Project Report

A Study on Portfolio Hedging using Option with special reference to Sharekhan
Ltd, Kochi
Submitted in partial fulfillment of the requirements of the degree of

MASTER OF BUSINESS ADMINISTERATION
AMRITA UNIVERSITY
BY
SUVITHA K VIKRAM
AM.BU.P2MBA16056
Under the guidance of

Snigdha Sasidharan
AMRITA SCHOOL OF BUSINESS

AMRITAPURI CAMPUS
KOLLAM
2017
1
DECLARATION
I hereby, declare that the project report titled A study on portfolio hedging using option with
special reference to Sharekhan Ltd, Kochi, is my original work and it was under the supervision of
Snigdha Sasidharan, Amrita School of Business, Amritapuri.
I also declare that this report has not been submitted by me fully or partially for the award of
any degree,diploma,or any other similar title or recognition before.
Place: Suvitha K Vikram

Date: AM.BU.P2MBA16056
2
ACKNOWLEDGEMENT
I am very thankful to the Almighty God who led me in the right way to complete my project
work successfully. A deal of time and much effort have gone into developing and researching this
project. Many people have helped directly and indirectly for the completion of this project.
I would like to take this opportunity to thank the Amrita University for having project as part
of MBA curriculum.
I would like to express my sincere gratitude to Snigdha Sasidharan, Amrita School of Business,
my project guide for providing guidance whenever needed.
I express my sincere thanks to Mr. Ajith Rao, Branch Manager, Sharekhan Ltd. Kochi Branch
and Mr. Boban Mathews, Relationship Manager, Sharekhan Ltd. Kochi Branch and my guide ,for
giving me an opportunity to do the project in such an esteemed organization an providing me with all
the help and encouragement. I would also like to sincerely thank all members in Sharekhan Ltd. Kochi
Branch and the clients for their valuable time and useful insights on my research topic.
I am grateful to my parents their never ending support and faith in me. Without their presence,
carrying out this research would have been rather difficult. In the end, I am thankful to my friends for
their constant source of encouragement and being there for me always.
3
CONTENTS
CHAPTERS TITLE PAGE NO.

1 INTRODUCTION 6
2 LITERATURE REVIEW 8
3 INDUSTRY AND COMPANY 10
PROFILE
4 DATA ANALYSIS AND 13
INTERPRETATION
5 FINDINGS SUGGESTION AND 26
CONCLUSION
6 BIBLIOGRAPHY 29
4
EXECUTIVE SUMMARY
Sharekhan by BNP PARIBAS is one of the leading brokerage firms in the country with more than eight
decades of trust and credibility in the stock market. Asset management, distribution initiatives, core banking and
training initiatives are the key areas of products and services provided by Sharekhan. It has one of the largest
network of share shops in the country. The service delivery model of Sharekhan includes share shops, online
trading (Trade tiger for active traders, web based classic interface for investors, web based applet fast trade for
investors). This study intends to examine the effectiveness of index options as a hedging instrument in Portfolio
Risk Management and understanding the perception of active clients in Sharekhan Ltd. towards option trading.
The first part of the study is purely based on the secondary data collected from websites of selected
companies, moneycontrol.com and trade tiger. The second part of the study is based on the survey done for
understanding the active clients perception towards option trading.
The 10 securities selected on the basis of market performance are analyzed by finding out their adjusted
rate of return, beta value, alpha value, systematic risk, unsystematic risk, total risk and excess return to beta ratio.
An optimal portfolio is constructed by using Sharpes optimization model. Cut off point is calculated from the
market variance, systematic risk and unsystematic risk of the 10 securities. It can be concluded that out of 10
companies 3 companies were selected for investment purpose on the basis of cut-off point which is 25.93.
Option trading is looked upon as a strategy for risk free profits for investors. Strategies like buying call
and selling put is most widely preferred option strategy by the active clients, majority of them are able to hedge
their money and thus they feel satisfied with the strategy. Apart from the usual practice of trading construction
of portfolio using Sharpe optimization model is used here. Different tools like Sharpe ratio, Treynor ratio and
Jensen measure is used for portfolio evaluation. Performance of the optimal portfolio was less compared to the 3
other portfolios. For portfolio hedging, the initial portfolio value is assumed to be 2500000. Beta values of the
securities are assumed to be constant for the hedge period selected. A dynamic hedging strategy is used for this
purpose. A long position in portfolio is taken on 2ndJanuary 2017 by investing 2500000 in the portfolio. A short
position in index option is simultaneously taken by calculating the appropriate number of index options contracts.
The portfolio is then continuously hedged from the period 2nd January 2016 to 31st March 2017 by constantly
monitoring the movement of the index. A questionnaire is provided to 52 active clients for understanding
perception towards option trading.
Constructed 4 portfolios with the 3 selected securities (optimal portfolio, equal weight, and random
numbers, P/E ratio). Performance of equal weight portfolio was seen superior to that of other portfolio. Hedging
nd
efficiency seemed less because the market had no much fluctuation during the 3 months starting from 2 Jan
st
2017 to 31 March 2017.
5
CHAPTER - 1
INTRODUCTION
The concept of risk and return are central to financial investment. They form the major tension faced by
investors. In exchange for bearing risk, investors require a higher return. In financial parlance, this is called the
risk/return tradeoff and investors choose a risk/return combination based on their attitude towards risk.
Determining the right tradeoff between risk and return is a complex process. In an uncertain investment
environment, as we have now, determining the right trade-off between risk and return involves application of
scientific portfolio management techniques like portfolio optimization models and employing hedging techniques
using derivative instruments.
Investment risk is of two types: systematic risk and unsystematic risk. Unsystematic risk of a portfolio
can be reduced by diversification. The investor, by constructing an optimal portfolio using portfolio optimization
models, can reduce the unsystematic risk considerably. Systematic risk can be removed by hedging with a
derivative instruments like options and futures. Hedging is a mechanism to counter balance or minimize risk. In
hedging an investor takes position in different types of derivative contracts with the aim to either eliminate or
minimize the risk. Hedging is like an insurance against price fluctuation.
PROBLEM STATEMENT
The project is an outcome of a study undertaken on options as an attempt to study the effectiveness of
index options in controlling the risk of a portfolio. The project entitled A Study on Portfolio Hedging Using
Option with Special Reference to Sharekhan Ltd attempts to study the effectiveness of optimization technique
and dynamic hedging with index options in improving portfolio performance. The study first examine the
effectiveness of Sharpes optimization model in designing and constructing an optimal portfolio for improved
risk-return tradeoff. The optimality of the portfolio was then tested against three other portfolios constructed using
different criteria with performance measures like Sharpe ratio, Treynor ratio and Jensen ratio. Once the optimal
portfolio is structured ,that optimal portfolio is hedged with index options by using a dynamic hedging strategy
using index options in order to study the effectiveness of hedging portfolio risk with index options.
SCOPE AND SIGNIFICANCE OF THE STUDY
Capital market is inherently volatile. The recent downturn in the global economy has added to the
volatility of the capital market. Investors major concern in the present scenario is how to achieve an efficient
trade-off between risk and return and how to protect their portfolio from the volatility of the market. The study
A Study on Portfolio Hedging Using Option with Special Reference to Sharekhan Ltd is considered to be
significant in the present volatile investment scenario and it focuses on how an efficient trade-off between risk
and return can be achieved by employing a portfolio optimization technique and how effectively an investor can
use options in protecting the value of her portfolio by undertaking a dynamic hedging strategy. Portfolio
optimization and hedging are complex techniques; the scope of the study is limited only to the portfolio that is
constructed using Sharpe optimization model and hedging with index options .The scope of the study is also
limited to Indian stock market and Indian derivative market.
OBJECTIVES
To examine the effectiveness of Index Options as a hedging instrument in Portfolio.

