Financial Management- 1 (FIN 5001)

Project Submission: Portfolio Risk and Return Analysis

5 Stocks: JSW Energy, IOC, Nestle, Adani Ports, Astral Poly

Two-Stock Portfolio: IOC and Astral Poly

GROUP AD1

1 21F514 MR. ANURAG PANDEY

2 21F523 MR. DURGA SAI TEJA KOKA
3 21F528 MS. ISHWIN KAUR
4 21F560 MS. VIDUSHI CHAPLOT
5 21F561 MR. VINAY KUMAR PANDEY
Introduction
JSW ENERGY 
JSW Energy Limited is one of India's top private sector power producers, dedicated to maximising the
use of all available resources. JSW Energy has expanded consistently and strongly over the years,
from managing operations to boosting social and economic advantages, minimising environmental
consequences, and applying cutting-edge innovation company with a market cap. of ₹ 50,570 Cr. The
industry has also gotten a lot of attention, with a lot of significant firms setting out big plans to grow
their renewable power capacities. JSW Energy, one of the country's biggest private-sector power
companies, is one of them. Despite a 21% drop since mid-October, in line with the overall market
correction, JSW Energy is still up over 700%. 
NESTLE 
Nestlé India has a long history in India and is one of the leading participants in the fast-moving
consumer goods segment. The company's net profit grew to 5.4 billion in the second quarter of 2021,
up from 4.9 billion in the previous quarter. Nestle’s market cap. Stands at ₹ 187,048 Cr. Nestlé
experienced double-digit growth in both metros and rural communities. This also points to a major
opportunity for Nestlé to unleash value in rural areas, where it is underserved. As the pandemic crisis
eased, contemporary trade, one of the distribution routes, revived to record robust growth in the mid-
twenties. Nestlé's current price implies long-term earnings growth of 13-14%,  
ASTRAL POLY 
Astral Pipes specializes in designing plumbing & drainage systems of the highest quality for both
residential and industrial applications. The company has received an ISO 9001:2000 certificate in
respect of manufacture and supply of CPVC and PVC pipes and fittings for plumbing systems
and industrial piping system. During the year under review, Astral Poly Technik incurred a capital
expenditure to the tune of Rs. 24.28 Crore towards the purchase of Land situated qat Hosur and
Dhokla and balance Rs. 69.42 Crore towards the Plant and Machinery, Factory Building and Other
Capital Expenditure.  
It has achieved volume growth of 16%, which was the highest in the last 3 years. The backward
integration of CPVC polymer helped the company to grow the volume and increase the gross
margin. The firm increased its shareholding in its associate company viz. Astral Pipes Ltd. (Kenya)
from 37.5% to 50%. 
IOC 
Indian Oil Corporation Limited (IOCL), sometimes known as Indian Oil, is a government-owned
company in India. It is owned by the Ministry of Petroleum and Natural Gas of the Government of
India, which is based in New Delhi. As of 2021, the government firm is placed 212nd on Fortune's
Global 500 list of the world's largest enterprises. It is the largest government owned oil corporation in
the country, with a net profit of $6.1 billion for the financial year 2020-21. It’s market cap stands at ₹
116,076 Cr.  
ADANI PORTS 
Adani Ports reiterates its commitment to improving the value of its port services by extending
logistics capabilities. The company's geographic and product expansion strategy is still in place. It
now handles 178 million metric tonnes of freight on the west coast and 45 million metric tonnes of
cargo on the east coast. In FY19, the west-east freight mix was 85 percent:15 percent. It is  in the
midst of acquiring Krishnapatnam (expected in Q3FY21), which will change the company's west-east
coast mix to 65 percent:35 percent. Adani Ports should be placed in the portfolio due to the
government's significant infrastructure spending. 
Recent financials reveal that earnings climbed by 21.70 percent year over year, and the P/E ratio is
substantially below the sector P/E ratio, indicating that the stock is inexpensive and a strong portfolio
selection. Promoters have also grown their stake from time to time, while DIIs such as Mutual Funds
House have recently boosted their ownership from 3.94 percent to 4.97 percent. This company is a
fantastic long-term investment opportunity, since it is supported by strong fundamentals and huge
government infrastructure spending. 
BENCHMARK INDEX 
NIFTY 500 
The NIFTY 500 reflects the top 500 companies in our eligible universe, based on their total market
value. The NIFTY 500 index accounts for about 96.1 percent of the total market capitalisation of all
NSE-listed stocks. 
The NIFTY 500 was chosen as our benchmark index because it may be used for a variety of things,
including index-based derivatives, benchmarking fund portfolios, and index funds. 
GOVERNMENT BONDS 
In India, government bonds are included in the broad category of government securities (G-Sec).
Government Bonds are debt securities issued by the Indian government, both central and state
governments. State Development Loans are a type of bond issued by state governments (SDLs).  The
majority of G-Secs were initially issued for large investors such as corporations and commercial
banks. However, the government of India finally made government securities available to smaller
investors like co-operative banks and individual investors. 
Coupons refer to the interest rates on government bonds, which might be fixed or floating. As of
January 4, 2022, the risk-free rate is 6.526 percent. 

