Retrenchment Strategy- Turnaround Phase for Flipkart

'Everything is fair in love and war'.

Every time you can not go ahead as you desired. As we know that current objective of every business is to create value. Even in the current scenario where organisations are incurring huge loss but due to value creation and future prospective investors are still relying on them. One of best example can be given here is Flipkart. The company is in operating loss but the current market value of the company is $5 billion to 11 billion. From last year its valuation getting downward as the major investors are in a panic and downgrading its valuation.The main reason behind the downgrading is increasing market share of Amazon and E-bay in Indian Market. The second is the operating loss.The company has missed the golden chance for their IPO when the valuation was at the Top level.There are six companies are registered in the name of Flipkart and the three has large charges on their assets. Simply incurring huge interest cost as well.

We are not going much deeply in this project, we will simply talk about the phases of Retrenchment Strategy.(Because we don't have financial records available for better analyse but these pieces of information(finance) are taken from newspapers)

Retrenchment strategy is not so popular strategy because everyone is looking for expansion. But as we know that the current environment is so complex, dynamic and hostile sometimes it is better to pull off your legs. And this will stop you to fall in the pit.Retrenchment strategy is simply a diagnose tool.


Firstly if the followings things are happening in your company then you should think that, are we going in right direction?

1) High labour turnover Ratio
2) Incurring Operating Loss
3) Persistent negative cash flow
4) Declining Market Share
5) Deterioration in the physical facilities
6) Uncompetitive products and services
7) Mismanagement

It is wrong to say that retrenchment strategy means the liquidation of the entity. However, this also forms part of retrenchment strategy and is the last resort where other phases of retrenchment strategy not working out.

The first phase of retrenchment strategy is Turnaround Phase


In Turnaround phase, we look internally and find the cure.

In Turnaround strategy emphasis is laid on improving internal efficiency. For making turnaround strategy successful, it is imperative to focus on the short and long term financing needs as well as on strategic issues. A Turnaround plan include analysis of
1) Product - Flipkart is an e- commerce company. Currently working as an intermediate party for the seller and the buyer.
2) Market- In e- commerce, the world becomes a market. But specifically, the hold and priority define the market in e-commerce.The main future reason for declining in the revenue of Flipkart would be 'static' in nature. They don't review their product prices. If in local market consumer is getting the same product at lower price, then why he would choose e- commerce company.
3) Production Processes- If we see deeply then we realise that the Flipkart current focus is in improving its logistics. They want to reduce the supply cost and may be in future can utilise for servicing other company. Flipkart needs to think some innovative and creative ideas to enhance customer satisfaction. For example, they should place their review( Here is mean that Flipkart True Review) on the product so that customer will buy without fear of inferior product or shown product is different from receiving product. The other example can be taken that in Myntra add functions that suggest clothes as per your body.It's all about current need and tackling it with innovation with creativity.
4) Competition- The tough competition is from Amazon. A US-based giant who has forex support as well. Simply if they invest 1000 US dollar in India resulting approx. 67000 rupees in India.They have more Investment to stay in the market. Other competitors are e-bay and shop clues. But currently these e- commerce companies are incurring losses as well.
5) Market Segment Positioning- In e-commerce world market positioning can be changed rapidly. Flipkart is a well-known e-commerce site in India. The most awkward situation is when the product gets its popularity, they opt to launch their product on their own website reducing revenue for Flipkart.
6) Market Place- The current marketplace for Flipkart is India. This is a huge market and company is not in the position to expand its business outside India, but there is still a good opportunity for Flipkart to give tough competition in foreign as well.
7) Production Logic- Sometimes it's better to change yourself. Flipkart should change its intermediate position into the direct position where a new good product is launched. For example, if an unpopular brand releases a good product( A product which has good potential).Flipkart may purchase all stock at lower price stating their brand name. It would result in higher revenue for the Flipkart.
8) Implementation of Plan- The Flipkart should review its current plan and bifurcate into value added and non-value added plan.
9) Feedback-This is the most important pillar for any company. The company should have a separate eye for the feedback system.Feedback can give you new ideas for the business. Because Innovation is generated by need.


After analysing aforesaid issues the remedial action should be initiated.
A set of 10 elements that contribute to turnaround are:

1) Change in Top Management
2) Initial credibility building action
3) Neutralising external pressure
4) Initial control
5) Identifying quick payoff activities
6) Quick cost reduction
7) Revenue generation
8) Asset liquidation for generating cash
9) Mobilisation of the organisations
10) Better internal coordination


These 10 elements are so deep and need to analyse separately. Where is company lacking and needs improvement?

