Tuesday 11 October 2016

Portfolio Management- Make it Easy





Hello Friends,

It's my pleasure that I am writing this blog for those who wants to understand what is Portfolio in an easy way.

As we know that Investment secures our futures.

Today's Investments leads to brighten your future.Even a student can save enough from his pocket to generate a handsome return at the time of his completion of graduation.

Do you want to really make money from money?

It's a great platform for you to learn how we can secure our investment without compromising return.

First, we will start as the academic purpose but we will see the practical scenario as well.


So let start.





First, we need to know what is the portfolio.

Suppose you have 1000 rupees($) You may have several options
Option 1. Just spent it. travel with friends, movie watching etc.
Option 2. 500 spend 500 Deposit into bank
Option 3. 1000 deposit into bank
Option 4. Invest in Reliance Industries
Option 5. Make diversification in Investment Like some proportion in Reliance, some in Tata, Some in Banking Sector and some in Govt. Bond




So what you want?

If you choose option 1 that means you are rich enough not caring money. And those not aware of utilisation of money in proper manner definitely they will lose out in future.

if you choose option 2 that means you care about money but not utilising in a wise manner. Deposit into the bank where you get the only marginal rate of return.

If you have chosen option 3 that means you care about money but not wise to utilise it.

If you have chosen option 4 that means you care about money and have the hunger to earn a massive return with taking a massive risk. What happens if Reliance share drops down dramatically? You will curse yourself. Put your all eggs in a basket is not a good wise decision.

if you have selected Option 5 that means o my God you are Investor. You are wise enough to utilise your money.





Some of you may argue that this is not fair, option 1 or 2 or 3 may be best. But after reading this blogger your mindset will change.



Here it doesn't matter that you are a student or layman. Here you will know the ABC of a portfolio in a simple manner. Even you can become a good expert.

So don't talk many let's start this chapter.


The first question arise in your mind that what is Portfolio and how its work?

In simple Portfolio is the combination of various security which reduces risk by maintaining a good rate of return.



For studying Portfolio you should have the fundamental knowledge of statistics. Oh stuck after knowing that it will require basic statistics.


Don't worry buddy, Why we are here

We will start from very Basic Points. So are you ready?

First Point

What is return?

we are shouting here return return return. How we calculate it


Return(%)=     (Price(end)- Price(Beginning)+Any Income distribution)/Price Beginning

Suppose you have invested in Reliance Industries $100 on 25 Jan. 2016 when the price of Reliance Industries was $100 per share. That means you have a share. suppose at today the Price of Reliance Industries is $150 then how much you have earned?

Simple buddy=( $150-$100)/$100 = 50%


Point No. 2

What is Average Return

Let's Take an example

year       Return
2001      10
2002      12
2003      15
2004      25
2005      30



Average Return = (10+12+15+25+30)/5 = 18.4


So do you need a formula for average return?


Point No. 3

What is expected Return based on Probability

Let's do with another example. we need not mention formula. You are a genius buddy. You can make it by yourself


Return%             Probability
10                          .20
20                          .50
50                          .10
70                          .10
100                        .10


Expected Return = 10x.20+20x.50+50x.10+70x.10+100x.10 = 34%

Do we need to tell that sum of probability is always coming 1?


Point No 4.

What is Risk?


Even a little child can tell chances of losing money is a risk.

oh .........

yes

so there is any way that we can calculate risk in securities?


So first we need to identify risk. How it arises, how we can identify it.


Before we started I want to tell you one story

In 11th class, I have a friend named Pankaj. You will laugh after knowing his friend-hood name, Tidda


So Tidda and I were only two boys from our village who were studying in Delhi Govt. School.

Only 40 rupees were allotted to me for pocket money. Which included fare as well. Tidda was so chip.He never spent his penny. He used to borrow from me. Whenever he saw ice cream or any eatable thing his mouth comes to the water.

Slowly he borrowed from me 200 rupees. Whenever I ask him for return. He neglect.I was worried a lot. He was not returning my money. Even he had found an idea, whenever I asked him for money he angrily replied that he will bring 200 coins of 1 rupees and stick it on my forehead.


From that day I came to know that I had invested the money in 100% risk Zone.
But somehow I got my money.


So there are two types of risk that are a systematic risk and unsystematic risk.

For basic know knowledge, systematic risk comes from the economy as a whole and unsystematic risk is a micro level risk. We will discuss it later


it is right to say for security risk is the deviation.

Analyse some securities you will find some securities gets the sharp dip and up and some little dip little up. So in which security you think that more volatility?



I know you are a genius buddy.

Sharp dip and sharp up have more risk.



