Experiential Learning Assignment #1

Course ID - FIN ZG-520

Course Name - Security Analysis and Portfolio Management
Submitted by – Subroto Das
Student ID - 2023hb59023
1. Stock Selection

For this analysis, I have chosen ADANI GREEN and YESBANK, two companies from different
industries Adani Green Energy and Yes Bank present contrasting yet compelling investment
opportunities. Adani Green Energy, a leading player in India’s renewable energy sector, aligns
with global trends towards sustainable energy, benefitting from strong government support
and a growing project pipeline across solar and wind energy. This makes it attractive for long-
term growth driven by India's increasing energy needs and environmental policies. YESBANK
on the other hand, has undergone significant restructuring since its financial distress in 2020
and is working to rebuild its brand, governance, and financial health. Although a riskier option,
Yes Bank holds potential for substantial gains if it successfully capitalizes on India's economic
growth and banking sector reforms. Together, these stocks offer a balance between stable,
sustainable growth and the opportunity for high returns contingent on a successful
turnaround. The period of analysis is September 2023, to August 2024, using daily data from
the Bloomberg database.

2. Data Source

The daily closing stock prices for both companies, along with the Nifty 500 index, were
collected from the Bloomberg database. The dataset spans 260 trading days.

3. Daily Return Calculation Method

I chose to use logarithmic (log) returns for this analysis due to their numerous advantages. Log
returns are time-additive, simplifying multi-period calculations. They assume a normal
distribution, allow for more accurate measurement of significant price changes, and maintain
consistency across various time periods, making them highly reliable for financial analysis.

4. Basic Calculations

Output ADANIGREEN YESBANK NSE500 Index

Expected Retrun 0.251% 0.092% 0.125%
Variance 0.000940 0.000821 0.000078
Standard Deviation 3.065% 2.865% 0.886%
Covariance 0.000353
Correlation
Coefficient 0.402022
Expected Return

o ADANIGREEN has the highest expected return at 0.251%, followed by the

NSE500 Index at 0.125%, and YESBANK at 0.092%. This indicates that, on
average, ADANIGREEN is expected to generate a higher return compared to
YESBANK and the NSE500 Index. Investors may view ADANIGREEN as more
attractive in terms of return potential, but this should be considered along with
the volatility of each asset.

Variance and Standard Deviation (Volatility)

o ADANIGREEN has the highest standard deviation (3.065%) and variance

(0.000940), indicating that it is the most volatile of the three assets.

o YESBANK follows with a standard deviation of 2.865%, while the NSE500 Index,
as expected from an index, has the lowest volatility at 0.886%.

o Higher volatility in ADANIGREEN and YESBANK suggests a greater degree of risk,

meaning their returns are less predictable than those of the NSE500 Index.

Covariance

o The covariance between ADANIGREEN and YESBANK is 0.000353, indicating a

positive relationship where both stocks tend to move together. However, this
value alone doesn’t tell us the strength of the relationship.

Correlation Coefficient

o A correlation coefficient of 0.402022 between ADANIGREEN and YESBANK

implies a moderate positive correlation. This suggests that while these stocks
do tend to move in the same direction, the relationship is not very strong. For
portfolio diversification, a lower correlation between assets is preferred, as it
reduces risk. While ADANIGREEN and YESBANK are somewhat positively
correlated, they are not perfectly aligned, which offers some diversification
benefit.

5. Portfolio & Risk Calculation

Given Total investment of Rs. 100,000. I chose to allocate 60% to ADANI GREEN and 40% to
YESBANK, based on my expectation that ADANI GREEN would deliver more consistent returns
with lower risk. Using these allocations, I calculated the portfolio’s expected return, variance,
and standard deviation. For the portfolio variance, I applied the Markowitz model formula.
 NSE500
Output ADANIGREEN YESBANK Index
Expected Return 0.002511256 0.000920883 0.001247608
Variance 0.000939538 0.000821031 7.84596E-05
Standard Deviation 0.03065189 0.02865364 0.00885774
Weight 60% 40%
Covariance 0.000349905
Correlation Coefficient 0.401760581

Portfolio Calculation
Portfolio Expected Return 0.001875107
Portfolio Variance 0.000638972
Portfolio Standard
Deviation 0.025277902