Analysis
Co-Relation Matrix and Co-Variance Matrix
Correlation Matrix As per the co-relation matrix, we see that the
Nifty 500 JSW Energy IOC Astral Poly Nestle Adani Ports pairs- IOC and JSW Energy and IOC and Adani
Nifty 500 1.00 0.02 0.29 0.44 0.42 0.05 Ports have the negative values for correlation
JSW Energy 1.00 -0.01 0.01 0.05 0.26 and covariances. This means that these stocks
IOC 1.00 0.10 0.07 -0.01 will have the least risk in terms of a two asset
Astral Poly 1.00 0.19 0.02 portfolio.
Nestle 1.00 0.02
However, most of the other pairs also have
Adani Ports 1.00
significantly low values for correlation and
covariance. Hence, instead of selecting two stocks on the basis of the above matrices, we proceed with
analysing the returns of the stocks.
Variance- Covariance Matrix
Nifty 500 JSW Energy IOC Astral Poly Nestle Adani Ports
Nifty 500 0.000129 0.000007 0.000116 0.000125 0.000074 0.000013
JSW Energy 0.000704 -0.000012 0.000009 0.000019 0.000156
IOC 0.001219 0.000088 0.000039 -0.000009
Astral Poly 0.000623 0.000072 0.000010
Nestle 0.000236 0.000005
Adani Ports 0.000524

Calculation of Beta
Beta represents the market volatility of a stock. It is an important measure of systematic risk of a
particular stock.
 Beta Calculation
  Nifty 500 JSW Energy IOC Astral Poly Nestle Adani Ports
Mean 0.06% 0.18% 0.23% 0.17% 0.11% 0.09%
Variance 0.03174 0.17255 0.29894 0.15273 0.05788 0.12840
Standard Deviation 17.82% 41.54% 54.68% 39.08% 24.06% 35.83%
BETA 1.00 0.05 0.90 0.97 0.57 0.10

Calculating CAGR
Compounded Annual Growth Rate
  Nifty 500 JSW Energy IOC Astral Poly Nestle Adani Ports
Start Price ₹ 8,053.15 ₹ 58.66 ₹ 62.40 ₹ 448.58 ₹ 6,060.22 ₹ 333.05
Mean Returns 0.06% 0.18% 0.23% 0.17% 0.11% 0.09%
CAGR 24.34% 89.50% 135.53% 86.43% 50.76% 41.21%

Capital Asset Pricing Model

The market data for nifty 500 stocks is as follows:

Market Index Nifty 500

Beta 1.00
Expected Market Return (CAGR) 24.34%
Market Risk 17.82% r i=r f + β∗(r m−r f )
Risk Free Rate 6.518%
Variance 0.0317
Market Premium 17.826%

This above formula is used to calculate the expected returns on stocks using the Capital Asset Pricing
Model.

Capital Asset Pricing Model

  Nifty 500 JSW Energy IOC Astral Poly Nestle Adani Ports
BETA 1.00 0.05 0.90 0.97 0.57 0.10
Expected Returns (CAPM) 24.34% 7.43% 22.48% 23.80% 16.66% 8.30%

Two Asset Portfolio

In order to select the two best stocks, we select each pair of stocks and analyse them on the basis of
CAPM and Sharpe ratio. We analyse each pair and select the optimal weights. Then calculate the 10
pairs to select the best 2-asset portfolio. The results are as follows:

