Portfoilo constructuion

Report on

Efficient Portfolio Construction Course Name: Portfolio Management

Course Code: F- 407

Submitted ToMs. Pallabi Siddiqua

Assistant Professor

Department of Finance

University of Dhaka

Submitted ByMd.Monjurul Ahsan

Roll No: 19-099

Section: A

Department of Finance

University of Dhaka

Date of Submission: 20th November, 2016

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LETTER OF TRANSMITTAL

20th November, 2016

Ms. Pallabi SiddiquaAssistant Professor Department of FinanceUniversity of Dhaka

Subject: Submission of Report on “Portfolio Construction and Performance Evaluation”.

Dear Ma’am,With due respect I would like to state that, as per the requirements of the course Portfolio

Management (F-407) offered at Department of Finance, University of Dhaka under your

supervision, I submit here my report entitled “Portfolio Construction and Performance

Evaluation”. I have concentrated my best efforts to achieve the objectives of the report and

hope that my endeavor will serve the purpose. I sincerely believe that the knowledge and

experience I have gathered during the preparation of the report will immensely help me in my

future professional life. Any mistake or shortcoming in this report would be apologetically

considered as my fault.

I, therefore, pray and hope that you would be kind enough to grant my Report and oblige

thereby.

With thanks and best regards

Md. Monjurul AhsanID: 19-099 (Section A)Department of Finance University of Dhaka.

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AcknowledgementIt was a great pleasure to prepare a report on “Efficient Portfolio Construction”. First of all I express my gratitude from heart to the Beneficent, the Merciful, & Almighty Allah for giving me the strength and patience to prepare this report within the programmed time.

I would also like to thank the following the kind and very helpful senior brother for their generous help and the lab assistant’s helpful hand.

This report is an outcome of my self-effort, but its successful completion would have been impossible without the sincere effort and helping attitude of my course instructor. I am truly gratified that I have received the instructions and the regulations from my course instructor in preparing this report. Without his help my report would not be correct to a great extent. I would like to thank my honorable course instructor, Ms. Pallabi Siddiqua, Assistant professor, Department of Finance, University of Dhaka for his instructions in making my report.

This is a great opportunity for me to make a report on“Portfolio Construction and Performance Evaluation”. I hope the report will help me pursuing my goal in the near future.

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ContentsEXECUTIVE SUMMARY...........................................................................................................................5

Efficient Portfolio...................................................................................................................................9

Steps followed in determining efficient portfolio................................................................................10

Selection of Listed companies:........................................................................................................10

Industry Analysis..................................................................................................................................11

Pharmaceutical Industry.......................................................................................................11

Textile Industry......................................................................................................................11

Fuel and Power Industry.......................................................................................................11

Banking, NBFI & Investment Sectors..................................................................................11

Engineering............................................................................................................................11

Food & Allied Products.........................................................................................................12

Ceramic Industry...................................................................................................................12

Price Adjustment and Return Calculation............................................................................................12

Price Data................................................................................................................................12

Cash Dividend......................................................................................................................................13

Stock Dividend.....................................................................................................................................14

Return Series..........................................................................................................................15

.........................................................................................................................................................15

Preparing the Covariance Matrix.........................................................................................................16

Max Theta............................................................................................................................................17

Max theta with Short sell.....................................................................................................................17

Min risk with short sell........................................................................................................................18

Conclusions:.........................................................................................................................................20

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EXECUTIVE SUMMARY

It is very important for an investor to analyze different aspects of the investment whether it is profitable or not. The investor can take investment decision only after analyzing all aspects of the investment. Then these types of decision can give a positive result. So it is needless to say that proper analysis plays a vital role for any investment decision.

The report shows how to evaluate stock companies to decide optimum investment amount to be allocated in each company’s stock to achieve expected return. Portfolio is the combination of investments. The creation of an optimum investment portfolio is not simply a matter of combining numerous securities to deal with risk and return but factors also. Using inside information constructing an efficient portfolio is also important factor here. I have tried to create a portfolio on the basis of the market price data and the dividend adjustments.

For fulfilling the purpose of the report I have selected ten companies from different industries. Portfolio has been constructed considering different objectives of an efficient portfolio.