In currently Flipkart becomes a partially question mark or problem child having a good market share but need heavy continue investment with the low potential to generate cash. It may become a cash trap if necessary steps will not be taken.



To be continued......

Reduce Export-Import Risk : Letter of Credit

Letter of Credit:

Understanding and Using Letters of Credit

Letters of credit accomplish their purpose by substituting the credit of the bank for that of the customer, for the purpose of facilitating trade. There are basically two types: commercial and standby. The commercial letter of credit is the primary payment mechanism for a transaction, whereas the standby letter of credit is a secondary payment mechanism.

Commercial Letter of Credit
Commercial letters of credit have been used for centuries to facilitate payment in international trade. Their use will continue to increase as the global economy evolves.

Letters of credit used in international transactions are governed by the International Chamber of Commerce Uniform Customs and Practice for Documentary Credits. The general provisions and definitions of the International Chamber of Commerce are binding on all parties. Domestic collections in the United States are governed by the Uniform Commercial Code.

A commercial letter of credit is a contractual agreement between a bank, known as the issuing bank, on behalf of one of its customers, authorising another bank, known as the advising or confirming bank, to make payment to the beneficiary. The issuing bank, on the request of its customer, opens the letter of credit. The issuing bank makes a commitment to honour drawings made under the credit. The beneficiary is normally the provider of goods and/or services. Essentially, the issuing bank replaces the bank's customer as the payor.

Elements of a Letter of Credit

• A payment undertaking was given by a bank (issuing bank)
• On behalf of a buyer (applicant)
• To pay a seller (beneficiary) for a given amount of money
• On presentation of specified documents representing the supply of goods
• Within specified time limits
• Documents must conform to terms and conditions set out in the letter of credit
• Documents to be presented at a specified place

Beneficiary
The beneficiary is entitled to payment as long as he can provide the documentary evidence required by the letter of credit. The letter of credit is a distinct and separate transaction from the contract on which it is based. All parties deal in documents and not in goods. The issuing bank is not liable for performance of the underlying contract between the customer and beneficiary. The issuing bank's obligation to the buyer is to examine all documents to ensure that they meet all the terms and conditions of the credit. Upon requesting demand for payment the beneficiary warrants that all conditions of the agreement have been complied with. If the beneficiary (seller) conforms to the letter of credit, the seller must be paid by the bank.

Issuing Bank
The issuing bank's liability to pay and to be reimbursed from its customer becomes absolute upon the completion of the terms and conditions of the letter of credit. Under the provisions of the Uniform Customs and Practice for Documentary Credits, the bank is given a reasonable amount of time after receipt of the documents to honour the draft.

The issuing banks' role is to provide a guarantee to the seller that if compliant documents are presented, the bank will pay the seller the amount due and to examine the documents, and only pay if these documents comply with the terms and conditions set out in the letter of credit.

Typically the documents requested will include a commercial invoice, a transport document such as a bill of lading or airway bill and an insurance document; but there are many others. Letters of credit deal in documents, not goods.

Advising Bank
An advising bank, usually a foreign correspondent bank of the issuing bank will advise the beneficiary. Generally, the beneficiary would want to use a local bank to ensure that the letter of credit is valid. In addition, the advising bank would be responsible for sending the documents to the issuing bank. The advising bank has no other obligation under the letter of credit. If the issuing bank does not pay the beneficiary, the advising bank is not obligated to pay.

Confirming Bank
The correspondent bank may confirm the letter of credit for the beneficiary. At the request of the issuing bank, the correspondent obligates itself to ensure payment under the letter of credit. The confirming bank would not confirm the credit until it evaluated the country and bank where the letter of credit originates. The confirming bank is usually the advising bank.

Letter of Credit Characteristics

Negotiability
Letters of credit are usually negotiable. The issuing bank is obligated to pay not only the beneficiary but also any bank nominated by the beneficiary. Negotiable instruments are passed freely from one party to another almost in the same way as money. To be negotiable, the letter of credit must include an unconditional promise to pay, on demand or at a definite time. The nominated bank becomes a holder in due course. As a holder in due course, the holder takes the letter of credit for value, in good faith, without notice of any claims against it. A holder in due course is treated favourably under the UCC.

The transaction is considered a straight negotiation if the issuing bank's payment obligation extends only to the beneficiary of the credit. If a letter of credit is a straight negotiation it is referenced on its face by "we engage with you" or "available with ourselves". Under these conditions, the promise does not pass to a purchaser of the draft as a holder in due course.

