Acknowledgement

I would like to express my heartiest gratitude to Mr.Kunal Damle,

Territory Head Pune, for giving me an opportunity to work in such an
esteemed organization. I am thankful to Mr.Kunal Chowdhary,
Mr.Achint Garg, for providing me with excellent opportunities to
understand the complete organizational process and apply my knowledge
at practical level. I have gained immense knowledge through the constant
daily interactions we had throughout the training period. Thank you for
your guidance sir.

I would also like to thank Mr. Akash Munshi for his constant guidance
and encouragement which helped me immensely, and without which I
could not have accomplished my project.

I also take this opportunity to thank all the members of KOTAK family for
providing me with constant cooperation and thus making my summer
training a memorable one.

I would also like to take this opportunity to thank to the Director

Prof.Atul Sapre and all faculty members of IMDR, My family members,
my seniors and my friends for their moral support throughout the
training period.

Above all I am grateful to almighty, the most beneficent and merciful,

who provided me confidence and determination in accomplishing this
work.

1
KOTAK SECURITIES

2
EXECUTIVE SUMMARY

I completed my Summer Training in KOTAK SECURITIES

(PUNE). This being the first exposure to the corporate world
provided me with a lot of opportunities to understand the
functioning of organization. My expectation was to gain an
insight into the working of an organization and at the same time
develop a better understanding of different processes of the
organization.

The aim was not only to do a project but also to make myself
aware of the various functions of this department and learn
through observing the day-day activities. In this report, I have
made an attempt to capture all my experiences and learning’s
during my summer training, followed by a brief on the project
that I had undertaken as part of my internship.

First part of my internship was with the Retail Division of

KOTAK SECURITIES that is mainly responsible for creating and
maintaining relationship with clients including HNI’s. Also, we in
teams of 3 were responsible for achieving targets given, in terms
of number of clients and margin amount. I worked as the part of
similar team and along with generating leads for the company
our focus was on carrying out need analysis and advising clients
regarding suitable vehicles of investment. Also, Customer
support i.e. explaining the functioning of the market to the new

3
clients & helping them in exploring investment opportunities in
the Equity, Derivatives & Commodity markets.
I was fortunate enough to join the company at the time of its
opening of second branch in Pune city, thus I was able to gain a
first hand experience of how a new venture is initiated.

The second part of my internship was into the technical analysis

of various securities in terms of evaluating the risk of taking up
a security and the return fetched by that particular security. The
base, which was used for this part, was the CAPM model, i.e.
Capital Asset Pricing Model that basically gives us the risk and
return relationship for a given stock. The quantitative analysis
using this particular model helps us to know various risk
attached to a given stock and also how is this particular stock
sensitive to the market fluctuations. It also gives us an insight
as to how the stock has performed in comparison to market
expectations from that scrip. We also gain an insight on as to
how the risk free securities play the role of increasing return per
unit of risk, as a smart investor tend to avoid risk and maximize
his returns. As we know that investors’ main anxieties are
related to the returns they will get and what kind of risk are they
exposed to. Thus through this model we can measure the
expected rate of return from a particular security and thus will
leave us in a better position to advise our clients in terms of
which stock to take up.

4
About The Company

Kotak Mahindra Group

Kotak Mahindra is one of India's leading financial institutions,

offering complete financial solutions that encompass every sphere of
life. From commercial banking, to stock broking, to mutual funds, to
life insurance, to investment banking, the group caters to the
financial needs of individuals and corporates.

The group has a net worth of around Rs.1, 700 crore and employs
over 4,000 employees in its various businesses. With a presence in
74 cities in India and offices in New York, London, Dubai and
Mauritius, it services a customer base of over 5,00,000.

Kotak Mahindra has international partnerships with Goldman Sachs

(one of the world's largest investment banks and brokerage firms),
Ford Credit (one of the world's largest dedicated automobile
financiers) and Old Mutual (a large insurance, banking and asset
management conglomerate).
The Kotak group include the following under its umbrella brand:

 Kotak Mahindra Bank Ltd.

 Kotak Mahindra Primus Ltd.
 Kotak Mahindra Asset Management Co. Ltd.
 Kotak Mahindra Old Mutual Life Insurance Limited.
 Kotak Securities Ltd.
 Kotak Mahindra Capital Co. Ltd.

