UNIVERSITY OF MUMBAI

PROJECT ON
“PORTFOLIO MANAGEMENT: A STUDY ON INVESTMENT
STRATEGIES”

SUBMITTED BY
ABHISHEK ANIL MALI
SEAT NO.: 4143
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS
FOR
THE AWARD OF DEGREE OF MMS (Finance)
OF
UNIVERSITY OF MUMBAI
2024-2025
UNDER THE GUIDANCE OF
PROF. DEEPIKA RAO
MATOSHRI USHATAI JADHAV INSTITUTE OF MANAGEMENT
STUDIES AND RESEARCH CENTER, BHIWANDI.
 CERTIFICATE

This is to certify that Abhishek Anil Mali, a student of Matoshri Ushatai Jadhav
Institute of Management Studies and Research Centre, Bhiwandi of MMS Semester-
III bearing SEAT No.4143 and specializing in Finance has successfully completed
the project titled."Portfolio Management A Study on Investment Strategies.”
Under the guidance of PROF. Deepika Rao in partial fulfillment of the requirement
of Masters of Management Studies by University of Mumbai for the Academic Year
2024-2025.

Prof. Deepika Rao Prof. Vijay Vanjare Dr. Sopan Bhamre

(Project guide) (Coordinator) (Director)

Examiner: ___________

DATE: ___________
 ACKNOWLEDGEMENT

To list who all have helped me is difficult because they are so numerous, and the depth is so
enormous

I would like to acknowledge the following as being idealistic channel and fresh dimensions in the
completion of this project

I take this opportunity to thank the UNIVERSITY OF MUMBAI for giving me chance to do this
project

I would like to thank our Director Dr. Sopan Bhamre Sir for providing the necessary facilities
required for completion of this project

I take this opportunity to thank our CO ORDINATOR Prof. Vijay Vanjare Sir for his moral
support and guidance

I would like to express my sincere gratitude toward my project guide Prof. Deepika Rao whose
guidance and care made the project successfully

I would like to thank my college LIBRARY for having provided various reference Books and
magazines related to my project

Lastly, I would like to thank each and every person who directly or indirectly helped me in the
completion of the project especially MY PARENTS AND PEERS who supported me throughout
my project work.

Abhishek Anil Mali

 INDEX

Sr. No Particulars Page

No
1 Executive Summary 1
2 Introduction 3
3 Literature Review 53
4 Research Methodology 55
5 Objectives and Scope of the Study 59
6 Case Study Analysis 61
7 Findings 63
8 Suggestions 64
9 Conclusion 65
10 Bibliography 67
11 Annexure 69
Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

CHAPTER I :- INTRODUCATION
EXECUTIVE SUMMARY
This study explores portfolio management as a comprehensive investment strategy that optimizes returns
while managing associated risks. Portfolio management is crucial for individuals and institutions alike,
helping them meet financial goals such as retirement, wealth accumulation, or income generation by
strategically allocating assets like stocks, bonds, real estate, and cash equivalents. The document outlines
various types of portfolios suited to different investor profiles, including aggressive, conservative, income,
speculative, and hybrid portfolios, each designed to meet specific financial objectives and risk tolerances. An
aggressive portfolio, for example, seeks high returns and accepts higher risk, ideal for younger investors or
those with long-term horizons. Conversely, a conservative portfolio focuses on stability and is well-suited for
risk-averse investors or those with short-term goals.

The study compares active and passive portfolio management approaches. Active management seeks to
outperform benchmarks through stock selection and market timing, while passive management aims to mirror
index performance, prioritizing cost-effectiveness and stability. Additionally, the document describes
discretionary portfolio management, which grants managers full control over investment decisions, and non-
discretionary management, where investors retain decision-making authority. Strategic approaches to asset
allocation—such as Strategic Asset Allocation (SAA), which maintains a steady asset mix for the long term,
and Tactical Asset Allocation (TAA), which allows short-term adjustments—enable managers to adapt
portfolios to changing market conditions and investment goals.

Technological advancements have introduced new tools and trends, such as Environmental, Social, and
Governance (ESG) investing, Artificial Intelligence (AI)-driven analytics, and robot-advisors, which bring
automation and data-driven insights to portfolio management. ESG investing integrates ethical considerations
into investment choices, aiming for sustainable returns aligned with social and environmental responsibility.
AI-enhanced portfolio management leverages data for predictive insights and efficient decision-making,
while robe-advisors provide low-cost, automated portfolio solutions, making sophisticated strategies
accessible to a broader audience.

The roles of financial advisors and planners are integral to portfolio management. A financial
advisor specializes in investment research, security selection, and portfolio optimization, ensuring
that investments align with the client’s financial objectives. Advisors actively manage risk, oversee
performance, and provide regular updates to clients. In contrast, a financial planner adopts a

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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

comprehensive approach to the client’s financial well-being, incorporating long-term financial

goals, retirement planning, tax optimization, and estate planning. By tailoring investment
strategies to align with broader life goals, financial planners help clients achieve holistic financial
stability and growth.

Then comes risk management, which boasts varieties of diversification, hedging, and rebalancing to minimize
volatility during periods of turmoil in the markets. Diversification reduces risk by dispersing investments
across the asset classes. Loss from underperformance in any given area is consequently minimized by
increasing returns in other areas. Hedging uses financial instruments like options to offset loss from a potential
market downturn while rebalancing ensures the portfolio still maintains its original risk profile-the portfolio
would meet the investor's consistent objectives.

The last performance evaluation is required for measuring the portfolio's performance relative to market
conditions and investor objectives. Metrics such as the Sharpe Ratio and Treynor Ratio evaluate returns net
of risk to ensure that the performance is reflective of prudent risk management. Such metrics also enable a
differentiation between the skill of the portfolio manager and general market trends, hence offering a robust
framework for future strategic adjustments.

Overall, this study emphasizes the importance of customized portfolio strategies that adapt to changing
economic conditions, investor goals, and risk appetites. Portfolio management is no longer confined to
traditional approaches; it now integrates innovative technologies and strategic adjustments to help investors
navigate complex financial landscapes. A well-managed portfolio not only aligns with the investor's goals
and risk tolerance but also responds proactively to market trends, maximizing growth potential while
minimizing risk.

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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

INTRODUCTION
Portfolio
A portfolio’s meaning can be defined as a collection of financial assets and investment tools that
are held by an individual, a financial institution or an investment firm. To develop a profitable
portfolio, it is essential to become familiar with its fundamentals and the factors that influence it.

What is a Portfolio?
As per portfolio definition, it is a collection of a wide range of assets that are owned by investors.
The said collection of financial assets may also be valuables ranging from gold, stocks, funds,
derivatives, property, cash equivalents, bonds, etc. Individuals put their money in such assets to
generate revenue while ensuring that the original equity of the asset or capital does not erode.
Depending on one’s know-how of the investment market, individuals may either manage their
portfolio or seek the assistance of professional financial advisors for the same. As per financial
experts, diversification is a vital concept in portfolio management.

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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

Types of Portfolios
 Aggressive Portfolio:
An income portfolio is built with a focus on creating recurring passive income. Rather than seeking
out investments that might result in the greatest long-term capital gain, investors look for
investments that pay steady dividends with low risk to the underlying assets that earn those
dividends. This type of portfolio is ideal if you are risk-averse, or if you plan to invest with a short
to medium time horizon.

 Conservative Portfolio:
This portfolio is designed for low-risk tolerance investors, such as those with short-term goals. A
conservative portfolio will have a high allocation to low-risk fixed-income instruments and
traditional investments. A conservative portfolio may have a small smattering of high-quality
stocks. It is also known as a defensive portfolio.

 Income Portfolio:
This portfolio is focused on regular income from investments. It includes investments in bonds,
debt securities, as well as stocks which regularly pay dividends. This type of portfolio is suitable
for a risk-averse investor who does not want to take any risk. Retirees who want regular income
during their golden years may also prefer this portfolio.

 Speculative Portfolio:
This portfolio is considered as most risky among all portfolio types. As in this portfolio,
investments are made in risky instruments with the expectation of substantial gains in the future.
This may include betting on Initial Public Offerings (IPO) or stocks with growth potential, buying
low-rated bonds or debentures for higher returns, or investing in options or futures contracts as a
form of portfolio protection.

 Hybrid Portfolio:
This portfolio primarily allocates your investments between two types of assets: equity and debt.
While equities have the potential to produce high returns and build wealth, they also come with
higher risks due to short-term volatility.

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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

MEANING AND DEFINITON OF PORTFOLIO

Meaning
Portfolio management refers to the process of managing a collection of financial investments,
projects, or business ventures to achieve specific goals and objectives.

Definition
Portfolio management is the process of strategically selecting, managing, and optimizing a
collection of financial investments, projects, or business ventures to achieve specific goals and
objectives while minimizing risk and maximizing returns.

Or

Portfolio management is the art of selecting and overseeing a group of investments that align with
an investor’s long-term financial goals and risk tolerance. Whether you’re an individual investor,
a company, or an institution, this is where the magic happens

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 Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

PORTFOLIO MANAGEMENT

 Portfolio management is the art and science of selecting and overseeing a group of investments
that meet the long-term financial objectives and risk tolerance of a client. Company, or an
institution.
 Some individuals do their own investment portfolio management. That requires a basic
understanding the key elements of portfolio building and maintenance that make for success,
including asset allocation, diversification, and rebalancing.
 Investors can implement strategies to aggressively pursue profits, conservatively attempt to
preserve capital, or a blend of both.
 Portfolio management requires clear long-term goals, clarity from the IRS on tax legislation
changes, understanding of investor risk tolerance, and a willingness to study investment options.
 Portfolio management refers to managing an individual ’s investments in the form of
bonds, shares, cash, mutual funds etc. So that he earns the maximum profits within
the stipulated time frame.
 Portfolio management refers to managing money of an individual under the expert guidance of
portfolio managers.
 In a layman’s language, the art of managing an individual’s investment is called as portfolio
management.

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 Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

Portfolio management involves deciding what assets to include in the portfolio, given the goals of
the portfolio owner and changing economic conditions. Selection involves deciding what assets to
purchase, how many to purchase, when to purchase them, and what assets to divest. These
decisions always involve some sort of performance measurement, most typically expected return
on the portfolio, and the risk associated with this return (i.e. the standard deviation of the return).
Typically, the expected returns from portfolios, comprised of different asset bundles are compared.
The unique goals and circumstances of the investor must also be considered. Some investors are
more risk averse than others. Mutual funds have developed particular techniques to optimize their
portfolio holdings.
Thus, portfolio management is all about strengths, weaknesses, opportunities and threats in the
choice of debt vs. Equity, domestic vs. International, growth vs. Safety and numerous other trade-
offs encountered in the attempt to maximize return at a given appetite for risk.
Aspects of Portfolio Management:
 Basically, portfolio management involves
 A proper investment decision making of what to buy & sell
 Proper money management in terms of investment in a basket of assets so as to satisfy the asset
preferences of investors.
 Reduce the risk and increase returns.

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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

History of Portfolio Management

Portfolio management has evolved significantly over the past century, reflecting changes in
financial markets, economic theories, and investment practices.

The origins of portfolio management can be traced back to the early 20th century when economists
and financial theorists began exploring ways to optimize investment returns while managing risk.
The foundation of modern portfolio management was laid by Harry Markowitz in the 1950s with
his ground-breaking work on Modern Portfolio Theory (MPT). Markowitz introduced the concept
of diversification, demonstrating that a well-diversified portfolio could reduce risk without
sacrificing returns. His work earned him the Nobel Prize in Economics and set the stage for the
development of more sophisticated portfolio management techniques.

Over the decades, portfolio management has incorporated various financial theories, including the
Capital Asset Pricing Model (CAPM) developed by William Sharpe, which helps in understanding
the relationship between risk and expected return.

The Efficient Market Hypothesis (EMH), proposed by Eugene Fama, also influenced portfolio
management by suggesting that it is difficult to consistently outperform the market. As financial
markets grew more complex, the advent of computer technology enabled more advanced
quantitative analysis, leading to the rise of algorithmic trading and factor-based investing.

 Early Investment Practices

Pre-20th Century: The concept of managing investments can be traced back to ancient times when
merchants and traders would diversify their goods to minimize risk. However, formal portfolio
management didn’t exist in its current form. Investors largely relied on basic principles like not
putting all their wealth into a single venture.

 The Birth of Portfolio Theory

1920s – 1930s: The Great Depression and stock market crashes led to a greater understanding of
risk and the need for diversification. Economists began to explore how to balance risk and return
more effectively.
1938: John Burr Williams published “The Theory of Investment Value,” laying the groundwork
for future portfolio theories by discussing the present value of expected future dividends.
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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

 Modern Portfolio Theory (MPT)

1952: Harry Markowitz published his ground breaking paper “Portfolio Selection,” introducing
Modern Portfolio Theory (MPT). He proposed that investors could achieve the maximum expected
return for a given level of risk by diversifying their portfolios. The key insight was that the risk of
a portfolio depends not only on the risk of individual assets but also on how those assets correlate
with one another.
1960s: William Sharpe, John Lintner, and Jan Mossin developed the Capital Asset Pricing Model
(CAPM), building on Markowitz’s work. CAPM provided a model to determine the theoretically
appropriate required rate of return of an asset, considering its risk relative to the market.