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Origin of the report

Now a day, education is not just limited to books and classrooms. In today’s world, education is the tool to understand the real world and apply knowledge for the betterment of the society as well as business. From education the theoretical knowledge is obtained from courses of study, which is only the half way of the subject matter. Practical knowledge has no alternative. The perfect coordination between theory and practice is of paramount importance in the context of the modern business world in order to resolve the dichotomy between the two areas.

As a part of the BBA program, the course teacher has assigned us to analyze portfolio and to construct efficient frontier. For that purpose, we searched internet and related papers to find information the company condition in DSE and CSE. I also read my text book with a view to preparing this report

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Objective of this report

In this report, I have discussed important considerations in application of portfolio and construction of efficient frontier. The main objective of the study is to get a definite idea about how to make optimum portfolio and construct efficient frontier. Other tools for gaining the answer that really I have chosen the project are as following:

1. A study based on our theoretical knowledge to justify whether it has practical implications.

2. The analysis on the industry in which the company belongs to.

3. The way to determine whether it would be profitable or not in investing in this company.

4. Maximization of return with short sale.

5. Minimization of risk with short sale.

6. Minimization of risk without short sell at given return.

7. Maximization of sharp ratio without short sell at given return

Limitation of the report

We man are not perfect. To make a report various aspects and experiences are needed. But I have faced some barriers for making a complete and perfect report. These barriers or limitations, which hindered my work, are as follows:

Difficulty in accessing data of its internal actions. Non-Availability of some preceding and latest data. Some information was withheld to retain the confidentiality of the company. DSE indexes do not reflect market properly.

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Methodology

The types of methods used in this report are mainly of analytical & graphical in nature. Secondary data analysis was selected as the basic research method.

Secondary Data Collection: Certain data for this report has been extracted from secondary sources. • Majority of the secondary data was obtained from DSE.• Slide provided by our course teacher and different books.

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Efficient Portfolio

Efficient Portfolio is a portfolio offering higher return in a given risk level or lower risk at a given Return level. The calculation for a portfolio of optimum returns for each level of risk, and minimum risk for each potential level of return. If expected returns are not met for a particular level of risk, or the risk required for a specific level of return turns out to be too high, the portfolio is said to be inefficient. A Graph is Shown Below where we can see a curve. The point Minimum Variance Portfolio is a portfolio with lowest risk. Above part of Minimum Variance Portfolio is Called Efficient Frontier. Rf is the risk free rate. A line starting from the origin at risk free rate tends upward by touching the efficient frontier is known as CAL(Capital allocation line). The point of tangency is known as optimum or efficient portfolio.

Figure: Efficient frontier & capital Allocation line.

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Efficient Portfolio

Steps followed in determining efficient portfolioSelection of Listed companies: There are numerous number of companies listed in DSE and CSE. I have selected 20 listed companies of DSE. As I am using data of five years, I have selected companies which are listed before 2010. My selected companies are –

Serial no. Company Name01 IDLC

02 Islamic Bank

03 BSRM Steels Limited

04 Fu-Wang Ceramic

05 limde bd

06 Apex Spinning.

07 Square Pharma

08 ACI Limited

09 BD com online

10 Grameenphone Ltd.

Process of selecting company

The companies that have used for building the portfolio have been selected on the basis of some selected criteria. The criteria are following……

1. The companies whose P/E is less than 100 are selected.

2. The companies which has positive equity.

3. The companies whose NAV is greater than face value are selected.

4. The companies which havesame NAV their P/NAV have been calculated.

5. The companies that pay stock and cash dividend regularly are selected.

6. Industry and sector representation has been taken into consideration.

7. Turnover has been taken into consideration.

8. Market cap has been taken into consideration.Page | 10

9. OCF per share has been compared with EPS.

10. The maturity of these companies is more than 5 years.

11. The companies are listed in Dhaka Stock Exchange.

Industry Analysis Pharmaceutical Industry

The growth of Pharmaceutical industry is mentionable in our country. Competition in this industry is becoming intense day by day. Moreover, Government recently has reduced import duty of raw materials of this industry by 5%. Export of the product of this industry is also increasing gradually.