5
The Kotak Mahindra Group was born in 1985 as Kotak Capital
Management Finance Limited. Uday Kotak, Sidney A. A. Pinto and
Kotak & Company promoted this company. Industrialists Harish
Mahindra and Anand Mahindra took a stake in 1986, and that's
when the company changed its name to Kotak Mahindra Finance
Limited. Since then it's been a steady and confident journey to
growth and success which is as follows:

1986 Kotak Mahindra Finance Limited

starts the activity of Bill Discounting
1987 Kotak Mahindra Finance Limited
enters the Lease and Hire Purchase
market
1990 The Auto Finance division is started
1991 The Investment Banking Division is
started. Takes over FICOM, one of
India’s largest financial retail
marketing networks
1992 Enters the Funds Syndication sector
1995 Brokerage and Distribution
businesses incorporated into a
separate company - Kotak Securities.
Investment Banking division
incorporated into a separate company
- Kotak Mahindra Capital Company
1996 The Auto Finance Business is hived
off into a separate company - Kotak
Mahindra Primus Limited. Kotak
Mahindra takes a significant stake in

6
 Ford Credit Kotak Mahindra Limited,
for financing Ford vehicles. The
launch of Matrix Information Services
Limited marks the Group’s entry into
information distribution.
1998 Enters the mutual fund market with
the launch of Kotak Mahindra Asset
Management Company.
2000 Kotak Mahindra ties up with Old
Mutual plc. For the Life Insurance
business.
2003 Kotak Securities launches
kotakstreet.com - its on-line broking

Kotak Securities Limited

7
Kotak Securities needs no introduction as India's largest stock
broking house and it is also the leader as far as primary market
distribution goes.

Kotak Securities Ltd. has been formed by a strategic joint venture

between Kotak Mahindra Bank and Goldman Sachs, a leading
international investment banking and brokerage firm.

A corporate member of the BSE and the NSE, Kotak Securities is also
a depository participant with the National Securities Depository
Limited (NSDL) and the Central Depository services Limited (CDSL)
for trading and settlement of dematerialized shares.

Kotak securities cater exclusively to share trading and investment

requirements. It provides that pedestal where the investor can take
control of all his investing needs.

The company has a full-fledged research division involved in Macro

Economic studies, sectoral research and company specific equity
research combined with a strong and well-networked sales force,
which helps deliver current and up to date market information and
news.

The company has 42 branches servicing around 1,00,000 customers.

Kotakstreet.com the online division of Kotak Securities Limited offers
Internet Broking services and also online IPO and Mutual Fund
Investments.

8
Kotak Securities Limited manages assets over 1700 crores under
Portfolio Management Services (PMS) which is mainly to the high end
of the market. Kotak Securities Limited has newly launched “Kotak
Infinity” as a distinct discretionary Portfolio Management Service,
which looks into the middle end of the market.

Kotak Securities offers a range of products and services to meet

different investing needs. It caters to the specific needs of various
clients as per their requirement. They have different products
designed to meet different investor needs. The broking house
provides its clients access to different types of D-Mat a/c ,all having
different benefits attached to it.

Share Market at a Glance

Evolution

9
Indian Stock Markets are one of the oldest in Asia. Its history dates back
to nearly 200 years ago. The earliest records of security dealings in India
are meager and obscure. The East India Company was the dominant
institution in those days and business in its loan securities used to be
transacted towards the close of the eighteenth century.

Post-independence Scenario

Bangalore Stock Exchange Limited was registered in 1957 and

recognized in 1963.

During early sixties there were eight recognized stock exchanges in India
The number virtually remained unchanged, for nearly two decades.
During eighties, however, many stock exchanges were established:
Cochin Stock Exchange (1980), Uttar Pradesh Stock Exchange
Association Limited (at Kanpur982), and Pune Stock Exchange Limited
(1982), Ludhiana Stock Exchange Association Limitesd (1983), Gauhati
Stock Exchange Limited (1984), Kanara Stock Exchange Limited (at
Mangalore, 1985), Magadh Stock Exchange Association (at Patna, 1986),
Jaipur Stock Exchange Limited (1989), Bhubaneswar Stock Exchange
Association Limited (1989), Saurashtra Kutch Stock Exchange Limited
(at Rajkot, 1989), Vadodara Stock Exchange Limited (at Baroda, 1990)
and recently established exchanges - Coimbatore and Meerut. Thus, at
present, there are totally twenty-one recognized stock exchanges in India
excluding the Over The Counter Exchange of India Limited (OTCEI) and
the National Stock Exchange of India Limited (NSEIL).

The Table given below portrays the overall growth pattern of Indian stock
markets since independence. It is quite evident from the Table that
Indian stock markets have not only grown just in number of exchanges,

10
but also in number of listed companies and in capital of listed
companies. The remarkable growth after 1985 can be clearly seen from
the Table, and this was due to the favoring government policies towards
security market industry.