 Advancements in the Late 20th Century

1970s – 1980s: The Efficient Market Hypothesis (EMH), proposed by Eugene Fama, suggested
that it’s impossible to consistently achieve higher returns than the overall market because asset
prices fully reflect all available information. This led to the rise of passive investing strategies like
index funds.
1980s – 1990s: The development of computer technology enabled more complex modelling and
analysis, making sophisticated portfolio management techniques more accessible.

 Recent Developments
2000s: The rise of behavioural finance, led by scholars like Daniel Kahneman and Richard Thaler,
challenged the assumptions of rationality in MPT and EMH. They showed that psychological
factors often drive investor behaviour, leading to anomalies in financial markets.
2010s – Present: The advent of robot-advisors, algorithmic trading, and AI-driven portfolio
management has further transformed the landscape, making sophisticated strategies available to a
broader audience.

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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

Importance of Portfolio Management

Portfolio management is crucial for achieving financial objectives, whether for individuals,
corporations, or institutional investors like insurance companies. For individual investors, a well-
managed portfolio can help achieve goals such as retirement, education funding, or wealth
preservation. For institutional investors, particularly in the insurance industry, portfolio
management is vital for ensuring that the company can meet its future liabilities while generating
a stable income stream.
In the context of an insurance company like SBI Life Insurance, portfolio management plays a
critical role in balancing the need to meet policyholder obligations with the desire to generate
returns on investments. Insurance companies must carefully manage their portfolios to ensure that
they have sufficient liquidity to pay claims, comply with regulatory requirements, and achieve a
return on investment that supports their financial stability and growth.
Effective portfolio management also involves risk management, which is essential for mitigating
potential losses in volatile markets. By diversifying investments and employing various risk
management techniques, portfolio managers can protect the portfolio from significant losses while
still achieving the desired returns.

 Risk Management
Risk is an inherent part of investing. The goal of portfolio management is to minimize risk while
striving to maximize returns, a balance that requires strategic diversification and ongoing
monitoring.
Diversification: Portfolio management helps in spreading investments across various asset classes,
industries, and geographical regions, reducing the overall risk. By not putting all eggs in one
basket, investors can mitigate the impact of a poor-performing investment.
Risk-Return Balance: It allows investors to achieve an optimal balance between risk and return
based on their risk tolerance, investment horizon, and financial goals.

 Achieving Financial Goals

Goal Alignment: Portfolio management ensures that investments are aligned with the investor’s
financial goals, whether they are for retirement, education, purchasing a home, or wealth
accumulation. This strategic alignment helps in systematically working towards long-term
objectives.

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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

Custom Tailoring: It provides a structured approach to tailoring an investment strategy that meets
specific needs and preferences, such as income generation, growth, or capital preservation.

 Maximizing Returns
Efficient Asset Allocation: Portfolio management involves choosing the right mix of asset classes,
which can enhance returns by taking advantage of different market conditions.
Performance Optimization: Continuous monitoring and rebalancing of the portfolio can optimize
returns by responding to market changes and adjusting the asset allocation accordingly.

 Adapting to Market Conditions

Market Responsiveness: A well-managed portfolio can quickly adapt to changing economic and
market conditions. Active portfolio management, in particular, involves making adjustments to
capture new opportunities or to minimize losses during downturns.
Hedging and Protection: Techniques like hedging can be employed within the portfolio to protect
against adverse market movements, ensuring stability in volatile markets.

 Professional Guidance
Expertise: Professional portfolio managers bring expertise, experience, and research-based
insights that individual investors may lack. They can provide access to a wider range of investment
opportunities and advanced strategies.
Ongoing Support: Portfolio management offers ongoing support, with regular reviews and
adjustments to ensure that the investment strategy remains aligned with the investor’s goals and
changing circumstances.

 Tax Efficiency
Tax Planning: Effective portfolio management also considers the tax implications of investment
decisions, aiming to maximize after-tax returns. Strategies such as tax-loss harvesting, asset
location, and tax-efficient fund selection are employed to minimize tax liabilities.

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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

Objectives of Portfolio Management

The basic objective of Portfolio Management is to earn a high return at minimum risk. However,
some of the objectives of Portfolio Management

1. Attaining Long-term Financial Goals:

An investor always invests with a motive to secure the future by earning a high return, keeping
this in mind Portfolio Management works with the objective to fulfil the long-term financial
goals of the investors by recommending the most profitable portfolio, overseeing and
rebalancing it from time to time to ensure high return with minimum risk appetite.

2. Capital Appreciation: Capital appreciation means an increase in the value of an asset

over a time period. Portfolio Management intends to make the portfolio of the investor grow, so
the market value of the investment rises within the given timeline, in comparison to its purchase
value. Capital appreciation is the main source of investors’ earnings.

3. Maximizing Return on Investment: Return on Investment shows the earning from

the investment in relation to the expenditure made in such investment. Portfolio Management

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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

aims to maximize the ROI by analysing the market before selecting the right investment mix.
Other factors like time period, inflation, Legal restrictions, and economic conditions are also
considered.

4. Achieving Asset Allocation: The primary objective of Portfolio Management is to

allocate assets across different investment classes, such as equities, fixed income, and alternative
investments in such a way that the asset allocation goes with the investor’s risk profile and
investment goals.

5. Risk Management: Investment and risk are something that goes side by side and hence
is a major concern of the investors. Portfolio Management minimizes the degree of risk
associated with the investment by using the concept of diversified investment. Under this,
investment is not made in a single category of an asset or the same industry, rather the investment
is scattered into various investment classes or different industries, so even if any of the categories
or industries so a downfall the other can overcome it by experiencing the rise.

6. Rebalancing and Monitoring the Portfolio: Portfolio Management aims to regularly

monitor and adjust the portfolio by rebalancing the portfolio, adding or removing assets, or
changing investment strategies so, it remains consistent with the investor’s risk profile and
investment goal

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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

Scope of Portfolio Management

 Asset Allocation and Investment Selection
Determining the optimal asset allocation and selecting specific investments to achieve
investor goals.
 Risk Management and Diversification
Portfolio management encompasses mitigating risk through diversification and strategic
asset allocation to protect investments.
 Monitoring and Rebalancing
Regularly reviewing and adjusting the portfolio to maintain alignment with investor
objectives.
 Aligning with Investor Objectives and Time Horizon
Portfolio management includes tailoring the investment strategy to meet individual investor
goals, risk tolerance, and time horizon.
 Tax Efficiency and Cost Management
Minimizing tax liabilities and investment costs to maximize returns.
 Adapting to Regulatory and Economic Changes
Portfolio management requires adjusting the portfolio in response to changes in regulations,
economy, and market conditions.

 Need for portfolio management

Portfolio management present the best investment plan to the individuals as per their income
budget, Age, and Ability to undertake risk.

Portfolio management minimizes the risk involved in investing and increases the chance of
making profits.

Portfolio managers understand the client’s financial needs and suggest the best and unique
investment policy for them with minimum risk involved.

Portfolio management enables the portfolio managers to provide customized investment

solutions to clients as per their needs and requirement.

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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

Type of Portfolio Management

Active portfolio management:

Active portfolio management focuses on generating higher return then a benchmark index like the
NIFTY 50 or the BSE SENSEX.
The portfolio manager actively manages the investment portfolio and the research them pick the
requisite securities
Investors who have a higher risk appetite and seek higher capital gains opt for Active Portfolio
Management. The portfolio manager selects undervalued stocks and sells them at a higher price
when they realize their true potential.
Moreover, the portfolio manager diversifies the portfolio across investment options to mitigate
investment risk.

Passive Portfolio Management:

Passive Portfolio Management involves mimicking the performance of a market index such as the
Nifty 50.
The fund manager tracks and replicates the stock market index portfolio to give investors returns
in line with the index it tracks.
Passive Portfolio Management focuses on index funds which are mutual funds that mimic market
index portfolios.
Moreover, the Passive Portfolio Management strategy involves lower transaction costs as the
portfolio manager doesn’t churn the portfolio frequently compared to Active Portfolio
Management.

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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

Discretionary Portfolio Management:

The Discretionary Portfolio Management Services portfolio manager has complete control over
the portfolio and can adopt any strategy to achieve investment objectives.
Investment Decisions are entirely at the portfolio manager’s discretion, and the clients don’t have
much of a say in investment decisions.

Non-Discretionary Portfolio Management:

Under Non-Discretionary Portfolio Management Services, the portfolio manager gives investment
ideas. However, clients decide whether to take up these investment ideas while the execution of
trades rests with the portfolio manager.
In Non-Discretionary Portfolio Management Services, the fund manager suggests investment
strategies and works according to the direction given by the client.

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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

Process of Investment Portfolio Management

A step-by-step sequence needs to be followed to achieve the desired results.

 Identification of Investment Objectives: The initial stage in portfolio management is to clearly

define the investor’s financial goals and risk tolerance. Investment objectives vary across
individuals based on factors such as age, income level, financial commitments, and future goals.
Common objectives include
 Capital Growth: Investors aiming for an increase in the value of their assets over time. This is
typically suited for individuals with a long-term investment horizon.
 Income Generation: Prioritizing regular income from investments, such as dividends, interest,
or rent, over capital growth. This approach is often preferred by retirees or those with short-term
income needs.
 Capital Preservation: Ensuring the safety of the invested capital with minimal risk. This is
ideal for conservative investors with low risk tolerance.
 Liquidity: Ensuring the portfolio maintains enough liquid assets to meet the investor’s short-
term financial obligations.
The portfolio manager clearly understands the client’s investment objective. It can be either
capital appreciation or stable returns.

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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

 Estimation of Capital Market: Once the investment objectives are established, it is essential
to analyse the current and expected future conditions of the capital markets. This involves both
macroeconomic and microeconomic analysis
The expected returns and risk involved in the various capital market assets are analysed and
compared.
 Market Trends: Identifying trends in the stock, bond, and commodity markets.
 Economic Indicators: Analysing indicators such as interest rates, inflation rates, GDP growth,
and unemployment levels.
 Risk and Return Analysis: Estimating expected returns and associated risks in various
markets. This stage helps in forming an educated view of where opportunities and risks lie in
the near future.
Effective market estimation assists the portfolio manager in making informed decisions
regarding which asset classes and securities are likely to perform well.

 Decision Regarding Asset Allocation: Decisions regarding the ratio or combination of

different assets like stocks and bonds are taken wisely to generate better returns at minimal risk.
Asset allocation is arguably one of the most critical stages in portfolio management. It involves
distributing investments across different asset classes, such as stocks, bonds, real estate, and
cash, in a manner that aligns with the investor’s objectives. The principle behind asset allocation
is diversification, which reduces overall risk by spreading investments across different asset
categories that typically do not move in tandem. There are three main approaches to asset
allocation
 Strategic Asset Allocation: Establishing a long-term, relatively fixed asset mix based on the
investor’s goals and risk profile. Adjustments are made only if there is a significant change in
objectives.
 Tactical Asset Allocation: Involves short-term adjustments to the asset mix in response to
expected market conditions. Here, portfolio managers may increase exposure to a particular
asset class that is expected to outperform in the short term.
 Dynamic Asset Allocation: A more flexible approach where the portfolio is continuously
adjusted in response to market conditions, keeping in mind both short- and long-term objectives.

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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

 Formulation of Portfolio Strategy: Accordingly, a strategy for investment duration and risk
exposure is formulated.
Once the asset allocation decision is made, the next step is to devise a strategy that defines how
the portfolio will be managed. Two principal approaches dominate portfolio strategy:
 Active Management: Involves a hands-on approach, where the manager actively buys and sells
securities to outperform a benchmark index. Active management relies heavily on research,
market forecasts, and the manager’s experience to generate higher returns than the market.
 Passive Management: This approach involves constructing a portfolio that mirrors a market
index, such as the S&P 500, with the aim of matching the market’s returns. This is a cost-
effective strategy, as there is minimal trading, which reduces transaction costs and taxes.
The choice between active and passive strategies depends on the investor’s belief in market
efficiency, risk tolerance, and the costs associated with frequent trading.

 Selection of Securities and Investment: With a clear strategy in place, the portfolio manager
moves on to selecting specific securities within each asset class. This step requires rigorous
analysis, The assets are analysed on fundamental, technical, maturity, credibility and liquidity
grounds. The best options are selected out of the proposed ones.
 Fundamental Analysis: Examining a company’s financial health, including revenue growth,
profit margins, and debt levels, to identify undervalued securities.
 Technical Analysis: Evaluating price trends, historical data, and volume to predict future
movements in stock prices.
 Sector Analysis: Determining which sectors of the economy (such as technology, healthcare,
or utilities) are likely to perform well in the current economic environment.
The goal is to select a mix of securities that provide optimal returns while keeping risk levels
within the investor’s comfort zone.

