSTAN UNILEVER (R B ) Covariance (COV ab) = (R A - A) (R B - B) = ( ) = σ a = 16.48; b = Correlation Coefficient = = = editor@iaeme.com

9 Portfolio Management - Risk & Return Analysis of Selected Scripts HDFC BANK (R A ) & AMBUJA CEMENT (R B ) Covariance (COV ab) = (R A - A) (R B - B) = ( ) = σ a = 16.48; σ b = Correlation Coefficient = = = Correlation of Hindustan Unilever with other Companies HINDUSTAN UNILEVER (R A ) & AMBUJA CEMENT (R B ) Covariance (COV ab) = (R A - A) (R B - B) = ( ) = σ a = 22.04; σ b = Correlation Coefficient = = = Interpretation The Correlation between HDFC Bank and Ambuja cement is good compared to relation between other companies. 8. CALCULATION OF PORTFOLIO WEIGHTS Portfolio weights are calculated using the formula W b = 1-W a Where W a is Weight of Portfolio a W b is Weight of Portfolio b σ a is Standard Deviation of Script a σ b is Standard Deviation of Script b n ab is Correlation coefficient of Script a and b editor@iaeme.com

10 Dr. V. Sreehari, G. Ramesh, G. Vinesh Kumar and K. Sandeep Kumar Calculation of Weights of TCS with other Companies TCS (W a ) & BAJAJ AUTO (W b ) σa = 18.43, σb = 12.78, n ab = = W b = 1 (0.396) = TCS (W a ) & HDFC BANK (W b ) = σa = 18.43, σb= 16.48, n ab = W b = 1 - (0.444) = TCS (W a ) & HINDUSTAN UNILEVER (W b ) = W b = 1 (0.682) = σa = 18.43, σb= 22.04, n ab = TCS (W a ) & AMBUJA CEMENT (W b ) = W b = 1 (0.765) = σa = 18.43, σb= 30.25, n ab = Calculation of Weights of Bajaj Auto with other Companies BAJAJ AUTO (W a ) & HDFC BANK (W b ) = W b = 1 (0.645) = σa= 12.78, σb= 16.48, n ab = editor@iaeme.com

11 Portfolio Management - Risk & Return Analysis of Selected Scripts BAJAJ AUTO (W a ) & HINDUSTAN UNILEVER (W b ) = σa = 12.78, σb = 22.04, n ab = W b = 1 (0.730) = BAJAJ AUTO (W a ) & AMBUJA CEMENT (W b ) = W b = 1 (0.928) = σa = 12.78, σb = 30.25, n ab = Calculation of Weights of HDFC Bank with other Companies HDFC BANK (W a ) & HINDUSTAN UNILEVER (W b ) = σa = 16.48, σb = 22.04, n ab = W b = 1 (1.113) = HDFC BANK (W a ) & AMBUJA CEMENT (W b ) = W b = 1 (1.582) = σa = 16.48, σb= 30.25, n ab = Calculation of Weights of Hindustan Unilever with other Companies HINDUSTAN UNILEVER (W a ) & AMBUJA CEMENT (W b ) = W b = 1 (1.387) = σa = 22.04, σb= 30.25, n ab = Interpretation Among all the scripts the weights of TCS & Bajaj Auto (0.396 & 0.604) and TCS &HDFCBank(0.444 & 0.556) are good compared to all the companies editor@iaeme.com

