Team Details || GROUP 2

Avishek Saha 113

OPTIMAL PORTFOLIO CREATION Meet Bhalavat 115

USING SINGLE INDEX MODEL Piyush Rai

Megha Aggarwal
135
229
Smarak Bhattamishra 246

1
 WHAT IS PORTFOLIO
MANAGEMENT?
PORTFOLIO
refers to a collection of tools related to
investment such as stocks, shares, mutual
funds, bonds, cash and the likes of the same
MANAGEMENT
. The art of selecting the right investment
policy for individuals so that their return is
maximized while their risk is minimum

OBJECTIVES
Consistent Investment
Capital growth Liquidity Tax benefits
returns security

Presents the best investment plan for

investor considering factors like minimizes the risk of the investor while
Advantages
income, budget, ability to take risks maximizing his returns
etc.
Non-
Discretionary
Active Portfolio Passive Portfolio discretionary
Types Portfolio
Management Management Portfolio
Management
Management
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 WHAT IS SHARPE INDEX?
Measure of the portfolios performance as it helps investors figure out how much return
will they get in exchange for the level of risk they are taking by investing in the
securities
Better the fund earns for every unit risk that the investor has
Higher Sharpe Ratio
taken on by investing in the securities

Sharpe Ratio works considering both systematic and

unsystematic risks in the denominator whereas
Treynor Ratio only considers systematic risk of
portfolio

Sharpe Ratio is expected to generally fail when

Sharpe ratio= (Mean portfolio
return Risk free rate) /Standard
deviation of portfolio return
applied to portfolios that do not have a normal
distribution of expected returns. This ratio does not
also account for options and warrants which have
non-linear risks and can not be used in these cases
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 WHY DO WE ONLY USE SHARPE
INDEX?
Sharpe Ratio is used in
comparing the change in a
portfolios overall risk
return characteristics when a
123
new class of assets is added
to it. To consider an
example, if a portfolio
currently has a Sharpe ratio
of 0.7 and addition of a new
class of investments such as
Hedge Funds increases the
ratio to 0.8, that means the
risk return characteristics
of the combined portfolio
has increased even though
hedge funds alone are
extremely risky
For example, assume two
funds: Fund 1 (SPY) and Fund
2 (XLV). Fund 1 averages a
12% return and fund 2
averages a 10% return. Plus,
The greater a portfolio's assume that the standard
Sharpe ratio, the better deviations of funds 1 and 2
its risk-adjusted are 8% and 5%, respectively.
performance has been. A Lastly, well assume a risk-
negative Sharpe ratio free rate of 5%. At first
indicates that a risk-less glance, the return of fund 1
asset would perform better is larger, so it seems to be
than the security being the better performer.
analyzed However, the Sharpe ratio
for fund 1 is 0.875, while the
ratio for fund 2 is 1. So fund
2 is able to generate a
higher return on a risk-
adjusted basis
4
 COMPANIES USED IN ANALYSIS
Covered 25 companies from Nifty 50 spanning over sectors such as Banking, IT Services,
Automobiles, Telecom, Power, Natural Resources, FMCG

Indian multinational banking and Indian MNC, public sector banking

ICICI Bank SBI
financial services company and financial services company

Indian MNC in business consulting, Indian Information Technology

Infosys Wipro
IT and outsourcing services Services corporation

IndusInd Mumbai based Indian new

Idea Indian mobile network operator
Bank generation bank

Indian MNC IT service, consulting Indian PSU Public Sector

TCS NTPC
and business solutions company Undertaking

Kotak
Indian conglomerate FMCG,
Mahindra Indian private sector bank ITC
Hotels, Paperboards, Agri and IT
Bank

Tech Indian MNC IT service, consulting Indian multinational oil and gas
ONGC
Mahindra and business solutions company company
5
 COMPANIES USED IN ANALYSIS
Tata Motors An Indian multinational automotive
L&T Indian multi-national conglomerate
DVR manufacturing company

Indian state-owned electric utilities Indian multinational steel-making

PowerGrid Tata Steel
company company

Transnational pharma company 7th Indian multinational automotive

Lupin Tata Motors
largest by market capitalization manufacturing company

Owns businesses engaged in India's biggest cement company

Ultratech
Reliance energy, petrochemicals, textiles, and largest exporter of cement
Cement
retail etc. clinker
ZEE
Indian multinational automobile Indian media and entertainment
Mahindra Entertainme
manufacturing corporation company; Essel Group subsidiary
nt

Indian pharma MNC manufacturing Core business is to generate,

Sun Pharma Tata Power
and selling APIs and formulations transmit and distribute electricity