 Implementation Of the Portfolio: The planned portfolio is executed by investing in the

selected investment options. once the investment decisions are made, the portfolio is constructed
by purchasing the selected securities. This stage involves the actual execution of trades, ensuring
 Cost Efficiency: Minimizing transaction costs, such as brokerage fees and taxes.
 Timely Execution: Buying or selling securities at the most favourable prices possible to ensure
the portfolio aligns with the planned strategy.

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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

 Account Management: Ensuring that investments are held in appropriate accounts, whether
taxable or tax-deferred, depending on the investor’s tax considerations.
Efficient implementation is critical for maximizing returns and minimizing costs.

 Revision and Evaluation of Portfolio: The process of portfolio management is dynamic and
requires ongoing monitoring. The portfolio must be regularly reviewed to ensure it continues to
meet the investor’s objectives. Key factors for evaluation include:
 Performance Analysis: Comparing the portfolio’s returns to the benchmark index or other
relevant performance metrics.
 Risk Metrics: Assessing the portfolio’s risk levels, such as volatility, and ensuring they align
with the investor’s risk tolerance.
 Economic Changes: Adjusting for changes in market conditions, interest rates, or the investor’s
financial situation.
Regular evaluation helps in identifying underperforming assets or overexposure to certain risks.
The portfolio is evaluated at regular intervals, and the scope of improvement or better
opportunities are analysed.

 Rebalancing the Portfolio: Necessary steps to improve the portfolio are taken by rebalancing
the ratio of investment and the assets to enhance the efficiency of the investment portfolio
Over time, market fluctuations may cause the portfolio to drift away from its intended asset
allocation. For instance, if stocks outperform bonds, they may represent a larger portion of the
portfolio, increasing its overall risk. To restore the desired asset mix, portfolio managers engage
in rebalancing, which involves
 Selling Overperforming Assets: To prevent an over-concentration in a single asset class, high-
performing assets may be sold.
 Buying Underperforming Assets: Increasing investment in assets that have underperformed
but still align with the long-term strategy.
Rebalancing ensures that the portfolio remains consistent with the investor’s risk tolerance and
financial goals, maintaining a balanced risk-return profile.

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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

Portfolio Management Strategies

 Active Management
Active management involves making investment decisions based on thorough market analysis and
predictions with the goal of outperforming a benchmark index. This strategy requires frequent
trading and adjustments to the portfolio, leveraging in-depth research and market timing. Active
managers select securities they believe will outperform the market, relying on their expertise to
capitalize on market inefficiencies. While this approach can potentially yield higher returns, it
often comes with higher management fees and increased trading costs.

 Passive Management
Passive management aims to replicate the performance of a market index by holding a diversified
portfolio that mirrors the index’s composition. This strategy is based on the belief that markets are
efficient, and attempting to outperform the market consistently is challenging. Passive
management involves minimal trading and low management fees, focusing on achieving returns
that match the market rather than exceeding them. The primary advantage of this strategy is its
cost-effectiveness and simplicity, though it lacks the potential for outperforming the market.

 Strategic asset allocation

Strategic asset allocation (SAA) is a long-term investment strategy that establishes a target mix of
asset classes (e.g., stocks, bonds, real estate) based on the investor’s risk tolerance, financial goals,
and investment horizon. The idea is to create a diversified portfolio that achieves an optimal
balance between risk and return. This asset mix remains relatively constant over time, with
periodic rebalancing to restore the original allocation.
Principals of SAA
Risk Tolerance: Investors choose an asset allocation that matches their risk tolerance. For
example, risk-averse investors may allocate more to bonds, while aggressive investors may Favor
equities.
Diversification: Diversifying across asset classes helps reduce overall portfolio risk, as
different assets often respond differently to market conditions.
Long-Term Focus: SAA emphasizes a buy-and-hold approach, reducing the need for frequent
adjustments based on short-term market fluctuations
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Example:
An investor might choose a strategic asset allocation of 60% equities, 30% bonds, and 10% cash
based on their long-term goals and risk tolerance. If market movements cause the equity portion
to rise to 65%, the investor would sell some equities and buy bonds to return to the original
60/30/10 allocation.

Strategic asset allocation chart 📈📉

Asset Target Actual Rebalanced
Class allocation allocation Allocation
(%) (%) (%) (%)
Equities 60% 65% 60%
Bond’s 30% 25/% 30
Cash 10% 10% 10%

 Tactical Asset Allocation (TAA)

Tactical asset allocation (TAA) is a more flexible strategy that allows investors or portfolio
managers to make short-term adjustments to their asset mix based on market conditions or
economic forecasts. Unlike strategic allocation, which remains relatively fixed, TAA involves
temporary deviations from the target asset allocation to capitalize on perceived opportunities.

Principles of TAA:

Active Adjustments: Investors make short-term adjustments to their portfolio based on current
market conditions, such as increasing exposure to equities when they believe the market is poised
for growth.

Market Timing: TAA relies on the ability to predict market movements and adjust the portfolio
accordingly. This can involve shifting between asset classes or sectors based on expected economic
or market changes.

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Example:
A portfolio manager might shift 10% of a portfolio’s assets from bonds to equities if they expect
a short-term stock market rally due to favourable economic data. Once the rally subsides, they
would rebalance the portfolio back to its original allocation.

Tactical Asset Allocation (Chart):

Asset Initial Tactical New
allocatio Allocatio Adjustmen Allocatio
n [%] n (%) t (%) n (%)
Equities 60% +5% 65%
Bonds 30% -5% 25%
Cash 10% 0% 10%

 Growth Investing
Growth investing focuses on identifying and investing in companies expected to experience above-
average growth in earnings or revenue. Investors in this strategy are primarily interested in capital
appreciation rather than current income. Growth stocks are often characterized by high price-to-
earnings ratios and significant reinvestment of earnings into expansion and innovation. While
growth investing can offer substantial long-term gains, it also comes with higher volatility and the
risk of overvaluation.

 Core-Satellite Strategy
The core-satellite strategy blends passive and active management by establishing a “core” portfolio
of stable, broad-market investments, complemented by smaller “satellite” investments aimed at
outperforming the market. The core portion represents the bulk of the portfolio, providing stability
and broad diversification, while the satellite portion is designed to enhance returns through
targeted, higher-risk investments.

Core Investments:
The core is typically composed of low-cost, diversified index funds or ETFs that provide exposure
to major asset classes, such as U.S. equities, international equities, and bonds. The objective is to
match market returns with minimal management costs.

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Satellite Investments:
Satellites are smaller, actively managed positions that seek to generate excess returns through more
aggressive investment strategies. These may include sector-specific funds, emerging market
stocks, or alternative assets like real estate or commodities.
Example:
A portfolio might allocate 70% to a core investment in a diversified global index fund, while 30%
is allocated to satellite investments in emerging markets, technology stocks, and commodities,
which are expected to outperform in the near term.

Core-Satellite Portfolio Allocation (Chart):

Investment Core Satellite Total
Type Allocatio Allocatio Portfolio
n (%) n (%) Allocatio
n (%)
Core (Index 70% 0% 70%
Funds/ETFs
)
Satellite 0% 30% 30%
(Sector
Funds/Activ
e Funds)

 Value Investing
Value investing involves purchasing stocks that are perceived to be undervalued relative to their
intrinsic value, based on fundamental analysis. Investors look for stocks trading below their true
worth, using metrics such as price-to-earnings ratios and price-to-book ratios to identify bargains.
The strategy relies on the expectation that the market will eventually correct the undervaluation,
leading to potential capital appreciation. Although value investing can offer significant upside
potential, it requires patience and thorough analysis to avoid value traps.

 Income Investing
Income investing aims to generate a steady stream of income through investments in dividend-
paying stocks, bonds, and real estate. This strategy focuses on producing regular cash flow rather
than capital appreciation. Income investors seek investments that offer reliable and consistent
returns, such as high-yield bonds and dividend-paying equities. While income investing provides

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a stable income stream, it may offer lower growth potential and can be affected by changes in
interest rates.

 Diversification
Diversification involves spreading investments across various asset classes, sectors, and
geographic regions to reduce risk and enhance returns. By allocating investments among different
types of assets, such as equities, bonds, and real estate, investors aim to minimize the impact of
poor performance in any single investment. Diversification helps stabilize portfolio returns and
manage risk, though it may also dilute potential gains if high-performing investments are balanced
by lower-performing ones.

 Risk Management
Risk management encompasses identifying, assessing, and mitigating potential risks associated
with investments to protect the portfolio from significant losses. This strategy involves evaluating
risks such as market, credit, and interest rate risks and employing techniques like hedging and
portfolio insurance to safeguard against adverse events. Effective risk management aims to
preserve capital and enhance portfolio stability, but it may involve additional costs and may not
fully eliminate risk.

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Recent Trends in Portfolio Management

With technological development, awareness of sustainability, and democratization of investment,
over the years, portfolio management has outgrown its traditional strategies. The next three
important trends shaping the present-day investment scenario are discussed under the sections of
ESG investing, AI and machine learning, and robot-advisors. This represents increased complexity
and sophistication of modern portfolio management.

ESG investing (Environmental, Social, and Governance investing)

ESG investing integrates non-financial factors—environmental, social, and governance—into
financial decision-making. The idea is to identify companies that are not only financially stable
but responsible in their practices. Environmental factor focuses on the impact of the company on
the natural world and includes carbon emissions, waste management, or energy efficiency. Social
factors assess how a firm interacts with their employees, suppliers, and local communities within
which they work, such as fair labour and diversity and inclusion initiatives. Governance refers to
the integrity of a firm's top leadership and the transparency demonstrated by corporate actions, for
instance, pay of key executives, shareholder rights, and composition of the boards.
Portfolio management is redefined under this approach in the pursuit of aligning individual values
and investment. Companies with high ESG ratings are considered to be more resilient because
they are actively managing risks that might eventually lead to reputational or regulatory damage.
Long-term studies show that portfolios that are aligned with ESG can provide returns similar to, if
not better than, those of traditional investments as consumer and investor demand for sustainability
increases. There are challenges facing ESG investing: inconsistent ESG metrics as various rating
agencies apply different criteria for rating the companies, thereby resulting in differences in
company ratings. Another issue is greenwashing, where companies exaggerate ESG efforts to
attract investors; therefore, investors need to be alert in scrutinizing ESG claims.

AI and Machine Learning in Portfolio Management

Artificial intelligence and machine learning are changing the face of portfolio management by
allowing for quicker, data-driven insights and automation. AI systems can analyse vast amounts
of historical and real-time data to identify patterns, forecast trends, and optimize portfolios.
Predictive analytics enables AI to predict the prices of assets and how the market will move using
complex patterns in data. Algorithmic trading is automated buying and selling of securities at the
best possible time, maximizing returns while reducing transaction costs. Machine learning-based
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portfolio optimization adjusts the asset allocation dynamically to ensure that investors remain
resilient amid changing market conditions.
Major advantages AI and ML have for the portfolio management are improved accuracy and more
efficient operations. A better risk management approach further helps in identifying subtle trends
that a human analyst might look over and, hence, further aid investment decisions. Nevertheless,
it remains dependent on quality data, and if bad data exists, whether it be inaccurate or incomplete,
then insight into AI-driven results get distorted. However, this does leave open the question of
algorithmic bias where an AI model might reflect and predict biases that are historically evident
in the data with which the model was trained and thus might lead to possibly biased predictions.
Nevertheless, these notwithstanding, AI and ML are revolutionizing the very traditional portfolio
management space with their tools for precision analysis and decision-making.

Robo-Advisors
Robo-advisors are automated low-cost digital platforms that expand investment management
services to a much wider audience. These digital platforms collect details about the investor's
goals, his or her risk tolerance, and time horizon through questionnaires available online before
advising him or her on diversified portfolios. The portfolio, typically made up of ETFs or index
funds, allows for cost-effectiveness and convenience. They charge a much lower fee than a
traditional advisor and offer an automatic rebalancing, which keeps portfolios in line with investor
objectives.
They offer democratization of investing for those with smaller portfolios, but not much. They lack
deep personalization so may not provide a full answer for complex financial needs, and they do
poorly in volatile market conditions requiring human insight. Still, robot-advisors reflect the huge
trend in portfolio management because they cater to tech-savvy and cost-conscious investors who
require a simpler alternative to traditional financial advisory services.

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Portfolio Management Techniques

Effective portfolio management is crucial for optimizing returns and mitigating risks. This chapter
delves into essential techniques used in portfolio management: diversification, hedging, tactical
asset allocation, and rebalancing. Each technique is explored in detail, with practical examples and
applications.

