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Department of Finance

University of Dhaka
Course Name: Portfolio Management
Course code: F-407

A report
on
Constructing an efficient frontier and ratio
analysis.

Date of Submission: 6 January, 2015

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Submitted To
Md. Sajib Hossain
Lecturer,
Department of Finance
University of Dhaka

Submitted By
Prasenjit Roy
ID: 17-153, Section-A
Department of Finance
University of Dhaka.

Date of Submission: 29 December, 2014

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Letter of
December 29, 2014
MD. Sajib Hossan
Lecturer,
Department of Finance
University of Dhaka
Subject: Letter regarding Submission of report on Constructing an efficient frontier and
ratio analysis.
Dear Sir,
With due respect I would like to inform that I have prepared a report on Constructing an
efficient frontier and ratio analysis. On 15 listed company. I have tried my best to prepare
the report in consistence with the optimal standard under your valuable direction.
I would be very grateful if you kindly accept this report. I tried heart and soul to make this
report as a complete one. It would be pleasure for me if this report can serve its purpose.
Respectfully

Prasenjit Roy
Roll: 17-153, Section: A.
BBA (17th Batch)
Department of Finance
University of Dhaka

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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.
Financial statement analysis is a critical vehicle that furnishes investors
with most reliable estimates of investments worth. Financial statements,
periodically published by publicly listed company, are a source of most
valuable information of a company that facilitates investors to do
valuation of security properly.
In this report, we tried to evaluate stock of fifteen companies to decide
optimum investment amount to be allocated in each companys 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.
I have selected fifteen companies from fifth different industries. Portfolio
has been constructed considering different objectives of an efficient
portfolio.
Solver function gives different combination of securities with higher
return, less variance, and the maximum theta value.
So, consuming little bit higher risk, theta can be maximized. If investment
is performed on the different securities considering optimum weight,
highest return can be achieved and wealth of investor can be maximized.

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TABLE OF CONTENT

Sl. No.

Topic

Page No.

Origin of the report

Objective of the report

Methodology

Selection of Listed companies

Industry Analysis:

6
7

Share Price Adjustment with Dividend


and Stock Split:
Total Return

Preparing the Covariance Matrix:

Annualized Return & Annualized Risk Calculation

Theta
maximization
without short sale

with&

10

Minimization of standard deviation


&without short sale

11

Return
maximization
short sale

12

Fixed return with


short sale

13

Efficient frontier

14

Conclusion

with

without

& without

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Origin of the Study:


This report is prepared for Md. Sajib Hossain, Lecturer, and Department of
finance, University of Dhaka, Course teacher of Security Pricing and Portfolio
Theory (F-407) which requires submitting a report on a specific topic

determined by the course instructor. Our course teacher has assigned us


to make a report on making Efficient Portfolio Construction. The
standard procedure for the long, formal report is followed here as part of
the instruction of the course instructor.

Objectives of the Study: The main objectives of this report are to


focus on
The overall economy of Bangladesh which focuses on its overall
conditions.
The analysis on the industry in which the company belongs to.
The way to determine whether it would be profitable or not in investing
in this company.
A study based on our theoretical knowledge to justify whether it has
practical implications.
Maximization of theta with and without short sale
Minimization of risk without and with short sale.
Minimizing risk without and with short sell at given return.
Maximizing theta with and without short sell at given return.

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.

Limitations:
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There are not enough data for economy and industry analysis.
There are not available industry data, so I cant find industry
correlation.
DSE indexes do not reflect market properly.

Optimum or Efficient Portfolio:


Efficient Portfolio is a portfolio offering higher return in a given risk level or
lower risk at a given Return level. 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 CML
(Capital market line). The point of tangency is known as optimum or
efficient portfolio.

Efficient Portfolio

Figure-1: Efficient frontier & capital market line.

Our main objective in this report is to find the efficient portfolio with a
portfolio of 10 securities which are of A category listed in DSE before
2008. We are working on Monthly data.

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Steps followed in determining efficient portfolio:


We have followed the following steps for constructing efficient portfolio-

Selection of Listed companies: There are numerous number of


companies listed in DSE and CSE. I have selected 15 listed companies of
DSE. As I am using data of five years, I have selected companies which
are listed before 2008. My selected companies are

Sl. No.

Company Name

Sl. No.

