A REPORT ON

‘Portfolio Management’

BY: Dinakaran S

COMPANY: Growth Arrow

1
 A REPORT ON Portfolio Management

BY: Dinakaran S
Roll No. DM 22118
PGDM 2020-2022
GREAT LAKES INSTITUTE OF MANAGEMENT

Company Guide:
Company Name: Growth Arrow
Name of the Guide: Krishna Raju
Designation: Branch Manager

Faculty Guide
Name of the Institute: Great Lakes Institute of Management
Name of Guide: Dr. Trichy Krishnan
Designation: Professor in Marketing.

Name of the Programme: PGDM

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3
DECLARATION

I hereby declare that the Project Report ‘Portfolio Management’ is my own work to the best
of my knowledge and belief. It contains no material previously published or written by another
person or material which to substantial extent has been accepted for the award of any other
degree, diploma or programme of any other institute, except where due acknowledgement has
been made in text.

Name: Dinakaran S

Date: 22/07/2021

Roll No.: DM 22118

Great Lakes Inst. of Management, Chennai

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 CERTIFICATE

This is to certify that Project Work entitled ‘Portfolio Management’, is a piece of work done
by “Dinakaran S” under my guidance and supervision for the partial fulfilment of Post
Graduate Diploma in Management, a Programme offered by Great Lakes

To the best of my knowledge and belief the Project Report:

a. embodies the work of the candidate himself / herself

b. has duly been completed
c. fulfills the requirements of the Rules & Regulations relating to the Summer Internship
of the Institute.
d. is up to the standard both in respect to contents and language for being referred to the
examiner

Signature of the Faculty Guide

Date: 22/07/2021

Name of the Faculty Guide: Dr . Trichy Krishnan

Designation / Department: Faculty PGDM/ PGPM

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 Table of Contents

Table of Contents
Title page

Certificate.......................................................................................................................................................................
Declaration.....................................................................................................................................................................
Executive summary......................................................................................................................................................
List of Tables...............................................................................................................................................................
List of Figures..............................................................................................................................................................
List of abbreviations.......................................................................................................................................................
Organization profile.....................................................................................................................................................
Project Description:......................................................................................................................................................
Business case................................................................................................................................................................
Project objectives:........................................................................................................................................................
Methodology:...............................................................................................................................................................
Fundamental Analysis..................................................................................................................................................
Technical analysis........................................................................................................................................................
Candlesticks.............................................................................................................................................................
RSI indicator............................................................................................................................................................
Fibonacci Retracement.............................................................................................................................................
Moving average indicator:........................................................................................................................................
Limitations of technical analysis:.............................................................................................................................
Management theories...................................................................................................................................................
Capital Asset Pricing Model (CAPM)..........................................................................................................................
Markowitz Portfolio Theory.........................................................................................................................................
Sharpe ratio..................................................................................................................................................................
Project Findings and Inferences...................................................................................................................................
Trading and advisory calls...........................................................................................................................................

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Summary on trading.....................................................................................................................................................
Conclusion...................................................................................................................................................................
References:...................................................................................................................................................................

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 LIST OF ABBREVIATIONS
BSE Bombay stock exchange
CAPM Capital Asset Pricing Model
CAL Capital Allocation Line
CMIE Centre for Monitoring Indian Economy
EMA Economic moving average
EPS Earnings Per Share
FMCG Fast moving consumer goods
IT Information technology
MA moving average
MPT Markowitz Portfolio Theory
NSE National Stock Exchange
OPM Operating Profit Margin
P/B Price to Book Ratio
P/E Price to Earnings
ROCE Return on capital employed
ROE Return on Equity
ROI Returns on investment
RSI relative strength index
SMA simple moving average

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 LIST OF TABLES

Table 1 List of companies with market capitalization considered for the study .................................14
Table 2 list of companies with key financial ratios considered for the study ......................................15
Table 3 Stock returns, Standard deviation, Variance, Beta coefficient.................................................16
Table 4 Portfolio Return, Standard deviation and Sharpe ratio ...........................................................17
Table 5 Split-up of investment Portfolio ..............................................................................................20

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 LIST OF FIGURES

Figure 1: Candlestick ………………………………………………………………….........................7

Figure 2 Efficient Frontier…………………………………………………………………………………..12

Figure 3: Risk Vs Sharpe ratio……………………………………………………………………………..18

Figure 4: Efficient Frontier Graph……………………………………………………………………….18

Figure 5: Sector-wise stock…………………………………………………………………………………19

Figure 6: Investment Split-up……………………………………………………………………………...20

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 Executive summary

Growth Arrow is a privately held financial services company that offers financial planning, consulting
services, and wealth management strategies to its clients. The initial portion of our internship consists
of technical and fundamental analysis training sessions for the Indian stock market and the Forex
market. I should analyse trading performance after the training sessions, create new trading strategies,
implement the strategy, and document the activity. I must do paper-based trading in Excel (virtual
trading) and make advisory calls (buy/sell decisions) on several stocks using the Google form provided.
Second, I should work on a project that was chosen at the early stages of the internship and includes
the tools and skills learned throughout the training sessions. My project is titled "Portfolio
Management," and it requires me to create an ideal portfolio with the highest possible return and the
lowest possible risk. I must choose companies and sectors based on their historical performance,
followed by key financial ratio analysis, fundamental and technical research, to attain the targeted
objectives. After selecting stocks, I should give weights (asset allocation) that are appropriate to the
investors' goals. I used the CAPM model and Markowitz portfolio theory to come up with the best
asset allocation strategy. Constructed an efficient frontier based on multiple portfolio returns and
standard deviations to determine the best portfolio for the investor depending on their investment
goals. The chosen optimal portfolio met the investment goal of maximum return with the least
amount of risk.

