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mCollection of assets mNeed for portfolio management. mTypes of risk- systematic and unsystematic.

Steps in portfolio management O. identification of objectives. 2. Portfolio strategy 3. Selection of asset mix 4. Portfolio execution. 5. Portfolio revision 6. Portfolio evaluation

R   ANASS m TRADITIONAL APPROACH m Risk can be measured on each security through

standard deviation. And security having lowest standard deviation must be selected. m MODERN APPROACH m Includes combination of securities to form a portfolio. m Relationship among different securities

6 NA N  2 SE6 ES m 6                   m 6                   

     0  

         

              

6ovariance m ˜               

   m 6   0    !

     

                           m               

m            m   "       

6 EA N 6 E6EN m r(xy)= cov xy/ ºx ºy m r (xy)- correlation coefficient between x and y m ºx- standard deviation of X m ºy- standard deviation of Y m R (xy) varies from -O to +O m ariance of portfolio m = º2 p= w2 x º2 x + w2 y º2 y+ 2 wx wy r(xy) ºx ºy

m

expected return O5% 20%

º 50% 30%

X Y sol. Risk of portfolio= (.4 x .O5)+ (.60 x .20) = O% ariance of portfolio = (.4)2 (50) 2 +(.6) 2 (30) 2 + 2x .4 x .6x 50x 30 x (-0.45) = 400 +324 -324 = 400 ºp= 20

6ASE S   WR AN 6 m Calculated the return on portfolio of ITC and wipro. m A ERAGE RETURN OF WIPRO m Average Return

= (R)/N m Average Return = O4.O3/5 = 2.3 Opening Closing m share price share price Year (P0) (P1) m á áá    á á á á á

á á á á

  

á á   

á á á  

TOTAL RETURN

(P1-P0)  á  

á  

(P1-P0)/ P0*100 á     

  14.13

ITC LTD:

á á á á á

Year áá á á á á

   

Opening share price (P0)   á á   á  

Closing share price (P1) á á   á á á  

TOTAL RETURN r     

(P1-P0)    á    

(P1-P0)/ P0*100   á   á    áá 180.79

Sta dard D viati = Varia c Varia c = 1/ (R-R)

á á á á á

Year áá á á á á

   

Return (R) á     

 

Avg. Return (R) á  á  á  á  á 

TOTAL

m ÿ   m   

(R-R)  á        á

(R-R)2   á á 

3388

6 Year

Return (R)

Avg. Return (R)

(R-R)

(R-R)2

á

áá



  á



 

á

á

á



 



á  

ááá

á

á



á 





á

á

á



 



á



á





áá



 



TOTAL

13284

m ariance = O/n (R-R)2 = O/5 (O324) = 2656.

Standard Deviation =

ariance = 2656. = 5O.54

6ovariance (6 ab) /n (A-A)(-) 6orrelation 6oefficient 6 ab/ºa*ºb

YEAR á áá  á áá  á á  á á á á 

(rA-RA)  á á    á

 

(rB-RB)       á

 

(rA-RA) (rB-RB)  á

á   

TOTAL

m m m m m m

9,967.28

Covariance (CO ab) = O/5-O (9967.2) = 249O.2 Correlation Coefficient = CO ab/ºa*ºb ºa= 26 ; º b = 5O.54 = 249O.2/(26) (5O.54) = positively correlated

R   SK ITC (a) & WIPRO (b): m m m m m

m

ºa = 5O.54 ºb = 26.00 nab = 0.02 Wa= 2/3 Wb= O/3

RP 2 = (2/3)2(5O.54)2+(O/3)2(26.00)2+2(5O.54)(26.00)*(26.00)*(2/3)*(O/3) = O2O

m Wipro (a) & ITC (b): m m m m m m

m

m

sa = 33.09 sb = 56.09 Wa = 2/3 Wb= O/3 Nab = 0.9 RP2 = (2/3)2(49.57)2+(O/3)2(0.5O.54)2+2(49.57)(5O.54)*(0.9)*(2/3)*(O/3) = 2505 Rp= 50.04

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