 Diversification
Importance of Diversification in Reducing Risk
Diversification is a fundamental principle in portfolio management that involves spreading
investments across various assets to reduce the overall risk of the portfolio. The primary goal of
diversification is to minimize the impact of any single investment’s poor performance on the total
portfolio. By diversifying, investors can reduce the volatility and potential losses associated with
individual securities or asset classes. Diversification leverages the idea that different assets respond
differently to economic events, thus balancing out potential fluctuations
Types of Diversification
1. Asset Class Diversification: This approach involves spreading investments across multiple
asset classes, such as equities, fixed income securities, real estate, and commodities. Each asset
class has distinct risk-return characteristics, contributing to a balanced portfolio that reduces
exposure to any single market segment. For instance, while equities might offer high growth
potential, bonds can provide stability and income.
Example: A portfolio comprised of 50% equities, 30% bonds, and 20% real estate investment
trusts (REITs) aims to balance growth and income, thereby reducing overall risk.
2. Geographical Diversification: Investing across various geographic regions helps to mitigate
country-specific risks, including political instability and economic downturns. By including
international investments, investors can benefit from growth opportunities in different markets
and reduce their dependence on the performance of any single country’s economy.
Example: An investment portfolio might include 40% domestic stocks, 30% international
equities, and 30% emerging market investments, thereby spreading geographic risk.
3. Sectoral Diversification: This strategy involves distributing investments across different
industry sectors, such as technology, healthcare, finance, and consumer goods. By avoiding
overexposure to any single sector, investors reduce the risk associated with sector-specific
downturns and capitalize on growth opportunities across various industries.

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Example: A well-diversified portfolio might allocate 25% to technology, 20% to healthcare,

15% to finance, 10% to consumer goods, and 30% to other sectors.

Examples of Well-Diversified Portfolios

I. Balanced Portfolio: A classic example of diversification is the balanced portfolio, which
might consist of 60% equities, 30% fixed income, and 10% alternative investments such as
real estate. This mix seeks to balance growth potential with income and risk reduction.

II. Global Portfolio: Another example is a global investment portfolio, which could include 50%
U.S. equities, 30% international equities, 10% emerging markets, and 10% bonds. This
allocation aims to capture global growth while reducing exposure to any single region.

 Hedging
 Explanation of Hedging Techniques
Hedging is a risk management strategy employed to protect a portfolio from adverse price
movements. It involves taking offsetting positions in financial instruments to mitigate potential
losses. Hedging is not intended to eliminate risk entirely but to manage and reduce it to
acceptable levels. This strategy helps in stabilizing portfolio returns by minimizing the impact
of unfavourable market conditions.
 Use of Derivatives for Hedging
1. Options: Options are financial contracts that grant the right, but not the obligation, to buy (call
option) or sell (put option) an asset at a predetermined price. Investors use options to hedge
against potential declines in asset prices. For example, purchasing put options can provide
insurance against falling stock prices.

2. Futures: Futures contracts obligate the buyer to purchase, or the seller to sell, an asset at a
specified future date and price. Futures are used to hedge against price fluctuations in
commodities, currencies, or financial instruments. For instance, a company expecting future
sales in foreign currency might use currency futures to lock in exchange rates and hedge against
currency risk.

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3. Swaps: Swaps are agreements to exchange cash flows or other financial instruments between
parties. Interest rate swaps, for example, allow parties to exchange fixed interest payments for
floating rates, helping to hedge against interest rate fluctuations.

 Real-Life Examples of Hedging Strategies

1. Currency Hedging: A multinational corporation may use currency futures or options to hedge
against fluctuations in exchange rates that could impact its international revenues. This strategy
helps stabilize cash flows and protect profit margins from adverse currency movements.
2. Stock Market Hedging: An investor with a substantial stock portfolio might purchase put
options to protect against potential market declines. By holding these options, the investor can
limit potential losses if the market experiences a downturn.

 Tactical Asset Allocation

Tactical allocation involves making short-term adjustments to the asset mix based on current
market conditions or economic forecasts. This strategy aims to take advantage of market
opportunities or mitigate risks in the short term.
Examples of Tactical Adjustments Based on Market Conditions
 Economic Expansion: During periods of economic growth, an investor might increase their
allocation to equities to capitalize on rising stock prices. For example, shifting 10% from bonds
to stocks when economic indicators signal robust growth.
 Economic Downturn: In times of economic uncertainty or downturn, an investor might shift
assets from equities to more stable investments like bonds or cash. For instance, reallocating
15% of the portfolio from stocks to government bonds during a market downturn to reduce
exposure to equity risk.

 Rebalancing
Techniques for Rebalancing a Portfolio
Rebalancing involves realigning the portfolio’s asset allocation to maintain the desired risk profile
and investment objectives. This can be achieved through:
 Manual Rebalancing: Investors periodically review and adjust their portfolios by buying or
selling assets to return to their target allocation. This approach requires active management and
periodic assessment.

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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

 Automated Rebalancing: Many investment platforms offer automated rebalancing services,

which adjust the portfolio based on predefined rules or thresholds, ensuring alignment with
investment goals without requiring constant monitoring.

 Frequency and Triggers for Rebalancing

 Periodic Rebalancing: This method involves adjusting the portfolio at regular intervals,
such as quarterly or annually, to ensure that it remains aligned with the investor’s objectives
and risk tolerance.
 Threshold-Based Rebalancing: Rebalancing occurs when the allocation of an asset class
deviates by a specified percentage from the target. For example, rebalancing when the
weight of equities exceeds 60% or falls below 40% helps maintain the intended risk level.

Impact of Rebalancing on Portfolio Returns

 Potential Benefits: Rebalancing helps maintain the portfolio’s risk profile and can potentially
enhance returns by taking advantage of market fluctuations. For instance, selling
overperforming assets and buying underperforming ones may lead to better long-term returns.
 Potential Drawbacks: Frequent rebalancing may incur transaction costs and tax implications,
which can affect overall returns. It is essential to weigh these factors when determining the
rebalancing strategy.

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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

Role of Financial Planner and Investment Advisor

 Financial Planner
A financial planner plays a crucial role in portfolio management by offering a comprehensive
approach to a client’s financial well-being. Unlike an investment advisor, whose focus is
primarily on maximizing investment returns, a financial planner provides a broader perspective
that integrates various financial components such as retirement planning, tax optimization, risk
management, and estate planning. Their goal is to create a structured and long-term strategy that
aligns the client’s financial resources with their personal and financial objectives.

 Role of a Financial Planner in Portfolio Management:

1. Defining Financial Goals: The financial planner’s primary responsibility is to work
with clients to define and prioritize financial goals. These goals can range from saving for a
child's education to planning for retirement or buying a house. Establishing clear goals is
foundational to constructing a portfolio that is tailored to the client's needs.

2. Assessing Risk Tolerance: Financial planners assess a client’s ability and willingness
to take risks. This process involves evaluating various factors such as age, income,
investment experience, and the client's psychological comfort with market fluctuations. The
planner uses this information to recommend an appropriate asset allocation that balances
risk and reward, thereby ensuring that the portfolio aligns with the client's risk profile.

3. Diversification and Asset Allocation: A well-diversified portfolio is essential

for risk mitigation. The financial planner works on spreading investments across different
asset classes—such as stocks, bonds, real estate, and commodities—depending on the
client’s goals and risk tolerance. Proper diversification reduces the impact of poor
performance in any single investment, thus protecting the portfolio from excessive risk.

4. Long-Term Financial Planning: Financial planners adopt a long-term perspective

when managing a portfolio. They look beyond short-term market trends and focus on
ensuring that the client’s future needs, such as retirement or large expenditures, are met.
They constantly monitor progress and adjust the portfolio to stay on track with the client’s
evolving financial goals.
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5. Periodic Portfolio Review and Adjustments: The financial planning process is

dynamic, and planners periodically review the portfolio’s performance to ensure that it
remains aligned with the client’s objectives. Life events, such as marriage, the birth of a
child, or changes in income, can necessitate portfolio adjustments. Planners also adapt to
shifts in market conditions or macroeconomic trends to keep the portfolio optimized.

6. Comprehensive Financial Advice: Beyond investments, financial planners integrate

insurance, debt management, and tax strategies into the overall financial plan. By
considering the client's full financial picture, they ensure that the portfolio complements
other aspects of their financial life.

 Investment Advisor
An investment advisor plays a specialized role in managing portfolios by providing expertise in
selecting securities, monitoring portfolio performance, and making recommendations to align
with the client’s financial objectives. Their primary focus is on ensuring that the portfolio is
optimized for risk-adjusted returns, reflecting both the client’s risk tolerance and time horizon.

 Role of an Investment Advisor in Managing Portfolios:

1. Investment Research and Security Selection: Investment advisors conduct thorough
research on market trends, individual stocks, bonds, mutual funds, and other financial
instruments. Based on their analysis, they recommend investments that fit the client’s goals
and risk tolerance. Advisors use a combination of technical analysis, fundamental analysis, and
macroeconomic trends to guide investment decisions.
2. Portfolio Construction: Once investment options are selected, the advisor constructs a
portfolio that balances the client’s risk and return objectives. This involves determining the
correct asset allocation and ensuring diversification to reduce risk. Advisors also decide
whether the portfolio should follow an active or passive investment strategy, depending on
market conditions and client preferences.

3. Active Portfolio Management: Investment advisors frequently adjust the portfolio to

capitalize on short-term market opportunities or to protect against market downturns. This may
involve rebalancing, hedging, or reallocating assets to sectors with strong growth potential.

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4. Risk Management: Managing risk is a key function of the investment advisor. Advisors
employ strategies like asset diversification, hedging, and stop-loss orders to protect the
portfolio from significant market downturns. They monitor economic indicators and market
volatility to make adjustments that protect the client's capital.

5. Performance Monitoring and Reporting: Investment advisors regularly review portfolio

performance against benchmarks, ensuring the portfolio is achieving the expected return. They
provide clients with detailed reports on the portfolio’s progress, including information on fees,
asset allocation, and individual investment performance.

 Regulatory Requirements and Ethical Considerations for Investment

Advisors
 Regulatory Oversight: Investment advisors are subject to strict regulatory requirements set
by governing bodies such as the Securities and Exchange Board of India (SEBI) or the U.S.
Securities and Exchange Commission (SEC). Advisors must register with these authorities and
adhere to guidelines that ensure transparency, professionalism, and client protection.

 Fiduciary Duty: Investment advisors have a fiduciary responsibility to act in the best interests
of their clients. This means they must put the client's financial well-being above their own
interests, ensuring that all recommendations and actions are aligned with the client's needs and
objectives.

 Disclosure Requirements: Advisors must provide clients with full disclosure regarding their
fees, commissions, and potential conflicts of interest. Transparency is a core ethical
requirement, ensuring that clients are fully informed of any factors that might influence the
advisor’s recommendations.

 Ethical Standards: Advisors are held to high ethical standards, which include maintaining
confidentiality, avoiding conflicts of interest, and acting with integrity and honesty in all client
interactions.

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RISK MANAGEMENT IN PORTFOLIO

Risk management is a fundamental aspect of portfolio management, aimed at identifying,
assessing, and mitigating potential risks that could adversely affect investment performance.
Effective risk management strategies help ensure that a portfolio meets its financial objectives
while minimizing the impact of unforeseen events. This chapter will explore the key principles of
risk management, various types of risks, and strategies for managing and mitigating risk in
portfolio management.

1. Understanding Risk in Investment Portfolios

Risk refers to the uncertainty associated with the potential for investment returns to deviate
from expected outcomes. Understanding and managing risk is crucial for achieving desired
investment outcomes while avoiding excessive losses.

Types of Risk:
In portfolio management, risks are generally divided into systematic risks and unsystematic risks.

1. Systematic Risk (Market Risk): Systematic risk affects the entire market, meaning it cannot
be eliminated through diversification. Examples include changes in the economy, interest rates,
inflation, and global events. These factors impact all investments to some extent.

2. Unsystematic Risk (Specific Risk): Unsystematic risk is unique to individual companies or

industries, like management decisions or sector-specific trends. Unlike systematic risk, it can be
reduced by diversifying across different assets. For instance, if a tech company underperforms,
it won’t affect a portfolio diversified with assets in healthcare, real estate, or energy sectors.

Additional risk types important in Portfolio Management

1. Credit Risk: The risk of loss due to a borrower’s failure to make required payments on debt
securities. This is particularly relevant for bonds and other fixed-income investments.

2. Liquidity Risk: The risk of being unable to buy or sell assets quickly enough to prevent a
loss. This can occur in markets with low trading volumes or during financial crises.

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3. Operational Risk: The risk of loss due to inadequate or failed internal processes, systems, or
external events. This includes risks from technology failures, fraud, or regulatory non-
compliance.

4. Inflation Risk: The risk that inflation will erode the purchasing power of investment returns,
impacting the real value of assets and income.

