Portfolio Management and Investment Analysis

Perquisites:

1. Basic Financial Time Value of Money, Risk and Return, and Capital Budgeting
Management Tools.
Concepts
2. Financial Statements Income Statement, Balance Sheet, Cash Flow Statement and
and Ratios Financial Ratios Analysis.
3. Software, Web Pages Microsoft Excel, Financial Calculator, Web Pages (Bangladesh
and Applications Bank, DSE, Stock Bangladesh etc.) and other Relevant Software.

Basic Concepts: Financial System and Markets

1. Economy Government Structure, Financial System of Bangladesh, Payment System,
Gross Domestic Product (GDP), GDP Growth Rate, Inflation Rate, Interest
Rate, Exchange Rate, Money Supply, Producers, Consumers, Demand and
Supply, Market Mechanism, Monetary Policy, Fiscal Policy, Reserves etc.
2. Regulators Central Bank, Security and Exchange Commission, Insurance Development
& Regulatory Authority, Microcredit Regulatory Authority etc.
3. Financial Debt Market, Equity Market, Money Market, Capital Market, Primary
Markets Market, Secondary Market, Spot Market, Futures Market, Exchange-traded
Market, OTC Market, Foreign Exchange Market, Derivative Market,
Commodity Market etc.
4. Institutions Bangladesh Bank, Stock Exchange, Central Depository, Trustees/Custodians,
Commercial Banks, Non-Bank Financial Institutions, Insurance Companies,
Stock Brokers, Investment Banks, Merchant Banks, Asset Management
Companies, Micro Finance Institutes, Specialized Financial Institutes, Credit
Rating Agencies etc. FX Authorized Dealers, Money Exchange etc.
Sole Proprietorship, Partnership , Private and Public limited Companies,
Multinational Companies etc.
5. Financial Government Securities, Treasury bills and bonds, Commercial Paper, Repo,
Instruments Reverse Repo, Insurance Products, Savings and Loan Products, Common
Stock, Preferred Stock, Bonds, Debentures, Asset Backed Securities,
Forward, Futures, Options, Swaps, Currencies, Open-end and Close-end
Mutual Funds , Commodities etc.
 Financial Formulas:

1) Present Value (PV) = FV (1+ r)t or PV = FV (1+ r/n)tn 10) Variance = 2 = [ ri2 (ri)2 / T ] / (T -1)
2) Present Value of Annuity (PVA) = CF [1- 1/ (1+r)t] r or 11) Expected Return = = piri
PVA= CF [1- 1/ (1+r/n)tn] r/n 12) Variance = 2 = pi [ri ]2
3) Present Value of Perpetuity (PVp) = CF1 (r - g) 13) Standard Deviation () = Square root of Variance
4) Present Value of Growing Annuity (PVGA) = CF1 [ 1- {(1+g)/ 14) CV = Risk / Return
(1+r)}t ] (r-g) 15) Return conversion (semi-annual to annual): (1+ rs)2 -1 = ra
5) Net Present Value (NPV) = PV of Future Cash Flows Initial 16) Return conversion (annual to semi-annual): (1+ ra)1/2 -1 = rs
Investment 17) Z Value = (X- ) (where X = targeted return)
6) Internal Rate of Return (IRR) = LR+ (HR-LR)[NPV HR / 18) Effective interest rate = 1+ (Nominal interest rate/ n) n 1
(NPVLR-NPVHR)] where, HR = higher discount rate, LR = 19) Effective interest rate (Continuous compounding) = er -1
lower discount rate, NPVHR = NPV using HR and NPV LR = 20) Maintenance margin % = [(stock price x number of
NPV using LR.
7) Rate = (FV/PV)1/t - 1
securities) Amount borrowed] / (stock price x
8) Modified IRR = (Terminal Value / Initial Investment)1/t -1 number of securities)
9) Average Return = = ri /T