Company Name

01

Square pharms

09

Pubali Bank

02

The.Ibn.Sina

10

Square Textile

03

Dutch Bangla Bank

11

Fu. Wang .Food

04

Bangladesh Lamps

12

Apex Food

05

Golden Son

13

Atlas Bangladesh

06

Singer Bangladesh

14

Eastern Cable

07

BD. COM

15

Dhaka Bank

08

IDLC Investment

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Company Selection Criteria


The companies that have used for building the portfolio have been selected
on the basis of some selected criteria. The criteria are following
The Net Asset Value (NAV) of the selected companies is more than Tk.
15.
The maturity of these companies is more than 5 years.
The market capitalization of these companies is more than Tk. 3,000
million.
The companies are listed in Dhaka Stock Exchange.
All the companies are A category company.

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Industry Analysis
Textile Industry: Our 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

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.
Banking, NBFI & Investment Sectors: Banking, Non-banking and
Investment companies of a country is 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 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 Products: This 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.

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Share Price Adjustment with Dividend and Stock Split:


To 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

Cash Dividend:
The 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.
For example, Dividend Yield = February Dividend/ January stock price.

Figure-2: Cash dividend adjustment.

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

Figure-3: Stock dividend adjustment.

Stock Split:
When stock price is divided into smaller unit it is called stock split. It is
adjusted at the time of calculating the capital gain.
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For example, Capital Gain = (Feb. stock price*(1+Feb.stock


dividend)*Stock split Feb-Jan. Stock price)/Jan. stock price

Figure-4: Stock split adjustment.

Total Return Calculation:


Total return is the sum of the Dividend Yield and the Capital Gain.
For example, Total Return = Dividend Yield (Feb) + Capital Gain (Feb).

Figure-5: Total return calculation.

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Return Series and Mean Return Calculation:


These are the monthly returns of the companies that I have gotten after making all
types of adjustment. These monthly returns have been averaged and then
multiplied by 12 to calculate the yearly return.

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Covariance Matrix Calculation


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Annualized Total Return & Annualized Risk:

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IF all the company have equal weight, then the portfolio return is 29.73% And Portfolio
risk is 9.63%.

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Theta maximization without short sale:


Investment in Golden son =33%, in IDLC = 16.77%, in pubali bank =
10.35%, in Atlas Bangladesh =23% and in Singer Bangladesh = 9.15%.

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Theta maximization with short sale:


When Theta is maximized with short sale then the Investment will be - in
Golden Son =70%, in Pubali bank = 18%%, In Singer BD =35%, in Prime
Textile = 21% and in Square Pharma = 12%.
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The short sale proportion will be- Apex Food =74% Dutch Bangla Bank
=55%,
The following chart shows the proportion of the investment and short sale in
the individual assets of the portfolio.

Investment and short sale proportion of the individual assets of the portfolio when Theta is maximized with short
sale.
Efficient Frontier Of Maximize Theta With Short Sales.

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Minimization of standard deviation without short sale:


I order to minimize the portfolio standard deviation without short sale the
Investment will be - in Square Pharma =148.39%, in Eastern Cables =
23.82%, In Dhaka Bank = 23.64%, inBD.COM = 3.80%
The following table shows the proportion of the investment in the individual
assets of the portfolio , portfolio return &risk.

Efficient Frontier of risk minimization Without Short sales.

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Minimization of standard deviation with short sale:

The following table shows the proportion of the investment and short sale in
the individual assets of the portfolio. And portfolio return & risk and other
return.

Return maximization without short sale:


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For maximizing return without short sale I should invest only in


BD.COM.
The following table shows the portfolio return and risk for this
types of investment decision.

Fixed return with short sale:


I order to attain a given level of return short sale, Investment & short sale
proportion are given below.

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Efficient Frontier
Subsets of the portfolios that will be preferred by all investors who will
exhibit risk avoidance and who prefer more return to loss. This set is usually
called the efficient set or efficient frontier.

The Graphical Presentation of the efficient frontier:


The following Table shows the risk and return and the chart shows the
Efficient Frontier with the combination of the risk and return. The horizontal
axis represents the risk and the vertical axis shows the return.

Figure-22: Risk, Return and the Efficient Frontier.

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Conclusion
In this report I tried to make real life use of portfolio construction
procedure and discern the optimum portfolio which will serve my utility as
well as investment objective. In my analysis i have used secondary data to
make the analysis. I used 5 years data from 2009 to 2013 collected from DSE
data archive
Based on the above analysis we can see that each of constructed portfolio
under 6 constrains has its own risk return portfolio. From these results, I
found Portfolio where maximize theta with short sell has highest risk return
combination and portfolio where minimum risk with short sell has lowest risk
return combination. I used solver tool of Microsoft excel which made the
study more accurate and informative. It will help to take decision easily
about weighting my investment fund into different assets.

Bibliography
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www.bsec.bd.com
Modern Portfolio Theory and Investment Analysis(8th edition)-By: Gruber
Analysis of Investments and Management of Portfolio(10th edition)-By: Reilly
Brown

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