### Annualised Risk and Return

FM Assignment Q) Obtain daily, weekly and monthly closing prices of the stock given to you. Get adjusted closing prices. Daily and weekly prices should be for one financial year. Monthly prices should be for 2 years. E. g. FY 2011-2012 and FY 2010-11. Compute annualized return and risk. DATA| ANNUALIZED RETURN| ANNUALIZED RISK| Weekly| -16. 952| 36. 449| Daily| -16. 241| 39. 347| Monthly| -11. 21| 30. 209| Comparing this with a suitable peer company, Company| Annualized return| Annualized risk| JSP| -11. 2154| 30. 209| TATA STEEL| -4. 0020| 47. 202| OBSERVATION

As can be seen from the observations above, the stock which gives the maximum return also comes with the maximum risk (TATA STEEL). So when it comes to selecting the stock, the following two cases can be considered: a) Maximum return :- If you are a person who values maximum return and is willing to take the risk for the same, go for TATA STEEL b) Minimum Risk :- If you are a risk averse person, go for JSP as the risk associated with it is less compared to TATA STEEL In either case, whether TATA STEEL or JSP, the annualized return is negative. Q) Construct 10 different portfolios with another company (Correl < 0. 0) and compute return and risk for each portfolio. Identify the best portfolio. Construct the minimum variance portfolio. Company| Correl| JSP AND TATA STEEL| 0. 89| JSP AND CUMMINS| 0. 65| Initially we compared JSP and TATA STEEL. We found the Correl = 0. 89 which was greater than 0. 70. Next we compared JSP and Cummins and found the Correl to be 0. 65. So we will choose Cummins for making the portfolio. Portfolio| Return(%)| Return(%)| | | Percentage ofJSP| | Percentage of CUMMINS| | Portfolio Return| | JSP| CUMMINS| | | | | | | | 1| -11. 21| 14. 83| | | 10%| | 90%| | 12. 2233| 2| -11. 21| 14. 3| | | 20%| | 80%| | 9. 6196| 3| -11. 21| 14. 83| | | 30%| | 70%| | 7. 0159| 4| -11. 21| 14. 83| | | 40%| | 60%| | 4. 4122| 5| -11. 21| 14. 83| | | 45%| | 55%| | 3. 11035| 6| -11. 21| 14. 83| | | 50%| | 50%| | 1. 8085| 7| -11. 21| 14. 83| | | 60%| | 40%| | -0. 7952| 8| -11. 21| 14. 83| | | 70%| | 30%| | -3. 3989| 9| -11. 21| 14. 83| | | 80%| | 20%| | -6. 0026| 10| -11. 21| 14. 83| | | 90%| | 10%| | -8. 6063| Min Variance| -11. 21| 14. 83| | | 36%| | 64%| | 5. 45368| Portfolio| Risk(%)| Risk(%)| | Percentage ofJSP| | Percentage of CUMMINS| Covariance| Portfolio Risk| | JSP| CUMMINS| | | | | | | | 30. 21| 27. 36| | 10%| | 90%| 543. 6637905| 6. 99497971| 2| 30. 21| 27. 36| | 20%| | 80%| 543. 6637905| 9. 326639613| 3| 30. 21| 27. 36| | 30%| | 70%| 543. 6637905| 10. 685008| 4| 30. 21| 27. 36| | 40%| | 60%| 543. 6637905| 11. 42275403| 5| 30. 21| 27. 36| | 45%| | 55%| 543. 6637905| 11. 59986156| 6| 30. 21| 27. 36| | 50%| | 50%| 543. 6637905| 11. 65829952| 7| 30. 21| 27. 36| | 60%| | 40%| 543. 6637905| 11. 42275403| 8| 30. 21| 27. 36| | 70%| | 30%| 543. 6637905| 10. 685008| 9| 30. 21| 27. 36| | 80%| | 20%| 543. 6637905| 9. 326639613| 10| 30. 21| 27. 36| | 90%| | 10%| 543. 637905| 6. 99497971| Min Variance| 30. 21| 27. 36| | 36%| | 64%| 543. 6637905| 11. 19196754| From the above observation, for decision regarding the best portfolio the following cases can be considered:- a) Maximum Return :- If one wants to maximize the return, one should have a portfolio mix consisting of 10% JSP and 90% Cummins b) Minimize Risk :- A risk averse person should go for a portfolio mix consisting of 10% JSP and 90% Cummins c) Minimum Variance: – Ideally, as per the minimum variance rule, one should have 36% of JSP and 64% of Cummins as their portfolio mix.

But in this case, it does not give the maximum return nor the least risk. Since maximum return as well as minimum risk is observed for a portfolio mix of 90% Cummins and 10% JSP, one should opt for that. Learning’s * For studying the valuation of assets or securities, knowledge about the concepts of Risks and Returns are essential * Variance or standard deviation is the measure of the risk of returns * Combination of multiple securities are called portfolio’s * Portfolio risk is not a weighted average risk as the securities included in the portfolio are associated with each other.

Hence, portfolio risk also accounts for the covariance between the returns of securities * Covariance is the product of standard deviation of individual securities and their correlation coefficient * The magnitude of the portfolio risk will depend on the correlation between the securities.

The portfolio risk will be equal to the weighted risk of individual securities if the correlation coefficient is +1. 0. If correlation coefficient < 1, the portfolio risk will be less than the weighted average risk. When the correlation coefficient = -1. 0, the portfolio risk becomes 0. Submitted By Group C14 Vaibhav Bhasin 2012182 Vinay Harinarayanan 2012184