Growth Pattern of the Indian Stock Market

As on 31st 1946 1961 1971 1975 1980 1985 1991 1995

S.No.
December
No. Of 7 7 8 8 9 14 20 22
1 Stock
Exchanges
No. Of 1125 1203 1599 1552 2265 4344 6229 8593
2
Listed Cos.
No. Of Stock 1506 2111 2838 3230 3697 6174 8967 11784
3 Issues of
Listed Cos.
Capital of 270 753 1812 2614 3973 9723 32041 59583
4 Listed
Cos. (Cr. Rs.)
Market value 971 1292 2675 3273 6750 25302 110279 478121
of
5 Capital of
Listed
Cos. (Cr. Rs.)
Capital per 24 63 113 168 175 224 514 693
Listed Cos.
6
(4/2)
(Lakh Rs.)
7 Market Value 86 107 167 211 298 582 1770 5564
of

11
 Capital per
Listed
Cos. (Lakh Rs.)
(5/2)
Appreciated 358 170 148 126 170 260 344 803
value
8 of Capital per
Listed Cos.
(Lakh Rs.)

Source: Various issues of the Stock Exchange Official Directory, Vol.2 (9)
(iii), Bombay Stock Exchange, Bombay.

Bombay Stock Exchange (BSE)

The Stock Exchange, Mumbai, popularly known as "BSE" was

established in 1875 as "The Native Share and Stock Brokers
Association". It is the oldest one in Asia, even older than the Tokyo
Stock Exchange, which was established in 1878. It is a voluntary non-
profit making Association of Persons (AOP) and is currently engaged in
the process of converting itself into demutualised and corporate entity. It
has evolved over the years into its present status as the premier Stock
Exchange in the country. It is the first Stock Exchange in the Country to
have obtained permanent recognition in 1956 from the Govt. of India
under the Securities Contracts (Regulation) Act, 1956.

12
The Exchange, while providing an efficient and transparent market for
trading in securities, debt and derivatives upholds the interests of the
investors and ensures redressal of their grievances whether against the
companies or its own member-brokers. It also strives to educate and
enlighten the investors by conducting investor education programmes
and making available to them necessary informative inputs.

A Governing Board having 20 directors is the apex body, which decides

the policies and regulates the affairs of the Exchange. The Governing
Board consists of 9 elected directors, who are from the broking
community (one third of them retire ever year by rotation), three SEBI
nominees, six public representatives and an Executive Director & Chief
Executive Officer and a Chief Operating Officer.

The Executive Director as the Chief Executive Officer is responsible for

the day-to-day administration of the Exchange and the Chief Operating
Officer and other Heads of Departments assist him.

The Exchange has inserted new Rule No.126 A in its Rules, Bye-laws &
Regulations pertaining to constitution of the Executive Committee of the
Exchange. Accordingly, an Executive Committee, consisting of three
elected directors, three SEBI nominees or public representatives,
Executive Director & CEO and Chief Operating Officer has been
constituted. The Committee considers judicial & quasi matters in which
the Governing Board has powers as an Appellate Authority, matters
regarding annulment of transactions, admission, continuance and
suspension of member-brokers, declaration of a member-broker as

13
defaulter, norms, procedures and other matters relating to arbitration,
fees, deposits, margins and other monies payable by the member-brokers
to the Exchange, etc

Turnover on the Exchange

 The average daily turnover of the Exchange during the financial

year 2003-2004 and 2004-05 (April-March), was
Rs. 1978.81 crores and Rs. 2050.26 crores respectively.
 The average number of daily trades recorded during the above
period was 7.98 lakhs and 9.38 lakhs respectively.

The ban on all deferral products like Borrowing & Lending of Securities
Scheme (BLESS) and Automated Lending & Borrowing Mechanism
(ALBM) in the Indian capital markets by SEBI w.e.f. July 2, 2001,
abolition of account period settlements, introduction of Compulsory
Rolling Settlements in all scrips traded on the Exchanges w.e.f.
December 31, 2001, etc. has adversely impacted the liquidity in the
market and consequently there is a considerable decline in the average
daily turnover at the Exchange as reflected in above statistics.

National Stock Exchange (NSE)

With the liberalization of the Indian economy, it was found inevitable to
lift the Indian stock market trading system on par with the international
standards. On the basis of the recommendations of high-powered
Pherwani Committee, Industrial Development Bank of India, Industrial
Credit and Investment Corporation of India, Industrial Finance

14
Corporation of India, all Insurance Corporations, selected commercial
banks and others incorporated the National Stock Exchange in 1992.
Trading at NSE can be classified under two broad categories:

(a) Wholesale debt market and

(b) Capital market.
Wholesale debt market operations are similar to money market
operations - institutions and corporate bodies enter into high value
transactions in financial instruments such as government securities,
treasury bills, public sector unit bonds, commercial paper, certificate of
deposit, etc.
There are two kinds of players in NSE:
(a) Trading members and
(b) Participants.
Recognized members of NSE are called trading members who trade on
behalf of themselves and their clients. Participants include trading
members and large players like banks who take direct settlement
responsibility.
Trading at NSE takes place through a fully automated screen-based
trading mechanism that adopts the principle of an order-driven market.
Trading members can stay at their offices and execute the trading, since
they are linked through a communication network. The prices at which
the buyer and seller are willing to transact will appear on the screen.
When the prices match the transaction will be completed and a
confirmation slip will be printed at the office of the trading member.
NSE has several advantages over the traditional trading exchanges. They
are as follows:

15
  NSE brings an integrated stock market trading network across the
nation.

 Investors can trade at the same price from anywhere in the

country since inter-market operations are streamlined coupled
with the countrywide access to the securities.