So first we will study about Risk of an Individual security.

if you are statistics student it means you are eager to tell?


yes buddy volatility can be measured using Standard deviation, Variance, Coefficient of Variance


Now we will talk about these.



Standard deviation whose lovely name is S.D is a measure of total risk of a security. High volatility
means high risk.
Decision-based on standard deviation is if higher the S.D, Higher will be the risk.

Let us take an example


Year    Return(%)    x- Average Return i.e( d )             dxd
1             20                          10                                       100
2           -10                         - 20                                      400
3            30                           20                                       400
4           -5                            -15                                      300
5           15                              5                                         25
  

Where average return = sum of return/ no. of years = 50/5 = 10%

d denotes the deviation from the average return

Why we square d because if you add deviation from average return results into zero.

Check it buddy

Now know the equation of S.D

 


where x = given rate and x bar = Average Return


you can use n-1 well in the denominator. It makes sample S.D unbiased.


We can also calculate standard deviation based on Probability.

And that is very simple

sd=√n x p x (1-p) 

or 

S.D = under- root of  sigma(Probability x square of d)



There is another way also to find Risk and that is variance.
Variance is also a measure of risk.
Variance is denoted by square of S.D
Decision-based on variance is Higher the variance, Higher the Risk

for example-

                                                                 Tata            Reliance
                              S.D                               10                 5
                               Variance                     100               25

Now we will learn what is Coefficient of variation based on past data. As I have told earlier that these measure risk, and we are taking about unsystematic risk.
CV may be defined as risk per unit of return.
E.g
                                                               S Ltd.                    Z Ltd.
                                         S.D                  10                          20
                                    Average Return    10                          10
                                         CV                    1                            2
CV is calculated dividing S.D by Average return
What does it mean for S Ltd. and Z Ltd.?
Its means for every 1 rupee return S Ltd has to bear the risk of 1 and for Z Ltd. the risk is 2 for every rupee return.

Decision-based on CV.
Higher the CV, Higher the Risk
that means for low-risk aversion person lower CV is better.

It is true in every sense that for every unit of increase in risk will lead to an increase in expectation of the Investor.Higher risk averse person expect higher return and

We can also calculate CV based on probability

CV = Standard deviation/ Expected return

For selecting securities we can follow basic rules which are as follows

Rule 1. Where the risk of two securities is the same, we select that security which gives a higher return.

For e.g
                                                                  Tata                Reliance
                                          Risk                   6                       6

                                          Return             13                     15

Since in these two securities risk are same but Reliance has more return, so we shall select Reliance over Tata

Rule2. When return is same for two securities then whichever have lower risk selected.

For e.g
                                                              Tata                    Reliance
                                      Risk                   15                         5
                                      Return                15                        15

So the Reliance shall have superiority over Tata because of lower risk.

Rule3. When risk and return of both securities are different we take our decision on basis of C.V.
            Lower the Better

   E.g                                                           Tata            Reliance
                                                     Return      10              15
                                                     Risk           5               20

             CV tata = 5/10 = .50:1
             CV Reliance = 20/15 = 1.33;1

So the Tata is the best option here

Note that Rule no. 03 should not be applied where more than 2 securities are given.The application of CV is limited up to 2 securities given.



Now after learning of basic statistics we will go to the next steps


Point No. 5  Return of Portfolio based on past data
For understanding purpose, we are taking an example.
Let Mr Kumar wants to invest 10000 INR and there are two securities available.Suppose he invests in both securities with equal amount i.e 5000 each and return is 10% and 20% respectively then what would be returned?

Simple

Return = 10x.50+20x.50 = 15%

In equation language

Return = Return from security A x Weight of security A+ Return from security B x Weight of security B.

We can calculate Portfolio return using return and weight.

Can we calculate Portfolio return using expected return?

Yes, buddy, everyone expects something and all market future is depends upon expectation. Sometimes expectation depends upon true facts and sometimes we are guessing.

Then return on portfolio is

Expected return on security A x Weight of security A + Expected return on security B x Weight of security B

Now we are perfect in calculating the risk of a single investment, but the portfolio is not about a single investment.
Now we will learn how to calculate the risk of Portfolio.


As we know that the volatility is the other name of risk.

here we will learn two more measures used in Portfolio named Coefficient of Correlation and Co-Variance.

Firstly let's talk about S.D of Portfolio

Before we starting I want to tell one thing also that Portfolio risk doesn't mean the weighted average risk.

The real equation is( for two investment)

S.D of A and B  =


we will discuss later that why we have not used the weighted average formula for calculating S.D of the portfolio.

Now we will learn about coefficient of correlation

Coefficient of correlation = Covariance of Asset A and B / S.D of A x S.D of B


to be continued.....

http://fkrt.it/mufSp!NNNN








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