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 Organization profile

Company vision: Towards prosperity

Growth Arrow is an independent financial services domain developing a strong commitment towards
new standard in financial services to its clients in a better way. Growth Arrow is an innovative
platform for educating and mentoring the theory towards wealth and prosperity. They develop and
implement strategies that are proven and useful to many clients. They have 1000+ clients
throughout the world, which stands for the best testaments.

Company Offerings:

Financial planning In the stock market

investments

Advisory services On intraday, short term &

long term

Wealth management Customized Investment

Strategies

Training program In Stock market

training
1

Company’s Website: https://www.thegrowtharrow.com/

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Project Description:

• To define the investment strategy and choose an investment mix that will help you
accomplish your investment goals.
• To create a well-balanced portfolio that not only protects against inflation but also
maximises profits while minimising risk.
• To buy and sell securities on time.

• Investing in various tax-saving investment products to maximise the after-tax return

Business case
Investing is an art and science. Although each person's financial demands and expectations are
unique by their risk tolerance, certain of these criteria and expectations are common. In recent
years, investments have become a significant part of income saving. When it comes to investing in
securities, an investor is faced with a large array of possibilities from which to choose. The risk-
return characteristics of specific securities are used to guide investment decisions. Investors would
aim to pick the most appealing stocks and diversify their money across their portfolio. The investor is
faced with the task of deciding which securities to hold and how much to invest in each.

The investor can choose from an endless number of portfolios or groups of securities. Individual
securities that are integrated to form a portfolio have distinct risk and return characteristics than
portfolios. By considering the risk-return characteristics of all possible portfolios, the investor tries to
find the best one. As the economic and financial environment changes, the risk-return characteristics
of individual assets and portfolios alter as well. An investor puts money into a portfolio in the hopes
of making a profit while taking on less risk.

The creation and maintenance of an investment portfolio is the subject of portfolio management. It
is the process of investing money in a variety of assets to lower the total risk of the portfolio while
increasing the expected return. It is more concerned with reducing risk than with creating profit.
Return is important, and a portfolio manager's ultimate goal is to achieve a specific level of return
while accepting the least amount of risk possible.

Project objectives:

Portfolio management's main goal is to assist in the selection of the best investment options based
on one's income, age, time horizon, and risk appetite.

The following are some of the most important goals of portfolio management:

• Appreciation of capital

• Returns on investment (ROI) maximisation

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 • To improve the portfolio's overall proficiency

• Optimal risk management

• Optimal resource allocation

• Assuring portfolio flexibility

• Defending earnings against market risks

To get the most out of portfolio management, however, investors need to choose a management
style that fits their investment style.

Methodology:
Fundamental Analysis
A comprehensive way of examining a company is known as fundamental analysis. When making a
long-term investment in a firm, an investor needs to have a wide grasp of the company. It is critical
for an investor to separate the daily short-term volatility in stock prices from the underlying business
performance. The stock price of a fundamentally sound company tends to rise over time, resulting in
wealth for its shareholders. Fundamental analysis is a method of identifying a security's intrinsic
value by examining related economic and financial factors. Fundamental analysis considers
everything that can affect a security's value, from macroeconomic factors such as the state of the
economy and industry conditions to microeconomic variables such as the company's management
effectiveness. The end goal is to come up with a number that can be compared to a security's
current price to see if it is undervalued or overvalued. This style of stock analysis is seen to be in
opposition to technical analysis, which forecasts the direction of prices by evaluating prior market
data such as price and volume.

Basic analysis is used to assess individual organisations, which entails looking at their financial
statements and analysing a variety of ratios and other metrics. This is used to determine a
company's intrinsic value based on sales, profits, costs, capital structure, and cash flows, among
other things. The results can then be compared to those of the company's peers and competitors in
the industry. When conducting a fundamental study of a company, there are a few important
phrases and financial ratios to consider.

Market Capitalization, often known as Market Cap, is a measure of a company's market value. All of
the company’s outstanding shares can be purchased at the price. It is calculated by multiplying the
number of outstanding shares by each share's market price. The market cap changes since the stock
price is a dynamic objective. It denotes the size of the organization. More well-known corporations
with larger market capitalization have already advanced to a position where they are less vulnerable
to volatility and risk. As a result, a large market size is an excellent way to differentiate enterprises
with guaranteed profits from those with more uncertain returns.