 Delays in communication, late payments and the malpractice’s

prevailing in the traditional trading mechanism can be done away
with greater operational efficiency and informational transparency
in the stock market operations, with the support of total
computerized network.

Unless stock markets provide professionalized service, small investors

and foreign investors will not be interested in capital market operations.
And capital market being one of the major sources of long-term finance
for industrial projects, India cannot afford to damage the capital market
path. In this regard NSE gains vital importance in the Indian capital
market system.

Listing means admission of the securities to dealings on a recognized

stock exchange. The securities may be of any public limited company,
Central or State Government, quasi-governmental and other financial
institutions/corporations, municipalities, etc.
The objectives of listing are mainly to:
 Provide liquidity to securities;
 Mobilize savings for economic development;
 Protect interest of investors by ensuring full disclosures.

16
The Exchange has a separate Listing Department to grant approval for
listing of securities of companies in accordance with the provisions of the
Securities Contracts (Regulation) Act, 1956, Securities Contracts
(Regulation) Rules, 1957, Companies Act, 1956, Guidelines issued by
SEBI and Rules, Bye-laws and Regulations of the Exchange.
A company intending to have its securities listed on the Exchange has to
comply with the listing requirements prescribed by the Exchange. Some
of the requirements are as under: -

Working with the Retail Division Of Kotak Securities

The intial part of my internship involved working with the retail sales
division of the company. This involved direct selling of the services to the
clients. I worked upon a target to attain a target of 25 clients per month
in a team of 3. The process of achieving target and various observations
made during that period is as follows:

We as a team was provided with a database of the prospect clients whom

we need to call up and educate them regarding the services provided by
the company. This included:

17
  Details about the stock market to the naïve investors and
encouraging them to invest in capital market.
 Making them aware of various risks attached with the stock
market.
 Advising clients as to which kind of investment they should go in
for.
 Analyzing the requirement of the client on different parameters,
(which are mentioned in detail further), and providing them with
the suitable investment patterns.
 Providing them in detail all the services Kotak has to offer.

This all included various factors to be studied, before advising a client

which kind of investment he should go in for. Some of the factors are as
follows:
 The amount a client has to put in stock market.
 His attitude to carry risk.
 The time span with in which he is expecting returns.
 Whether he is looking for a long-term investment or short-term
gains?
 Whether he has a fair amount of knowledge about stock market?

Thus before approaching a client various factors needed to be

considered. If a client is a newcomer he need to convince well
regarding the risk associated with the investment. The clients I
approached, maximum were newcomer to this field. Thus I need to
provide them with details regarding how stock market operates and
what it is all about. They need to educate regarding various channels
of investment such as Equity, Futures& Options etc.

18
 Also various formalities need to be dealt with before a client can
actually open an account. The person who wishes to open the account
needs to provide certain document for verifications. These are needed
basically for:
 Identity Proof
 Address Proof
The documents, which can be provided, are:
 Passport
 Driving License.
 Ration Card
 PAN card

Other than the above mentioned, the mandatory documents, which

need to be provided, are
 Bank statement
 Cancelled cheque
Ones the sales person collect all the documents and get the form filled by
the clients, it is send to the Mumbai Head Office, where it gets verified
and if every thing is as specified in the span of 2 days a pin number and
a DMAT a/c number is generated in the name of that client. The client
then has to transact through this ID and PIN number provided to him.

There are different types of account facilities, which are provided to

clients as per their requirements.

19
 

Technical Analysis Of Stocks using “CAPM model”

The second part of my training involved the analysis of stocks using

the CAPM model, which provides a tool to evaluate the risk and
return from a particular stock. Here to evaluate the return and risk of
4 securities, historical data of past 52 weeks has been taken as a
sample and inferences are drawn from that only. Following are the 4
securities that are undertaken (as sample) for studies:
1. Bajaj Auto
2. BPCL

20
 3. Dr.Reddy’s
4. Century Textile.

Markowitz (1952) began the modern age of Finance by showing

how increasing diversification lowers risk taking up. His work was
based on the idea that stock returns are normally distributed and
that people like returns and do not like risk. Thus they want a high
mean, low standard deviation or lower risk portfolio. The portfolios
that have the highest return for a given level of risk are called the
mean-variance efficient frontier (MVE). The capital Asset Pricing
Model is an extension of Markowitz Portfolio theory. It tries to co
relate the returns from the stock with the market index rather
than as well as with the returns from other stocks.

