Portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents. It is a collection of different securities that are combined and considered as a single asset by an investor. The portfolios are held directly by investors and managed overall by financial professionals. The risk-return characteristics of the portfolio are different from the characteristics of the assets that make up that portfolio, especially with regards to risk. This process of mixing broad classes to achieve a return with minimal risk is called portfolio construction CAPITAL ASSET PRICING MODEL This model is used to predict how the returns of an investment are determined in an efficient capital market and breaks down the riskiness of each security into two components, i.e. market related risk which cannot be diversified at all called systematic risk measured by beta coefficient and others which can be eliminated through diversification is called unsystematic risk. The expected return of the security according to the CAPM is: E(R) = Rf + ß (ERm - Rf )E(R) = expected return of the security ß = beta of the securityRf = risk-free rateERm = expected return of the market portfolio applications of the CAPM model are the following: • The optimal portfolio depends on the market risk-return and on the risk differences of individual investors. • The relationship between expected return and risk is linearly related for all portfolios and individual assets. o High beta portfolios earn high risk premiums. o Low beta portfolios earn low risk premiums. • Stock price beta measures the risk for all stocks. MARKOWITZ THEORY: This theory is widely used in portfolio construction. The theory explains that, for a given level of expected return in a group of stocks, one stock dominates...... middle of paper ......g Growth per share (EPS): Growth EPS = {(EPS current year / last year EPS – 1)} * 100Indicates the relative EPS growth over the last two periods.h) Book Value (BV) Growth:BV Growth = {(current year BV / last year BV – 1)} * 100Indicates relative growth of BV in the last two periods.3. Valuation Metrics: Valuation ratios are related to the current market price. They are volatile in general.a) Price to Earnings Ratio (PE): PE = Current Market Price/EPSPrice to Earnings Ratio is the important parameter. It indicates the valuation ratio of a company's current stock price to its earnings per share.b) Price to Book (P/B):P/B = CMP / BVPrice to Book Ratio is a very important ratio for investors of value.c) Dividend Yield: dividend yield = dividend per share / current market price Indicates the dividend yield in percentage terms of total investments.