Risk Assessment Techniques

To manage risks effectively, portfolio managers use different methods to assess the level of risk in
a portfolio.
I. Standard Deviation (Volatility): Standard deviation measures the variability of returns
from the mean. A high standard deviation means the returns are more spread out, indicating
higher volatility and risk. For instance, if a portfolio’s average annual return is 8% with a
standard deviation of 12%, the returns will fluctuate widely, implying higher risk

II. Value at risk (Var) is used to calculate the maximum loss a portfolio can be expected to lose
in a given period. The result is calculated for a specific level of confidence, usually 95 or 99%.
There are two methods of calculating Var using either a normal distribution, or simulations. Var
is widely used for quantifying risk by banks and regulators.
Var calculates the largest daily value decrease over a certain time span and a certain degree of
confidence,
Non parametric method is used to calculate Var regardless of the type of distribution it has.
Knowing that the initial value of investment is WO and the final value of the portfolio at the end
of the target period is W, then it will show the equation: W= WO(1+R) and R is the return
earned by the investor.

III. Beta: Beta measures a portfolio’s sensitivity to market movements. A beta of 1 means the
portfolio’s performance closely follows the market, while a beta above 1 indicates higher
volatility relative to the market. For instance, if a portfolio has a beta of 1.2, it is expected to be
20% more volatile than the overall market, making it riskier but with the potential for higher
returns.
IV. Stress Testing and Scenario Analysis: Stress testing simulates extreme conditions, such as
financial crises or sudden market shifts, to see how a portfolio might perform. Scenario analysis
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focuses on specific hypothetical events, such as oil price increases, to predict their impact on
the portfolio. These assessments provide insights for handling worst-case scenarios and building
a resilient portfolio

 Risk Mitigation Strategies in Portfolio Management

Portfolio managers employ various strategies to manage and reduce the risks associated with
investments. These strategies help protect the portfolio’s value and maintain a balance between
risk and return:

1. Diversification: Diversification involves spreading investments across multiple asset classes,

industries, or geographic regions. By diversifying, portfolio managers reduce unsystematic risk,
as poor performance in one asset can be offset by gains in others. A well-diversified portfolio
might include stocks, bonds, real estate, and international assets to provide a balanced risk
profile.

2. Asset Allocation: Asset allocation is the practice of dividing investments across different asset
categories, such as equities, bonds, and cash, to meet specific risk tolerance and objectives. For
instance, an aggressive portfolio for a young investor might focus on equities for growth, while
a conservative portfolio for a retiree may allocate more to bonds for stability.

3. Hedging: Hedging uses financial instruments like options or futures to offset potential losses.
For example, a portfolio manager might purchase put options to protect against stock market
declines or use currency hedges to reduce the impact of exchange rate fluctuations on
international investments.

4. Rebalancing: Rebalancing is the process of realigning the portfolio’s asset mix by buying or
selling assets to maintain the desired allocation. For example, if equities outperform and take up
a larger portion of the portfolio, rebalancing would involve selling some equities and reinvesting
in bonds or other assets to return to the target allocation.

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 Tools and Techniques for Ongoing Risk Monitoring

 Risk management is not a one-time process. It requires continuous monitoring and adjustments
to respond to changes in market conditions. Portfolio managers use various tools to monitor and
control risk:

 Portfolio Management Software: Platforms like Bloomberg Terminal and Morningstar Direct
provide real-time data and analysis, allowing managers to track performance, risk metrics, and
market trends in real time. This enables quick decision-making and adjustments as needed.

 Risk Dashboards: Dashboards display important risk metrics—like Var, beta, and
diversification scores—in a single view, making it easy for managers to assess risk levels at a
glance. Dashboards also provide alerts for any deviations that require immediate action.

 Automated Alerts and Risk Reports: Automated alerts notify managers when risk thresholds
are exceeded, allowing for prompt adjustments. Risk reports, generated periodically, offer a
comprehensive view of portfolio changes and potential risks, guiding managers in decision-
making and strategy adjustment.

 Aligning Risk Management with Investment Objectives

A crucial part of risk management is ensuring that risk strategies align with the portfolio’s goals
and the investor’s risk tolerance.

 Investor Risk Tolerance: Every investor has a unique tolerance for risk, which must be
considered when creating a portfolio. For example, young investors with long investment
horizons might accept higher risk for potentially greater rewards, while older investors nearing
retirement may prefer safer, low-volatility assets.

 Behavioural Considerations: Behavioural finance studies show that investors are often more
sensitive to losses than gains. This concept, known as loss aversion, can lead investors to make
impulsive decisions in response to market downturns. Portfolio managers must educate
investors on market cycles and the importance of staying committed to the long-term strategy.

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PERFORMANCE EVALUATION IN PORTFOLIO

MANAGEMENT
Performance evaluation is a crucial process in portfolio management, as it measures how well the
portfolio manager has utilized resources to achieve the desired investment objectives. It ensures
that the strategies align with the investor’s financial goals and risk tolerance, and offers a
framework to benchmark results against market indices.

 Objectives of Performance Evaluation

 Assessing the Effectiveness of the Portfolio Strategy:
Evaluating whether the chosen asset allocation and strategies align with the investor’s goals.

 Benchmarking Performance:
Comparing portfolio returns with relevant benchmarks or indices to understand relative
performance.

 Risk-Adjusted Performance Measurement:

Determining whether the returns are justifiable given the risks taken.

 Identifying Manager Skill vs. Market Effects:

Separating the portfolio manager’s skill from general market movements.

 Importance of Performance Evaluation

 Assessing Portfolio Manager Skill:

It separates returns generated by market conditions from those generated by the manager’s
expertise.

Ensuring Alignment with Investment Objectives:

 The portfolio’s performance should reflect the investor’s financial goals, risk appetite, and
investment horizon.

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 Benchmarking Performance:
Comparison against a relevant benchmark helps identify overperformance (alpha) or
underperformance.

 Analysing Risk-Adjusted Returns:

Evaluates whether the portfolio’s return justifies the risk taken by the investor.

 Measuring Portfolio Returns

The initial step in evaluating a portfolio is to measure the returns it generates. Understanding return
types—such as nominal, real, absolute, and relative—provides clarity on portfolio performance
over time and in relation to external factors.

 Nominal and Real Returns:

Nominal returns indicate the raw percentage return of a portfolio without adjustments, often
useful for historical comparisons. However, real returns, adjusted for inflation, offer a more
accurate view by showing the portfolio’s actual increase in purchasing power. This distinction
is crucial because inflation erodes the value of nominal gains over time, which can mislead
investors on true growth.
SBI Life Insurance evaluates both nominal and real returns to assess how effectively its
investments support policyholder obligations and meet strategic goals.

Formula : Real Return=Nominal Return−Inflation Rate

Example: Nominal vs. Real Returns

Year Portfolio Inflation Portfolio
Nominal Rate Real
Return Return
2021 9% 3% 6%
2022 10% 2.5% 7.5%
2023 8% 2% 6%

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SBI Life Insurance Example: In 2022, SBI Life’s nominal return was 10%, but after adjusting
for an inflation rate of 2.5%, the real return came to 7.5%. This real return metric helps the
company assess the actual growth of its assets in terms of purchasing power.

 Absolute and Relative Returns:

Absolute returns measure the total gain or loss, providing a straightforward assessment of
performance. Relative returns, however, compare the portfolio to a benchmark index, adding
context to the results by showing whether the portfolio outperformed or underperformed its peer
group. For instance, a portfolio that returns 10% may seem successful in isolation, but if the
benchmark index returned 12%, the portfolio actually underperformed on a relative basis.

Formula : Relative Return=Portfolio Return−Benchmark Return

Absolute vs. Relative Returns

Portfolio Benchmark Relative
Return Return Return
12% 8% 4%
9% 10% -1%
7% 7% 0%

Example: A portfolio with a 12% return compared to a benchmark return of 8% results in a

4% relative return, indicating outperformance.

 Key Metrics and Formulas for Performance Evaluation

 Sharpe Ratio: Measuring Risk-Adjusted Performance

The Sharpe ratio is a widely recognized metric developed by economist William Sharpe to
assess the risk-adjusted return by examining the excess return over the risk-free rate, adjusted
for total risk (volatility). A higher Sharpe ratio indicates a more efficient portfolio, where greater
returns are generated per unit of risk taken. This metric is particularly valuable for comparing
portfolios with varying levels of risk.

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The Sharpe ratio measures the excess return generated per unit of risk (volatility). It is useful to
determine if the returns are sufficient given the portfolio’s volatility.

Example: A mutual fund portfolio generated a return of 12% over the past year. The risk-free rate
(government bond yield) is 3%, and the portfolio’s standard deviation of returns is 10%
𝟏𝟐%−𝟑%
𝑺𝒉𝒂𝒓𝒑𝒆 𝑹𝒂𝒕𝒊𝒐 = = 𝟎. 𝟗
𝟏𝟎%

Interpretation:
A Sharpe ratio of 0.9 indicates that for every unit of risk taken, the portfolio generated 0.9 units of
excess return. A ratio above 1 is generally considered good, and below 1 suggests that the risk may
not be adequately compensated by returns.

 Treynor Ratio: Evaluating Systematic Risk

The Treynor ratio evaluates performance relative to market risk (beta) rather than total volatise to
market risks specifically, rather than unsystematic risks that diversification can mitigate. Useful for
portfolios exposed to market fluctuations.

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Example:
Consider a portfolio with an annual return of 15% a beta of 1.2, and a risk-free rate of 4%
15%−4%
𝑇𝑟𝑒𝑦𝑛𝑜𝑟 𝑅𝑎𝑡𝑖𝑜 = = 9.17%
1.2
Interpretation
This means the portfolio generated 9.17% excess return for each unit of market risk. A higher
Treynor ratio indicates better performance relative to market volatility

 Jensen’s Alpha:
Jensen’s Alpha gauges whether the portfolio’s returns exceed the expected performance based
on its market risk, using the CAPM model. A positive alpha suggests superior performance
above expected returns, indicating strong manager skill, while a negative alpha implies
underperformance. A 2% positive alpha, for instance, would mean that the portfolio
outperformed its expected benchmark-adjusted returns by that amount.

Formula : α=Portfolio Return−(Risk-Free Rate+β×(Market Return−Risk-Free Rate))

Jensen’s Alpha Calculation

Portfolio CAPM- Jensen's

Return Predicted Alpha
Return
11% 9% 2%
10% 11% -1%
8% 8% 0%

Example: A portfolio with a return of 11% and a CAPM-predicted return of 9% has a

Jensen’s Alpha of 2%, indicating outperformance relative to the CAPM model.

 Benchmarking and Comparison to Market Indexes

Performance evaluation often involves comparing a portfolio’s returns to relevant benchmarks
or market indexes to determine how well the portfolio has performed relative to the broader
market or similar portfolios.
 Selection of Appropriate Benchmarks:
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The choice of benchmark is critical in performance evaluation. The benchmark should reflect
the portfolio's asset allocation, investment style, and risk profile. Common benchmarks include
the S&P 500 for large-cap U.S. equities, the MSCI Emerging Markets Index for emerging
market stocks, and the Barclays U.S. Aggregate Bond Index for bonds

 Benchmarking Against Market Indexes in SBI Life Insurance

SBI Life Insurance compares its portfolio performance to benchmarks such as the NIFTY 50
Index and the S&P BSE 500 to gauge its success in achieving targeted returns.

Example: Benchmark Comparison

Year SBI Life NIFTY Relative

Portfolio 50 Return
Return Return
2021 12% 9% +3%
2022 10% 8% +2%
2023 9% 10% -1%

SBI Life Insurance Example: In 2021, SBI Life outperformed the NIFTY 50 benchmark by
3%. Tracking these relative returns helps SBI Life understand how well its portfolio
performs compared to the broader market.

 Tracking Error:
Tracking error measures the deviation of a portfolio’s returns from its benchmark. A low
tracking error indicates that the portfolio closely follows the benchmark, while a high tracking
error suggests greater deviation. It is a key metric for evaluating the performance of passively
managed funds that aim to track a specific index.

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Tracking Error Calculation

Standard
Portfolio Benchmark Deviation Tracking
Return Return of Error
Returns
10% 8% 8% 1.5%
7% 7% 6% 1.0%
9% 12% 10% 2.0%
Example: A portfolio with a tracking error of 1.5% shows how closely it follows the
benchmark's performance.

 Information Ratio:
The information ratio measures a portfolio manager's ability to generate excess returns relative
to a benchmark, adjusted for the risk taken (as measured by tracking error). A higher information
ratio indicates that the portfolio manager has consistently outperformed the benchmark while
managing risk effectively.
 Information Ratio Calculation
Portfolio Excess Return Tracking Error Information Ratio
2% 1.5% 1.33
0% 1.0% 0.00
-3% 2.0% -1.50
Example: A portfolio with an excess return of 2% and a tracking error of 1.5% has an
information ratio of 1.33, indicating effective excess return generation.

 Benchmark Comparison
Portfoli Benchmar Trackin Informatio
o k Return g Error n Ratio
Return
10% 8% 1.5% 1.33
7% 7% 1.0% 0.00
9% 12% 2.0% -1.50

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Example: A portfolio with a return of 10% and a benchmark return of 8% has a tracking
error of 1.5% and an information ratio of 1.33, indicating effective management and
outperformance relative to the benchmark.

 Performance Attribution Analysis

Performance attribution analysis helps to identify the sources of a portfolio's returns and assess
whether those returns were due to skill, market movements, or luck. It breaks down the
portfolio's performance into various components to understand where value was added or lost.