Revocability
Letters of credit may be either revocable or irrevocable. A revocable letter of credit may be revoked or modified for any reason, at any time by the issuing bank without notification. A revocable letter of credit cannot be confirmed. If a correspondent bank is engaged in a transaction that involves a revocable letter of credit, it serves as the advising bank.

Once the documents have been presented and meet the terms and conditions in the letter of credit, and the draft is honoured, the letter of credit cannot be revoked. The revocable letter of credit is not a commonly used instrument. It is generally used to provide guidelines for shipment. If a letter of credit is revocable it would be referenced on its face.

The irrevocable letter of credit may not be revoked or amended without the agreement of the issuing bank, the confirming bank, and the beneficiary. An irrevocable letter of credit from the issuing bank insures the beneficiary that if the required documents are presented and the terms and conditions are complied with, payment will be made. If a letter of credit is irrevocable it is referenced on its face.

Transfer and Assignment
the beneficiary has the right to transfer or assign the right to draw, under a credit only when the credit states that it is transferable or assignable. Credits governed by the Uniform Commercial Code (Domestic) may be transferred an unlimited number of times. Under the Uniform Customs Practice for Documentary Credits (International), the credit may be transferred only once. However, even if the credit specifies that it is nontransferable or nonassignable, the beneficiary may transfer their rights prior to performance of conditions of the credit.

Sight and Time Drafts
All letters of credit require the beneficiary to present a draft and specified documents in order to receive payment. A draft is a written order by which the party creating it, orders another party to pay money to a third party. A draft is also called a bill of exchange.

There are two types of drafts: sight and time. A sight draft is payable as soon as it is presented for payment. The bank is allowed a reasonable time to review the documents before making payment.

A time draft is not payable until the lapse of a particular time period stated in the draft. The bank is required to accept the draft as soon as the documents comply with credit terms. The issuing bank has a reasonable time to examine those documents. The issuing bank is obligated to accept drafts and pay them at maturity.

Standby Letter of Credit
The standby letter of credit serves a different function than the commercial letter of credit. The commercial letter of credit is the primary payment mechanism for a transaction. The standby letter of credit serves as a secondary payment mechanism. A bank will issue a standby letter of credit on behalf of a customer to provide assurances of his ability to perform under the terms of a contract between the beneficiaries. The parties involved in the transaction do not expect that the letter of credit will ever be drawn upon.

The standby letter of credit assures the beneficiary of the performance of the customer's obligation. The beneficiary is able to draw under the credit by presenting a draft, copies of invoices, with evidence that the customer has not performed its obligation. The bank is obligated to make payment if the documents presented to comply with the terms of the letter of credit.

Standby letters of credit are issued by banks to stand behind monetary obligations, to ensure the refund of advance payment, to support performance and bid obligations, and to ensure the completion of a sales contract. The credit has an expiration date.

The standby letter of credit is often used to guarantee performance or to strengthen the credit worthiness of a customer. In the above example, the letter of credit is issued by the bank and held by the supplier. The customer is provided open account terms. If payments are made in accordance with the suppliers' terms, the letter of credit would not be drawn on. The seller pursues the customer for payment directly. If the customer is unable to pay, the seller presents a draft and copies of invoices to the bank for payment.

The domestic standby letter of credit is governed by the Uniform Commercial Code. Under these provisions, the bank is given until the close of the third banking day after receipt of the documents to honour the draft.

Procedures for Using the Tool
the following procedures include a flow of events that follow the decision to use a Commercial Letter of Credit. Procedures required to execute a Standby Letter of Credit are less rigorous. The standby credit is a domestic transaction. It does not require a correspondent bank (advising or confirming). The documentation requirements are also less tedious.

Step-by-step process:

• Buyer and seller agree to conduct business. The seller wants a letter of credit to guarantee payment.
• Buyer applies to his bank for a letter of credit in favour of the seller.
• Buyer's bank approves the credit risk of the buyer, issues and forwards the credit to its correspondent bank (advising or confirming). The correspondent bank is usually located in the same geographical location as the seller (beneficiary).
• Advising bank will authenticate the credit and forward the original credit to the seller (beneficiary).
• Seller (beneficiary) ships the goods, then verify and develop the documentary requirements to support the letter of credit. Documentary requirements may vary greatly depending on the perceived risk involved in dealing with a particular company.
• Seller presents the required documents to the advising or confirming bank to be processed for payment.
• Advising or confirming bank examines the documents for compliance with the terms and conditions of the letter of credit.
• If the documents are correct, the advising or confirming bank will claim the funds by:
• Debiting the account of the issuing bank.
• Waiting until the issuing bank remits, after receiving the documents.
• Reimburse on another bank as required in the credit.
• Advising or confirming bank will forward the documents to the issuing bank.
• The issuing bank will examine the documents for compliance. If they are in order, the issuing bank will debit the buyer's account.
• Issuing bank then forwards the documents to the buyer.