Weigh Weight Portfolio Portfolio Sharpe's

Portfolio Stock 1 Stock 2 t1 2 Risk Returns Ratio
1 JSW Energy IOC 53% 47% 33.84% 111.13% 3.09
2 JSW Energy Astral Poly 48% 52% 28.47% 87.90% 2.86
3 JSW Energy Nestle 39% 61% 21.86% 65.87% 2.71
4 JSW Energy Adani Ports 64% 36% 29.56% 72.11% 2.22
5 IOC Astral Poly 45% 55% 32.68% 108.53% 3.12
6 IOC Nestle 36% 64% 24.99% 81.28% 2.99
7 IOC Adani Ports 61% 39% 36.16% 98.75% 2.55
8 Astral Poly Nestle 41% 59% 21.41% 65.39% 2.75
9 Astral Poly Adani Ports 66% 34% 28.53% 71.06% 2.26
 10 Nestle Adani Ports 74% 26% 20.09% 48.28% 2.08
10 year Government Bond 0.00% 6.52%  

Mean Variance Analysis

120.00%
100.00%
Portfolio Returns

80.00%
60.00%
40.00%
20.00%
0.00%
0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00%
Portfolio Risk

On the basis of above results, we select IOC (45%) and Astral Poly (55%) as our two-asset portfolio.

EFFICIENT FRONTIER & SHARPE RATIO

An efficient frontier is a set of investment portfolios that 160.00%
are predicted to offer the best returns for a given risk 140.00%
level. If there is no comparable portfolio that gives higher 120.00%
returns for a lower or similar degree of risk, it is said to 100.00%
be efficient. The best mix of portfolio that we found was 80.00%
where IOC was assigned 45% weight and Astral at 55% 60.00%
which showed expected return as 108 % and Sharpe ratio 40.00%
rose to 3.12 20.00%

The Sharpe ratio is a measure of a financial portfolio's 0.00%

30.00% 35.00% 40.00% 45.00% 50.00% 55.00% 60.00%
risk-adjusted return. In comparison to its counterparts, a
portfolio with a greater Sharpe ratio is deemed superior.

Portfolio 5 Portfolio 5

  IOC Astral Poly IOC 45.00%

Weights
Portfolio Return 135.53% 86.43% Astral Poly 55.00%

Beta 0.90 0.97 Expected Returns 108.53%

Variance 0.30 0.15 Risk 32.68%

STDEV 0.55 0.39 Sharpe Ratio 3.1217

Co-Variance 0.00009

Market Return 24.34%

Market
STDDEV 17.82%
Risk Free
Return 6.518%

CAPITAL MARKET LINE (CML)

Portfolios that blend risk and return optimally are represented by the capital market line (CML). It's a
theoretical notion that encompasses all portfolios that combine the risk-free rate of return and a
market portfolio of hazardous assets in the most efficient way possible. According to the capital asset
pricing model (CAPM), all investors will take an equilibrium position on the capital market line by
borrowing or lending at the risk-free rate, which optimises return for a given degree of risk.

Calculating Capital market line:

Portfolios that fall on the CML optimize the risk and return relationship, hence, maximising
performance. So, slope of CML is the Sharpe ratio of market portfolio.

CAPITAL ALLOCATION LINE (CAL)

The capital allocation line helps investors decide how much money to put into a risk-free asset and
one or more risky investments. Asset allocation is the distribution of funds among various types of
assets with variable levels of expected risk and return, whereas capital allocation is the distribution of
funds among risk-free assets such as Treasury securities and risky assets such as equities. The
expected return (ER) of this portfolio is calculated as follows:
ER of portfolio = ER of risk-free asset x weight of risk-free asset + ER of risky asset x (1- weight of
risk-free asset)

SECURITY MARKET LINE (SML)

The total of the risk-free rate and the Risk Premium (RPi= I (rm-rf)) of the individual equities can be
considered of as the required return on Astral Poly and IOC's individual stocks. The risk premium for
Astral Poly and IOC is the additional return required to encourage an investor to keep their
investment. The return on CAPM is computed as follows:
r i=r f + β∗(r m−r f )

Here r i is the expected rate of return; r m is the Market return and r f is the risk-free return

Portfolio 5 Portfolio 5
  IOC Astral Poly IOC 45.00%
Weights
135.53 Astral Poly 55.00%
Portfolio Return % 86.43% Expected Returns 108.53%
Beta 0.90 0.97 Risk 32.68%
Variance 0.30 0.15 Sharpe Ratio 3.1217
Standard Expected Returns (CAPM) 23.20%
Deviation 0.55 0.39 Alpha 85.32%
Co-Variance 0.00009
Market Return 24.34%
Market STDDEV 17.82%
Risk Free Return 6.518%