12 Dr. V. Sreehari, G. Ramesh, G. Vinesh Kumar and K. Sandeep Kumar 9. CALCULATION OF PORTFOLIO RISK Portfolio risk is calculated using the formula R P = (σ a *W a ) 2 + (σ b *W b ) 2 + 2* σ a * σ b *W a *W b *n ab Where R p is portfolio Risk σ a is Standard Deviation of Script a σ b is Standard Deviation of Script b W a is Weight of script a W b is Weight of script b n ab is Correlation coefficient of script a & b Calculation of Portfolio Risk of TCS with other Companies TCS (a) & BAJAJ AUTO (b): σ a = 18.43, σ b = 12.78, 0.396, W b = 0.604,n ab = R P = (18.43*0.396) 2 +(12.78*0.604) 2 +2(18.43)*(12.78)*(0.396)*(0.604)*(-0.742) R P = TCS (a) & HDFC BANK (b): σ a = 18.43, σ b = 16.48, 0.444, W b = 0.556, n ab = R P = (18.43*0.444) 2 +(12.78*0.604) 2 +2(18.43)*(16.48)*(0.444)*(0.556)*(0.001) R P = TCS (a) &HINDUSTAN UNILEVER (b): σ a = 18.43, σ b = 22.04, 0.682, W b = 0.318, n ab = R P = (18.43*0.682) 2 +(22.04*0.318) 2 +2(18.43)*(22.04)*(0.682)*(0.318)*(0.001) R P = TCS (a) & AMBUJA CEMENT (b): σ a = 18.43, σ b = 30.25, 0.765, W b = 0.235, n ab = R P =(18.43*0.765) 2 +(30.25*0.235) 2 +2(18.43)(30.25)(0.765)(0.235)(0.152) R P = Calculation of Portfolio Risk of Bajaj Auto with other Companies BAJAJ AUTO (a) & HDFC BANK (b): σ a = 12.78, σ b = 16.48, , W b = 0.355, n ab = R P = (12.78*0.645) 2 + (16.48*.355) 2 +2(12.78)(16.48)(0.645)(0.355)(0.144) R P = editor@iaeme.com

13 Portfolio Management - Risk & Return Analysis of Selected Scripts BAJAJ AUTO (a) &HINDUSTAN UNILEVER (b): σ a = 12.78, σ b = 22.04, , W b = 0.270, n ab = R P =(12.78*0.73) 2 + (22.04*.27) 2 +2(12.78)(22.04)(0.73)(0.27)(-0.093) R P = BAJAJ AUTO (a) & AMBUJA CEMENT (b): σ a = 12.78, σ b = 30.25, , W b = 0.072, n ab = R P = (12.78*0.928) 2 +(30.25*0.072) 2 +2(12.78)(30.25)(0.928)(0.072)(0.259) R P = Calculation of Portfolio Risk of HDFC Bank with other Companies HDFC BANK (a) & HINDUSTAN UNILEVER (b): σ a = 16.48, σ b = 22.04, 1.113, W b = , n ab = R p = (16.48*1.113) 2 +(22.04*(-0.113)) 2 +2(16.48)*(22.04)(1.113)(-0.113)(0.802) R P = HDFC BANK (a) & AMBUJA CEMENT (b): σ a = 16.48, σ b = 30.25, 1.582, W b = , n ab = R p = (16.48*1.582) 2 +(30.25*(-0.582)) 2 +2(16.48)(30.25)(1.582)(-0.582)(0.892) R P = Calculation of Portfolio Risk of Hindustan Unilever with other Companies σ a = 22.04, σ b = 30.25, 1.387, W b = , n ab = R p = (22.04*1.387) 2 +(30.25*(-0.387)) 2 +2(22.04)(30.25)(1.387)(-0.387)(0.869) R P = Interpretation Among all the companies Risk is low for TCS & Bajaj Auto (5.408). So, it is safe to invest in TCS & Bajaj Auto as the risk is low compared to all other companies. 10. CALCULATION OF PORTFOLIO RETURNS Portfolio Return is calculated using the formula Where R p is Portfolio return R A is Return of Script A R B is Return of Script B W A is Weight of Script A W B is Weight of Script B R p =(R A *W A ) + (R B *W B ) editor@iaeme.com