Standard Forms of Documentation
When making payment for the product on behalf of its customer, the issuing bank must verify that all documents and drafts conform precisely to the terms and conditions of the letter of credit. Although the credit can require an array of documents, the most common documents that must accompany the draft include:

Commercial Invoice:
The billing for the goods and services. It includes a description of merchandise, price, FOB origin, and name and address of buyer and seller. The buyer and seller information must correspond exactly to the description in the letter of credit. Unless the letter of credit specifically states otherwise, a generic description of the merchandise is usually acceptable in the other accompanying documents.

Bill of Lading
a document evidencing the receipt of goods for shipment and issued by a freight carrier engaged in the business of forwarding or transporting goods. The documents evidence control of goods. They also serve as a receipt for the merchandise shipped and as evidence of the carrier's obligation to transport the goods to their proper destination.

Warranty of Title
a warranty is given by a seller to a buyer of goods that states that the title being conveyed is good and that the transfer is rightful. This is a method of certifying clear title to product transfer. It is generally issued to the purchaser and issuing bank expressing an agreement to indemnify and hold both parties harmless.

Letter of Indemnity
specifically, indemnifies the purchaser against a certain stated circumstance. Indemnification is generally used to guaranty that shipping documents will be provided in good order when available.

Common Defects in Documentation
About half of all drawings presented contain discrepancies. A discrepancy is an irregularity in the documents that causes them to be in non-compliance with the letter of credit. Requirements set forth in the letter of credit cannot be waived or altered by the issuing bank without the express consent of the customer. The beneficiary should prepare and examine all documents carefully before presentation to the paying bank to avoid any delay in receipt of payment. Commonly found discrepancies between the letter of credit and supporting documents include:

• Letter of Credit has expired prior to the presentation of a draft.
• Bill of Lading evidences delivery prior to or after the date range stated in the credit.
• Stale dated documents.
• Changes included in the invoice not authorised in the credit.
• Inconsistent description of goods.
• Insurance document errors.
• Invoice amount not equal to the draft amount.
• Ports of loading and destination not as specified in the credit.
• Description of merchandise is not as stated in credit.
• A document required by the credit is not presented.
• Documents are inconsistent as to general information such as volume, quality, etc.
• Names of documents not exact as described in the credit. Beneficiary information must be exact.
• Invoice or statement is not signed as stipulated in the letter of credit.

When a discrepancy is detected by the negotiating bank, a correction to the document may be allowed if it can be done quickly while remaining in the control of the bank. If time is not a factor, the exporter should request that the negotiating bank returns the documents for corrections.

If there is not enough time to make corrections, the exporter should request that the negotiating bank sends the documents to the issuing bank on an approval basis or notify the issuing bank by wire, outline the discrepancies, and request authority to pay. Payment cannot be made until all parties have agreed to jointly waive the discrepancy.

Tips for Exporters

• Communicate with your customers in detail before they apply for letters of credit.
• Consider whether a confirmed letter of credit is needed.
• Ask for a copy of the application to be fax to you so you can check for terms or conditions that may cause you problems in compliance.
• Upon the first advice of the letter of credit, check that all its terms and conditions can be complied with within the prescribed time limits.
• Many presentations of documents run into problems with time-limits. You must be aware of at least three-time constraints - the expiration date of the credit, the latest shipping date and the maximum time allowed between dispatch and presentation.
• If the letter of credit calls for documents supplied by third parties, make reasonable allowance for the time this may take to complete.
• After dispatching of the goods, check all the documents both against the terms of the credit and against each other for internal consistency.

Summary
the use of the letters of credit as a tool to reduce risk has grown substantially over the past decade. Letters of credit accomplish their purpose by substituting the credit of the bank for that of the customer, for the purpose of facilitating trade.

The credit professional should be familiar with two types of letters of credit: commercial and standby. Commercial letters of credit are used primarily to facilitate foreign trade. The commercial letter of credit is the primary payment mechanism for a transaction.

The standby letter of credit serves a different function. The standby letter of credit serves as a secondary payment mechanism. The bank will issue the credit on behalf of a customer to provide assurances of his ability to perform under the terms of a contract.

Upon receipt of the letter of credit, the credit professional should review all items carefully to ensure that what is expected of the seller is fully understood and that he can comply with all the terms and conditions. When compliance is in question, the buyer should be requested to amend the credit.

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