I. Investment Decision Making (Time Value of Money)

1. An investor can buy a piece of land now and can expect sell the land for Tk. 10,000,000 after six years.
Based on a careful study of other investment alternatives, she believes that a 20 percent annual return
compounded yearly is a reasonable return to earn on this investment. How much should she pay for the
investment today? Calculate the same considering return to be compounded monthly.
2. Mr. Tanvir is evaluating an investment that will provide the following returns at the end of each of the
following years: year 1, Tk. 500,000; year 2, Tk. 1,000,000; year 3, Tk. 1,700,000; year 4 Tk. 2,000,000;
year 5, Tk. 2,500,000; year 6, Tk. 0; and year 7, Tk. 3,000,000. Mr. Tanvir believes that he should earn an
annual rate of 20 percent on this investment. How much should he pay for this investment?
3. Consider an investment that will pay Tk. 100,000 per month for the next 15 years as regular payments.
Besides, it is expected that you will be able to liquidate the investment for Tk. 3,000,000 at the end of that
time. How much is this investment worth to you today at a 20 percent discount rate compounded monthly?
4. Ms. Anita just got a job offer of Tk. 600,000 per year (to be received at the end of year 1) from a reputed
Bank in Dhaka. She anticipates an average increment of 8% per annum every year until her retirement in 35
years from today. Assuming an interest rate of 11.5% per annum, what is the value of the job offering?
5. Your friend wants you to join in his business as a dormant partner. He promises to pay you Tk. 100,000 as
dividend at the end of the Year 1. Thereafter, his offers to pay 10% more as dividend each year forever. If
your required rate of return on this investment is 20% p.a., how much should you pay for this investment
opportunity?
II. Risk and Return Analysis:
1. Based on risk return criteria, explain which of the following investment would you prefer and why?

Year Stock X(rx) Stock Y(ry)

2016 55% -30%
2015 30% -10%
2014 40% 50%
2013 -15% 60%
2012 -10% 30%
2. Based on risk return criteria, explain which of the following investment would you prefer and why?

Return of Return of
Economic Probabili Company Company
Condition ty A B
Good 0.2 60% -25%
Average 0.5 35% 39%
Bad 0.3 -15% 35%
3. Please explain in your own language what is the benefit of knowing a) Average/ Expected Return, b) Standard Deviation and c)
Co-efficient of Variation.

4. Consider following risk and return statistics:

Portfolio Portfolio
XY AB
Return () 20% 25%
Risk () 14.9% 12.28%
i. What is the probability of losing money on Portfolio XY and AB?
ii. Calculate the probability of getting more than 30% in Portfolio XY?
iii. Calculate the probability of doubling your money (i,e 100% return) in Portfolio AB?

5. Ms. Rebeka bought 50,000 shares of Company X Ltd. in December 31, 2014 at Tk. 50 per share. After one year, on December 31
2015, the company paid her a dividend of Tk. 5 per share. Ms. Rebeka sold her shares immediately after receiving the dividends
for Tk. 70 per share. The brokerage house charged 0.35% commission on both buy and sell transactions. Calculate dividend yield
(%), capital gains yield (%) and total rate of return (%) on Ms. Rebekas investment.

6. Your investment of Tk. 100,000 grew to Tk. 10,000,000 in 20 years. What rate of return did you earn on that investment?

7. ABC Ltd. is considering following investment. The projects net cash flows are as follows:

Year 0 1 2 3 4 5
Cash Flow Tk. (50,000) 15,000 15,000 15,000 15,000 15,000
a. Calculate the Internal Rate of Return (IRR) for the project.
b. Calculate the Modified IRR of the Project (MIRR) assuming 20% reinvestment rate.

8. Convert following returns:

a. Convert 1% per month return to a semi-annual return.

b. Convert 12% per annum return to a quarterly return.
c. Convert 0.5% per week return to an annual return.
d. Convert 10% semi-annual return to a monthly return.
e. Convert 0.05% daily return to an annual return.

9. Three local banks are offering the following rates on deposits: 7% per year compounded quarterly; 6.9%
per year compounded monthly; and 6.8% per year compounded continuously. Where would you put your
money?

10. Leverage and Return on Investment:

If the rate of return on the security is higher than the interest rate on the loan, then leveraging leads to a higher rate of return.
Conversely, if the rate of return on the security is lower than the interest rate on the loan then leveraging leads to a lower rate of
return. (Reference: Investment by Ravi Shukla, Page 36)

11. Margin Loan and Return and Risk:

Mr. Rasels brokerage account requires 60% initial margin and 40% maintenance margin. Mr. Rasels first transaction was to
purchase 50,000 shares of a stock at Tk. 400 using full initial margin.
a) At what stock price will he receive a margin call?
b) Today the stock price fell to Tk. 200. How much cash will Mr. Rasell be asked to add to his account to bring the account
to the initial margin level?
c) The account executive called Mr. Rasell and requested him to add more money to his account. Mr. Rasell, however,
expressed his inability to do so. How many shares must the account executive sell to restore the account to the initial
margin level?

12. Solve above problems using MS Excel.

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