Analysis of risk & return of 2

companies under 2 Portfolios

(minimum variance portfolio)

Presented By:
Raju Avhad (01)
Arpita Chakraborty (06)
Sonali Daine (11)
Digamber Jangam (22)
Nishank Gonsalves (16)
 Investment analysis

• Portfolio Management
• Portfolio Selection
• Security Analysis
– Assessing the Risk
– Assessing the Return
 Portfolio management
Investment objectives &
Constraints
Portfolio Evaluation

Choice of Asset Mix

Portfolio Revision

Portfolio Strategy

Portfolio Execution
Selection of Securities
 Portfolio selection

• Portfolio Theory- Harry Markowitz (1950)

• Diversification of a Risk

• Portfolio Risk

• Optimal Portfolio
 Security Analysis

• Return

– Reward for undertaking investment

– Measurement of a historical return

– Components of a Return:
• Periodic Return
• Capital Gain/Loss
 Cont…

 Total
Return= Dividend+ (P1- P0)
P0
Where,
P1= Ending Price of the Investment
P0= Beginning price

Rate of Return= Total Return * 100

 Risk

• Possibility that the actual outcome of an

investment will differ from its expected outcome

• Types of a Risk:-
– Business Risk
– Interest Rate Risk
– Market Risk
 Cont…

• It is associated with variability in the return

• Methods to measure variability of a return:-

– Range of Return
– Variance
– Standard Deviation
 Measuring historical risk

• Measures of a risk are variance or standard

deviation
n
_
• Variance= Σ (Ri – R )2/ n-1
i=1
• Standard Deviation = ( Variance)1/2
 Cont…

• Where,
Ri = return from stock in period
_
( i= 1, 2, …….., n)
R = arithmetic return
n = number of periods
 covariance

• Changing pattern of securities

• Positive Covariance

• Negative Covariance

• Minimum Variance Portfolio

 Selection of Securities in 2 Portfolios

Portfolio 1 Portfolio 2

• State Bank of India(SBI). • Hero Honda

• Larsen & Toubro(L & T) • Tata Consultancy

Services (TCS)
Introduction of companies

• Largest state-owned
banking and financial
services company in India

• Founded: 1st July 1955

• Chairman- O. P. Bhatt

• Banking Services
Cont…

• Revenue: $ 28.212 billion

• Profit : $ 2.4732 billion

• Total Assets: $ 323.04

billion

• Total Equity: $ 18.519

billion
 Financial Condition of SBI
Cash flow
  Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06

Profit before tax 13,926.10 14,180.64 10,438.90 7,625.08 6,837.36

Net cashflow-
-1,804.99 29,479.73 -856.87 -1,776.07 6,039.14
operating activity

Dividend History Net cash used in

-1,761.52 -1,651.93 -2,798.01 -284.56 -1,134.18
investing activity

Net cash used in

-3,359.67 5,097.38 19,371.12 9,494.11 461.98
fin. activity

Net inc/dec in
-6,926.18 32,925.18 15,497.65 7,433.49 5,366.94
cash and equivlnt

Cash and
equivalnt begin 1,03,110.02 71,478.62 51,968.69 44,535.20 39,322.10
of year

Cash and
equivalnt end of 96,183.84 1,04,403.80 67,466.34 51,968.69 44,689.04
year
Quarterly Trends Annual Trends
Graphs to Study

Stock Prices at BSE

 Larsen & toubro
• Multinational Conglomerate
Company

• Founded : Mumbai (1938)

• Engineering & IT Services

• Products: Power Generation,

Cement Plants, Ships
 Cont…

• Revenue: $ 9.54 billion

• Operating Income: $
1.59 billion

• Net Income: $ 1.18

billion
 Financial Condition of L&T
Cash flow
  Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06

Profit before tax 5,880.67 3,940.41 3,155.47 2,004.89 1,383.40

Net cashflow-
operating 5,482.75 1,478.57 1,945.24 2,130.45 1,369.25
activity

Dividend History Net cash used in

investing -6,071.73 -3,308.53 -5,241.89 -1,588.17 -1,326.30
activity

Netcash used in
1,245.56 1,640.79 3,166.68 -31.05 -287.77
fin. activity

Net inc/dec in
cash and 656.58 -189.17 -129.97 511.23 -244.82
equivlnt

Cash and
equivalnt begin 775.29 964.46 1,094.43 583.20 828.02
of year

Cash and
equivalnt end of 1,431.87 775.29 964.46 1,094.43 583.20
year
Quarterly Trends Annual Trends
Graphs to Study