Understanding the perception of active clients in Sharekhan Ltd towards option trading
6
RESEARCH METHODOLOGY
The research design is the conceptual structure within which research will be conducted. The first part of
the study is purely based on secondary data collected from Websites, Annual Reports, Journals, and Books.
Different statistical tools like Sharpe ratio and Treynor ratios are used.
Second part of the study purely based upon primary data (questionnaire) for understanding active clients
perception towards option trading in Sharekhan Ltd.
DESIGN OF THE STUDY
(a) Determine return and risk of each security.
(b) Determine Beta value, Alpha value and Unsystematic risk (Residual variance) of each security.
(c) Constructed 4 portfolios
By using Sharpes optimization model and assigning optimal weight to each security in the
portfolio.
By giving equal weight to each security in the portfolio.
By giving weight to the security on the basis of random numbers.
By giving weight to each security based on price earnings ratio of each security.
(d) Calculated the return and risk of each portfolio
(e) Select best portfolio using Sharpe ratio, Treynor ratio and Jensen measure
(f) Hedge the portfolio by adopting a dynamic hedging strategy using hedging options
PERIOD OF STUDY
The study was carried for a period of 10th April 2017 to 10th June 2017
LIMITATION
(a)The duration of the study was limited to a period if two months so that an extensive and deep study could not
be possible
(b)Data is only considered for 1 year (1 st April 2016 to 31 st March 2017)
(c) Out of the 10 stock were taken, only three were used to construct the portfolio
(d) A well-diversified portfolio cannot be constructed due to the time constraint
(e) The Beta value taken for risk assessment is static beta.
(f) Only dynamic hedging with index options is considered
(g) Controlling risk and avoiding losses completely cannot be fully guaranteed.
7
CHAPTER 2
LITERATURE REVIEW
RISK MANAGEMENT
Diversification always reduces non-systematic risk within a portfolio to a certain extent. Efficient
portfolio is one that yields maximum expected returns, given a minimum level of risk given (ESTIMATION
RISK MODELING IN OPTIMAL PORTFOLIO SELECTION: AN EMPIRICAL STUDY FROM EMERGING
MARKETS by Sarayut Nathaphan and Pornchai Chunhachinda ). Optimum portfolio selection within the capital
market is primarily dependent on the best risk-return trade-off among the industry sectors. Suggestions from
literature about the market volatility can be attributed to substantial increase in sector specific and sub-sector
specific risks. Portfolio is the combination of securities such as stocks, bonds and money market instruments.
The process of blending together the broad asset classes so as to obtain optimum return with minimum risk is
called portfolio construction. Diversification of investments helps to spread risk over many assets
(CONSTRUCTION OF OPTIMAL PORTFOLIO USING SHARPE INDEX MODEL & CAMP FOR BSE TOP
15 SECURITIES by Chintan A. Shah).
PORTFOLIO OPTIMIZATION
Portfolio theory examines the relationship that exist between risk and return when investing in equities.
Obviously, investors are assumed to be risk averse, which means they wish to bear as little risk as possible for a
given level of expected return, and the risk reducing benefits make it wiser to invest in a diversified portfolio than
in a single asset. Portfolio optimization is a hot topic nowadays, this new type of investment research and analysis
begin from the concept of Markowitz diversification theory. Markowitz Model had serious practical limitations
due to the accuracy involved in the expected returns, standard deviation, variance, covariance of each security to
every other security in the portfolio. Sharpe Model has simplified the process by relating the return in a security
to a single market index. In the present study 10 companies listed at National Stock Exchange (NSE) was selected
taking Jan 2016 to March 2017 as period of study. The monthly opening and closing prices of the selected
securities were used for the above mentioned period. Application of Single Index Model for the empirical analysis
identified a portfolio of three companies based on the cut-off point of 25.93(THE SINGLE INDEX MODEL &
THE CONSTRUCTION OF OPTIMAL PORTFOLIO: A CASE OF BANKS LISTED ON NSE INDIA by
Saurabh Singh and Jayant Gautam).
SHARPES OPTIMIZATION MODEL
Excess return is the difference between the expected on the stock and the risk-free rate of interest such
as rate of return on the government securities. In the present study 10 companies listed at National Stock Exchange
(NSE) was selected taking 2nd Jan 2017 to 31st March 2017 as period of study. The monthly closing prices of the
selected securities were used for the above mentioned period. It can be concluded that out of 10 companies only
3 companies were selected for investment purpose on the basis of Cut-off point which is 25.93. Application of
Single Index Model for the empirical analysis identified a portfolio of three companies based on the cut-off point
25.93 (THE SINGLE INDEX MODEL AND THE CONSTRUCTION OF OPTIMAL PORTFOLIO WITH
CNXPHARMA SCRIP by J. Francis Mary and G. Rathika).
8
OPTION AND HEDGING
Option is a financial instrument whose value depend upon the value of the underlying assets. Option itself
has no value without underlying assets. Option gives the right to the buyer either to sell or to buy the specified
underlying assets for a particular price(Exercise / Strike price) on or before a particular date(expiration date).If the
right is to buy, it is known as call option and if the right is to sell, it is called as put option . The buyer of the
option has the right but no obligation to buy or to sell. The option buyer has to exercise the option or before the
expiration date, otherwise, the option expires automatically at the end of the expiration date. Hence, options are
also known as contingent claims. Such an instrument is extensively used in share markets, money markets and
commodity market to hedge the investment risks and act as financial leverage investments. The sensitivity of
managers stock and stock option portfolios to stock price increases, firms tend to hedge more. However, as the
sensitivity of managers stock option portfolios to stock return volatility increases, firm tend to hedge less (THE
VOLATLITY AND PRICE SENSITIVENESS OF MANAGERIAL STOCK OPTION PORTFOLIOS AND
CORPORATE HEDGING by John D Knopf, Jouhan Nam, and John H. Thornton Jr.). Option is a kind of
derivative instruments along with forwards, futures and swaps, which are used for managing risk of the investors.
Though derivatives are theoretically risk management tools and leverage investment tools, most use them as
speculative tools.
9
CHAPTER-4
INDUSTRY PROFILE AND COMPANY PROFILE
The Indian capital market is the market for the long-term capital. It refers to all the facilities and
institutional arrangements for borrowing and lending short-term funds, medium funds and long-term funds.
The requirements of the long-term fund arise from the private and public manufacturing countries, trading and
transport units etc. The Central and State Governments raise substantial funds from the capital market. The
major fund coming to the capital market is from individual investors, corporate savers, commercial banks,
insurance companies, public provident funds and other agencies. The Indian capital market comprises mainly
industrial securities market, financial intermediaries, development financial institutions like
IFCI,ICICI,IDBI,SIDBI etc. and investment institutions like UTI, LIC, GIC etc. The capital market is a major
segment of the financial system of a country. It operates as a switching mechanism for transfer of funds to
meet the long-term needs of the private and public enterprises. It is the market that deals in financial assets,
which have a long or indefinite maturity. Capital market generally deals with long term securities. The term
capital market is used to denote all operations in the new issues and stock market
. FUNCTIONS OF CAPITAL MARKET
To speed up financial disintermediation