Maruti Automobile manufacturer in India

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 STEPS USED IN ANALYSIS
The portfolio of stocks will have different weightage for different stocks and the weightage of
capital invested in each selected stock can be calculated as per the model given by Elton, Gruber,
Brown and Goetzmann
Average daily
CAPM model is
return is
used to calculate

1 2 3 4 5 6
calculated by
the raw beta for Now the weights
Daily return of all using the Average annual
each stock which of accepted
stocks as well as geometric mean return is then The stocks with
shows us the stocks are
the market is of the historical calculated from coming out to be
dependence of calculated as per
calculated from daily returns. The average daily ve are removed.
expected return of the formula given
the Excel sheets standard returns
an asset on above
deviation of the
movement of the
daily returns is
market
calculated

Stocks with higher

A cut off rate C* is Preceding this ith

7 8 9 101112
treynors ratio
Now the weights calculated and the stock will be This Ci will be our
means that the Out of these Cis,
of accepted stocks with the greater than this C* and all the
stock is more there will be only
stocks are higher Treynors Ci and treynors stocks preceding
under valued and one Ci for which
calculated as per ratio than this C* ratio of all the it will be selected
hence are ranked treynors ratio of
the formula given are selected for succeeding this in our optimum
on its value all the stock
above portfolio ith stock will be portfolio.
(highest to
construction. less than this Ci
lowest).

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 RESULTS AND FINAL PORTFOLIO
Comparison for returns
Assumption Nifty50 data has been has been done with
Risk Free rate: 6.84%
s considered for 5 years
Nifty50
Market Variance for the time period comes out to be 0.9564732

CONDITIONS FOR PORTFOLIO INCLUSION

Based on this analysis, we have

When shorting is allowed

When shorting is allowed

Based on this analysis, we have calculated (E(R) Rf )* i /
calculated (E(R) Rf )* i / Unsystematic risk for all the stocks
Unsystematic risk for all the stocks which is used in conjunction with
which is used in conjunction with another factor to find Ci
another factor to find Ci
If (Expected Ri - Rf)/ Bi > Ci, then the
If (Expected Ri - Rf)/ Bi > Ci, then the stock is chosen as a part of the portfolio
stock is chosen as a part of the portfolio If (Expected Ri - Rf)/ Bi < Ci, then the
else it is not stock is shorted to generate returns for
the portfolio

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 RESULTS AND FINAL PORTFOLIO
When SHORTING is not allowed
Rank Security Wi

4 MARUTI 33.59%

2 LUPIN 19.60%

3 ZEEL 19.53%

5 INDUSINDBK 14.98%

1 TECHM 5.37%

6 SUNPHARMA 5.14%

8 TCS 1.26%

7 KOTAKBANK 0.52%
Lupin and ZEEL
which belong to IndusInd Bank, Tech Mahindra
Maruti which
Pharma and representing the and Sun Pharma
belongs to the For our analysis,
Entertainment Financial which represent TCS and Kotak
Automobile the value of C*
sector Services sector, IT sector and Bank complete
sector constitutes comes out to be
respectively constitutes Pharma sector the portfolio
33.6 % of our 16.49552368
contribute around around 15% of our constitute around
portfolio
20% each to our portfolio 5% of our portfolio
portfolio
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 RESULTS AND FINAL PORTFOLIO
When SHORTING is allowed
Rank Security Wi Rank Security (SHORTED) Wi
1 TECHM 1.95% 13 SBIN 0.00%

2 LUPIN 7.54% 14 MAHINDRA 0.26%

3 ZEEL 8.07% 15 ICICIBANK 0.01%

16 TATAMTRDVR 0.38%
4 MARUTI 13.94%
17 TATAMOTORS 1.56%
5 INDUSINDBK 11.08%
18 LT 3.64%
6 SUNPHARMA 4.06%
19 RELIANCE 6.97%
7 KOTAKBANK 1.06%
20 ONGC 1.81%
8 TCS 3.40%
21 TATASTEEL 5.00%
9 ULTRACEMCO 4.98% 22 IDEA 2.08%
10 ITC 1.16% 23 NTPC 6.40%
11 POWERGRID 2.63% 24 WIPRO 3.91%
12 INFY 0.11% 25 TATAPOWER 7.97%

Maruti contributes IndusInd Bank Tata Power

ZEEL contributes Lupin contributes Similarly, Reliance
the max by contributes contributes 8% of
around 8% of our around 7.5 % to contributes nearly
making up nearly around 11% to our our portfolio and
portfolio our portfolio 7% of our portfolio
14% portfolio must be shorted
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THANK YOU
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