report on portfolio management

5/19/2018 Report on portfolio Management

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Efficient Portfolio Construction


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Date of Submission:

30.12.2014

12/30/2014


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A Report on

Efcient Portolio Construction

And Evaluation o Portolio Perormance

Efficient Portfolio Construction

Date of Submission: 30.12.2014


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Course Title: Portolio ana!ementCourse Code: "#40$

%u&mitted to:

d' %a(i& )ossain

*ecturer+

,epartment o "inance

-niversit. o ,aa

%u&mitted &.:

d' Ersad Ali ondal

, : 1$#022


-niversit. o ,aa

Date of Submission: 30.12.2014

*etter o Transmittal


5/30

30t ,ecem&er+ 2014

d' %a(i& )ossain

*ecturer+


-niversit. o ,aa

,ear %ir+

ts m. pleasure to su&mit m. term paper or te course entitled

%ecurit. Pricin! Portolio Teor. course code is " 5 40$' Tis

report on suc a realistic topic 6ill elp us to e7pand our

teoretical no6led!e' t 6as assi!ned as a partial re8uirement o

te 9Portolio ana!ement ;"#40$< course in last semester'

)o6ever tere ma. &e some mistaes incurred unconsciousl. &.

us' Tis is m. um&le ur!e to .ou to &e rationale or tose

mistaes'

"inall.+ 6ould lie to tan .ou or !ivin! me suc an interestin!

tas 6ic reall. elped us to understand te process develop

insi!t to6ards construction o Portolio'

%incerel. =ours+

d' Ersad Ali ondal

, :1$#022


-niversit. o ,aa

E>EC-T?E %-AR=


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@e are assi!ned to mae a report on optimum portolio

construction' As it is a individual tas+ )ere ave selected 1

companies stoc tat are listed in ,aa stoc e7can!e rom

diBerent industries' "or tis purpose 6e ave collected data rom

,%E' Ten ave input inormation o stoc price+ casdividend + stoc dividend+ Ri!t %are ratio+ Ri!t %are Ber

Price+ stoc split o tese companies in E7cel %eet' Ater tat

ave calculate

,ividend =ield+

Capital Dain+

'Covariance atri7+

Total Return+

'Ris "ree Rate + Portolio Ris return+

Ratio Calculation+

a7i Teta Allo6in! @it %ort sale

a7 Teta no sort sale+

in Ris o sort sale+

inimiFin! ris sort sale+

inimiFe ris 6it Diven return Allo6in! %ort sale

Return o sort sale

,erivation o Efcient "rontier

Ratio Calculation+

Ater doin! diBerent matematical and statistical tools and

tecni8ues are used' Gnall. !et tat portolio 6ei!t or eac

situation' )ere ave seen tat i sort sellin! is allo6ed

individual can !et i!est teta 6it minimum ris tan tat o

an. oter com&inations' To do so+ econom. anal.sis+ industr.

anal.sis and selection o proGta&le industries are so mucimportant' ts not eas. to do all tese anal.sis' Hecause te

present condition o our econom. is so poor 6it multiple

pro&lems' nterpretation o te calculated results is also made

6ic is ver. essential to understand te portolio tat ave

constructed' "inall. dra6in! Efcient rontier &. usin! te


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com&ination o minimum ris. portolio or a !iven level o results'

Ater tat various ratios calculated or m. portolio and maret

portolio and comparision &et6een te ratios 6eter m. portolio

is under or overperormed tan maret'

ACKNOWLEDGEMENTACKNOWLEDGEMENT

6ould lie to pa. our !ratitude to all o te related &oos+

autors+ te compan. personnel and related @e& %ites tat

elped us a lot or te completion o tis report &eore+ durin!+

and ater te 6orin! period' At Grst 6e 6ould lie to

acno6led!e te Almi!t.+ 6o elped us ever. time and 6as

6it us and !ave us moral support and stren!t ever. moment'

Te presentation o tis report is o a !reat e7pectation in our HHA

pro!ram and 6e are 8uite app. to su&mit it dul. appl.in! tat

6e tin sould ave to &e included' Teoretical no6led!e

sould &e valued 6en it is successull. applied in practical Geld'

n tis respect+ 6e ound tis report a !reat opportunit. to deal

6it 9Efcient Portolio Construction or selected 1 Companies'