14 Dr. V. Sreehari, G. Ramesh, G. Vinesh Kumar and K. Sandeep Kumar Calculation of Portfolio Return of TCS with other Companies TCS (A) & BAJAJ AUTO (B): R A = 19.90, R B = 17.63, W A = 0.396, W B = R p = (19.90*0.396) + (17.63*0.604) = TCS (A) & HDFC BANK (B): R A = 19.90, R B = 26.14, W A = 0.444, W B = R p = (19.90*0.444) + (26.14*0.556) = TCS (A) & HINDUSTAN UNILEVER (B): R A = 19.90, R B = 28.91, W A = 0.682, W B = R p = (19.90*0.682) + (28.91*0.318) = TCS (A) & AMBUJA CEMENT (B): R A = 19.90, R B = 17.86, W A = 0.765, W B = R p = (19.90*0.765) + (17.86*0.235) = Calculation of Portfolio Return of Bajaj Auto with other Companies BAJAJ AUTO (A) & HDFC BANK (B): R A = 17.63, R B = 26.14, W A = 0.645, W B = R p = (17.63*0.645) + (26.14*0.355) = BAJAJ AUTO (A) & HINDUSTAN UNILEVER (B): R A = 17.63, R B = 28.91, W A = 0.730, W B = R p = (17.63*0.730) + (28.91*0.270) = BAJAJ AUTO (A) & AMBUJA CEMENT (B): R A = 17.63, R B = 17.86, W A = 0.928, W B = R p = (17.63*0.928) + (17.86*0.072) = Calculation of Portfolio Return of HDFC Bank with other Companies HDFC BANK (A) & HINDUSTAN UNILEVER (B): R A = 26.14, R B = 28.91, W A =1.113, W B = R p = (26.14*1.113) + (28.91*(-0.113)) = HDFC BANK (A) & AMBUJA CEMENT (B): R A = 26.14, R B = 17.86, W A =1.582,W B = R p = (26.14*1.582) + (17.86*(-0.582)) = Calculation of Portfolio Return of Hindustan Unilever with other Companies HINDUSTAN UNILEVER (A) & AMBUJA CEMENT (B): R A = 28.91, R B = 17.86, W A =1.387 W B = R p = (28.91*1.387) + (17.86*(-0.387)) = Interpretation Return is more in Hindustan Unilever & Ambuja cement (33.186) compared to all other companies. So, it is safe to invest in Hindustan Unilever & Ambuja cement to gain more returns editor@iaeme.com

15 Portfolio Management - Risk & Return Analysis of Selected Scripts Comparative Return & Risk of Selected Scripts Portfolio Return & Risk For Scripts a & b Portfolio Risk Portfolio Return TCS & Bajaj Auto TCS & HDFC Bank TCS & Hindustan Unilever TCS & Ambuja Cement Bajaj Auto & HDFC Bank Bajaj Auto & Hindustan Unilever Bajaj Auto & Ambuja Cement HDFC Bank & Hindustan Unilever HDFC Bank & Ambuja Cement Hindustan Unilever & Ambuja Cement Interpretation Among all the companies HDFC Bank & Ambuja cement has less risk & higher return. So, it is safe to invest in HDFC Bank & Ambuja cement in order to gain more Returns with less Risk. 11. FINDINGS Individual returns on the selected stocks of TCS, BAJAJ AUTO, HDFC Bank, Hindustan Unilever & AMBUJA CEMENT are 19.90%, 17.63%, 26.14%, 28.91% and 17.86% respectively. Individual risks on the selected stocks including TCS, BAJAJ AUTO, HDFC Bank, Hindustan Unilever & AMBUJA CEMENT are 18.43%, 12.78%, 16.48%, 22.04% and 30.25% respectively Correlation between all the companies is positive except TCS & Bajaj Auto Stocks and Hindustan Unilever & BAJAJ AUTO stocks which means most of the combinations of portfolios are at good position to gain in future. Weights of TCS & Bajaj Auto (0.396,0.604), TCS & HDFC (0.444,0.556), TCS & Hindustan Unilever (0.682,0.318),TCS & Ambuja Cement (0.765,0.235), Bajaj Auto & HDFC Bank (0.645,0.355), Bajaj Auto & Hindustan Unilever (0.73,0.27), Bajaj Auto & Ambuja cement (0.928,0.072) are positive compared to HDFC Bank & Hindustan Unilever (1.113,-0.113), HDFC Bank & Ambuja Cement(1.582,-0.582), Hindustan Unilever & Ambuja Cement (1.387,-0.387) are negative. The weight of Scripts are based on the percentage of weights invested. Portfolios returns of Hindustan Unilever & Ambuja Cement(33.186%) followed by HDFC Bank & Ambuja Cement (30.959%), HDFC Bank & Hindustan Unilever (25.827%) TCS and HDFC Bank (23.369%) stood on the top while Portfolio Returns of Bajaj Auto & Ambuja Cement (17.647%) is the only combination which stood at the bottom with minimum profits. Portfolios risk of Hindustan Unilever & Ambuja Cement (21.203%) and TCS & Hindustan Unilever (17.294%) are very high compared to others while Portfolio risk of TCS & Bajaj Auto (5.408%) stood at the bottom. 12. SUGGESTIONS Of the five stocks selected, all the stocks have given positive returns. HDFC Bank and HUL has been giving good profits of over 25% while the other companies have also given good returns. All the companies seem to be a good bet for investment editor@iaeme.com