Stock Prices at BSE

 Hero Honda

• Joint venture between hero group of India

& honda of Japan

• Automotive Industry

• Founded: 19th January 1984

• Chairman: Brijmohan Lal Munjal

 Cont…

• Products: Motorcycles,
Scooters

• Revenue: $ 2.8 billion

• Second largest two-

wheeler manufacturer in
the world
Financial Condition of Hero Honda

Dividend History
Quarterly Trends Annual Trends
Graphs to Study

Stock Prices at BSE

 Tata consultancy services

• Largest provider of Information

Technology & business process
outsourcing services in India

• Industry: IT Services

• Founded : 1968

• Chairman: Ratan Tata

 Cont…
• Services: Outsourcing,
Software Products

• Revenue: $ 6.52 billion

• Operating Income: $ 1.8

billion

• Profit: $ 1.58 billion

• Total Assets: $ 6.112 billion

 Financial Condition of TCS
Cash flow
  Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06

Profit before tax 6,370.38 5,139.68 5,003.86 4,170.68 3,074.35

Net cashflow-
operating 6,264.74 4,874.12 3,827.91 3,551.26 2,344.42
Dividend History activity

Net cash used in

-4,556.64 -3,162.22 -2,404.90 -2,076.42 -1,464.97
investing activity

Netcash used in
-1,969.65 -1,588.25 -1,424.77 -1,075.35 -882.30
fin. activity

Net inc/dec in
-261.55 123.65 -29.62 385.97 -5.10
cash and equivlnt

Cash and
equivalnt begin 554.83 417.00 557.14 171.17 176.27
of year

Cash and
equivalnt end of 293.28 540.65 527.52 557.14 171.17
year
Quaterly Trends Annual Trends
Graphs to Study

Stock Prices at BSE

 Table For Calculation of Return
State Bank Of India Larsen and Toubro

Year Closing Dividend Rate of Date Closing Dividend Rate of

Date Return(%) Date Return
(%)
Aug-2005 917 0 - Aug-2005 1332.95 17.50 -

Aug-2006 930 14 2.94 Aug-2006 2401.05 22 81.78

Aug-2007 1599.50 14 73.77 Aug-2007 2582.75 11 8.03

Aug-2008 1403.60 21.50 -10.90 Aug-2008 2589.85 15 0.86

Aug-2009 1743.05 29 26.25 Aug-2009 1567.60 10.50 -39.07

Aug-2010 2764.85 20 59.77 Aug-2010 1812.45 12.50 16.42

 Risk, Variance and Standard
Deviation
State Bank Of India Larsen and Toubro

Year Return( Deviati Square of Return( Deviation Square of (Ri-

Deviation Rj ) (Ri-Ravg) Deviation Riavg)*(
(1) Ri) on(Ri- (4) (6) (7) Rj-Rjavg)
(5)
(2) Ravg)(3) (3)*(6)

2006 2.94 -27.37 749.12 81.78 68.17 4647.15 -

1865.81

2007 73.49 43.18 1864.51 8.03 -5.58 31.14 -240.94

2008 -10.90 -41.21 1698.26 0.86 -12.75 162.56 525.43

2009 26.25 -4.06 16.49 -39.07 -52.68 2775.18 213.88

2010 59.77 29.46 867.89 16.42 2.81 7.8961 82.78

 For SBI
_
• Expected Return- Ri = 30.31

= 5196.25/4 =1299.07

= 36.04
Time Series of Yearly Rates of Return For
SBI
 For L&T
_
• Expected Return- Ri = 13.61

= 7623.92/4 = 1905.98

= 43.65
Time Series of Yearly Rates of Return For
L&T
 Interpretation
• Standard deviation of L & T is more than
SBI but return is less

• Risk factor is more in case of L & T

– Risk Lover- L & T

– Risk Averse- SBI
 Covariance and Correlation
• Covariance_between
_
SBI & L&T =
• Σ (Ri – R ) (Rj – R ) /5
=-1284.66/5
= -256.93
»Correlation = Covariance/i*j
= -256.93/ (36.04*43.66)
= -0.16
 Interpretations
Particulars SBI Securities L&T Securities
Expected Returns 30.31 13.61
Standard Deviation(Risk) 36.04 43.66
Correlation -0.16
Covariance -256.93

• The Return of SBI shares are more than that of L&T.