Price to Earnings Ratio (P/E ratio) - The price to earnings ratio compares the price of a company's
stock to its earnings per share (EPS) (Earnings per Share). This ratio is used to assess firms and
securities to determine if they are undervalued or overvalued.

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Price to Book Ratio (P/B ratio) - A company's current market price (CMP) divided by its book value
is the price to book ratio. Historically, a P/B number at below 1.0 was considered a good P/B
number, suggesting a stock that was inexpensive (possibly undervalued).

Return on Equity (ROE) is a measure of a company's financial performance that is determined by

dividing net income by shareholder equity.

Book value - The book value of a stock is the potential amount of money that a firm would pay its
shareholders if it were liquidated and all of its creditors were paid.

Industry P/E ratio - This is the average P/E ratio of all stocks in a sector. Different sectors have
varying P/E ratios, and different P/E ratios are considered healthy.

Earnings Per Share (EPS) - EPS is the net profit of a firm divided by the number of outstanding
shares. EPS is a widely used indicator to calculate/estimate corporate value because it shows how
much money a firm may produce for each share of its stock.

Operating Profit Margin (OPM) - This value is calculated by dividing a company's operating profit
by its sales revenue. Operating profit is the profit generated by a company's fundamental business
operations. It is a useful signal because most analysts believe a company has true value when profits
are generated from its core business rather than unplanned financing. It shows the long-term
viability, efficiency, and health of a company.

Net profit- While operating profit focuses primarily on the primary business, net profit takes into
account all aspects of a company. It also considers expenses such as taxes and loan interest, as well
as the overall earnings of the company as a whole. After all costs and expenses have been accounted
for, the bottom line is the net profit, which displays at the bottom of the profit statement.

Technical analysis
Technical analysis is a trading discipline that analyses statistical patterns from trading, such as
price movement and volume, to evaluate investments and uncover trading opportunities.
Technical analysts, unlike fundamental analysts, who try to determine a security's intrinsic
value, rely on chart patterns of price movements, trading signals, and other analytical chart
tools to determine a security's strength or weakness.

Any security with past trading data can benefit from technical analysis. Stocks, futures,
commodities, currencies, and other securities are included. Technical analysis is more
commonly utilised in commodities and Forex markets, where traders are more concerned with
short-term price movements.

Technical analysts, unlike fundamental analysts, are unconcerned about whether a stock is
undervalued or overvalued. Indeed, the only thing that matters is the historical trading data
(price and volume) of the stocks and the information they can provide regarding the security's
future development.

A few key assumptions constitute technical analysis.

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 1. Markets discount everything
This assumption implies that all publicly available information, both known and unknown, is
reflected in the most recent stock price. For example, an insider in the company might buy a
large amount of stock in anticipation of a good quarterly profit report. While he is doing this
in secret, the price reacts to his actions, indicating to the technical analyst that this could be
a smart investment.

2. The ‘How’ is more important than ‘Why’

This is a follow-up to the first assumption. In a similar scenario to the one described above,
the technical analyst would be uninterested in addressing why the insider purchased the
stock as long as he understands how the price reacted to the insider's action.

3. Price moves in trend

A pattern underpins all-important market movements. Technical analysis is built on the
concept of pattern. For example, the new rising trend in the NIFTY Index from 12000 to
15000 was not coincidental. This transition took place over the course of more than a year.
Another way to look at it is that once the pattern is established, the value goes toward the
pattern.

4. History tends to repeat itself

The price pattern tends to repeat itself in the context of technical analysis. This occurs when
traders consistently respond to price changes in a strikingly similar manner every time the
price moves in a particular direction. In up trending markets, for example, traders become
greedy and feel compelled to buy despite the high price. Furthermore, traders must sell
regardless of the low and ugly price in a down pattern. This human reaction ensures that
history will repeat itself.

Candlesticks
A candlestick is a type of price chart that displays the high, low, open, and close price of
securities over a certain period. Many years before it became famous in the United States,
Japanese rice merchants and traders to track market prices developed it. The "true body" is
the wide area of the candlestick that tells traders if the close price was greater or lower than
the opening price (red if the stock is closed lower, green if the stock closed higher)

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 Figure 1: Candlestick

We can construct a picture of price action by following the open, high, low, and close.

The open price is the first price at which a trade is executed when the markets open for trading.

The high price - This refers to the most extortionate price at which dealers were willing to trade
on that particular day.

The Low price - This refers to the lowest price at which traders were willing to execute for that
day.

The close price – Because it represents the last price at which the market closed for a certain
duration, the Close price is the most important. The intraday strength is indicated by the close
price. It is considered a positive day when if the close price is higher than the open else it is
considered a negative day

Assumptions of candlesticks

1. Buy strength and sell weakness

A bullish (blue) candle represents strength, while a bearish (red) candle represents
weakness. As a result, whenever you buy, make sure it is a blue candle day, and whenever
you sell, make sure it is a red candle day.