Other than the risky securities to invest in there is also available

risk free securities in the market for the investors to go in for. For
e.g. Government securities. When a Risk free asset is included in
the model we can draw a line from the RF rate to the MVE we have
what is called a capital allocation line (CAL). We obviously want to
take the highest CAL. (the one with the highest return per unit of
risk-also called the coefficient of variation). Thus, the optimal CAL
will be just tangent to the old MVE frontier. If the CAL is tangent at
the market portfolio, then the CAL is called the capital market line
(CML).

E(r)

 

 M

21
Rf   MVE Frontier

Variance

From this big beginning step, Sharpe, Linter, and Treynor (some
also say Mossien) helped to develop what has become known as
the Capital Asset Pricing Model (CAPM). This MODEL is one of the
most famous of all financial models.

Risk is an important consideration in holding any portfolio. The risk in

holding securities is generally associated with the possibility that realized
returns will be less than the returns expected.

Risks can be classified as Systematic risks and Unsystematic risks.

 Unsystematic risks:

These are risks that are unique to a firm or industry. Factors such as
management capability, consumer preferences, labour, etc. contribute to
unsystematic risks. Unsystematic risks are controllable by nature and
can be considerably reduced by sufficiently diversifying one's portfolio.

 Systematic risks/ Market risks.

These are risks associated with the economic, political, sociological

and other macro-level changes. They affect the entire market as a whole

22
and cannot be controlled or eliminated merely by diversifying one's
portfolio.

Beta
The degree, to which different portfolios are affected by these
systematic risks as compared to the effect on the market as a whole, is
different and is measured by Beta. To put it differently, the systematic
risks of various securities differ due to their relationships with the
market. The Beta factor describes the movement in a stock's or a
portfolio's returns in relation to that of the market return. For all
practical purposes, the market returns are measured by the returns on
the index (Nifty, Mid-cap etc.), since the index is a good reflector of the
market. In other words it is the measure of the contribution of an
individual securities to the risk of a well-diversified security. The CAPM
contends that shares co-move with the market. If the market moves by
1% and a share has a beta of two, then the return on the share would
move by 2%. The beta indicates the sensitivity of the return on shares
with the return on the market. Some companies' activities are more
sensitive to changes in the market - eg luxury car manufacturers - have
high betas, while those relating to goods and services likely to be in
demand irrespective of the economic cycle - eg food manufacturers - have
lower betas. The beta value of 1.0 is the benchmark against which all
share betas are measured.

 Beta > 1 - aggressive shares

These shares tend to go up faster then the market in a rising (bull)

market and fall more than the market in a declining (bear) market.

 Beta < 1 - defensive shares

23
 These shares will generally experience smaller than average gains in a
rising market and smaller than average falls in a declining market.

 Beta = 1 - neutral shares

These shares are expected to follow the market.

Methodology / Formula
Beta is calculated as:
 = Cov (X, Y)
Var (X)
Where,
Y is the returns on your portfolio or stock - DEPENDENT VARIABLE

X is the market returns or index - INDEPENDENT VARIABLE

Variance is the square of standard deviation.

Covariance is a statistic that measures how two variables co-vary, and is

given by:

Where, N denotes the total number of observations, and and

respectively represent the arithmetic averages of x and y.

24
In order to calculate the beta of a portfolio, multiply the weightage of
each stock in the portfolio with its beta value to arrive at the weighted
average beta of the portfolio.

Standard Deviation

Standard Deviation is a statistical tool, which measures the variability of

returns from the expected value, or volatility. It is denoted by sigma(s). It
is calculated using the formula mentioned below:

Where, is the sample mean, xi’s are the observations (returns), and N is
the total number of observations or the sample size.

Three economists – William Sharpe, John Lintner, Jack Treyner,

developed this model in the mid 1960’s. It states that in a competitive
market, the expected risk premium varies in direct proportion to beta.

i.e.… (Ri – Rf) µ 

Expected risk premium (Ri – Rf) = difference between the investment’s

expected return (in this case i) and return from risk free instrument (Rf).
Beta () = the sensitivity of an investment /security to the market
movement.

Thus when a graph is plotted with the expected return in y-axis and beta
in x-axis, we get:
Security Market Line (SML)

25
Expected Rm (Market
Portfolio)
Return

Risk Premium
Rf (Treasury Bills)

0
1.0
Beta

The line that connects Rf & Rm (market return) is called the security
market line (SML). “For Rf the beta is zero and for Rm it is one.” Any
investment considered must lie along SML because beta – the slope of
the line 0 is directly proportional to the expected rate of return.

Calculation of the slope of SML

Consider the market portfolio. Its expected rate of return is Rm and
beta is m.

Slope of SML = (Rm – Rf)/ m.

