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Portfolio Management

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DOI: 10.13140/RG.2.2.19016.57601

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Portfolio Management

Mrunal Joshi

B.R.C.M. College of Business Administration

Mrunal Joshi
 Portfolio and Portfolio Management
• Portfolio is group of securities considered for the investment.
• It is basket of investment or assets held by an individual or a
corporate body, or any economic unit.
• Portfolio management deals with the analysis of individual
securities as well as with the theory and practice of optimally
combining securities into portfolio.
• Portfolio management comprises all the processes involved
in the creation and maintenance of an investment portfolio. It
deals specifically with security analysis, portfolio analysis,
portfolio selection, portfolio revision and portfolio evaluation.
• Analysis consists of examining the risk-return characteristics
B.R.C.M. College of Business Administration
Mrunal Joshi
 Risk - Return
• Return means whatever output generated from
Investment made. Return may be positive or negative.
• Basically return may be in two form: income and capital
gain.
• Income generally consist regular income like dividend
(on share) and interest (fixed interest bearing fund like
bond, deposit etc.).
• Capital gain is basically the difference between sale
price and purchase price of investment. Total yield of
the investment is called return, which includes both of
above kind
• Expected return and Realised return
B.R.C.M. College of Business Administration
Mrunal Joshi
• Risk and Uncertainty
• Risk is uncertainty of the income/capital appreciation or
loss of both into an investment.
• Possibility of variation of the actual return from the
expected return is termed risk. “Risk is the potential for
variability of returns.”
• Low risk = fairly stable returns e.g. Government securities.
• High risk = significant fluctuation in returns e.g. Equity
shares.
• Two major types of factors cause the risk. 1. external to a
company – uncontrollable. 2. internal to company –
controllable.
• The risk produce by the first group of factors is known as
systematic risk and by the second group is know as
B.R.C.M. College of Business Administration
unsystematic risk. Mrunal Joshi
 Types of Risk
• Systematic Risk
– Interest Rate Risk
– Market Rate Risk
– Purchasing Power Risk
• Unsystematic Risk
– Business Risk
– Financial Risk
– Default risk / Insolvency risk
• Other types
• Political risk
• Marketability risk
B.R.C.M. College of Business Administration
Mrunal Joshi
Risk and Return relationship

RISK TAKEN BY INVESTOR

B.R.C.M. College of Business Administration
Mrunal Joshi
 Calculation of Return
• Return is generally measured in form of
percentage(Important aspect about this percentage is
that it should be annualized). For example if we have
purchased security at Rs. 100 received dividend of Rs.
10 and after one year investor has sold that security at
Rs. 105 than his return percentage will be as follow.
• Total return Percentage = (Income + Price
change)*100/Purchase Price
• Hence in this case Return Percentage = [10+(105-100)*
100]/100 = 15%

B.R.C.M. College of Business Administration

Mrunal Joshi
• For calculation of expected return we need to
consider past data.
• on the basis of that we can use statistical techniques
i.e. central tendency to predict future return.
• In central tendency basically we can use mean value
of past return.
• For calculation we have two types mean generally we
can use: Arithmetic Mean and Geometric Mean.
• Arithmetic Mean or average = 𝑋ത = ∑xi/n
– If probability is given, Mean = ∑xi.pi
• Geometric Mean G =
[(1+R1)(1+R2)(1+R3)…….(1+Rn)]1/n – 1
B.R.C.M. College of Business Administration
Mrunal Joshi
 Calculation of Risk
• Expected returns are insufficient for decision-
making. The risk aspect should also be
consider.
• The most popular measure of risk is the
variance or standard deviation

– if probability is given

B.R.C.M. College of Business Administration

Mrunal Joshi
 Systematic and Unsystematic Risk
• Systematic risk is the variability in security returns
caused by changes in the economy or the market.
• The average effect of a change in the economy can
be represented by the change in the stock market
index.
• The systematic risk of security is measured by a
statistical measure called Beta.
• Two methods to calculate Beta, correlation method
or regression method
B.R.C.M. College of Business Administration
Mrunal Joshi
The Correlation method:

𝑟𝑖𝑚 𝜎𝑖 𝜎𝑚
𝛽𝑖𝑚 = 2
𝜎𝑚
rim = correlation coefficient between the returns
of stock i and the returns of the market
index.
σi = standard deviation of returns of stock i.
σm = standard deviation of return of the market
index
σ2m = variance of the market returns
B.R.C.M. College of Business Administration
Mrunal Joshi
The regression method:

Y = 𝛼 + 𝛽𝑖𝑚 𝑋 + e
where,
Y = Dependent variable (stock return).
X = Independent variable (market return).
𝛼 and 𝛽 are constants.
e = random error in estimation

B.R.C.M. College of Business Administration

Mrunal Joshi
Stock Return

Slop = Beta

Beta

Alpha (Positive)

Market Return (or Market index)

B.R.C.M. College of Business Administration
Mrunal Joshi
Stock Return

Beta Slop = Beta

Alpha (negative)

Market Return (or Market index)

B.R.C.M. College of Business Administration
Mrunal Joshi
Stock Return

Slop = Beta

Beta

Alpha (Zero)

Market Return (or Market index)

B.R.C.M. College of Business Administration

Mrunal Joshi
Alpha (α)
α or Alpha is the distance between the horizontal axis and line’s
intersection with y-axis. It measures the unsystematic risk of the
company. If α is a positive return, then that scrip will have higher
returns. If α = 0, then the regression line goes through the origin
and its return simply depends on the Beta times the market return

Beta (𝜷)
B or Beta describes the relationship between the stock’s return and
the Market index return. This can be positive and negative. It is the
percentage change in the price of the stock regressed (or related) to
the percentage changes in the market Index. If Beta is 1, a one
percentage change in Market index will lead to one percentage
change in price of the stock. If Beta is zero, stock price is unrelated
to the Market index.
B.R.C.M. College of Business Administration
Mrunal Joshi
n = Number of items
𝑌ത = Mean value of the dependent variable
scores
𝑋ത = Mean value of independent variable scores.
Y = Dependent variable scores (stock return)
X = Independent variable scores (market return)

B.R.C.M. College of Business Administration

Mrunal Joshi
References:
Avadhani, V. A. (2016). Securities Analysis and Portfolio
Management: Himalaya Publishing House.
Bhalla, V. K. (2011). Investment Management Security Analysis
and Portfolio Management (17th Revised ed.). New Delhi:
S.Chand & Company Ltd.
Kevin, S. (2009). Security Analysis and Portfolio Management.
New Delhi: PHI Learning Private Limited.

B.R.C.M. College of Business Administration

Mrunal Joshi
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