To mobilize savings, which are scattered
To provide different avenues to investors to park their savings depending upon their risk
To provide liquidity to different instruments
Capital market developments can be taken as a barometer to show the strength or otherwise of the
company.
Capital market can be divided into 3 categories:
Industrial securities market

Government securities market
Long term loans market
INDUSTRIAL SECURITIES MARKET
Industrial securities market deals in industrial securities like equity shares, preference shares and debentures
or bonds. Industrial organizations mobilize their capital requirements through these securities.
Industrial markets are classified as follows:
Primary market and Secondary market
The primary market enables the government as well corporate in raising the capital that is required to
meet their requirements of capital expenditure and/or discharge of their obligations such as exit opportunities
for venture capitalist/PE firms. The primary market is governed by the provisions of the Companies Act, 1956,
which deals with issues, listing, and allotment of securities. Additionally, SEBI prescribes the eligibility and
disclosure norms through the ICDR Regulations 2009 that the issuer and the promoter need to comply with
for assessing the market.
10
FEATURES OF PRIMARY MARKET
It is a market for long term corporate securities that is equity and debt
It is a market where issuers sell shares directly to the investing public
Primary market is for channelizing the savings of the public for productive purposes
SECONDARY MARKET
Secondary market deals with the buying and selling of securities already issued by the joint stock
companies. Securities, which are traded in the secondary stock market, are required to list their securities
in a recognized stock exchange. The stock exchanges in India are regulated under the Securities Contract
(Regulation) Act, 1956 and SEBI. SEBI formulates the rules, the regulations and the procedures to be
followed for trading in the secondary markets. . The stock exchanges in India are regulated under the
Securities Contract (Regulation) Act, 1956 and SEBI. SEBI formulates the rules, the regulations and the
procedures to be followed for trading in the secondary markets. Stock exchange is a medium of transfer
of resources for those securities, which have already been issued. It also plays an important role in the
transfer of securities with the companies whose shares being deal with, as the process the registration of
shares must be done when they are transferred. Secondary markets do not create financial claims. In this
market, funds do not flow between sellers of and buyers of securities. The securities market has essentially
three categories of participants- the issuer of the securities, the investors in the securities, and the
intermediaries. The issuers are the borrowers or deficit savers, who issue securities to raise funds. The
investors, who are surplus savers, deploy their savings by subscribing to these securities. The
intermediaries are the agents who match the needs of the users and the suppliers of funds for a commission.
These intermediaries function to help both the issuers and the investors to achieve their respective goals.
There are a large variety and number of intermediaries providing various services in the Indian securities
market. This process of mobilizing the resources is carried out under the supervision and overview of the
regulators. The regulators develop fair market practices and regulate the conduct of the issuers of securities
and the intermediaries. The regulator ensures a high service standard from the intermediaries, as well as
the supply of quality securities and non- manipulated demand for them in the market
COMPANY PROFILE
ShareKhan is one of the leading brokerage firms in the country. It is the retail brokerage arm of the
Mumbai-based SSKI (Shripal, Shewantilal, Kanthilal, Iswarnath Limited). ShareKhan Ltd is a brokerage firm
which is established on 8th February 2000. ShareKhan is Indias third largest stock broker (after ICICI Direct and
HDFC securities). ShareKhan provides brokerage service through its online trading web site sharekhan.com and
1800 offices which include branches and franchises in over 550 cities across India. ShareKhan has seen incredible
growth over last 10+ years through its very successful online trading platform and the chain of franchises located
in almost every part of India. ShareKhan also has international presents in the UAE and Oman.
ShareKhan offers its services to all kinds of customers including individual investors and traders,
corporate, institutional and NRIs. As of December 2014, ShareKhan has over 13 lack customers. ShareKhan
offers trade execution facilities for equities, cash and derivative segments on BSE and NSE, Commodities trading
facilities on MCX and NCDEX. Share/khan also offers depository service (Demat account) and option to invest
in mutual funds and IPOs.
11
Sharekhan.com is the finest portal for India stock market. The well designed web sites provides wide
range of investment options, share market news ,research reports, stock quotes ,fundamental and statistical
information across equity, IPOs and much more. Share khan also offers Sharekhan Trade Tiger one of the most
popular trading terminals, for retail investors. The trade tiger is quite similar to broker terminal and allows
frequent traders to place and execute their orders at a high speed. It also provide live data and other tools on the
same screen to help the users with their trades. Sharekhan Share Mobile platform offers trading facility through
mobile apps are available for popular iPhone, iPad, Blackberry, Android and other phones. Sharekhan offers
variety of accounts to suit customer requirement. These accounts include Sharekhan first step Account, Sharekhan
Classic Account, Sharekhan Trade Tiger Account and Portfolio Management Services (PMS) through Sharekhan
Platinum Circle Account.
SHAREKHAN BUSINESS
1. Brokering business.
2. White feathering house production.
Among the top three (3) branded retail services providers (Rs. 856 cr average daily volume.NO. 2 player
in online business. Large network of branded broking outlets in the country servicing around 5, 45, 000 Clients.
BENEFITS
Free Depository A/c
Secure Order by Voice Tool Dial-n-Trade.
Automated Portfolio to keep track of the value of your actual purchases.
24x7 Voice Tool access to your trading account.
Personalized Price and Account Alerts delivered instantly to your Cell Phone & E-mail address.
Special Personal Inbox for order and trade confirmations. On-line Customer Service via Web Chat.
Anytime Ordering.
NSDL Account
Instant Cash Tranferation.
Multiple Bank Option.
Enjoy Automated Portfolio.
Buy or sell even single share
12
CHAPTER-4
DATA ANALYSIS AND INTERPRETATION
RETURN, RISK AND RISK ADJUSTED RATE OF RETURN
Risk adjusted rate of return = (Ri - Rf)/
R (Return) =Average return of the individual securities in the portfolio
(Risk) = Beta value of the security
Rf(Risk free rate of return) = 6.91 %