16 Dr. V. Sreehari, G. Ramesh, G. Vinesh Kumar and K. Sandeep Kumar Comparing the individual risks, HUL and AMBUJA CEMENT are high risky compared to the other securities like BAJAJ AUTO, and HDFC and it is suggested that the investors should be careful while investing in high risk securities. The investors who require average returns with low risk can invest in Hindustan Unilever Investors are advised to invest in Portfolios of Ambuja Cements & Hindustan Unilever (33%) and Ambuja Cements & HDFC Bank (31%) which have given the maximum returns. Low Risk investors are advised to keep away from HUL & AMBUJA CEMENT and Hindustan Unilever & HDFC Bank and prefer the Portfolios of Bajaj Auto with other companies which have the least risk. 13. CONCLUSIONS The main objective of the Portfolio management is to help the investors to make wise choice between alternate investments without a post trading shares. Any portfolio management must specify the objectives like maximum returns, optimum Returns, capital appreciation, safety etc., in the same prospectus. This service renders optimum returns to the investors by proper selection and continuous shifting of portfolio from one scheme to another scheme of from one plan to another plan within the same scheme. Greater portfolio return with less risk is always is an attractive combination for the investors. REFERENCES [1] Punithavathy Pandian (2009), Security Analysis and Portfolio Management, Vikas Publishing House Private Limited, New Delhi. [2] S. Kevin (2009), Security Analysis and Portfolio Management, Prentice Hall of India, New Delhi. [3] Donald E. Fischer, Ronald J. Jordan (2009), Security Analysis and Portfolio Management, Prentice Hall of India, New Delhi. [4] Prasanna Chandra (2009), Investment Analysis and Portfolio Management, Tata McGraw Hill, New Delhi. [5] S. Raghavan and Dr. M. Selvam, Determinants of Foreign Portfolio Investment and Their Effects on The Indian Stock Market. International Journal of Management, 8(3), 2017, pp [6] Hasanudin, Sugeng Wahyudi, Irene Rini Demi Pangestuti., Managing The Pension Fund To Improve Portfolio Performance: An Empirical Study On Employer Pension Funds In Indonesia, International Journal of Civil Engineering and Technology, 8(8), 2017, pp [7] Dr. Vani Kamath and Dr. Roopali Patil, Cost Benefit Analysis of National Pension Scheme. International Journal of Management, 8 (3), 2017, pp [8] Dr. Varsha Nerlekar and Swapnil Patel, An Empirical Analysis of Inventory Efficiency of Major Refineries in India. International Journal of Management, 7(7), 2016, pp [9] A. Ramaraju, Impact of FDI On Stock Market Development: An Empirical Investigation, International Journal of Management, Volume 2, Number 1, Jan- April (2011) [10] Benefits of FDI In Indian Retail Sector and Custome r Perception of Organized Retail Outlets In Hyderabad, K.Venkateswara Raju, Dr. Svss Srinivasa Raju, Dr. D.Prasanna Kumar, International Journal of Management, Volume 4, Issue 4, July-August (2013), pp editor@iaeme.com

17 Portfolio Management - Risk & Return Analysis of Selected Scripts [11] [12] [13] [14] [15] [16] [17] [18] editor@iaeme.com