2. Be flexible with patterns (quantify and verify)

While the textbook definition of the pattern may express some criteria, market conditions may
cause slight differences in the pattern. As a result, one must be adaptable. However, one must
be adaptable within boundaries, which necessitates quantifying flexibility regularly.

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 3. Look for a prior trend
If you are searching for a bullish pattern, the previous one should be bearish, and if you are
looking for a bearish pattern, the previous one should be bullish.

Significant patterns in candlestick

Trading patterns are identified using candlesticks. The patterns are created by lining up at least
two candles in a specific order. In any case, a single candlestick pattern might occasionally
reveal great trading signals. Candlestick patterns can now be divided into two types: single
candlestick patterns and multiple candlestick patterns.

1. Paper umbrella
The hanging man and the hammer are two trend reversal patterns found on a paper umbrella.
The hammer design is often bullish, whereas the hanging man motif is bearish. A long lower
shadow with a little upper body distinguishes a paper umbrella. The 'Hammer' is a paper
umbrella that appears at the bottom end of a downhill trend. The 'Hanging man' is a term used
to describe a paper umbrella that appears at the top of an uptrend. To qualify a candle as a
paper umbrella, the lower shadow must be at least twice the length of the actual body. The
‘shadow to real body ratio' is the term for this.

2. Bullish engulfing pattern

In a stock's candlestick chart, a bullish engulfing pattern occurs when a giant green candle
engulfs the smaller red candle from the previous period. As a rule, this example occurs
during a downtrend and is regarded to signal the commencement of a bullish trend in the
stock.

3. The Morning and Evening Star Patterns

The morning star is a bullish candlestick pattern that appears over several days. It's a
reversal pattern from a downtrend. Consolidating three continuous candles frames the
illustration. At the bottom of a downtrend, the morning star appears. If a similar pattern
forms on an uptrend for three consecutive days, it becomes a reversal pattern, framing an
Evening star pattern.

4. Double top and double bottom

A double top is a word used to describe the rise of a stock, the subsequent decline, the
subsequent rise to the same level as the original increase, and finally the subsequent
decline. The two-folded top is shaped like the letter "M." The twice-contacted high is

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 regarded as a level of resistance. The decline at two levels must be the same over a multi-
week period; if the equivalent looks like a "W" with the stock price falling twice in the same
price range; it is referred to as a double bottom.

The following are some of the other indicators.

RSI indicator
The relative strength index (RSI) is a technical analysis price indicator that examines the number
of price changes to determine whether a stock or other asset is overbought or oversold. The RSI
is displayed as an oscillator (a line chart that travels between two limits) with a range of zero to
one hundred.

When the RSI is above 70%, an asset is deemed overbought, and when it is below 30%, it is
deemed oversold. Upsides of 70 or more on the RSI, according to conventional wisdom, indicate
that an investment is becoming overbought or overvalued and that a pattern inversion or
corrective downturn in price is imminent. A reading of 30 or less on the RSI indicates that the
market is oversold or undervalued.

Fibonacci Retracement
Technical traders like Fibonacci retracements because they can be used to construct support
lines, identify resistance levels, place stop-loss orders, and set target prices. They are based on
the thirteenth-century key numbers identified by mathematician Leonardo Fibonacci.
A Fibonacci retracement is calculated by dividing the vertical distance between two limit points
(usually a peak and a trough) on a stock chart by the important Fibonacci proportions of 23.6
per cent, 38.2 per cent, half, 61.8 per cent, and 100 per cent. Horizontal lines are drawn and
utilised to designate support and resistance levels once these levels have been found. Fibonacci
retracements have the same shortcomings as other universal trading tools, thus they are best
used in conjunction with alternative pointers.

Moving average indicator:

A moving average is a statistical computation that is used to analyse data points by averaging distinct
subsets of the entire dataset. A moving average (MA) is a stock indicator that is commonly used in
technical analysis in the stock market. The purpose of calculating a stock's moving average is to
smooth out price data by creating a constantly refreshed average price. The impact of random,
short-term variations on the price of a stock over a set time range is relied on by computing the
moving average.

A simple moving average (SMA) is a computation that takes the arithmetic mean of a collection of
prices over a specific number of days, such as the previous 15, 30, 100, or 200 days. The exponential
moving average (EMA) is a weighted average that adds more weight to a stock's price on subsequent
days, giving it a more sensitive indicator to fresh data.

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Limitations of technical analysis:

• When critical information about the company is being presented, technical analysis is
not very useful.
• Two technical analysts may hold opposing viewpoints on the same stock because each
uses a different analysis tool.
• Because the candlestick pattern is a lagging indicator, monitoring risk can be difficult
and unpredictable.

Management theories

Capital Asset Pricing Model (CAPM)

The Capital Asset Pricing Model (CAPM) is a mathematical model that describes the relationship
between systematic risk and expected return for assets, especially equities. The CAPM model is
commonly used in finance to price hazardous securities and generate predicted returns for assets
based on their risk and cost of capital.