ADJUSTED RATE OF RETURN
SECURITY Ri Rf (Ri Rf ) (Ri Rf )

YES BANK 57.72 6.91 50.81 1.41 36.03546099
KOTAK MAHINDRA BANK 23.16 6.91 16.25 0.74 21.95945946
CIPLA 12.96 6.91 6.05 0.52 11.63461538
SUN PHARMA -19.92 6.91 -26.83 0.73 -36.75342466
IDEA -11.04 6.91 -17.95 0.82 -21.8902439
BHARTI AIRTEL 3.84 6.91 -3.07 0.78 -3.935897436
ONGC 20.64 6.91 13.73 0.51 26.92156863
GAIL 35.88 6.91 28.97 0.75 38.62666667
BAJAJ AUTO 14.64 6.91 7.73 0.82 9.426829268
HERO MOTOCORP 4.2 6.91 -2.71 1 -2.71
Source: Computed by researcher using secondary data
Inference:
The risk adjusted rate of return is the return the investor can expect while considering the risk associated
with it. The above chart shows that Baja auto and Yes bank have the high return with risk adjusted rate of return
of 38.62 and 36.03 respectively. Also negative rate of return is there in the chart.
BETA VALUE OF SECURITIES
SECURITY
YES BANK 1.41
KOTAK MAHINDRA BANK 0.74
CIPLA 0.52
SUN PHARMA 0.73
IDEA 0.82
BHARTI AIRTEL 0.78
ONGC 0.51
GAIL 0.75
BAJAJ AUTO 0.82
HERO MOTOCORP 1
Inference:
The beta value indicates the measure of systematic risk of security. From the above table it can
be inferred that beta value is maximum for Yes bank indicating that it has maximum systematic risk
13
ALPHA VALUES OF SECURITIES
Inference:
Alpha is used to measure the performance on a risk adjusted basis. Here, the alpha value is maximum
for Yes bank and minimum for Sun pharma.
SECURITY Ri MARKET
RETURN
YES BANK 57.72 1.41 1.29 57.6
KOTAK MAHINDRA BANK 23.16 0.74 1.29 23.71
CIPLA 12.96 0.52 1.29 13.73
SUN PHARMA -19.92 0.73 1.29 -19.35
IDEA -11.04 0.82 1.29 -10.55
BHARTI AIRTEL 3.84 0.78 1.29 4.35
ONGC 20.64 0.51 1.29 21.44
GAIL 35.88 0.75 1.29 36.43
BAJAJ AUTO 14.64 0.82 1.29 15.11
HERO MOTOCORP 4.2 1 1.29 4.49
SYSTEMATIC RISK.
MARKET
SECURITY STANDARD MARKET
^2 DEVIATION VARIANCE SYSTEMATIC RISK
YES BANK 1.41 1.9881 2.75 7.5625 15.03500625
CIPLA 0.52 0.2704 2.75 7.5625 2.0449
SUN PHARMA 0.72 0.5184 2.75 7.5625 3.9204
IDEA 0.8 0.64 2.75 7.5625 4.84
BHARTI AIRTEL 0.78 0.6084 2.75 7.5625 4.601025
ONGC 0.49 0.2401 2.75 7.5625 1.81575625
GAIL 0.74 0.5476 2.75 7.5625 4.141225
BAJAJ AUTO 0.82 0.6724 2.75 7.5625 5.085025
HERO MOTOCORP 1 1 2.75 7.5625 7.5625
Inference:
The systematic risk or market risk is the one which cannot eliminate by portfolio construction. Highest
risk is for Yes bank and lowest is for ONGC.
RESIDUAL VARIANCE
Residual
SECURITY () ()2 systematic risk variance(Unsystematic risk)
YES BANK 7.94 63.0436 15.0350062 48.00859375
CIPLA 5 25 2.0449 22.9551
SUN PHARMA 5.44 29.5936 3.9204 25.6732
IDEA 10.35 107.1225 4.84 102.2825
BHARTI AIRTEL 6 36 4.601025 31.398975
ONGC 5.36 28.7296 1.81575625 26.91384375
GAIL 5.28 27.8784 4.141225 23.737175
BAJAJ AUTO 4.52 20.4304 5.085025 15.345375
HERO MOTOCORP 4.56 20.7936 7.5625 13.2311
14
Inference:
From the diagram, the highest unsystematic risk is for Idea and the security have the lowest unsystematic
risk is for Heromotocorp.
COMPOSITION OF TOTAL RISK OF SECURITIES
Total Risk = Systematic Risk + Unsystematic Risk

SECURITY Total risk
YES BANK 63.0436
KOTAK MAHINDRA BANK 24.6016
CIPLA 25
SUN PHARMA 29.5936
IDEA 107.1225
BHARTI AIRTEL 36
ONGC 28.7296
GAIL 27.8784
BAJAJ AUTO 20.4304
HERO MOTOCORP 20.7936
Inference:
Risk of a security is the variation of return of that security. Security having higher return will always
possess high risk. Here high risk is in Idea that is 102.
PORTFOLIO CONSTRUCTION
It refers to the allocation of funds among a variety of financial assets open for investment. The objective
of portfolio construction is to diversification of the risk.
SHARPES OPTIMIZATION MODEL
Steps in construction of portfolio are given below:
A) Calculate the excess return to beta ratio for each stock under consideration and rank them from the
highest to the lowest. B) The stocks are ranked on the basis of excess return to beta ratio, it represents the
desirability of any stock inclusion. C).After ranking the securities, the next step is to find out the cutoff
point with the use of following formula
C = 2m (Ri Rf )i/ 2e
1+2m + (i2/2ei)
2m = market variance, 2ei = systematic risk, Ri = expected return of the stock, Rf = risk free rate of return,
= Beta of the stock
D) Calculate the proportion to be invested in each security
15
EXCESS RETURN TO BETA RATIO
SECURITY (Ri) (Rf) (Ri - Rf) (Ri - Rf )/ Rank

