Assignment on Portfolio Investment Of 20 lac BDT Prepared For Dr. Md. Jahangir Alam Professor Course Instructor Portfolio Management Prepared by Mohammad Riyadul Islam (50) Tazrian Shainam Shahid (68) Muhammad Mazhar Hossain (96) Wahath Shahid (111) Institute Of Business Administration University of Dhaka 19 November 2012
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Objectives of the portfolio ............................................................................................................................ 7
Time Horizon ......................................................................................................................................... 7
Roles and Responsibilities ............................................................................................................................. 8
Constraints of investors ................................................................................................................................ 8
Time Horizon ............................................................................................................................................. 9
This term paper will follow a systematic step by step process in order to design an investment portfolio
that is based upon a certain financial circumstance. The resulting portfolio design will help to ensure
that individual investment decisions are complimentary and supportive of the initial financial goals.
The actual design of the investment portfolio is one of the most important aspects of investing. The
individual investment decisions should be coordinated and organized according to a well-defined
portfolio design. Just like investment professionals, personal investors need to develop a customized
portfolio design to guide and coordinate their individual investment decisions. The key items they need
to focus on in this process include
their financial goals
their ability to save
their required average annual rate of return, and
assuming the least amount of investment risk as possible
With these items in focus we are asked to take the shoes of an investor with Tk. 20,00,000 that has to be
invested in a suitable portfolio to achieve certain goals. Tk. 20,00,000 may seem like a significant sum of
money but in investment terms its actually a small amount. As for most small investors, their investment
portfolio will be a collage of individual and separate investment decisions. One investment decision is
often made in isolation of previous decisions. More often than not the investment decisions are made at
the time of their savings contribution and are based upon what seems to be working at that moment.
This adhoc approach to investing can be counter-productive with previous investment decisions and can
actually work against achieving the financial goals. Hence this term paper is going to look at a systematic
approach to investing this sum.
Creating a proper portfolio design will help the invesotors achieve the following investment goals:
Defending your savings from unknowable future events
Incorporating your investing personality
Complementing your financial circumstances
Identifying your financial goals
The following section in this chapter discusses the outline of the report and the next chapter will review
the basics of portfolio design in order to create a sound portfolio for the above mentioned investor.
1.1 Outline of the paper
This term paper will consist of the following
1. Basic concepts and methods Portfolio design
2. Developing an investment policy statement on the basis of the concepts above
3. Examining current and projected financial and economic conditions
4. Implementing investment policy statement by constructing the portfolio
5. Establish a process for a continuous monitoring of the investors needs
Basic concepts and methods Portfolio design
This section is going to highlight relevant literature and pertinent studies behind the effective design of
portfolio which help rationalize the decisions in the next steps.
Developing Investment policy statement
Policy statement is the roadmap for the investor’s guide the investment process. Policy statement
includes the objectives and policies of the investors and the constraint faced by the investors. It also sets
the standards for evaluating the investment performance. Investors can evaluate the performance of
the investment by comparing with the policy statement to find out whether the investment is
appropriate for the investor.
Examining financial and economic condition
Before investing investors require to study short term and intermediate term expected financial and
economic condition and forecast their future needs. There are 3 factors, investor needs, expectation
from the financial market, and economic conditions, jointly determine the investment strategy for the
investor.
Implementing the Investment policy statement by constructing the portfolio
With the policy statement and financial forecast the investor determine how to implement the
investment plan to allocate available funds across different asset classes and securities. This involves
constructing a portfolio to minimize the investor’s risk.
Monitoring the performance of investment
Investors’ needs might change overtime so it requires continual monitoring of the investors’ needs and
conditions of the financial market. So it is very much important for the investors to monitor the portfolio
performance and compare it with the expectation and the requirement of the investors. It does not
meet the investors’ needs and requirement; investors require updating the investment portfolio. That
means investors require to drop some securities and to add some other securities in the portfolio. So
the policy statement should be modified accordingly when necessary.
2. Basic Portfolio Design steps
Any good investment design should give a clear answer on the following questions
Are the investments working together or against each other?
Is the investor over exposed or under exposed to certain investment categories?
Is the portfolio too risky or too conservative?
Is the portfolio making or losing money?
There's more to successful portfolio building than picking good investments. Putting together a portfolio
of securities is like building a wardrobe. Even if the closet is filled with top-of-the-line attire that may not
be enough: All those components need to work together as outfits. Investment portfolios are the same
way.
2.2 Determining the goals of Investment
It is important to know and realize what an investor wants out of his investment efforts. We regularly
invest -- squirreling away as much as we can -- without knowing whether we're saving enough for our
goals. That's because most of us have no idea what our goals will cost. The goals may range from
paying off student loans
saving to purchase a house
saving for your children’s education
saving to purchase a new car
saving for that special vacation
saving for an additional home
saving to start your own business
saving for retirement
saving to leave an estate for your children and grandchildren
2.3 Asset Allocation
Before the investor begins choosing individual mutual funds and stocks, he/she needs to think in broader
strokes. They need to consider your asset allocation. A portfolio’s asset allocation is the portfolio's blend
of stocks, bonds and cash. Finding the best asset mix is crucial to meeting investment goals. In fact, most
financial advisers agree that setting up the right asset mix is more important than choosing great
investments.