• The Risk associated with SBI is lesser than that of L&T.
• The negative correlation between 2 securities indicates
that the returns for the two stocks does not move
together in a linear manner.
Time Patterns of Returns for 2 assets with
Negative Correlation
 Table For Calculation of Return
Hero Honda Tata Consultancy Services

Year Closing Dividend Rate of Date Closing Dividend Rate of

Date Return(%) Date Return
(%)
Aug-2005 646.70 20 - Aug-2005 1405.85 8 -

Aug-2006 720.30 20 14.47 Aug-2006 996.05 3 -28.58

Aug-2007 648.60 17 -7.59 Aug-2007 1065 3 7.22

Aug-2008 825.05 17 29.53 Aug-2008 812.45 3 -23.43

Aug-2009 1511.35 19 85.49 Aug-2009 527 2 -34.89

Aug-2010 1791.80 80 23.85 Aug-2010 843.85 2 60.50

 Risk, Variance and Standard
Deviation
Hero Honda Tata Consultancy Services

Year Return( Deviati Square of Return( Deviation Square of (Ri-

Deviation Rj ) (Ri-Ravg) Deviation Riavg)*(
Ri) on(Ri- Rj-Rjavg)
Ravg)
2006 14.47 -14.74 217.26 -28.58 -32.43 1051.06 477.87

2007 -7.59 -36.8 1354.24 7.22 11.06 122.32 -407.01

2008 29.83 0.62 0.3844 -23.43 -19.59 383.77 -12.15

2009 85.49 56.28 3167.44 -34.89 -31.05 964.10 -

1747.49
2010 23.85 -5.36 28.73 60.50 64.34 4139.64 -344.89
 For Hero Honda
_
• Expected Return- Ri = 29.21

= 4768.05/4 =1192.01

= 34.53
Time Series of Yearly Rates of Return For Hero
Honda
 For TCS
_
• Expected Return- Ri = -3.84

= 6660.89/4 = 1665.22

= 40.81
Time Series of Yearly Rates of Return For TCS
 Covariance and Correlation
• Covariance between Hero Honda & TCS =
_ _
• Σ (Ri – R ) (Rj – R ) /5
= -2033.64/5
= -406.74
»Correlation = Covariance/i*j
= -406.74 / 34.53*40.81
= -0.29
 Interpretations
Particulars Hero Honda Securities TCS Securities
Expected Returns 29.21 -3.84
Standard Deviation(Risk) 34.53 40.81
Correlation -0.29
Covariance -406.73

• The Return of Hero Honda shares are more than that of TCS.
• The Risk associated with Hero Honda is lesser than that of
TCS.
• The negative correlation between 2 securities indicates
that the returns for the two stocks does not move together in a
linear manner.
Time Patterns of Returns for 2 Assets with
Negative Correlation
 Minimum Variance Portfolio
• Weights of the Individual Assets in the Portfolio:-
• W =  -2 Cov
SBI L SL
 + 2 - 2Cov
2
S L SL
= (43.66) – (-256.93)
2 =0.58
(36.04)+(43.66)-2*(-256.93)
2 2
• W =  - Cov
2
L&T  S +  - 2CovSL
2
= (36.04)S2– (-256.93)
L SL
=0.42
2
(36.04)+(43.66)-2*(-256.93)
2 2
 Return and Risk of Portfolio
• Return On Portfolio
E(R )p = W *S E(R ) S+ W * LE(R ) L
= 0.42 * 13.61 + 0.58 * 30.31
= 23.296
= 23.30
• Risk of Portfolio
 = ( *2W + 2 * W 2
+ 2*2 *  * Corr * W * W ) 1/2
S
p = [(36.04) *S2(0.58)
L + (43.66)
L *S (0.42)
L SL S L
+2*36.04*43.66*(-
2 2 2
0.16)*0.58*0.42]
1/2
= (650.538) 1/2
= 25.51
 Minimum Variance Portfolio
• Weights of the Individual Assets in the Portfolio:-
• W =  -2 Cov
Hero T HT
Honda + 2 - 2Cov
2
H T HT
= (40.81) – (-406.73)
2 =0.56
(34.53)+(40.81)-2*(-406.73)
2 2
• W =  - Cov
2
TCS  H +  - 2CovHT
= (34.53)H2– (- 2406.73)
T HT
=0.44
2
(34.53)+(40.81)-2*(-406.73)
2 2
 Return and Risk of Portfolio
• Return On Portfolio
E(R )p = W *H E(R ) H+ W * TE(R ) T
= 0.56 * 29.21 + 0.44 * (-3.84)
= 14.67

• Risk of Portfolio
 = ( *2W + 2 * W 2
+ 2*2 *  * Corr * W * W ) 1/2
H
p = [(34.53) *H2(0.56)
T + (40.81)
T *H (0.44)
T HT H T
+2*34.53*40.81*(-
2 2 2
0.29)*0.56*0.44]
1/2
= (494.96)
1/2
= 22.25
 Conclusion

• The return on Portfolio 1 is more than that of

Portfolio 2.

• The risk associated with Portfolio 1 is more

than that of Portfolio 2.