GAIL 35.88 6.91 28.97 0.75 38.62666667 1
YES BANK 57.72 6.91 50.81 1.39 36.55395683 2
ONGC 20.64 6.91 13.73 0.51 26.92156863 3
KOTAK MAHINDRA BANK 23.16 6.91 16.25 0.76 21.38157895 4
CIPLA 12.96 6.91 6.05 0.52 11.63461538 5
BAJAJ AUTO 14.64 6.91 7.73 0.82 9.426829268 6
HEROMOTOCORP 4.2 6.91 -2.71 1 -2.71 7
BHARTI AIRTEL 3.84 6.91 -3.07 0.78 -3.935897436 8
IDEA -11.04 6.91 -17.95 0.82 -21.8902439 9
SUN PHARMA -19.92 6.91 -26.83 0.73 -36.75342466 10
STEPS TO CUT OFF RATE AND CALCULATION OF CUT OFF RATE

SECURITY (2ei) (R-Rf) (R-Rf)*/2ei (R-Rf)*/2ei (^2)/2ei
GAIL 4.141225 21.7275 5.246635959 5.246635959 0.135829374
YES BANK 15.03500625 70.6259 4.697430704 9.944066664 0.128506764
ONGC 1.81575625 7.0023 3.856409692 13.80047636 0.143246099
CIPLA 2.0449 3.146 1.538461538 18.32114726 0.132231405
BAJAJ AUTO 5.085025 6.3386 1.246522878 19.56767014 0.132231405
HEROMOTOCORP 7.5625 -2.71 -0.358347107 19.20932304 0.132231405
BHARTI AIRTEL 4.601025 -2.3946 -0.520449248 18.68887379 0.132231405
IDEA 4.84 -14.719 -3.041115702 15.64775808 0.13892562
SUN PHARMA 3.9204 -19.5859 -4.995893276 10.65186481 0.135930007
SECURITY market
variance (R-Rf)*/^2ei (^2)/^2ei cut off point (Ci)
GAIL 7.57 5.2 0.3 12.03
YES BANK 7.57 9.9 0.8 10.62
ONGC 7.57 13.8 0.4 25.93
CIPLA 7.57 18.5 0.64 23.96
BAJAJ AUTO 7.57 19.9 0.82 20.9
HEROMOTOCORP 7.57 19.9 0.9 19.28
BHARTI AIRTEL 7.57 18.69 1.01 16.36
IDEA 7.57 15.76 1.22 11.65
SUN PHARMA 7.57 10.3 1.35 6.94
RELATIVE INVESTMENT IN EACH SECURITY AND WEIGHT OF SECURITY

SECURITY market
variance (R-Rf)*/2ei (^2)/2ei cut off point (Ci) Zi
GAIL 7.57 5.246635959 0.135829374 19.58213136 -0.69616
YES
BANK 7.57 9.944066664 0.264336138 25.08362827 4.165323
ONGC 7.57 13.80047636 0.407582237 25.57146644 0.076913
SUM zi 3.546071
SECURITY Zi Weight (Xi)

GAIL -0.69616 -0.196320009
YES BANK 4.165323 1.174630474
ONGC 0.076913 0.021689535
SUM 3.546071 1
Source: Computed by researcher using secondary data.
16
CRITERIA USED FOR THE CONSTRUCTION OF PORTFOLIO
The first portfolio is constructed by using Sharpes optimization model

SECURITY Weight (Xi) Weight (%)
GAIL -0.19 -19.63
YES BANK 1.17 117.46
ONGC 0.02 2.16
SUM 1 100
PORTFOLIO (1) ALPHA, BETA AND RESIDUAL VARIANCE
SECURITY Alpha Weight(Wi) Alpha*Weight

GAIL 36.43 -0.2 -7.15
YES BANK 23.71 1.17 27.85
ONGC 21.44 0.02 0.46
SUM 81.58 21.16
SECURITY Beta Weight beta*weight

GAIL 0.74 -0.19632 -0.145
YES BANK 1.41 1.17463 1.65
ONGC 0.49 0.02169 0.010
SUM 2.64 1.52
SECURITY Residual (Wi2)*Residual

variance weight Wi2 variance
GAIL 4.141225 -0.19632 0.038541546 0.159609214
YES BANK 15.03500625 1.17463 1.37975675 20.74465136
ONGC 1.81575625 0.02169 0.000470436 0.000854197
SUM 20.90511477
PORTFOLIO (1) RETURN AND RISK
PORTFOLIO 1
Alpha (p) 21.16357424
Beta (p) 1.521580034
Average return of index 1.291334944
Portfolio Return 23.1284437
PORTFOLIO 1
^2p 2.315205799
^2m 7.57
Wi^2*^2ei 20.90511477
portfolio risk,p^2 38.43122267
p 6.19929211
17
PORTFOLIO 2 (GIVING EQUAL WEIGHT TO STOCK)
SECURITY Alpha weight Alpha* Weight

GAIL 36.43 0.333333333 12.14333333
YES BANK 23.71 0.333333333 7.903333333
ONGC 21.44 0.333333333 7.146666667
SUM 81.58 1 27.19333333
SECURITY beta weight beta * weight

GAIL 0.74 0.333333333 0.246666667
YES BANK 1.41 0.333333333 0.47
ONGC 0.49 0.333333333 0.163333333
SUM 2.64 1 0.88
RESIDUAL
SECURITY RESIDUAL VARIANCE
VARIANCE WEIGHT Wi^2 *Wi^2
GAIL 4.141225 0.333333333 0.111111111 0.460136111
YES BANK 15.03500625 0.333333333 0.111111111 1.67055625
ONGC 1.81575625 0.333333333 0.111111111 0.201750694
SUM 1 2.332443056
alpha 27.19333333
beta 0.88
average return of index 1.291334944
portfolio return 28.32970808
beta2 0.7744
2m 7.57
Wi2*2ei 2.332443056
portfolio risk 8.194651056
PORTFOLIO 3 (WEIGHT BASED ON RANDOM NUMBERS)