The formula for calculating the expected return of an asset

𝐸(𝑅 ) = 𝑅 + 𝛽 (𝐸𝑅 −𝑅)

Where:

E (Ri) – Expected return of the asset

Rf - Risk-Free Rate

(ERm – Rf) – Market Risk Premium

βi - Beta of the asset

Investors are expected to compensate for risk and the time value of money. The risk-free rate in the
CAPM calculation takes into account the time value of money. The remaining components of the
CAPM formula account for the investor's willingness to take on more risk. The beta of a proposed
investment is a measure of how much risk it will add to a market-like portfolio. A stock with a beta
greater than one is riskier than the market. According to the formula, a stock with a beta of less than
one will reduce the risk in a portfolio. The market risk premium is then multiplied by a stock's beta,
which is the expected return from the market above the risk-free rate. The risk-free rate is then

20
compounded by the market risk premium multiplied by the stock's beta. The result should provide
the required return or discount rate for determining the asset's worth to an investor. The CAPM
approach is used to examine if a stock is adequately valued when risk and time value of money are
compared to expected return.

The CAPM model has the following assumptions:

• Investors are rational and risk-averse, and they want to maximise the returns on their
investments.
• The stock market is highly efficient and competitive.

Markowitz Portfolio Theory

Harry Markowitz established Modern Portfolio Theory (MPT), which is one of the most
fundamental and significant economic theories dealing with finance and investment. The
concept is based on Markowitz's idea that investors can design an optimal portfolio to maximise
earnings by taking on a quantifiable amount of risk. Essentially, investors can reduce risk by
diversifying their portfolio using a quantitative technique. Analysing the expected risk and
return of a single stock, according to modern portfolio theory, is insufficient. By investing in
various equities, an investor can reap the benefits of diversification, the most noteworthy of
which is a reduction in the portfolio's riskiness.

Modern portfolio theory quantifies the benefits of diversification, or not putting all of your eggs
in one basket. When most investors acquire a stock, they assume the risk of a smaller return
than anticipated. It is the difference between the average and highest return, to put it another
way. In modern portfolio theory, each stock has its standard deviation from the mean, which is
referred to as "risk."

Figure 2 Efficient Frontier

The efficient frontier is determined by the portfolio's projected return (Y-axis) at each level of its
standard deviation/risk, according to Modern Portfolio Theory (X-axis). The efficient frontier is a
hazardous asset combination that maximises the expected return for each standard deviation
level. This region of the curve is considered the optimal portfolio because it provides the best
possible returns for a given risk level. The Capital Allocation Line (CAL) represents the risk-
reward trade-off of assets with idiosyncratic risk. The Sharpe ratio is the slope of the capital

21
 allocation line, and it measures the increase in expected return per additional unit of standard
deviation (reward-to-risk ratio).

According to Modern Portfolio Theory, rational risk-averse investors should possess portfolios
that fall on the efficient frontier (since they provide the highest possible expected returns for a
given level of standard deviation). The asset mix, which comprises one riskfree asset and one
risky asset, is the ideal/optimal portfolio (also known as the "market portfolio").

Sharpe ratio
The Sharpe ratio is a risk-adjusted return estimate for a financial portfolio. A portfolio with a higher
Sharpe ratio is considered superior to its peers. The Sharpe ratio is a proportion of a portfolio's
standard deviation that measures its excess return above the risk-free rate. The riskfree rate is
usually referred to as the 90-day Treasury bill rate.

The formula for calculating the Sharpe ratio is

𝑅 −𝑅
𝑆ℎ𝑎𝑟𝑝𝑒 𝑟𝑎𝑡𝑖𝑜 =
𝑆𝑡𝑑𝑒𝑣 𝑅

Where:

Rx – Expected Portfolio return

Rf - Risk-Free Rate of return

Stdev Rx - Standard deviation of Portfolio return (volatility)

When the returns of two funds are equal, the one with the higher standard deviation has a lower
Sharpe ratio. To compensate for the increased standard deviation, the fund must generate a higher
return to maintain a higher Sharpe ratio. It shows how much more money an investor makes by
taking on additional risk in nonprofessional's terms. A risk-free asset's Sharpe ratio is intuitively
known to be zero. Diversifying a portfolio with assets with low to negative correlation lowers total
portfolio risk and increases the Sharpe ratio as a result. On the other side, the Sharpe ratio is a risk-
adjusted return measure. When examined separately, it reveals nothing about the fund's
performance. Furthermore, the standard deviation is taken into consideration, which assumes
asymmetrical return distribution.

22
 Project Findings and Inferences
The table below depicts the list of companies considered for the study
Sector Company Market Cap (in Cr)
Construction Ambuja Cements 62359
Chemicals Asian Paints 250682
Communication Bharti Airtel 296855
FMCG Dabur India 95777
Retail Dmart 188266
Financial HDFC Bank 812107
FMCG HUL 565862
IT INFY 575808
FMCG ITC 251470
Construction L&T 190830
Automobile Maruti Suzuki Ltd 198335
Chemicals Pidilite 93917
Energy Reliance Industries Ltd 1283135
Financial SBI 320751
IT TCS 1152347
Table 1: List of companies with market capitalization considered for the study

Stocks are split into three groups based on their market capitalization: large-cap, mid-cap, and small-
cap. A large-cap company has a market capitalisation of more than $5 billion. A smallcap company
has a market valuation of less than $1 billion, whereas a mid-cap company has a market
capitalisation of $1 billion to $5 billion. Small caps have less trading liquidity, capital market access,
and experience than large businesses, and there is less information available about them. Because of
their size, large-cap corporations are regarded to be safer, but they may not offer the same growth
potential as small-cap and mid-cap equities. According to financial advisors, small-cap, mid-cap, and
large-cap equities should all be represented in an investment portfolio, especially for those with
long-term investing goals.

