PORTFOLIO MANAGEMENT
•Collection of assets
•Need for portfolio management.
•Types of risk- systematic and unsystematic.
Steps in portfolio management
1. identification of objectives.
2. Portfolio strategy
3. Selection of asset mix
4. Portfolio execution.
5. Portfolio revision
6. Portfolio evaluation
PORTFOLIO ANALYSIS
TRADITIONAL APPROACH
Risk can be measured on each security through
standard deviation. And security having lowest
standard deviation must be selected.
MODERN APPROACH
Includes combination of securities to form a portfolio.
Relationship among different securities
COMBINATION OF 2 SECURITIES
Combination of 2 or more securities decreases the risk
of the investor.
Calculation of expected return of portfolio is done as
follows
risk of portfolio= wi x ri
wi= weights of funds employed in security i.
ri= expected return of security I
n= total numbr of securities.
Covariance
For knowing riskiness of each of the securities we need
covariance.
Cov(security x & y)= ( rx-Rx)(ry-Ry)/n
rx- return on security x
ry- return on security y
Rx- expected return on x
Ry- expected return on y
n- total numbr of securities.
If cov positive- rate of return of x& y move together
If cov negative- inverse movements.
If cov 0- securities are independent
CORRELATION COEFFICIENT
r(xy)= cov xy/ x y
r (xy)- correlation coefficient between x and y
x- standard deviation of X
y- standard deviation of Y
R (xy) varies from -1 to +1
Variance of portfolio
= 2 p= w2 x 2 x + w2 y 2 y+ 2 wx wy r(xy) x y
expected return
X 15% 50%
Y 20% 30%
sol.
Risk of portfolio= (.4 x .15)+ (.60 x .20)
= 18%
Variance of portfolio
= (.4)2 (50) 2 +(.6) 2 (30) 2 + 2x .4 x .6x 50x 30 x (-0.45)
= 400 +324 -324
= 400
p= 20
CASE STUDY OF WIPRO AND ITC
Calculated the return on portfolio of ITC and wipro.
AVERAGE RETURN OF WIPRO
Average Return = (R)/N
Average Return = 14.13/5 = 2.83
Opening Closing
share price share price (P1-P0)/
Year (P0) (P1) (P1-P0) P0*100
2002-
2003 1,700.60 1233.45 -467.15 -27.47
2003-
2004 1,233.45 1361.20 127.75 10.36
2004-
2005 1,361.20 2,012 650.8 47.87
2005-
2006 670.95 559.7 -111.25 -16.58
2006-
2007 559.70 559.40 -0.3 -0.05
TOTAL RETURN 14.13
ITC LTD:
Opening Closing
share price share price (P1-P0)/
Year (P0) (P1) (P1-P0) P0*100
2002-2003 696.70 628.25 -68.45 -9.82
2003-2004 628.25 1043.10 414.85 66.03
2004-2005 1043.10 1342.05 298.95 28.66
2005-2006 1342.05 2932 1589.95 118.47
2006-2007 195.15 151.15 -44 -22.55
TOTAL RETURN 180.79
Average Return = 180.79/5 = 36.16
CALCULATION OF STANDARD DEVIATION:
WIPRO
Standard Deviation2 = Variance
Variance = 1/n (R-R)2
Year Return (R) Avg. Return (R) (R-R) (R-R)2
2002-2003 -27.47 2.83 -30.29 917
2003-2004 10.36 2.83 7.53 57
2004-2005 47.87 2.83 45.04 2029
2005-2006 -16.58 2.83 -19.41 377
2006-2007 -0.05 2.83 -2.88 8
TOTAL 3388
Variance = 677.6
Standard Deviation =26
ITC
Year Return (R) Avg. Return (R) (R-R) (R-R)2
2002-2003 -9.82 36.16 -45.98 2114.16
2003-2004 66.03 36.16 29.87 892.22
2003-2004 28.66 36.16 -7.5 56.25
2004-2005 118.47 36.16 82.31 6775
2005-2006 -22.55 36.16 -58.71 3447
TOTAL 13284
Variance = 1/n (R-R)2 = 1/5 (13284) = 2656.8
Standard Deviation = Variance = 2656.8 = 51.54
CALCULATION OF CORRELATION :
Covariance (COV ab) = 1/n (RA-RA)(RB-RB)
Correlation Coefficient = COV ab/a*b
YEAR (rA-RA) (rB-RB) (rA-RA) (rB-RB)
2002-2003 -16.024 -10.89 174.50
2002-2003 -26.574 -46.94 1,247.38
2003-2004 -3.684 -8.7 32.05
2004-2005 -34.724 -26.98 936.85
2005-2006 81.006 93.53 7,576.49
TOTAL 9,967.28
Covariance (COV ab) = 1/5-1 (9967.28) = 2491.82
Correlation Coefficient = COV ab/a*b
a= 26 ; b = 51.54
= 2491.82/(26) (51.54)
= positively correlated
PORTFOLIO RISK
ITC (a) & WIPRO (b):
a = 51.54
b = 26.00
nab = 0.02
Wa= 2/3
Wb= 1/3
RP 2 = (2/3)2(51.54)2+(1/3)2(26.00)2+2(51.54)(26.00)*(26.00)*(2/3)*(1/3)
= 1281
Wipro (a) & ITC (b):
sa = 33.09
sb = 56.09
Wa = 2/3
Wb= 1/3
Nab = 0.98
RP2 = (2/3)2(49.57)2+(1/3)2(0.51.54)2+2(49.57)(51.54)*(0.98)*(2/3)*(1/3)
= 2505
Rp= 50.04