PORTFOLIO (3) WEIGHT BASED ON RANDOM NUMBERS
SECURITY random numbers Weight

GAIL 0.253174658 0.35
YES BANK 0.368698354 0.24
ONGC 0.369077468 0.41
SUM 0.99095048 1
SECURITY alpha weight alpha*weight

GAIL 36.43 0.35 12.7505
YES BANK 23.71 0.24 5.6904
ONGC 21.44 0.41 8.7904
SUM 81.58 1 27.2313
18
SECURITY beta weight beta *weight
GAIL 0.74 0.35 0.259
YES BANK 1.41 0.24 0.3384
ONGC 0.49 0.41 0.2009
SUM 2.64 1 0.7983
SECURITY RESIDUAL
VARIANCE WEIGHT Wi^2 residual variance * Wi^2
GAIL 4.141225 0.35 0.1225 0.507300063
YES BANK 15.03500625 0.24 0.0576 0.86601636
ONGC 1.81575625 0.41 0.1681 0.305228626
SUM 1.678545048
alpha 27.2313
beta 0.7983
beta square 0.63728289

2m 7.57
Wi2*2ei 1.678545048
portfolio risk , 6.502776525
p 2.55005422
PORTFOLIO 4 (GIVING WEIGHT TO STOCK BASED ON PRICE EARNING RATIO

SECURITY P/E ratio WEIGHT
GAIL 18.84 0.25
YES BANK 19.65 0.44
ONGC 12.39 0.31
SUM 50.88 1
SECURITY ALPHA WEIGHT ALPHA * WEIGHT

GAIL 36.43 0.25 9.1075
YES BANK 23.71 0.44 10.4324
ONGC 21.44 0.31 6.6464
SUM 81.58 1 26.1863
SECURITY BETA WEIGHT BETA *WEIGHT

GAIL 0.74 0.25 0.185
YES BANK 1.41 0.44 0.6204
ONGC 0.49 0.31 0.1519
SUM 2.64 1 0.9573
SECURITY RESIDUALVARIANCE WEIGHT Wi2 Wi2*residual variance

GAIL 4.141225 0.25 0.0625 0.258826563
YES BANK 15.03500625 0.44 0.1936 2.91077721
ONGC 1.81575625 0.31 0.0961 0.174494176
SUM 3.344097948
19
alpha 26.1863
beta 0.9573
beta square 0.91642329

^2m 7.57
Wi^2*^2ei 3.344097948
portfolio risk , 10.28142225
p 3.206465695
COMPARISON OF RISK AND RETURN OF DIFFERENT PORTFOLIOS

PORTFOLIO RETURN AND RISK
portfolioportfolio criteria return

1 optimal 23.1284437
2 equal weight 28.32970808
3 random numbers 28.26217269
4 p/e ratio 27.42249494
portfolioportfolio criteria RISK

1 Optimal 6.199292
2 equal weight 2.86263
3 random numbers 6.502777
4 p/e ratio 3.206466
RISK AND RETURN
40
20
0
optimal equal random p/e ratio
weight numbers
return RISK
Inference:
The return is higher in the equal weight portfolio and risk is less in equal portfolio comparing with other
constructed portfolio
PORTFOLIO EVALUATION
Portfolio evaluation is the last step in the process of portfolio management. The best measure for
evaluation of portfolio is the risk adjusted rate of return as determined by Sharpe ratio and Treynor ratio
20
SHARPE RATIO
This is the ratio of excess return. For determining this ratio, risk is taken as the total risk of the portfolio
as measured by the standard deviation on the assumption that the portfolio is not well diversified.
pi (%) standard deviation
PORTFOLIO Rp(%) Rf (%) of portfolio (Rp-Rf)/pi
optimal 23.1284437 6.91 6.19929211 2.616176721
equal weight 28.32970808 6.91 2.862630094 7.482527389
random numbers 28.26217269 6.91 6.502776525 3.283547051
p/e ratio 27.42249494 6.91 3.206465695 6.397228878
TREYNOR RATIO
It is also the ratio of excess return to risk. But here risk is defined as the systematic risk or market risk on
the assumption that the portfolio is well diversified.
PORTFOLIO Rp(%) Rf (%) p (Rp-Rf)p
optimal 23.1284437 6.91 1.521580034 10.65894882
equal weight 28.32970808 6.91 0.88 24.34057737
random numbers 28.26217269 6.91 0.7983 26.74705335
p/e ratio 27.42249494 6.91 0.9573 21.42744693
JENSEN MEASURE
Jensens Measure gives differential return earned by a portfolio over and above the expected return as
mandated by capital asset pricing model.
PORTFOLIO Rp(%) Rf (%) p Rm E(Rp) Rp-E(Rp)
optimal 23.1284437 6.91 1.52158 1.29 -1.64128 24.76972
equal weight 28.32970808 6.91 0.88 1.29 1.9644 26.36531
random numbers 28.26217269 6.91 0.7983 1.29 2.423554 25.83862
p/e ratio 27.42249494 6.91 0.9573 1.29 1.529974 25.89252
OPTIMALITY OF THE PORTFOLIO
An optimality test is performed by constructing three other portfolios with different criteria and
comparing the performance of the optimal portfolio with the performance of the portfolios so constructed.
PORTFOLIO Sharpe ratio Treynor ratio Jensen Alpha
optimal 2.616176721 10.65894882 24.76972349
equal weight 7.482527389 24.34057737 26.36530808
random numbers 3.283547051 26.74705335 25.83861869
p/e ratio 6.397228878 21.42744693 25.89252094
Inference:
From the above table it can be seen that 2 performance measures higher for the equal weight. So it can
be concluded that the performance of the equal weight portfolio is is superior in that of the other portfolio
thereby confirming the optimality of the portfolio
21
HEDGING PORTFOLIO RISK
For the purpose of the study an optimal portfolio is constructed with 3 securities and the risk and the
return of this portfolio is then determined. The process of dynamic hedging using index option is explained in
the remaining section of this study. Assumption is given as follows:
1) The initial total value of the portfolio is assumed to be 25,00,000