Two factors must be considered while picking sectors for portfolio management:

• Invest in stocks that are unrelated to each other, such as IT vs. FMCG.

• Look for equities that have a negative correlation, such as IT vs Infrastructure.

Key Financial ratios

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 Company Market Cap ROE P/E Industry P/B ROCE
(in Cr)
(in %) Ratio P/E Ratio (in %)

Ambuja 62359 10.1 22.63 20.28 2.74 18.3

Cements
Asian Paints 250682 25.67 91.18 34.48 24.75 33.8
Bharti Airtel 296855 -47.3 NA 17.91 3.82 5.45
Dabur India 95777 23.62 60.1 40.02 14.5 27.9
Dmart 188266 15.61 197.61 37.35 16.99 20.4
HDFC Bank 812107 16.49 25.56 14.48 3.87 6.76
HUL 565862 83.95 75.91 37.6 63.34 39.2
INFY 575808 27.29 29.29 29.76 7.42 35.2
ITC 251470 22.96 18.94 37.6 3.85 32.6
L&T 190830 13.78 16.62 7.51 2.86 12.6
Maruti Suzuki 198335 8.61 45.19 21.94 3.78 10.6
Ltd
Pidilite 93917 25.95 95.61 34.48 21.08 34.6
Reliance 1283135 9.37 29.13 17.04 2.69 10.7
Industries Ltd
SBI 320751 9.45 13.83 14.48 1.28 4.99
TCS 1152347 38.03 35.91 29.76 13.52 48.9
Table 2 list of companies with key financial ratios considered for the study

The price-to-earnings ratio of each firm is calculated separately, and an average is calculated as a
standard. Overvalued companies have a PE that is higher than the industry P/E, and they are further
evaluated using the PEG for growth option. Undervalued stocks have a PE lower than the industry
P/E and are considered for Value selection if their EPS has improved over the previous year. Only a
few stocks (Infosys, ITC and State Bank of India) are cheap in the above table of firms evaluated for
the study, while others are overvalued. When a portfolio has the best mix of inexpensive and
overvalued companies, it is said to be optimum. The best mix of undervalued and overvalued stocks
reduces portfolio risk while also neutralising the impact of any positive or negative extremes in the
stocks and sectors chosen. A well-diversified portfolio decreases the risk of a single investment while
also increasing the chances of profit or, at the very least, avoiding inherent loss.

Calculated Stock returns using CAPM Model

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 Company CAPM Average Variance Annualized Annualized Historical Beta
coefficient
Return Daily Variance SD
Volatility

Ambuja 16.07% 2.24% 0.05% 12.54% 35.42% 0.85

Cements
Asian Paints 16.27% 1.82% 0.03% 8.28% 28.78% 0.5
Bharti Airtel 27.40% 2.36% 0.06% 13.92% 37.31% 0.76
Dabur India 17.69% 2.11% 0.04% 11.13% 33.36% 0.61
Dmart 43.42% 2.06% 0.04% 10.61% 32.57% 1.11
HDFC 28.32% 2.04% 0.04% 10.40% 32.26% 0.81
HUL 12.73% 1.82% 0.03% 8.28% 28.78% 0.54
INFY 45.22% 2.41% 0.06% 14.52% 38.11% 0.78
ITC 14.70% 2.03% 0.04% 10.30% 32.10% 0.66
L &T 30.76% 2.30% 0.05% 13.23% 36.37% 1.16
Maruti Suzuki 33.24% 2.11% 0.04% 11.13% 33.36% 0.96
Pidilite 26.78% 2.18% 0.05% 11.88% 34.47% 0.74
RIL 26.92% 2.25% 0.05% 12.66% 35.58% 1.05
SBI 23.16% 2.40% 0.06% 14.40% 37.95% 1.22
TCS 17.72% 1.85% 0.03% 8.56% 29.25% 0.51
Table 3 Stock returns, Standard deviation, Variance, Beta coefficient
I used the stock's historical yearly total returns to get the CAPM return, which is the average of the
total yearly returns. The risk-free rate is estimated to be 4%. (Average fixed deposit interest rate
among many banks). The average of the stock's historical beta is also used to compute the beta
coefficient.