Origin of the report

o6 a da.s education is not (ust limited to &oos and classrooms'

n toda.s 6orld+ education is te tool to understand te real

6orld and appl. no6led!e or te &etterment o te societ. as

6ell as &usiness' "rom education te teoretical no6led!e is

o&tained rom courses o stud.+ 6ic is onl. te al 6a. o te


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su&(ect matter' Practical no6led!e as no alternative' Te

perect coordination &et6een teor. and practice is o paramount

importance in te conte7t o te modern &usiness 6orld in order

to resolve te dicotom. &et6een tese t6o areas' Tereore+ or

te H'H'A' pro!ram am assi!ned to prepare a report on 9Portolio

construction &ased on 10 listed companies o ,%E'

Objective of the Report

To o&tain no6led!e a&out construction

To increase our e7perience in data collection anal.sis'

To no6 a&out stoc maret mecanism

To no6 a&out optimiFin! te portolio &. ma7imiFin! teta

and minimiFin! ris 6it and 6itout sort sale To &e a&le to construct efcient rontier and optimum

rontier' mplement te no6led!e earned rom tis course to

evaluate te stocs o te compan.' To increase competence in investment decision'

Scope of the Report

To Gnd out te report re8uirements 6e ad to no6 a&out teeatures and mecanism o constructin! efcient rontier' @e alsoave collected some inormation rom diBerent ne6spapers andperiodicals' @e 6ould lie to mention tat tis researc 6as onl.concentrated' A tou! eBort ad &een placed 6ile te

inormation 6as collected and a careul stud. o tem made tisreport loaded 6it inormation and several recommendations6en tere is also pointed out decisions made'

*imitations o te Report


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@ile preparin! tis report durin! data collection ave acedseveral pro&lems'

,ue to limited access o te data+ tis stud. ma. not &e

perect to te 100I percent'

*ac o enou! e7perience in anal.Fin! o data'

,ue to inade8uate inormation+ in#dept anal.sis could not

&e done in te report'

%ources and etodolo!.

Tis reports researc is &ased on portolio construction' Tedata t.pes are mainl. secondar. data' %econdar. data t.pes

are collected trou! diBerent pu&lications' %econdar. sources:

@e&sites'

Annual Report

,%E trade inormation

Company Selectionn selectin! te companies 6itin an industr.+ at Grst 6e ave to

select te industr. &ased on teir A? and P/E ratio' Te industr.

selection also includes su&(ective (ud!ment re!ardin! uture

economic conditions and !overnment polic.' Ater selectin! te

industr.+ te compan. are selected &ased on te A? and P/E

ratio o te compan. relative to te A? and P/E ratio o te

selected companies'

Deneral caracteristics o te selected companies

*isted in ,%E'


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Te compan. to &e te aret leader o te industr. or close

competitor Compan. to &e in te !ro6t sta!e

A? more tan 100'

aret CapitaliFation more tan H,T 10+000million

nl. A Cate!or. companies are considered'

*isted &eore 200J

Compan. Cate!or.ConGdence Cement AEH* A"ine "oods *td' AEastern *u&ricant *td' A

e!na Petroleum *td' AKe.a Cosmetics *td' A*an!a&an!la "inance *td' AContinental nsurance *td' A%8uare Te7tile AAC *td' AH,' *AP% A,HH* A,E%C A

Dreen ,elta insurance A,*C AAC* Pran A

Subjective judgment

"inancial sector comprises o Hans+ nsurances+ H"s and man.

oter su&sectors or industries+ is te &ac&one o our econom.'

on Han "inancial nstitutions are oldin! a ma(or maret sare

amon! te listed companies in ,%E Cemical and Parmaceutical

industries in Han!lades are intensel. competitive+ e7port

oriented and are dominated &. e6 top maret pla.ers'

En!ineerin! sector is !ro6in! 6it te !ro6t o te econom.'

"oods and Allied Products sector are also competitive+ e7port

oriented and are dominated &. e6 top maret pla.ers' "uel and


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Po6er industr. is anoter industr. tat is liel. to ace u!e

development in te uture .ear

CA*C-*AT TERPRETATCA*C-*AT TERPRETAT

ave made some assumptions or te anal.sis purpose'

@e ave ad(usted an. dividend or &onus sare durin! te

time %plited sares are ad(usted to mae e8uivalent 6it previous

monts price'

ave calculate ,ividend =ield &. tis ormula

Capital !ain calculation

Calculation of mean return

Ater ad(ustin! te price te mont 6ise return or eac individual

stoc is calculated in lo! orm' Tis is &ased on te researc o

"ama tat te stoc returns are lo! normall. distri&uted' %o+ &.