Before asset allocation the investor needs to answer the following questions regarding their goals of
investing
1. The number of years until your goal is reached. The deadline when you need the investment
amount as well as the returns. That's the number of years to your goal.
2. How much money you need for your goal.
3. How much money you can invest right now.
4. How much money you can contribute each month.
2.4 Creating your Investment Policy Statement
Creating an Investment Policy Statement enables the investor to put his/her investment strategy in
writing and commit to a disciplined investment plan.
Big organizations create Investment Policy Statements for their company retirement plans. Financial
advisers craft them for their clients. They require some philosophizing and number crunching. However,
an IPS isn't only for the well-heeled who love paperwork. It's a must for all investors. That's because
creating an Investment Policy Statement forces you to put your investment strategy in writing and
commit to a disciplined investment plan. It's both a blueprint and a report card.
2.4.1 Investment objectives The Investment Objectives portion of your Investment Policy Statement details what the investor is
trying to achieve and in what time frame.
It answers the following questions:
What is the investors’ financial goal?
How long will the investor be funding this goal?
How much will this goal cost every year
2.4.4 Monitoring procedures
The Monitoring Procedures portion of the Investment Policy Statement details the plan for keeping tabs
on investments. It's the blueprint for rebalancing, and for determining what investments, if any, should
be sell.
Answer the following questions:
How often will the investor monitor the portfolio?
How will the investor determine how well the individual investments are doing?
How will the investor determine how well his overall portfolio is doing?
How will the investor determine whether his portfolio is meeting his expected return?
How will the investor determine whether losses fall within his accepted range?
To determine how well individual investments and overall portfolio are doing, investors must use the
benchmarks chosen in the Investment Policy Statement. If it is found that the portfolio is not meeting
the expected return, or that losses are falling outside of an acceptable range, the investor may need to
adjust the investments.
When monitoring, the focus must not only be on performance. It also has to be seen that the reasons
these investments were chosen in the first place still apply. To do that, the status of each investment
must be checked against the Investment Selection Criteria. If a stock or fund no longer meets the
criteria, it may be a sell candidate.
3. The Investment Policy Statement
3.1 Investor Circumstances
The Trust beneficiaries are a group of 4 people ages 26-29 who are all in fair health and with stable
employment. They have accumulated BDT 20,00,000 and wish to invest the amount. They have no
immediate need liquidity and wish for this amount to grow to a more significant amount after 5 years so
that they can start their own business
The primary objective of this portfolio is to appreciate in value in real terms, while also generating a
stable continuous source of income as a secondary goal.
Objectives of the portfolio
The portfolio will have a long term investment horizon. The primary objectives are:
Generation of current income. This can be done through reinvestment of sufficient total return
and additional funds.
Capital preservation of current and future contributions
Maximize return within reasonable risk levels.
Providing opportunities to diversify across risk-return spectrum.
Time Horizon The investment guidelines are based upon an investment horizon of greater than five years. The
strategic asset allocation is also based on this long-term perspective. Short-term liquidity requirements
are anticipated to be small and to be covered by cash inflows.
Risk Tolerances It is recognized that some risk must be assumed in order to achieve the investment objectives of
In establishing the risk tolerances of the IPS, the ability to withstand short and intermediate term
variability were considered.
We have ranked, among the broad possible priorities, the following investment objectives:
Safety/ 4
Capital Preservation (Adjusted for Inflation) 5
Growth: 5
Liquidity: 3
Current Income: 3
The long-term objective for the assets under this policy is to achieve after fees and expenses, a pre-tax average annual return of 15% over the expected holding period of this portfolio.
Roles and Responsibilities
The investment will be done through the broker house Commercial Bank Securities and Investment
Limited (CSBIL). A broker will be engaged in fulfilling the objectives set here within. The total investment
amount of BDT 2,000,000 will be placed in one account. Thus the trading will be done through this single
account. All four members of this group will monitor the market and the final decisions regarding the
portfolio will be made through a joint consensus.
Constraints of investors
Liquidity Needs
Sufficient liquidity must be maintained through the choice of investment vehicles and asset allocation,
so as in cases of cash inflow deficit expenses can be met. Liquidity needs in the short term period inare
minimal.
Time Horizon
This portfolio is suitable for investors with a minimum time horizon of five years. Capital values fluctuate
over short period of time and the risk of incurring loss is high in short term period. Research suggests
that this loss can be minimized over a long period of time. The portfolio’s asset allocation is based on
this long-term perspective, since short-term liquidity needs are of less importance.