Since beta for the market portfolio is one

Slope = (Rm – Rf)/ 1
= (Rm – Rf) (1)

26
 This is called the market risk premium. (Difference
between market return and risk free return).

Now for any stock that is considered, the slope will be the same.
Therefore slope = (Ri – Rf)/ (i) (2)
Where Ri is the expected rate of return for stock (i)
(i) = The sensitivity of stock (i) to the market.

From (1) & (2) we get

(Ri – Rf)/ (i) = Rm – Rf

Ri = Rf + (i)*(Rm-Rf)

i.e. … Expected rate of return on any stock = Expected rate of return

from risk free Investment + beta of that stock * Market risk premium

CAPM depends on three main things

1) The pure time value of money: This is the reward for waiting for your
money, without taking any risk. Rf denotes it
2) The reward for bearing systematic risk: This is the reward that market
offers for bearing an average amount of systematic risk in addition to
waiting.
It is denoted by (Rm – Rf), i.e the market risk premium.
3) The amount of systematic risk: This I the amount of systematic risk
present in a particular asset or portfolio, relative to an average asset. It is
measured by .

27
Uses of CAPM:
1.To find out the expected return of any particular asset.
2.To find out the discount rate for a new capital investment.

Basic Principles of CAPM:

1.Investors like high expected return and low standard deviation.

Common stock portfolios that offer highest expected returns for a given
standard deviation are know as efficient portfolios.

2.If investor can lend or borrow at the risk free rate of interest, one
efficient portfolio is better than all the others: the portfolio that offers the
highest ratio of risk premium to standard deviation (i.e. A risk averse
investor will put part of his money in this efficient portfolio and part in
risk free assets. For eg. Government bonds.

The above discussed are the various terminologies which are used in
evaluating various stocks for their return and risk under the CAPM
model. It is essential to know these functions so as to understand the
whole process. Below are mentioned the step-by-step process of working
of “CAPM”.

1.To find the average earnings of each stock, data of 52 weeks is taken
on weekly basis and the weekly return is calculated using the formula
mentioned below. To calculate the Expected rate of return and further
Beta, the prices of securities were taken over 52 weeks from 5 thjuly2004

28
to 5th July 2005. The return per week was calculated by the following
formula:

= Pi – Po+E (divd)
Po
Where Pi =closing price of the stock for a week
Po = opening price of the stock for a week
E (divd) = earning in form of dividend per week i.e. divided over 52
weeks.

2.After calculating the weekly returns of a stock over 52 weeks, its total
sum was calculated by adding up the returns of 52 weeks. Then from
that we took the average return of 52 weeks. This average return is said
to be “Ri”, which is the return from that security over the period of 1 year
or 52 weeks. After that Standard deviation is calculated which is
considered to be the risk attached to that particular security. This
standard deviation as mentioned earlier measure the variability of the
returns from the expected value. Thus the standard deviation gives the
volatility of the stock in terms of its return. The table mentioned below
gives us the return and standard deviation or risk attached to the given
security. Also return per unit of risk is calculated to find out the best
scrip to be held for this period of time. For our sample stocks the return
per unit of risk are as follows:

Name of the Return Risk Return/Risk

company
BAJAJ AUTO 0.01766 0.037084 0.4762
BPCL 0.005589 0.05325 0.1049
DR.REDDY’S 0.001729 0.03549 0.04850

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CENTURY 0.02413 0.05368 0.4494
TEXTILE

We can make out from the above table that the best return per unit of
risk is given by BAJAJ AUTO i.e. 47.62%, followed by CENTURY
TEXTILE at 44.94%.

3.Now as we calculated the standard deviation of all the stocks

individually, this gave us the individual risk and return from that
security which to a large extent is driven by market movements.

4.As the next step we will calculate Beta of all the securities, which will
show us to what extent a security is sensitive to market returns. To
calculate Beta we need the market return. We will assume the index to
be the base to calculate market return, as market holds all the securities
and thus it will give us the picture of the market as to what is the return
from that. Market index is supposed to be the most diversified portfolio
containing all the securities in the market. Thus we take the data of 52
weeks of BSE 30 index. Further we will calculate the return and risk
from the market. Beta will be calculated by the formula:
Cov (Ri, Rm)/Var (m)
Where Ri= security return
Rm= market return
Var (m)= standard dev^2 of market.