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usin! te lo!aritm 6e ensure te normalit. o return distri&ution

6ic is a prior condition or our urter calculation o mean+

variance and covariance'

use te ollo6in! ormula or te calculation o te mean return:

ReturnL ,ividend .ield M Capital Dain

Ten Total return is calculated &. tis ormula

Ten 6e ave calculated te mean return

Ris ree rate:

"or calculatin! ris ree rate+ 6e tae Han!lades Han si7 mont

treasur. &ill rate as te ris ree rate' Te data are taen rom

Appendi7#2 o te annual report o Han!lades Han or te .earendin! 2012#2013' @e use $'3I as ris ree rate'

Portfolio Return, excess return, risk and theta


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n tis matri7 variances and co#variances o 1 securities are

!iven and it is assumed tat all securities ave e8ual 6ei!t o

e8ual'

"or tis 6ei!t te e7cess portolio return is 1'4I

Portolio e7cess return is 1'4 6ic is calculated &.

L-*T;E2:T2+,4:,1J< tis ormula'


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Ris is J'NI is calculated &.

L-*T;E2:T2+-*T;E4:T1J+-4:-1J


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Te Teta is 1'$ is calculated &. LH22/H24 ormula'


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Maximum heta !ith "o Short Sell

Te ma7imum teta tis portolio can !enerate is 2'N' )ere

e7cess portolio return is 4O I and portolio ris is 1OI 6ic are


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&etter tan previous return and ris


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Maximum heta #llo!ing Short Sell

@en sort sell is allo6ed+ Teta is urter increased' t is

possi&le &ecause portolio ris is reduced and e7cess return is

increased' @ei!t or eac asset is:

%ecurities 6it te ne!ative si!n sould &e sort sell' "or

instance+ AC + ,HH*'Te sales proceed rom sort sell and te

ori!inal und is used to &u. securities 6it positive si!n'

inimum Ris 6it o %ort %ell:


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inimum ris o tis portolio is #'0I' tere is no sort sell tan

it is not possi&le to lo6er ris tan tis'

)ere+ te compan. 6ei!ts are

Minmi$ing Risk !ith short sale

-nder tis situation+ our o&(ective is to determine te minimum

ris tat must &e &orne &. te investor 6o old tis portolio' n

tis case our o&(ective is+

H. usin! solver 6e ave ound te ollo6in! results as so6n

&elo6


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n tis situation te e7cess return per unit o ris is a&out #'4I'

Te compan. as a minimum portolio return is 0'01' %o+ te

investor 6o olds tis portolio must &ear a portolio ris a&out

OI' t cannot &e possi&le to &ear ris &elo6 tis'

Te 6ei!t o te securities under tis situation is !iven &elo6

"or a !iven return minimiFe ris 6itout sort sale

Tis 6ill &e applica&le 6en te investor 6ants to acieve a

certain amount o return trou! minimum ris 6itout sort sale'

Hut in tis situation it is not possi&le to acieve return a&ove te

ma7imum return amon! te individual assets' Hecause t is onl.

possi&le to invest te 6ole und in one return ma7imiFin! asset

in case o no sort sale' Tis process is also necessar. to contract

efcient rontier and optimum portolio'


&elo6:


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)ere+ or te !iven return o 40I+ te minimum ris or te

compan. is a&out 0'11N' To acieve tis return at minimum ris'

"or tis te investment @ei!t is

Minimi$e risk for a given return !ith short sale

t is also possi&le to minimiFe ris or a !iven return' Tis 6ill &e

applica&le 6en te investor 6ants to acieve a certain amount

o return trou! minimum ris' Tis process is also necessar. tocontract efcient rontier and optimum portolio'


&elo6


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)ere+ or te !iven return o JI+ te minimum ris or te

compan. is a&out 0''13J' To acieve tis return at minimum ris

te investment sould &e tese ollo6in! 6ei!t'

Efcient rontier

Te efcient rontier consists o dominant portolio' ,ominant

portolio is one tat dominates oter portolio o assets in terms o

ris and return' n te oter and+ 6it te e7istence o risless

lendin! and &orro6in! rate+ te optimum portolio or an.

investors is te portolio o assets tat is tan!ent to te capital

maret line'

@it our calculated ma7imiFed teta te !rap or efcient and

optimum rontier is created &. usin! te ollo6in! steps:

Te minimum ris and its respective return is calculated

or 6it and 6itout sort sale'

Te minimum return is increased at a certainpercenta!e eac time and te respective minimum risor !iven return is calculated usin! te solver unction'