I used the average annual daily volatility of the stock from the Centre for Monitoring Indian Economy
(CMIE) database to calculate annualised variance and annualised standard deviation. The average
number of trade days in a year is 250. I estimated annualised variance and annualised standard
variance using the average annual daily volatility and the number of trading days in a year. All
historical data for a stock in the CMIE database is based on stock performance on the National Stock
Exchange (NSE). The historical data of a stock may differ between the Bombay Stock Exchange (BSE)
and the National Stock Exchange (NSE).

Portfolio – asset allocation, return, standard deviation and Sharpe ratio

Company P1 P2 P3 P4 P5 P6 P7 P8 P9 P10
Ambuja 4.00% 5.00% 3.00% 2.00% 1.00% 0.00% 2.00% 2.00% 0.00% 2.00%
Cements

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Asian Paints 4.00% 5.00% 3.00% 2.00% 1.00% 2.52% 2.00% 2.00% 5.04% 2.00%
Bharti Airtel 4.00% 5.00% 3.00% 2.00% 1.00% 0.00% 2.00% 2.00% 0.00% 2.00%
Dabur India 4.00% 5.00% 3.00% 2.00% 1.00% 0.00% 2.00% 2.00% 0.00% 2.00%
Dmart 41.04% 30.00% 43.41% 45.91% 47.32% 15.00% 10.00% 15.00% 12.00% 40.00%
HDFC 4.00% 5.00% 3.00% 2.00% 1.00% 1.57% 4.46% 2.00% 1.10% 2.00%
HUL 4.00% 5.00% 3.00% 2.00% 1.00% 15.00% 10.00% 15.00% 12.00% 2.00%
INFY 4.00% 5.00% 3.00% 2.34% 3.02% 5.43% 7.44% 5.99% 7.12% 3.36%
ITC 4.00% 5.00% 3.00% 2.00% 3.36% 12.40% 8.78% 8.27% 11.41% 3.42%
L &T 4.00% 5.00% 3.00% 2.00% 1.00% 0.00% 2.00% 2.00% 0.00% 2.00%
Maruti Suzuki 4.00% 5.00% 3.00% 2.00% 1.00% 3.38% 9.72% 2.00% 10.09% 2.00%

Pidilite 4.00% 5.00% 3.00% 2.00% 1.00% 1.64% 9.61% 2.00% 5.25% 2.00%
RIL 4.00% 5.00% 3.00% 2.00% 1.00% 13.06% 10.00% 9.74% 12.00% 2.00%
SBI 6.96% 5.00% 17.59% 27.75% 35.31% 15.00% 10.00% 15.00% 12.00% 31.22%
TCS 4.00% 5.00% 3.00% 2.00% 1.00% 15.00% 10.00% 15.00% 12.00% 2.00%
Expected 31.98% 29.87% 32.34% 32.79% 33.12% 24.77% 26.28% 25.03% 25.60% 31.60%
Return
Standard 25.39% 27.22% 22.74% 20.31% 17.81% 23.47% 30.00% 24.48% 26.83% 19.90%
deviation

Sharpe Ratio 1.10 0.95 1.25 1.42 1.64 0.88 0.74 0.86 0.81 1.39

Table 4 Portfolio Return, Standard deviation and Sharpe ratio

Sharpe Ratio Benchmarks

• Less than 1 – Not a good portfolio

• 1 – 1.99 - Good Portfolio

• 2 – 2.99 – Very good portfolio

• More than 3 – Excellent Portfolio

In Table 4, the letter "P" stood for Portfolio. The risk-to-reward ratio of an investment is usually 2:1
or greater (popular belief). A portfolio's goal is to earn the maximum potential return while posing
the least amount of risk. No guarantee taking on additional risk will pay off in the long run. The
investment split shown in Table 4 was calculated with the Microsoft Excel Solver - Generalized

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Reduced Gradient Nonlinear function (GRG Nonlinear) and a mix of minimum and maximum asset
allocation restrictions.

Risk Vs Sharpe Ratio

100%
80%
60%
Sharpe Ratio
40%
Stdev
20%
0%
1 2 3 4 5 6 7 8 9 10 11

Figure 3: Risk Vs Sharpe ratio

Efficient Frontier

Portfolios 4 and 5 (refer to Table 4) have the higher portfolio return and a Sharpe ratio greater than
1.4. I should analyse those two portfolios and select one of them. Even if the returns in Portfolios are
the same, investors will prefer Portfolio 5 based on the mean-variance criterion.

However, when compared to Portfolio 4, the level of risk (standard deviation) in Portfolio 5 is lower.
We can observe from Figure 2 that Portfolio 5 is a better investment than Portfolio 4.

Points on the upward-sloping area of the portfolio frontier represent portfolios that are appealing to
investors, while points on the downward-sloping section represent inefficient portfolios.

Any investor should choose a portfolio that is on the upward-sloping portion of the portfolio frontier,
also known as the efficient frontier or lowest variance frontier, based on the meanvariance criterion.

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Any portfolio on the efficient frontier is selected depending on the investor's risk preferences. It is
impossible to have a portfolio that is beyond the efficient frontier, whereas one that is below it is
inefficient.