The beta of the 4 securities is as follows:

Name of the scrip Beta ()

Bajaj Auto 0.53219

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BPCL 1.24437
Dr.Reddy’s 0.70224
Century Textile 0.54549

Here, as mentioned earlier beta is the measure of contribution of an

individual security to a well-diversified portfolio. Thus the value of beta
takes into account the market risk also in how sensitive a security is to
the market movements. In our securities the beta is highest for BPCL,
which is around 1.244. This indicates that on an average when the
market rises a 1% extra BPCL rises by an extra 1.244%. Also if the
market falls by 1%, BPCL will fall by 1.24%. Following BPCL is the Beta
for Dr.Reddy’s.
5.As per CAPM, a smart investor tends to avoid risk by combining
different stocks from different sectors to bring down the risk. This is
called “diversification”. This diversification helps in cutting down what is
called the unsystematic or unique risk as explained before. Thus to verify
how the portfolio cut down the risk we will build 4 portfolios by giving
different weights to different securities. For the sake of convenience we
will assume the availability of only 4 securities in the market and thus
the portfolio will include only these 4 securities.

After designing the portfolios by giving different weights to different

securities we will further find out the return and risk of those portfolios
and will select the best portfolio in terms of return per unit of risk. This
will be called as the Efficient Portfolio.

In order to find out the risk of the portfolio it will be wrong to take the
average of the variance of individual securities because some of the risk
will be reduced because of diversification. Thus in order to find out the

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risk of efficient portfolio, we will find the weighted variance and also the
co-variance of different securities which make up the portfolio. It is
essentially important to find out the co-variance of different securities
because it tells us how a security behaves and changes with respect to
the other securities, which make up the portfolio.

The weights of the portfolio exhibit the percentage of total investment

done in that particular security. For example say in the 1 st portfolio
weight of Bajaj Auto is 50%, which implies that this much investment is
done in this particular script. This step is taken to show how
diversification helps in reducing the systematic risk attached to the
securities. The return will be the average return of individual securities,
which make up the portfolio. For the risk part we need to calculate 2
things:
1. Weighted variance ^2
2. Covariance of securities.

Thus variance of portfolio containing 4 securities will be will be =

(X1^2*1^2)+(x2^2*2^2)+(x3^2*2^2)+(x4^2*4^2)+
2 cov (x1, x2)+2cov(x1, x3)+2cov(x1, x4)+2cov(x2, x3)+2cov(x3, x4)

Where x1, x2, x3, x4 =securities

^2 = variance of all the securities.
Cov (x, x)= covariance of different securities.

This will help us to determine what is called Efficient Portfolio. It will be

the one, which will give the highest return per unit of risk or variance.
Among the 5 portfolios, which were created, the 1 st is most efficient one

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as it gives the highest return per unit of risk i.e. 16.11%. The return per
unit of risk for 5 portfolios is as follows:

Portfolio no Return/ Risk

1 16.11%
2 14.06%
3 9.8%
4 14.54%
5 12.26%
This signifies that if an investor goes in for investment in this 1 st
portfolio he will gain maximum return of around 16.11%. Thus in
comparison to individual securities diversification tends to bring down
the risk. Followed by the 1 st portfolio is the 4th portfolio, which is giving a
return of 14.54%.

6.After calculating the return and risk from the various portfolios and
verifying how diversification reduces the risk we now try and take into
account another concept of free securities available to the investors in
the free market. As there are certain government securities, which are
risk free, and thus returns on these types of securities are less than the
normal securities. In such a situation an investor in order to cover the
risk, invest a part of the investment in these types of securities. For
understanding this we take our most efficient portfolio and introduce
risk free security in that and then will conclude on the affect it had on
the return and risk of the portfolio. For this we will take a government
security giving a return of 8%. We will also assume that he invest 40% in
government security say bonds and remaining 60% in our portfolio. After
calculating the return by risk of the portfolio with the introduction of risk

33
free security we can clearly infer that the return per unit of risk has
increased from 16%to 49%.
7. Now as mentioned earlier the expected return from any security will
be:
required rate of return on any stock = Expected rate of return from risk
free Investment + beta of that stock * Market risk premium
Thus, Ri= Rf+ (Rm-Rf)
Where Rf= risk free investment return
Rm = return from market.
= Beta of a stock.
Ri= expected rate of return from a security.
The required return from the sample stock taken is as follows:

Name of Scrip Expected return (Ri)

Bajaj Auto 3.7747
BPCL -1.9427
Dr.Reddy’s 2.38899
Cen Text 3.54144

Thus from the above table we can infer that expected return is highest
for BAJAJ AUTO at 3.77 followed by CENTURY TEXTILE at 3.54. for
BPCL the Expected return is negative at –1.94 which can be justified as
the Beta of BPCL is also the highest at 1.24, which means it is a scrip
highly sensitive to market movements.

How dose the CAPM works?

Gupta & sehgal (1993) studied the return-risk model in the Indian
capital market using monthly returns of 30 stocks included in the BSE

34
sensex. They found that model seems to perform well in explaining the
returns on BSE market.

Stock market investment decisions

When we read the financial section of newspapers, it is commonplace to

see analysts advising us that it is a good time to buy, sell, or hold certain
shares. The CAPM is one method that may be employed by analysts to
help them reach their conclusions. An analyst would calculate the
expected return and required return for each share. They then subtract
the required return from the expected return for each share, ie they
calculate the alpha value (or abnormal return) for each share.