Te riss are put into te C* unction to determine te

C* return'


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Te ris+ return and C* are put into te scatter !rap

to Gnd te !rap or efcient rontier and optimumrontier+

t is appeared rom te a&ove !rap tat Efcient "rontier

6it sort sale is more at ris is 11I 6ere return is O0I' Tis

investors 6it indicates tat 6en sort sales are allo6ed te

investor 6ill !et more e7cess return per unit o ris' Te optimum

rontier or te minimum ris 6it sort sales is so6n in te

a&ove !rap' All te investors 6o are allo6ed to sort sale old

te portolio A' Hut teir portion o investment in optimum

portolio and risless asset depends on teir personal ris

preerence'

%&cient 'rontier 'or minimi$ing risk !ith short sale


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%&cient frontier for minimi$ing risk !ith no short sale

Portolio Perormance Evaluation

As a Portolio mana!ers dut. is to minimiFe ris and ma7imiFe

return'

@e ave t6o ma(or re8uirements o a Portolio ana!er


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Re8uirement 1 can &e acieved eiter trou! superior timin!

or superior securit. selection' A P can select i! &eta securities

durin! a time 6en e tins te maret 6ill perorm 6ell and lo6

;or ne!ative< &eta stocs at a time 6en e tins te maret 6ill

perorm poorl.'

Conversel.+ a P can tr. to select undervalued stocs or &onds

or a !iven ris class'

Re8uirement 2 ar!ues tat one sould &e a&le to completel.

diversi. a6a. all uns.stematic ris ' =ou can measure te level o

diversiGcation &. computin! te correlation &et6een te returns

o te portolio and te maret portolio' A completel. diversiGed

portolio correlated perectl. 6it te completel. diversiGedmaret portolio &ecause &ot include onl. s.stematic ris'

%ome portolio evaluation tecni8ues measure or one

re8uirement< and not te oterQ some measure or complete

diversiGcation and not te oterQ some measure or &ot+ &ut

dont distin!uis &et6een te t6o re8uirements'

%ometimes P perormance &ased solel. on te rate o return'

Te. 6ere a6are o ris+ &ut didnt no6 o6 to measure it orad(ust or it' %ome investi!ators divided portolios into similar ris

classes ;&ased upon a measure o ris suc as te variance o

return< and ten compared te returns or alternative portolios

6itin te same ris class'

@e sall loo at some measures o composite perormance

speciall.

%arpe Ratio

Tre.no rratio

Sension Alpa ratio

+m#s8uared ratio


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inormation ratios

and sortino ratios tat com&ine ris and return levels into a

sin!le value'

Sharpe Portfolio Performance Measure

Te %arpe measure or maret portolio is

As te %arpe measure o m. portolio ;%pL1'J< is less tan te

%arpe measure o maret portolio ;%pL1'$3


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As te Tre.nor measure o m. portolio ;TpL#0'1O< is lo6er tan

te Tre.nor measure o maret portolio ;TmL0'22


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CC*-% A, RECE,ATCC*-% A, RECE,AT

"rom te a&ove anal.sis it is seen tat+ minimum ris and

ma7imum return can!es 6it sort sell' Ris is lo6er and return

is i!er 6en sort sell is allo6ed tan 6en it is not allo6ed' t

appens &ecause 6it sort sell te investor can tae a position

&e.ond is efcient portolio' )e can &orro6 and sell te sare

6ose price 6ill all in uture and invest te sales proceed 6it is

o6n und to assets 6ose price 6ill increase' H. tis process e

can earn more return and diversi. is ris to a !reater de!ree'

@en ris is minimiFed+ more unds are allocated to te asset

6ose variance is lo6er &ut return is also lo6er' Hut 6en Teta

is ma7imiFed i!er amount o asset is invested in te i!er

return asset' @it te inclusion o more ne!ativel. correlated

securities+ ris can &e minimiFed more even at ero'


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Appendi7 and Hi&lio!rap.:

i' @e&sites:

,%E

o 666'dse&d'or!

%toc Han!ladeso 666'stoc&an!lades'com

@iipedia

o 666'6iipedia'or!

ii' Reerences:

nvestment Anal.sis and Portolio ana!ement &. Reill.

Hro6n'

nvestment &. Hodie+ ane and arcus'
http://www.dsebd.org/http://www.stockbangladesh.com/http://www.wikipedia.org/http://www.stockbangladesh.com/http://www.wikipedia.org/http://www.dsebd.org/


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report on portfolio management

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