The Capital Allocation Line (CAL) is a graph that depicts an asset's risk-reward profile and can be used
to calculate the best portfolio. The ideal portfolio consists of a risk-free asset and an optimal risky
asset portfolio. The optimal risky asset portfolio is identified where the CAL intersects the efficient
frontier. I received the largest returns per additional unit of risk with this portfolio since the slope of
CAL is the highest. Depending on their objectives, investors use both the efficient frontier and the
CAL to achieve distinct risk and return combinations.

Investment Portfolio Segmentation

Following the selection of an investment portfolio based on Markowitz portfolio theory, which
includes CAPM, Portfolio return, Portfolio risk/volatility, Sharpe ratio, and efficient frontier, an
amount of Rs.10 Lakhs will be invested in the stocks in the optimal portfolio. The table below will
assist us in obtaining a clear picture of investment allocation for each company in the selected
portfolio.

Figure 5: Sector-wise stocks

Company % Allocation Amount to be Share No.of

invested price shares

Ambuja 1.00% ₹ 10,000 332 30

Cements

Asian Paints 1.00% ₹ 10,000 2,919.65 3

Bharti Airtel 1.00% ₹ 10,000 532.6 19
Dabur India 1.00% ₹ 10,000 543.55 18
Dmart 47.32% ₹ 4,73,166 3,200.00 148
HDFC 1.00% ₹ 10,000 2,613.00 4
HUL 1% ₹ 10,000 2,344.20 4
INFOSYS 3.02% ₹ 30,171 1,385.15 22
ITC 3.36% ₹ 33,571 209.55 160
L &T 1.00% ₹ 10,000 1,536.15 7
Maruti Suzuki 1.00% ₹ 10,000 7,219.50 1
Pidilite 1.00% ₹ 10,000 2,079.90 5
RIL 1.00% ₹ 10,000 2,186.90 5
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SBI 35.31% ₹ 3,53,091 434.3 813
TCS 1.00% ₹ 10,000 3,138.50 3
 Automobile, 1 Tech, 2
Energy, 1

Financial, 2
FMCG, 3

Chemicals, 2
Retail, 1
Communication, 1 Construction, 2

Table 5 Split-up of Investment Portfolio

(Above Share price was recorded on 4/6/21)

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Trading and advisory calls
Based on the past trading history, daily charts, candlestick patterns, relative strength index and
volumes of shares traded, I virtually traded in the following stocks and gave advisory calls on the
following stocks.

Amaraja batteries ICICI

Ashok Leyland Indian oil corporation
Bajaj finance IRCTC
Barbeque nation Marico
BPCL Mind tree
Britannia Pfizer
Dabur Pidilite
Deepak nitrate Sun pharma
Dixon Tata chemicals
Dr Reddy Tata consumer
HAL Tata Elxsi
HCL tech Tata steel
HDFC life Tech Mahindra
Hero motor corporation Vedanta limited
Hindustan zinc Wipro

Summary on trading
• Trade win rate- 76%

• Return on investment- 24.52%

• Average risk: reward ratio- 1:2.64 (the risk to reward ratio of an investment, according to
popular perception, should be 1:2 or greater)

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 Conclusion

A portfolio is a collection of various securities and assets that we employ to achieve our
primary goal of maximising yield while trying to avoid risk. The created portfolio is based on
current and historical data, and it is reviewed using a top-down approach, which means that
the future market price is anticipated based on the company's history and ongoing
performance, and it may or may not be precise. Fundamental analysis is advantageous when
making a long-term investment, but technical analysis is good when making a shortterm
investment. Elections, budgets, government policies, natural disasters, and other external
events have a big impact on stock markets

Fundamentals analysis will play a larger role in determining which industry and company to
invest in if you are intending to invest for the long term. Technical analysis is very important
when deciding where to enter and exit your assets. Speculators employ technical charts
since they are primarily interested in the short term.

In conclusion, neither fundamental nor technical analysis is superior to the other. Both have
their benefits and should be used as needed. Finally, one can obtain a complete
understanding of the fundamentals of basic and technical analysis, as well as the elements
to consider before investing in the stock market.

The market is 80 per cent psychological and 20% logical, according to technical analysis. The
stock market, according to fundamental research, is 20% psychological and 80% rational.
Although psychological and logical objections might be made, the current price stability is
undeniable.

When the analysis is done correctly, the risk of losing money on the stock is reduced. The
firms' previous data is also important in deciding which companies to invest in for the long
term. Short-term investment, on the other hand, is constrained by the price and number of
shares traded; therefore, technical analysis is not required. After all, of this research, an
investor may lose money since, in the end; stock buying and selling determine market
behaviour, whether bullish or bearish.

References:
• Investopedia - https://www.investopedia.com/

• Money control - https://www.moneycontrol.com/

• Zerodha- https://zerodha.com/varsity/

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• Centre for Monitoring Indian economy- https://www.cmie.com/

• National stock exchange- https://www.nseindia.com/

• Screener- https://www.screener.in/

• Upstox- https://pro.upstox.com/

• Bombay stock exchange- https://www.bseindia.com/

• Economic times- https://economictimes.indiatimes.com/

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