National Institute of Technology Karnataka, Surathkal

Portfolio Diversification and Credit Worthiness


We live in a capitalist country with a number of risks associated with every investment. We are not new to the problems posed by an economic crisis, in fact we might witness one in the near future. Why is it that a lot of investors lose money during recessions? How do they calculate risks? Is it possible to mitigate the loss? “Never put all your eggs in one basket” Our problem statement mostly revolves around the old saying mentioned above. Our task is to make a diversified portfolio that has a better chance of surviving than a non diversified portfolio during a financial crisis.


To solve a problem that involves trading it is important to understand the fundamentals of the stock market. Our primary goal was to analyse the market on a day to day basis and compare the data to that of during a recession. After analysing the data we came up with companies that are neutral, safe and have less risk associated with them.
The fluctuation in the stock market is bizarre especially during recessions. It is always better to be prepared. We analysed real time diversified portfolios during a financial crisis and used that data to calculate risk factor.
In this step we took data from six different stock exchange markets for sector division depending on their weightage in each of the markets. After calculating the average weightage of each sector, we selected major companies from each sector and calculated idiosyncratic risk and unsystematic risk of the entire portfolio with respect to the beta of each company.
A hedge is an investment to reduce the risk of adverse price movements in an asset.Hedging is the practice of taking a position in one market to offset and balance against the risk adopted by assuming a position in a contrary or opposing market or investment. There are many hedging techniques used by many firms. We have used the following hedging techniques:
1) Hedging With Gold : Gold prices increase in times of crisis and it can be a good hedge in times of global crisis.
2) Hedging With Foreign Currency : This hedging helps in economic crises of a particular country.
3) Hedging With Derivatives( Not used in project) : This helps the portfolio from all types of crisis but it requires a lot of knowledge and investors should be really active.
4) Making a SIP : It averages the price and neutralizes all the fluctuation in share price. It helps in reducing the risk in the market but return is reduced and as it is a neutralization technique it requires patience.


After calculating the aggregate risk, we used several hedging techniques to test the portfolio we made and the results are as follows:
● After calculating the average return of the companies in each sector, we calculated the overall return of the portfolio.
● We invested 70% in shares of different companies and 30% in gold in portfolio one. The overall return of this portfolio came out to be 10.51%.
● We invested 70% in shares of different companies and 30% in ForEx in portfolio two. The overall return of this portfolio came out to be 12.63%.
● Companies with a lower beta value are safer than that of companies with a higher beta value.
● Neutral stocks with low return values save the portfolio during a financial crisis. ( gold price goes up )
● The covariance between the assets plays an important role in deciding the overall return of a portfolio.


It is extremely hard to predict the fluctuations of a market as it is impossible to calculate the risk imposed by the future.
● Minimising risk of loss :if one investment performs poorly over a certain period, other investments may perform better over that same period, reducing the potential losses of your investment portfolio from concentrating all your capital under one type of investment.
● Preserving capital : not all investors are in the accumulation phase of life; some who are close to retirement have goals oriented towards preservation of capital, and diversification can help protect your savings.
● Generating returns : sometimes investments don’t always perform as expected, by diversifying you’re not merely relying upon one source for income.




We have worked on analyzing risk and reducing it. We have applied many hedging techniques and worked on decreasing risk and keeping the money safe. In the future we can work on maximizing the profit using many techniques and trading strategies to gain financial freedom.


It is clear from the project that diversifying a portfolio involves less risk when compared to that of a non diversified portfolio. It is impossible to predict the future. Stress tests are accurate to a certain point and there are a number of other factors which are still unknown with regard to predicting the present value or the future value of an asset. Making money in a free market always involves risk but with some accurate predictions and precautions it shouldn’t be hard to do the task.


● Pranav : Mentor
● Priyank : Mentor
● VAIBHAV SAHAI – - 8050829050
● Jahnavi Kancharla - 9591512111 -