Taxes
Since the investment being made as a single investor, the returns from this portfolio will be subjected to
income tax rates in-line with the policies set by the National Board of Revenue.
Unique Circumstances
Due to insufficient funds investing in some asset classes will not be conceivable.
Risk Tolerance
Some risks must be assumed in order to achieve the investment objectives. The portfolio's long time
horizon, current financial condition and several other factors suggest collectively some interim
fluctuations in market value and rates of return may be tolerated in order to achieve the longer-term
objectives.
Investment Opportunities
For any investor these are many outlets through which they can invest their money. The following are
the list of opportunities that are available in Bangladesh. Also we have identified the opportunities are
most suitable to us based on our objectives:
4. Current Financial and Economic conditions
Multiple downside risks and growing uncertainties continued to characterized the global economy as it
entered into 2012. Double-dip depression was not unlikely, particularly in the backdrop of a slowing
pace of economic growth in the last quarter of 2011, and weak growth projections for 2012 and 2013.
Persistently high unemployment rate, low consumer and business confidence, and volatility in financial
sectors are likely to have wide ranging multiple downside risks and growing uncertainties continued to
characterize the global economy as it entered into 2012.
Double-dip depression was not unlikely, particularly in the backdrop of a slowing pace of economic
growth in the last quarter of 2011, and weak growth projections for 2012 and 2013. Persistently high
unemployment rate, low consumer and business confidence, and volatility in financial sectors are likely
to have wide ranging. The Bangladeshi economy has shown great resilience in the face of the recent
global economic crisis and recession and has continued to grow at a healthy rate. Since 1996, the
economy has grown 5% – 6% per year. Political instability, poor infrastructure, corruption, insufficient
power supplies, and slow implementation of economic reforms have not slowed down growth.
Economists agree that the country has the potential to achieve a higher growth rate if these roadblocks
are adequately addressed. More than half of GDP is generated through the service sector, but nearly
two-thirds of Bangladeshis are employed in the agriculture sector. The share of agriculture in the labor
force is 45%, in industry 30% and in services 25%. The share of the service sector in GDP is 52.6% while
industry’s share is 28.7% and agriculture’s 18.7% (Independent Review of Bangladesh’s Development
(IRBD), 2012).
The stock market in Bangladesh was characterized by an extreme see-saw motion throughout 2010 and
early 2011. Record numbers in index, turnover, market capitalization and investors were the brighter
aspects of the market until dramatic falls were experienced twice in December 2010, sparking street
protests. The benchmark key index at the DSE nearly doubled within a year, from 4535.53 points in 30
December 2009 to 8290.41 points on the last trading day of 2010. In the last two years many small
investors flocked to the market, lured by the prospect of easy profits. It is estimated that more than 1.3
million new investors entered the capital market in this period and the total stood at 3.3 million by the
end of 2010. After a slight recovery in the last days of 2010, the stock market crumbled in January 2011.
In two days in January the Bangladeshi stock market lost more than 15%, an estimated loss of wealth of
almost $7.5 billion. It was a confluence of factors, including lack of investment opportunities in the real
sector, excessive supply of money and proliferation of trading facilities that encouraged inexperienced
small investors to take a wild ride in the stock market. The banks’ reckless participation in the market
exacerbated the situation. The central bank paid very little attention to the growing bubble until it was
too late. Of particular concern is the central bank’s lack of oversight with regard to the sector’s
participation in the stock market. It allowed banks to leave their traditional business and did not enforce
rules limiting stock market participation by them.
Two other factors exacerbated the situation: Overpricing initial public offerings (IPOs), especially mutual
funds, and the Securities and Exchange Commission’s (SEC) decision to change rules erratically either as
a panic response or to help a small group of people.
4.1 Overview of the Market
The capital market of Bangladesh has passed a painful year by experiencing substantial market
corrections. The bearish trend in the market which started in December 2010 prevailed throughout
2011 and in the first two months of 2012. The overpriced stocks have experienced significant loss of
their values which resulted in a drastic fall of major market indicators such as price index, market
capitalisation, daily trade volume and their values by about 50 to 90 per cent (Table 5.1). The average
Price/Earnings (P/E) ratio at the Dhaka Stock Exchange (DSE) came down to 11.1 from the historic high
of 29.2 in December 2010. During 2011, the primary market was almost unchanged – a total of 15
companies have offloaded their initial public offerings (IPOs), raising an amount of about Tk. 1,900 crore
as capital.
After a long period of significant corrections, high volatility still persists as a major challenge, which has
extended from short-term to intra-day volatilities.
Risk associated with investment: The chance that an investment's actual return will be different than expected. Risk includes the
possibility of losing some or all of the original investment. Different versions of risk are usually measured
by calculating the standard deviation of the historical returns or average returns of a specific
investment. A high standard deviation indicates a high degree of risk.
There are basically six types of risk that is confronted by investors-