 Allocation Effect: The allocation effect measures the impact of the portfolio manager’s asset
allocation decisions on performance. It evaluates whether the decision to overweight or
underweight certain asset classes, sectors, or regions contributed positively or negatively to the
portfolio’s returns.

 Selection Effect: The selection effect assesses the impact of the specific securities chosen within
each asset class or sector. This metric shows whether the manager's choice of individual stocks,
bonds, or other assets contributed to or detracted from overall returns.
Allocation and Selection Effect

SBI Life Insurance Example: In 2022, SBI Life’s allocation effect in equities was +1.5% due
to overweighting compared to the market, while the selection effect added another +1%
through effective stock selection. This breakdown allows SBI Life to assess the impact of
asset allocation and stock-picking decisions on performance

 Interaction Effect
Interaction effect assesses the combined influence of allocation and selection. For instance, if
the portfolio manager overweighted a thriving sector and chose top-performing stocks within it,

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the interaction effect would be positive. Together, these effects provide a clear view of the
manager’s skill in both market positioning and security selection.

 Cost-Adjusted Performance
Cost management is integral to portfolio success as fees and expenses can significantly reduce
returns. Cost-adjusted performance considers the impact of these factors on net gains.

 Expense Ratio:
The expense ratio represents the annual management fee, reducing gross returns. A lower expense
ratio is generally preferable, leaving more for investors, while high ratios can erode returns,
especially for passive funds. For example, a mutual fund with a 1.5% expense ratio diminishes the
net returns by that amount annually.
 Turnover Ratio and Transaction Costs:
Turnover ratio indicates the frequency of asset changes within the portfolio, impacting transaction
costs. High turnover can lead to increased trading fees and potential capital gains taxes, detracting
from returns. Portfolios with excessive trading may experience lower net returns compared to those
with a more stable asset composition.
 Net Performance After Fees:
Assessing net performance after deducting all fees gives investors a clearer view of actual returns.
A portfolio with a 10% gross return but 2% in fees yields only 8% net to investors, which is a
critical adjustment for evaluating genuine performance.
Evaluating portfolio performance after fees and expenses helps SBI Life Insurance accurately
assess the net returns available to policyholders.
Example: Expense Ratio and Net Returns
Year Gross Expense Net
Return Ratio Return
2021 11% 1.2% 9.8%
2022 10% 1.1% 8.9%
2023 9% 1.3% 7.7%
SBI Life Insurance Example: In 2021, SBI Life’s gross return of 11% was reduced by an
expense ratio of 1.2%, resulting in a net return of 9.8%. Monitoring these costs allows SBI
Life to understand the impact of expenses on overall portfolio performance.

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 Peer Group Comparisons

Peer group comparisons provide further insight by evaluating a portfolio relative to similar
funds or portfolios with comparable investment objectives, risk levels, and asset allocations.
 Peer Group Benchmarks:
By comparing a portfolio’s performance against a group of similarly managed funds or
portfolios, managers and investors can better gauge relative performance. For instance, a
small-cap growth fund may be assessed against other small-cap growth funds to establish
whether it is leading or lagging its peers.
 Quartile Rankings:
Quartile rankings categorize funds within a peer group, indicating their performance in four
segments: top 25% (first quartile), next 25% (second quartile), and so forth. A first-quartile
ranking suggests outperformance relative to peers, while a fourth-quartile ranking suggests
the opposite, helping investors choose funds that align with competitive performance
standards.
 Peer Group Comparisons for SBI Life Insurance
SBI Life Insurance also evaluates its portfolio by comparing it to similar insurance companies
to understand how well it performs relative to industry standards.

Example: Peer Group Ranking

Year SBI Life Peer Quartile
Portfolio Group Ranking
Return Average
Return
2021 10.5% 9.2% 1st
Quartile
2022 9.8% 10.0% 2nd
Quartile
2023 8.7% 9.0% 2nd
Quartile
SBI Life Insurance Example: In 2021, SBI Life was ranked in the first quartile, outperforming
most of its peers with a return of 10.5% compared to a peer average of 9.2%. Quartile ranking
allows SBI Life to see how it fares against similar portfolios within the insurance industry

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COMPREHENSIVE ANALYSIS
 Banking Industry
Portfolio management in the banking industry of India primarily deals with asset-liability
management. This is done to ensure that the bank is liquid and that there are no interest rate risks.
Most importantly, it has to satisfy all the conditions set by the Reserve Bank of India, or RBI.
Example: Consider State Bank of India. State Bank of India is India's largest public sector bank.
According to the current reports, SBI's portfolio could include the following:
50% Loans (personal loans, home loans, corporate loans)
40% Investment Securities (government bonds, corporate bonds)
10% Cash Reserves
A portfolio of such diversification supports SBI's raising its returns on loans due to the creation of
interest as well as supports a time-to-time liquidation of deposits, satisfying withdrawal calls as
well as supporting a regulated environment.

SBI ASSET ALLOCATION

10%

50%

40%

LOAN INVESTMENT SECURITEIES CASH RESERVE

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 MUTUAL FUND
A mutual fund is an investment vehicle in which money is pooled from several investors for
creating diversified portfolios under the management of professional fund managers. The
philosophy of managing a mutual fund portfolio is based on the concept of risk dispersion and
maximizing returns. Generally, mutual fund strategies are performed in two ways: active
management and passive management. Actively managed funds attempt to beat the market
benchmark by selecting securities based on utmost research and market analysis, whereas passive
funds track the performance of a particular index, such as the NIFTY 50, S&P 500.
Example: HDFC Equity Fund is an example of an actively managed mutual fund that typically
invests in:
70% Equities or large-cap and mid-cap stocks
20% Debt Instruments or government and corporate bonds
10% Cash or Cash Equivalents for liquidity
Aims to track the performance of Nifty 50 Index, and primarily consists of the equities of the
index.

Performance Comparison: Over the last five years, the HDFC Equity Fund has delivered an
average annual return of 15%, outperforming the Nifty 50 Index, which has averaged 12%.

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 INSURANCE SECTOR
This Indian insurance industry has an enormous portfolio of premiums accrued from
policyholders; to be invested suitably so it is possible to clear any claims arising out of policies
and hence generate profits. Portfolio management within this sector is such a way that it balances
a risk with return while the same time ensuring that liquidity arrangements are adequate so there
would be enough to cover all claims or profits obtained.
Example: SBI LIFE (SBI LIFE INCURENCE LTD), being the biggest insurance company in
India, has a good investment portfolio. As of the latest reports, the corporation invests its
portfolio in the following proportions:
55% in Government Securities, to ensure safety and stability
30% in Corporate Bonds, for better returns
10% in Equity Markets, to share the growth of the capital market
5% in Real Estate and Other Assets
This diversified approach enables SBI LIFE to offer assured returns to its policyholders and
generate profitability for the corporation. Due to the significant investment into government
securities, risks can be reduced and strategic positioning in equities and corporate bonds for
growth.

SBI LIFE INCURENSE

GOVERNMENT SECURITIES CORPORATE BONDS

EQUITY MARKET REAL ESTATE & OTHER ASSETS

This diversified approach allows SBI LIFE to provide assured returns to policyholders while
also generating profits for the corporation. By heavily investing in government securities, SBI
mitigates risks while taking strategic positions in equities and corporate bonds for growth.

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 INDIVIDUALINVESTOR’S PORTFOLIO
RADAKRISHAN DAMANI’S PORTFOLIO
As per the latest corporate shareholdings filed, Radha-Krishan Damani publicly holds 13 stocks
with a net worth of over Rs. 183,214.0 Cr.
Radhakrishnan Damani is recognized for his ability to identify undervalued stocks and has built
a significant fortune through his investments in the Indian equity markets. His portfolio typically
reflects a long-term vision, focusing on sectors with strong growth potential.

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CHAPTER II: - LITERATURE REVIEW

Markowitz, h.(1952). “Portfolio Selection”, Journal of finance
Modern Portfolio Theory (MPT)
Modern Portfolio Theory, introduced by Harry Markowitz in 1952, is one of the most influential
frameworks in portfolio management. MPT emphasizes the importance of diversification in
reducing the overall risk of a portfolio. According to Markowitz, the risk of an individual asset
should not be viewed in isolation but rather in the context of how it contributes to the portfolio’s
overall risk. By combining assets that are not perfectly correlated, investors can construct a
portfolio that maximizes returns for a given level of risk or minimizes risk for a given level of
expected return. This concept is captured in the efficient frontier, a graphical representation of
optimal portfolios that offer the highest expected return for a given level of risk.

Sharpe, W. F.(1960), “Capital asset Prices: A Theory of Market equilibrium

Under Conditions of Risk”, Journal of Finance
Capital Asset Pricing Model (CAPM)
The Capital Asset Pricing Model (CAPM), developed by William Sharpe in the 1960s, builds on
MPT by providing a framework for pricing risky securities and understanding the relationship
between expected return and risk. CAPM introduces the concept of beta, a measure of an asset’s
sensitivity to market movements, which is used to determine the expected return of an asset based
on its systematic risk. The model asserts that the expected return on an asset is equal to the risk-
free rate plus a risk premium, which is determined by the asset’s beta. CAPM has become a
fundamental tool in portfolio management for assessing the trade-off between risk and return and
for making investment decisions.

Fama, E, F, And French, K, R. (1970-1992). “The cross section of Expected

Stock Returns”, Journal of finance
Efficient Market Hypothesis (EMH)
The Efficient Market Hypothesis, proposed by Eugene Fama in the 1970s, posits that financial
markets are “informationally efficient,” meaning that asset prices fully reflect all available
information. According to EMH, it is impossible to consistently achieve higher returns than the

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overall market through stock-picking or market timing because any new information is quickly
incorporated into asset prices. EMH has significant implications for portfolio management,
particularly for the debate between active and passive management. If markets are truly efficient,
then passive management—simply tracking a market index—would be the optimal strategy, as
active management would not be able to consistently outperform the market.

Aricing Theory (APT)

Arbitrage Pricing Theory (APT), introduced by Stephen Ross, offers an alternative to CAPM by
accounting for multiple factors affecting an asset's returns rather than just market risk. APT
proposes that various economic and market factors, such as inflation and interest rates, impact
asset returns, providing a more comprehensive approach to asset pricing.
APT is known as a multi-factor model, allowing portfolio managers to adjust portfolios based on
several economic conditions relevant to their investment strategy. This flexibility enables investors
to align their portfolios with specific economic scenarios. For instance, during times of economic
uncertainty, a manager might prioritize assets that are less sensitive to economic downturns.
However, APT has its challenges; it requires identifying and accurately measuring the influence
of relevant factors, which can be complex.

Black-Litterman Model
The Black-Litterman Model, developed by Fischer Black and Robert Litterman, is an advanced
portfolio optimization model that blends market consensus with investor-specific views. This
model allows investors to incorporate their individual insights on expected asset returns while
respecting market equilibrium. It is particularly useful for sophisticated investors and institutional
portfolios.
The Black-Litterman Model helps align portfolios with both market expectations and unique
investor views, enhancing customization in asset allocation. This model accommodates changing
conditions by dynamically adjusting portfolio weights based on updated expectations, which can
improve risk-adjusted returns over traditional methods. However, the model is complex, requiring
advanced statistical tools and accurate inputs to be effective, making it most suitable for large-
scale or institutional investors.

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CHAPTER-III RESEARCH METHODOLOGY

RESEARCH METHODOLOGY

WHAT IS RESEARCH?
Research takes place with the purpose of acquiring knowledge to contribute to further investigation
or process to inform action, to prove a theory, or to reach a result. To produce fruitful experience,
the Research must be of high quality. And types of Research Methodology support to get the best-
suited outcome. We can understand the significance of Research with some fundamental points:
• Research is a way to build knowledge.
• It is an essential requirement to start analysing, writing, reading, and distributing information.
• It nourishes and opens up the minds.
• With Research, different understanding issues seem easy.
• Research helps to build confidence and positivity to try on opportunities.
• The importance of Research in any field can’t be ignored. But many skip researching before
starting anything. Lazy students and disinterested academics do not realize the need for doing
research, but it is an imperative procedure to ensure the safety or positive result of their work. The
research covers not only the education field, but it covers both professionals and non-professionals.
Even for non-professionals, it is meant to acquire knowledge which helps them to sharpen their
skills to survive around intelligence and improve their confidence.

DEFINITION
In Research, the world’s’ signifies frequency and intensity, while the ‘search’ syllable is
synonymous with discovery. This way, ‘research’ means – the repetitive and in-depth findings of
the objects. In other words, searching for the core of the items, making some conclusions,
discovering new theories, and clarifying those contributions fall under the process of “research”.