2) Beta values of the securities are assumed to be constant for the hedge period selected
3) The transaction costs are ignored for the purpose of analysis
PORTFOLIO HEDGING WITH INDEX OPTIONS
A dynamic hedging strategy is used for this purpose. A long position in portfolio is taken on 2ndJanuary
2017 by investing 2500000 in the portfolio. A short position in index option is simultaneously taken by
calculating the appropriate number of index options contracts. The portfolio is then continuously hedged from
the period 2nd January 2016 to 31st March 2017 by constantly monitoring the movement of the index.
ACTUAL ACTUAL
SECURITY WEIGHT AMOUNT SPOT PRICE NUMBER OF NUMBER OF SHARE
SHARES SHARES VALUE
GAIL
-0.19632 1000000 326.36 3064.100993 3064 999967.04
YES BANK
1.17463 1000000 1144.65 873.6294937 874 1000424.1
ONGC
0.02169 500000 192.25 2600.780234 2601 500042.25
TOTAL
AMOUNT 2500000 2500433.4
The total amount of 2500000 is invested among the securities in the portfolio based on the respective
weights in the securities carry in the portfolio. The resultant number of shares being in fractions. Consequently
we have to invest an amount of 2500433.4
MOVEMENT OF PORTFOLIO (2ND JANUARY 2017 TO 31ST APRIL 2017)
PORTFOLIO
20% GAIL
40%
YES BANK
40%
ONGC
22
CALCULATION OF TOTAL PROFIT OR LOSS FROM HEDGING USING INDEX OPTIONS
TOTAL PROFIT FROM OPTIONS 11193.75

TOTAL PROFIT ON PORTFOLIO 417.24
TOTAL LOSS ON TRADING 10776.54
HEDGE EFFICIENCY 26.83
By hedging portfolio using the index put options 26.83% of the loss can be reduced. Hedging is not at all
effective because there was not much fluctuations happened in the market.
SURVEY IN SHAREKHAN LIMITED

A questionnaire was prepared to understand clients perception towards option trading in
Sharekhan Ltd., option strategy used by the clients and to know whether they are satisfied with the option
strategies. Questionnaire was used for the survey and survey was conducted through face to face interview with
customers.
Sample Size: Sample size was limited to 52 samples. Out of the total number of clients in Sharekhan, Kochi
branch only 52 were trading in Option trading.
TRADING MARKET
TRADING MARKET CLIENTS
Only derivatives 18
Equity and derivatives 21
Equity, derivative and currency 9
Equity, derivative and commodity 4
Total 52
Source: Computed by researcher using primary data
TRADING MARKET
Only derivatives
8%
Equity and
17% 35% derivatives
Equity, derivative
and currency
40%
Equity, derivative
and commodity
Inference:
Majority of the clients are interested to trade in the segment of equity and derivatives in trading market.
About 40% of clients are interested in equity and derivatives segment ,35% of the clients are interested in only
derivatives,17% of clients are interested to trade in equity derivative and currency and only 8% of the clients are
interested in equity, derivative and commodity segment of the trading market
23
TYPE OF OPTION
TYPES OF OPTION CLIENTS
Stock option 11
Index option 13
Both 28
TYPE OF OPTION
21% Stock option

54% Index option
25%
Both
Inference:
Most of the active clients are using stock option.54% of the clients are interested in stock option
whereas 25% of the clients interested in index option and the rest 21% of the clients interested in both
stock option and index option.
OPTION STRATEGY
STRATEGY USED CLIENTS

call 36
put 32
bear spread 19
bull spread 5
strangle 21
straddle 9
covered 7
NA 12
24
STRATEGY USED
NA
covered call
stradle
strangle
bull spread put

bear spread
Inference:
Mostly the active clients are used call and put strategies because they can hedge their money effective.
The idea of purchasing a call option is that the client believes the underlying stock will increase and the person
who sell the option thinks otherwise. If the purchaser a stock value will decline he opt put option because that
allows him the right to sell the stock on a future date.
SATISFACTION OF CLIENTS WITH OPTION STRATEGY
satisfied with strategy clients

satisfied 21
moderately satisfied 17
not satisfied 9
can't say 5
SATISFACTION OF CLIENTS WITH

STRATEGY
10% satisfied
17% 40% moderately satisfied
33% not satisfied
can't say
Inference:
Strategies like buying call and selling put is most widely preferred option strategy by the active clients
and majority of them are able to hedge their money and thus they feel satisfied with the strategy
25
CHAPTER-5
FINDINGS SUGGESTIONS AND CONCLUSION
Security analysis is the first step of portfolio optimization. Ten securities are selected for the analysis on
the basis of positive alpha and risk return analysis is performed on those securities. The findings are tabulated
below:
Parameters Maximum Minimum
Adjusted return 36.03 Yes bank -36.28 Sun pharma
Security alpha 57.6 Yes bank -19.28 Sun pharma
Security beta 1.39 Yes bank 0.82 Idea
Systematic risk 15.03Yes bank 1.81 ONGC
Unsystematic risk 102.28 Idea 13.81 Hero motocorp
Parameters Maximum Minimum
PORTFOLIO OPTIMIZATION
An optimal portfolio is constructed using Sharpes Optimization Model. The performance of this portfolio
is evaluated using Sharpe Ratio, Treynor Ratio and Jensen Measure. The findings are given below:
OPTIMIZATION PORTFOLIO USING SHARPES OPTIMIZATION MODEL
The selected 3 securities are used to construct an optimal portfolio using Sharpes Optimization Model.
The risk and return of the portfolio are then determined. The findings are:
The return on optimal portfolio 23.12
The risk of optimal portfolio 6.19
Total risk of portfolio 59.33
The beta value of optimal portfolio 21.16
The alpha value of optimal portfolio 1.52
The systematic risk of optimal portfolio 20.59
The unsystematic risk of optimal portfolio 38.43
OPTIMALITY TEST
PORTFOLIO Sharpe ratio Treynor ratio Jensen Alpha