Say for example:

We are considering investing in F plc or G plc. Their beta values and

expected returns, which can be calculated by above-mentioned
process, are as follows:

Beta values Expected returns

F plc 1.5 18%
G plc 1.1 18%

The market return is 15% and the risk-free return is 5%.

Alpha table

Expected returns Required returns Alpha values

F plc 18% 5% + (15% - 5%) -2%
1.5 = 20%
G plc 18% 5% + (15% - 5%) +2%
1.1 = 16%

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Sell shares in F plc as the expected return does not compensate the
investors for its perceived level of systematic risk, it has a negative alpha.
Buy shares in G plc as the expected return more than compensates the
investors for its perceived level of systematic risk, ie it has a positive
alpha.

The expected return of the portfolio is calculated as normal (a weighted

average) and goes in the first column in the alpha table. We then have to
calculate the required return of the portfolio. To do this we must first
calculate the portfolio beta, which is the weighted average of the
individual betas. Then we can calculate the required return of the
portfolio using the CAPM formula.

Some Observations & Suggestions

I really feel grateful that I got an opportunity to work with kotak

Securities as a part of my Summer Internship. I was enriched in terms of
knowledge in the field of Capital Market on a whole. On one hand
working with the Direct Sales team gave me a first hand insight on client
handling and their various anxieties about the stock market. I myself got
a clearer picture about how actually stock market functions in reality
and thus was able to come over some of my misconception in the same
field. On the other hand working on the CAPM model gave me the picture
of technical aspects or in other words behind the curtain part regarding
how different stocks depend upon the market movements and what all
kind of risk is in the capital market.

Talking about the organization, we have 2 branches in Pune and I was

fortunate enough to attend the inauguration of the 2 nd branch, thus

36
providing me the real experience of setting up a new venture and what all
details need to be tackled with. The structure of the organization goes as
follows. We have the territory head. Under him are the 2 branch
managers for each branch. Further down we have sales team and
dealers. The sales team is mainly responsible for the selling and
educating clients regarding the services provided by the company and
also on the stock market. The dealers’ teams are the people sitting on the
terminals of NSE and BSE and directly punching the orders as received
from the clients who want to buy and sell their holdings. Ones the sales
team brings in the client they are assigned a dealer and after that there
is a direct interaction between the dealer and the client. We have direct
phone lines on which orders are taken from the clients regarding what
they want to buy or sell. These lines are recorded lines, in order to avoid
any misunderstandings in the communication between the client and the
dealer. In case of any problem or confusion, the client can approach
either the dealer assigned to him or the sales person so called
relationship manager. The sales team is a target driven team and thus
works either individually or in teams. I was a part of such team. There is
one employee who handles the back office job, which includes
maintaining and giving the details of a clients account. Calling them in
case they have some debit to be cleared off. At the end of every working
day the notes are sending to each of the customers clearly mentioning
their transaction for the previous day so as to ensure transparency in the
work.
I personally found the entire Kotak team, right from the Top management
to the lower level extremely helpful and cooperative. In case of any
problem I was free to approach any senior. The overall working system
was very friendly and comfortable to adjust in. one thing where I faced a

37
little difficulty was their was no unity of command, due to which I
confronted a bit trouble at times.

The selling team in particular who tend to have 1 st interaction with the
clients leaves a very humble impression on them. The clients are
provided with almost all possible facilities to make them aware of the
stock market as a whole, thus ensuring that they should be aware as to
where their money is being invested in. we even have the provision for
the clients to come and directly sit with the dealers and have a feel of
how their money is put into the stock market. Ones the client opens an
account with Kotak, they are given access to e-mail account of their own
on which through the KOTAK RESEARCH TEAM, reports are send daily
regarding the movements of stock market sand how things will be in the
coming days. Other than this they are also provided with the hard copy
of the research report. On this point I will like to put a suggestion that as
the investors can directly relate to the return and risk factors, using the
above-mentioned CAPM model we can enhance the research work and
can mention in the research reports the return expected from a
particular stock in terms of percentage. Also to the tips (as to which
stocks to buy and which to sell given) by kotak research team, this model
will help to add on the parameters like expected return and how risky is
the security, thus providing better weightage to the reports issued.

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Communication Process
There is no rigid structure that is followed in kotak in terms of top down
approach or bottoms up approach of communication. The head
office lays most of the policy decisions, but for day to day
activities they are open to any kind of suggestions from the
employees lower down in the echelon. There have been
instances in the company where executives came up with their
proposals and they were promptly taken and effectuated in the
organization.

Decision Making Process

The decisions are made at various levels, depending upon the

nature of the decision. The employees themselves take small day-
to-day decisions. The managers take decision relating to customer
services, handling important clients etc.

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