Research is a well-planned and scientific method of finding solutions to a wide variety of

problems. Under the meaning of Research, there is an attempt made to obtain a solution to the
problem by collecting various types of data and systematic analysis of the multiple aspects of the
issues related. Research is a systematic method, by which new facts are discovered, or ancient
facts are confirmed, and they study the sequences, interactions, causal interpretations, and natural
laws that determine the points obtained. Research, an attempt is made to solve a theoretical or
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practical problem. As per the American sociologist Earl Robert Babbie, “Research is a systematic
inquiry to describe, explain, predict, and control the observed phenomenon. Research involves
inductive and deductive methods.”

WHAT IS RESEARCH METHODOLOGY?

The techniques or the specific procedure which helps the students to identify, choose, process, and
analyse information about a subject is called Research Methodology. It allows the readers to
evaluate the validity and reliability of the study in the research paper. In simple words, it describes
what you did and what made you reach this obtained result. It is practical to know ‘how’ the given
Research or any specific piece of Research was done. How a researcher designs a comprehensive
study to get a reliable outcome which justifies the objectives of the course can be figured out by
research methodology.

Types of Research are as follows:

• Experiments
• Surveys
• Questionnaires
• Interviews
• Case studies
• Participant and non-participant observation
• Observational trials
• Studies using the Delphi method

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PRIMARY DATA
WHAT IS PRIMARY DATA?
Primary data is a type of data that is collected by researchers directly from main sources through
interviews, surveys, experiments, etc. Primary data are usually collected from the source— where
the data originally originates from and are regarded as the best kind of data in research.
The sources of primary data are usually chosen and tailored specifically to meet the demands or
requirements of a particular research. Also, before choosing a financial data source, things like the
aim of the research and financial data of the company need to be identified.
For example, while finding the difference between the financial data of any two companies
financial background is important.
Primary data sources include; Surveys, observations, experiments, questionnaires, focus groups,
interviews, etc, while secondary data sources include; books, journals, articles, web pages, blogs,
etc.
These sources vary explicitly and there is no intersection between the primary and secondary data
sources.

I HAVE CHOSEN THE CASE STUDY BECAUSE: -

A case study is a detailed study of a specific subject, such as a person, group, place, event,
organization, or phenomenon. Case studies are commonly used in social, educational, clinical, and
business research. A case study research design usually involves qualitative methods, but
quantitative methods are sometimes also used. Case studies are good for describing, comparing,
evaluating and understanding different aspects of a research problem.
When to do a case study A case study is an appropriate research design when you want to gain
concrete, contextual, in-depth knowledge about a specific real-world subject. It allows you to
explore the key characteristics, meanings, and implications of the case. Case studies are often a
good choice in a thesis or dissertation. They keep your project focused and manageable when you
don’t have the time or resources to do large-scale research. You might use just one complex case
study where you explore a single subject in depth, or conduct multiple case studies to compare and
illuminate different aspects of your research problem.

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SECONDARY DATA
WHAT IS SECONDARY DATA?
Secondary data refers to data that is collected by someone other than the primary user. Common
sources of secondary data for social science include censuses, information collected by
government departments, organizational records and data that was originally collected for other
research purposes.
Secondary data analysis can save time that would otherwise be spent collecting data and,
particularly in the case of quantitative data, can provide larger and higher-quality databases that
would be unfeasible for any individual researcher to collect on their own.
In addition, analysts of social and economic change consider secondary data essential, since it is
impossible to conduct a new survey that can adequately capture past change and/or developments.
However, secondary data analysis can be less useful in marketing research, as data may be outdated
or inaccurate.
Secondary data can be obtained from different sources: Information collected through censuses or
government departments like housing, social security, electoral statistics, tax records, internet
searches or libraries, GPS, remote sensing, km progress reports.
Administrative data and census, Government departments and agencies routinely collect
information when registering people or carrying out transactions, or for record keeping – usually
when delivering a service. This information is called administrative data.
It can include:
Personal information such as names dates of birth, addresses, information about schools and
educational achievements, information about health, information about criminal convictions or
prison sentences, tax records, such as income.
A census is the procedure of systematically acquiring and recording information about the
members of a given population. It is a regularly occurring and official count of a particular
population.
It is a type of administrative data, but it is collected for the purpose of research at specific intervals.
Most administrative data is collected continuously and for the purpose of delivering a service to
the people.
The secondary data is acquired from the sources of research papers, books, websites and internet.

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SCOPE OF THE STUDY

 This project can help companies to optimize their portfolio management strategies

 Through this project industry professionals can develop a deeper understanding of portfolio
management best practices.

 This project can help investors and policyholders understand the impact regulatory changes
on portfolio management.

 Through this project organisation can improve their financial performance.

 Through this project stakeholder can make informed decisions of about investment and risk
management

 This project can help future researcher providing a foundation of farther research in portfolio
management.

 Through this project industry wide best practices for portfolio management can be develop.

 Through this project individual can learn how to diversify their investment portfolio.

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OBJECTIVE OF THE STUDY

 To evaluate the risk and return trade of portfolio.

 To understand the impact of economic and market conditions on investment strategies.

 To investigate the role of ESG factors in investors or companies’ investment decisions.

 To identify the risk management techniques used in portfolio management.

 To compare SBI life insurance portfolio management with industry standers and
competitors.

 To study portfolio optimization techniques.

 To study on asset allocation strategies.

 To analyse the portfolio management strategies of companies.

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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

CHAPTER IV – CASE STUDY ANALYSIS

This case study, conducted by v. Gajendra Yadav and Dr P. Basaiah (2020), focuses on analysing
the performance of selected companies listed on India's leading stock exchanges. The study
evaluates the risk-return profiles of five companies-Reliance, SBI, TCS, L&T, and Dr Reddy's
Labs-over a 3-year period (January 2017 to December 2019). It aims to assist investors in
constructing portfolios that maximize returns while minimizing risks, using analytical tools like
the Markowitz model, Beta, Standard Deviation, and Sharpe Index.
Portfolio management deals with strategic selection, management, and optimization of a variety
of assets in meeting specific financial goals of an investor. Portfolio management in the context of
the Indian stock market is highly relevant because the movements of the Indian stock market are
highly dynamic and participation level of Foreign Institutional Investors is very high, almost 40%
of total investment. This study has prepared using secondary data from sources above, such as
NSE India and Money control. In doing so, it studies some of the select Indian companies:
Reliance, SBI, TCS, L&T, and Dr. Reddy's Lab. By taking individual stock performance basis and
nature between risk and return, an optimal combination of portfolio may be achieved from 2017
to 2019.
The objectives of this study are to evaluate the risk-return trade-off of these stocks and rank the
portfolio combinations according to the Sharpe ratio, which is a measure of the risk-adjusted
return. Returns are computed by following the changes in the stock price over the period, and risk
is evaluated using standard deviation, which measures price volatility, and beta, which measures
the movement of the stock relative to the market. For each pair of stocks, portfolio return and risk
are calculated and applied to the Sharpe ratio to determine the most efficient combinations.
Hypothesis testing was also carried out to determine the nature of the relationship between risk
and return. The null hypothesis of no significant relationship between risk and return was tested
using a paired T-test.
The data analysis results showed different performance trends of the selected stocks. Reliance
showed the maximum average return of 9.17%, hence the highest performer. The worst was from
Dr. Reddy's Lab, that is 0.048% return. This is low volatility but also does not make for good
returns if a lot of gain was desired. SBI proved to be the riskiest stock, as it had the standard
deviation of 15.42%. It is found that the Reliance-TCS combination gave the highest portfolio
returns at the lowest risk, 0.19 with a return of 9.19%. This combination also scored the highest
on the Sharpe ratio confirming that to be the best one for maximizing the return with minimized
risk exposure. On the contrary, the risk profile was highest for the SBI-Reliance at (10.92), while

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offering only a moderate return to indicate that it is not suitable for conservative investors. The
TCS-L&T portfolio exhibited a balanced option, as the values for return and risk were moderate.

Hypothesis testing reveals that there was no statistically significant relationship between risk and
return, as accepted by the paired T-test at a certain confidence level. The results for such selected
stocks hint at increased risks not being rewarded in proportion to the increases and still support
careful selection of blue-chip stocks rather than diversification to meet required portfolio
management returns. So, for blue chips, such as Reliance or TCS, where it promises stable, long-
term income, it will work well, while such volatility risk in stocks should always have caution.
This study further reiterates that an optimized portfolio, like the combination of Reliance and TCS,
can bring a significant return with minimum risk.
The case study on this combination brings into focus the importance of structured portfolio
management in the Indian stock market. Proper stock pairing may be very helpful in yielding
results in this market. The data-driven approach and calculated metrics such as the Sharpe ratio
prove to be helpful guides for investors, making the correct choice. This study thus supports the
premise that portfolios which are well-selected indeed gain a balanced risk – return profile
especially if the market environment happens to somewhat unpredictable about the movement of
the stock. Finally, the issue of portfolio management aims maximum return from diversified
investment and strategic once as the case clearly outline the path towards such objective within
the context of the Indian financial system

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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

CHAPTER V- Findings, Suggestions, Conclusions

 FINDINGS
 This Case revealed that reliance industries provided the highest returns among the selected
stocks with an average return of 9.17%
 The analysis showed that state bank of India carried the highest risk among all the stocks, with
a standard deviation of 15.42%
 The case study found that TATA Consultancy services delivered a strong return of 5.68% with
moderate risk.
 Larsen & Toubro was the least risky stock in the list, with a standard deviation of 8.63%.
 The lowest return was achieved by Dr. Reddy's Laboratories at 0.048%, which indicates almost
no growth.
 The case showed that the TCS and Reliance portfolio offered the highest combined return of
9.19% with the lowest risk.
 The portfolio of SBI and Reliance had the highest risk measured at 10.92%.
 From the given analysis, it was found that the TCS and L&T portfolio provided a balanced return
of 4.16% with moderate risk.
 The study resulted in where the L&T and Reliance portfolio had a very favourable risk-adjusted
return.
 The project derived the result that the risk-adjusted return of Dr. Reddy's Lab and TCS portfolio
turned out to be less attractive.
 It concludes that there is no major relation between risk and return for these particular stocks.
 The analysis showed correlations between SBI/Reliance (positive) and Dr. Reddy's Lab/L&T
(negative).

 The TCS and Reliance portfolio emerged as the top performer, boasting a Sharpe ratio of 46.26,
making it an ideal investment choice for optimal returns with minimal risk.

 Through diversification with L&T, stability can be imparted and thus would help a portfolio in
terms of balanced risk and returns.

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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

SUGGESTIONS
 Reliance has been the outstanding performer with a return of nearly 9.16%. This indicates that
Investors can be assured of good returns in the long run by investing in blue chip companies.

 SBI has high risk 15.42% and followed by reliance 12.66% it suggested that the investors should
be careful while investing in these securities.

 Investors are advised to invest in Portfolios of TCS &RELIANCE portfolio has highest returns
i.e., 9.19 and with lowest risk with 0.19. which have given the maximum returns.

 SBI & RELIANCE has highest risk i.e., 10.92 and moderate return of 5.40. TCS – L&T

 The investor can diversify the portfolio by investing in high-return stocks like (Reliance
Industries) and low-risk stocks like (Larsen & Toubro).

 Equity portfolios can be supplemented with fixed-income instruments like bonds or government
securities to reduce volatility, especially if one includes a higher-risk stock like SBI.

 There should be a risk management strategy to avoid loss by this stock’s (Any stocks),
Particularly high risky stocks like state bank of India.

 Review your investment goals and risk tolerance regularly

 Investors in banking sectors like SBI should monitors interest rates, inflation and regulatory
changes Adjustments based on these indicators will better manage risk.

 Meet a financial consultant to find best for your investment portfolio.

 Leverage Sharpe and Treynor ratios for risk-adjusted performance evaluation.

 Adopt a long-term investment approach for blue-chip companies like Reliance.

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CONCLUSION
Portfolio management is a vital tool in personal finance and investment strategy, enabling
individuals and institutions to achieve financial goals while managing risk effectively. This project
has underscored the critical role of portfolio management in aligning investments with an
investor's unique risk tolerance and long-term objectives. By exploring the types of portfolios—
such as aggressive, conservative, income, speculative, and hybrid—it became clear that each
serves distinct investor needs, ranging from high returns and steady income to capital preservation.
For instance, aggressive portfolios cater to those with a higher risk appetite and a long investment
horizon, while conservative portfolios are suited for risk-averse individuals seeking stability.

The importance of asset allocation as a cornerstone of portfolio management cannot be overstated.

The division of assets among stocks, bonds, real estate, and other classes determines how well a
portfolio balances risk and return. Strategic Asset Allocation (SAA), with its long-term focus, and
Tactical Asset Allocation (TAA), allowing for short-term market adjustments, offer
complementary approaches to achieving financial objectives while adapting to market conditions.
This insight reinforced the necessity of a well-planned allocation strategy to mitigate risks and
enhance returns.

Risk management emerged as another pivotal component of the project. Through strategies like
diversification, hedging, and rebalancing, investors can protect portfolios from market volatility
and optimize performance. Diversification reduces reliance on a single asset's performance, while
hedging safeguards against adverse market movements using instruments like options or futures.
Rebalancing ensures the portfolio maintains its intended structure by periodically adjusting asset
allocations. These techniques collectively highlight the proactive measures required to build
resilient portfolios.