Cement IndustryCement industry is potential for mainly two reasons- Infrastructure development and Availability of raw materials. Real estate development projects have been increased largely in recent period. As a result the construction of infrastructure has also increased. Finally the demand of cement has increased in a greater number. Besides, China has withdrawn the barrier of supplying fly ash to us. This increased the availability of raw materials and also has increased the attractiveness of this industry.

Textile IndustryOur textile industry has high potentiality. We know that Bangladesh earns the largest portion of foreign currency from RMG. Recently this potentiality has increased radically due to global financial crisis. As income of the people of developed countries has fallen in remarkable number, their living standard also has fallen. And now they are trying to save money minimizing cost. As a result, the demand for Bangladeshi textile based low priced cloths is increasing worldwide. Specially, the demand has increased largely in the market of USA. So, we can conclude by saying that ‘Textile Industry’ is now one of the potential industries in our country

Fuel and Power IndustryGovernment is heavily emphasizing on the development of power sector. Government is calling for more and more private investment in the generation of power, making contract with the foreign investors to make the industry leading one and also proper care of the industry. As a result, the potentiality of this industry is bright.

Banking, NBFI & Investment SectorsBanking, Non-banking and Investment companies of a country are the main drivers of the economic development. These sectors are facing strong competition. The competition among the existing companies is very high. In these sectors the bargaining power of the buyers and suppliers is very high.

Engineering This sector is very emerging for our economy. This industry is facing strong competition because foreign companies are considering this market more profitable. The competition among the existing companies is low because the demand of the products of this industry is

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very high. The threat of substitute products is very low. The bargaining power of the buyers is high and the bargaining power of the suppliers is very high.

Food & Allied ProductsThis sector is very emerging for our country. The demand of the products of this industry is increasing day by day with the increase of the population. The threat of new entrants is very high. The competition among the existing companies is medium. Bargaining power of the suppliers is very low and the bargaining power of the buyers is very high.

Ceramic IndustryBangladesh has certain competitive advantages in the international market in terms of availability of gas, cheap labor and the generalized system of preferences (GSP) that allows Bangladesh to have duty-free exports to Europe and there is no quota restriction either on the export. Considering this sector’s potentiality for investment, ceramic industry has always allured both local and foreign investors.Since domestic and export demand for ceramic products are rising rapidly, widening the gap between demand and supply, the new entrants can easily expect to earn attractive profit by capturing the untapped demand.

Price Adjustment and Return CalculationTo get actual result from the analysis it is necessary to adjust the share price with dividend and stock Split. The way or process through which the stock prices are adjusted is below…

Price DataMonth end price data of 10 companies and of 5 years have been used for completing the report purpose.

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Figure: Price Data

Cash DividendThe profit that is paid to the equity holders in the form of cash is called cash dividend. It is adjusted at the time of calculating the dividend yield.

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Stock Dividend

The profit that is paid to the equity holders in the form of stock is called stock dividend. It is adjusted at the time of calculating the capital gain.

For example, Capital Gain = (Feb. stock price*(1+Feb.stock dividend)*-Jan. Stock price)/Jan. stock price

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Return Series

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Preparing the Covariance MatrixIn order to prepare the covariance matrix, at first I have to select all the return series. Then I have to go to the data analysis option to select the covariance command.

After making a covariance command the following dialogue box will come where I have to select the ‘Input Range’ (The numeric section of the return series) and ‘Labels in First Row’ (Non-numeric section of the return series- company names). Then I have select command ‘OK’.

Then I shall get the first part of the following figure (Figure-8). Then the second part is copied from the first part. After that I have to copy the second part put my mouse pointer to the block area of the first part to make the command from the past special option- (Values, Skip Blanks, Transpose and then Ok).

After completing the above parts of preparing the covariance matrix I shall finally get the following Covariance Matrix.

Figure: Process of preparing covariance matrix.

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Max Theta

Max theta with Short sell

Minimum risk

Min risk with short sell

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Min risk .5% return, no short Sell

Min .5% return, short sell

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Conclusions:Portfolios are selected by the investors based on the expected return and risk. The calculation of the efficient portfolio is based on the historical data available to the investor. Any change in the expected macro or micro economic factors can affect the portfolios. So the investors must be prepared to accept the changes in various economic conditions when constructing the efficient portfolio

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