optimal 2.61 10.65 24.76
equal weight 7.48 24.34 26.36
random numbers 3.28 26.74 25.83
p/e ratio 6.39 21.42 25.89
Inference:
The findings of the optimality test is tabulated in the above table the above, it can be seen that 2 performance
measures higher for the equal weight. So it can be concluded that the performance of the equal weight portfolio
is superior in that of the other constructed portfolios.
26
HEDGING WITH OPTTION
The findings of portfolio hedging with option is tabulated in the below table:
TOTAL PROFIT FROM OPTIONS 11193.75
TOTAL PROFIT ON PORTFOLIO 417.24
TOTAL LOSS ON TRADING 10776.54
HEDGE EFFICIENCY 26.83
By hedging portfolio using the index put options 26.83% of the loss can be reduced. Hedging is not at all
effective because there was not much fluctuations happened in the market.
Initially 10 securities are selected and after calculating cutoff rate 3 of the securities are used for
designing an optimal portfolio
3 securities are selected from a cutoff rate of 25.93 (GAIL, ONGC and YES BANK)
Constructed 4 portfolios (optimal portfolio, equal weight, random numbers and P/E ratio)
Performance of equal weight portfolio is superior to that of other portfolio.
Hedging efficiency is less because the market has not much fluctuation during the 3 months starting from
2nd Jan 2017 to 31st March 2017.
Option trading is considered to be an important means to generate income and hedge the risk associated
with it.
Strategies like buying call and selling put is most widely preferred option strategy by the active clients
and majority of them are able to hedge their money and thus they feel satisfied with the strategy
SUGGESTIONS
The research has shown the effectiveness of portfolio optimization model in reducing portfolio risk by
efficient diversification and in improving portfolio performance. Investors are advised to use portfolio
optimization model like Sharp Optimization model for ensuring efficient diversification and improving
the performance of their portfolio
The research has also shown the effectiveness options in hedging portfolio risk. Scientifically constructed
portfolio can reduce the unsystematic risk of a portfolio to a significant extend. Hedging with index option
will further reduce the portfolio risk by removing the systematic risk of a portfolio.So the investors are
advised to use the these powerful tools of portfolio risk management by efficient diversification and
effective portfolio
If the trend of the market is to move up, option is more advisable rather than hedging in index futures.
27
CONCLUSION
Every investment is characterized by return and risk. In general, it refers the possibility of incurring a loss
in financial transactions. The risk can be defined in term of variability of the returns. Risk is the potential for
variability in returns. An investment whose returns are fairly stable is considered to be a low risk investment,
whereas investment whose returns fluctuate significantly is considered to be high- risk investment. Equity shares
whose returns are likely to fluctuate widely are considered to possess low risk. In the trading securities or
derivatives an element of risk is always inherent .Risk is defined as the chance of negative or low returns as
compared to expectation. Hedging is a mechanism to counter balance or minimize such risk. Under hedging an
investor takes a position in a derivative contract with the aim to either eliminate or minimize the risk. Hedging is
like an insurance against price fluctuation which might take place in future.
A portfolio manager first task is efficient asset allocation by constructing an optimal portfolio by striking
an optimal compromise between expected risk and return. An optimum portfolio was constructed with three
leading securities by Sharpe optimization model. The performance of this equal weight portfolio was compared
against four other portfolios created with different criteria. Three evaluation measures namely Sharpe ratio,
Treynor ratio, and Jensen measure were used for this purpose. The comparison has revealed the optimality of the
portfolio and the effectiveness of Sharpe optimization model in ensuring efficient diversification of risk and
ensuring superior performance.
The study next focused on the effectiveness of derivative instruments in controlling portfolio risk by
devising appropriate hedging strategies. The optimal portfolio is hedged with index options. Index option are used
as a hedge instrument since they track the market better than other derivative instruments. It was found that
hedging with index options have reduced the portfolio loss considerably even in volatile market.
28
CHAPTER-6
BIBLIOGRAPHY
Fisher E Donald and Jordan J Ronald, Security Analysis and Portfolio Management
Kevin S, Portfolio Management
Simon Vine Options: Trading strategy and Risk Management
www.nseindia.com
www.sharekhan.com
www.moneycontrol.com
www.yahoofinance.com
29

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A Study on Portfolio Hedging using Option with special reference to Sharekhan

Submitted in partial fulfillment of the requirements of the degree of

Under the guidance of

AMRITA SCHOOL OF BUSINESS

Place: Suvitha K Vikram

CHAPTERS TITLE PAGE NO.

SCOPE AND SIGNIFICANCE OF THE STUDY

To examine the effectiveness of Index Options as a hedging instrument in Portfolio.

DESIGN OF THE STUDY

(a) Determine return and risk of each security.

(c) Constructed 4 portfolios

(d) Calculated the return and risk of each portfolio

SHARPES OPTIMIZATION MODEL

. FUNCTIONS OF CAPITAL MARKET

To speed up financial disintermediation

Capital market can be divided into 3 categories:

Industrial securities market

INDUSTRIAL SECURITIES MARKET

Industrial markets are classified as follows:

Primary market and Secondary market

DATA ANALYSIS AND INTERPRETATION

RETURN, RISK AND RISK ADJUSTED RATE OF RETURN

Risk adjusted rate of return = (Ri - Rf)/

R (Return) =Average return of the individual securities in the portfolio

(Risk) = Beta value of the security

Rf(Risk free rate of return) = 6.91 %

SECURITY Ri Rf (Ri Rf ) (Ri Rf )

Total Risk = Systematic Risk + Unsystematic Risk

SHARPES OPTIMIZATION MODEL

Steps in construction of portfolio are given below:

SECURITY (Ri) (Rf) (Ri - Rf) (Ri - Rf )/ Rank

STEPS TO CUT OFF RATE AND CALCULATION OF CUT OFF RATE

RELATIVE INVESTMENT IN EACH SECURITY AND WEIGHT OF SECURITY

SECURITY Zi Weight (Xi)

The first portfolio is constructed by using Sharpes optimization model

PORTFOLIO (1) ALPHA, BETA AND RESIDUAL VARIANCE

SECURITY Alpha Weight(Wi) Alpha*Weight

SECURITY Beta Weight beta*weight

SECURITY Residual (Wi2)*Residual

PORTFOLIO (1) RETURN AND RISK

SECURITY Alpha weight Alpha* Weight

SECURITY beta weight beta * weight

PORTFOLIO (2) RETURN AND RISK

PORTFOLIO 3 (WEIGHT BASED ON RANDOM NUMBERS)

SECURITY random numbers Weight

PORTFOLIO (3) ALPHA, BETA AND RESIDUAL VARIANCE

SECURITY alpha weight alpha*weight

PORTFOLIO (3) RETURN AND RISK

beta square 0.63728289

PORTFOLIO 4 (GIVING WEIGHT TO STOCK BASED ON PRICE EARNING RATIO

PORTFOLIO (4) ALPHA, BETA AND RESIDUAL VARIANCE

SECURITY ALPHA WEIGHT ALPHA * WEIGHT

SECURITY BETA WEIGHT BETA *WEIGHT

SECURITY RESIDUALVARIANCE WEIGHT Wi2 Wi2*residual variance

beta square 0.91642329

COMPARISON OF RISK AND RETURN OF DIFFERENT PORTFOLIOS

portfolioportfolio criteria return

portfolioportfolio criteria RISK

RISK AND RETURN

OPTIMALITY OF THE PORTFOLIO

1) The initial total value of the portfolio is assumed to be 25,00,000

PORTFOLIO HEDGING WITH INDEX OPTIONS

MOVEMENT OF PORTFOLIO (2ND JANUARY 2017 TO 31ST APRIL 2017)