Performance evaluation plays a critical role in portfolio management by measuring whether

financial goals are being met and identifying areas for improvement. Comparing portfolio returns
to benchmarks or market indices, alongside using metrics like the Sharpe and Treynor ratios,
provides insights into risk-adjusted performance. These tools help investors determine if their
strategies are yielding adequate returns relative to the risks undertaken, emphasizing the
importance of ongoing assessment in achieving investment success.

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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

Financial advisors and planners are instrumental in the portfolio management process. Advisors
specialize in offering investment recommendations, constructing portfolios, and adjusting
strategies in response to market dynamics, ensuring portfolios align with clients' financial
objectives and risk profiles. Meanwhile, financial planners adopt a holistic approach, integrating
investments into broader financial planning that includes retirement, tax strategies, and estate
management. Their combined efforts ensure that portfolios are not only optimized for current
conditions but also aligned with long-term financial aspirations.

This project highlighted that effective portfolio management transcends mere asset selection; it
requires strategic planning, comprehensive risk management, and adaptability to evolving market
conditions. It demands a clear understanding of the investor's goals, risk tolerance, and time
horizon. The dynamic nature of portfolio management necessitates continuous monitoring,
strategic adjustments, and collaboration between clients and financial professionals.

Ultimately, the essence of portfolio management lies in achieving a balance between risk and
reward through diversified, well-maintained portfolios tailored to individual financial goals. By
leveraging the expertise of financial advisors and planners, investors can navigate the complexities
of the financial markets and make informed decisions. This ensures not only the fulfilment of
immediate investment objectives but also the creation of long-term wealth. The project has
deepened the understanding of portfolio management as a dynamic, multifaceted process that is
essential for financial success in a constantly changing economic landscape.

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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

CHAPTER VI - BIBLIOGRAPHY
 Books
Author Name :- Bodie, Z., Kane, A., & Marcus, A. J. (2019).
Title :- Investments (11th ed.)
Publication :- McGraw-Hill Education
A comprehensive guide to investment strategies, portfolio theories, asset pricing, and risk
management
--------------------------------------------------------------------------------------------------------------------
Author Name :- Markowitz, H. M. (1959).
Title :- Portfolio Selection: Efficient Diversification of Investments.
Publication :- Yale University Press.
The foundational text on Modern Portfolio Theory, focusing on diversification to optimize
portfolios.
--------------------------------------------------------------------------------------------------------------------
Author Name :- Chandra, P. (2017).
Title :- Investment Analysis and Portfolio Management (5th ed.).
Publication :- Tata McGraw-Hill.
Covers advanced techniques in portfolio construction, performance evaluation, and risk
assessment.
--------------------------------------------------------------------------------------------------------------------
Author Name :- Ranganathan, M., & Madhumathi, R. (2020).
Title :- Investment Analysis and Portfolio Management (3rd ed.).
Publication :- Dorling Kindersley (India) Pvt. Ltd.
A detailed analysis of portfolio management strategies, focusing on risk-return analysis and
valuation.
--------------------------------------------------------------------------------------------------------------------
Author Name :- Sharpe, W. F., Alexander, G. J., & Bailey, J. V. (1999).
Title :- Investments (6th ed.).
Publication :- Prentice Hall.
Explores the concepts of CAPM, asset allocation, and portfolio optimization techniques.
--------------------------------------------------------------------------------------------------------------------

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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

 Webliography

INVESTOPEDIA :- www.investopedia.com

5PAISA :- www.5paisa.com

JARO EDUCATION :- www.jaroeducation.com

GROWW :- www.groww.in

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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

CHAPTER VII - ANNEXURE

A Study on Portfolio Management
V. Gajendra Yadav1, Dr. P. Basaiah2
1
Student, 2M. Com, MBA, Ph.D., ICWA,
1,2
Department of Management, JNTU Anantapur, Ananthapuramu, Andhra Pradesh, India

Annotation: How to cite this paper: V. Gajendra

Portfolio Management is a very generic term used to Yadav
refer to the management of different assets. In the | Dr. P. Basaiah "A
financial markets, there are many assets available, Study on Portfolio
such as stocks, bonds, and Treasury bill, Management"
IJ 3 38
commodities, currencies. etc., The main objective of Published in TS 3

portfolio management is to maximize the return and International Journal of Trend in

minimize the risk for that one should do the process Scientific
of selection of portfolio, analysis of portfolio, Research and Development
revision of portfolio and evaluation of portfolio from (ijtsrd), ISSN: 24566470, Volume-4 |
time-to-time. India is developing country in which Issue-5, August 2020, pp.1409-1411,
stock market is growing day by day. Indian stock URL:
markets have attracted huge Foreign Institutional
Investors (FII) that is nearly 40% of investment. The
study is to analysis risk, return of the selected to
stocks, showing the best combination of portfolio
using beta, sharp index value.
www.ijtsrd.com/papers/ijtsrd33138.pdf
INTRODUCTION
Indian stock market Industry plays a positive role in the growth of the economy and prevents
economic disasters of the country. In India most of the trading takes place only in two stock
exchanges, those are Bombay stock exchange (BSE) and the National stock exchange (NSE).
Portfolio Management is defined as the art and science of making decisions about the investment
mix.

In general, the portfolio is constructed based on the selection of different sectors stocks that yield
high return and reduce the risk.

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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

The companies selected for study

1. Reliance
2. SBI
3. TCS
4. L&T CO.,
5. DrReddy’s LAB

Need of the study:

The study is to analyse the portfolio from time to time and reviewed and adjusted if needed. The
evaluation of portfolio is to be done in terms of targets set for risk and returns.

Scope of the study:

The study covers the calculation of risk, return of securities in order to find out the best portfolio
to investor. For a period of 3 years data. i.e. from January 2017 to December 2019.

Objectives of the study:

 To analyse the Return of DrReddy’s Lab, TCS, L&T, SBI &Reliance.
 To study the Risk of DrReddy’s Lab, TCS, L&T, SBI &Reliance.
 To Rank the portfolio based on the returns and risk.

Research methodology:
The study is based on the secondary data collected from the internet,
www.nseindia.com,www.moneycontrol.com

Limitations of the study;

Construction of Portfolio is restricted to two companies based on Markowitz model.

Very few and randomly selected scripts / companies are analysed from NSE Listings.

 HYPOTHESIS
HO: There is no significant relationship between risk and return.

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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

H1: There is significant relationship between risk and return.

Data Analysis
The rate of return on any stock is calculated as,
R= (p1-p0)/p0

Whereas;
R = expected rate of return during period t. P1 = price of closing P0= price of opening.
5 | J
SCRIPTS AVG.RETURN
RELIANCE 9.17
SBI 3.19
L&T 3.13
TCS 5.68
Dredd’s 0.048
LAB
International Journal of Trend in Scientific Research and Development (IJTSRD) @
www.ijtsrd.com eISSN: 2456-6470

From, the above returns Reliance 9.17, TCS 5.68 with lowest is DrReddys lab 0.048

The rate of risk is calculated by standard deviation. Standard Deviation = Variance

Variance = 1/n (R-R)2

SCRIPTS RISK
RELIANCE 12.66
SBI 15.42
L&T 8.63
TCS 11.3
DrREDDYS 9.34
LAB

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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

From, the above table, sbi has highest risk15.42, reliance 12.66 & l&t 8.63.

Beta: Beta is a measure of a stock's volatility in relation to the overall market. Beta with more than
1(>1) shows that the stock will move twice as much as the market. Beta with less than 1(<1) shows
that the stock movement is less than the market movements. Beta with equals to 1(=1) shows that
the stock will moves along with the market.

Scripts Beta
β
RELIANCE 1.79
SBI 2.44
L&T 0.21
TCS 0.76
DrREDDYS 0.011
LAB

Correlation analysis is done by using Pearson’s correlation.

The formula is
r= n(∑xy)-(∑x)(∑y)
√[n∑x2-(∑x)2] [n∑y2-(∑y)2]

Where; x = returns of individual stocks A. y = returns of individual stocks B.

Correlation analysis is a technique used to find out the relationship between two individual stocks
The Pearson correlation is done in the SPPS software. The bivariate correlation is done in SPSS
and the output is show below.

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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

PARTICULARS CORRELATIONS
DR REDDY -0.077
LAB-TCS
DR REDDY -0.636
LAB-L&T
DR REDDY -0.262
LAB- SBI
DR REDDY 0.38
LAB-
RELIANCE
TCS-L&T -0.369
TCS-SBI 0.284
TCS-RELIANCE 0.194
L&T-SBI -0.023
L&T- -0.229
RELIANCE
SBI-RELIANCE 0.254

CALCULATION OF PORTFOLIO WEIGHTS

Wa = σb{σb-(nab*σa)}/σa2+σb2-(2nab)(σa)(σb)
Wb = 1-Wa

CALCULATION OF PORTFOLIO RISK

Rp = Ѵ(σa*Wa)2+(σb*Wb)2+2*σa*σb*Wa*Wb*nab

CALCULATION OF PORTFOLIO RETURN

RK = (RA*WA)+(RB+WB)

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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

PORTFOLIO RETURN &RISK

COMPANY RETURNS RISK
DR REDDY
2.37 6.92
LAB-TCS
DR REDDY
1.66 3.83
LAB-L&T
DR REDDY
1.03 6.95
LAB- SBI
DR REDDY
LAB- 2.50 8.71
RELIANCE
TCS-L&T 4.16 5.47
TCS-SBI 4.95 10.23
TCS-
9.19 0.19
RELIANCE
L&T-SBI 3.14 7.46
L&T-
5.07 7.05
RELIANCE

The TCS & RELIANCE portfolio has highest returns i.e., 9.19 and with lowest risk with 0.19. SBI
& RELIANCE has highest risk i.e., 10.92 and moderate return of 5.40. TCS – L&T has the
moderate return and risk of 4.16 &5.47 respectively.

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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

From the Sharpe index the Reliance-TCS have high Sharpe ratio when compared with other
combination. Then TCS-L&T, L&TReliance, and SBI-Reliance are followed respectively.
HYPOTHESIS
HO: There is no significant relationship between risk and return.
H1: There is significant relationship between risk and return.
Calculation of hypothesis paired T-Test using spss.

In t-test if t(cal) value is greater than t(table) value we reject null hypothesis and accept alternative
hypothesis and vice versa. Here, the T (cal) {T (cal) <T (table), (-1.983 < 1.833)} Is less than the
T (table) value, hence we accept Null hypothesis (h0) i.e., There is no significant relationship
between risk and return.
Findings:
Individual returns on the selected stocks are DRREDDYS LAB, TCS, Larsen and Toubro Ltd.,
SBI & RELIANCE are 0.048%, 5.67%, 3.12%,3.18% & 9.16 respectively.

Individual risks on the selected stocks including DRREDDYS LAB, TCS, Larsen and Toubro Ltd.,
SBI & RELIANCE are 9.34%,11.3%, 8.63%, 15.42% & 12.66% respectively.

Portfolios Returns &Risk of the TCS & RELIANCE portfolio has highest returns i.e., 9.19 and
with lowest risk with 0.19. SBI & RELIANCE has highest risk i.e., 10.92 and moderate return of
5.40. TCS – L&T has the moderate return and risk of 4.16 &5.47 respectively.

On evaluating performance TCS-RELIANCE ranks 1st in Sharpe's index performance.

Suggestions:
Reliance has been the outstanding performer with a return of nearly 9.16%. This indicates that
Investors can be assured of good returns in the long run by investing in blue chip companies.

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Portfolio Management: A Study on Investment Strategies SYMMS (SEM III)

SBI has high risk 15.42% and followed by reliance 12.66% it suggested that the investors should
be careful while investing in these securities.

Investors are advised to invest in Portfolios of TCS & RELIANCE portfolio has highest returns
i.e., 9.19 and with lowest risk with 0.19.which have given the maximum returns.

SBI & RELIANCE has highest risk i.e., 10.92 and moderate return of 5.40. TCS – L&T

Conclusion:
Portfolio management is a process of encompassing many activities of investment assets and
securities. It is a dynamic and flexible concept and involves regular and systematic
analysis, judgment, and action. A combination of securities held together will give a beneficial
result if they grouped in a manner to secure higher returns after taking into consideration the risk
elements.

The main objective of the Portfolio management is to help the investors to make wise choice
between alternate investments without a post trading share. Any portfolio management must
specify the objectives like Maximum returns, Optimum Returns, Capital appreciation, Safety etc.,
in the same prospectus.

References:
[1] www.moneycontrol.com
[2] www.nseindia.com
[3] Investment Analysis and Portfolio Management, written by M. Ranganathan, R.
Madhumathi published by Dorling Kindersley (India) Pvt.Ltd, 3rd Editions.
[4] Investment Analysis and Portfolio Management, written by Prasanna Chandra Published by
Tata McGraw-Hill, 3rd Edition.

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