6. Efficient Frontier and Capital Market Line (CML)

0.003
Efficient Frontier and Capital Market
Line(CML)
0.0025 0.002511256
0.002431737
0.002352219
0.0022727
0.002193181
0.002113663
0.002 0.002034144
0.001954626
0.001875107
0.001795588
0.00171607
0.001636551
0.0015 0.001557032
0.001477514
0.001397995
0.001318476
0.001238958
0.001159439
0.001079921
0.001 0.001000402
0.000920883

0.0005

0
0 0.005 0.01 0.015 0.02 0.025 0.03 0.035
Efficient Frontier

 The blue curve represents the Efficient Frontier. Portfolios on this curve offer the best
possible returns for each level of risk. As we move along the curve from left to right,
we increase the risk level, which is accompanied by higher expected returns. This
makes sense, as higher-risk portfolios should ideally provide higher returns to
compensate for the increased volatility. Portfolios below this blue curve are
suboptimal, as they carry higher risk without delivering proportionately higher returns.

Capital Market Line (CML)

 The orange line represents the Capital Market Line. It typically begins from a risk-free
rate (y-intercept) and intersects the Efficient Frontier at the point where an investor
holds the optimal mix of risky assets (the "market portfolio"). Any point along the CML
offers a better risk-return profile than points directly on the Efficient Frontier because
it includes the risk-free asset. Investors choose a point on this line based on their risk
tolerance: closer to the y-axis for low-risk tolerance (higher allocation to the risk-free
asset) and further along the line for higher-risk tolerance (higher allocation to the
market portfolio).

The point where the CML intersects the Efficient Frontier is called the tangency portfolio,
representing the optimal combination of risky assets (market portfolio). This point has the
highest Sharpe ratio, providing the best risk-adjusted return. Portfolios on the CML offer
better performance than those strictly on the Efficient Frontier by including a risk-free asset.
This improves the risk-return ratio for investors, making the CML portfolios ideal for
maximizing returns at any risk level.

ADANIGREEN YESBANK
Expected Return 0.002511256 0.000920883
Standard Deviation 0.03065189 0.02865364
Weight 1.00 0.00
Correlation
Coefficient 0.401760581

Portfolio Return 0.002511256

Portfolio Risk 0.03065189
Risk Free Rate 0.000277778
Sharpe ratio 0.072865923

Using Excel Solver, optimized the portfolio with Sharpe ratio 0.0728 with 100% investment in
ADANI GREEN.
7. CAPM and Beta Calculation

Beta (β)
 Interpretation for ADANIGREEN (0.402):
o With a beta of 0.402, ADANIGREEN is less volatile than the market. It tends to
fluctuate less when the market moves, making it relatively less risky in terms
of systematic risk. This lower beta suggests that ADANIGREEN may not respond
strongly to market-wide events and is less sensitive to market fluctuations.
ADANIGREEN YESBANK
Expected Retrun 0.002511256 0.000920883
Standard Deviation 0.03065189 0.02865364
Risk Free Rate 0.000277778 0.000277778
Risky rate 0.002511256 0.000920883
Beta 0.402021862 1.67033622
Daily CAPM 0.001175685 0.00135198
Annualized CAPM 0.304502377 0.350162871

 Interpretation for YESBANK (1.670):

o YESBANK has a beta of 1.670, indicating it is much more volatile than the
market. When the market moves, YESBANK is likely to experience larger price
swings, making it a riskier investment. The high beta suggests that YESBANK’s
returns are more sensitive to overall market changes and could provide higher
returns in a bullish market, but also higher losses during downturns.

CAPM (Expected Return based on Beta)

 Expected Return=Risk-Free Rate+β×(Market Return−Risk-Free Rate)
o The annualized CAPM return of 30.45% implies that, based on its beta,
ADANIGREEN is expected to return 30.45% annually, considering the risk-free
rate and market premium. This relatively high expected return is due to its risk-
adjusted position in the market.
 Interpretation for YESBANK:
o The annualized CAPM return of 35.02% suggests that YESBANK, despite its
higher volatility, is expected to yield a higher return annually due to its
elevated beta. This aligns with its riskier profile, as higher risk assets typically
offer higher potential returns to compensate investors.

8. Conclusion
 ADANIGREEN has a lower beta and therefore lower expected volatility. Its expected
annualized return (30.45%) reflects a moderate risk-return profile.
 YESBANK has a high beta, meaning higher expected volatility. Its annualized CAPM
(35.02%) suggests a higher risk but also a higher potential return.
 Investors might prefer ADANIGREEN for a more stable, moderate-growth option,
while YESBANK could appeal to those willing to take on more risk for potentially higher
returns.